Q2 2024 Earnings Summary
- New commercial lines business premiums increased over 30% in the first half of the year, reflecting disciplined risk selection and pricing in a favorable market environment.
- The company is capitalizing on exponential growth opportunities in the middle market personal lines segment, supported by its strong balance sheet of $12.7 billion of GAAP equity.
- Robust growth in both middle market and high net worth personal lines is considered transformational, with the company leveraging sophisticated pricing and expertise to become a premier writer in this "generational" market.
- Adverse development in personal auto bodily injury claims, particularly in accident year 2023, indicating potential issues with loss severity or reserving in that line.
- Unfavorable prior year reserve development in commercial casualty lines, with the company adding reserves of $51 million for accident years 2021 and prior, suggesting prior underestimation of losses.
- Uncertainty in excess and surplus lines due to changes in IBNR and case incurred losses, which may indicate potential volatility in that segment. ,
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Commercial Casualty Reserves
Q: Are prior accident year reserves in commercial casualty adequate?
A: Management is confident in their commercial casualty reserves, noting that over the last 15 years, only two accident years haven't developed favorably from original estimates. They've increased the IBNR ratio for commercial casualty by 10 percentage points compared to pre-pandemic years, strengthening their reserve position.
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Commercial Casualty Pricing
Q: Is renewal pricing in commercial casualty strong?
A: Renewal pricing remains in the high single digits, consistent with the first quarter. Management sees continued opportunity for increased rates and focuses on segmentation and risk-by-risk pricing using predictive analytics.
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Expense Ratio Outlook
Q: What is driving changes in the expense ratio?
A: The expense ratio increased slightly to 30.1% year-to-date due to higher profit-sharing commissions and employee-related expenses. However, earned premium growth is outpacing expense increases, and management aims to reduce the ratio below 30%.
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Personal Lines Growth
Q: How are personal lines performing between middle market and high net worth?
A: Both segments are growing healthily, with middle market currently outpacing high net worth. Management views the personal lines market as "generational" and believes it is transformational for Cincinnati Insurance.
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Workers' Compensation Strategy
Q: Will you grow in workers' compensation?
A: While they have a strong appetite for workers' comp, management remains prudent, writing business only at the right rate on a risk-adjusted basis. They note the current rate environment isn't attractive for aggressive growth due to the line's long-tail and volatility.
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Personal Auto Margins
Q: Any concerns about personal auto adverse development?
A: Adverse development is primarily in bodily injury claims from accident year 2023, with some impact from 2022. Physical damage is performing well. Growth in the high net worth segment brings diversification benefits to personal auto results.
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Competitive Position in Commercial Lines
Q: How is your competitive positioning in commercial lines?
A: Management focuses on risk selection, pricing discipline, and deep agent relationships, resulting in over 30% growth in new commercial lines business in the first half. They continue appointing new agencies and compete effectively with both national and regional carriers.
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Cincinnati Re and Cincinnati Global
Q: What's the outlook for Cincinnati Re and Cincinnati Global?
A: All lines in Cincinnati Global are growing except for direct impact property due to increased capital in that space. Cincinnati Re operates with an allocated capital model and has maintained a spectacular combined ratio since inception, growing opportunistically without pressure to expand rapidly.
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Commercial Auto Performance
Q: Has commercial auto improved after past challenges?
A: Management feels positive about commercial auto, having acted quickly on reserving and underwriting in 2016 and 2017. They avoid volatile segments like trucking and have managed the book well, leading to favorable performance.
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Market Competitiveness and Pricing
Q: Is the commercial lines market stable?
A: Management describes the commercial marketplace as responsible and orderly, with continued rate increases across all major lines except workers' compensation. They do not see a softening market and believe uncertainty supports ongoing rate strength.
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Agent Appointments and Brand Value
Q: Will more agents dilute your brand value?
A: Management believes appointing more qualified agents won't dilute franchise value. They emphasize quality over quantity and see ample opportunity to expand their exclusive distribution without affecting the brand.
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Maturity of Pre-2021 Accident Years
Q: How mature are the 2018–2020 accident years?
A: The $30 million unfavorable development was mainly from accident years 2018–2020, but management feels good about reserves for those years. They are confident in their reserving process and the increased IBNR ratio.