Q3 2024 Earnings Summary
- Strong premium growth and market opportunities: Cincinnati Financial is capitalizing on a "once in a lifetime, once in a generation" market opportunity, especially in personal lines, due to competitors being disrupted and macro factors. Their balance sheet strength allows them to take advantage of these opportunities, leading to significant growth across all lines of business. ,
- Deep relationships with agents and attractive business model: The company has deep relationships with agents and is considered a premier market. They continue to expand their expertise, teams, products, and agencies, which favorably impacts their excess and surplus lines company. Their business model of dealing directly with retail agents, having their own in-house brokerage, and handling claims with their own people is attractive and allows for continued expansion. , ,
- Confidence in pricing sophistication and ability to grow through all market cycles: Cincinnati Financial has improved its pricing sophistication and segmentation over the past decade, utilizing predictive models developed by experienced teams. This gives them confidence to play offense in all segments and lines of business, believing they can grow through all market cycles. ,
- Rising Loss Ratios in Commercial Casualty: The company reported an increase in the current accident year loss ratio for commercial casualty, up almost 6 percentage points, due to higher loss picks and added IBNR reserves, driven by higher case incurred losses and severity rather than frequency .
- Macro Uncertainties Affecting Profitability: Management acknowledged that macro factors like litigation costs, social inflation, legal system abuse, and third-party litigation funding are causing uncertainty and negatively impacting the commercial casualty line industry-wide .
- Aggressive Growth Amidst Uncertainty: Despite the rising loss ratios and increased uncertainty in the commercial casualty line, the company is choosing to "play offense" and continue aggressive growth in this area, which may heighten risk exposure .
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Commercial lines | Q2 2024: 7% growth, 99.1% combined ratio. Q1 2024: 7% growth, 96.5% combined ratio. | 11% premium growth and 93.0% combined ratio, reflecting improved profitability despite litigation pressures. | Consistently mentioned, focus on rate increases and profitability |
Pricing discipline | Q2 2024: Maintained discipline and relied on predictive analytics. Q1 2024: Stressed adequate pricing and underwriting segmentation. | Achieving high single-digit rate increases, emphasizing sophisticated underwriting and risk-by-risk pricing. | Recurring theme with incremental adjustments quarter over quarter |
Personal lines | Q2 2024: 30% growth, expanding high net worth focus. Q1 2024: 33% growth, strong private client momentum. | 29% premium growth, with a shift to 60% high net worth business. Concentration on property-driven risks in coastal areas. | Ongoing expansion, with renewed emphasis on coastal property risks |
Reserve development | Q2 2024: Mixed, with favorable for recent years but unfavorable for older accident years. Q1 2024: $100 million net favorable, cautious in commercial casualty. | $71 million favorable reserve development YTD, with upper half estimates for prudent caution. | Continuing caution, but generally favorable in recent accident years |
Loss ratio trends | Q2 2024: 98.5% combined ratio, slightly higher from prior year due to reserve development. Q1 2024: Improved core loss ratio in commercial lines. | Notable catastrophe losses lifted the combined ratio to 97.4%; underlying improvement in non-cat lines. | Consistent monitoring, constraints primarily from catastrophe losses |
E&S lines | Q2 2024: Healthy 15% growth, cautious view on quarter-to-quarter "noise". Q1 2024: 7% growth, profitable combined ratio of 91.9%. | 23% premium growth, acknowledging 90% casualty mix leads to volatility but strong long-term potential. | Steady expansion, mindful of shifting premium and reserve variables |
Reinsurance (Cincinnati Re & Cincinnati Global) | Q2 2024: Cincinnati Re combined ratio 70.1%, Cincinnati Global combined ratio 63.2%. Q1 2024: Both segments reported strong profitability, focusing on diversification and cat exposure reduction. | Cincinnati Re grew by 5% with a combined ratio of 95.6%, Cincinnati Global grew at 12% and saw a 66.6% combined ratio. | Consistently profitable, leveraging diversified portfolios |
Expense ratio & profitability | Q2 2024: Expense ratio 0.5 points higher, influenced by profit-sharing commissions and strategic investments. Q1 2024: 0.7 points higher due to agency commissions. | Slight decrease in expense ratio by 0.2 points, main pressure from catastrophe losses and reserve developments. | Recurring focus on balancing expenses vs. earned premiums |
Inflation & litigation costs | Q2 2024: Addressing inflation with pricing segmentation; limited direct mention of litigation costs. Q1 2024: Inflation addressed via IBNR reserves in casualty lines; less specific on litigation. | Litigation cost and social inflation remain consistent concerns, causing cautious loss picks in commercial casualty. | Underlying driver of continued caution in casualty underwriting |
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Commercial Casualty Reserve Strengthening
Q: Why is the commercial casualty loss pick increasing?
A: We are adding to reserves due to higher-than-expected loss payments and case reserve increases in commercial casualty, driven by severity rather than frequency. This reflects uncertainty around social inflation and legal system abuse, prompting us to take a prudent approach and increase IBNR reserves. -
Investment Portfolio Strategy
Q: What's behind the large sell-down in the investment portfolio?
A: There is no change in our investment philosophy due to new leadership. The sell-down is part of standard prudent portfolio management, where we trim or prune positions opportunistically, especially in a strong equity market, and reallocate capital to take advantage of higher interest rates. -
Personal Lines Growth Opportunity
Q: How is the company approaching growth in personal lines?
A: We see a once-in-a-generation market opportunity in personal lines, expanding from a middle-market focus to now being under 60% private client or high net worth. Our strong balance sheet allows us to capitalize on disruptions in the market, and we do not believe in a new business penalty; instead, we aim to write every risk at the right rate. -
Growth in Excess and Surplus Lines
Q: What's driving growth in the E&S segment, and is it sustainable?
A: We are experiencing significant growth in our E&S segment, which is 90% casualty, due to expanding our expertise, team, and products. We believe we're just scratching the surface of what's possible, leveraging our direct relationships with retail agents and our own in-house brokerage to capitalize on market opportunities. -
Agency Expansion Plans
Q: What are your plans for growing the agency force in 2025?
A: While we aren't making public our specific goals, we are committed to expanding our distribution without diluting our franchise. We focus on partnering with the most professional agents aligned with our local business approach, and we expect to continue expanding at a rate similar to recent years. -
Personal Auto Rate Adequacy
Q: Do you need double-digit rate increases in personal auto for 2025 and beyond?
A: We continue to see runway for rate increases across the entire personal lines book. While we have already accelerated rates from high single digits to low double digits, we believe there's still a lot of rate earning into the book, and we aim to stay ahead of loss cost trends on a prospective basis. -
Core Loss Ratio Increase in Other Lines
Q: What caused the core loss ratio to increase in other commercial and personal lines?
A: The increase is due to inherent variability or volatility in those smaller lines, such as watercraft in personal lines. We have not identified any specific concerns by geography, agency, or line of business, and we continue to monitor these areas closely. -
E&S Unfavorable Development
Q: Can you explain the unfavorable development in E&S lines?
A: We observed higher-than-expected case incurred losses in our E&S casualty book, which is 90% casualty and inherently volatile. Despite this, we have a strong track record of profitability in our E&S company and remain prudent in our reserving approach.