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    CINF
    Earnings call· Dec 2024(Q4 FY24)

    CINCINNATI FINANCIAL CORP CINF

    Feb 11, 2025 Source

    Executive summary

    Cincinnati Financial Q4 FY24 — Strong Underwriting and Investment Performance Offset by Q1 2025 Catastrophe Losses

    Cincinnati Financial delivered a strong Q4 and full year 2024, marked by improved underwriting profitability, robust premium growth, and significant investment income. While the company faces substantial estimated catastrophe losses in Q1 2025 from California wildfires, management remains confident in its financial strength and long-term strategy, emphasizing pricing precision and strong agent partnerships.

    Highlights

    5

    • Fourth quarter property casualty combined ratio improved by 2.8 percentage points to 84.7%, bringing the full year combined ratio to 93.4%, 1.5 points better than 2023.

    • Non-GAAP operating income for the quarter increased 38% to $497 million and rose 26% for full year 2024.

    • Consolidated property casualty net written premium growth was 17% for the quarter, driven by 15% growth in agency renewal premiums and 23% in new business premiums.

    • Investment income reached $1 billion for the year, growing 15% for the full year 2024 and 17% for the fourth quarter.

    • Cash flow from operating activities for full year 2024 was $2.6 billion, up 29% from last year.

    Concerns

    5

    • Estimated first quarter 2025 pretax catastrophe losses are approximately $450 million to $525 million net of reinsurance recoveries, primarily from California wildfires.

    • Net income for Q4 2024 included an unfavorable swing of $931 million from the prior year due to a decrease in fair value of equity securities still held.

    • The bond portfolio experienced a pretax net loss of $350 million in the fourth quarter.

    • There was an unfavorable $201 million in aggregate net reserve development for accident years prior to 2021 during 2024.

    • The estimated net effect of first quarter premium revenue is a decrease of $50 million to $60 million due to reinsurance reinstatement costs.

    Guidance & targets

    6
    CategoryTargetConfidence
    Estimated Q1 2025 Pretax Catastrophe Losses
    $450M-$525M net of reinsurance recoveries
    high materiality
    High
    Estimated Q1 2025 Net Premium Revenue Effect
    decrease of $50M-$60M
    medium materiality
    High
    Dividend Increase
    7%
    medium materiality
    High
    Property Treaty Retention
    $15M
    low materiality
    High
    Casualty Treaty Retention
    $10M
    low materiality
    High
    Property Catastrophe Treaty Coverage
    increased to $1.5B
    medium materiality
    High

    Segment performance

    6
    SegmentRevenueYoYQoQMargin
    Commercial Lines
    Grew net written premiums by 8% with an excellent combined ratio that improved by 3 percentage points.
    Combined ratio improvement: 3 percentage points
    		—8%—93.2% combined ratio
    Personal Lines
    Grew net written premiums by 30% and improved the combined ratio by 2.9 percentage points.
    Combined ratio improvement: 2.9 percentage points
    		—30%—97.5% combined ratio
    Excess and Surplus lines
    Grew net written premiums by 15% with a 94.0% combined ratio, which was 3.4 percentage points higher than last year but still quite profitable.
    		—15%—94.0% combined ratio
    Cincinnati Re
    Grew net written premium by 7% with an 85.0% combined ratio, remaining very profitable.
    		—7%—85.0% combined ratio
    Cincinnati Global
    Growth was 8% with a 73.6% combined ratio, remaining very profitable.
    		—8%—73.6% combined ratio
    Life Insurance
    Improved its results with a 21% increase in 2024 net income and term life insurance earned premium growth of 3%.
    Term life insurance earned premium growth: 3%
    		———21% increase in net income

    Operational metrics

    20
    Non-GAAP Operating Income
    $497Mup 38% YoY
    Q4 FY24

    For full year 2024, non-GAAP operating income rose 26%.

    Net Income
    $405M
    Q4 FY24

    For full year 2024, net income rose 24%. Included recognition of $107M after-tax for decrease in fair value of equity securities, an unfavorable swing of $931M from prior year.

    Investment Income
    $1Bup 15% YoY
    FY24

    Investment income grew 17% for the fourth quarter.

    Dividend Income
    -4%down 4% YoY
    Q4 FY24

    Driven by third quarter sales of equity securities from rebalancing of investment portfolio.

    Bond Interest Income
    28%grew 28% YoY
    Q4 FY24

    Strong growth in bond interest income.

    Net Purchases of Fixed Maturity Securities
    $1.1B
    Q4 FY24

    Net purchases for the quarter.

    Average Pretax Yield for Fixed Maturity Portfolio
    4.93%up 45 bps YoY
    Q4 FY24

    Average pretax yield for the total fixed maturity portfolio.

    Average Pretax Yield for Purchased Bonds
    5.66%
    FY24

    Average pretax yield for the total of purchased taxable and tax-exempt bonds during 2024.

    Equity Portfolio Net Loss (Pretax)
    $136M
    Q4 FY24

    Valuation changes in aggregate for the fourth quarter were unfavorable.

    Bond Portfolio Net Loss (Pretax)
    $350M
    Q4 FY24

    Valuation changes in aggregate for the fourth quarter were unfavorable.

    Total Investment Portfolio Net Appreciated Value
    $6.7B
    Q4 FY24

    Approximate value at the end of the fourth quarter.

    Equity Portfolio Net Gain Position
    $7.2B
    Q4 FY24

    At the end of the fourth quarter.

    Fixed Maturity Portfolio Net Loss Position
    $553M
    Q4 FY24

    At the end of the fourth quarter.

    Property Casualty Underwriting Expense Ratio
    29.9%in line with 2023
    FY24

    Fourth quarter ratio was 1.4 percentage points lower than last year primarily due to lower accruals for agency profit sharing commissions and premium growth outpacing employee-related expenses.

    Net Addition to Property Casualty Loss and Loss Expense Reserves
    $1.1B
    FY24

    Includes $998 million for the IBNR portion. Approach aims for net amounts in the upper half of the actuarially estimated range.

    Dividends Paid
    $490M
    FY24

    Part of capital returned to shareholders.

    Shares Repurchased
    1.1M shares
    FY24

    At an average price of approximately $113 per share, including an immaterial amount during the fourth quarter.

    Parent Company Cash and Marketable Securities
    $5.2B
    Year-end FY24

    Strong liquidity position.

    Debt to Total Capital
    under 10%
    Q4 FY24

    Remained under 10%.

    GAAP Consolidated Shareholders' Equity
    nearly $14B
    Q4 FY24

    Providing plenty of capacity for profitable growth.

    Industry KPIs

    12
    MetricValueDetails
    Combined ratio84.7%%
    Capital returns7% dividend increase%
    ROE operating ROE19.8%%
    Catastrophe losses$450M-$525MUSD
    Book value per share$89.11USD
    Net investment income$1BUSD
    Retention persistencyUpper 80% range%
    Life specific when present21% increase%
    Net premiums written earned17% growth%
    Renewal rate change pricingHigh single-digit percentage range%
    Statutory regulatory capitalUnder 10%%
    Prior year reserve development$236M favorableUSD

    Risks & headwinds

    5
    California Wildfires Catastrophe LossesQ1 FY25

    Estimated Q1 2025 pretax catastrophe losses of $450M-$525M net of reinsurance recoveries.

    Mitigation: Reinstated applicable layers of primary property catastrophe reinsurance treaty coverage; increased property treaty retention to $15M and added $300M coverage to property cat treaty, increasing top to $1.5B.

    Investment Portfolio Valuation SwingsQ4 FY24

    Unfavorable swing of $931M in net income from decrease in fair value of equity securities (YoY). Q4 pretax net loss of $136M for equity portfolio and $350M for bond portfolio.

    Mitigation: Ongoing rebalancing of investment portfolio; net purchases of fixed maturity securities totaling $2.5B for the year.

    Unfavorable Prior Accident Year Reserve DevelopmentFY24 (for prior years)

    Unfavorable $201M in aggregate for accident years prior to '21 during 2024.

    Mitigation: Consistent approach to loss reserves, aiming for net amounts in the upper half of the actuarially estimated range; continuous consideration of new information like paid losses and case reserves.

    Challenging California Homeowners MarketOngoing

    77% of homeowner premiums in California are on a non-admitted basis; acknowledged as a challenging market.

    Mitigation: Deep dive assessment of strategy changes, including regulatory and rate environment, after focusing on claims payment; supporting agents and policyholders.

    Social Inflation in Casualty LinesOngoing

    Social inflation noted in umbrella and commercial auto losses.

    Mitigation: Underwriting and pricing policy-by-policy, risk-by-risk; close watch on trends by state, agent, and class of business.

    What to watch in Q1 FY25

    5

    California Wildfire Strategy

    Next quarter / Longer term
    CurrentActively assessing strategy changes for California homeowners market following Q1 2025 wildfires.
    TargetFormulation of any changes to strategy, including rate and regulatory environment.

    Why it matters

    The California market is challenging, and any strategic shift could impact premium growth, risk exposure, and profitability in a significant geography.

    But I think right now, we are really focused on paying claims fairly, empathetically face-to-face. And the lessons learned, although we're looking at them actively -- that will take a little longer to really formulate if we're going to make any changes going forward⏳.

    Q&A highlights

    6

    What is the outlook for the reinsurance sector after the California wildfires, how will Cincinnati Re respond, and what does it mean for 2025 premiums?

    Management noted the reinsurance industry's improved underwriting profit, emphasized long-term relationships with ceded partners, and stated Cincinnati Re will stay its course, as its losses from the California wildfires were within expectation and it remains very profitable.

    “Cincinnati Re, they're going to stay the course. You heard we had an extremely profitable 2024 inception to date with Cincinnati Re is very profitable as well. They plan for cat. That's what they do. Their losses on -- specifically on the California wildfires were within expectation. And they'll proceed throughout the year with their 2025 plan. No change.”

    asked by Michael Phillips · answered by Stephen Spray

    2 min read5 chapters

    Detailed Narrative

    01

    Strong Underwriting Performance and Premium Growth

    Cincinnati Financial achieved a strong underwriting performance in Q4 and full year 2024, with the property casualty combined ratio improving to 84.7% for the quarter and 93.4% for the full year. The accident year combined ratio before catastrophe losses improved by 1.9 percentage points to 86.5% for 2024. This was supported by robust consolidated net written premium growth of 17% in Q4, driven by 15% growth in agency renewal premiums and 23% in new business premiums, reflecting diligent use of pricing precision tools and risk segmentation.

    02

    Investment Income and Portfolio Dynamics

    Investment income significantly contributed to operating performance, growing 17% in Q4 and 15% to $1 billion for the full year 2024. Bond interest income increased 28% in Q4, and net purchases of fixed maturity securities totaled $2.5 billion for the year, with an average pretax yield of 5.66% for new purchases. However, the total investment portfolio experienced valuation changes, with a Q4 pretax net loss of $136 million for equities and $350 million for bonds, though the equity portfolio remained in a net gain position of $7.2 billion at year-end.

    03

    California Wildfire Impact and Reinsurance Program

    The company estimates significant pretax catastrophe losses of $450 million to $525 million net of reinsurance recoveries for Q1 2025, primarily from California wildfires. In response, Cincinnati Financial renewed its primary property casualty treaties, increasing property treaty retention to $15 million and adding $300 million of coverage to its property catastrophe treaty, raising the program top to $1.5 billion, to protect its balance sheet.

    04

    Reserve Development and Loss Cost Trends

    During 2024, the company added $1.1 billion to property casualty loss and loss expense reserves, including $998 million for IBNR. Net favorable reserve development on prior accident years totaled $236 million, benefiting the combined ratio by 2.7 points. However, there was an unfavorable $201 million in aggregate for accident years prior to 2021. Management indicated that prospective pricing generally exceeds or matches loss costs, with workers' compensation being an exception.

    05

    Capital Management and Shareholder Returns

    Cincinnati Financial maintained a strong financial position, with parent company cash and marketable securities totaling $5.2 billion at year-end and debt to total capital remaining under 10%. The company returned $490 million to shareholders through dividends in 2024 and repurchased 1.1 million shares at an average price of approximately $113 per share. The Board declared a 7% dividend increase, extending its streak to 65 years.

    AI-generated summary of the company’s earnings call. Not investment advice.