Good day, and welcome to the Cincinnati Financial Corporation Fourth Quarter and Full-Year 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Dennis McDaniel, Investor Relations Officer. Please go ahead.

Hello. This is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our fourth quarter and full year 2022 earnings conference call. Late yesterday, we issued a news release on our results, along with our supplemental financial package, including our year-end investment portfolio. To find copies of any of these documents, please visit our investor website, cinfin.com/investors. The shortest route to the information is the quarterly results link in the navigation menu on the far left. On this call, you'll first hear from Chairman and Chief Executive Officer, Steve Johnston; and then from Executive Vice President and Chief Financial Officer, Mike Sewell. After their prepared remarks, investors participating on the call may ask questions. At that time, some responses may be made by others in the room with us, including President, Steve Spray, and Cincinnati Insurance's Chief Investment Officer, Steve Solaria, Chief Claims Officer, Mark Schambow, and Senior Vice President of Corporate Finance, Theresa Hoffer. First, please note that some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties. With respect to these risks and uncertainties, we direct your attention to our news release and to our various filings with the SEC. Also, a reconciliation of non-GAAP measures was provided with the news release. Statutory accounting data is prepared in accordance with statutory accounting rules and therefore is not reconciled to GAAP. Now I'll turn over the call to Steve.

Good morning, and thank you for joining us today to hear more about our results. We see positive momentum in several areas and are bullish (ph) about our future prospects despite 2022 financial results that were somewhat below our expectations. Challenges during the year included elevated inflation and higher losses from natural catastrophe events for us and the property casualty industry, in addition to the market volatility affecting the valuation of investment portfolios. Our experience in managing adversity, coupled with the company's financial strength allows us to maintain a long-term view and supports our confidence as we execute our plans. Net income for the fourth quarter of 2022 was just over $1 billion, that's 31% or $457 million less than last year's outstanding fourth quarter, largely due to $307 million less benefit on an after-tax basis in the fair value of securities held in our equity portfolio. Non-GAAP operating income of $202 million for the fourth quarter was down $118 million from a year ago, including catastrophe losses that were $66 million higher on an after-tax basis. Our 94.9% fourth quarter property casualty combined ratio was 10.7 percentage points higher than the 84.2% for the fourth quarter of last year, which was amongst the best combined ratios we've ever recorded. We think longer-term comparisons are also important. On a current accident year basis, excluding catastrophe losses, our 90.2% combined ratio compares favorably with each of the five years prior to 2020 and was 1.5 percentage points better than the average for that period with each accident year measured as of the respective year-end. On a calendar year basis, our 2022 combined ratio experienced a larger negative impact from catastrophe losses than in 2021, as they increased 4.2 percentage points for the fourth quarter and 1.2 points for the year. Inflation…

Thank you, Steve, and thanks to all of you for joining us today. Investment income continued to grow at an outstanding pace, up 12% for the fourth quarter and 9% for full year 2022 compared with the same periods of last year. Dividend income rose 7% for the quarter. Net equity securities purchased during 2022 totaled $36 million. Bond interest income was up 11% in the fourth quarter. The pretax average yield of 4.16% for the fixed maturity portfolio was 17 basis points higher than a year ago. The average pretax yield for the total of purchased taxable and tax-exempt bonds continue to rise to 5.01% during full year 2022. We continue to emphasize investing in fixed maturity securities with net purchases during the year totaling $788 million. Valuation changes for our investment portfolio during the fourth quarter of 2022 were favorable in aggregate for both our stock and bond holdings. The overall net gain for the quarter was nearly $1.3 billion before tax effects, including an additional $230 million of unrealized gains in our bond portfolio. At the end of 2022, total investment portfolio net appreciated value was approximately $4.7 billion. The equity portfolio was in a net gain position of $5.5 billion, while the fixed maturity portfolio was in a net loss position of $847 million. Cash flow, in addition to rising bond yields contributed to the 7% increase in interest income we reported for the year. Cash flow from operating activities for full year 2022 generated almost $2.1 billion, a record high amount, up 4% from a year ago. For the fourth quarter of this year, it rose 36%. Turning to expense management. Our objective is to appropriately balance expense control with continuing to make strategic investments in our business. The full year 2022 property casualty underwriting…

Thanks, Mike. We faced a number of challenges in 2022 and still recorded an underwriting profit for our insurance business. That result bolsters our belief that we'll see future benefits from our efforts to continually refine pricing precision and segmentation and our efforts to expand our geographic footprint and produce -- and product offerings. When you consider our financial strength, our experienced service-oriented associates and our Premier Agency force, I'm confident we'll be able to continue delivering shareholder value far into the future. Our Board of Directors shares that confidence and expressed it by increasing our quarterly cash dividend 9% last month, setting the stage for a 63 year of rising dividend payments. So that's not just paying the dividend for 63 straight years. That sets the stage for increasing the dividend for a 63 consecutive year. We believe that's a record that can only be matched by seven other publicly traded U.S. companies. As a reminder, with Mike and me today are Steve Spray, Steve Soloria, Marc Schambow and Theresa Hoffer. Cole, please open the call for questions.

Thank you. And we will now begin the question-and-answer session. [Operator Instructions] And our first question today will come from Paul Newsome with Piper Sandler. Please go ahead. Hello, Paul. Perhaps your line is muted.

Good morning.

Good morning, Paul. No worries.

Congratulations on the year and the quarter.

Thank you.

I was hoping you could give us a little bit more color on investment income, which given the higher interest rates, your view on how much the portfolio yield could improve over the course of the year? And any thoughts on changing or different -- the allocation that you've had the last many years here in terms of buys versus equities and what you're doing within those fixed income as well?

Paul, this is Steve Soloria here. Just in terms of moving forward, the allocation will remain virtually the same. We've taken advantage of the increase in rates over the course of the year to our benefits. We'll continue to do so, but we'll try and maintain an even keel and stay disciplined in our allocation moving forward. In terms of last year, as mentioned previously, the aggregates or kind of blended rate for the year was about 5%. Comparing that year-over-year, a year ago, we were at about 3.5%. So we picked up about 150 basis points on purchases over the year. Looking forward, as the Fed begins to hopefully slow down the rate increases, we'll probably see a bit of a pullback in the purchase yield moving forward, but we think we've booked some pretty nice yields over the course of the year, which will benefit us for the next eight to 10 years.

Maybe as a second question, can you give us some further thoughts on claims inflation for the commercial line side of the house. Obviously, social inflation is top of mind to everyone in the business. And do you think the uptick in what you're doing with pricing is sufficient to overcome what you perceive as the prospective inflation improves.

Yeah. Thanks, Paul. This is Steve. And we do see the inflation. As we just mentioned, have had our reserves developed favorably now for 34 years. And as a part of that, we try to be very prospective as we look at how we set our reserves and our pricing and be very prudent about it. And we do think that we are in a position for our rates to keep pace and exceed inflation. And I think that comes from a combination of the pure net rates that our net rate increases I went over in my fixed part of the call here and also exposure increases that we're getting both in personal and commercial lines.

So do you think the underlying claims inflation is essentially less than combination of the exposure benefit plus the pure rate or do you think it's actually even lower than the pure rate at this point?

I think the combination of the two, they're both kind of intertwined in terms of the overall premium that we're able to charge. And the exposure base does contemplate to a certain degree, the inflation and building costs and so forth.

Thank you. Always appreciate the help guys. [Multiple Speakers]

Thank you, Paul.

And our next question will come from Mike Zaremski with BMO. Please go ahead.

Hey. Thanks. Good afternoon, everybody. This first question -- thank you for the commentary about the reinsurance renewals and I’ll limit, I need, I’ll need to kind of sit down and think through it on paper a bit more. So I'm asking this comes on the slide. But if I think back to historical guidance you've given us on the catastrophe load, I found back in '18, you kind of talked about 6 points to 7 points. Obviously, over the last few years, it's been, I think, directionally closer to 10, but it could be a bit off on the math. So kind of I guess, just given what the increased retentions and what way you just kind of discuss, should we become of splitting those two and thinking the new normal with what's going on in reinsurance is going to cause the catastrophe load to be kind of between the historical guidance and kind of what your last few years have been or just any help there would be great?

Sure, Mike. This is Steve again. And I think what we really focus on is the loss ratio points. And what we've done really over a decade or more is to model all of our losses. And what we've been able to do is to push our accident year ex-cat down over a number of years. And that puts -- and then we also have grown our balance sheet significantly. And that puts us in a position, I think, that's enviable right now as reinsurance rates rise and that we can look at what we think we're getting in terms of price adequacy on our book, as well as protection of our balance sheet through our CAT program. And so while we don't give guidance on a cat loss ratio, I think that we do feel that we're in a good position in terms of the overall in managing both our accident year ex-cat showing 34 years of favorable reserve development and also managing our cat exposure across the company.

Okay. That's I guess just then in the past, you've talked about the combined ratio target low to mid-90s. And also in the past, I'm talking about kind of 95 to 100. Is the -- just to be clear, is there is, one like more of a short-term versus a long-term target or has there anything changed given what's taking place with the insurance costs or maybe higher investment income is an offset to how you think about the mine ratio?

You're right. Nothing has changed. The 95 to 100 is a longer-term target through all cycles in the low to mid-90s is what we're looking for in the shorter term for 2023.

Okay. Got it. And just maybe sticking -- moving to the commercial side of the portfolio. It feels like there's -- on the commercial property side, you're readjusting exposure and you'll get in front of that in terms of pushing rate on the commercial property side to get in front of inflationary trends. You said on the commercial umbrella side, though, that things remain elevated, but not as elevated as kind of how you had re-upped your loss picks in previous quarters. Anything you've learned kind of over the last three months on the commercial umbrella side piece of the business that has given you insights into maybe kind of the need to just re-shift the portfolio or anything that's maybe been distinct to CINCI and maybe not just reflective of the overall industry's social inflationary issues?

Yeah. Mike, Steve Spray. Great question. I really do think the driver is the elevated inflation effects that we're seeing. We look at -- as I've commented on the past, we look at every single large loss and just see if we can see any trends whatsoever, it still seems to be rather random in that umbrella excess line. Like we said last quarter, though, all hands on deck. The entire book needs rate. We are getting rate into the book to cover that inflation. But we underwrite every single risk on its own merits. And the vast, vast majority of the umbrella or excess policies we write. As a company, we write the underlying too. So we know the risk. We underwrite each risk, like I said, on its own merits, and we are looking at each risk, the pricing, the terms, conditions. We look at specific venues, specific fleets. So to determine how much capacity we want to put out there. So it's a -- and again, it's a risk by risk scenario that we do, but it needs -- the book needs of rate.

Okay. And maybe lastly on growth and maybe sticking with commercial lines, thinking about the growth outlook you laid out in the prepared remarks. Is there anything incremental that's coming from any initiatives that you would want to call out? I believe there's a -- about a small commercial BOP initiative or I'm sure there's other initiatives too or is it really just mostly pushing exposure adjustments and maybe some pricing power through '23?

I think it's -- again, Steve here, Mike. I think it's all of the above. I think it's exposure. I think it is rate. Steve alluded to, our retentions remain strong. You talked about our small business platform we call synergy that rollout is going extremely well. That's feedback from our agents, still pretty early in the game, but the rollout is going rapidly. We couldn't be happier with that. So we see a lot of good prospects there. Our E&S company continues to produce outstanding profitable results and strong growth. Personal lines, you see the growth there has been very, very strong as well, both on the high net worth and middle market. And I think we're confident and feel good that we're in a good position in personal lines and that we're a strong player, both middle market and now high net worth. High net worth is about 51% of our total premium. So the growth trajectory there has been extraordinary too.

Okay. Exciting things. Thank you for the answers.

Thanks, Mike.

And our next question will come from Mark Dwelle with RBC. Please go ahead.

Yeah. Good morning. A couple of questions. First, this is just kind of a numbers question. The level of dividend income within total investment income was up a little bit in the quarter and also for the full year. Is there anything in particular that is driving that other than -- I mean, I don't think average corporate rate dividend increases have been as high as 12%, but maybe they are.

Mark, this is Steve Solaria. We did have a couple of unique factors over the course of the year. We did have two companies pay special dividends. LyondellBasell paid on early in the year, which was about $5 million. And then in December, CME usually pays a special dividend, but the dividend that they paid this year was well in excess of what we had expected. So those two special dividends really, really factored into the increase in dividend income year-over-year.

Okay. Thanks for that. And the second question, this is just a reiteration, I guess. Steven, I think it was in your comments talking about the reinsurance treaty, it's something and I'm just trying to write what I heard. So if you -- on a $1 billion of total losses, you would have $542 million of exposure in the new treaty versus $499 million. Is that -- that's $1 billion of aggregate losses or is that a single event loss?

Yeah. No, good question, and I will clarify that a bit. So I wanted to make sure to kind of put things on an apples-to-apples comparison. So this year's program 2023 goes up to $1.1 billion. And so we have moved up a bit as our equity has grown, our GAAP equity has grown, our premium has grown, we feel we are in a position to move the program up a bit, but we wanted to buy more at the top end. So to put it kind of on an apples-to-apples basis, I used a hypothetical $1.1 billion loss for both years 2023 and 2022. And you're right on for the 2023 year, we would have $542 million of exposure. So that would include the $200 million up to the attachment point plus co-participations and that compares with $499 million for 2022 -- in the 2022 program.

And then, again, just to clarify, that's on an aggregate basis for the full year or that's on a per event loss?

Per event.

Per event. Got it. So if there were $2 billion storms -- your two storms that cost Cincinnati Financial $1 billion in a year, then it would be double each of those respective figures, again, just for comparison.

Right. We have reinstatement provisions in the contracts.

Right. Of course. Okay. All right. Thanks for that. And then another question just -- can you remind me within Cincinnati Re, what proportion of that business is property and property catastrophe oriented as compared to being specialty or liability lines?

Yes. I have it. And you know it's interesting. We don't necessarily target a given percentage, but our 2022 full year in our inception to date are really pretty close. And for property, both from 2022 and inception to date, it's a little over 30% of the premium. For casualty, it's right in that 55% range. And for specialty, it's a little over 15% for the year in a little bit lower than that for the year-to-date, probably about 13%. So across time, it's been very consistent in that 30 plus range for property 53-ish for casualty and 15% or so for -- they didn't quite add up. I better make it get to 100%, so more like 30%, 55% and 15% across time.

Any outlook you'd like to share on how your January 1 renewals might skew those percentages?

No. I think it's a little early on the January 1's, but -- it's one nice thing as buyers of reinsurance, we're seeing the cost go up. It's almost like a little bit of a hedge in that we have Cincinnati Re, we've got very talented people there, very experienced people, and you see that shining through in a market like this. And they are benefiting from the firming rates and firming terms and conditions that you read about.

Okay. Appreciate that. Thanks for the answers.

Thank you, Mark.

[Operator Instructions] Our next question will come from Greg (ph) Carter with Bank of America. Please go ahead.

Hi, everyone.

Good morning, Grace.

Good morning. I'm thinking about the guidance for 8% plus premium growth in 2023. Like we keep hearing about potential for a macro slowdown. I was just wondering if you could go over the macro assumptions that underpin that guidance.

Yeah. That's a good point. At 13% for this year, that's the highest percentage growth in net rent premium we've had it since Insurance since 2001. And so we do recognize that there could be a slowdown. We're not predicting that necessarily or giving guidance on it, but it's possible as you point out, we want to be disciplined in our underwriting. Profit always comes first with us. And so our guidance is for a little bit less than what it was this year, but we are still very optimistic across all of our business areas in terms of the growth that we're seeing, the relationship we have with our agents, the technology we have, the models that we have, we feel very bullish about growth, but we did temper back a little bit from where we are for the full year, just to be cognizant of the points that you bring up, even though I wouldn't say that we're predicting it for sure.

Thank you. And looking at the attritional loss ratios for commercial property and homeowners in the quarter, they were a bit improved versus the first nine months of the year. So I was just wondering, if there is any sort of change in trend regarding frequency or severity that you've observed for those lines or if this is just kind of normal variability just given the volatility of those lines can see?

Grace, I'm sure there is some of that volatility that you can see, but I also know there's a lot of hard work that's been going on in addressing property. And it predates our addressing and say umbrella, for example. And it's nice to see the hard work of our underwriters and really everybody throughout the company chipping in here in terms of underwriting, loss control, pricing. And I do think it's paying off.

Thank you.

Thank you.

And our next question will come from Mike Zaremski with BMO. Please go ahead. Hello, Mike. Perhaps your line is muted.

Sorry. Thanks for seeking me in. So I’m just going back to thinking about the combined ratio goals for the company. Are there specific lines of business you'd like to call out and maybe they're obvious, maybe it's commercial casualty and commercial property both. But were there kind of the most wood to chop when we're thinking about improving the combined ratio in outer years? I guess when we look at the pricing disclosure that you offer us the mid-single digit plus numbers. The pricing, I guess, isn't at levels that are, I don't know, maybe I'm wrong, are like extremely high levels relative to inflationary levels. So just kind of curious where you feel you have the most wood to chop over the coming couple of years.

Yeah. We haven't provided that any lower than at the company-wide level. And it's really because it's a big team effort. Every one of our operating areas is focused on profit improvement, and we're seeing it across the board from underwriting to claims to loss control in the pricing and underwriting part of it. We are reflecting on the property in the exposure, the increase in inflation. We are trying to reflect that. And we're also getting a pure net rate on top of that and really feel that with our accident year ex cat wood is and the underwriting that we're doing in terms of cat exposure and geographic diversification that we're in a good spot to hit the numbers that we gave in the comments.

Okay. And just when we think about kind of trajectory of potential improvement, should we be kind of just keeping in mind that there's some element of multiyear policies or that are coming -- that are within the portfolio or comps there kind of getting easier or maybe there's less multiyear policies than there were in the past. Any nuances there we should be cognizant of? Thank you.

Yeah, Mike, Steve Spray. And it kind of goes to your prior question, too, is those average for us, the as net rate change just doesn't tell the full story and the underwriters working with our agents in segmenting the book, the tools that they have in front of them to really focus on getting rate and terms, conditions on those policies, but we feel we are probably least adequate. And then also focusing on retention of the business that's so adequately priced. That's where the rubber is really meeting the road, and that segmentation is really helping to drive those results.

Got it. That’s helpful. Thank you.

And our next question will come from Meyer Shields with KBW. Please go ahead.

Thanks. I'm going to try Mark's question from a slightly different perspective, if that's okay. Historically, Cincinnati has been a very methodical company. And I'm wondering now that you've got reinsurance and Lloyd's capabilities, is it reasonable to expect maybe faster reaction to take advantage of temporary opportunities like property cat seems to be this year?

Yes, Meyer. That is an excellent point. And I think in both areas, I think particularly in Cincinnati Re, as they have been looking at these policies, both quantitatively and qualitatively on a one-by-one basis and are in a position to react quickly to these types of opportunities, and that was part of the strategic decision at the beginning.

Hey, Meyer. I might -- this is Steve Spray, I might add, too, just because it's a great question. I think it's a great point. As our E&S company, CSU, founded and we started back in '08, gives us that kind of flexibility for our agents as well. And I think we've learned a lot as that has continued to grow to the point now where we're issuing homeowner business on an E&S basis and able to provide our agents and the policyholders they have that flexibility and capacity and solutions. And I think the same thing is going to happen for our agents as we go forward and give them -- what I'll call or I think we would call just that much more effective access to Lloyd's. So everything we develop as a company is focused on that agency strategy. And so bringing the agents more flexibility, more capabilities is certainly in the plans today and moving forward.

Okay. Perfect. That's very helpful. Related question with regard to the agencies. One of the theories that's been banding around is that a lot of, let's say, regional or mutual companies don't necessarily have the capital seeing the property-related volatility that the reinsurance market is kind of forcing back to the primary carriers. And I was wondering, based on your conversations with agents, is that like a phenomenon that they're seeing? And is that underlie some of the growth expectations for '23?

I think it is probably a little early to tell what the 1/1 (ph) renewals and then 4/1 and 6/1, how that's going to impact quite frankly, any carriers. I'd tell you, insurance is -- for us, insurance is a local business there, and there's a lot of great regional mutual companies out there that we compete with on a day-to-day basis. It's something we do think about, but not hearing a lot of feedback yet. We've seen -- anecdotally, we've seen a couple of instances where the reinsurance, either the lack of or the costs have put pressure on some maybe a little more regional carriers, but I think it's too early to tell what the full impact will be. It's certainly something that -- it's a great question, something that we're keeping our eye on.

Okay. Fantastic. And one last question, if I can. I was just looking for a little more color on the reserve development, specifically within excess and surplus lines.

Yeah. Great, Meyer. This is Mike Sewell. And let me start off, we're really proud of our 34 years of -- consecutive years of net favorable development. So I'm going to open up with that. But related to E&S, were you thinking about on a year-to-date basis or on a quarter basis, are you looking?

So mostly, I guess, on the -- I'm going to call it volatility in that's the right word, but the quarterly number seaman awful lot.

On that, so for the E&S business, let's say, for the quarter, we saw a $4 million of reserve strengthening. But on a year-to-date basis, it was $9 million of favorable development. Thinking about it on the year-to-date basis, it was really favorable for all the accident years except the more recent accident year '21. And so we did see favorable development for 2020, 2019, 2019 and before. What I would say is, we follow a consistent approach. I wouldn't look at one quarter, two quarters as a as a trend. So you'll see some things move. But we've got the same actuarial professionals that are doing the work. They're looking at how the case reserves develop, the paid losses other factors. And so we really just follow the great work that our actuaries do. And I think it's a pretty consistent approach. So I wouldn't necessarily look at it on a quarter-to-quarter basis and say that, that is some sort of a trend.

Okay. That’s perfect. Thank you so much.

Thank you for the question.

And this will conclude our question-and-answer session. I'd like to turn the call back over to Steve Johnston for any closing remarks.

Thank you, Cole. Excellent job, and thank you all for joining us today. We look forward to speaking with you again on our first quarter 2023 call. Have a great day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.