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Cincinnati Financial Corp. Q1 2010 Earnings Call Transcript

Cincinnati Financial Corp. Q1 2010 Earnings Call Transcript

Cincinnati Financial Corp. (CINF)

Q1 2010 Earnings Call

April 29, 2010 11:00 am ET


Ken Stecher - President and Chief Executive Officer

Steve Johnston - Chief Financial Officer

J.F. Scherer - Executive Vice President, Sales & Marketing

Martin Hollenbeck - Chief Investment Officer


Michael Phillips - Stifel Nicolaus

Dan Johnson – Citadel

Scott Heleniak - RBC Capital Markets

Dan Schlemmer - Macquarie

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Welcome everyone to the Cincinnati Financial first quarter conference call. (Operator Instructions) Dennis McDaniel, Investor Relations Officer, you may begin your conference.

Dennis McDaniel

Hello. This is Dennis McDaniel, Investor Relations Officer for Cincinnati Financial. Thank you for joining us for our first quarter 2010 earnings conference call. Late yesterday we issued a news release on our results, along with our supplemental financial package and we filed our quarterly report on form 10Q. If you need copies of any of these documents, please visit our Investor website,


The shortest route to the information is in the far right hand column via the Quarterly Results QuickLink. On the call, you will first hear from Ken Stecher, President and Chief Executive Officer; and Chief Financial Officer, Steve Johnston. After their prepared remarks, investors participating on the call may ask questions. At that time, some responses maybe made by others in the room with us that include Chairman, Jack Schiff Jr.; Executive Vice President, J.F. Scherer, Sales & Marketing; Principal Accounting Officer, Eric Matthews; Chief Investment Officer, Marty Hollenbeck; and Chief Claims Officer, Marty Mullen.

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 data is prepared in accordance with statutory accounting rules, and therefore is not reconciled to GAAP.

With that, I will turn the call over to Ken.

Ken Stecher

Thank you, Dennis. Good morning to all of you. As highlighted in our news release we reported improving trends in several areas while our industry continues to experience significant challenges particularly in the commercial lines insurance market.

Improvement has occurred over the past year in securities markets and our book value per share reflects that with an increase of 25% while we also increased our shareholder dividend. The mix we have selected for our investment portfolio took advantage of favorable market movement. It is up 24% since this time last year. We also grew our first quarter investment income by 5%.

Growth in the portfolio and the income it produces reflect good choices made during 2009 as we invested more than $1 billion in cash that was held at the beginning of the year. We continue to add to our common stock portfolio including net purchases of over $60 million during the first quarter with the intention of balancing current income with long-term capital growth. We have a track record of holding attractive stocks with unrealized capital gains making up over 25% of the equities portfolio and we continue to monitor concentrations.

Our largest common stock position now is about 1% of the total investment portfolio. While our property casualty insurance underwriting results fell short of our goal of a combined ratio under 100% we saw favorable trends in parts of that operation as well. Our personal lines segments combined ratio improved by almost 20 percentage points. While most of that was due to more favorable first quarter weather there also was an improvement in the non-capacity loss ratio reflecting rate increases implemented during 2009 plus better pricing for risk that we attribute in part to our homeowner predictive modeling efforts.

Last year at this time our large volume of business in the Midwest made our property insurance results lag much of the industry due to weather related losses. Results so far this year demonstrate how weather effects tend to even out over time. Our excess and surplus lines operation made a positive contribution to premium revenue trends with earned premiums more than doubling to $11 million for the quarter. We continue to carefully manage excess and surplus lines exposure not only through policy terms and conditions but also by limiting our loss retention to $1 million per risk after reinsurance.

Competition for ENS business has been increasing and kept our new business written premium levels flat. Agents continue to give us opportunities to round out client accounts, keeping the non-standard part of the account in the Cincinnati insurance family. Our earned premiums for our life insurance operation grew at a double digit rate in the first quarter and it continues to be a steady contributor to corporate profit and book value.

Commercial lines is our largest segment and still is experiencing very strong competition making it difficult to achieve price increases. While we achieved price increases on some accounts during the first quarter, on average policies renewed at a price estimated at less than 1% lower than a year ago assuming no change in insured exposures or policy coverage terms. We are staying focused on identifying quality accounts and working to write insurance policies with an acceptable profit margin, walking away from business when necessary.

Our largest drop in new business premium volumes was from Worker’s Compensation, currently an unprofitable line of business for our commercial lines segment. We aim to restore its profitability by carefully applying our underwriting guidelines along with other initiatives. Lower premium volume is a factor that has put upward pressure on our underwriting expense ratio. Investment in technology also contributes to a higher expense ratio in the short-term but it is justified over the long haul because we are confident there will be future benefits.

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