Cincinnati Financial Corporation (CINF) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the 2020 Annual Meeting of Shareholders of Cincinnati Financial Corporation. Before we get started, I'd like to go over a few items so you know how to participate in today's event. [Operator Instructions] Today's meeting is being recorded. I would now like to introduce Ken Stecher, Chairman of the Board.

Welcome, friends. It is an honor to be with you at Cincinnati Financial Corporation's first-ever Virtual Meeting of Shareholders. I am Ken Stecher, Chairman of the company's Board of Directors. While we plan to see you in person for next year's annual meeting, the COVID-19 pandemic has made it important to take extra steps to keep our shareholders and associates safe as we conduct this year's meeting. If you are a shareholder who has registered to attend this live virtual meeting, you'll be able to vote and to ask questions during the Q&A session at the end of our agenda, giving you the complete shareholder meeting experience. At this time, I would like to formally call the meeting to order. I'd also like to open the polls for any shareholder who still wishes to vote. Please visit aalvote.com/cinf now to cast your vote. Global pandemic we faced together has changed our personal and professional lives. In March, your company activated robust business continuity plans to seamlessly transition into serving agents and policyholders in a more virtual environment. I'd like to invite Cincinnati Financial President and Chief Executive Officer, Steve Johnston, to share with you the details of how the company has thrived during this time. Before Steve begins, let me remind you that some of the matters we will discuss are forward-looking and may involve certain risks and uncertainties. You may refer to various filings with the SEC for factors that could cause results to differ materially from those discussed. You can find reconciliations for non-GAAP measures in our most recent quarterly earnings news release, which is available at cinfin.com/investors. Steve, I will now turn the floor over to you.

Thank you, Mr. Chairman, and good morning, everyone. Thank you for joining us morning to hear more about the banner year your company experienced in 2019 and about how successfully navigate -- or successfully navigating the landscape that has changed so dramatically over just a few short weeks. First, I will provide a report on our vision, our strategy and our financial results for 2019. Then I will transition to a discussion of our first quarter results and the effects of the COVID-19 pandemic. In our 2020 annual shareholder letter, we celebrated The Cincinnati Ethic, a document that contains 8 tenets or values that have helped guide us to success over the past 70 years. These ethics also help to shape our response to the COVID-19 pandemic, answering a global crisis with humanity. The Cincinnati Ethic bolsters our vision to be the best company serving independent insurance agents. Together, these ideals ensure we face the pandemic from a position of strength, giving us the confidence to act decisively as we work together to overcome the many challenges we faced over the past few weeks. I want to start with our vision. I start nearly every presentation with this graphic, ensuring that all stakeholders are aligned with our strategy. Our vision is simple and straightforward: to be the best company serving independent agents, not just the best insurance company but the best company serving independent agents. That's why agents are at the top of this graphic, supported by our overwhelming claim service, empowered field teams and experienced headquarters associates. We are very financially strong, putting us in a position to deliver on our promises and provide ample capital for continued growth. We put the entire strategy on a foundation of ethical behavior. We know that it doesn't do any good to have a winning vision and strategy if we don't execute in the right way. We try to execute on the golden rule: treat people the way that we would want to be treated. In short, we do business right. As I mentioned earlier, 2019 was a banner year for your company. The positive trends we experienced over the past 5 years affirmed that our strategies are the right ones to continue building shareholder value over time. I believe there is more to be gained from these initiatives, and that we'll emerge from this pandemic with new strengths to carry us forward. On Slide 7, the value-creation ratio is our primary financial performance measure. Every associate in the company has the opportunity and ability to contribute to VCR growth. We target 10% to 13% annually. The blue bars depict the VCR for each of the past 5 years. While equity investing can introduce some volatility from year-to-year, the blue line shows that on a 3-year average basis, we have consistently met the goal. The average for the past 5 years is above our goal at 14.2%. Strong VCR growth leads to strong balance sheet growth. This chart shows growth in the statutory surplus of the Cincinnati Insurance Company, the dark blue bars and with the addition of the cash and marketable securities, the GAAP equity of Cincinnati Financial Corporation for the past 5 years in the green bars. The statutory surplus has risen more than $1 billion to over $5.6 billion, giving us plenty of capital to continue to grow. The GAAP equity grew by $4.4 billion over this period of time and gives us the capital and the financial flexibility to invest in the business and the ability to continue to grow the dividend to shareholders. Slide 9 shows the growth over the last 5 years against the top peer -- group of peer companies in the industry. The blue bars represent Cincinnati Insurance. The green bars represent the peer group. And the gray is the industry. Every year, except 2018, we've outgrown both the industry and the peer group. Over the 5-year period, we're up by 33%, while the peer group has grown 22%, and the industry, up 27%. Most importantly, we have grown profitably. The underwriting discipline, the frontline underwriting of our agents and the underwriting discipline of our associates have produced profitable combined ratios for each of the last 5 years. It's the same color schematic. And you can see Cincinnati has outperformed on a combined ratio basis every year. As many of you know, there was a change in accounting rules in 2018 that requires us to record the unrealized gains and the value of equity secured or equity portfolio as a part of net income. As you can see on Slide 11, that change and the volatility in equity returns produces volatility in GAAP net income. We will continue to provide the more consistent non-GAAP operating income measure. Non-GAAP operating income per share has trended up over the past 3 years to $4.20 for 2019 driven by strong underwriting and growth in investment income. While 2019 ended just a few months ago, it seems like it was a few years ago, and I think this Slide 12 shows the change. We saw challenges from both the weather and the onset of the most severe pandemic of our lifetimes. This slide shows that the combination of the 2 effects impacted our VCR, our stock price and the value of the S&P 500. We showed the results of $1 invested at the end of 1987 in the S&P 500, represented by the green line; our VCR, represented by the gray line; and Cincinnati Financial stock, represented by the blue line. Through year-end, everything was trending up. As you can see, it all changed direction during the first quarter. Slide 13 shows some of the drivers. While our underwriting profit dropped 74% compared with the last year's first quarter, our combined ratio at 98.5% was within our long-term target, even with the first quarter catastrophe impact of 9.1 percentage points compared to a 10-year average of 5.6 percentage points. The decline in our equity portfolio drove our negative value-creation ratio for the quarter. However, that portfolio still holds more than $2.5 billion in appreciated value before taxes. The equity portfolio has the ability to appreciate even more over time, just one of the reasons why we believe a significant portion of our investment portfolio in stocks is superior to a bond-only portfolio as we work to increase shareholder value over time. We feel that our strong balance sheet and growth prospects are well positioned for the future. Nearly 8 weeks into our country's pandemic response, we wouldn't be in the strong position we are today without each of our associates contributing at a high level. I always say that the key to success is to hire the best people and then to give them the resources they need to achieve greatness. I thank all of our associates for their ongoing efforts to keep our business running smoothly and for providing Cincinnati's hallmark of personalized service and professionalism. As an insurance company, we are in the business of risk. We help policyholders manage risk, and we feel it's important to lead by example. We have robust business continuity plans for our own operations. Our business continuity team plans for how to best protect our associates and keep our business running through many different scenarios. In March, we activated our pandemic plan. This virus created a fluid and fast-moving situation, and we were ready to respond. We have the technology infrastructure that allows us to quickly transition 95% of our headquarters associates to working from their homes over a weekend. Our field associates routinely work from their homes. They live in our agents' communities and didn't miss a step in delivering outstanding service in supporting our agents as agents enacted their own business continuity plans. Our field teams also continued to creatively serve policyholders, paying claims and providing risk management expertise and advice virtually whenever possible. We have maintained our workforce, including full pay and benefits for associates who couldn't do their jobs from home or who were needed to care for family members. Thanks to this advanced planning, we have answered the call for all of the stakeholders who count on Cincinnati Financial. As we settled into working from home, our relationship-focused culture helped us to collaborate on the best ways to support our agents and their clients. We have made several billing and underwriting accommodations for policyholders, including pausing cancellations due to nonpayment of premium and waiving any late fees until at least May 31. We're providing credits when requested on commercial vehicles not being used. We've waived vacancy clauses for buildings temporarily closed due to the pandemic. We're waiving restrictions on policyholders now performing delivery services and efforts to protect the well-being of their communities. And we're offering a 15% stay-at-home credit for personal lines auto policyholders on their April and May premiums. We join with others from our industry in doing all that we can to support policyholders. In January, the Board of Directors raised our shareholder dividend to $0.60 per share, a 7.1% increase, setting the stage for a 60th consecutive year of increasing dividends. On April 15, we paid that quarterly dividend, also providing shareholders much needed income during this pandemic. Before I turn the meeting back to our Chairman, I'd like to comment on a few Board transitions. Smooth director transitions are important to provide stability to shareholders. We knew that 3 of our directors were ending their service to our company this year. To prepare, the Nominating Committee of the Board began exploring who might hold the right talent, further enhancing the governance of Cincinnati Financial Corporation. Their search introduced us to Jill Meyer and Tom Aaron. Jill and Tom are both talented and engaged directors who are already contributing to robust discussions and bringing fresh perspectives to help advise our management team. We are thankful to have Jill and Tom aboard. It's time now to say goodbye to 3 directors who have served our shareholders well for many years. Greg Bier joined the Board in 2006. With a deep knowledge of accounting and financial reporting, he served shareholders through his participation on the Audit, Compensation and Investment Committees. Rodney McMullen joined the Board in 2001. As Chair of our Compensation Committee and a member of the Executive and Investment committees, he contributed his experience in leading a large public company. Together, they helped guide management decisions in many facets of our operations. And I thank them for the many years of friendship, counsel and service. Chairman Ken Stecher is also retiring from the Board after this meeting. While Ken has served at the helm of our Board for nearly a decade, his service to our organization began more than 50 years ago. In 1967, Ken joined our life insurance subsidiary and was quickly recognized for his dedication and work ethic. He quickly advanced through the accounting ranks, earning the respect of his peers in both life insurance and property/casualty insurance accounting. He became our company's third Chief Financial Officer in 2001. As President and Chief Executive Officer, Ken was the guiding force for Cincinnati Financial through the 2008 financial crisis. The company still benefits from the emphasis he placed on technology and on guidelines he helped create for our investment strategy, creating a more balanced risk profile. Ken is a mentor and a friend. He hired me and introduced me to Cincinnati's unique culture as I served as CFO. When I took over as President of the company, Ken remained my sounding board, offering the wisdom he's harvested over his long and distinguished career. Ken, as this chapter closes, I join with the entire company in wishing you all the happiness in the world during your retirement. Mr. Chairman, I turn the meeting back to you.

Thank you for those kind words, Steve. It's been my pleasure to work with you these last 12 years. I will miss being business colleagues, but I know our friendship will continue. The company is in great hands. And I applaud your leadership in helping the company, our agents and our policyholders navigate through these challenging times. I look forward to following the fortunes of Cincinnati Financial for many years to come and to keeping in touch with the many Cincinnati associates, past and present, that I call friends. We turn now to the business of the meeting. I will ask Lisa Love, Senior Vice President, General Counsel and Corporate Secretary, to read the notice of the meeting.

Thanks, Mr. Chairman. I certify that on March 18, 2020, Notice of the Annual Meeting of Shareholders was mailed to those persons who were shareholders of record of the company on March 4, 2020. That notice provided that the annual meeting be held at 9:30 a.m. on Saturday, May 2, 2020, at the Cincinnati Art Museum and that the items of the business to be considered at the meeting would be: electing 13 directors for 1 year term, voting on a nonbinding proposal to approve the compensation for the company's named executive officers, ratifying the selection of Deloitte & Touche LLP as the company's independent registered public accounting firm for 2020 and transacting such other business as may properly come before the meeting. On April 1, we announced a notice of change of location of the Annual Meeting of Shareholders and provided details of today's virtual meeting. I will include a copy of these notices, along with the minutes of the meeting in the company's record. Mr. Chairman, I'd also like now to report the number of shares represented at today's meeting: the number of shares represented in person, 0; the number of shares represented by proxy, 143,120,081; the total number of shares represented, 143,120,081 shares. That is 88.2% of the total shares outstanding.

Thank you, Lisa. We have a quorum present, and the meeting may proceed. We have 3 items of business to present this year. Lisa, will you please read the items to be voted on?

Mr. Chairman, the first order of business is the annual election of directors. The 13 nominees standing for election are: Thomas J. Aaron, William F. Bahl, Linda W. Clement-Holmes, Dirk J. Debbink, Steven J. Johnston, Ken C. Lichtendahl, Jill P. Meyer, David P. Osborn, Gretchen W. Price, Thomas R. Schiff, Douglas S. Skidmore, John F. Steele, Jr. and Larry R. Webb. The second order of business is voting on a nonbinding resolution to approve the compensation for the company's named executive officers. The resolution reads as follows: resolved that the company's shareholders approve, on an advisory basis, the compensation of the named executive officers as disclosed in the company's proxy statement for the Cincinnati Financial Corporation 2020 Annual Shareholder Meeting, pursuant to the compensation disclosure rules of the SEC and including the compensation discussion and analysis, the 2019 summary compensation table and other related tables and narrative disclosure. And the third order of business is to ratify the selection of Deloitte & Touche LLP as the company's independent registered public accounting firm for 2020.

Thank you, Lisa. The polls are now closed for each matter voted on at this meeting. Lisa, do the inspectors of election have the preliminary voting results?

Mr. Chairman, the preliminary voting results are as follows. For the first proposal, the election of directors, each of this year's nominees received votes for their election of at least 88% of the shares present or represented and entitled to vote at the meeting. For the nonbinding advisory vote on executive compensation, approximately 95.7% of the shares present or represented and entitled to vote at the meeting were voted in favor of the nonbinding resolution to approve the compensation for the company's named executive officer. For the third proposal, approximately 95.6% of the shares present or represented at the meeting were voted in favor of ratifying the appointment of Deloitte & Touche LLP as the company's independent registered public accounting firm for 2020.

Thank you, Lisa. It appears all directors have been elected, the nonbinding resolution to approve the compensation for the company's named executive officers has passed and the appointment of Deloitte & Touche as the company's independent registered public accounting firm has been ratified. The inspectors of election will furnish a written report of the final vote count with respect to the matters voted on today to be included in the minutes of the meeting. We'll announce final results once they're certified early next week. At this time, we welcome your questions, and we want to learn more about your interest in our business. To ask a question, you may type it into the questions box on the right-hand side of your screen. Each shareholder may ask up 2 questions. And please remember that we may combine questions on the same topic from multiple shareholders to ask together and that we will decline to answer questions that violate our meeting rules of conduct. It appears that there are no questions. Thank you very much for your presence today. We look forward to seeing you in person next year. We stand adjourned.