Cincinnati Financial Corporation (CINF) Q4 FY2025 Earnings Call Transcript & Summary

Thank you for standing by. My name is Jordan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Cincinnati Financial Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] I'd now like to turn the call 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 2025 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, investors.cinfin.com. The shortest route to the information is the Quarterly Results section near the middle of the Investor Overview page. On this call, you'll first hear from President and Chief Executive Officer, Steve Spray; 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 Executive Chairman, Steve Johnston; Chief Investment Officer, Steve Soloria; and Cincinnati Insurance's Chief Claims Officer, Marc Schambow; and Senior Vice President of Corporate Finance, Andy Schnell. 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 had another excellent quarter of operating performance that again demonstrated the resilience of our proven operating model and the long-term strategy that drives our insurance business. Investment results were also part of that excellent performance, including investment income growth and another quarter with net investment gains. Operating performance was very strong for the fourth quarter and boosted full year results enough to outperform last year in several key areas despite starting 2025 with the largest catastrophe loss in our company's history. Net income of $2.4 billion for full year 2025 was 4% higher than 2024. Fourth quarter net income of $676 million rose 67% and included recognition of $145 million on an after-tax basis for the increase in fair value of equity securities still held. Non-GAAP operating income for the quarter increased 7% to $531 million. For full year 2025, it was up 5% from a year ago. Our fourth quarter 2025 property casualty combined ratio was an outstanding 85.2%. It lowered the full year combined ratio to 94.9%, near the midpoint of our long-term average target range. The full year ratio was 1.5 percentage points higher than last year, driven by an increase of 1.6 points in the catastrophe loss ratio. On a current accident year basis, measured at 12 months before catastrophe losses, the combined ratio improved by 0.4 percentage points. The loss and loss expense portion would have improved slightly, if not for the unfavorable effect of 0.3 points from reinsurance reinstatement premiums. Consolidated property casualty net written premiums continued to grow, but at a slower pace, 5% for the quarter. That reflects our pricing discipline in the insurance marketplace as our underwriters carefully consider risks on a policy-by-policy basis and use pricing precision tools to segment those risks as part of their underwriting decisions. Estimated average renewal price increases for most lines of business during the fourth quarter were lower than the third quarter of 2025, but still at a level we believe was healthy. Our standard and excess and surplus commercial lines business averaged increases in the mid-single-digit percentage range. Our personal lines segment included homeowner in the low double-digit range and personal auto in the high single-digit range. We believe our relationships with independent agencies are as strong as ever and that they will continue to trust us with their high-quality new business. The fourth quarter 2025 decrease in new business written premiums was driven by our personal lines segment that had unusually large amounts the past 2 years. However, the $92 million for the quarter was still 62% more than the average of the 3 years prior to 2023. Policy retention rates in 2025 were similar to 2024. Our commercial lines segment was down slightly, but still in the upper 80% range. Our personal lines segment was also down slightly, but still in the low to mid-90% range. Performance by insurance segment is the next area I'll highlight, focusing on full year 2025 results compared with 2024. But first, I'll note that all operating units had an excellent fourth quarter profitability, each with combined ratios below 90%. Commercial lines' 91.1% combined ratio for the year improved by 2.1 percentage points, including a decrease of 1.9 points in the catastrophe loss ratio. Its net written premiums grew 7%. Personal lines' 103.6% combined ratio for 2025 increased by 6.1 percentage points, including an increase of 7.1 points in the catastrophe loss ratio. Its net written premiums grew 14%. Excess and surplus lines' 88.4% combined ratio for the year improved by 5.6 percentage points, including a decrease of 1 point in the catastrophe loss ratio. Its net written premiums grew 11%. Both Cincinnati Re and Cincinnati Global produced strong results and again demonstrated the benefits of diversifying risk to improve income stability. Cincinnati Re's combined ratio for the year was 95.9%. Its 1% decrease in net written premiums reflects changing reinsurance market conditions. Cincinnati Global's combined ratio for 2025 was 79.2% with premium growth of 10%, benefiting from product expansion. Our life insurance subsidiary increased annual net income by 16% and grew term life insurance earned premiums by 3%. Moving on to our reinsurance ceded programs. On January 1 of this year, we again renewed each of our primary property casualty treaties that transfer part of our risk to reinsurers. For our per risk treaties, terms and conditions for 2026 are fairly similar to 2025, other than an average premium rate decrease of approximately 7%. The primary objective of our property catastrophe treaty is to protect our balance sheet. The treaty's main change this year is increasing the top of the program to $2 billion compared with $1.8 billion, effective July 1, 2025. Should we experience a 2026 catastrophe event totaling $2 billion in losses, we'll retain $523 million compared with $803 million for an event of that magnitude during the second half of last year. We expect 2026 ceded premiums for these treaties in total to be approximately $204 million, with the increase from the actual $192 million in 2025 driven by additional coverage and subject premium growth. As usual, I'll conclude my prepared remarks with the value creation ratio. Our 18.8% full year 2025 VCR exceeded our 5-year annual average target range of 10% to 13%. On a full year basis, net income before investment gains or losses contributed 9.1%. Higher overall valuation of our investment portfolio and other items contributed 9.7%. Now Chief Financial Officer Mike Sewell will highlight investment results and other important points about our financial performance.

Thank you, Steve, and thanks to all of you for joining us today. Investment income was a significant contributor to higher net income and improved operating results, rising 9% for the fourth quarter and 14% for the full year 2025 compared with the same periods of last year. Bond interest income grew 10% for the fourth quarter, and net purchases of fixed maturity securities totaled $1.6 billion for the full year 2025. The fourth quarter pretax average yield of 4.92% for the fixed maturity portfolio was similar to last year. The average pretax yield for the total of purchased taxable and tax-exempt bonds during 2025 was 5.6%. Dividend income for the quarter matched last year, even without the repeat of a $6 million special dividend from December 2024. Net purchases of equity securities totaled $74 million for the year. Valuation changes in aggregate for the fourth quarter and the year were favorable for both the equity portfolio and our bond portfolio. Before tax effects, the fourth quarter net gain was $181 million for the equity portfolio and $24 million for the bond portfolio. At the end of the fourth quarter, the total investment portfolio net appreciated value was approximately $8.4 billion. The equity portfolio was in a net gain position of $8.5 billion, while the fixed maturity portfolio was in a net loss position of $181 million. Cash flow from successful insurance and investment activities continued to fuel investment income. Cash flow from operating activities for full year 2025 was $3.1 billion, up 17%. Regarding expense management, our strategy continues to seek a good balance between controlling expenses and investing in our business. Our fourth quarter 2025 property casualty underwriting expense ratio decreased by 0.2 percentage points as an increase in agency profit sharing commissions was offset by growth in earned premiums, outpacing growth in other expenses. Turning to loss reserves. Our approach remains consistent and aims for net amounts in the upper half of the actuarially estimated range of net loss and loss expense reserves. As we do each quarter, we consider new information such as paid losses and case reserves. Then we updated estimated ultimate losses and loss expenses by accident year and line of business. During 2025, our net addition to property casualty loss and loss expense reserves was $1.3 billion, including $1.1 billion for the IBNR portion. For current accident year loss, loss expenses before catastrophe effects and measured at 12 months, several of our major lines of businesses had 2025 ratios better than 2024. The main exception was commercial casualty, rising 4.2 percentage points. That reflects ongoing uncertainty, including potential negative effects of legal system abuse we and others in the industry have noted in recent years. We remain confident with our pricing and risk selection for this line of business. For prior accident years, we experienced $196 million of property casualty net favorable reserve development during 2025 that benefited the combined ratio by 2.0 percentage points. On an all-lines basis by accident year, net reserves developed during 2025 included a favorable $275 million for '24, favorable $8 million for '23 and an unfavorable $87 million in aggregate for accident years prior to '23. As usual, I'll conclude with capital management highlights. For the full year 2025, we returned capital to shareholders totaling $730 million, including $525 million of dividends paid and $205 million of share repurchases. We repurchased approximately 1.4 million shares at an average price of $151 per share, including 651,000 shares during the fourth quarter at $157 per share. We continue to believe our financial flexibility and our financial strength are both in an excellent position. Parent company cash and marketable securities at quarter end was $5.6 billion. Debt to total capital remained under 10%. Our quarter end book value was a record high $102 million -- $102.35 per share with $15.9 billion of GAAP consolidated shareholders' equity, providing plenty of capacity for profitable growth of our insurance operations. Now I'll turn the call back over to Steve.

Thanks, Mike. Before we get to Q&A, I want to share our efforts related to intelligent automation. As most of you have heard us say before, our vision is to be the best company serving independent agents. Strategies we undertake must ladder up to improving the experience for the independent agents we serve and their clients. We are embracing intelligent automation to improve processes across our technology ecosystem. Generative AI is certainly a part of it, but it's only one aspect. Our work began with improvements to our data architecture, giving us a rich understanding of our risks and how we could shape our entire insurance portfolio for the future. We use workflow tools in each insurance segment that organize data and automate certain activities in writing new business or in other transactions. That experience formed a deep pool of talented associates with the knowledge, skills and desire to continue our journey into generative AI. Most importantly, these associates are also insurance experts. We've created an AI center of excellence, which is harnessing cloud provider large language models to create internal solutions that can be then -- that can then be easily replicated throughout our company for fast scalability. We have a number of projects completed, and even more on the road map. Let me share an example. Using generative AI, we created a proprietary chatbot that our commercial lines underwriters use to obtain reference information and find answers that assist with underwriting decisions. We are concentrating on using gen AI to gain efficiency that leads to meaningful productivity gains for our associates. We're optimizing their efforts, allowing them to add more value to our business, deepening relationships, sharing expertise and focusing their energy on the most complex underwriting and claims decisions. As we continue to weave gen AI into our business, we expect to see additional impacts to our profitability and growth. As a reminder, with Mike and me today are Steve Johnston, Steve Soloria, Marc Schambow and Andy Schnell. Jordan, please open the call for questions.

[Operator Instructions] Your first question comes from Michael Phillips from Oppenheimer.

I guess I did want to start with the commercial casualty line. And Mike, I heard your comments on the uncertainty and the legal system abuse. I think it's been pretty common for everybody for a while. I guess pricing seems to be getting softer for commercial casualty for the industry. Maybe not necessarily for you, but at least for your peers. So I guess just as we think about '26 and your 2025 number of, I guess, 76% or 77%, how much confidence do you have in that number not continuing to creep up from here or hopefully holding flat or maybe improving? Just confidence around that given what is a bit of a softer market today than it was the last couple of years.

Yes, Mike, Steve Spray. Let me -- I can start, and then if Mike wants to add some additional thoughts, he can as well. Just to your -- to the softness in the pricing, I think the -- we did see -- just -- I'll speak to maybe overall commercial pricing there in the fourth quarter. We did see it start to get more competitive pretty quickly in the fourth quarter on a packaged basis, all lines. Now most of that was driven by commercial property. But I think again, as a packaged company, the auto and the casualty kind of got drawn into that. I just -- I can understand somewhat the property softening just given the results of the industry, and you can see Cincinnati's results as well. But I just think there's loss cost headwind, particularly in casualty, as Mike mentioned on the legal system abuse, commercial auto. So I think that the pricing is going to hold up. We're confident in the future. For 2026, we're confident that our rates, our pricing are exceeding loss costs in all lines, except for workers' compensation. The only other thing I might add there, Mike -- and we talk about it in prior quarters -- is if you look at the average rate increase for Cincinnati, I'll just speak to Cincinnati, it just doesn't tell the entire picture. Our underwriters, both on new and renewals, have been executing now for years on -- using sophisticated tools they have to segment the business, the accounts we write, risk by risk. And when you get into a market like we're in and you have commercial results like we have, 14 consecutive years of underwriting profit, I think it only stands to reason that the average net rate is going to be under pressure. We have fewer accounts that are underpriced or that need aggressive action. And then on the business that's most adequately priced, we're coaching our teams to make sure they do whatever they need to do to keep that business. And so sometimes when the market gets a little softer, we have to give up a little rate on that. But again, in my opening remarks, I said we're still confident in the risk selection. And the overall pricing, we think, is very healthy in the commercial book, too.

Okay. Yes, Steve. That's helpful. I appreciate the comments. Second question is on your tech investments, and you've talked on this for a while. One of the benefits that you've talked about is more accurate pricing. I guess, do you see that those investments and the one comment of more accurate pricing, is that more applicable to you in personal lines versus commercial lines? Or is it kind of the same? Do you apply that to both? Should it be applied to both? And how do you think about that from the two sides of the fence there?

Yes, we definitely apply it to both. Like I just mentioned, our overall combined ratio as a company now, 14 consecutive years of underwriting profit. And for someone who's been here for 34-plus years and grew up as an underwriter, I can tell you we've always had this culture of continuous improvement. We've gotten better at risk selection. We've gotten better at loss control, loss mitigation. We've got better claims management. But from my seat, that's always been linear. And the pricing sophistication and segmentation that we instituted back -- roughly 2011, 2012, that has been exponential in the improvement in the results of Cincinnati Insurance. And it is in commercial lines, it's in personal lines. It runs through other areas of our business as well. It's probably been more pronounced in the improvement in commercial lines over the years. But the sophisticated pricing is probably even more important in middle market personal lines and specifically, personal auto. So if you can see the ex-cat accident year continuing to improve in personal lines, and that's heading in the right direction. And we need that, too. Cat has been -- we've had a lot of volatility, a lot of variability around cat. And we think there's still room for improvement across all lines of business, actually, but probably more importantly in personal lines.

Your next question comes from the line of Paul Newsome from Piper Sandler.

I wanted to follow up a little bit on the commercial competition question that Mike asked. And maybe some thoughts, is it still very much large versus small, the competition you're seeing in the fourth quarter incrementally changing towards? Is it still just the large folks? Or are we seeing it creep down into smaller accounts over time? And similarly, I want to see if there's any sort of thoughts you had or observations you had related to the kind of source of that incremental competition. Is it just across the board? Or are we seeing some emergence of some folks that maybe aren't necessarily terribly disciplined in carriers or MGAs or whoever?

Yes. Paul, I would say, yes, it's still -- it is still, I would say, leaning towards larger accounts. And then even there, I'd be saying more specifically towards large property. But like I mentioned, it's gotten more competitive in the middle market space for sure. And I think that is what you're seeing there, too. But let me maybe put this in perspective a little bit too and see if this helps. If you look over the last 3 or 4 years, we were in unprecedented hard market, if I'd say, for my career, particularly in personal lines. And with our financial strength, we were able to really help our agents continue to write business through that hard market and be there in a really dislocated market. Let me just give you a -- let me give you -- I hate the tough comp thing because it sounds like an excuse, so that's not what I'm driving at here. 2024 was just an extraordinary year when it comes to new business, both for personal lines and commercial lines. And if you look at -- if you just look at the -- at 2025, over 2023, commercial lines new business was up 31%; '25 over '23 for personal lines, new business were up 14%; 2025 over 2023 for E&S, up 30%. On a -- if you consolidate those 3, '25 was up over 25% over 2023. So on an actual basis, we are still really pleased with the new business. We're able to write it at pricing that we feel is adequate and that we're -- that it's healthy and that we're happy with. So a little bit of this softening is just coming off I'd say a pretty extraordinary hard market. And again, we were able to grow through that because of the relationships we have with our agents, because of our financial strength. Cincinnati Insurance company since 2018 on an all-lines basis, we've doubled net written premiums since 2018 from just a little over $5 billion to now over $10 billion in net written premium. Personal lines more than doubled in the last 4 years. So that just kind of frames it, Paul. Hopefully, the way we're looking at it, the way I'm looking at it, really strong growth for the company. I think this is a natural slowdown. And we'll -- one thing I can promise you is we're going to maintain discipline through all cycles when it comes to risk selection and pricing. And I couldn't be more proud of the underwriters, both on the new business and on the renewal and the way they're executing with what I think are the most professional agents in the business.

That makes a lot of sense. A second question, different. Where are we in the process for derisking on the personal lines side? You mentioned California. I think it's maybe -- it's a little bit broader than that. But where are we in that process? Are we kind of done? Are we a few quarters to go before all of this works itself out and then you can't necessarily get out of some of those policies?

Yes. Paul, we are well into the process. I wouldn't be able to give you a view on if we're for a quarter or 2 or 3 or 4 away. I can just tell you, from my perspective, we're well into it. On the metrics we're using, we're exceeding the expectations that we have for ourselves at this point in the process. We had moratoriums on certain areas for new business. We're working with the state of California, and we'll continue to do that as well. But as far as lessons learned in California, I think it really boils down to -- it's just a new view of risk, I think, both for us and for the industry on what a really bad day can look like in aggregations. And so that's where our focus has been terms, conditions and pricing on our E&S homeowner business in California. Whether it's post loss or pre-loss, we still feel really good about where we are there.

Your next question comes from the line of Mike Zaremski from BMO Capital Markets.

In terms of the new reinsurance program that you detailed, should we embed a lower top line impact in the income statement, maybe specifically on personal lines?

On the -- this is Mike, and thanks for the question, Mike. On our -- the cat program is really applicable to both commercial and personal. So in 2025, you saw a huge benefit that the cat program had on our personal lines side. So I won't say maybe it matters on which one gets hit first depending on what the cat is. But we still have a reinstatement, 1 reinstatement, generally speaking, on the overall cat program. So that would cover us for a second loss. But as Steve mentioned, if we do have a $2 billion loss this year compared to last year, that would be '26 compared to '25, we would have a lower amount that we would be out in the current year with the improved coverage up to $2 billion.

Mike, Steve Spray. The only thing I might add is that, as I said in my prepared remarks too, is that the overall rate on that property cat program was down 7%, even with the additional coverage.

Okay. That's a good clarification. Okay. So we shouldn't be -- I shouldn't be kind of impacting the premium, the cost for that in the model. Okay. It's good to hear about the upside protection. Maybe switching gears to workers' comp. The answer might just be you guys are booking really conservatively on an accident year basis, but if I just look at what you're looking at, it continues to increase year-over-year. Obviously, a lot of reserve releases. But is anything changing on comp that we should be aware of?

I would say -- let me start, and Steve, if you want to add on. But as it relates to release reserves, it has been consistent. And I -- not that I'm surprised, but each year, we have been having favorable development. We have had the many years of favorable development. We did have $20 million of favorable development in the fourth quarter with $65 million for the year. For the quarter, I would say the $20 million, it was spread really throughout. If you look back the last 10-plus years, the most favorable was 2024, 2023 accident years. That was $4 million and $3 million between those two. If you look at it on a year-to-date basis, the $65 million of favorable development primarily came from accident year '23, '22 and 2020. The other accident years were -- even the most recent accident year on a year-to-date basis for 2024, that was a favorable $2 million of favorable development. So we continue to reserve the way we do conservatively, and we'll just -- I'll watch what our actuaries do.

Mike, I might just add on the -- kind of on the day-to-day business, underwriting and pricing of comp. We've made -- that's another area we've made great strides over the last 15 years is our expertise. And then our appetite for comp, we just -- right or wrong, we just have felt that the rate environment wasn't where we wanted it to be, so we've been cautious. We've been careful, conservative. In comp, it is -- you can see, I think it's now roughly 200 -- a little over $240 million of premium. So it has less impact on the overall commercialized book. But we stand ready to help our agents write work comp where we feel like we can get a risk-adjusted return. And I think the future will bode well for us on comp. One of the other things is some of our biggest states -- well, our biggest state, Ohio, is obviously a monopolistic state, and we don't write workers' compensation here. And we're not active for work comp in California. And some of our other larger states, Texas, they're a little more minimal as well. So that's just kind of a view from the, say, the business side.

Helpful. And maybe lastly, just going back to the commercial lines competitive environment. I guess if we think about your comments about casualty is still an issue for the industry in terms of inflation there, property is well priced. I guess if you all had a crystal ball for the industry, if you don't want to speak to Cinci, would you expect pricing to continue moderating just a tad from the property side? Or I don't know if you guys are willing to go on record there. We can see that you guys might not be playing full offense right now based on the kind of agency appointments and top line growth. But just curious if you feel the competitive environment, the rate of change on pricing has kind of moderated and the kind of stable-ish territory?

Yes, Mike, let me make sure -- I'm glad you mentioned this, but make sure we are playing full offense. We always are. We've got such a winning strategy and model that's been proven over time. We're on full offense. We're adding more products, whether it be on the standard side for commercial and personal, our small business platform. Our E&S company continues to grow. We're adding product out of Lloyd's for -- to help our agents write more business with us as well. We're adding agencies across the country. The high-quality agencies, that will continue. So we'll continue to play offense. But playing offense, winning offense is not going to be in pulling back on risk selection or probably even more cutting rate. That's not going to be part of the equation. So we're going to have to, along with, I think, the best agents in the -- like I said, in the country, we can't always come down to a price. We've got to be able to convey value that we think we bring as a company that I know our agents bring in their communities. And that's where we're going to win. And if price becomes more and more of an equation, then we just have to get -- we're going to have to get more at bats and kind of weed through all that. As far as looking forward on competition, I said it kind of early on here. Just with the headwinds on loss costs primarily around casualty, general liability, umbrella, management liability has been under pressure, commercial auto, I just don't see that market. That's my opinion. I don't see that market getting -- continuing to have pressure on pricing. I just don't think it makes sense. Now it may go there, and I think it will have an impact on us because if it gets to a point where, again, on a risk-by-risk basis, if we don't feel we can get a risk-adjusted return, we're going to turn away from those in the short term because we're playing a long game here.

[Operator Instructions] Your next question comes from the line of Greg Peters from Raymond James.

This is [ Mitch ] on behalf of Greg. So you mentioned in an earlier response that you expect commercial auto pricing to hold up. Can you give us an update on where commercial auto renewal pricing was in the quarter? And based on current claims, how much additional rate you believe might be required to sustain underwriting margins in 2026?

Yes. Thanks, [ Mitch ]. Well, commercial auto rate for the fourth quarter was up mid-single digits. We think it on the pricing is prospective. Looking forward, we think that -- and we're confident that our commercial auto pricing is exceeding loss costs. One thing that I think is a little unique with us, [ Mitch ] -- and I mentioned earlier, too -- is we are a package writer. And so we do not -- monoline auto is not a big product for Cincinnati Insurance Company. We're also not in a heavy transportation rider, long-haul trucking risks. It's not to say we don't have 1 or 2 in our portfolio, but that is not a focus of ours. So I think our commercial auto over the last, I'll say, 7, 8 years has been a little more predictable and a little more as of year-end 2025 commercial auto, even with some adds in accident year 2025, on a calendar year basis, we were slightly profitable in commercial auto. So for us, we feel good about commercial auto. And again, it's part of the package.

Great. Turning over to the investment portfolio. You mentioned reinvestment yields are running about 70 basis points above the book yield. How are you guys expecting that to translate into net investment income growth in 2026 considering the declining rate environment?

Thanks, [ Mitch ]. This is Steve Soloria. We're thinking that the longer rate -- longer maturity rates are going to kind of hold steady from where they are. So we're expecting to be able to put money to work there pretty consistently. The insurance side has given us a lot of cash to work with. But from a market standpoint, the Fed seems to be kind of cautious on what they're going to do on the short end. So we think on the long end, we'll continue to get yields in the ballpark of where we've been right now. So we're pretty comfortable that we'll see solid growth going into 2026 and beyond.

That concludes our question-and-answer session. I'll now turn the call over to Steve Spray, CEO, for closing remarks.

Thank you, Jordan, and thank you all for joining us today. We look forward to speaking with you again on our first quarter 2026 call.

That concludes today's meeting. You may now disconnect.