Cincinnati Financial Earnings Call Insights: IBNR Side Estimates and Expense Ratio Analysis
IBNR Side Estimates
Vincent DeAugustino – Keefe Bruyette & Woods Inc.: I’d just like to first start with acknowledging with what you guys have accomplished just because it’s been quite a feat over the last few years and then, second, I’d just like to preamp my question by saying that on our side we unfortunately tend to only focus on some of the negatives on these calls and our questions which doesn’t really often reflect our optimism. So, in that light I just don’t want to come across as being too critical, but I’d just like to spend a moment on the reserve development in the quarter, specifically, the content in the press release on the IBNR reserves and just from my side, when going through the Schedule P this year on some of the lines, I saw that I could easily justify the lower carried IBNR reserves on exiting your 2012, just understanding that in a lot of these lines, workers’ comp, a really good example where you’ve pulled forward the claims reporting and have done an excellent job on managing the loss cost side. All things in my opinion that would allow you to carry a little less IBNR reserves, so is there anything that has emerged that would maybe change your thinking in terms of some of the progress that you’ve made and just how that impacts your estimates on the IBNR side?
Steven J. Johnston – President and CEO: Good question; and we really appreciate and respect your balance, Vincent. There really hasn’t been a change. I think that we are very consistent in your process. And I might just kind of start at the beginning on these sorts of things. And I know you’re expert in this, and so I just want to make sure that I cover this fully as I can. And I know I’m not telling you anything that you don’t already know, but just to kind of put a framework around our discussion, we do have a consistent process where our actuaries make an estimate of the ultimate accident years’ losses for each line. And then these estimates are used to calculate the best estimate of IBNR. And for this quarter and really for every quarter that I can remember; management then adopts actuarial’s best estimate. So when we show a 1.1 point of favorable development during the first quarter overall, that just means that our best estimate of accident years 2012 and prior didn’t change much during the quarter. And I think (where you’re coming) from that is different than the first quarter a year ago, but I think it’s very explainable and it’s very much indicative of us as a company that prides itself on maintaining a strong conservatively state of balance sheet. We consider a lot of factors when we’re saying reserves, including that we’re growing at a strong pace that our results have turned, as you mentioned, and that our accident year loss ratios are improving in a strong fashion. So when we look at all this information, we just think it’s prudent that the best estimate for accident years 2012 and prior did not change much in a short period of time from when they were reviewed at year end. And to be clear, and I think the answer to your question, it doesn’t mean that we think reserves weakened any during the quarter. In fact, on the contrary, we’re confident that reserves remained well into the upper half of the actuarial range. To buttress that position, when we compare the first quarter of 2013 to the first quarter of 2012, the emergence of case (incurred) for prior accident years was the same. Virtually the entire amount of the change was due to change in IBNR released on prior accident years. Just summarizing, I think that we maintain a consistent process. That was a big difference from the first quarter a year ago to this quarter, but I think it’s indicative of us in terms of prudent reserve setting, and I think we are reflecting the progress, as you mentioned, that we’re making in a lot of areas in terms of our pricing and our underwriting.
Vincent DeAugustino – Keefe Bruyette & Woods Inc.: Again from our side, your track record is virtually unparalleled, so really good color. As far as – just because what the time of the year that it is and as you guys go through and meet with a lot of agents with the 20 or so sales meetings that you do, I’m always curious – I usually get to go to one or so, but as you go through these, is there anything that you’re hearing that’s a bit of surprise or just really any good feedback that you might be getting from agents that you’re thinking about implementing?
Jacob F. Scherer, Jr. – Chief Insurance Officer and EVP: This is J.F. I would say nothing surprising coming from agencies. I think we’re always anxious to hear about pricing and how agencies feel about the industry overall; our industry and their agency, if you will, and how comfortable they feel with delivering rate increases, and we, up to this point, we have four more meetings to go. Of the 19 we’ve attended, it’s been consistent that they’re comfortable with the approach we’re taking that rates, renewal pricing is up, a lot of discussions about – particularly in wind-prone areas about the use of higher deductibles, percentage deductibles, wind and hail deductibles is something that we’re focusing a lot and there is a generally consistent comment from everyone that that we’re going to be able to implement some of those initiatives. So, I wouldn’t say that there has been anything at all surprising this spring that relative to the types of things we’ve talked about on previous calls and what has in general happen in the marketplace.
Vincent DeAugustino – Keefe Bruyette & Woods Inc.: Then one last one if I can sneak it in just on audit premiums from accounting standpoint, when you have $1 of audit premium come in, is there a corresponding incurred loss with that or because of the way that you do your reserving, have you already necessarily booked the incurred loss regardless of the audit premiums coming in and so would it end up just falling all to the bottom line as far as audit premium tailwind?
Michael J. Sewell – CFO, SVP and Treasurer: That would basically fall to the bottom line because we’ve already incurred losses. So, that has been a very positive for us over the last so many quarters.
Expense Ratio Analysis
Michael Zaremski – Credit Suisse: First, I was curious, your goal for the expense ratio is 30%. I was curious if that’s what the time frame is around that goal, and I was curious is the driver of that, to that 30% largely premium growth leverage?
Michael J. Sewell – CFO, SVP and Treasurer: Part of that is premium growth leverage, you’re exactly right. As we grow the top line there that will have the natural effect to bring down the expense ratio. We are controlling expenses, one of the like I say problems that we have, but as we have more income, more profitable or lower combined ratio the offsetting effect of that is that our profit-sharing for the agents tends to go up. So that works against us. So the commission side is a very large item and that’s really what affected the increase for the current year. We do have a lot of initiatives that are going on that are also helping to reduce our loss and expense ratio. So, we’re controlling those, we watch them, we’ve got an expense committee, a headcount committee and we’re committed to drive it down to the 30. But it’s a problem to have with the profit-sharing to the agents.
Michael Zaremski – Credit Suisse: Secondly clearly a really great combined ratio, on an accident year ex-cat basis, I was curious if there was a non-cat weather benefit versus maybe what you’d call normal or versus last year 1Q. A number of years, a larger insurers have cited the benefit this quarter so far of the earning season?
Steven J. Johnston – President and CEO: Mike, this is Steve. I’ll take a shot at that one. We don’t track that for all lines. We could track it for certain personalized and so forth. I do think though to your point that it’s just kind of natural that when we do have high catastrophe losses, we’ll have more, what you call non-cat weather just because there are losses in the region that may not fall into that particularly cat, but their weather losses nonetheless. So I would think this is more of an opinion then something I can back up with the fact, because we don’t keep it for all lines, but I do think that there would be a benefit because we had lower cats that it would naturally fall there would be less non-cat weather as well.
Michael Zaremski – Credit Suisse: So probably a correlation between the cat level and non-cat weather.
A Closer Look: Cincinnati Financial Earnings Cheat Sheet>>