Cincinnati Financial Earnings Call Insights: Margin Improvement and Workers’ Comp

Cincinnati Financial Corporation (NASDAQ:CINF) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Margin Improvement

Michael Zaremski – Credit Suisse: Very impressive margin improvement. One segment that really stood out was the commercial property. If I’m calculating this correctly, I’m getting an accident year excluding cat combined ratio of 27%. If that’s correct, is there a non-recurring element benefiting that ratio?

Your 1 Feature Stock Pick for February is hot off the press. Click here to discover it now!

Steven J. Johnston – President and CEO: Mike, we’ve got some numbers here I want to check real quick before we answer that. You’re looking at commercial property? That loss ratio is at the current accident year loss ratio 28.1 improved from 31.1 and that’s before catastrophe losses. 28.1 before catastrophe losses versus 31.1 fourth quarter a year ago. And then for the full year, which I think really for all of our lines is one to look at as well, it’s 46.1 and 69.7 for the full-year 2012 compared to 2011 and that’s current accident year before catastrophe losses.

Michael Zaremski – Credit Suisse: So I guess the moral of the story is (I need to kind of take for you guys) last 12 months average more so than looking at the absolute level this quarter versus – I guess it’s just that ratio – that’s like a very, very good ratio.

Steven J. Johnston – President and CEO: That’s a good point Mike and we look at all the numbers obviously, but we do tend to focus on the full year numbers.

Michael Zaremski – Credit Suisse: Okay. And I guess then kind of asking the question another way then. In terms of the overall margin improvements on a consolidated basis, is there a way to kind of break down the drivers of the margin improvement. For example, maybe pricing versus I know technology driven underwriting initiatives, etc.?

Steven J. Johnston – President and CEO: It’s a great question and again something we think about it lot and we do feel that we are getting improvement across the board from every area of the company pricing and maybe I will let J.F. comment on this a bit, but I’d say in general terms with the missing digit rate increases that we have been getting. We have been seeing about half come from rate and about half from other areas.

Jacob F. Scherer, Jr. – Chief Insurance Officer and EVP: And then why that on the property side, we are actually up close to 10% net rate increases on commercial property increases, so that is driving the improvement in property. We are also doing lot more loss control inspections as Steve mentioned in his prepared remarks, modeling has helped us across the board, we are also in the property lines as well. So, as Steve said, it’s in across the board contribution.

Michael Zaremski – Credit Suisse: And lastly, I guess can you comment on the competitive environment as it pertains to rate increases that seems like everyone in the industry including you guys have been taking?

Jacob F. Scherer, Jr. – Chief Insurance Officer and EVP: Well, no question that everyone is raising rates, some more than others. Agencies right now, what we are finding and particularly this week when we are out travelling is that there are some companies that are taking some fairly sizeable increases and in some cases we are too. What we are finding at least in terms of market conditions that it’s driving quite a bit of business into the market for competition. While our agencies report that because they perceived at some of the increases are little more than policy holders can tolerate, that there is a lot of preempting, preempted shopping of accounts that are perhaps type of thing that carrier would want to keep, it’s driving it in the marketplace. So, there is a lot going on out there, new business. We are not seeing the rouge – if you will the rouge carriers and I guess everybody gets credit for being a rouge carrier sometime, but we are not seeing anyone carrier driving a new business overly aggressively. So, mid-single digits to upper single-digits, from our standpoint is what we are seeing on improvements on renewals and I’d say just by way of commentary obviously property, cat prone property, awful lot of aggressive action being taken there.

Workers’ Comp

Vincent DeAugustino – Stifel Nicolaus: I guess first I’d just to say I’m glad that you guys are finally getting a few quarters worth. It’s not so much of an uphill battle with the weather. It’s just good to see. My first question would be is if I remember correctly in Q4 ’11, there was an 11 point adjustment that needed to be made to the reported core loss ratio for workers’ comp, but even if I back that adjustment out, the core loss ratio picked up in Q4 ’12. So, I just wanted to see, if there was anything notable in workers comp in terms of one offs just in light of the recent progress that you guys have been making in workers’ comp?

Steven J. Johnston – President and CEO: I think again I would focus a little bit more on the year, especially if the line is volatile and has been as you know is volatile for us as workers compensation. We still feel very confident with the progress that we’re making and it’s just that most recent accident quarter for workers’ comp is going to be pretty volatile in any year and so we are looking more to the long-term trend, the full-year improvement and feel good about the improvement that we’re, but given the volatility that can occur, your point is well taken that it’s aligned and always you have to have a close eye kept on it.

Vincent DeAugustino – Stifel Nicolaus: Then just with guys writing some of your accounts on a three year basis, how do you feel about the increases that you’re getting on the three year accounts that are renewing now? I guess this versus what the one year accounts have been getting as far as rate increases in the last few years? Then thinking about it in that way, what would the implied forward rate increase be that you’re assuming I guess in the go forward next three years on those accounts?

Jacob F. Scherer, Jr. – Chief Insurance Officer and EVP: Vincent, this is J.F. The way I would characterize the three year policy right now is that we probably more than at any point in time, previously are strengthening the difference between what we would offer as a one year renewal price increase and a three year policy price increase. The take up rate has been a little bit less. Agencies have renewed policies on a one year policy rather than three. And that’s all right, because we’d be very happy with the kind of increases we’re asking for. Then next year we’ll have the opportunity to revisit the policy. So, I say very committed to the three year policy it’s still a very stabilizing mechanism for us. So all-in-all good progress there, but once again strengthening the kind of increases we’re looking for in three year policy.

Vincent DeAugustino – Stifel Nicolaus: The comments you made about renewals going to one year versus three in some cases, it seems really interesting. I’m curious if I should – maybe the takeaway that I should make from that, would it be that agents maybe don’t think that the current rate environment is going to persist for the next couple of years and insurers would be better off taking a one year renewal or is it – should my takeaway be that you guys are just being very conservative and the rate increase that you’re asking for on the three year.

Steven J. Johnston – President and CEO: Yes, the latter. Well, I think we are pressing for higher rate increases on the three year policy. I think the bottom-line of the economy is not as robust as some businesses but like for to be. And there they can’t tolerate quite the increase that we may ask for on the three year policy.

Vincent DeAugustino – Stifel Nicolaus: And then the last one from me. In terms of the 65 agency appointment goal, is that just because of reaching saturation and I think that’s what you mentioned. I guess the other question will be, was there any volume of agency own or complaints regarding the last few years pace that would have impacted that lower target.

Steven J. Johnston – President and CEO: Yes, there have been some volume of agency complaints, but I don’t think it’s anything drastic. Obviously, when your ad agencies as we have and we have been so careful throughout our history to make certain we don’t oversaturate an area. You can get into a lot of discussions with agencies about better debates. But the 65 level for this year I think is a reflection of the fact that over the last three years, we have increased the agency force in lot of areas. A lot of opportunities we appointed about $2.7 billion in property and casualty premium this year which was probably double our best year previously or certainly a significant increase over previous year. So having had a lot of conversations over the last year and a half with agencies about our long-term aspirations for growth. Number of agencies we have in our area examining the agencies that have plateaued as far as their activity levels concerned. We think we have done a real good job, we have a lot more critical mass to work with right now. Having said that, there are always going to be opportunities for new appointments, there are 65 agencies that we’re projecting for this year will reflect that.

A Closer Look: Cincinnati Financial Earnings Cheat Sheet>>