Cincinnati Financial Earnings Call Nuggets: Homeowner Options and New Business Growth

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

Homeowner Options

Joshua Shanker – Deutsche Bank: I wanted to ask a few questions about homeowners growth was quite strong and I want to know, first if we could parse that into unit volume in traditional territories unit volume and new territories and rates and to talk about whether or not there’s a lack of viable options for homeowners and that’s becoming a big opportunity for Cincinnati.

Jacob F. Scherer, Jr. – Chief Insurance Officer and EVP: This is J.F. I guess to put into perspective unit volume for us, since January of ’09 just to give you an idea, we’re up 24% and homeowner policy count we’re up 35% in private passenger auto policy count and we’ve gone, and this is something to consider as well, we’ve gone from 73% of our book of business being packages both the home and the auto up to 81%. We have been pretty strong with our agents that if we can’t right the auto with the home owners we’re not interested. So, on new business it would be a rare situation, that situation might be that we write the commercial, the private passenger autos are under the commercial lines. We’re requiring the private passenger auto. So, that can have a way of muting a little bit of the homeowner growth. Overall maybe another item in terms of rates and we have been increasing rates. Over the past 15 quarters, we’ve increased homeowner rates by 43.4%. Now, we’ve it increased more than that in some of the Midwestern states, for example, Ohio was 51.4%, and that includes rate increases that will go into effect a little later this year. So, and one other item in terms of growth just for purposes of personal lines, we’ve appointed 558, over that same period of time, 558 new locations to represent us in personal lines, 214 of which were commercial lines agencies that because they have a greater appreciation for our technology and how we can help them issue the policies, have started writing business with us. So, I think we have a lot of good things going. The increases, certainly on a percentage basis from newer states for us, has been strong, but we’re continuing to write business in the Ohios, Indianas and the Illinois’, but we’re a lot more pleased with the rate levels that we’re at. A couple of things have happened this year, I think it was mentioned before, April 1, we strengthened our underwriting requirements. We required higher deductibles on homeowners on all new business. We’ve also added actual cash value endorsement to the homeowner policy if the roofs are 15 years or older. We’re not writing shake shingles for example. So, we’re managing rooftops a little stronger and I think that, that has had a tendency as we would’ve expected it to mute the new business in the second quarter. So between rate increases, tougher underwriting and a third thing, a lot more inspections, we’re going to be inspecting over this year and the next two years, 300,000 structures in personal lines for us to verify the condition of the property. Add it all together, I think we’re comfortable, we’re going to have a more profitable book of business, and secondly it is going to have an effect of slowing growth down just a little. So, I hope that wasn’t more than you were asking for, but that gives you a little bit of an overview of how we’re doing at homeowner.

Joshua Shanker – Deutsche Bank: More’s always better. On these inspections, are they – obviously they’re going to be a lot of things but is roof a particularly important part of this inspection process or what are you really trying to get at?

Steven J. Johnston – President and CEO: Roof is a significant part of it. We’ve asked the – we have some of our employees that do those inspections, but vendors that we’ve hired to do with a specific focus on roofs, they’re actually taking with cameras that can zoom in on it pictures of the shingles and best they can verify and how old the shingles are. But we are also looking for overall condition of property, whether it’s casualty, cracked sidewalks things of that nature, dogs that we didn’t know about wood-burning stoves, verifying the protection class the property’s in sometimes we have it as a better protection class than it’s actually in. So it is across the board pictures running back, pictures of every deficiency very thorough, but we’re pleased with how our agencies approach doing business with us, but we are verifying everything right now…

Joshua Shanker – Deutsche Bank: On the investment portfolio. I was actually surprised a little bit at the book value shrinkage. I look at your investment portfolio is more resilient than peers, but it was kind of about a peer level is there any reallocation that’s going on in your mind with the 2Q storage and interest rates and thinking about the next 18 months out?

Martin H. Hollenbeck – CIO, SVP, Assistant Secretary, Assistant Treasurer: This is Marty Hollenbeck. Not really, we actually welcome a gradual rise in interest rates I mean it spiked a bit in the second quarter, but we’d still like to see it work its way up further. Obviously the balance sheet takes a quick hit, it takes long for the income statement to get the benefits of that, but nonetheless we would welcome it. Our bond portfolio, I don’t think to be honest with you took as big a hit as you might think into book value. We have a pretty generous dividend which comes out of that as well. We have a slightly higher duration but we have, we have less allocated to fixed income and certainly as a percentage of our shareholders equity that is the case. So we are not doing anything dramatically different going forward, corporate bonds, municipal bonds, and dividend growing stocks are still our favorite asset classes.

 

New Business Growth

Scott Heleniak – RBC Capital Markets: I was just wondering if you could touch on the new business growth, it was good in the quarter, I guess it was down a little bit the pace, but I was just wondering if you could touch on that, was there certain areas more so than others where you decided to dial back on and if you could just talk about that a little bit?

Jacob F. Scherer, Jr. – Chief Insurance Officer and EVP: Yes, Scott. As I already mentioned on homeowners we expected the new business to moderate a little bit on that and consequently since we’re only accepting packages private passenger auto. Otherwise, actually there are timing differences and booking differences and so, I think the best way to look at all of this is over the first six months of the year but frankly it’s going along as planned. We’d projected out to the end of 2015 to be $5 billion company and that does — just to keep in mind — it does include life insurance, but the kind of new business that we expected to ride, we’re actually a little bit of plan on it. The only thing I would say that was somewhat remarkable on the second quarter was the level of competition on larger accounts, they always draw a crowd, that’s not surprising but we saw a bit of I guess a bit of a tick up in terms of the aggressiveness of the marketplace in that area. After we really dug into it, it turned out not to be as remarkable as we thought but I guess that’s just I suppose worth mentioning. So, across the lines of business, we write packages so we’re not writing or targeting commercial auto or workers’ comp or something of that nature, but all in all, I’d have to say, we finished the quarter and pleased with what we saw.

Scott Heleniak – RBC Capital Markets: What is the pricing differential, you mentioned large account business, what’s the pricing differential between your sort of core, small to mid-account customer and then a large account customer, what kind of – where’s pricing for the large account business that you were talking about? Is that kind of just low single digits?

Michael J. Sewell – CFO, SVP and Treasurer: No, it’s a little bit better than that, I’d say overall, a little below 5%, I suppose with the smaller accounts up towards 10%.

Scott Heleniak – RBC Capital Markets: I’m just wondering if you’d talk about the E&S business. Obviously, everyone’s talking about how more business is coming into E&S and just wondering if you guys could touch on just the opportunities now, that Cincinnati has versus a couple of years ago and maybe there’s an opportunity to grow that at a faster rate than maybe you saw.

Steven J. Johnston – President and CEO: Well, what we’re seeing in our book, and keep in mind, we are pretty conservative in our underwriting appetite. I think there’s a fair amount of business that’s on the fringe, that kind of floats back and forth between the standard market and the E&S market. What we have seen in that area, larger accounts, we’ve seen a lot of competition from standard carriers, and so we’ve lost a few accounts in that regard. We’re not seeing them from other E&S carriers in terms of the competition. So, that wasn’t noticeable really through the first six months of this year. We still think we have a great opportunity. I can’t say that we’ve seen anything in the way the market has changed that is causing us to think this is really going to – the doors are really going to fly open and some business is going to come in. Still deliberate, we’re still trying to be pretty conservative about what we do, and so, as a general statement we’re seeing some standard market players take some business out, but other than that it’s been pretty steady for us.

Scott Heleniak – RBC Capital Markets: The only other question I had was, you guys mentioned equities being 30% of invested assets. I was wondering you said there is a little bit of room to move that higher and what did you have in mind as far as how much higher is their new policy on that, as far as how high they can go.

Martin H. Hollenbeck – CIO, SVP, Assistant Secretary, Assistant Treasurer: There’s a lot that goes into that decision. We look at really from the bottom-up by entity, by company in regards to regulatory issues, tax issues, et cetera. We don’t have a hard target obviously the last few years equities of the type we buy have been very attractive just on a pure income basis. They are still relatively so by historical standards. We are not looking for a large scale bump up. I think we were just trying to convey the fact that we had not reached a maximum there. We do have.

A Closer Look: Cincinnati Financial Earnings Cheat Sheet>>