Cincinnati Financial Corp 2026 Q3 Earnings Call

Good morning, and thank you for joining us for our third quarter 2026 earnings conference call. Late yesterday, we issued the news release on our results, along with our supplemental financial package, including our quarter-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 the call over to Steve.

Good morning, and thank you for joining us today to hear more about our results. We had another quarter of strong operating performance that reinforces our confidence in the long-term direction of our business. Our insurance operations produced excellent underwriting results, even as the property-casualty combined ratio increased from last year's exceptional level. Net income of $459 million for the third quarter of 2026 included recognition of less than $1 million on an after-tax basis for the increase in fair value of equity securities still held. Non-GAAP operating income was $443 million for the quarter, down only $6 million from a year ago, despite catastrophe losses that were $146 million higher on an after-tax basis. The 90.9% third quarter 2026 property-casualty combined ratio increased by 2.7 percentage points compared with third quarter last year, including an increase of 7.0 points for catastrophe losses.

Our current accident year combined ratio before catastrophe losses for the first 9 months of 2026 was 86.5%, improving slightly compared with the 86.7% reported through the first 9 months of 2025. Moving to premium growth, our consolidated property-casualty net written premiums grew 2% for the quarter. Premium growth moderated as expected, reflecting our commitment to pricing discipline, careful risk selection, and segmentation on a policy-by-policy basis. Estimated average renewal price increases for most lines of business during the third quarter were lower than the second quarter of 2026, but still at levels we believe were healthy. Commercial lines and excess and surplus lines averaged increases in the low single-digit percentage range. Our personal line segment included homeowner increases in the high single-digit percentage range and personal auto increases in the mid-single-digit range.

Although market conditions continue to be challenging, we remain confident that our diverse product portfolio, exceptional service, and strong relationships with independent insurance agents provide a solid foundation for long-term success. Next, I will highlight third quarter performance by insurance segment compared with a year ago. The commercial lines combined ratio was 92.8%, an increase of 1.7 percentage points, including 4.3 points from higher catastrophe losses. Net written premiums grew less than 1%. Personal lines grew net written premiums 1%, impacted by lower new business premiums that reflect continued softening market conditions. The combined ratio for personal lines was 90.3%, just 2.1 percentage points higher than last year, despite an increase of 12.1 points from higher catastrophe losses. Excess and surplus lines grew net written premiums 5% and produced another excellent combined ratio of 89.4%.

Cincinnati Re and Cincinnati Global both contributed meaningfully to premium growth and continue to provide diversification benefits for our insurance operations. Cincinnati Re's third quarter 2026 net written premiums increased by 34%. Its combined ratio was 94.8%. Cincinnati Global grew 13% while maintaining an impressive 70.7% combined ratio. Our life insurance subsidiary had another solid quarter, including 11% net income growth. In addition, term life insurance earned premiums grew 2%. Now, I will give a summary of our primary measure of long-term financial performance, the value creation ratio. Our VCR was -2.1% for the third quarter of 2026. Net income before investment gains or losses for the quarter contributed 2.7%, lower overall valuation of our investment portfolio and other items contributed negative 4.8%. Before I hand the call to Mike, I wanted to give you an update on our ongoing investment in data technology and artificial intelligence.

We continue to prioritize applications of generative and agentic AI that can improve the efficiency and effectiveness of our associates. We want to optimize their efforts, allowing them to add more value to our business, deepening relationships, sharing expertise, and focusing their energy on the most complex insurance and technology decisions. I will give you two examples of AI applications that are in production today that we believe have already and will continue to produce meaningful benefits across the organization. Many other use cases exist in varying stages of development, from design all the way through production. First, our AI Center of Excellence is harnessing cloud provider large language models to create reusable internal capabilities that can be adapted for additional business areas where the use case and supporting evidence are strong.

So far, we've developed seven proprietary intelligent assistants for associates to use in areas such as underwriting, claims, and loss control. These assistants, along with other tools we've deployed, reduce the time spent on information-intensive tasks such as summarizing underwriting and claims files and understanding internal appetite and risk guidance. Second, we are applying automation and AI-enabled capabilities within selected new business and commercial service workflows. More specifically, we are using these capabilities to process new business submissions received by email, enabling us to accelerate quote delivery by more than 30% across our commercial lines and excess and surplus lines businesses. Our approach is disciplined. We establish a baseline, evaluate the operating results, ensure we have strong governance and controls, and then expand the capability only where the evidence supports it.

Because our agents tell us that speed to quote is a key variable as we compete for business, we believe reducing the average time to quote will positively support our continued profitable growth. Now, I'll turn it over to Chief Financial Officer Mike Sewell for additional insights regarding our financial performance.

Thank you, Steve, and thanks to all of you for joining us today. Investment income growth of 10% in the third quarter of 2026 contributed nicely to our operating results, driven by strong cash flow from insurance operations. Bond interest income grew 11%, and the net purchases of fixed maturity securities totaled $1.1 billion for the quarter and $2 billion for the first nine months of the year. The third quarter pre-tax average yield of 5.04% for the fixed maturity portfolio was down six basis points compared with last year. The average pre-tax yield for the total purchased taxable and tax-exempt bonds during the third quarter of this year was 5.93%. Dividend income was down 4% for the quarter. Net sales of equity securities totaled $52 million for the quarter and $784 million on a year-to-date basis.

Valuation changes in aggregate for the third quarter were slightly favorable for our equity portfolio and unfavorable due to rising interest rates for our bond portfolio. Before tax effects, the net gain was $6 million for the equity portfolio, while the net loss was approximately $1.2 billion for the bond portfolio. At the end of the third quarter, the total investment portfolio net appreciated value was approximately $7.4 billion. The equity portfolio was in a net gain position of $8.9 billion, while the fixed maturity portfolio was in a net loss position of $1.5 billion. Cash flow continued to benefit investment income growth. Cash flow from operating activities for the first nine months of 2026 was $2.1 billion, a decrease of less than 1% from a year ago. Moving to expense management, our goal is to balance making strategic investments in our business while also controlling expenses.

The third quarter 2026 property casualty underwriting expense ratio increased by 0.4 percentage points due primarily to timing of recognition of certain expenses. Regarding loss reserves, our approach remains consistent and aims in 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. For the first nine months of 2026, our net addition to property casualty loss expense reserves was $1.26 billion, including $997 million for the IBNR portion. During the third quarter, we experienced $94 million of property casualty net favorable reserve development on prior accident years that benefited the combined ratio by 3.6 percentage points.

For the commercial casualty line of business, there was no material reserve development for any prior accident year during the quarter. On an all-lines basis by accident year, net favorable reserve development for the first nine months of 2026 included favorable $203 million for 2025, favorable $70 million for 2024, and an unfavorable $56 million in aggregate for accident years prior to 2024. I'll conclude my comments with third quarter capital management highlights. We paid $142 million in dividends to shareholders. During the quarter, we repurchased an immaterial number of shares. We believe our strong balance sheet continues to provide substantial flexibility and supports our financial strength. Parent company cash and marketable securities at quarter end was $6.1 billion. Debt to total capital remained under 10%.