Ladies and gentlemen, thank you for standing by. And welcome to the Fourth Quarter and Full Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today Mr. Dennis McDaniel, Cincinnati Financial's Investor Relations Officer. Thank you, sir. Please go ahead.

Hello. This is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our fourth quarter and full year 2019 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 cinfin.com/investors. The shortest route to the information is the quarterly results link in the navigation menu on the far left. On this call, you'll first hear from Steve Johnston, President and Chief Executive Officer; and then from 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 Chairman of the Board, Ken Stecher; Chief Investment Officer, Marty Hollenbeck; and Cincinnati Insurance's Chief Insurance Officer, Steve Spray; Chief Claims Officer, Marty Mullen; and Senior Vice President of Corporate Finance, Theresa Hoffer. First, 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. Thank you for joining us today to hear more about our 2019 results. Operating results and overall financial performance for the fourth quarter and full year were excellent. And we also see reasons for confidence regarding future performance due to our proven strategy and demonstrated experience and execution. Net income for the fourth quarter rose nearly $1.1 billion, including more than $1 billion for changes in the fair value of equity securities. Non-GAAP operating income improved 28% for the quarter and on a full year basis, it was 26% higher than 2018. Strong 2019 operating performance for both the fourth quarter and for the year again reflected efforts to carefully underwrite and price policies provide outstanding service to our agencies and manage investments well. We also continue to benefit from risk diversification by product line and geography. Our fourth quarter 91.6% combined ratio helped lower full year 2019 to 93.8%, 2.6 points better than 2018. More favorable catastrophe weather effects contributed slightly more than one full percentage point for the year, while improved underwriting was reflected in various underlying measures. We continue to further segment our renewal and new business opportunities.

Great. Thank you, Steve, and thanks to all of you for joining us today. Investment income growth continued at 4% for both the fourth quarter and full year 2019 doubling the growth rate we experienced for the previous year. Dividends from our equity portfolio again drove the growth, up 10% during the fourth quarter of 2019 and 11% for the year. Interest income from our bond portfolio was essentially flat for the year.

Thanks Mike. It was a good quarter and 2019 overall was a great year. We see improving trends in several areas that give us confidence in the future for Cincinnati Financial. Last week A.M. Best recognized our capital strength and upward operating trends by affirming our A+ financial strength rating and raising our issuer credit rating to a little A from a little A-. At the same time, Best upgraded the financial strength rating of the Cincinnati Life Insurance Company to an A+ superior rating to match the rest of the Cincinnati companies. All ratings have a stable outlook. We know our strategy works and we'll continue to execute it as we target profitable growth while providing great service to our appointed agencies. That should benefit all stakeholders of the company creating shareholder value over time. We appreciate this opportunity to respond to your questions and also look forward to meeting in person with many of you during the remainder of the year. As a reminder, with Mike and me today are Ken Stecher, Steve Spray, Marty Mullen, Marty Hollenbeck, and Teresa Hoffer. Catherine, please open the call for questions.

Yes, sir. Your first question comes from the line of Mike Zaremski with Credit Suisse.

Hey good morning gentlemen.

Good morning Mike.

First question. I believe the language in the earnings release was about commercial P&C pricing was low single-digits which didn't seem like a change from last quarter. It feels like based on the surveys and some of your competitors who have released earnings there seems to be some pricing momentum. Would you say that you just you don't need to take as much price given the results are good? Or maybe it has to do with your book being a little bit more multiyear-weighted? Any color there would be great.

Yes. Thanks Mike. This is Steve Spray. It's a great question one I believe certainly worth some further discussion. I'd tell you first we've certainly witnessed the disruption that you mentioned; large rate increases, capacity contraction that you're hearing about in the industry. However, I think it's a little more complex than that and I don't think you can simply paint the entire industry with a broad brush. I think it warrants peeling the layers back a little bit. And I think from our perspective the best way to do that is by line of business. I think commercial auto is still probably the best example of the entire line struggling to make money and the struggle seems to be rather universal across the industry. But the point is is even within commercial auto, we see segments under more pressure or ones that are more stressed than others. Large fleets with heavy gross vehicle weight trucks, long-haul transportation risks seem to be really under pressure, both from a rate and a capacity standpoint. I think in commercial property, it seems to be experiencing more disruption with the higher hazard risks, larger limit industrial properties, habitational, and anything coastal. Those will be just a few examples. On the casualty front, it feels like it's in a similar position as property. High-hazard-casualty risks such as manufacturers with tough product exposures, residential contractors that are in states where maybe construction defect jurisdictions are a little tougher. Professional liability even for us on skilled nursing home facilities really, really tough. I would say in the casualty segment though the thing that we've seen probably -- where there's been the most dislocation or disruption is an umbrella in excess liability and quite frankly on tougher risks that I mentioned before in the auto and on…

That's helpful. And I guess a couple of things that might dovetail with those comments. So, do you feel like the industry -- like pricing should be biased higher just given the interest rate headwinds in the industry is facing? Like you -- or maybe you kind of feel you don't need to have in your book? And I guess separately were there any -- some companies have said that loss cost inflation on the casualty is going to inch-up a little bit quarter-over-quarter or year-over-year. Are you guys seeing any changes in your trends? Those are two separate questions.

This is Steve Johnston, Mike. Really good questions. I agree 100% with the answer Steve Spray just gave. In terms of the interest rates, we certainly do consider them. They're really just low. I mean they're bouncing around your 50 basis points or a little bit more from time-to-time. But wherever they are and where they settle, it's really low against historic norms. And we recognize that in -- that we do have to make an underwriting profit and a good one every year. Just as Steve mentioned, eight years in a row now that we've put in underwriting profits. I think in terms of the trends, I guess my main point is and it buttresses what Steve said is we do have very sophisticated pricing models. And we look at them in the results on a policy-by-policy basis. We aggregate them up, everything that we're seeing from our pricing models, which show that we're more adequately priced today than we were a year ago. And those trends look such that we feel will be more adequately priced next year. Hence the comment in my prepared remarks that we feel that our combined ratio, we can perform next year to either match or exceed where we are today. In terms of the inflation, we've always measured inflation. We do that explicitly in our reserving models. I do think -- and I'd like to talk a little bit about the size of policy. As Steve mentioned, our average policy is about $11,000. For CSU, it's about $6,000. 93% of our commercial GL policies have occurrence limits of $1 million or less. 92% of our umbrella and excess policies have limits of $5 million or less. So, we don't feel that insulates us from inflation or if you want to call it…

Yeah. Great color. Thank you for the answers.

Your next question comes from the line of Amit Kumar from Buckingham Research.

Thanks and good morning. Maybe I'll follow-up Mike's question in a different manner. So staying on the discussion on, I guess the guidance and maybe let's start with commercial lines. I would have imagined with all the discussion that's going on your guidance probably would have gotten better than what you suggested. And maybe if you were to look at this in a different manner what number are you picking or thinking for loss cost inflation versus earned rate?

Well, we feel with our rate that it is above what we see in the loss cost inflation. We've talked about our commercial lines, our average rate being in the low single digits. So it's going to be a little bit less than that. And again I think to Steve's point, it has to do with segmentation. When we look at loss cost trends, it's not historic. When we look at loss cost trends, it's prospective. Rate making from an actuarial perspective is rate -- is prospective. So you always want to try to be projecting how much will loss cost increase into the prospective policy period. And that is impacted by the great segmentation that Steve and his people are doing as we move the book away from those policies with the less profit potential to those with the highest profit potential. And so it's a matter of every company having a different mix, a different position, a different geography. Everything is different. And we can't look at our premium as -- our total commercial premium as if it's one policy and it gets that rate increase. It's thousands of policies all being treated individually by local underwriters that can go out and put the decision at the intersection of the art and science of underwriting to see risks to meet management teams. And we really feel confident as our results would show that we're doing a good job in that respect.

So as a follow-up to that question. You know, when you look at the buckets of different policies et cetera or sub-segments if you will many companies will talk about there is a bucket of business which still needs rate and then there's a bucket which is adequate and other is obviously benefiting from the hardening. Can you, sort of, talk about -- even in a broader sense are there buckets in your overall, which could definitely use more rate acceleration from here? And maybe what percent is sort of adequately priced here?

Sure. And it's not so much buckets. We do summarize to groupings but it's looked at with each single policy. It's the technology. It's the skill that we have now. And we're not the only one in the industry in this position. But it's -- by a long shot it's looking at each policy on its overall merits. And I do think we add -- in addition to the science that we bring to the table which I think is substantial we bring people on the ground, working from their homes, living in the communities with the agents that go out see the risks meet the management teams. And so we have worked the percentage of those that are we believe those with the most profit potential to be a substantial part of our book.

Okay. The other question I had was just staying on the topic of social inflation. And I was looking at the claim count data and that's probably closed claim count data. Maybe you can talk about your own book? And if you look at it over the past I don't know 3, 6, 9, 12, 24-months have you seen any pressure or noticeable pressure from social inflation in terms of attorney involvement, et cetera? I know you talked about how the small size of the book insulates it to a great extent, et cetera and you're confident of the changes. But in your book are you noticing trends where you're like, okay. That is interesting and that is exactly what we thought it would be or maybe in pockets where it's coming in better than what you expected?

We -- this is Steve Johnson, again. We have seen trends over a period of years. It's nothing that just jumped up here in the last six months and surprised us. I think if we go back to 2015 we did see some movement there. We did -- you'd have to have a good memory but we did as I just gave the numbers increase our reserves over the last few years took some adverse development back then fuel that puts us in a very strong position. We just said back then that for somebody who wants to have 31 years of favorable development you have to react to trends as soon as you see them. We saw them we reacted and we feel good about our position. I think it's -- the answer would be it's just been more of a stable look at inflation over the last several years rather than something that we've seen jump up in the last six months.

Got it. That's helpful. Last question. On the E&S segment obviously it's seen good growth. And I was, sort of, wondering when you look at the different businesses and the rates versus returns how are you thinking about sort of capital allocation for 2020? Clearly E&S is where a lot of rate movement is happening and submission activity is happening. I was just wondering I mean we've seen great growth in the past few quarters. Is that sustainable? Or are you saying, okay, you know what? This is where we want to be in our broader pie chart? Maybe just talk about that.

Sure. This is Steve Johnson again and maybe Steve Spray would want to chime in. But what we preach is that the next policy that we write we want to be adequately priced on a risk-adjusted basis. In the E&S space under the leadership of Don Doyle they've just been doing a fantastic job. I mean over the last -- they have increased rates in the mid single-digit range for 113 straight quarters. I mean that's 9.5 years every quarter. And so we're going to continue to allow them on a policy-by-policy basis to pick the risks that they think are best. We think that business model that we have with our excess and surplus lines company gives us a great advantage in work. So we're going to continue to ask them to do that policy by policy. I sometimes love to demand matching this year's growth rate, or especially when it's that high, because it might put pressure to accept risks that have less profit potential. So we just want them to be out in the agent's offices, which they do a tremendous job of doing, look at every policy on its merits, write the ones that we think that we can write at the very profitable levels that they've been doing over the years.

Yes. And this is -- yes, this is Steve. I'm sorry...

I'm sorry. Go ahead.

This is Steve Spray. I would -- to the other part of your question too, I just -- for 2020 anyway, we still feel the submission counts are up. We don't see any change in the marketplace that would think that we can't continue to grow the E&S business.

And Steve wrote me a note correcting that it's 113 months, not 113 quarters. I had the 9.5 years.

Okay. Thanks so much and good luck for the future.

Thank you.

Your next question comes from the line of Meyer Shields with KBW.

Great. Thanks. Good morning.

Good morning, Mayer.

Obviously, we're seeing --good morning, I'm sorry -- tremendous success on the pricing sophistication. And I'm trying to get a handle on continued potential upside, so I'm going to frame the question this way. Is there any quantification or description of, let's say, the current profitability gap between the best and worst 10% of your book and what that looked like three years ago?

Yes. We have all that in detail. I don't think we're in a position to make a disclosure on it, but it has made really substantial improvement over that period of time.

Okay. Fair enough. And then, two really smaller questions. First, are you seeing any increase in workers' compensation severity? We're seeing medical costs fill up and maybe wages going up and I'm wondering how that's running through the book.

We look at the loss costs pretty much in total. It has been a mix of increasing inflation. I don't know that I would say that it's picked up or spiked. It's been just a pretty steady inflationary increase. Our frequency and, again, I think, it has to do with the segmentation and so forth, is still continuing to be down. And over the last many years it's down by a substantial amount. So we look at the total loss cost trend and that is one line where we feel we're losing some ground to that, in terms of where we are with the rate, but we're losing it like much of the industry, from a very profitable position. And you don't want to do anything rash that would run off good profitable business. We've got a real long-term focus.

Okay. Now, that makes perfect sense. And then finally, I think, you did a great job explaining the whole in place on leverage. But I'm wondering, whether the social inflation phenomenon that we're hearing a lot about, is that more pronounced at accounts that have higher limits? In other words, is there a deep pocket phenomenon also?

I've wondered about that. It's not just by size of limit, but by geography, as well. If you're going to have increased attorney involvement, they're going to, I would think, seek deep pockets. They would seek jurisdictions, maybe, where they think they might have a higher likelihood of success. But at this point, it's just kind of a thought experiment more than anything we're seeing in the data.

Okay. Fantastic. Thanks so much.

Thank you, Meyer.

So we'll take the next question from Mark Dwelle with RBC Capital Markets.

Yes. Good morning. I think my esteemed colleagues have already exhausted quite a lot of the questions that I had hoped to ask, but a couple of others to hit on. Given the pricing trends and things that you're seeing, do you contemplate any changes in business appetite in either Cincinnati Re or Cincinnati Global? And maybe, while you're at it, just a little bit of an update on how those businesses are performing and what your thoughts are there?

Yes. It's pretty much steady go the course with both. They're just doing a great job. I mean from what you could see in the numbers there, the combined ratio for Cincinnati Re for the year it came in at -- in the low 90s, the growth, 44%. I think they're doing it in a disciplined fashion. The submission flow for the fourth quarter was up 31% from where it was a year ago. And the hit ratio went down. It's actually accepting less than 20% of those that are submitted to them. And that's very consistent with what we wanted to do from the beginning, which was have an allocated capital model. We didn't set up a company and put capital in there such that they would feel compelled to grow maybe recklessly against that capital. We want them to just look at each of the contracts that they're faced with and make good decisions there. They've really staffed up with some very, very skilled underwriters, actuaries, technicians. It's actually without that being the plan been quite steady over time. On an inception date -- inception-to-now basis the property, premiums have been about 33%; the casualty 54%; the specialty 13%. For this year, it was 32, 51 in 2017. So very consistent with the way they've been operating. And so we're happy there. And we encourage them as markets change to look at opportunities. The Cincinnati Global couldn't be more happy with the way that that started out. We know, there'll be volatility therein in Cincinnati Re, but we hadn't done an acquisition for many, many years. And it's always better to start off on the right foot than in a loss position. They've had good growth. They've come in in the low 80s with their combined ratio. One thing I can say there is, as they file their business plan with Lloyd's. It's for good growth. They're going to add two new lines. One of them is going to be terrorism; the other one is going to be political risk. And so they've already hired seasoned underwriters to start to write those lines of business and take advantage of a -- what we think to be affirming -- and trade credit, I'm sorry. So there's terrorism political risk and trade credit. So, there's the higher experienced underwriters in those two areas. They're going to I think take advantage of a firming market over there at Lloyd's.

That's helpful. I appreciate the update. And then, the other question I had probably for Marty. Just with equity markets at kind of record levels and bond yields, I don't know thrashing around in the 1s, anything you're doing differently from a portfolio management perspective just to balance exposures and so forth?

Nothing dramatic. What we do is look for opportunity in the yield curve where we see it. We might put a little more money short term maybe try to wait out a little bit; try to get a surge in yields, that kind of thing, but not a lot. We're getting the dividend increases which have been very healthy last couple of years. So, that protects us a little bit. So, nothing on the scale that would be particularly meaningful.

Anything on the equity side? You're harvesting any gains or otherwise repositioning there?

Not too much. No, we're kind of staying in the course there as well. Not seeing as you might expect as you alluded to a whole lot of values out there, but there's pockets to be had out there. So, we generally don't make big macro calls and really move portfolio around a whole lot, so fairly steady.

Okay. Thanks for those questions and appreciate the update. Thanks.

Thank you, Mark.

And with no further questions at this time, I'd like to turn the call back over to Mr. Steve Johnston for any closing remarks.

Thank you, Catherine, and thanks to everyone for joining us today. We look forward to speaking with you again on our first quarter 2020 call. Thank you, very much and have a great day.

Ladies and gentlemen, this does conclude today's conference call. Thank you for your participation. You may now disconnect.