Hello, and welcome to the Cincinnati Financial second quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Dennis McDaniel, Investor Relations Officer. Please go ahead.
Hello, this is Dennis McDaniel, Investor Relations Officer at Cincinnati Financial. Thank you for joining us for our second quarter 2022 earnings conference call. Late yesterday, we issued a 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, 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 Chairman and Chief Executive Officer Steven Johnston, 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 President Stephen Spray, Executive Vice President and Chief Investment Officer Martin Hollenbeck, and Cincinnati Insurance's Chief Claims Officer Marc Schambow, 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.
Thank you, Dennis. Good morning, and thank you for joining us today to hear more about our second quarter results. Increased catastrophe losses and increasing inflation affecting the industry pressured our property casualty insurance results for this quarter. We are well-positioned to improve results through continued focus on pricing and risk selection. As we have in the past, we'll follow our proven formula to successfully analyze and address challenged areas of our insurance operations. Our financial strength remains excellent, and we are confident we can achieve profitable growth over the long term and through all economic cycles. We reported a net loss of $808 million for the quarter due to the recognition of a reduction in the fair value of securities held in our equity portfolio.
Non-GAAP operating income of $104 million for the second quarter of 2022 was down from last year's impressive $292 million, largely due to catastrophe losses that were $119 million higher on an after-tax basis. Our 103.2% second quarter property casualty combined ratio was 17.7 percentage points higher than the 85.5% posted second quarter of last year. That increase reflected higher catastrophe losses and less favorable results on both the prior accident year and current year, current accident year basis. We regularly disclose large losses exceeding $1 million for individual property casualty claims, excluding losses from catastrophes. Commercial property and commercial umbrella tend to account for the bulk of those losses, each typically about 1/3 of total large losses.
We noted on our last call that commercial property large losses rose sharply in the first quarter of this year. That increase reversed in the second quarter when they declined 86% from the second quarter of 2021. For our personal line segment, net written premiums grew 16%. Sorry. However, in the second quarter, commercial umbrella losses rose significantly, prompting reserve additions that we detailed in our Form 10-Q. That business has long history of profitability for us and has benefited from very strong pricing in recent years for both the industry and us. Overall, premiums continued a healthy growth pattern with steady average renewal price increases for each of our property-casualty insurance segments.
We benefited from outstanding production from the finest independent agents, while our underwriters remained steadfast in seeking to retain and grow profitable accounts and address areas where they judge pricing is not adequate, segmenting opportunities on a policy-by-policy basis. Consolidated property casualty net written premium rose percent for the second quarter of 2022. Our commercial lines insurance segment continued to experience estimated average renewal price increases in the mid-single-digit percentage range, similar to the first quarter. Our excess and surplus lines insurance segment continued in the high single-digit range. Personal lines, average renewal price increases were slightly higher than in the first quarter, remaining in the low single-digit range. Personal auto is an area where we plan to more aggressively raise rates in future quarters as we work to improve its loss ratio.
Underwriting processes designed to help premiums keep pace with rising property values, whether from outsized inflation or other changes in insured exposure amounts, are another reason for significant increases in 2022 renewal written premiums. Our commercial lines segment grew second quarter renewal premiums by 10%, and our personal lines segment also grew second quarter renewal premiums by 10%. The commercial lines segment grew second quarter 2022 net written premiums by 10% with a combined ratio of 106.3, including higher than usual catastrophe losses and elevated inflation effects. For our personal lines segment, net written premiums grew 16%, mostly from our continued planned expansion of high net worth business produced by our agencies. Its second quarter combined ratio of 112.1% also included higher than usual catastrophe losses and elevated inflation effects.
The second quarter provided another example of the benefits of improving diversification over time by product line and geography. Profitability was very good for our operations in excess and surplus lines insurance, reinsurance, global specialty insurance, and life insurance. Our excess and surplus line segment had an 85.1% combined ratio and continued strong growth with second quarter 2022 net written premiums growing 17%. Cincinnati Re and Cincinnati Global each continued a pattern of profitable growth. Cincinnati Re grew net written premiums by 31% for the second quarter of 2022, with a combined ratio in the low 80% range. Cincinnati Global grew net written premiums by 47%, with a combined ratio below 70%.
Our life insurance subsidiary had another good quarter, with net income of $21 million and a 91% increase in operating income, along with growth in term life insurance earned premiums of 8%. We continue to emphasize the importance over time of the value creation ratio, our primary measure of long-term financial performance. VCR was a negative 11.2% for the second quarter of 2022. Net income before investment gains or losses made a positive contribution, but was offset by lower investment valuations during the quarter. Next, Chief Financial Officer Mike Sewell will discuss a few more important insights regarding our financial performance.
Thank you, Steve, and thanks to all of you for joining us today. Investment income continues to grow and was up 11% for the second quarter of 2022 compared with the second quarter of last year. Dividend income rose 20% for the quarter, aided by a $5 million special dividend from one of our stock holdings. Net equity securities purchased during the first half of 2022 totaled $40 million. Bond interest income grew 6% in the second quarter. The pre-tax average yield of 4% for the fixed maturity portfolio was down 2 basis points from a year ago. The average pre-tax yield for the total of purchased taxable and tax-exempt bonds during the second quarter of 2022 was 4.75%.
We again purchased additional fixed maturity securities with net purchases totaling $240 million during the first six months of the year. Valuation changes for our investment portfolio during the second quarter of 2022 were unfavorable in aggregate for both our stock and bond holdings. The overall net decrease was approximately $1.8 billion before tax effects, including a net decrease of $610 million for unrealized gains in our bond portfolio. At the end of the quarter, total investment portfolio net appreciated value was approximately $4.7 billion. The equity portfolio was in a net gain position of $5.3 billion, while the fixed maturity portfolio was in a net loss position of $564 million. Cash flow continues to fuel growth of investment income.
Cash flow from operating activities for the first six months of 2022 generated $755 million, compared with $917 million a year ago. As in the past, we emphasize careful management of expenses and balance that with strategic investments in our business. The second quarter 2022 property-casualty underwriting expense ratio was 0.6 percentage points lower than last year. Most of the decrease was from lower accruals for profit-sharing commissions for agencies and related expenses. Moving on to loss reserves, we aim for a consistent approach by targeting 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, and then updated estimated ultimate losses and loss expenses by accident year and line of business.
In the first half of 2022, our net addition to reserves was $414 million, a pace well ahead of 2021 or 2020, and a level we believe is an indication of the quality of our balance sheet. During the second quarter of 2022, we experienced $59 million of property casualty net favorable development on prior accident years that benefited a combined ratio by 3.4 percentage points. On an all lines basis by accident year, net reserve development for the first six months of 2022 was favorable and included $61 million for 2021 and $54 million for 2020. That was partially offset by an unfavorable $15 million in aggregate for accident years prior to 2020. Next, I'll comment briefly on capital management.
We've had a consistent approach that includes share repurchases as part of maintenance intended to offset shares issued through equity compensation plans. At the same time, changing circumstances or opportunities can influence us to repurchase more or less than historical averages. We continue to believe that we have plenty of financial flexibility and that our financial strength at the end of the quarter was excellent. Shareholder dividends continue to be our primary way of returning capital to shareholders, and cash dividends declared in the first half of 2022 are up 10%. In addition, during the second quarter, we repurchased just over 1.2 million shares at an average price per share of $124.44. As usual, I'll conclude with a summary of second quarter contributions to book value per share. They represent the main drivers of our value creation ratio.
Property casualty underwriting decreased book value by $0.26. Life insurance operations increased book value by $0.13. Investment income other than life insurance and net of non-insurance items added $0.53. Net investment gains and losses for the fixed income portfolio decreased book value per share by $3.03. Net investment gains and losses for the equity portfolio decreased book value by $5.81, and we declared $0.69 per share in dividends to shareholders. The net effect was a book value decrease of $9.13 per share during the second quarter to $66.30 per share. Now I'll turn the call back over to Steve.
Thanks, Mike. While this wasn't the kind of quarter we want to have, one quarter doesn't sway us from our long-term strategies and objectives. Our financial strength remains excellent. We are optimistic about the future. In the last month, three different third-party organizations agreed. Moody's and S&P both affirmed our strong financial strength ratings. We were also again included on the Ward's 50 list. We are one of only four companies named 31 times to the Property Casualty Ward's 50, recognizing our growth, profitability, and shareholder return. Before we open the call for questions, I'd like to pause to recognize Martin Hollenbeck. Many of you know Martin from his years of investor travel. He's announced his intent to retire at the end of September after 35 years of service to our organization.
We thank him for his steady hand overseeing investments, especially during some of the very challenging times of market volatility. As I'm sure you can all imagine, we're sad to see Martin go. At the same time, however, I have absolute confidence in Steve Soloria in his ability to smoothly step in to lead our investment operation with his nearly 30 years of experience. I know you all will feel the same as you get to know him during future investor visits. As a reminder, with Martin, Mike, and me today are Stephen Spray, Marc Schambow, and Theresa Hoffer. MJ, please open the call for questions.
Thank you. We will now begin the question-and-answer session. Our lines are open. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question today comes from Meyer Shields of Keefe, Bruyette & Woods. Please go ahead.
Good morning. Thanks a lot. My first question is two parts related to the commercial umbrella line of business. You readjust to your loss picks last quarter, but just curious what kind of new information that you've gotten to make another adjustment this quarter. Secondly, since the umbrella line of business is pretty heavily exposed to inflation, how comfortable do you feel about the inflation assumptions embedded within your reserving and accident year loss picks?
Hey, Derek, Stephen Spray here. Thanks for the question. Yeah, here in the second quarter, we've definitely seen inflationary impacts as well as pandemic effects on the umbrella book. As an example, you know, courts closed during the pandemic, slower to open. We're seeing that show up. I would also say that, you know, our umbrella book in general, just from quarter to quarter is going to have inherent variability. We've seen that here in the second quarter. You know, maybe of note as well is that book, our commercial umbrella book is up over $500 million now, and we've got a long track record of underwriting profit, understanding how to price that book. The limits profile on it is relatively lower.
The book reflects our primary business, which tends to be smaller to mid-size accounts. That's the business that we're primarily writing the umbrella coverage over. You know, there's uncertainty for sure. There's inherent variability. You're seeing that in the actual results. Then on top of that, as you can expect from Cincinnati and our long track record of recognizing uncertainty, you know, we've gone ahead and recognized that through, you know, the IBNR for the reserving of the umbrella going forward too.
Okay. That's really helpful. My second question is around the personal line segment. You had really good growth in that segment, especially within the high net worth business. You've talked about in the past about how the high net worth business has a longer term attractiveness relative to the middle market business. I'm just curious how you think about the overall profitability in the near term, just in the context of rising loss trends.
Yeah. Derek, again, Stephen Spray. Yeah, we are feeling really good about the high net worth business, primarily the team that we've assembled, the expertise, the experience that they have. You're right. The majority of our growth in personal lines right now is coming from high net worth. On the written premium side, it's almost all coming from high net worth. On new business, we have seen our middle market book rebound. Although again, the new business lion's share is still coming from the high net worth. High net worth is important to us. We think we have a valuable contract. We think the way we handle claims is worth more premium. That being said, I wouldn't want anybody to think that we are not completely focused on that middle market book as well.
We think that we are in a unique position that we have the sophisticated pricing, we have the products, we have the team, we have the historical experience long-term on the middle market book as well. We feel good about the middle market book. Maybe to get a little deeper for you there. Personal auto obviously is under pressure. A lot of that is coming from inflation. We are taking rate. We've been taking rate in 2022. We'll continue to take rate in that personal auto book in 2022. We expect in 2023 that we're going to take a little bit, a little more than double the rate in the personal auto book that we are this year.
The homeowner book is performing better, but it's under a little bit of pressure as well. We're taking rate in 2022. We plan to continue to take rate in 2023. The other thing I would add there is in homeowner line, we are getting high single-digit exposure change there too. That's helping with the inflationary pressure we're feeling.
Got it. I appreciate the color in that. Last just numbers question. Did you see any Russia or Ukraine related loss this quarter?
This is Steven Johnston. Yes, we did. For the quarter, and this would come from our Cincinnati Re and Cincinnati Global areas for the quarter, $6 million, and for the year to date, $11 million. We think we have that properly managed.
Okay. Thank you very much.
Thank you.
Again, if you have a question, please press star then one. Our next question comes from Mark Dwelle of RBC Capital Markets. Please go ahead.
Yeah, good morning, guys. I have a few questions. Starting with the commercial lines. When you reported a 64.8 accident year loss ratio before cat losses, that was up seven points. Is all of that second quarter or is there a catch up within that to catch up for a first quarter loss trend?
Mark, this is Steven Johnston, and that would be our first quarter VCR. I'm sorry, second quarter VCR. That would be just the quarter's VCR.
The relatively lower loss pick that you had for the first quarter, you've picked it. I'm just trying to make sure I understand. Based on the run rate you're seeing right now, you would like your loss pick to be, you know, roughly 65 points as compared to the relatively lower pick that you had in the first quarter?
We just, for each quarter, we try to do our best estimate, you know, of our reserves, of our losses and premiums for each of the quarters. The two stand on their own and, of course, the year to date would be the sum of the two.
Okay. Understood. I presume the same applies related to the personal lines, you know, the 8-point bump there that in the accident year loss pick, that's all just in there. There's no prior quarter development embedded within that number.
That's correct.
Okay. When you think about your loss cost trends right now, and I appreciate they vary by line of business, but if you were thinking about your average loss cost trend across the entire commercial lines book, for example, what would you say that is right now based upon what you're seeing in your data?
Well, you're right, Mark, that it is, you know, done at a very detailed level. When we look at our prospects, we do it prospectively. We try to estimate what we think we need to trend losses for into the prospective rating period for the policies that will be effective. We do think, and as Steve kind of alluded to, that we are in a position that we can keep up with and/or exceed those loss cost trends as we go forward.
I mean, can you share sort of a run rate number? I mean, some companies have said 5%, some have said 6%, 6.5%. I mean, is there a number you can share in terms of what you're seeing as far as trend?
We don't have a specific number like that in terms of a number, you know, but when we do talk about getting mid-single digit rate and as Steve alluded to for both personal and commercial, some inflationary effects on our exposure growth, we feel that we can keep pace with and exceed that trend.
Okay. Turning over to the personal lines. I mean, again, you commented that you're getting kind of low single-digit rates across the personal line book. Can you break that between what portion, what you're seeing in the auto book as compared to the homeowners book?
Yes. This is Steve again. For the auto, it would be currently in the low single-digit%, and for the homeowners in the mid-single-digit%. As Steve mentioned, for the homeowners, there is exposure growth in the rate for inflation in addition to the rate increase that we quote.
As far as raising the rates on the auto book more aggressively, are you largely locked in on those rates now for this year based on your state filings? Or will you have to, you know, kind of begin that process from the start in order to try to get more? I mean, your average rate increase in your auto book, you know, seems to be distinctly below where I would see at least some of your competitors at.
It's a rolling process, so we're already engaged in some of the 2023 rate increases. Also, you know, a point we make is through the pandemic, we did not reduce our rates any through there at all. We did have kind of a stay at home discount that was in place on the expense side for several weeks, but did not take rate decreases.
There's not much you can really do to improve the rate picture for 2022. You're pretty much just beginning the process of, you know, trying to tackle on 2023. Is that what I'm hearing?
Well, it's ongoing. It's rolling, you know, so they've already been filed. To your point, you know, we both kind of understand the earnings guidance for 2022 in terms of how rate will be earned during 2022. The ones that are in process don't move the needle much.
Right. Okay. One other question related to the investment portfolio. I guess I was a little surprised that the average pre-tax yield was effectively unchanged in the quarter. I would have thought if for no other reason than just getting better interest rates on the, you know, your shorter term money that that would have pushed a little bit higher. Can you talk about maybe some of the dynamics there as when we might see that move a little bit higher?
Yeah, Mark. This is Martin. Yeah, I think you'll start to see it soon. You know, that's what you look at. There is actually a realized yield. Our book value ended the quarter 4 basis points higher than did
Q1, although still 5 basis points less than a year ago in the second quarter. We kinda had a little bit of a muted effect in the first quarter of the run-up in rates. It was sort of backloaded, so we didn't quite get the benefit. With a little bit longer duration than typical, we didn't quite see it, but we saw definitely a significant rise in Q2. I think book yield purchased for the taxable was just under 5%. Tax-exempt was about 4%. It should start being more pronounced going forward here in the next couple quarters.
I see. Okay, so you're getting, you know, somewhere between 50 basis points and 100 basis points of incremental, say, you know, new money rate relative to kind of where the realized book rate is right now. Is that about right?
Yeah, about, probably about three-quarters, 70 basis points to 75 basis points.
Okay. I'll stop there. Thank you.
Thank you, Mark.
Our next question comes from Paul Newsome of Piper Sandler. Please go ahead.
Thank you. Good morning. I wanted to hone in on a little bit on the large losses again. Is there any way to kinda think about that increase from a sort of inflationary perspective versus anything that would be non-inflationary, you know, frequency level, maybe just sort of something that's odd for the quarter as we look at sort of that impact, and think about it on a perspective basis, both for the personalized business as well as for the commercial lines business where I think they were kind of both up.
Yeah. Oh, Paul, Stephen Spray again. I would say again, that umbrella book, there's inherent variability in it. You know, statistically, the number of losses that are there is just, it's a really low number from quarter to quarter. So even if it jumps, it's a smaller number. I would say other than inflationary factor, which is certainly playing a role in that. What I mentioned earlier was just the courts reopening coming out of the pandemic. We've noticed that has impacted the quarter. You know, I don't know if Steve wants to add anything to that or not. No. That's hard to improve upon.
I guess if I would think of any other comment would be umbrella attaches at a higher layer. There is a leveraged impact of inflation. What I mean by that is, if, you know, historically, a claim is just below the retention. Now, with inflation heating up, it would inflate into the layer. You have a leveraged effect on the upper layers, like an umbrella policy, which would add to the claim count. Hey, Paul, thanks again, Stephen Spray. I might just add a couple things there for you know, it's not uncommon that auto losses, both personal and commercial are what get up into that umbrella layer, those umbrella layers, and we saw that in the second quarter.
It's larger auto claims that have gotten up in there. We look at every single one of these claims, as I mentioned in the first quarter. As far as geography or class of business, industry segment, you know, there's randomness there, and we're not seeing any patterns, so I thought I might add that for you too.
That's great. Just to clarify and apologize, I can be very slow. Are these the umbrella, is this this is in both commercial lines and personal lines or just commercial lines? I guess your comment on the auto, is that also both commercial lines and personal lines? Are the auto creeping up into umbrella on both sides of the business or just the commercial side?
We write commercial umbrella over commercial business obviously, and personal umbrellas over personal. In personal lines, it is almost always predominantly auto claims that get into your umbrella policies there. On the commercial side, it varies between, say, general liability claims that can bounce up into the umbrella or commercial auto. I would say that we've seen just a slight uptick in the commercial auto getting into the umbrella.
The umbrella cases are on the commercial line. They're not necessarily just the auto. The auto was elevated, too. Personal auto was elevated, too. The commercial umbrella is not necessarily related to just the auto on the commercial side.
That's correct.
Okay. Thank you. Appreciate the help as always.
Seeing no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Steven Johnston for any closing remarks.
Thank you, MJ, and thank you all for joining us today. We look forward to speaking with you again on our third quarter call.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.