Good morning. My name is Steve, and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2015 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press the pound key. Thank you. Investor Relations Officer, Dennis McDaniel, you may begin your conference.
Hello, this is Dennis McDaniel at Cincinnati Financial. Thank you for joining us for our second quarter 2015 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 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 The Cincinnati Insurance Company's Executive Committee Chairman, Jack Schiff Jr., Chairman of the Board, Ken Stecher, Chief Insurance Officer for Cincinnati Insurance, J.F. Scherer, Principal Accounting Officer, Eric Mathews, Chief Investment Officer, Marty Hollenbeck, and Chief Claims Officer for Cincinnati Insurance, Marty Mullen. 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 the 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 second quarter results. Overall, it was a strong quarter. Our results reflect well on our strategy and on the efforts of our associates and agents. We continue to see ongoing benefits from executing on the fundamentals while enhancing performance through various initiatives. Together, our underwriting programs and investment philosophy translated into substantial underwriting profit in our eighth consecutive quarter of investment income growth. Disciplined underwriting and pricing on each policy was aided by more favorable weather than in the second quarter of last year. Together, they led to a second quarter 2015 consolidated property casualty combined ratio of 92.4%. Our first half 2015 combined ratio before catastrophe effects was 89.1%, improving on that ratio from both full year 2014 and 2013.
As we further segment our business, we use pricing precision tools and informed underwriting judgment to select and retain policies at prices we believe provide an appropriate return for the risk we assume. We continue to earn quality new business from our agencies, especially in areas we've been emphasizing, such as personal lines, products and services for our agencies' higher net worth clients. We are on track to release Executive Capstone, our new suite of high net worth insurance products, in New York this quarter. We're also on track with progress for an initiative we announced early in the second quarter, expansion of reinsurance assumed, which we refer to as Cincinnati Re. We have an experienced executive leading the effort, and we are developing a small team of excellent people to help execute our plans. We aim to be very disciplined in this expansion, particularly during tough reinsurance market conditions.
We have already entered into a few treaties that will be reported during the third quarter, generating approximately $15 million in diversifying written premium in 2015. Overall pricing for the second quarter was very similar to the first quarter, with average renewal price increases for commercial lines continuing at percentages near the middle of the low double digit range. That average includes the muting effect of three-year policies that were not yet subject to renewal during the second quarter. For commercial property and commercial auto policies that did renew during the second quarter, we continued to obtain meaningful price increases with both lines averaging in the mid-single digit range. Our personal auto policies average renewal price increases near the low end of the mid-single digit range, while homeowner policies were a little higher in that range.
For our Excess and Surplus line segment, second quarter 2015 average renewal price percentage increases were also near the low end of the mid-single digit range. The E&S segment continues to perform very well, producing another quarter with combined ratio below 80% and double-digit growth in net written premiums. Our life insurance subsidiary, including income from its investment portfolio, also had another good quarter. A double-digit growth in profit in the second quarter brought our six-month result in line with last year's first half. I'll conclude with a couple of points that I think are important for all company stakeholders to keep in mind. First, our primary measure of financial performance, the value creation ratio, is by design long-term in nature. We're not alarmed when that measure falls short of target in the short term due to securities market volatility. Our insurance business is in excellent shape.
We have confidence in all of our associates, in the relationships we build with independent agencies, and in the ongoing benefits of our strategic initiatives that aim to continually improve performance. Second, those studying this industry over the years have seen other times where merger and acquisition activity generates excitement and speculation. We believe our proven successful strategy will continue to deliver long-term value to all stakeholders. Looking forward to the next few years, our vision includes continuing to profitably grow the company with our agency-centered model. I'll now ask our Chief Financial Officer, Mike Sewell, to highlight other aspects of our recent financial performance.
Great. Thank you, Steve, and thanks to all of you for joining us today. First, I'll highlight some important aspects of our second quarter investment results. We had another quarter of investment income growth with an increase of 3%. All 48 common stocks in our core portfolio increased their annual regular dividend over the 12-month period of July 2014 through June 2015. The median dividend increase for those stocks was 7.7%. For our fixed maturity portfolio, interest income rose despite declining average yields, in part due to the first half 2015 net purchases totaling $311 million. The bond portfolio's second quarter 2015 pretax average yield, reported at 4.64%, was 12 basis points lower than a year ago. Taxable bonds purchased during the second quarter had an average pretax yield of 4.48%, while tax-exempt bond purchases averaged 3.43%.
In both cases, those yields are higher than those we experienced a year ago and in the first quarter of this year. Our bond portfolio's effective duration at June 30th was 4.8 years, up from 4.4 years at year-end. The increase was due primarily to the impact from rising interest rates on our callable bonds and not a change in strategy. Cash flow from operating activities again contributed to investment income growth. Funds generated from net operating cash flows for the first half of 2015 rose 34% compared with a year ago to $470 million and helped generate $394 million of net purchases of securities for our investment portfolio. Paying $46 million less for catastrophe losses compared with a year ago helped drive the increase in operating cash flow for the first half of this year.
We are still carefully managing our expenses while we continue to strategically invest in our business. We kept the second quarter and first half property casualty underwriting expense ratios essentially flat compared with prior periods. Moving to loss reserves, I'll first remind you that our approach to setting overall reserves remains consistent with the past. We continue to aim for net amounts well into the upper half of the actuarially estimated range of net loss and loss expense reserves. For the first half of 2015, favorable development on prior accident years at 4.4% was essentially in line with 4.8% from the first half of last year. As we noted in our news release, we again prudently added IBNR reserves to our commercial and personal auto lines. At the same time, we were pleased to see another quarter of improvement in the case incurred loss ratio for those lines.
Our six-month 2015 net favorable development was again spread over several accident years, including 41% for accident year 2014, 23% for accident year 2013, 32% for accident year 2012, and 4% for all older accident years in aggregate. Our stellar capital strength includes liquidity and financial flexibility. Cash and marketable securities for our parent company at June 30th totaled nearly $1.8 billion, up slightly from year-end. Our strong capital is vital for ongoing growth of our insurance operations, as well as other capital management actions, such as returning capital to shareholders. During the second quarter, we used $74 million for cash dividends to shareholders. We also used $20 million to repurchase 400,000 additional shares at an average cost of $50.90 per share. Similar to our share repurchases in 2014, it was a maintenance type action intended to partially offset the issuance of shares through equity compensation plans.
I'll end my prepared remarks as usual by summarizing the contributions during the second quarter to book value per share. They represent the main drivers of our value creation ratio. Property casualty underwriting increased book value by $0.51. Life insurance operations added $0.07. Investment income other than life insurance and reduced by non-insurance items contributed $0.29. The change in unrealized gains at June 30th for the fixed income portfolio, net of realized gains and losses, decreased book value per share by $0.71. The change in unrealized gains at June 30th for the equity portfolio, net of realized gains and losses, decreased book value by $0.32. We declared $0.46 per share in dividends to shareholders. The net effect was a book value decrease of $0.62 during the second quarter to $39.60 per share. Now I'll turn the call back over to Steve.
Thanks, Mike. In closing our prepared remarks, I have to say that we have a lot of positive momentum going as we move into the second half of the year. In addition to these strong results, we had positive news from two rating agencies that rate our company. In June, Standard & Poor's Ratings Services raised its financial strength and credit ratings on our standard market and life insurance subsidiaries to A+ from A with a stable outlook. S&P cited our improved underwriting performance and efforts to continue building strong relationships with our agency partners. Two weeks ago, Fitch Ratings affirmed the A+ insurer financial strength rating of our standard market and life insurance subsidiaries, maintaining its stable outlook. We are confident that Cincinnati Financial is on the right track to deliver shareholder value far into the future.
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 Jack Schiff Jr., Ken Stecher, J.F. Scherer, Eric Mathews, Marty Mullen, and Marty Hollenbeck. Steve, please open the call for questions.
Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star then the number 1 on your telephone keypads. We'll pause for just a moment to compile the Q&A roster. Thank you. Our first question comes from the line of Paul Newsome with Sandler O'Neill. Your line is open.
Good morning. Congratulations on the quarter.
Thanks, Paul.
This is probably a question for Mike. I noticed it looks like a fairly sizable increase in at least amount of reserve releases in the commercial business in the second quarter for the last, well, three, maybe four years. Are there any studies or events that happened during the quarter that would account for that pattern?
Let me kick it off, Paul, and then we'll see if Steve wants to jump in. We do studies really every quarter. We're using the same actuaries. We're following a consistent approach. They're really looking at everything, commercial lines, personal lines, E&S. Full studies done each quarter looking at the paid losses as they come in, and then in addition to that, annually, we do have the external auditors are reviewing the reserves and opining on the financials in total. We do have a process that we follow. We've got controls around that process, and we believe it's a consistent process that really we've been following for years. I don't know, Steve, if you have anything to add on to that.
Mike, I think that was well put. I don't have anything to add.
I guess I'm really asking why there's a seasonality to reserve releases in the second quarter.
I guess, this is Steve. I don't know. Basically, when it comes to prior year reserve development, as Mike described, it's a consistent process. Our actuaries are looking at their best estimate of accident year ultimate losses. To the extent they decrease their estimate of an ultimate accident year loss on prior years, that would result in favorable development. I think we're careful to point out in the first quarter call that there isn't a lot of activity at that point because there's been such a short time and such lack of additional information since they did the full year review. I think it's just a matter of our actuaries doing their best to get a best estimate of ultimate accident year losses at each of the financial close periods.
Paul, maybe I'll have one other comment. Related to the commercial lines, specifically, the releases this year were. We had releases for accident year 2014, 2013, 2012. There were releases in total in addition to all accident years prior to that, with accident year 2014, 2013, and 2012 being, I'll say, somewhat consistent, kind of between a $15 million-$25 million range for each of those accident years. There's no necessarily spikes in one certain year versus another.
Okay, thank you.
Thank you. Your next question comes from the line of Joshua Shanker with Deutsche Bank. Your line is open.
I'm not going to let you guys off the hook so easily. Paul's much more of a gentleman than I am Workers' compensation. I know you're trying to get a best estimate, $40 million in reserve releases. This is a long-tailed line of business. Tell me what happened during the quarter, please, that caused such a change in your outlook on that business.
I guess with a long-tailed line, as you would expect, it takes not that much of a change in assumption with the payments that stretch out for so long to result in higher changes in the estimate. I think it's just the result of a lot of hard work that's going on in the claims department and the underwriting department, and it's being reflected in the actuary's view of accident year ultimate losses in terms of original assumptions versus revised assumptions as they gather more information.
In terms of it, is this information about claims progress on the severity side, on the frequency side, what accident years are affected? Look, you guys always tend to have reserves in workers' comp. That's definitely clear. You have a very conservative approach to this. It just seems outsize in nature. I know you're consistent, but understanding the methodology would help us out a lot. Is there anything you can point to in particular in that line that made you more optimistic during the quarter?
Josh, I just think they're looking at paid losses, how they're developing. They're using multiple regression methodologies. They're using standard methodologies. They're testing their assumptions currently versus assumptions that they've set before and coming up with their best estimate. I think, in total, reserves in terms of favorable development at this point in time this year are pretty much in line with where they were at the same point last year. I think we're trying our best to keep our reserve margin consistent, and it's just reflecting the best estimate of our actuaries.
Well, it looks excellent, and I applaud your efforts. If we go back about a year ago and two years ago, you guys were on an aggressive sort of scouting of your properties, analyzing roofs and whatnot for the re-underwriting year, and that became a huge benefit. One of the things that we've been hearing a lot about is drone technologies and the extent to which you can get aerial views. Do you think that Cincinnati could benefit and lower their expense ratio by doing regular roof analyses via remote operated units?
Hi, Josh, this is Marty Mullen. Actually, we already have a team formed to analyze the effectiveness and the values of the drone technology in underwriting, loss control for those inspections as well, and in claims. We're pretty excited about the opportunities with that technology and what it can bring to the industry for commercial inspections on property during the new business cycle and also in claims certainly in storm situations to provide visual data, confirm measurements, and actually confirm loss cost estimates as well.
Is that in development, or have you begun to use it?
We haven't started using it yet. We have teams investigating the opportunity to file the appropriate paperwork. As you know, that has to be filed and approved before you can implement the technology. We're encouraged with our progress and looking forward to the opportunities, certainly before the end of the year.
Great. Finally, can you tell me a little bit about your relationship with Google Compare and what kind of flows you're seeing from that new channel?
Josh, this is J.F. We don't have a relationship with Google Compare. We're not a fan of comparative raters, to be honest with you.
I'm sorry. I thought you were listed as one of their vendors on their site, but I guess that's a mistake.
No. We're not. We don't have a relationship with them.
Okay. Thank you.
Thank you. Again, if you would like to ask a question, that is star and the number one on your telephone keypads. Your next question comes from the line of Scott Heleniak with RBC. Your line is open.
Hi. Good morning. Just wondering if you could, now it has been a quarter since we announced the new reinsurance unit, reinsurance assumed, and you announced a couple new hirings yesterday as well. Wondering if you had an update, or you could share a little more on where you see that business heading and particular areas you might focus on.
Sure, Scott. This is Steve. We are hiring some very good people, very talented people. We are very happy with that. We are going to be very cautious as we move forward. We know it is a tough reinsurance market. As we look out there, just with the domestic reinsurance market, I think there is something like $70 billion in premium volume. I kind of joke with the guys that we have now captured $15 million of it. I think that despite an overall tough market with talented people, if we can look at it one treaty at a time, we can put ourselves in the position to especially utilizing the strong capital position, the A+ rating that we are in, we can really differentiate and write those policies where we have good profit potential, good expected risk-adjusted returns. Again, being very careful, putting our capital to work to generate more growth.
Could that be in property or casualty?
Yes. We are not going to limit it to property or casualty. We are going to just look for the best opportunities treaty by treaty.
That's fair. Then just on personal lines, I was wondering if you could elaborate on something on the press release you talked about, you're benefiting from agents broadening their underwriting appetite there. Just wondering if you could comment on that. Does that mean because you're simply writing more personal lines in more states and you have more products to offer, such as high net worth? Just wondering if you could kind of flush out that comment.
Scott, this is J.F. I think what we intended to communicate there was that because of the high net worth focus that we now have and expanding our appetite, not necessarily the agent's appetite.
We're able to offer a lot more products to our current agency force throughout the country. The business we're writing in the high net worth category has gone up quite a bit, as you would expect it would. Additionally, we are expanding, as Steve mentioned in his remarks, that we'll be opening up operations in the greater New York City area in September, introducing our high net worth approach. We'll be consistent with the way we've done things historically throughout the country. We're only going to appoint a few agencies. Our aim will be to earn a portion of their business that would be significant enough that we deem it to be successful in that area.
We are pleased, not unlike Cincinnati Re, we're very pleased with the work that Will Van Den Heuvel is doing to introduce us to that greater appetite, and he's brought along a lot of very talented people that'll enable us to, not only in New York, but across the country, do a better job in the high net worth area.
Okay. Along those lines, the comment about that you're attracting larger personal lines accounts, is that high net worth customers or is that bundling or a combination?
No, not necessarily any bundling. As a company, we always would write package, if you will, the auto, the umbrella, the homeowner. That's no different there. We really don't write monoline business. When we talk about larger customers, we're talking about high net worth. Yeah.
Okay. In the personal lines. All right.
Yeah, in the personal lines.
Right. Okay. The only other question I had was, there's been an uptick in the realized gains this year, I guess over $100 million or so. Could you talk about some of the areas you're reducing exposure? Is any of that just portfolio repositioning ahead of what might happen with the Fed next? Just any thoughts on that.
This is Marty Hollenbeck. Not really. It's more, we manage, we're generally buy and hold, in the equity portfolio, we do on occasion reconfigure it, that's really the primary driver of that. We've sold a few positions, awaiting deployment on some of it doesn't represent any kind of a real strategic change.
Okay. That's all I have. Thanks.
Thank you, Scott.
Thank you. Again, if you would like to ask a question, that is star and the number one on your telephone keypad. If there are no further questions at this time, Mr. Johnston, I turn the call back to you.
Thank you, Steve, and thanks to all of you for joining us today. We look forward to speaking with you again on our third quarter call. Thank you.
This concludes today's conference call. You may now disconnect.