Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2020 Earnings Conference Call. All lines are currently on a listen-only mode. After the speaker’s remarks, there will be a question-and-answer session. As a reminder, today’s conference is being recorded.

Hello, this is Dennis McDaniel of Cincinnati Financial. Thank you for joining us for our first quarter 2020 earnings conference call. We know people everywhere face many challenges during this period of turbulence and we sincerely hope that the things important to you improve over time. 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 will 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 Chief Investment Officer, Marty Hollenbeck; 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 will turn the call over to Steve.

Thank you, Dennis. Good morning and thank you for joining us today to hear more about our first quarter results. As I reflect on the past quarter, I find myself feeling thankful. I applaud the efforts of our healthcare industry to stand on the frontlines of the pandemic, working tirelessly to protect us all. I thank our associates for their dedication and creativity to keep our business moving forward, and I appreciate working with the best independent agents in the business. This pandemic has illuminated the leadership and professionalism they deliver to their clients, guiding them through much uncertainty. I’m thankful to be a part of this noble industry. Spring storms didn’t relent in the face of the pandemic and we stood ready to respond helping policyholders rebuild what was lost. I’m undeterred by the recent volatility we have experienced in the stock market, even though that volatility led to negative total revenues and a net loss for us in the first quarter.

Thank you, Steve, and thanks to all of you for joining us today. Some reviewing our results may be startled by our net loss and negative total revenues. Reporting negative total revenues is quite unusual, but has been possible since 2018, when new accounting rules from the FASB required changes in the fair value of equity securities to be reported through the income statement resulting in unnecessary variability. The fair value of equity securities we continue to hold on March 31 decreased during the first quarter by $1.6 billion before taxes, that offset revenues from premiums and investment income, which grew 9% and 5% respectively from a year ago. On an after-tax basis, the equity portfolio decrease had a negative income effect of nearly $1.3 billion and offset all of the income generated by our operations. It is interesting to compare that to the first quarter of last year when a strong stock market boosted net income by $550 million similarly to last year’s fourth quarter with a positive effect of $428 million. Volatility like this in revenues and net income does not seem to give a clear picture to investors trying to understand the business of operations of insurance. Changes in fair value of equity securities still held are better reported in other comprehensive income consistent with fixed maturity securities, where it still affects book value and investors can see it more clearly. Hopefully FASB will revisit this in the near future. Turning to more customary topics, investment income continued to grow at 5% for the first quarter of 2020, including 15% growth for dividend income. Net purchases of stocks during the quarter totaled $125 million. Interest income from our bond portfolio rose 1% compared with the same quarter a year ago. The pre-tax average yield was 4.04%, down 11 basis points from the first quarter of last year. While we continue to invest in bonds, we reported first quarter net sales of $6 million, as many bonds we purchased near the end of the quarter had not settled as of March 31. As we reported in our 10-Q, the average pre-tax yield for the total of purchase taxable and tax-exempt bonds was roughly 74 basis points lower than the same period in 2019, further pressuring interest income. Investment portfolio valuation changes for the first quarter of 2020 were unfavorable for both our bond and stock portfolios. The overall net decrease was just over $2 billion before tax effects, including $324 million for our bond portfolio.

Thanks, Mike. There is another point about future loss experience uncertainty that I want to emphasize. And we have heard investors ask related questions on other calls. Virtually all of our commercial property policies do not provide coverage for business interruption claims unless there is direct physical damage or loss to property. Because the virus does not produce direct physical damage or loss to property, no coverage exists for this peril, rendering and exclusion unnecessary. For this reason, most of our standard market commercial property policies in states where we actively write business do not contain a specific exclusion for COVID-19. While we will evaluate each claim based on the specific facts and circumstances involved, our commercial property policies do not provide coverage for business interruption claims unless there is direct physical damage or loss to property. Throughout our company’s history, we have weathered many storms and we have the technology, the risk management expertise, and the financial strength to weather this one. We have the best people in the industry. Together, we will take care of our Cincinnati family, protecting the health of our associates, serving agents and policyholders, and emerging as an organization with new strengths to carry us forward. As a reminder, with Mike and me today are Steve Spray, Marty Mullen, Marty Hollenbeck, Theresa Hoffer, and Ken Stecher. Please open the call for questions.

Our first question comes from the line of Mike Zaremski with Credit Suisse.

Hey, good morning, gentlemen.

Good morning, Mike.

First question is kind of beyond on business interruption. I guess the stock market investors kind of appear to be taking the language you offered us about your policies. Most of them are not having a specific virus exclusion. I think everyone does appreciate that the policies need to be triggered by property damage and COVID doesn’t constitute property damage. But given if I’m correct in interpreting language that most of your policies don’t have the virus exclusion, are your customers filing business disruption claims, trying to kind of stating that the policies don’t have the virus exclusion? Basically, is there more risk of potential litigation because of that?

Mike, I think like every other insurance company, we expect that we are going to receive our fair share of COVID-19 claims. I think that is just natural. But we feel strong in our position with our coverage language.

Okay. Understood. Switching gears to stock buyback. And I might have missed that in the prepared remarks, are you continuing to buy back stock in the second quarter or are you kind of taking a pause given the more uncertain business environment for all in industry?

Yes. This is Mike. So, we will likely not and we will not be buying for the rest of the year. We have always said, or I have always said, Steve has always stated that we have a maintenance buyback philosophy. And so, we have done that again so far this year. So, even though it is a little higher that we bought back here in the first quarter, two and a half million shares. When you look at it over time, we have been running about a million shares that is kind of really required. I was looking back. The maintenance that we did this year actually got us back to the same level of shares that we were about 10 years ago. So we have achieved what we have done and I probably do not see any other buybacks through the remainder of the year as part of our maintenance program.

Okay. Understood. And one last one, if I may, going back to this interruption. Given you stated that there are some claims coming through and don’t expect to pay them though and everyone in the industry, other your peers are also seeing those claims of being attempted to be made. So should we at least expect some type of provision later in the year to account for some types of adjustment costs or potential legal costs or should we just kind of assume this is a non-material event in the near term?

I think we are still in the middle of this storm, and I think as more facts and circumstances come out here in the second quarter and third quarter, we will provide that information to the extended material.

Okay. And just maybe lastly, if you are able to answer this. Is there a general rule of thumb in terms of what percentage of property policies have a business interruption endorsements? If you could answer that. Thanks.

Yes. It is about half, Mike.

Mike, this is Steve Spray and Steve is right. It is about half of our policies where the policyholder increases their limit. Our standard property form, like many others, includes a sub-limit automatically for business income of $25,000.

Thank you.

Our next question will come from Ron Bobman with Capital Returns.

Hi, thanks a lot. Hi, Steve. Hi team. I had a question on the property cat reinsurance treaty. What the $800 million tower, what payrolls are covered by that treaty?

Well, I would say that there is not a virus exclusion in there.

I’m sorry, I just so I understand. So it covers all payrolls?

It is generally a property catastrophe risk policy. And they follow our fortunes and we don’t have a virus exclusion in there.

Now the one other sort of strange twist will be if it ever becomes relevant, which I think it is low module, but what are the implications of the hours clause on that treaty and whether the pandemic and losses from it would be considered a single event or multiple events or somewhere in between?

Yes, that would be determined. If we ever got to that point, the hours clause for us is 120 hours, but our expectation is that we wouldn’t be in that position.

Okay. And any thoughts or plans to modify policy wordings on the BI subject?

I don’t think so at this point, but that is something again as the second quarter and third quarter here evolve. We will keep an eye on things, and we feel strong in our wording. We feel that an exclusion to those policies would just be belts and suspenders. And we feel that the policies do require physical damage or loss to the property.

Okay. Thanks a lot. Best of luck with this.

Okay. Thank you.

Our next question will come from the line of Mark Dwelle with RBC.

Good morning. First I wanted to follow up on a comment which Steve Spray made just a minute or two ago about sub-limits related to BI endorsements. Could you just go through that again?

Sure. Mark. This is Steve Spray. Our commercial standard property policies automatically include a sub-limit of $25,000 of business income. And then obviously like many other coverages, policyholders can elect to increase that limit based on their exposure. So it is not uncommon for property policies to include automatically a sub-limit for business income across the industry, and ours just happens to be $25,000. But again, even for that $25,000, you still need to have direct physical damage or loss in the insuring agreement to trigger coverage.

So just to make sure, I’m following the full flow of information, you had said initially that around 50% of the typical policies have a BI endorsement and then within those, the sub-limit which start at $25,000, and then to the extent somebody bought it up, it would be to whatever level they chose to pay an incremental premium to get a higher limit.

That is correct.

Got it. Okay, that is helpful. Changing gears a little bit, in the quarter there was some continued reserve pressure relays the commercial auto, there was also a first time in a while, a little bit or second quarter in a row rather some pressure in the ENS segment on reserving. Can you just comment a little bit what we are seeing there and how the reserves are fairing?

Yes. We obviously feel good in our reserve position overall. We have developed favorably for 30 years now and we look at each line as it stands on its own. We do our best to make our best estimate. We think with the commercial auto, given the way it has been over the past several years, given what we saw with some of the paid trends that it was appropriate to do what we did with the commercial auto. In terms of the ENS, again, we feel strong in terms of our best estimate there. We did take a look at what was going on with defense and cost containment, and we looked at that across the casualty lines for the standard and the ENS. For the standard, we have asked for some favorable movements and paid losses for the excess and surplus lines. We saw that go up by about a half a percent. And so, we just felt it appropriate to take the prudent action there, but we do feel good with the best estimate we have got in place.

What do the rate increases look like in each of those segments, commercial auto and ENS in general?

Yes. For the commercial auto, we have been getting in the mid-single digits this past quarter. I think with the ENS, the way I would describe that, it has been more that the lower single digits over time, but we have increased that quarter after quarter, month after month for years now. It is just a nice steady keeping up, if not exceeding inflationary trends and producing excellent combined ratios over long periods of time. It has just been a very steady approach there.

Okay. And then, I know you spend a lot of time in the sales offices and with the field underwriting staff and whatnot, can you just give us a sense of your customers and what they are doing, how they are changing policies, your own just anecdotal impression of how many people or what proportion are struggling to pay and so forth. Just trying to get a kind of a mosaic of what you are seeing on the ground amongst your small and mid-market customer base.

Yes. Sure. It is all over the board there, Mark. And we are being extremely flexible as you would expect with our policyholders in that. So, many of our liability policies are based on payroll and sales. We are working with our customers to reduce those exposures here midterms, so that it will reduce their premium. They are contacting us with some concerns on being able to pay. We have instituted, we are putting a moratorium on cancellations for nonpayment of premium up until May 31st or later, if a state mandates it. The key here is we want to help our policyholders and our agents through this and anything we can do to help that we will. I would say it is probably still a little too early to understand or have a full picture on premium collections over the long haul. So far, things have been good.

Most of your underwriting is not really in areas that would have been particularly hard-hit by the virus outbreak itself. I mean, how to best to ask the question. But I mean, are you seeing regional differences? Or is what you are seeing just generally kind of across the base?

You mean, as far as the collections?

Collections, pressure on wanting to change business, or change policy terms and so forth? I guess I’m trying to get out if you are seeing any regional variation that is notable or exceptional?

Yes, I think this is a pretty broad-based. We are not as far in the commercial side which would be most impacted here. We newer to the northeast, which would certainly be more impacted by COVID. But I would say as far as the collections and individuals wanting to put layup credits on their fleet or reduce their exposures on their liability for payroll and sales. I would say that is pretty much across the board.

Okay. Thank you for all the answers and best of luck going forward. Thanks.

Sure. Thank you.

Thank you.

The next question will come from the line of Meyer Shields with KBW.

Great, thanks. Good morning. Mike, I think your comments you mentioned that personal auto driving was down and that is accordingly so it is clean frequency. Can you just kind of fit in terms of what you are seeing with commercial auto?

Yes, this is Steve Spray. I would say we are seeing a little reduced frequency in commercial auto but it is still too early to tell on that. That is something that we will probably have to report back to you at a later date. Something we are watching closely. I do think that commercial auto and personal auto are apples and oranges here, because so many businesses are still up and running. I think everyone knows that almost 40% of our GL premium is in contractor classes. Construction, a knock on wood so far has been able to continue for the most part across the country. So those vehicles are still out operating. One of the other areas that we are helping our policyholders on is many restaurants or other retail businesses have moved to delivery to help their communities. And we are extending the average. It is adding exposure to us but it is something that we feel is the right thing to do. And so our exposures are going up on the higher non-owned commercial auto from a delivery standpoint that we didn’t anticipate at the beginning of the policy period.

Okay, no, that makes perfect sense. Can you give us your sort of long-term historical perspective on the influence of declining unemployment on workers' compensation frequency?

Yes, there are a couple of ways to look at that, Meyer. Especially coming out of the financial crisis, there could be the thought before somebody gets laid off, they get injured. And there could be an increase in frequency. Offsetting that there could be with employers as they determine which employees they keep, they tend to keep the more experienced ones that would be safer. I think also with the another consideration would be what we are seeing with unemployment insurance and some of the increases in the payments for unemployment insurance, I think would have a mitigating effect there too. So, I think it is too early to really tell, but in terms of as you ask the long-term perspective, those would be some of the considerations that we would be looking at.

Okay. Thank you very much.

Thank you.

Our next question will come from the line of Phil Stefano with Deutsche Bank.

Yes. Thanks. Good morning. I wanted to talk about premium volumes and the way it feels like it has been messaged by some peers is that we will get a short-term shock and written premiums and second quarter, third quarter may have some pressures. I was just hoping you could kind of talk about it from what you are seeing. I don’t know to the extent that the distribution is a little more reliant upon face-to-face contacts with agents to the extent that the shelter-in-place may go longer than some are expecting. How do you feel about the business trajectory? I mean, retention likely to go up, but new business likely to, maybe qualitatively you can just help us think about directionally what this might be.

Yes. I think for the long-term, Phil, our model is working extremely well. As Steve Spray likes to say, it is built for a situation like this and now I will let him have a chance to comment. But I think we are just naturally going to see submissions go down as an economy is in the shape that it is in. What we are seeing, though, is as that pie shrinks, we seem to be getting a bigger piece of the pie. And I think as we come out of this, all the work that we are doing with our agency-facing model, with the great relationships, our field people, every discipline, working in the communities, with the agencies and so forth, I think will come out with that bigger piece of the pie as the pie grows. So, I feel for the long haul we are in good shape. I would invite Steve to add anything if he wants.

I think that is perfect. I spent 10 years in the field, Phil and I do say that if any company is built for this, it is Cincinnati Insurance Company. Having as few agencies as we do, having that limited franchise, I think helps us. We have fewer relationships to manage. We have deep relationships with each of them. Our field strategy taking the company out into the communities where our agents and policyholders are, 1,900 of our 5,200 associates work from their homes in the communities where our agents are and they have since 1950. So it sets us up well there in the community, deep relationships able to handle claims just like we literally are handling storm claims as we sit here and speak today, just delivering on that promise. So, I agree with Steve. I think that submission counts, although they have dipped, they have flattened in that dip too. Our hit ratio has gone up, and I think, like Steve said, I think our shot at a bigger piece of the pie because of those deeper relationships and being local with our agents is key.

Understood. Thank you. And to revisit the workers’ compensation conversation just for a minute, I mean it is a line that is clearly has pricing pressure. We have seen favorable development slowed down just given some of the maybe regulatory changes that are happening in workers’ compensation and the potential for increasing loss cost. Does it feel like that the COVID impact maybe something that changes the trajectory of this line of business?

Yes. I think it would. I think we are in a pretty good position here with workers comp only being about 5% of our premiums. Our largest state here, Ohio is a monopolistic state fund. We really don’t have any California workers comp to speak of. It is very small. And we have been disciplined, I feel in terms of as we have seen the pricing soften. We haven’t done crazy things with commissions. We have done our best to, as I mentioned in the opening comments, to really segment the book, make sure that we are getting rate on the ones that need it and that we are retaining the ones with the highest profit potential. And I do think that I would expect that there would be some firming given the points that you made as we go forward.

Got it. Okay. And last one, I will ask. And I’m not quite sure how to ask. So I apologize if this comes out awkward. But it seems like the messaging is our primary policies do not have an explicit virus exclusion. But it is not something to worry about. It is not notable, but our reinsurance program doesn’t have a virus exclusion. And that is something that is notable. Like I guess to the extent I wanted to play devil’s advocate that might be a contrary there. Can you help me understand that?

Yes. And I’m very glad that you brought it up actually. Because I think maybe I was thinking when somebody was zagging. When I talked about a reinsurance program, I was talking about what we see to our reinsurers, not what we would assume. What we would see to our reinsurer. So, it is basically that they are following the fortunes of us in terms of we are aligned with our policy provisions with the reinsurance that we seed to.

Okay, so one way or another, so goes the primary policy. So goes to the reinsurance section.

Yes.

Understood. Okay, that make sense. Thank you, sir.

Yes, thank you.

The next question will come from Paul Newsome with Piper Sandler.

Good morning, folks. I wanted to ask a little bit more about what might be happening with retentions and sales. My sense from other conference calls is that at least in the last couple weeks of March, and maybe in April, agents in general are just not selling much. And they are also not pulling business from other carriers as well. So I think there is the presumption that we will see retentions go up and new sales go down. Is that kind of what you are seeing on the margin here or not?

Paul, I think that is very steep. And I think it is still probably a bit early. But I think your take on it is what we are hearing in the marketplace as well. I can tell you, though, that we are still active trying to write new business where maybe other carriers aren’t able to meet the needs of the agent or the policyholder or that we feel that we can write that risk on a risk-adjusted basis and make margin. But I think your general sense is right and something we are going to have to watch going forward. But that is kind of the feedback we are getting from the agents as well. It is just that the new business has slowed a bit, but retentions are real solid.

Outside of - options, and I’m curious if you are seeing or have any anticipation of increased liability claims in things like your liability and do you know, et cetera move I mean, I’m thinking, lawsuits for nursing homes and hospitals and doctors and factories that needed to protect their workers enough. Is there any sense that some of that may be happening or it is just too early?

I think it is too early. I think that we are just in unprecedented times here, and I think some of that will play out here over the next quarters that what we are seeing now. We are not really seeing that.

Paul, this is Steve Spray. I would just to what Steve was talking about earlier on workers’ compensation is being only 5% of our premiums. And on top of that is, we don’t have a large account number or a large policy number of municipalities or hospitals where we write the workers’ compensation or on the small book of skilled healthcare facilities that we do have. It would be rare that we would write the workers’ compensation. So, exposure to first responders for us, I think is going to be minimal as well.

Great. Thanks. Appreciate it.

Thanks, Paul.

The next question will come from the line of Larry Greenberg of Janney Montgomery.

Good morning.

Good morning, Larry.

We are not in South Carolina, but that is okay.

We are not there yet.

Yes. So, I think that statement on business interruption was that most of your standard market policies don’t have the virus exclusion. I’m just curious where your policies would have a virus exclusion.

Yes. Larry, Steve Spray. That would typically be in states where we are inactive and where we have filed straight ISO. So we don’t have agents on the ground. We don’t have associates there. So where we would write a secondary coverages outside of our active state, so inactive states where we file straight ISO, we would have some.

Got it.

And also on our excess and surplus lines company on CSU, they have that as well as the binders we write out of the Lloyds.

Okay, great. Thanks. And then, just an accounting question, how are you going to treat the stay-at-home premium credits coming up, whether that is going to be a premium offset or will you account for it in the losses line?

Yes. This is Mike Sewell. It will be in the expense line as of right now. We understand there might be a group, NAIC, and others that might be looking at that issue, but as of right now, it will be an expense.

Great. Thank you very much.

Thank you, Larry.

The next question will come from Mike Zaremski with Credit Suisse.

Thanks for fitting me back in. Just a follow-up on reinsurance. Can you remind us to the extent for some reason some business interruption policies or just COVID writing claims were required to be paid out. How do we think about where to reinsurance program would start succinct in those payments?

Yes. Our program attaches at $100 million, which is why we feel confident that we won’t get there. But it is nice to know if there would be some legislative action or something that is just untested, unanticipated that we have the program and that we are in the falls of fortunate situations.

Okay, perfect. That is all I have. Thank you, gentlemen.

Thank you, Mike.

There is no further audio questions showing. We get back to the closing remarks.

Okay, thank you very much, Nicole. And thanks to all of you for joining us today. We hope some of you will join us for our first ever virtual shareholder meeting on Saturday, May the 2nd at 9:30 AM Eastern. While we intend to resume in person meeting until 2021, we felt moving the meeting online was the best way to keep shareholders and associates safe during the pandemic. Please visit www.cincin.com for details on how to register for the meeting. If you can’t make the meeting, we look forward to speaking with you again on our second quarter call. Thank you all very much and have a great day.

This does conclude today’s conference call. We thank you for your participation and ask that you please disconnect your lines.