Executive Summary / Key Takeaways

• Cincinnati Financial's core strategy centers on its exclusive independent agency model, disciplined underwriting enabled by advanced analytics, and a diversified investment portfolio, aiming for profitable growth and long-term shareholder value creation.
• First quarter 2025 results were significantly impacted by elevated catastrophe losses, primarily California wildfires, and lower net investment gains compared to a strong prior year period, resulting in a net loss and an underwriting loss.
• Despite the Q1 volatility, underlying property casualty results show improvement in current accident year loss experience before catastrophes, reflecting the positive impact of ongoing price increases and enhanced pricing precision.
• Management remains confident in its ability to achieve profitable growth through disciplined risk selection, strategic agency expansion, and leveraging its financial strength, expecting continued rate increases in key segments like commercial and personal lines.
• Key factors for investors to monitor include the trajectory of catastrophe losses, the effectiveness of pricing actions in outpacing inflation and social inflation trends, and the performance of the investment portfolio amidst changing market conditions.

Setting the Scene: A Century-Old Foundation Meets Modern Risk

Cincinnati Financial Corporation, with its primary subsidiary, The Cincinnati Insurance Company, marking its 75th anniversary in 2025, stands as a testament to enduring principles in the insurance industry. Rooted in a commitment to financial strength and stability, the company has built its foundation upon a select network of independent insurance agencies. This agency-centric model is not merely a distribution channel but a core strategic pillar, fostering deep local relationships that inform underwriting decisions and drive customer loyalty.

Operating primarily in the property casualty and life insurance sectors, Cincinnati Financial positions itself as a partner to its agents, providing a broad suite of products tailored to both commercial and personal clients. This approach contrasts with some larger, more digitally-focused competitors, emphasizing personalized service and local expertise. The company's long-term perspective is further underscored by its remarkable track record of increasing its annual cash dividend for 64 consecutive years, a streak set to continue into its 65th year in 2025, reflecting a steadfast commitment to returning value to shareholders.

Central to Cincinnati Financial's modern strategy is the integration of technology, particularly in enhancing underwriting and pricing capabilities. Over the past decade, the company has significantly invested in sophisticated predictive analytics tools and pricing precision models. These technologies enable underwriters to segment risks more effectively and make data-driven decisions on a policy-by-policy basis. For instance, the use of building valuation software helps accurately reflect property replacement costs in premiums, addressing inflationary pressures on insured exposures. While not a developer of disruptive product technology like some insurtechs, CINF's technological edge lies in applying data analytics to refine traditional insurance processes, aiming for improved pricing accuracy, better risk selection, and ultimately, enhanced underwriting profitability. Management commentary suggests these tools are crucial for "earning the business, not buy it," even in competitive markets.

The competitive landscape for Cincinnati Financial is diverse, ranging from large national carriers like Progressive (PGR), Allstate (ALL), Travelers (TRV), and Chubb (CB) to smaller regional mutuals and emerging insurtechs. While some peers like PGR leverage extensive digital platforms and AI for rapid customer acquisition and claims processing, CINF's strength lies in its agency relationships, which often translate to higher customer retention and loyalty, particularly in commercial lines. CINF's financial performance, as indicated by its net margin of 24.7% (TTM), stands favorably against many peers, suggesting effective cost management and pricing discipline. However, some competitors demonstrate higher capital efficiency (ROE) or greater speed in digital adoption, areas where CINF continues to evolve. The company's strategic positioning leverages its financial strength and agency network to capitalize on market opportunities, such as disruption among traditional competitors in personal lines, while maintaining discipline in areas facing macro uncertainties like social inflation or soft pricing environments.

Recent Performance: Catastrophe Headwinds Mask Underlying Strength

The first quarter of 2025 presented a challenging start to the year, primarily driven by significant catastrophe losses and a less favorable comparison in investment results. Total revenues decreased to $2.57 billion from $2.94 billion in the prior-year quarter, largely due to a substantial reduction in net investment gains ($67 million in Q1 2025 vs. $612 million in Q1 2024). This swing in investment gains, coupled with an underwriting loss, led to a net loss of $90 million, or $0.57 per share, compared to net income of $755 million, or $4.78 per share, in Q1 2024.

The property casualty operations bore the brunt of the quarter's volatility, reporting an underwriting loss of $298 million compared to a profit of $131 million in Q1 2024. The consolidated property casualty combined ratio surged to 113.3%, a significant increase from 93.6% a year ago. This deterioration was overwhelmingly attributable to catastrophe losses, which added 26.8 percentage points to the combined ratio in Q1 2025, up sharply from 7.5 points in Q1 2024. The January 2025 wildfires in southern California were a major contributor to these losses, with estimated pretax catastrophe losses totaling approximately $450 million to $525 million net of reinsurance recoveries.

Despite the headline impact of catastrophes, underlying underwriting performance showed signs of improvement. The current accident year loss and loss expense ratio before catastrophe losses improved to 60.5% in Q1 2025, down from 61.3% in Q1 2024. This improvement reflects the positive effects of ongoing price increases across the portfolio, which are helping to offset elevated paid losses influenced by economic and social inflation. Management noted that price increases have helped offset recent-year elevated paid losses. Net favorable reserve development on prior accident years contributed 4.0 percentage points to the combined ratio, a slight decrease from 5.0 points in the prior-year quarter.

Looking at segment performance:

• Commercial Lines: Earned premiums grew 9% to $1.18 billion. The combined ratio improved to 91.9% from 96.5%, benefiting from lower catastrophe losses and improved current accident year results before catastrophes. Favorable prior-year development was primarily in commercial property and workers' compensation.
• Personal Lines: Earned premiums saw robust growth of 19% to $698 million, reflecting strong new business and renewal pricing. However, this segment was severely impacted by catastrophes, driving the combined ratio to 151.3% from 93.9%. The current accident year loss ratio before catastrophes also increased, partly due to the effect of reinsurance reinstatement premiums.
• Excess and Surplus Lines: Earned premiums increased 16% to $162 million. The combined ratio improved to 88.3% from 91.9%, primarily due to a higher level of favorable reserve development on prior accident years.
• Life Insurance: Earned premiums grew slightly to $81 million. Segment profit decreased marginally to $9 million, primarily due to less favorable impacts from actuarial assumption changes.
• Investments: Pretax investment income grew 14% to $280 million, driven by higher interest income from bond purchases and increased yields, partially offset by lower dividend income following equity sales in late 2024. Net investment gains were significantly lower year-over-year.

Cash flow from operations remained positive at $310 million for the first three months of 2025, although lower than the $353 million generated in the same period of 2024, reflecting the impact of higher paid losses.

Financial Strength and Capital Management

Cincinnati Financial maintains a strong balance sheet, a key strategic advantage that provides flexibility and supports its ability to grow profitably through market cycles. At March 31, 2025, total assets stood at $37.28 billion, a modest increase from $36.50 billion at year-end 2024. Shareholders' equity decreased slightly to $13.72 billion from $13.94 billion, primarily due to the net loss and a decrease in accumulated other comprehensive income, partially offset by share repurchases. Book value per share decreased to $87.78 from $89.11 at year-end 2024.

The company's investment portfolio, a significant component of its balance sheet, totaled $28.48 billion. The portfolio is diversified, with a substantial allocation to equity securities ($11.12 billion at fair value) and fixed maturities ($16.52 billion at fair value). While the equity portfolio experienced a decrease in fair value in Q1 2025, the fixed-maturity portfolio saw an increase, contributing to a slight overall increase in total investments. The fixed-maturity portfolio had a net unrealized loss position of $486 million before taxes at March 31, 2025, an improvement from $553 million at year-end 2024, primarily due to a decrease in U.S. Treasury yields. The average pretax yield-to-amortized cost for the fixed-maturity portfolio was 5.15% at March 31, 2025. The equity portfolio, heavily weighted towards dividend-paying blue-chip companies, is viewed as a long-term growth opportunity.

Liquidity remains robust. Cash and cash equivalents totaled $1.01 billion at quarter-end. The company's debt-to-total-capital ratio was 5.6% at March 31, 2025, well below its 35% covenant threshold, indicating ample capacity. The parent company holds significant cash and invested assets ($5.03 billion), providing flexibility to fund obligations and minimize reliance on subsidiary dividends, thereby protecting insurance subsidiary capital.

Capital management remains focused on shareholder returns. The company extended its dividend growth streak by increasing the quarterly dividend to 87 cents per share in January 2025. In the first quarter, $125 million was paid in cash dividends. The company also actively repurchased shares, deploying $42 million in Q1 2025, with $5.31 million shares remaining available under its authorization at quarter-end.

Outlook and Strategic Trajectory

Despite the challenging start to 2025 marked by significant catastrophe losses, management's outlook remains focused on the underlying strength of the business and the expected benefits from ongoing strategic initiatives. The estimated Q1 2025 catastrophe losses, while substantial, are viewed in the context of the company's robust reinsurance program, which was renewed and expanded for 2025 to protect the balance sheet, increasing the top of the property catastrophe treaty to $1.5 billion.

Management anticipates that future property casualty underwriting results will continue to benefit from price increases and initiatives aimed at improving pricing precision and loss experience. They expect to see continued rate increases earning into the commercial lines book throughout 2025. In personal lines, improved pricing precision and broad-based rate increases are expected to position the combined ratio at a profitable level over the long term, complemented by greater geographic diversification to reduce volatility. Management believes its pricing in personal lines is currently ahead of loss cost trends on a prospective basis and sees the current market environment as a "generational opportunity."

The company plans to continue expanding its independent agency distribution, focusing on the quality and professionalism of agents to drive profitable growth without diluting the value of its franchise. Opportunities are seen across segments, including commercial lines new business and further development of the Excess and Surplus lines segment, where management believes they are still "scratching the surface." Cincinnati Re and Cincinnati Global are expected to continue contributing to diversification and income stability, with Cincinnati Re focusing on a less volatile book and Cincinnati Global maintaining pricing discipline in competitive markets.

Investment income is expected to continue benefiting from higher bond yields and ongoing cash flow, although overall investment results will remain subject to market fluctuations. The company's long-term investment strategy, balancing income generation and book value growth, remains unchanged.

Risks and Considerations

While the outlook is underpinned by strategic confidence, several risks warrant investor attention.

• Catastrophe Volatility: As demonstrated in Q1 2025, catastrophe losses can significantly impact quarterly results. While reinsurance mitigates balance sheet risk, earnings volatility remains. Changes in weather patterns or inaccurate catastrophe models could exacerbate this risk.
• Inflation and Social Inflation: Elevated inflation continues to pressure loss costs, particularly in property and liability lines. Social inflation and third-party litigation funding pose ongoing challenges, especially for longer-tail lines like commercial casualty and umbrella, potentially leading to adverse reserve development if not adequately anticipated by pricing and reserving actions.
• Investment Market Fluctuations: The significant equity portfolio exposes the company to stock market volatility, impacting net income and book value. Interest rate changes affect the value of the fixed-maturity portfolio and could influence investment income growth and life policy reserves.
• Competition: Intense competition in various segments could pressure pricing, particularly if competitors underprice business. While CINF emphasizes discipline, market dynamics could affect growth opportunities.
• Reserve Adequacy: Despite a history of favorable development, estimating ultimate losses is inherently uncertain. Unexpected emergence of losses, particularly from older accident years or challenging lines, could necessitate reserve strengthening, impacting profitability.

Conclusion

Cincinnati Financial Corporation's Q1 2025 results highlight the inherent volatility of the insurance business, particularly the impact of catastrophe losses. However, a deeper look reveals that the company's core strategy of disciplined underwriting, leveraging its unique agency model and enhanced pricing technology, is yielding positive results in underlying performance. While macro trends like inflation and social inflation persist, management's proactive approach to pricing and reserving, coupled with a strong balance sheet and diversified investment portfolio, provides a solid foundation.

The investment thesis for CINF rests on its ability to translate its strategic advantages – the strength of its agency relationships, the sophistication of its analytical tools, and its financial resilience – into sustainable profitable growth. The commitment to increasing shareholder dividends underscores management's confidence in the long-term trajectory. While short-term results may fluctuate due to external factors like weather and market conditions, the company's focus on underwriting discipline and strategic expansion positions it to capitalize on opportunities and navigate challenges, aiming to create value for shareholders over the long haul.