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Cincinnati Financial Corp  (NASDAQ:CINF)
Q4 2018 Earnings Conference Call
Feb. 07, 2019, 11:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good morning. My name is Katherine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter and Full Year 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I'd now like to turn the call over to Mr. Dennis McDaniel, Investor Relations Officer at Cincinnati Financial. You may begin your conference.

Dennis E. McDaniel -- Investor Relations

Hello. This is Dennis McDaniel and we thank you for joining us for our fourth quarter and full year 2018 earnings conference call.

Late yesterday, we issued a news release on our results, along with our supplemental financial package, including our year end investment portfolio. To find copies of any of these documents, please visit our investor website, cinfin.com/investors. The shortest route to the information is the quarterly results link in the navigation menu on the far left.

On this call, you'll first hear from Steve Johnston, President and Chief Executive Officer; and then from Chief Financial Officer, Mike Sewell. After their prepared remarks, investors participating on the call may ask questions. At that time, some responses may be made by others in the room with us, including Chief Investment Officer, Marty Hollenbeck; and Cincinnati Insurance's Executive Vice President, J. F. Scherer; Chief Claims Officer, Marty Mullen; Chief Insurance Officer, Steve Spray; Senior Vice President of Corporate Finance, Theresa Hoffer; and Chairman of the Board, Ken Stecher.

Firstly, 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.

Steven J. Johnston -- President and Chief Executive Officer

Good morning and thank you for joining us today to hear more about our fourth quarter results. Operating results for the fourth quarter of 2018 represent a strong finish, despite reporting a net loss of $452 million because of the accounting requirement for changes in the fair value of equity securities.

Non-GAAP operating income improved for the quarter and on a full year basis, it was 21% higher than 2017. We are encouraged by our 2018 financial results and continue to be confident in our strategy and in our ability to execute it well. Improved operating performance for the fourth quarter and the full year 2018 again reflected steady efforts to carefully underwriting price policies, provide outstanding claims service, manage investments and support our agencies.

Our fourth quarter 93.9% combined ratio help lower full year 2018 to 96.4%, 1.1 points better than 2017. Slightly more favorable catastrophe weather effects in 2018 contributed one-tenth of a point, while improved underwriting was reflected in various underlying measures. We continue to further segment our renewal and new business opportunities using pricing precision and risk selection decisions, the combined data models and underwriter expertise on a policy-by-policy basis. That work is vital to our further improvement of underwriting results.

We believe we can successfully balance prudent underwriting and business growth to improve on the 2018 combined ratio before catastrophe effects for a 2019 GAAP combined ratio below 95%. We also believe our 2019 property casualty premium growth rate can be within 1 percentage point of 2018. We recognize that weather and significant changes in industry market conditions that influence insurance policy pricing trends are some variables that will affect the property casualty results we ultimately report.

In 2018, we continue to manage our business to healthy levels of policy retention and with average renewal price increases for each of our property casualty segments. Policy retention rates for commercial lines were similar to a year ago, continuing near the high end of the mid-80% range. For personal lines, our policy retention during the second half of 2018 declined from recent year levels, reflecting increased underwriting discipline and was near the high end of the mid-80% range.

Our long-term growth strategy includes appointing agencies in areas where we are underrepresented, taking care to preserve relationships with established agencies and the franchise like benefit they value. In 2018, we appointed 167 new independent agencies. Similar to recent years, in 2019, we plan to appoint approximately 100 additional agencies that will offer most or all of our property casualty insurance products and another 80 that market only our personal lines products primarily ones with the high net worth focus.

We continue to earn new business through our agencies from a combination of superior service and expansion of insurance products for clients of those agencies. For full year 2018, each of our property casualty segments reported record levels of new business written premiums and overall property casualty net written premiums grew 4%.

For renewal business, in the fourth quarter, our underwriters continue to generate overall price increases. Commercial lines estimated average price increases for the fourth quarter were similar to the third quarter. Combined ratio for our commercial lines segment improved by a full percentage point for the year 2018 to 95.4%, despite the ratio for catastrophe losses increasing by eight-tenths of a point.

Our personal lines segment continued to experience a rise in average rate changes as the fourth quarter of 2018 was similar to the third quarter. Personal lines fourth quarter combined ratio was profitable. While it was above 100% for the year 2018, it improved compared with year end 2017 as we continue to work for performance improvement.

Our excess and surplus lines segment had another year with excellent results, including double digit growth in net written premiums and a 2018 combined ratio below 75%. Cincinnati Re continue to grow as planned, but was adversely affected by catastrophe losses from severe weather and wildfires. It finished the year with a combined ratio of 105.8%, which is consistent with our expectations for a year with global insured catastrophe losses roughly twice the long-term historical average.

Our life insurance subsidiary, again grew term life insurance premiums, it's largest product line with fourth quarter earned premium growth of 13% and full year of 2018 growth at 9%. This business supports account retention for our agents and provide steady contributions to our earnings, as it has less correlation to weather than our property casualty business.

On January 1st of this year, we again renewed each of our primary property casualty treaties that transfer part of our risk to reinsurers for both our per risk treaties and our property catastrophe treaty, terms and conditions for 2019 are similar to 2018. While we did receive some modest rate reductions, we expect the amount of ceded premiums for both years to be similar, because our direct written premiums subject to those treaties are growing.

The full year of 2018 value creation ratio are primary measure of long-term financial performance was negative 0.1%. The contribution from operating income was a positive 6.7%. The VCR in total was below our long-term target range due to the decline in securities market value. However, the VCR average for the past five years was within the target range.

In conclusion, finishing the year well reflects areas of ongoing operational improvement. Despite the fourth quarter downturn in the stock market, the good performance of our insurance business was a key factor and the recent decision by our Board of Directors to reward shareholders with a 5.7% increase in the regular cash dividend declared earlier this month.

Next, our Chief Financial Officer, Mike Sewell, will highlight several important points about our financial performance.

Michael J. Sewell -- Chief Financial Officer, Senior Vice President and Treasurer

Great. Thank you, Steve and thanks to all of you for joining us today. Investment income growth continued at 3% for the fourth quarter and 2% for the full year 2018 matching the full year 2017 growth rate. Dividends from our equity portfolio again led the way, up 9% during the fourth quarter of 2018 and 6% for the year.

Interest income from our bond portfolio was flat for the year. The pre-tax average yield was 4.21% for the fourth quarter of 2018, down 13 basis points from 2017's fourth quarter. We continue to invest in bonds, including $347 million in net purchases for the year. Taxable bonds purchased during 2018 had an average pre-tax yield of 4.48%, 60 basis points higher than we experienced a year ago. Tax-exempt bonds purchased averaged 3.69%, up 40 basis points from a year ago. Despite the higher purchase yields, we continued to experience redemptions of relatively high coupon bonds throughout 2018.

Our investment portfolio evaluation was volatile for much of 2018 and on a full year basis experienced an overall net loss of $741 million before tax effects. That included $395 million for equity portfolio and $334 million for our bond portfolio. Even though those losses -- even with those losses, we ended the year with a net appreciated value of nearly $2.6 billion, including $46 million in our bond portfolio. Cash flow from operating activities continues to help us grow investment income. Funds generated from net operating cash flows again exceeded $1 billion. And for full year 2018 exceeded the prior year by $129 million or 12%.

I'll briefly comment on expense management, always an important part of our focus. While we continue to make thoughtful strategic investments in our business, our full year 2018 property casualty underwriting expense ratio decreased by two-tenths of a percentage point compared with the same period of 2017. Loss reserves are another important area and our consistent approach to setting overall reserves again resulted in property casualty net favorable development on prior accident years on both a fourth quarter and full year 2018 basis.

2018 marked our 30th consecutive year of net favorable reserve development. Full year 2018 favorable reserve development benefited our combined ratio by 3.4 percentage points, matching the annual average during 2013 through 2017. Our commercial casualty line of business experienced $16 million of favorable reserve development during the fourth quarter -- during the quarter and $47 million for the year.

Most of our major lines of business experienced favorable reserve development in 2018. On an all-lines basis by accident year, it included 38% for accident year 2017, 23% for accident year 2016, and 39% for 2015 and prior accident years. We continue to actively manage our capital and both financial flexibility -- strength and flexibility remain excellent. This week we concluded efforts to enhance our financial flexibility by amending and extending our line of credit agreement with various banks.

The former agreement was due to expire in May. The term is for five years for up to $300 million and the accordion feature allows us to double that amount under the same terms and conditions. Most of the other terms and conditions are similar to the former agreement, although our financial flexibility also improved with the elimination of a minimum net worth covenant and the debt to total capital maximum is now 35%.

I'll wrap up my prepared remarks with the usual summary of fourth quarter contributions to book value per share. They represent the main drivers of our value creation ratio. Property casualty underwriting increased book value by $0.38. Life insurance operations added $0.04. Investment income other than life insurance and reduced by non-insurance items contributed $0.52. Net investment gains and losses for the fixed income portfolio increased book value per share by $0.17. Net investment gains and losses for the equity portfolio decreased book value by $3.70 and we declared $0.53 per share in dividends to shareholders. The net effect was a book value decrease of $3.12 during the fourth quarter to $48.10 per share.

And now I'll turn the call back over to Steve.

Steven J. Johnston -- President and Chief Executive Officer

Thanks, Mike. It was a good quarter and second half for the year 2018. We are bullish about the future of Cincinnati Financial. We see improving trends in several areas and look forward to meaningful contributions over time from leaders at Beaufort Underwriting Agency, the Lloyd's managing agency subsidiary of our pending acquisition of MSP Underwriting Limited. That acquisition is still on track to close during the first quarter of 2019.

We know our strategy works and will continue to execute it as we target profitable growth, while providing great service to our appointed agencies. That should benefit all stakeholders of the Company, creating shareholder value over time. Many of you know, J. F. Scherer from his years of investor travel, he has announced his intent to retire in August after more than 35 years of service and leadership to our organization. This will likely be his final earnings call.

JF would you like to say a few words?

Jacob F. Scherer -- Executive Vice President and Director

Yeah, thanks, Steve. I just like to say, it's been a pleasure traveling with and getting to know many of you that's on the call today. I've learned so much from the conversations we've had, your review of the industry and your comments about the Company. I'd be forever grateful for what I learned from all of you. Appreciate your professionalism and your interest in Cincinnati Financial and I certainly wish all of you continued success. Thanks to all of you.

Steven J. Johnston -- President and Chief Executive Officer

As I'm sure you can all imagine, we're sad to see JF go. At the same time, however, I have absolute confidence in Steve Spray and in his ability to smoothly step into the role of Chief Insurance Officer. I know you all will feel the same as you get to know him during future investor visits. As a reminder, with JF, Mike and me today are Steve Spray, Marty Mullen, Marty Hollenbeck, Theresa Hoffer and Ken Stecher.

Katherine, please open up the call for questions.

Questions and Answers:

Operator

Yes, sir. (Operator Instructions) Your first question comes from the line of Amit Kumar with Buckingham Research.

Amit Kumar -- The Buckingham Research Group -- Analyst

Thanks and good morning. The first question I have is, going back to the guidance you mentioned, I wanted to be sure I heard this correct. You said 95% ex-cats, is that correct?

Steven J. Johnston -- President and Chief Executive Officer

No, it was 95% or less assuming normal catastrophe loss levels.

Amit Kumar -- The Buckingham Research Group -- Analyst

Okay. So, the language is similar to what I think what you had said in terms of the cat definition. I was curious if I go back and look at the guidance for 2018, 2019 is obviously higher, what's the biggest sort of moving parts? Is this mostly driven on the loss cost side? Maybe just expand on that thought process a bit?

Steven J. Johnston -- President and Chief Executive Officer

In terms of the combined ratio being above 95%?

Amit Kumar -- The Buckingham Research Group -- Analyst

In terms of its above when we talked about -- when you laid out the initial guidance for 2018, at that time of 8th Feb I think you had said mid to low 90%s I think was the number you had given in early 2018. So, I was just trying to compare and contrast what has changed in your mind?

Steven J. Johnston -- President and Chief Executive Officer

Right. And yes, I think we're expecting and hoping for a little bit better performance in the personal lines results. They are the one segment for the year that came in over 100%. But having said that, we're really buoyed by the work that's been done in personal lines in terms of the rate action that's been taken. I think Steve might be able to expand a little bit on that, but I think kind of the proof is in the pudding is, in that when we look at the fourth quarter alone, it came -- personal lines came in with a 91.7%. And I think that gives us good optimism toward where we're heading into 2019 and maybe, Steve Spray might want to comment a little bit on the actions that have been taken.

Stephen M. Spray -- Chief Insurance Officer

Yeah, Amit, on the personal lines specifically, throughout 2018 we continue to earn in on the homeowner line, mid single-digit rate increases. We think that, that is going to strengthen in the '19 into the high-single digit range. And on the commercial auto, we think that's going to stay strong in the high-single digit range as well.

Amit Kumar -- The Buckingham Research Group -- Analyst

Got it. Now that's helpful. The other question I had was, looking at the workers' compensation line and I think the reserve releases were substantially higher than the run rate we have seen and I know a lot of companies have been talking about it. I wanted to understand a bit better as to the driver of those reserve releases. And maybe just talk about the market conditions. It seems that we were worried a bit in Q3 and in Q4 I think things have got eased up a little bit just based on the general economic conditions. Maybe just talk about the loss cost and the pricing environment?

Steven J. Johnston -- President and Chief Executive Officer

Yes, Amit, this is Steve Johnston. We have to Steve's here. So, we'll try to be careful to mention which one. This is Steve Johnston here and I'll cover the reserve part. In terms of the releases, we have a very qualified actuarial department that uses some very sophisticated tools, particularly in the long-tail lines such as workers' compensation. They are looking at trends and explicitly looking at inflation in terms of medical inflation, indemnity inflation, paid loss trends. And with all the data that they look at, there's obviously a little bit of a cautious eye toward workers' compensation and it's been a cyclical line over time and a slight variation in actual results on some of the loss trend picks can have a large impact on the overall results given the long-tail nature of the line.

So they have taken, I think a very prudent approach to reserving workers' comp. And yet as they look at the more recent accident years going back in terms of how the actual trends have come in versus what they predicted, feel that it's prudent to release the reserves that they have. It's a very consistent position that they take, a consistent philosophy that they go about the reserve setting.

In terms of the market conditions, I'll turn it over to Steve Spray.

Stephen M. Spray -- Chief Insurance Officer

Yeah, Amit, Steve Spray. We feel really good about workers' compensation. We're obviously a package underwriter. We don't write monoline work comp. The results have been good. We feel good about the growth of it in the future and our appetite for it. Over the last several years, I think we've made really good strides on many different fronts in managing workers' compensation. Risk selection, underwriting, pricing, the analytics that we've employed there, loss control and I think no change has impacted our work comp results more than the things that we've done with claims.

More expertise, a call center for timeliness of reporting have just helped medical bill repricing have just really helped the results over the year. I will tell you, over the years, we are cautiously looking ahead the continued base rate declines that come out of NCCI and the impacts that that's having on the accident year results. You can see that in the reports. But something that we are going to continue to watch, we'll continue to be cautious with work comp, but we want to continue to grow it.

Amit Kumar -- The Buckingham Research Group -- Analyst

Okay, that's helpful. Last question, and I will requeue. Just going back to the response on the guidance, you said it has some level of normal cats. What's the normalized cat load you're assuming? The reason is, I want to be very clear and understand how does that number probably compares with the investor expectations? Can you just talk about, is it 6 points or so, or may be higher or lower? Just talk about your normalized cat load expectations? Thanks.

Steven J. Johnston -- President and Chief Executive Officer

It would be right in that 6 point something to 7 points in terms of the normalized cat. You're right on it, Amit.

Amit Kumar -- The Buckingham Research Group -- Analyst

Got it. Okay, I will stop here. Thanks for the answers and good luck for the future.

Steven J. Johnston -- President and Chief Executive Officer

Well, thank you for your question.

Operator

Your next question comes from the line of Mike Zaremski with Credit Suisse.

Mike Zaremski -- Credit Suisse -- Analyst

Hey, congrats JF. Wish you all the best.

Jacob F. Scherer -- Executive Vice President and Director

Thank you.

Mike Zaremski -- Credit Suisse -- Analyst

My first question, just following up, I guess on the guidance, so, it's a 95% all-in combined ratio?

Steven J. Johnston -- President and Chief Executive Officer

That's correct.

Mike Zaremski -- Credit Suisse -- Analyst

And so, this year, you're about a point higher than that and your cat load was kind of in line with historical over last 10, 11, 12 year average. And so, kind of in this quarter, you put up close to 95%. So, is it kind of just doing more of the same as you've kind of did in 4Q and first lines gets a little bit better and that's kind of how you -- how we think about 95% and rate is kind of in line-ish with loss cost trends overall. I know it's generalizing a lot.

Steven J. Johnston -- President and Chief Executive Officer

Right, that's very close though Mike. This is Steve Johnston, and I think you're very close. We do see and feel that with the actions that we're taking in terms of loss cost trend, we're very prospective on that, what do we feel loss cost trend will be going forward. We do think that, while it maybe slight that we are slightly ahead of loss cost trend with our pricing, we think that all of the actions that are been taken will show improvement. And so, we do think on an ex-cat accident year basis see improvement next year.

Mike Zaremski -- Credit Suisse -- Analyst

Okay, that's helpful. And looking at commercial auto, the underlying loss ratio accident year ex-reserve developments has been improving, and it was in the 50s this quarter, which is great. But then, on the other hand, you have reserve additions from prior developments have persisted. Just trying to understand those two kind of contrasting trends.

Steven J. Johnston -- President and Chief Executive Officer

Sure. Good question, and this is Steve Johnston. I think anytime when you're in a turning point with a line, which I think we are with commercial auto. As you pointed out, we are seeing improvements in the ex-cat accident year. We have been taking the appropriate action to get there. I still think as we see that and in terms of setting the reserves, as you mentioned the, that there is a little bit of stubborn adverse development there. I think there is still a little bit of caution in terms of releasing reserves or being more optimistic with the picks on prior accident years until we see a little bit more evidence of the improvement that we're seeing in the current accident year.

Stephen M. Spray -- Chief Insurance Officer

Mike, this is Steve Spray, having spent the last couple of years in commercial lines, a lot of focus on commercial auto. Steve is right, we are seeing improvement in both the accident year and calendar year results. And one thing I would point out is, we continue to earn in really solid high-single digit rate increases throughout 2018. We think that there is still plenty of runway in '19 for that to continue. But those high single-digit increases don't really tell the full story. I think our underwriting teams with our agents, and working closely with our agents have really executed well on segmenting the book, and we're getting obviously more than the average on the least adequately priced business and less on the most adequately priced, really focused on retention on that adequately priced -- on that most adequately priced business.

So still plenty of runway, there is still macro issues that are going on in commercial auto that you've probably heard distracted driving, driver shortages, policyholders having difficulty finding qualified individuals to put behind the wheel, it's all having an effect on commercial auto.

Mike Zaremski -- Credit Suisse -- Analyst

Okay, great. That's -- hopefully that line of business gets better for the industry as the year progresses. And my last question was, back to the last question from Amit on workers' comp. So, I think you guys said, you want to grow that line of business, and when I look at premium rates, sorry, your premium volumes there, they've been second half of the year down kind of close to double digits. Is that mostly just pricing and policies are flattish, or are you guys expecting to kind of grow premium levels in 2019 because maybe pricing is getting less negative. I am just trying to understand the dynamics there on workers' comp growth for '19?

Stephen M. Spray -- Chief Insurance Officer

Yeah, Mike, this is Steve Spray again. Let me try to answer that, if I don't hit it, you obviously give me a follow-up. The base rate declines are putting pressure on the growth, the underwriters, I think they're doing an excellent job of trying to mitigate that as much as possible. We still feel really good about the overall pricing of the book at this point in time. Although again those base rates are putting pressure. We're a package underwriter, so many times when you write -- let me give you an example, if you're writing a package and you're not real high on the auto, you're probably going to lose the entire package, you're not going to -- you're not going to have an opportunity at that. With workers' compensation, there is enough monoline markets out there that if that line of business is not attractive to us, we can still continue to write the package and that comp will end up going somewhere else. So it allows us to be, I think more prudent and more conservative on the workers' compensation. So, I think that, that covers it.

Steven J. Johnston -- President and Chief Executive Officer

Yeah, in short, we do want to grow the line. It's a profitable line that we feel that we can do well.

Mike Zaremski -- Credit Suisse -- Analyst

Okay, great. Thank you for all the color.

Operator

Your next question comes from the line of Paul Newsome with Sandler O'Neill.

Jon Paul Newsome Jr. -- Sandler O'Neill & Partners -- Analyst

Good morning. I was hoping you could just give a little update about the expansion efforts that you're doing, and I'm just curious sort of maybe big picture thoughts on how far you think you'd develop products for yourself in the future?

Steven J. Johnston -- President and Chief Executive Officer

Okay. Paul, this is Steve Johnston, and we'll kind of tag team on this, but we have an agency strategy. We are always looking for products and services that we can do with our agents to help grow our Company, and we know that when our agents are successful, we'll be successful, and are confident and I think Steve has some ideas on how to expand on that thought. But we are confident in our growth strategies as we appoint agents come up with products and services that we are definitely in a growth mode.

Stephen M. Spray -- Chief Insurance Officer

Yeah, Paul, Steve Spray. Agree completely, especially the agency strategy piece. We've always been a company as you know, that has built or been build around our distribution. And anything we do in here, as far as expanding products and services is in direct reflection of what the agents desires are of us. So as an example, our excess and surplus lines company, you can see how that's performing. High net worth, Will Van Den Heuvel and the team that he's built and the growth that we've got there. We started our target markets division, which is really niche products in commercial lines in direct response to agents needs, and the fact that they were majoring in specific industries or class segments were up to 15 of those now.

We have made extensive product improvements in management liability and surety. Especially on the management liability front, that segment is growing rapidly and is very profitable. We stay out of the public company sector, it's primarily non-profit small privately held companies as well, so that's performed well. So it kind of just goes on and on. Now with, our Lloyd's Syndicate things that are always in direct, again, it's always in direct response to the needs of our agents. We have another area that we are expanding is in commercial lines, and as we move upstream into larger more complex risks for our agents, we feel like we have plenty of capacity. We just need to expand our expertise, we hired Chet Swisher about 2.5 years ago, came over to join us, had tremendous amount of large account experience and expertise. He is building out that unit. So it's just be that much more important to our agents as well.

So, hopefully I think that, that should cover what's your question was, Paul.

Jon Paul Newsome Jr. -- Sandler O'Neill & Partners -- Analyst

That's great, thank you. And congratulations JF. I'll miss watching you at the company. But all the best.

Jacob F. Scherer -- Executive Vice President and Director

Thanks, Paul. It's been great to spending so much time with you.

Operator

Your next question comes from the line of Josh Shanker with Deutsche Bank.

Joshua Shanker -- Deutsche Bank -- Analyst

Hi there everybody. Congratulation on a great quarter, and particularly in personal lines, just a excellent result. I was wondering if we could dig in a little about the timing. Some of your competitors have said they've seen a higher frequency of homeowners losses over the past six months or so. And that seems you already priced for that. Did you see that loss trend developing earlier than others and is that -- that's within your price right now. I guess to say, are you experiencing higher frequency of losses, but it's already priced for?

Steven J. Johnston -- President and Chief Executive Officer

I think in general, Josh, and not to bring in -- I haven't really heard or read about the competitors, but we do feel, just that our people in personal lines have been doing an excellent job in responding to the trends that we see in personal lines, both auto and homeowners. We have seen -- we focus on the pure premium trend, which would be the combination of frequency and severity. I do think within that pure premium trend, it is more of the severity that's driving it. But again, when we talk trends, we talk prospectively and a lot of the underwriting action that's been put in place by our underwriters, we think is dampening that trend some. And we feel that we are in a position where we are getting rate ahead of that loss cost trend.

Joshua Shanker -- Deutsche Bank -- Analyst

Do you have a general idea of how much rate you're getting in homeowners right now?

Steven J. Johnston -- President and Chief Executive Officer

Yes, in terms of the homeowners, we feel we're in the high single-digit range in terms of our homeowners increases. I'm sorry, mid single-digit for home; high single-digit for auto.

Stephen M. Spray -- Chief Insurance Officer

But Josh, this is Steve Spray. We do see it has strengthened on the homeowner line throughout 2018, and we expect the homeowner rate increases in '19 to move into the high-single digit range.

Joshua Shanker -- Deutsche Bank -- Analyst

Okay. And I realize you're not a big auto player compared to a lot of auto specialists out there, but there are people who do put their personal auto with you. Going forward can a multi-line competitor be an effective player in the auto market? Is that a concern you guys look at or you think that, there's many years of roadway ahead of you on the auto line?

Steven J. Johnston -- President and Chief Executive Officer

No, I think we can absolutely be effective in the personal auto market. Again, we are not a monoline auto writer, we're a package underwriter. We are trying to attract the policyholder that sees value in the advice that they get from an independent agent and the claims service that I'm proud of and have been proud of over the years that we provide in the community for our agencies and for the policyholders. So in the area where we are focused, Josh, the agency strategy and the centers of influence and the individuals in the community that they work with, we absolutely feel like we can continue to grow personal line.

Joshua Shanker -- Deutsche Bank -- Analyst

And then one last one, on the high net worth homeowners, how many states do you plan to be in 2019?

Steven J. Johnston -- President and Chief Executive Officer

By the end of 2019, the plan is, we'll be in 46 states. We are in 42 right now, the plan is to add Rhode Island, Delaware, Hawaii and Nevada in 2019.

Joshua Shanker -- Deutsche Bank -- Analyst

Very good. And I'll just say in regard that JF is wrong. The pleasure has been all ours, I'm sure. And have a very happy retirement.

Jacob F. Scherer -- Executive Vice President and Director

Thank you very much, Josh. Appreciate it.

Operator

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

Meyer Shields -- KBW -- Analyst

Thanks. I want to echo everyone's best wishes to JF, it's been a pleasure dealing with you over the years.

Jacob F. Scherer -- Executive Vice President and Director

Thanks.

Meyer Shields -- KBW -- Analyst

A couple of I think small questions if I can, one, for the past couple of years, we had some seasonality in the workers' compensation underlying loss ratio. Did that represent the fourth quarter true up of the full year and there's something else going on.

Steven J. Johnston -- President and Chief Executive Officer

I do think we try to look at things over an annual period of time, but I do think with workers' comp, you're going to see more construction activity and that sort of thing during the summer months than what you do in the fourth quarter and the first quarter. So there could be a little bit of seasonality there.

Meyer Shields -- KBW -- Analyst

Okay, that makes sense. Can you compare the rate increases you're seeing within excess and surplus lines to the other commercial lines?

Steven J. Johnston -- President and Chief Executive Officer

Yeah, I think, excess and surplus lines has been consistent for many quarters, Meyer, in that, they're getting in the low single digit range is pretty consistent.

Meyer Shields -- KBW -- Analyst

Okay. So actually lower than I guess the aggregate for standard commercial lines.

Steven J. Johnston -- President and Chief Executive Officer

No, I think it's about -- I think it's about the same in the aggregate.

Meyer Shields -- KBW -- Analyst

Okay, perfect. Thank you so much.

Steven J. Johnston -- President and Chief Executive Officer

Yeah.

Operator

(Operator Instructions) You have a question from the line of Scott Heleniak with RBC Capital Markets.

Scott Heleniak -- RBC Capital Markets -- Analyst

Hi, good morning. JF, wish you the best as well and happy retirement as well.

Jacob F. Scherer -- Executive Vice President and Director

Thank you very much.

Scott Heleniak -- RBC Capital Markets -- Analyst

And so, the first question I had was on the, just the life insurance book, you saw really good premium growth for the year was up about 8%. So how much was that just -- was that more a function of just your agency base kind of more marketing that more assertively, was it market conditions, something else going on there. And then if you can just talk about just the opportunity there, not only in the term life, which is where you see most of the growth, but in some of the other ancillary products annuity and disability and kind of where you see the opportunity in that next few years.

Michael J. Sewell -- Chief Financial Officer, Senior Vice President and Treasurer

Yeah, this is great. Thanks, great question. This is Mike, we had another really good year on the life company, we're thinking about the term product is our main product. For the first year, term premiums were up above --little over 14% and it's just been a lot of applicants -- applications that they've been receiving this past year. I think we had a pretty good year in '17 too also with the applications up. So the worksite, so when we're out there on the commercial lines side and getting the worksite, that was up 17.7% for the current year and that's a first year. So it's just all around, it's been very good, it's rounded out the -- what our independent agents have in their toolbox for the insurance to be able to sell the insurance.

From the annuity side, we just have fixed annuities. We don't do any variable annuities. So we think we do remain competitive there with the interest rates that we apply to those products and we do look and adjust those quarterly to make sure that we are remaining competitive in that area. So overall, another, I think a great year for the life company, their non-GAAP operating income was $52 million this year compared to $40 million in the prior year. So with the premiums that are in there, the mortality was up a little higher than what we predicted at the beginning of the year. And then kind of rounding that out with some tax effects, we had a great year. So the life insurance company continues to be a valuable asset for us.

Scott Heleniak -- RBC Capital Markets -- Analyst

Okay, great. And then the E&S premium growth that ticked up quite a bit compared to last couple of quarters. Just wondering if you could just talk about some of the trends there and some of the areas maybe you're writing a lot more business and are you just generally seeing more that type of business flow to, you know, as a sort of E&S risk as opposed to standard market risk or just any color on the 20% growth rate there.

Stephen M. Spray -- Chief Insurance Officer

Yes, Scott, Steve Spray. That -- I was involved in the E&S company from the get-go. And Don Doyle leadership in that team, they just continued it's blocking and tackling. They've stuck to their knitting, but they've also continued to expand their expertise, it's outstripping their appetite. But they're just -- they're out on the road constantly, meeting with the agents, their value proposition is extremely compelling, and I think it's like anything else, you have to just tell somebody 90 times over and over what's your value prop is. And the agents just continue to move more and more business that way. It's a primarily a casualty book. It's about 90% casualty, about 10% of it property. So it's -- there is, our agency plan today has about $3 billion of E&S business, of which we write roughly $260 million. So we just think that, there is a long runway for us there.

Scott Heleniak -- RBC Capital Markets -- Analyst

Okay, great. And then just one last one on the E&S as well. Just the accident year loss ratio saw a pretty big improvement, you're seeing any different trends there versus any other units as far as frequency or severity that kind of drove that improvement?

Stephen M. Spray -- Chief Insurance Officer

No, I think that -- again it's an E&S book. They do an excellent job of pricing in terms and conditions, but it's going to have a variability component to it. It's just inherently it's going to be a severity book. They only retain $1 million, so that helps their cause there as well. But I think it's just inherent variability that happens in that book.

Scott Heleniak -- RBC Capital Markets -- Analyst

Okay. Got you. Thanks a lot.

Operator

And you have a follow-up question from the line of Amit Kumar with Buckingham Research.

Amit Kumar -- The Buckingham Research Group -- Analyst

Thanks. Just two quick follow-ups. The first question goes back to the discussion on MSP Underwriting, at the time of the announcement you had, I think you had mentioned that it was going to be modestly accretive. In the slide deck you had mentioned 98% or better, I think it was a penny accretive at that point. I was curious, is that pretty much unchanged since the announcement or is there any more additional update on that?

Steven J. Johnston -- President and Chief Executive Officer

Yes, good question. It is unchanged since that. I would turn everybody to the slide deck that we released that Amit is referring to on October 12. And that is where we are still in terms of how we feel about the transaction with Beaufort. We are confident that it will close here in the first quarter. We've been in contact with the people and continue to be very confident in the people there, the quality of the people, the expertise and we are optimistic and we're ready to get -- ready to get going with that one.

Amit Kumar -- The Buckingham Research Group -- Analyst

Got it. And the second and the last question I have is, if you look at Cincinn Re, you know, in the 10-K you had laid out I think 30% of the premiums were coming from property exposure, 60% was from casualty, that piece has seen some decent growth. I was curious, how are you thinking about that piece for 2019. And especially coming out from an active hurricane season as well as other losses, is there -- could there potentially be a desire to grow that book and hence we could see an upside down the road, or is the desire to keep the PMLs within check and hence this books, you know, sort of proposition varies around $150 million or so in terms of premiums.

Steven J. Johnston -- President and Chief Executive Officer

This is Steve Johnston, and we're very much focused on the profitability on a risk adjusted basis there. We intentionally didn't set up a separate company, it's written on Cincinnati Insurance paper. We just look at each individual contract one by one to see if we think we can make a good risk-adjusted profit. So we don't put pressure on them to write. With the one ones, they've been very selective. They wrote less than 20 new property cat treaties out of some 130 cat submissions. They're very much looking to align themselves with quality companies.

And I think we would see continued more premium on the casualty side as we go through the year, as we saw in 2018, just based on the market conditions. But to the extent that we see, good opportunity on a risk-adjusted basis to either increase our share on contracts that we like or selectively write new ones, we feel very confident in their ability going forward.

Amit Kumar -- The Buckingham Research Group -- Analyst

Got it. That's actually very helpful. I will stop here. Thank you so much for the answers.

Steven J. Johnston -- President and Chief Executive Officer

Thank you Amit.

Operator

Thank you, ladies and gentlemen, for your questions. I'd now like to turn the call back over to Steve Johnston, for any closing remarks.

Steven J. Johnston -- President and Chief Executive Officer

Thank you all. We very much look forward to talking with you and look forward to speaking with you again on our first quarter 2019 call. Thank you, Katherine for running the call.

Operator

Thank you, sir. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

Duration: 49 minutes

Call participants:

Dennis E. McDaniel -- Investor Relations

Steven J. Johnston -- President and Chief Executive Officer

Michael J. Sewell -- Chief Financial Officer, Senior Vice President and Treasurer

Jacob F. Scherer -- Executive Vice President and Director

Amit Kumar -- The Buckingham Research Group -- Analyst

Stephen M. Spray -- Chief Insurance Officer

Mike Zaremski -- Credit Suisse -- Analyst

Jon Paul Newsome Jr. -- Sandler O'Neill & Partners -- Analyst

Joshua Shanker -- Deutsche Bank -- Analyst

Meyer Shields -- KBW -- Analyst

Scott Heleniak -- RBC Capital Markets -- Analyst

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