Insurer Expects $240-$290M in Cat Losses for April/May

Loss reports continue to roll in after April and May severe weather. The Cincinnati Insurance Companies' property/casualty group expects its second-quarter results to include pre-tax catastrophe losses, net of reinsurance, of approximately $240 million to $290 million. This total includes the company's previously announced catastrophe loss estimate for April storms, which has now been updated to approximately $155 million to $190 million, net of reinsurance.

"Much of the United States continued to see a higher than usual level of spring storm activity, raising our catastrophe losses well above our historical second-quarter average,” says Steven Johnston, Cincinnati Financial Corp. president and CEO.

These high numbers are consistent throughout the insurance industry. Tim Doggett, AIR Worldwide’s principal scientist, predicted that 2011 likely will surpass 2008 in terms of insured losses from severe thunderstorm activity. Indeed, the two major outbreaks of this year—the first in late April, the second in late May—are “the costliest on record.”

For Cincinnati Insurance, the same storm system that caused the tragic tornado in Joplin, Missouri extended to Dayton, Ohio, where hail damaged property of more than 5,000 policyholders. “Our representatives working with affected families and businesses are promptly providing professional assistance,” Johnston says. “We are confident that their dedication will create long-term customer loyalty and appreciation for our agencies and our company.

"Over the past 10 years, the impact of catastrophes on our second-quarter loss ratio has averaged 8.5 percentage points compared with a full-year average of 4.4 points. The estimated impact of April plus May 2011 catastrophe losses on our second-quarter loss ratio would be approximately 33 to 40 percentage points, net of reinsurance and based on estimated earned premiums for the full second quarter. The mix of total April and May net catastrophe losses was split between commercial lines and personal lines, at approximately 50% each, roughly in line with our 10-year annual average.”

Cincinnati Financial’s reinsurance program provided coverage for its losses above $45 million from a single catastrophe event. Policyholder losses exceeded that level for both the May tornado and hail event and the late April tornado event. “Accordingly, we expect to recover significant amounts from our reinsurers,” Johnston says. “Reinsurance premiums we will pay to reinstate applicable coverage for the April and May events are expected to reduce our 2nd quarter 2011 earned premiums by approximately $33 million to $40 million, including the previously reported $26 million estimated after the April tornado event.

"For the remainder of 2011, we continue to have reinsurance coverage for any single catastrophe event that causes losses above $200 million up to $500 million, with one automatic reinstatement provision. While we may not again buy coverage for 2011 single-event catastrophe losses between $45 million and $105 million, we are studying options and we expect to replenish coverage we partially tapped for single-event losses above $105 million and up to $200 million.”

The company does not expect to liquidate any investments in order to pay claims and plans to continue to earn a larger share of business from agents appointed in recent years in several states less prone to catastrophe losses.

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