Yesterday, property and casualty insurer Cincinnati Financial Corp. (CINF) declared a preliminary estimate of about $150–$200 million related to pre-tax catastrophe losses, which will be reflected in its second quarter 2011 results. The losses mainly emanated from tornadoes in the southern states during the month of April.
The industry is believed to have incurred losses of $4–$6 billion from the April tornadoes. The company’s loss accounts for 3.0% to 3.75% of the total losses incurred by the industry. Cincinnati stated that catastrophes had affected its loss ratio by an average of 8.5% over the past decade. However, the impact of the recent catastrophe on the second quarter results will be approximately 21 to 28 percentage points, beating the historical average.
Cincinnati’s use of reinsurance cover will, however, limit its loss as the company will be reimbursed for losses exceeding $45 million. Its geographic concentration ties its performance to business, economic, environmental and regulatory conditions in certain states. Though the company markets its property casualty insurance products in 35 states, its business is significantly concentrated in the Midwest region, which is prone to catastrophes. As such, the company’s operations are vulnerable to catastrophe losses that keep the earnings under pressure.
The top-line growth at Cincinnati Financial has been sluggish for the past five years, with an average revenue growth rate of mere 2% since 2004. The decline was completely due to weak markets and economic pressures. The lingering effects of a soft insurance market pricing are expected to influence growth rates and earned premium levels in 2011 or perhaps later, depending on when the insurance market conditions improve. These conditions continue to weaken loss ratios and hamper the near-term profitability. The Commercial Lines, which accounted for 73% of 2010 net written premiums, is still experiencing very strong competition in the market, along with pricing decline in low single digits and reduced insured exposure levels that include negative effects on audit premium. However, net written premiums were down $26 million or 1% in 2010, reflecting an improvement from the 6% decline in 2009. We expect the segment to remain somewhat weak until the economy strengthens significantly.
We maintain a Neutral recommendation on the shares of Cincinnati Financial. The stock carries a Zacks #3 Rank (near-term Hold recommendation), indicating no clear directional pressure on the shares.
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