Cincinnati, September 27, 2000 -- Cincinnati Financial Corporation (Nasdaq: CINF)—today announced that based on data for the first two months of the period, the combined ratio for its property casualty insurance affiliates in the third quarter ending September 30, 2000, is anticipated to be above 115 percent, excluding expenses associated with a previously announced one-time charge. This estimate includes approximately three points from preliminary estimates of third-quarter catastrophe losses through September 21, when a tornado in Xenia, Ohio, caused approximately $7 million in net losses to the Company’s policyholders. In last year’s third quarter, catastrophe losses accounted for 1.9 points of the 104.4 percent combined ratio.
"The Cincinnati Insurance Companies provide policyholders with protection in the event of loss. Paying claims is our business," said John J. Schiff, Jr., CPCU, chairman and chief executive officer. "At the same time, our careful attention to quality underwriting has been a significant factor in our ability to consistently achieve industry-leading results -- both in growth and profitability. Nonetheless, during any shorter-term period the frequency or severity of claims can move to unusual levels -- in our favor or not.
"For the first two months of this year’s third quarter, losses have moved above or to the high end of our normal monthly ranges. We anticipate that our third-quarter combined ratio will be above 115 percent, and based on our current level of property casualty business, every percentage point change in our combined ratio has approximately a two-cent impact on net earnings per share,” Schiff added.
“Our initial analysis has discovered no discernible new trend in the sources of these losses -- no geographic concentration, no line of business concentration, no policy age concentration. While we continue to evaluate the loss patterns and related underwriting and pricing elements, we believe that the primary reason for the unexpected upswing in our combined ratio is the timing of events. We don’t generally experience a combination of unusually high large losses, adverse developments and reserve increases, all in the same period, as well as higher ’remaining’ other losses. This timing appears to be an aberration and we expect to generate consistently strong results in the periods ahead," Schiff said.
July and August Large Losses, Adverse Developments and Reserves
During July and August, the Company incurred fourteen new large claims in excess of $1 million, for which the total contribution to third quarter net losses incurred is expected to be $21.1 million. Over the prior six full quarters, the Company had averaged six claims per quarter in excess of $1 million, with the average quarterly contribution of large losses to net losses incurred at $9.6 million. The Company noted that during July and August losses between $250,000 and $1 million were in the normal range.
"While our overall growth would lead us to expect more large losses, on a percentage basis the losses in July and August were above the parameters acceptable for our growing base of business. Primarily arising from fires and commercial liability, these losses occurred in states where we have been active and profitable for many years," Schiff commented.
“Also during July and August, prior losses with adverse development greater than $250,000 were above the anticipated range,” Schiff continued. “We routinely review pending claims, adjusting specific case reserves when we receive new data such as statements, diagnoses or verdicts.” Sixty-one case reserve increases above $250,000 in July and August will contribute $25.8 million to net losses incurred. Over the prior six full quarters, the Company averaged 43 increases per quarter with an average quarterly contribution of $21.4 million to net losses.
The Company also estimates that it will add at least $10 million to reserves for claims incurred but not yet reported (IBNR) for the third quarter. “While our IBNR reserves have historically developed favorably, we believe a conservative approach benefits policyholders. The planned reserve is appropriate in the context of our healthy business growth in recent quarters,” Schiff said.
Other Losses At High End of Normal Monthly Ranges
The Company noted that the remaining other losses incurred totaled $155.4 million in July and August compared with an average of $186.8 million for each of the prior six full quarters. (Other losses refer to total losses excluding those in excess of $250,000, adverse developments greater than $250,000 on prior losses, IBNR increases and catastrophe losses.) Representing 47.9 percent of earned premiums in July and 52.6 percent in August, these other losses are within, but at the high end, of the range for monthly losses in this category.
Schiff commented, “Claim frequency doesn’t seem to be an issue. However, we’re seeing increasing severity, which is a function of rising loss costs. This is an issue that has been noted across our industry and can be more challenging to control.”
Strong Growth and Historic Underwriting Expertise Point to Continued Positive Outlook
"As we go forward, we expect to achieve balance as a result of ongoing initiatives to carefully underwrite the broad range of commercial accounts, to obtain appropriate price increases on renewal business, to obtain rate increases in homeowners and other selected lines and to sell insurance to value,” Schiff said.
“Through July and August, property and casualty net written premiums continued to rise at double-digit rates. We anticipate continued growth throughout the remainder of this year and beyond. We are continuing to work with our local independent agent representatives to take advantage of quality business opportunities, renewing most accounts with modest price increases without increased exposures. Our local field representatives work with the agents on these business opportunities to ensure that quality underwriting standards are maintained, and our corporate staff continues to assess current losses to determine if any changes are needed in our products or pricing," Schiff added.
Schiff concluded, "Our business model -- always focused on long-term value rather than short-term results -- has been successful for 50 years, benefiting shareholders, agents, policyholders and associates. We continue to rely on our fundamental strengths to achieve a strong overall performance."
Cincinnati Financial Corporation offers property and casualty insurance, our main business, through The Cincinnati Insurance Company, The Cincinnati Indemnity Company and The Cincinnati Casualty Company. The Cincinnati Life Insurance Company markets life, long term care, health and accident insurance. CFC Investment Company supports the insurance subsidiaries and their independent agent representatives through leasing and financing activities. CinFin Capital Management provides investment management services to institutions, corporations and individuals. For additional information, please visit our Web site at www.cinfin.com.
Conference Call Webcast: Wednesday September 27, 2000, at 11:00 AM Eastern, www.cinfin.com/news
Contact: Kenneth W. Stecher
Senior Vice President,
Secretary and Treasurer
513/603-5236