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Cincinnati Financial sets plan to pull Munich Re Lloyd's biz back to profit

Cincinnati Financial Corp. believes the experienced leadership at MSP Underwriting Ltd. will turn a 2017 financial loss into an earnings lift within a year of acquiring the Munich Re Co. unit.

MSP Underwriting's Lloyd's of London syndicate recorded a £68.7 million underwriting loss for the 2017 calendar year and posted a 154.2% combined ratio. MSP Underwriting operates through Beaufort Underwriting Agency Ltd., which underwrites for Lloyd's Syndicate 318.

Cincinnati Financial executives during a conference call to discuss the deal noted that MSP's loss exposure is mostly short-tailed, which minimizes the risk of adverse reserve development. Business written in 2016 and 2017 suffered adverse effects from heightened 2017 catastrophe losses in the U.S. due to hurricanes that year, according to a deal presentation. The syndicate's estimated $300 million of loss and loss expense reserves as of June 30 are adequate, executives said.

Cincinnati Financial is targeting a compound annual growth rate of 8% to 12% in five years and a combined ratio of 90% to 95% for MSP. The Munich Re unit's management team put together a plan to grow through more diversified premiums and with its proportion of property business reduced to about 60%.

"We anticipate that most of the growth in the next five years will be in nonproperty lines," said Steven Johnston, Cincinnati Financial's president and CEO.

Annual EPS accretion in the next few years could reach 7 cents assuming a combined ratio declining to as low as 90%, said CFO Michael Sewell.

The MSP acquisition would expand Cincinnati Financial's market reach outside the U.S. while relieving Munich Re of the challenge of operating more than one Lloyd's syndicate, executives on the call said.

Cincinnati Financial management also provided loss estimates from Hurricane Florence of $90 million to $92 million. The company's third quarter saw an extra $28 million of catastrophe losses, which are expected to come in at around $120 million, Johnston said. The combined ratio for the period should range from 97% to 99%, the CEO added.