At this time, I would like to welcome everyone to the Cincinnati Financial second quarter for 2011 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Dennis McDaniel, Investor Relations Officer, you may begin your conference.
Hello, this is Dennis McDaniel, Investor Relations Officer for Cincinnati Financial. Thank you for joining us for our second quarter 2011 earnings conference call. Late yesterday, we issued a news release on our results, along with our supplemental financial package, and we filed our quarterly report on Form 10-Q. To find copies of any of these documents, please visit our investor website, www.cinfin.com/investors. The shortest route to the information is in the far right column via the Quarterly Results quick link. On this call, you'll first hear from Steve Johnston, President and Chief Executive Officer, and 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 Chairman of the Executive Committee Jack Schiff Jr., Chairman of the Board Ken Stecher, Executive Vice President J.F.
Scherer, Principal Accounting Officer Eric Mathews, Chief Investment Officer Marty Hollenbeck, and Chief Claims Officer Marty Mullen. First, 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. With that, I'll turn the call over to Steve.
Good morning. Thank you for joining us today. The loss of life and destruction of property caused by a record number of tornadoes, numerous hailstorms, and high winds were devastating to families and communities across the U.S. during the second quarter. While it's impossible to completely fix the situation, our well-equipped claims professionals gave tremendous effort to settle claims in a prompt, courteous, and professional manner and under very difficult circumstances. We handled nearly all of the claims with our own associates. Over one-third of our field claims staff from various parts of the country left home to perform additional storm duty, sometimes more than once, to assist in areas hit hard by second quarter catastrophes. The claims representatives remaining at home worked extra hard to maintain high levels of service in the less affected areas. It was a total team effort, and we sincerely thank them.
As an example, their promptness and efficiency was demonstrated by already closing over 80% of more than 21,000 claims from second quarter storms. We are hearing positive reports from our agents and understand that the claims effort is resulting in new business being referred to our agents by satisfied customers. In terms of dollars and cents, the storms clearly hit us where we operate. The record-setting catastrophe losses resulted in a second quarter combined ratio of 136.6 and an operating loss. Reflecting on this memorable quarter, our risk management efforts proved effective, including prudent use of reinsurance.
Despite incurring the two most costly catastrophe losses in the 60-year history of our company, each with estimated losses before reinsurance that more than doubled our largest prior event, Hurricane Ike in 2008, our shareholders' equity and book value per share both increased during the first half of the year. That was after returning $127 million to shareholders in the form of a cash dividend. We continue to execute and improve upon our risk management strategies, including appropriate use of reinsurance, improved pricing, a diversified investment approach, strong loss reserves, and geographic expansion. We reinstated our reinsurance program during the second quarter, which had the effect of reducing the quarter's earned premium by approximately $38 million. After the second event, we purchased additional third and fourth event catastrophe cover for the rest of the year.
Coverage now attaches at $70 million, which means our loss retention level is still relatively low. Similar to our program in effect at the beginning of the year, we retain a share of losses above the attachment point. Our share for the third and fourth event catastrophe cover is 15%. The second quarter storms demonstrated the benefits of our reinsurance program, as our recovery of losses is now estimated at over $220 million from the April and May storms. Our diversified investment portfolio contributed to gains to the balance sheet and generated higher investment income. Mike Sewell will provide additional investment detail in a couple of minutes. We continue to be confident about the strength of our loss reserves. We maintain a consistent approach and aim to remain solidly in the upper half of the actuarially estimated range, which we believe is important for longer-term financial performance.
Another positive trend was our premium growth. It was broad-based, occurring in all three property casualty segments. Profitable growth will help increase future earnings more rapidly. We believe that our pricing and profit improvement initiatives are gaining traction as the effect of higher catastrophes and the associated reinstatement premium more than explains the increase in our second quarter and first half combined ratios. We continue to achieve rate increases in our personal line segment. Our excess and surplus line segment has now been able to increase rates for nine consecutive months. While commercial lines renewals in total had a net average price decline estimated at 1%, approximately 75% of policies were flat or had an increase. Our workers' compensation line experienced a solid price increase. Life insurance earned premiums also grew in the second quarter, as did profit.
That segment remains an important contributor to operating results and helps smooth out the naturally more variable results from property casualty operations. On May 31st, our new CFO, Mike Sewell, joined the team, and the effects of his positive contributions are already being felt. Mike will provide some perspective on financial results and our financial position.
Great. Thank you, Steve, and thanks to all of you for joining us today. I'll start by highlighting some of the key components of investment performance. Net investment income rose 2% for the second quarter on a pre-tax basis. For our investment portfolio in total, the first half of 2011, after-tax average yield was down 16 basis points from a year ago and 20 basis points on a pre-tax basis. The bond portion of the pre-tax yield declined by 30 basis points. Dividend income from equity securities grew at a double-digit pace during the first half of 2011, partially offsetting the decline in the bond portfolio yields. Dividend growth faces a tougher comparison for the second half. As you may recall, in last year's third quarter, we completed the sale of our Verisk holding. Verisk did not pay a dividend in the second half of 2010.
Dividend income benefited from redeployment proceeds from that sale. The sum of realized gains, plus the change in unrealized investment portfolio gains in the first half of 2011, was $284 million pre-tax. That total represents a 23% increase over the balance of unrealized gains at the end of 2010, boosting our portfolio's total return. We ended the quarter with equity securities representing 25.3% of total invested asset fair value, 1.2 percentage points below that measure at the end of March. In part, that was due to second quarter bond portfolio gains outpacing our equity portfolio gains. Our investment approach has not changed. Valuations for our various portfolios in recent quarters have fluctuated at levels within what we consider normal variation. Moving to insurance operations, let's take a closer look at the combined ratio components on a consolidated property casualty basis. There are several moving parts to consider.
Loss and loss expense reserve development on prior accident years during the first half of 2011 had a favorable effect on our combined ratio by 10.3 percentage points, matching the full effect of 2010 ratio effect. To look at the underlying trends, we adjusted to cancel out the effects of catastrophes and the reinstatement premium. On that basis, the loss and loss expense ratio for the first six months of accident year 2011 improved 0.2 percentage points compared with accident year 2010, measured as of year-end 2010, and the underlying expense ratio improved 1.0 points. Controlling expenses remains an important focus throughout the organization, even as we aim to improve service in selected areas of strategic importance. We see the expense ratio benefiting from future growth.
We expect to continue realizing policy processing efficiencies over time from our investment in technology, along with other process improvements and further deployment of performance metrics. Net cash flow provided by operating activities for the first six months of this year was slightly positive, though well below last year's level due to higher paid losses arising mostly from catastrophes. Paid losses and loss expenses, net of reinsurance, were up $263 million, driving our $249 million decline in operating cash flow. We studied various ways to keep fueling investments, steadily supplying our portfolio managers with new cash to invest while also providing for consistent dividends and other corporate needs. We decided in mid-July to tap more of our existing lines of credit for an additional $55 million. The terms of borrowing are very favorable, including a floating interest rate currently just under 60 basis points.
If that borrowing had occurred before June 30th, the effect of $55 million on our debt-to-capital would have raised it modestly to 15.0%, compared with the 14.2% we reported. We ended the second quarter with over $1 billion in cash and marketable securities at the holding company level, and we remain in great shape in terms of capital, liquidity, and financial flexibility. The contributions to book value per share for the quarter are as follows: Property casualty underwriting losses reduced book value by $1.06. The life insurance operations added $0.08. Investment income other than life insurance and reduced by non-insurance items contributed $0.45. The change in unrealized plus realized capital gains from the fixed income portfolio increased book value per share by $0.38. The change in unrealized plus realized capital gains from our equity portfolio provided growth of $0.16.
Again, we paid $0.40 per share in dividends to shareholders. In total, book value decreased by $0.39 during the second quarter to $31.01 per share, $0.10 above the year-end 2010 level. Adding the $0.40 per share dividend, our value creation ratio for the quarter stayed in the positive territory at 0.1%. For the six months of 2011, our value creation ratio was 2.9%. That concludes my prepared comments, I'll turn it back over to Steve.
Thanks, Mike. Before we move on to questions, I'd like to share some observations based on my first few months as the new CEO. I've spoken with many of our agents and associates. They share with me a high level of confidence in the future of our company. Our efforts are concentrated on profit improvement plans that are showing early signs of success. Our tools and processes are changing but continue to embrace the principles that generated past results and will lead to profitable growth. Capital remains strong and will allow us to handle difficult circumstances that come and go while continuing to reward shareholders over the long term. I appreciate the opportunity to give you a glimpse into Cincinnati Financial. Jack Schiff Jr., Ken Stecher, J.F. Scherer, Eric Mathews, Marty Mullen, and Marty Hollenbeck are here with Mike and me, We are available to respond.
Stephanie, we're ready to open the call for questions.
Certainly. At this time, if you would like to ask a question, please press star, then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Matt Rohman from KBW. Your line is open.
Gentlemen, good morning. I guess, Steve, could you start off by talking about any areas of outlying strength or weakness on the pricing side? It seemed like commercial lines growth was stronger than I'd expected in the quarter.
Sure, Matt. I'll give it a shot. Then I'll turn it over to J.F. to see if he has any additional insights. In terms of pricing overall, I think on the personal line side, we continue to get rate in the homeowners area. It's in the upper single digits. After the events of the second quarter, we actually went back in some of the states and filed for more additional rate than we had originally planned for this fall. We feel that we're getting rate in homeowners, and we think our retention is holding up well. Personal auto, we're getting rate in the low single-digit area. We feel that that's also holding up well as our retention remains high. We are adding the predictive modeling capabilities to personal lines now for the third year.
In addition to the rate increases, on average, we're getting more rate on those risks that we feel need more rate. We're also seeing the distribution of our book shift towards the more profitable accounts. Excess and surplus lines I think has been strong in terms of rate increase. They're in a tough environment, I know because the market is soft. They face competition from other E&S writers. Also, we hear reports of standard companies that may relax their terms and conditions to go after what had previously been E&S business. Through all of that, we've been able to get rate increase on the E&S side now for nine consecutive months. Moving more into the commercial line segment, we are down overall still slightly around 1%. On most risks, over 75%, we're either renewing flat or up a little bit.
It's the larger risks that are under pressure, and we're seeing some need to take rate decrease there to hold on to some quality larger risks. Then also in the workers' comp area, we are getting rate now, and we've been getting some rate there for some time. I know, J.F., is there anything? I was kind of long-winded there. Is there anything that you'd like to-
Steve, I guess to me, that covers it. I think there are some questions relative to property, and in particular, there have been questions as to property increases in the affected areas. Steve mentioned it in homeowners. We've been able to refile there. In the commercial lines area, just to add some color to that, it might stand to reason that because of the significant catastrophes in the Tuscaloosa area and Joplin area, places like that property increases would be quick and easy to get. The psychology that we experience there, though, is that the policyholders in those areas are still, if you will, traumatized by what happened to them. In many cases, a lot of the property that we insure or they have insured isn't fixed yet. They're having difficulties getting contractors to take care of a lot of that type of thing.
The psychology of going back to those people right now
In effect, saying that we have another property loss for you in the form of an additional premium or increased rates in property isn't as easy as you might think. However, having said that, I think that's temporary in the sense that once the trauma is passed, once people are back on their feet, everyone will expect that rates will go up. We think we'll be able to get those rates as the months go on.
Okay, great. Next question on your reinsurance plan. You guys historically had a very conservative plan in place. Obviously, with the regional weather over the last couple of years in this quarter, in particular. Any thoughts after this year going forward, sort of restructuring that plan at all?
That's a good point, Matt. I think about that quite a bit. Talk with Tom Joseph and our brokers, and I think we will take a full look at our program when it comes time for our renewal, which is a one-one renewal. I think your point's well taken, and we will be investigating all of our alternatives in terms of structure.
Okay, great. Just last question. Looked like there was some sizable favorable development on the E&S book. Any color there?
Yes. We are conservative reservers. We've been conservative with all of our segments, including Excess and Surplus lines. We started out using more, not having our own E&S data, more data from our similar lines within our company, industry data. This time, for the first time, we actually felt comfortable using our own E&S data. I think it shows favorable development, particularly on the loss adjustment expense side. I think it makes sense in that we tend to write lower limits in our E&S book than we do in our other lines of business, which makes it have some common sense behind the favorable development that we're seeing.
Okay, great. Thanks very much, guys.
Thanks, Matt.
Your next question comes from the line of Vincent D'Agostino from Stifel Nicolaus. Your line is open.
Hi, good morning.
Good morning, Vince.
Just real quick. This topic comes up a lot, given its importance to your investor base. With August coming up and being the typical dividend-raising time of the year, I'm curious what metrics do you look at as a hurdle rate for continued dividend increases? I guess how are you feeling about sustained increases when 2011 will probably be the fourth consecutive year of combined ratio north of 100? I guess, I'd go on a limb and say that you'd agree with the assessment that Cincinnati probably has the excess capital to handle an increase. I'm just curious if there's any rating agency pushback with the payout ratio near or above 100% for a few years now.
Good question, Vince. It's timely given the quarter, and I anticipate it. It's a natural question. In terms of the quarter, we see the quarter as an income statement event. It hit our income statement hard. The balance sheet, though, remains largely unscathed. I think our risk management efforts kicked in. The premium surplus ratio is at 0.8 to 1, which is where it was at the end of 2010. Our book value per share is actually up $0.11. Over the first half, our leverage remains low. As you point out, we have the balance sheet strength to continue our dividend policy. We did cover the dividend in 2010. As you mentioned, the payout ratio was high, we were able to cover it. Given that we feel that our balance sheet has been unscathed, we still see that this quarter happened. We're putting it behind us.
We think the initiatives that we have in place to improve the operating results of the company will pay off, will put us in a position to continue on with our dividend strategy. We always have to put in the caveat that it's a board decision, and we discuss the dividend policy with the board actually every quarter. We feel we're still in the same position that we were at the end of the year.
Great. Then one more, if I may. I'm curious if the new geographical business, if that's inherently more profitable, maybe because there's less of a need to ensure renewal of existing business and maybe less precedent setting with the agents. I'm wondering if in maybe new regions you can come in a little bit higher but without the same renewal concerns as in existing markets, or if there's some sort of learning curve on new business in those regions that kind of prevents such an advantage.
Vince, this is J.F. Relative to the new areas, we've had the good fortune as we opened up new states or expanded to new territories to do so with experienced field reps. In all of those areas, fortunately for us, the reputation of our company precedes us. Agencies want to do business with us. There's a more deliberate effort on their part to build a profitable book of business with The Cincinnati Insurance Company for no other reason. If they do that, then we're less apt to appoint their competitor. They protect us from the beginning of the relationship. Because it's important that we achieve success together, I think they give us a bit more attention than they might other carriers.
Having said that, we do measure the loss ratios we're seeing in newer areas, on a trended basis, we're actually seeing that those loss ratios are more profitable than existing areas. We think we've continued to do it right and that we don't explode onto the scene in any of these states We take a very long-term approach right from the very beginning. We've been successful in all the new states where we've entered.
All right, great. Thank you so much.
Thank you, Vince.
Your next question comes from the line of Joshua Shanker from Deutsche Bank. Your line is open.
Good morning, everyone.
Morning, Josh.
I was looking through the Q and noticed that you said you rolled out the predictive modeling tools in commercial lines this quarter. It'll be a full rollout. I guess when I say this quarter, I mean 2Q and full rollout in 3Q. I'm wondering how that's going to affect loss ratios, particularly in workers' comp. It still seems like you're around 140% combined, what we can hope for going forward.
You're right. We are continuing to roll out the predictive modeling. We have rolled it out for the personal lines. The workers' comp has been actually rolled out for a few quarters now. It's gaining traction. I think that when I look at the accident years, particularly with a long-tail line like workers' comp, I try to look at it over a longer period of time. We think we're seeing improvement. If we look at the loss ratio that we had in place for the full year of 2010, this would be the accident year before catastrophes. Obviously, no catastrophes in workers' comp, but 106.5. For the six months, we're down to 102.3.
Loss or combined?
We see improvement. Granted, we would hope that it would be quicker. I think that also some of the non-rate items that we put into place in terms of claims handling, loss control, all the initiatives that we have in place, take a bit of time to show up in the data. In other words, we want to be sure that what we're seeing is real. We've seen a lot of positive signs in terms of not only rate, but the other initiatives that we have in place to improve workers' comp. I don't know if maybe J.F., Marty, Mike, anybody else wants to chip in anything else on that.
No, I think you covered it there. I think we're pretty happy with the traction we're getting. The new business that we're writing in comp, as a result of the models, are coming in at more favorable modeled scores than in the past. We think we're laying the groundwork for success in the future in that regard. I think all of the initiatives we have going in workers' comp are showing good progress. Our loss ratios in the other lines, property, the casualty, and auto, have been pretty stable. They've actually been pretty good. We're very happy with what we're seeing with the new model. Though it's been in test, we're going to roll it out to all of our field underwriters in August, as well as all of our HQ underwriters.
The experience we've had with workers' comp, the implementation of it as another tool for underwriting, I think, has been beneficial for us. We have a lot of confidence that the modeling that we're going to be doing on the balance of the book of business will make a contribution, too.
What about loss trend? A couple of your competitors who've reported before you have said they've seen an uptick in loss trend on workers' comp.
Josh, this is Steve. I want to make one comment before on the accident year before I jump into the loss trends. Just to make sure to point out, and I'm sure you've seen it, that we had favorable development on prior years during the first half of 16.9 loss ratio points. That's consistent with the 12.6 points of favorable development we had at year-end 2010. I always like to point out when we look at the accident year that we're consistent in our reserving practices. As we have favorable development on the prior years, keep in mind that we are being consistently conservative on our pick for the current accident year, such that our reserve margin in total, we can keep consistent from the beginning of the period to the end of the period for all accident years.
Absolutely.
In terms of the trend, our trends of late have been benign. I think we may have been early on to adjust the trends that we saw back in 2009. Our reserving systems, which I think are pretty state-of-the-art, kicked out what we thought to be some increasing trends. We took strong action in 2009. If I remember right, we added about $49 million in reserves in 2009. Since then, since we made that change, it's been pretty stable. I think we've seen a decrease in frequency, an increase in severity that's been pretty benign, such that our loss cost trend has been consistently benign of late.
Great. One small question. It's a small line, but not one I understand well. In the specialty packages, although it's a small line, there's a big drop-off of premium and a significant amount of cat losses. Do you have any thoughts on what went on there to just help me understand what you're doing over there?
I can speak to the cat losses. In terms of the premium, we'll touch that later. In terms of the cat losses, we do write a lot of our small BOP business, and it's coded into that specialty package. It really was, just like the rest of our property lines, hit hard in terms of the
The catastrophe losses. It was exactly as you see it in terms of the cat loss effect. Do you want to take a shot at the
Josh, on the specialty packages, we have some lines of business such as churches in that, and some of that business is being moved to standard package policies, which gives us an opportunity to get better rate. There's nothing broken in that particular line of business, just some movement of premiums.
Some $10 million went out of specialty packages and was divided up between commercial property and commercial casualty, probably.
Yeah. One other thing to consider, and agree 100% with what J.F. said, is also with the catastrophe losses happening, we've had reinstatement premium that we paid. We touched on $38 million for the quarter, that's going to be allocated to lines where the actual catastrophe losses were incurred. Specialty packages is going to get a proportionate share based on their losses of the reinstatement premium allocated, and that's going to have a negative impact on the premiums.
Thank you for all the color, as usual.
Thank you, Josh.
Your next question comes from the line of Scott Heleniak from RBC Capital Markets. Your line is open.
Scott Heleniak with RBC. How you doing?
Hi, Scott.
Just a couple of questions. The first is, obviously, the cat losses were pretty significant in the quarter. Just wondering if this particular quarter changes your strategy at all as far as reducing property exposure in certain regions, or just causing you to not write the business unless you're getting significant rate increases. Just wonder if you can touch on that as far as whether the policy count or in homeowners in particular, do you expect that to change at all or potentially shrink?
Scott, I think that when you have tornadoes, it is a fairly random event in terms of where it hits. Very devastating where it hits. I think our strategy, and we recognize our concentration, you're making an excellent point. The strategy has been more to write more premiums in our expansion states out west in Texas and Utah. We're into several new states out there. We're getting, I think, over 20% of our homeowners' new business coming from our seven expansion states. I think while we look at our exposures where we have concentration, the main emphasis in terms of our geography is to write more in more dispersed areas, such that when any event hits a particular area, it has less impact on our overall results.
Okay. You said 20% of new business. That's just in homeowners that you're talking about?
Yes.
Okay. Some of your other competitors have mentioned a lot of non-cat related weather losses. Just wondering if you saw that same sort of impact. I didn't really see much mentioned in the release about that.
Yes, Scott, this is Marty Mullen. Exactly. We've experienced the same type of non-cat weather issues in commercial and personal lines. Adjacent states not involved in the cats, but also sustained significant weather-type claims impacting the loss ratios.
Okay. My only other question was just on the E&S unit, which is ramping up well, had favorable development. Just wondering, are you writing any different risks or accounts than you were when you started this business a few years ago? Do you expect that to change? What do you think the business will look like as far as premium volume in a few years, assuming the market gets better? How much can you ramp that up?
Well, I would say what we've experienced here this year on the E&S side has been a bit more activity of standard market carriers putting price pressure. Our hit ratios are down a bit. We continue to write about 85% casualty lines, 15% property. We have added some miscellaneous professional lines to the business. We don't really feel that we need to expand our appetite aggressively. We have a lot of opportunity within our current agency force to write the E&S business they currently write. One of the things that we are beginning to do is add field underwriters to our marketing efforts and underwriting efforts for the E&S business. Up to this point, all the E&S business would have been funneled in here to headquarters. After having first gone through our standard market field reps, it would come in here for underwriting and pricing.
We have individuals who we believe are capable that are now going to move out into the field, call on agencies in person. Just as that model's worked beautifully for us on the standard side, we think that'll help us continue to write business in our agencies without any aggressive increase in our appetite. Our agencies write somewhere around $2 billion in Excess and Surplus lines business. If you were to eliminate half of it as business that would not fit our appetite, we have an opportunity to write a billion dollars with a model that's pretty attractive. We think the balance of casualty to property is about where it'll be. I think it's worth mentioning that we're not trying to write this in big chunks. Our average premium this year is just a little over $4,800.
The medium-sized policy we issued in CSU, our Excess and Surplus lines company, was just a little over $2,100.
We're very much a special events conservative writer. Some agencies, because they're pretty comfortable with us, are working real hard at moving a lot of their business our way.
Do you write E&S through all of your agencies right now?
Well, we write E&S, and this is a point to be made, only through Cincinnati Insurance Company agents. We do not use the wholesaler market. It's only appointed Cincinnati Insurance agents that write business through us. I think it's worth mentioning also that the premium and losses from excess and surplus lines business is included in or commingled with the premiums and losses with their standard business for purposes of the profit-sharing we offer to our agencies. In addition to the incentive of writing business with us because there is no middle person involved, because our field claims reps will handle claims, because our loss control reps will provide loss control services where none is available in the standard excess and surplus lines marketplace.
The agency also has an opportunity to earn profits on that business, which is an incentive for them not to put poor excess and surplus lines business with us, but to be more careful and thoughtful about the business they send our way. We think we have a fine model. We do business only with the agencies with whom we have a relationship, and we have good knowledge. Having said that, and given the opportunity that exists within our own agencies, we think we can keep our appetite about where it is and grow nicely.
Okay. Thanks a lot.
Thank you.
Your next question comes from the line of Paul Newsome from Sandler O'Neill. Your line is open.
Hello, guys. Thanks for the call. One follow-up question. I'd like to push back on the strategy of improving your catastrophe exposures by geographic diversion. I'm looking at your results for the last four or so years. They look pretty tough. Doesn't that suggest that on sort of a state-by-state basis within the current territories, you're underpriced for catastrophe losses given how persistent the losses have been year-over-year? Wouldn't that be not helped at all by the geographic improvements? You would maybe have a better weighted average return, but you'd still be underpriced in the geographies that you are from a catastrophe loss area. Am I just missing something?
No, Paul, that's a good point, and I probably should have addressed it. You're absolutely right. We can't, and I didn't want to suggest that we weren't taking corrective actions within our current operating territories. We are taking rate. We're trying to get rate adequacy. We're trying to get the most rate on those policies that we think have the highest expectation for future losses. I think also a lot of our activity has taken place in coastal states. We've done a good job in Florida over the past three years or so of reducing our exposure down there such that our average annual loss from hurricane, the expected value of that has dropped from $13.6 million a year to three. We've taken similar action in Mobile, Alabama, Savannah. We've taken rate in our current states that we operate in.
It has to be a total effort, and I should have given that more full description when I was talking about the geographic expansion.
Great. Thank you.
Thank you, Paul.
Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Vincent D'Agostino from Stifel Nicolaus. Your line is open.
Thanks for taking the follow-up. Just one here. I'm curious if there's any strategic plans for the life segment other than its diversification benefit. It just seems like there could be some cross-sell opportunity there given the strong agency relationships or maybe even in the group life product space.
Vince, this is J.F. We do have efforts where we, in particular in the worksite marketing, payroll deduction, life insurance side, where we exchange information about commercial accounts that we write on the property and casualty side with the life company to try to take advantage of writing more life insurance, particularly on a voluntary basis. We have many property and casualty agencies that as they grow larger, as they see, particularly with the soft market on the property and casualty side, they've been much more open to other revenue streams. They're putting life insurance specialists in their agencies. Frankly, we have good luck with general agencies, life-only shops in the communities in which we operate as well. About 70% of our premiums come from property and casualty distribution, the balance from life-only distribution. We have many initiatives in place to try to bolster the life company's activities.
Probably see a fair amount more agency appointments in that area and a bit more cross-selling.
Great. Thanks.
Again, if you would like to ask a question, please press star, then the number one on your telephone keypad. I'm showing no further questions at this time. I turn the call back over to the presenters.
Okay. Thank you, Stephanie. It was a memorable quarter, one we hope we never do again. I do think our claims adjusters did a phenomenal job, both in their service and in their estimates. In our pre-announcement, we estimated that we would have catastrophe losses for April and May between $240 million and $290 million, and it's actually come in right at that midpoint. Not only in terms of service, but in terms of the accuracy, a big compliment to our claims adjusters. I thank all of you for your participation, and we look forward to speaking with you at our next call, if not before. Thank you.
This concludes today's conference call. You may now disconnect.