辛辛納提金融 (CINF) 2007 Q4 法說會逐字稿

Good morning. My name is Latonya and I will be your conference operator today. At this time I would like to welcome everyone to the Cincinnati Financial year-end 2007 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). Ms. Wietzel, you may begin the conference.

Thank you, Latonya. Hello, this is Heather Wietzel, Cincinnati Financial's Investor Relations officer. Thank you for joining us today for our conference call. This morning we issued a news release on our results along with our supplemental financial package and the listing of the securities we own. If you need copies of any of today's materials, please visit www.cinfin.com, where all of the information related to the quarter can be found on the Investors page under the quarterly results Quick Link.

In the coming weeks cinfin.com also will host our online proxy statement and annual report in preparation for our annual shareholder meeting. We are making all of our materials easy to find and search online, and we're encouraging shareholders to do just that, especially for items like the extensive and bulky Form 10-K. But instead of totally discontinuing all paper mailings to shareholders, as the SEC's new notice and access regulations would permit, we are planning more frequent shareholder communications with more condensed and digestible information that is mailed earlier than in the past.

Getting back to today's call, Chairman and Chief Executive Officer Jack Schiff Jr., and Chief Financial Officer Ken Stecher will give prepared remarks after which we will open the call for questions.

First, please note that some of the matters to be discussed today are forward-looking. These forward-looking statements involved certain risks and uncertainties. With respect to today's risks and uncertainties we direct your attention to our news release and to our various filings with the SEC.

Also, reconciliation of non-GAAP information as required by Regulation G was provided with the release and is available on the Investors page of our website under financial analysis. Statutory data is prepared in accordance with statutory accounting rules as permitted by the state of Ohio including the National Association of Insurance Commissioners Accounting Practices and Procedures Manual and therefore is not reconciled to GAAP. With that let me turn the call over to Jack.

Thank you, Heather, and good morning to all of you and thank you for joining us again today to hear about our 2007 results. When I finish discussing our insurance operations Ken Stecher will talk more about our profitability, our capital management and our outlook for 2008; then we'll open for your questions. I'll start by highlighting the Board's action last week to increase our indicated annual dividends by 9.9% to $1.56 per share for 2008. This sets the stage for the 48th consecutive year of dividend increases.

Turning back to 2007, in total, operating income was $3.54 per share compared with $2.82 in 2006. While market pricing trends led to slightly lower written premiums and put pressure on our current accident year margins, several factors contributed to the excellent results. First, we recorded our lowest catastrophe loss ratio since 1991. Second, savings from favorable development on prior period reserves were well above our expectations. Plus life operations contributed to $0.23 per share, up $0.04 from a year ago. And investment income grew 6.6% bringing full-year investment income above $600 million for the first time in our history.

On the other hand, book value at year end suffered from market influences on the valuation of the financial stocks in equity portfolio, a topic Ken Stecher will also address. On the insurance side we continued to build our company for the long term offering the consistency that lets us earn a prominent position in our agency's offices, not just for one year but for five, 10, 20, even 50 years.

Agencies continue to successfully market our products to their better accounts; they gave us $325 million of new business in 2007 and helped us maintain the persistency of renewals at more than 90% of our accounts. Two weeks ago we began our 2008 sales meetings visiting with agents in Alabama, North Carolina, Tennessee and Virginia. At those visits and other meetings, agents continue to report that competition in the commercial and personal lines marketplaces is rising.

In some regions and for some types of business we are also seeing economic pressure. That pressure can affect our policyholders' revenues or payrolls which are factors in determining the premium calculation for certain business policies. Working closely with agents we are using credits more frequently to retain renewals of quality commercial accounts with variations by geographic region and class of business.

In many regional markets, to write the same piece of new commercial business we would have quoted a year ago, pricing is down about 15 to 20% on average. Pricing on renewal business is also down in the range of 4 to 6% varying by account size. Terms and conditions generally remain the same and are satisfactory, but are beginning to be pressured by some carriers. Our agents brought us $71 million of new commercial business in the fourth quarter bringing our full-year new commercial lines business total to $287 million.

There's no doubt it's a challenging new business market for our agents. Many carriers appear to be managing the soft market conditions by working very hard to protect their renewal portfolios through reduced pricing. When the agency can influence the selection of a carrier our agent and field teams do a great job of communicating Cincinnati's advantages and of minimizing price as the primary selection criteria. For business that would be new to the agency they may not have the same opportunity.

The result, we're not seeing quite as many opportunities as we ordinarily would expect, nor is our hit ratio quite as high as we consider normal. We believe our field staff are quoting prices appropriate to the quality of the risks and avoiding the trap of competing solely on price. Our disciplined decision-making remains in the hands of people who have direct local knowledge of the risks.

We're not sitting in Cincinnati making those decisions by line of business or geography. We continue to evaluate new and renewal business on a case-by-case basis. Over the long run our history says that this steady approach works best for agents, for policyholders and for shareholders.

Turning to our personal lines business -- policyholder retention remained above 90% for both our personal auto and homeowners lines, and new personal lines premium grew for the sixth consecutive quarter. The increased new business still doesn't fully offset the impact of lost business and lower rates on renewal business. We continue to work to improve our personal lines operations; restoring the momentum to this business remains a priority. We know that access to Cincinnati personal lines broad coverages and great claims service is an essential piece of strategy planning for our agencies.

On December 31st we accepted our first excess and surplus line application, a policy with premiums of $1500 for the Cincinnati Specialty Underwriters Insurance Company. Our new wholly owned brokerage subsidiary, CSU Producer Resources, is working with several of Cincinnati's independent agencies in Georgia, Illinois, Indiana, Ohio and Wisconsin.

In mid-February we'll be making E&S products available to all of our agencies in these states. These two subsidiaries will expand into additional states where Cincinnati currently offers standard market property casualty policies as the new companies obtain the necessary state regulatory approvals. This is a priority for our operations.

We structured our new E&S operations to serve the needs of independent agencies that currently sell our standard market insurance policies. When all or a portion of a current or potential client's insurance program requires E&S coverages, those agencies now can write the whole account with Cincinnati, gaining benefits not often found in the broader E&S market. Producers can submit risks from a variety of classes reflecting the mix of accounts Cincinnati agencies currently write.

CSU currently markets and underwrites general liability coverages and plans to expand this to include commercial property, miscellaneous professional and excess casualty in 2008. Agency producers have direct access to our dedicated E&S underwriters and they also can tap into their agency's broader Cincinnati relationships to bring their policyholders assistance with experience and responsive loss control and claims handling.

Our new E&S administration system delivers electronic copies of policies to producers within minutes of underwriting approval and policy issuance. We will give extra support to our producers by remitting surplus lines taxes and stamping fees, and retaining admitted market declinations.

We capitalized CSU with $200 million from The Cincinnati Insurance Company. That high level of funding underscores our commitment to help our independent agencies grow by partnering with a carrier they can depend on. Everything we do to increase their competitive advantages and success also helps us achieve our own long-term growth and profitability goals. CSU received an A (Excellent) rating from A.M. Best in December. Ken, let me turn things over to you.

Thank you, Jack. And thanks to all of you for joining us today. I'm going to comment today on insurance profitability, our capital management and investment strategies and our outlook for 2008. Before I do that let me point out a couple of items in the information we've provided with the financial supplement.

Large loss reports are on pages 17 to 19 of the financial supplement. We refined those reports to show more detail. We believe this will help us better distinguish between simple inflationary effects and anomalies in the data. A reserve analysis is on page 23. On this report we now provide a detailed look at the effect of reserve development on our loss and loss expenses, both dollars and the ratio. We hope you will find these useful in your analysis.

Now, first on the property casualty business -- the full year combined ratio improved to 90.3% from 94.3%. Jack mentioned the most significant influences on the improvement. For both commercial and personal lines higher accident year loss ratios were more than offset by very low cat losses and the benefit of favorable development on prior period reserves.

Turning to the factors that had a positive contribution. First, our 2007 catastrophe loss ratio was at its lowest level since the early '90s with the dollars at the lowest level since 1997. Further, the year-over-year decrease was further influenced by our record level of catastrophe losses in 2006, even though the industry's cat losses were extremely low.

Second, favorable development from prior year reserves continued at a healthy pace improving the fourth-quarter combined ratio by 15.3 points. In last year's fourth quarter, favorable development improved the ratio by 10 points. Our actuaries performed their most thorough review of our reserve position by accident year in the fourth quarter.

Full-year savings from favorable development rose to $244 million or 7.8 percentage points on the combined ratio. About 0.7 points of that savings was due to favorable catastrophe loss reserve development. Over half of the savings for the full year was attributable to our commercial casualty business line which would seem to be in line with recent industry experience.

Particularly for our longer tail lines our ultimate loss ratio estimate are showing the benefit of reclassifications and repricing of our commercial lines book of business early in this decade. During the same period we also made changes to our policy terms, conditions and coverages which often help manage limits or exposures. Further, we also continue to see positive payment and reporting pattern changes, partially attributable to the implementation of a claims management system and to the use of a claims mediation process that promotes earlier liability settlement resolution.

Looking at losses this year, for commercial lines the accident year loss and loss expense ratio, excluding catastrophe losses, rose to 65.2% from 61.4%, as you can see on the report on page 23. For the year the changes in the current accident year loss ratios for our larger business lines were largely due to softer market pricing. About 1 point of the commercial accident year increase was due to higher losses from non-cat weather, as we discussed last quarter. A few of those losses were unusually large as well.

Large losses, including those from non-cat weather, contributed a higher percentage in 2007 than in 2006. We're comfortable that natural volatility was largely responsible for the uptick. An accident year loss ratio in this range still translates into acceptable profitability for our commercial lines by taking into account a typical level of reserve changes, catastrophe losses and expenses.

In light of the soft market trends we're experiencing, we are very pleased with the business our agents are bringing to us. For personal lines the accident year loss and loss expense ratio excluding catastrophe losses rose to 64.2 from 61.9. For personal lines overall we believe that losses from non-cat weather were responsible for less than 1 point of that change. Personal auto results appear to be tracking with what we're hearing from others. The effects of softer pricing were a primary reason for the 4 point rise in the current and accident year loss ratio excluding catastrophe losses. In addition, the natural volatility of large losses may have contributed to the increase.

The homeowner ratio excluding catastrophe losses improved showing the gradual benefit of our actions. The personal lines 2007 loss and loss expense ratio excluding catastrophes was above our targeted range. As Jack said, we continue to address pricing, scale, growth and other issues to help restore the financial health of this important business segment.

On the expense side, the total company underwriting expense ratio rose by about 1 percentage point for the year. Commission expenses were up because of a higher level of contingent or profit-sharing commissions arising largely from the continued profitability of our agents' books of business. The contingent commission accrual in the fourth quarter was particularly high due to the large quarterly underwriting profit. For commercial lines non-commission expenses also rose because of higher salaries and reallocation of expenses.

CSU and Producer Resources, the two companies conducting excess and surplus lines operations for us, did add very slightly to overall expenses in 2007 as we invested in people and systems. We are looking forward to 2008 when we will have premiums to offset expenses. As Jack noted, agents are responding favorably to our entry into the surplus lines market.

Those are my comments on the property casualty business. I'll reiterate that The Cincinnati Life Insurance Company contributed nicely to our net income for the year. Before I turn to our outlook I want to add some color on capital management and investments.

Including the ASR we announced in October, we made a record level of repurchases in 2007. As we said in the past, we balanced the use of our available cash flow between the repurchase and investments based on a number of criteria. One of the criteria we consider is the valuation of our shares. In 2008 we'll continue to follow the same strategy, but don't know if circumstances will allow us to match the level of repurchase activity in 2007. We do believe our stock has been attractively priced for repurchase in recent months.

The softness of the property casualty markets is one of the factors putting insurance stocks under pressure. As we said in the release, another concern is the industry's potential exposure to the credit markets including subprime mortgages. Looking at our investment portfolio, we believe the market may have judged our company's portfolio too harshly on this score in the short term and that we are well positioned for the long term.

Our investment portfolio contains no mortgage loans. Our bond portfolio, which has no mortgage-backed securities, continued to hold steady again in the fourth quarter. Widening credit spreads in the corporate sector were more than offset by strong demand for low risk securities.

We do have a substantial municipal bond portfolio, selected for yield and quality with an emphasis on essential services. Muni's representing about 87% of that portfolio's value are insured. Although many of the bond insurers are suffering some well-publicized turmoil, our strong average underlying Moody's rating of A1 for the insured bonds minimizes our potential downside risk.

Now turning to our equity portfolio, banks and other financial sector stocks make up about 55% of the equity portfolio and about 35% of the total portfolio. This concentration offers us the advantages of good dividend income, but exposes us to market volatility when sector issues arise. Needless to say the sector is under pressure. To varying degrees the financial services firms in our portfolio are addressing a challenging credit quality environment and related issues.

To address their situations some of our holdings are evaluating their dividend levels in light of their own capital requirements and earnings outlook, potentially slowing our investment income growth. We emphasize portfolio strategies to maximize both income and capital appreciation over the long term and we are monitoring our holdings in the financial sector closely. We remain committed to sustaining strong capitalization.

I know a lot of you are interested in how current market conditions impact our expectations for 2008. Here's what we're seeing at this time. First, we believe our full-year net written premiums could decline as much as 5% if current commercial lines pricing trends continue into 2008. We believe that's a satisfactory comparison with our 1.9% decline in 2007 and the 0.6% decline estimated for the industry in 2008.

It shows that we expect to lower prices to keep our best accounts and help our agents protect their accounts from competition. We believe we can expect the positive contribution to premiums from our new excess and surplus lines operations, but we haven't taken that into account in our targets for 2008. And second, we believe our GAAP combined ratio could be between 96% and 98% for the full year.

As we noted in the release, our target relies on three assumptions. First, the savings in favorable development reduces the ratio by about 4 percentage points. Second, the catastrophe loss ratio adds about 4.5 percentage points to the ratio. Third, we'll be watching the current and accident year loss ratio excluding catastrophe losses. As Jack noted, the market trends that contributed to an increase in this ratio in 2007 are continuing and may put this ratio under further pressure.

We aren't looking for a change in the expense ratio. We believe it will be about even with 2007 as an anticipated decline in contingent commissions from this year's record level offsets any increase in other underwriting expenses. We believe the level of performance we have targeted will allow us to sustain our industry-leading position in the commercial lines insurance marketplace. We plan to take steps in our personal lines insurance operations to enhance our response to the changing marketplace. And we look for our life insurance business to continue to make a solid and growing contribution to our earnings.

We have been successful in recent soft market cycles, outperforming the industry with lower combined ratios. Our case-by-case underwriting approach supported by field underwriters, loss control associates and our claims team helps us retain quality accounts and places us in a position to benefit when the market changes. With adequate revenues and a strong capital position we expect to maximize opportunities in the future. Jack?

Thank you, Ken, and thanks to all of you for listening and your interest in Cincinnati Financial and The Cincinnati Insurance Companies. In closing let me note that our 2008 Sales Meetings will continue with meetings next week in Ohio and into other territories through the next two months. Agents in the mainly southern states we visited a couple of weeks ago were pretty upbeat and we expect more of the same as we continue these sales meetings.

Our agents know businesses and families need insurance. When the economy is less stable they know people feel less secure, and that's a great time to consider increasing security by getting a policy with a highly rated insurance company. We'll work with those agents to take care of clients and earn loyalty.

Latonya, we're about ready to open for questions, but let me remind everyone that Jim Benoski, J.F. Scherer, Marty Hollenbeck, Ken Stecher and I are here to help field your questions. So Latonya, let's go ahead with questions.

(OPERATOR INSTRUCTIONS). Beth Malone, KeyBanc.

I wanted to get a little bit of clarification on your comments that there were some economic pressures in certain markets that were having an impact on your top line. Could you give us a little bit more color? Are we talking about residential construction or other types of businesses?

Beth, this is Jack. It's really across the board for liability coverages, but I think when you get into particular policies and geographic areas I'd like for J.F. to talk about it more specifically.

Yes, Beth, I think you've hit it. Certainly throughout the country on the residential side everyone knows that there's an abating of new construction. We write a fair amount of construction; 43% of our general liability premiums are in the construction area, 46% is in workers' comp. Those particular lines of business are based on payroll and sales. So as we observe it, on the commercial lines side, commercial construction side -- particularly in the areas of government construction, road builders, things of that nature -- that's holding up reasonably well. But on the residential side it's obvious that everyone is taking a bit of a hit.

Okay. And then as far as the pricing pressure that you're seeing -- I know that your strategy has always been to focus on your agent relationships. Is there something else or is that a tried and true formula in a market like this that you can rely upon to kind of keep your business a little bit more intact? Or are there new things you're trying other than the -- I guess E&S would be one example, but could you give us some color on that?

Our strategy to work closely with our agency is the tried and true strength of the company. We continue to leverage, whether it's our field underwriters, loss control, field claims, machine and equipment -- all of our field associates that call on our agencies, discern which accounts to write, work together to make sure that we're renewing the right accounts. We think that's the way to do it. We're on the spot seeing the policyholders and working very closely to decide which accounts are worthy of renewing and which accounts are worthy of additional crediting.

What we continue to do is we appointed over the last two years 121 agencies so we are -- each year, this year 66 agencies were appointed. We were targeting 65 for 2008. We selectively pick agencies to complement the rest of our agencies in the 34 states we do business in. And we have, we think, a great opportunity in terms of the quality of the agency that would like to do business with us.

It's a balance. We have many, many agencies that do a great deal of business with us in geographic areas. They're working through the soft market just as we are and so we support them. Certainly though, excess and surplus lines and the return of the momentum in personal lines are going to be two items that we think are going to contribute as time goes on.

One more question, and this is on the investment portfolio. Given what's going on in the markets, especially as regards to financials, are there strategies that you're considering diversifying away from your traditional financial focus or heavily weighted in financials into other sectors that may be less sensitive?

Beth, this is Marty. We're going to take a hard look at all of that. Our general strategy to buy and hold, dividend focused, dividend growth is going to stay very much intact. I think how we execute that strategy will be something we will take a look at, hopefully learn something from all of this and address various actions that maybe could modify this in the future. I don't think you'll see large wholesale changes because, again, I think we're still going to be true to that general philosophy. But we are always trying to improve our execution of that investment philosophy.

Okay, thank you.

Meyer Shields, Stifel Nicolaus.

A quick question for Marty if I can. Jack talked a little bit about how you might change your investment approach if there is a change in the dividend outlook for some of the financial companies. And I'm wondering whether you're -- does that mean that you're going to wait for an announcement or is there any proactive analysis you can do that would lead to a change in investment strategy?

Well, we would be proactive if we were certainly -- fairly certain that something was imminent. We would not -- hopefully we could forestall some of that if we really did see it coming. We are patient -- for example, Alltel in early '06, we divested a partial amount of that in response to what we thought was going forward a dividend strategy that was not conducive to what we were looking at. So we will try to be proactive, Meyer, to the extent we can, yes.

And I guess a broader picture, Jack, you talked a little bit about how contingent commissions -- are I think Ken mentioned that contingent commissions are likely to go down in 2008. Are you expecting any pressure on the core commission rate?

There's always market pressure, Meyer, for the regular core commissions that we pay. Our commission structure for the most part has been the same for decades; you might find that remarkable but it's true. I think J.F. has a better insight of what goes on day to day on different lines of business and I wonder if J.F. would comment.

Meyer, I think -- we've constructed our base commission levels. I think it's competitive with the marketplace, maybe a little less competitive in the workers' comp area where we approach things conservatively. We wouldn't view a solution to any problems as cutting our agents' income. Where we are loaded, if you will, in terms of reward to our agencies for a job well done tends to be in the contingent area. It does require long-term profitability and that's what we're all looking for.

So we think the balance between a solid base commission structure, we don't think really needs any attention. And the use of the contingent approach to promote long-term profitability and growth is a good balance for us. So I would say we're comfortable with where we are now.

Okay. And one last question, I guess also for J.F. Are you seeing an uptick in the number of your competitors that are looking for book rolls instead of competing on an account-by-account basis?

I would say, yes, we've probably seen a little more of that activity. It's very competitive out there. And so it's not uncommon for a carrier to come into an agency and ask to take over a carrier's book of business.

Okay, thanks so much.

(OPERATOR INSTRUCTIONS). Mark Dwelle, Ferris Baker.

Good morning. I just wanted to spend a couple minutes talking a little more detail about CSU. The first premium that you quoted seemed fairly small. Is that your ambition, to focus on small size or would it be relatively larger accounts?

This is Jim Benoski, Mark. It will be based on the size of accounts that we write now. The large accounts or the medium-size accounts would probably be in the $20,000 to $50,000 range. That just happened to be the first policy that we wrote. And right now we're only in about 10 agencies I guess in five states. So it's not been extremely active, but it will be very shortly. I think we have quoted on some accounts in the $100,000 range.

Okay. Similarly to the extent that you begin writing more business there, will you be reinsuring that or ceding any more premium there than your kind of accustomed run rate or will you be retaining most of that premium?

We are reinsuring. I think we're retaining $1 million -- a lot lower than we do obviously on the P&C companies.

Okay. And then related to the -- there have been a couple questions already related to the uptick in commissions related to the profit share. I know you haven't changed your policy particularly related to those, but is that directly related to the size of the reserve releases that you did in the quarter or is it just the trends for the '08 or '07 year business?

Mark, this is Ken Stecher. I think it's a little bit of everything. We had an excellent quarter, the reserve releases were part of the underwriting profit. The agents' profits would increase if there was a reserve take down on the case reserve, so that would all factor into it. So it's that plus it's -- every year we enter into this the three-year average becomes a little bigger profit picture as we've entered -- going through this profitability cycle. So it's multiple factors, but the underwriting profit in this quarter is a part of that.

And then with respect to the personal lines, you commented upon the new business volumes there and that's obviously trending in the right direction. How are price decreases coming across in that business? Are they as great as what we're seeing on the commercial side or are there any signs that that's letting up at all?

Mark, we're, on a territory-by-territory basis, adjusting our premiums and I don't know that that's necessarily reflective to the marketplace in general. It's a matter of truing up our rates, as we've mentioned before, from where we may have gotten ourselves out of the market and in some cases out of the market by a substantial amount. What we're continuing to do then is adding more tiering and more scoring that allows us to further segment the business that we write. We wouldn't see, in terms of the marketplace in general, the kind of price declines in personal lines that we're seeing in commercial lines at all.

It's consistent with your strategy of sort of focusing on agency relationships as compared to the mass-market approach.

That's correct.

Okay. I think that's all my questions. Thank you.

Beth Malone, KeyBanc.

Can you give us an idea -- with the pricing pressure in the marketplace that we're seeing and it's obviously -- we're entering a down cycle. Is there any catalyst you see out there that would change that pricing environment that we're in right now or any sense of when you might -- there might be enough pain in the marketplace that you would see some companies becoming a little more rational?

Beth, I don't see anything currently. I think J.F. can probably add some color. But I think with the capital positions and the combined ratios that everyone is posting that I think that pricing pressure will continue at least through 2008 and possibly into 2009. I'm not sure if it will be all 2009, but I think we still have a ways to go from my perspective.

Beth, I don't know if I could add any more than that. All of our competitors seem to be in pretty good shape financially. I suppose everyone is going to watch accident year loss ratios to see where they do go. We have a good number of competitors, regional carriers, that are expanding into other states, appointing agencies.

When you have no track record in an area the differentiator you use is price. And so it's price-wise very competitive. It would be nice to sound a slightly more optimistic tone on that. We do like our strategy. Once again, we take the company into the field, we're seeing what's going on on a case-by-case basis firsthand. So given the kind of competition that's going on we like our chances for the long term. But it's right now -- there are so many competitors that seemingly have income statements and balance sheets that are in good shape, they're all looking for market share. So it's a tough competitive environment.

Beth, this is Jack. If I might add an idea, too. Some years ago we would be faced with these soft market conditions. And the idea was that if you could write at a combined of 99 or 100 you'd be okay and that's a pretty good idea. And then all of a sudden through the elements of inflation, through some reserving systems that might not have been as exacting as you would have liked, we found ourselves and our industry coming up with where we had thought the combined would be 100 all of a sudden it was 103 or something even worse than that.

And we're mindful of that history and we want to guard carefully. That doesn't mean that we will, but we are aware of those kinds of elements and the leveraging effect can be severe if we're not careful. And we don't want to go into a marketplace where we would impact our insurance operations to the detriment of our agents as they go forward. So it's difficult to speculate what possibly could be the one catalyst that would change the current market conditions. And I think J.F. and Ken both gave you superb answers on their views.

Okay. And then just one last question. On the catastrophe experience you had in 2007, I understand that a lot of that has to do with just the general weather and the fact that it was very mild. But are there other factors do you think in your catastrophe? Is it the business that you're writing or some of the underwritings away from some of the more highly exposed catastrophic markets that may be also influencing that?

One of the things that we've, Beth, experienced beginning in the hard market is the application of deductibles, not only in general but wind percentage deductibles in more wind prone areas. That's had a big significant effect -- in fact I think it's had a significant effect on frequency overall. We have not seen, as a result of the marketplace softening, carriers or policyholders drifting back into lower deductibles. So we view that as a real positive.

Okay. All right, thank you.

Dan Schlemmer, FPK.

Congratulations, it was a nice quarter. I wanted to I guess sort of follow up on the last question talking about cats. Obviously way too early for any kind of claims data on basically the events from last night, the tornadoes. But do you have any kind of picture of what your overall exposure just in that area is? Can you share any sort of general background with us?

Jim Benoski, Dan. Obviously we write in Kentucky, Arkansas and Tennessee and that was some of the areas that seemed to be getting a lot of attention. In Tennessee it's more towards Memphis where we do very little business. I think Little Rock was hit and we are active in the Little Rock area and also a lot of parts of Kentucky.

But it is too early. We have claim representatives in those areas that will be making their surveys. In some areas I'm certain that they have not even been able to get into the area yet because of the security. But as soon as they can get in and start surveying what we've got we'll be able to -- I'd say maybe a week from now we'll have a lot better feel. We are big in Nashville and I know Nashville also was an area that had some attention from the media. But right now it's just too early for us to put a number on it.

That's very helpful, thank you. If I can ask a couple of different questions just on the loss experience. First of all looking at just the personal lines, I want to make sure I'm understanding -- it looks to me like just on the personal lines, just on the current accident year, you dropped your loss ratio down a pretty significant amount, 12 points versus third quarter. I want to make sure I understand that. Is that based on experience this quarter being that good or is there a lot of true-up there relative to the first three quarters of the accident year flowing into that?

Dan, this is Ken Stecher. Just looking at third quarter of '07 we had 5.8 points of catastrophes. In the fourth quarter of '07 that was a negative 0.7. So that would be almost a 6.6 point swing right there, if you're looking at it including the cats. Is that the point --?

I guess my question is I'm looking at the 58.5 for the current accident year for Q4. I mean, it's quite a bit lower than anything you've looked over the last six quarters. And I guess the real question I'm trying to get at is are you seeing that much improvement in the book or is this sort of a onetime true up and, you're right, the cats obviously flow into that? But I was wondering if a decent chunk of that is a onetime true up from the first three quarters or if it's really basically looking at a pretty significant improvement in the actual experience this quarter? That's really what I'm trying to get at.

The one thing -- I don't know if I can answer it completely, but I do think that we did see some release in the personal lines on the personal umbrella through the IBNR. The fourth quarter, as I mentioned in my comments, the actuaries do a lot more of a full-blown loss test in the fourth quarter. And the personal umbrella in the quarter, we did have a -- I don't have the exact dollar -- I don't have the exact dollars on what might have been on the current accident year, but I know that could be part of the issue.

Okay. And then just overall, not just personal but personal and commercial, obviously pretty substantial releases from the prior accident year -- prior accident years. Can you give us a little bit of background on -- I'm really wondering which accident years you're releasing from, what the aging is on that mostly. And if you can give us background on overall what the drivers were if there were specific drivers, which I realize sometimes it's just the aggregate data?

That's true. A fair amount of it was casualty related. And basically when I've talked to our actuarial staff what they've basically said is they're going back and looking at a lot of prior years and the years have been developing more favorably than they thought. So therefore they're going back multiple years and saying where we thought the losses would -- how they would progress, they're progressing more favorably to us.

And so when they go back and look at those loss incurred ratios they were looking at previously, they're bringing those down as more claims get settled and there's less out there left for volatility. And when I look across multiple years they're finding that there is favorable development coming out of multiple years. And so that's the biggest piece of it is in the casualty line.

Now as it relates to the -- for like the full accident year -- let me just see if I can find -- just talking about casualty by itself, there are fairly large amounts of favorable development in 2006, 2005 and 2004 and 2002. So it is kind of spread across various years, accident years.

Great, very helpful, thank you. Last question real quick, sort of some of the big news I guess last quarter -- maybe not big news -- but news last quarter was this whole issue with the Florida DOI subpoena and then that's been somewhat in the news with other companies since then. Is there anything going on there that you can share with us, whether that's developing into an issue or where that's going?

It's Jim Benoski again. We at one point were subpoenaed to appear before the Department of Insurance and that subpoena was withdrawn; there has been nothing reset. I think what they're concentrating on are carriers that have a lot greater market share than Cincinnati and our share is I think about $20 million. In the areas they were looking at I think carriers were up in the $100 million. So not much is going on from our standpoint. We're waiting to hear if they do want us to come down and testify or not. Right now there's nothing set and whether they will call us again we don't have any idea.

That's great. Thank you. Congrats again on a nice quarter.

Meyer Shields, Stifel Nicolaus.

I was just wondering whether there's been any difference in the ramp up of the agency appointments over the last couple of years compared to your agency's historical ramp up pattern?

Meyer, we have had a few more agencies appointed here in the last few years. Just to give you a little bit of background -- in 2003 we had 47; 2004, 56; 2005, 57; 2006, 55 and then 66 this past year. It's not huge, it's deliberate and as we've gone into a couple new states that's helped it along.

But the make-up of our agency force is very key to our strategy. We carefully examine geographic areas. We would anticipate that level of in the mid-60s probably to continue for a few years. As far as ramping up business growth as a result of that, it doesn't explode on the scene for us. We tend to nurture those relationships for a couple of years, but we do well and we would expect that they're going to contribute to our growth.

But the business growth that you're seeing so far is typical of your earlier year's agency appointment?

There hasn't been any change far as a percentage make-up of newer agencies or more mature agencies, it's all consistent, yes.

Okay, great. Thank you.

Thanks, Meyer. We appreciate it and we appreciate all of you for joining us today on our questions. You know we're available if you want to call us on the telephone and talk one-on-one. Jim, Ken, Marty, myself, we're glad to speak with you at your convenience. We truly appreciate your interest in Cincinnati Financial and look forward to tracking our progress for you in 2008. Thank you.

Thank you. This concludes today's Cincinnati Financial year-end 2007 conference call. You may now disconnect.