辛辛納提金融 (CINF) 2008 Q1 法說會逐字稿

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Cincinnati Financial first-quarter '08 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 your conference.

Thank you, Chris. Welcome, everyone. This is Heather Wietzel, Cincinnati Financial's Investor Relations Officer. Thank you for joining us for our first-quarter 2008 conference call.

This morning, we issued our earnings release, along with our 10-Q, 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.

On 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 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 information as required by Regulation G was provided with the release and is available on the Investors page of our website under Financials and 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. Good morning to all of you and thank you for joining us again today to hear about our first-quarter results. I will start by stating the obvious; our first quarter was not the best that Cincinnati Financial can produce. It is no surprise that soft pricing in the property/casualty insurance market pressured our growth and profitability, not so different from what many others have reported this quarter. Nor is anyone surprised at declining market values in the financial sector.

However, net income for the quarter suffered because we took some of those declines on a non-cash basis through the income statement rather than simply reflecting the fluctuation in other comprehensive income and book value. We firmly believe in our 55-year plus history lets us say with confidence that Cincinnati's strategies work through underwriting and business cycles.

After reviewing our position, we are confirming our previously announced outlook for full-year performance and confirming our commitment to remain the financially strong and stable organization that our agents and policyholders can rely on. We plan to do what we have always done to successfully compete in the insurance marketplace, supporting our agents' strengths by providing them with local service and local decision-making authority. Our history also tells us that our investment strategy works and can lead to the accumulation of gains over longer periods of time. So our underlying strategies are the same as ever and we think that preserves advantages that serve shareholders well.

What we do refine continuously are the details as we respond to current conditions and update our initiatives. This is an ongoing process that last year resulted in higher profile decision such as entering two states, moving into excess and surplus lines, increasing our share repurchase levels, and more actively managing our common stock portfolio as we have done for the last three or four years now.

More frequently, it involves incremental improvement such as adding loss control services for our commercial policyholders. In many areas, we are improving the competitiveness of our products on an ongoing basis. Without dismissing the challenges of the first quarter, we believe we are in good shape to surmount them and keep moving in a positive direction.

With that introduction, let me point to a few of the primary measures of the quarter. As you saw in the release, operating income was $0.66 per share compared with $0.88 last year. Catastrophe losses reduced earnings by $0.17 this year compared with just $0.01 in last year's first quarter. Softer pricing and normal loss cost inflation accounted for most of the remainder of the change. We reported a quarterly net loss of $0.26 per share, largely because of the non-cash investment write-downs, which Ken will discuss in a moment. Book value was $33.40 per share on the overall market weakness compared with $35.70 at year-end, a decline of 6.4%.

I am going to now comment on how we are responding to current market conditions. Following my remarks, Ken will give more detail on the quarter's results and our investment portfolio and our outlook for the remainder of 2008.

On the insurance side, we continue to work hard to be the preferred market for our agents' better accounts. We want to earn a prominent position in our agencies' offices, not just for one year, but for five, ten, twenty years or longer. Much of what we do to earn agents' business remains unchanged. Our field associates are in our agents' offices asking for business, emphasizing the Cincinnati value proposition, calling on prospects with those agents, carefully evaluating insurance exposure and working up their best quotes for good accounts.

Working equally as diligently, our headquarters underwriters are talking to agents well in advance of policy renewal dates, communicating our willingness to work with agents, update coverages and to retain good accounts. We emphasize many different aspects of Cincinnati's advantages such as availability of three-year commercial policies, the backing of our superior claim service and our A++ insurer financial strength ratings recently affirmed by A.M. Best Co.

We regularly review our products. For example, we have an update of our machinery and equipment coverage, including a new product to ensure major mechanical systems under our homeowner policy. Plus, new agency appointments always receive careful attention at Cincinnati headquarters, as well as by our field associates. We are using our capabilities to pursue quality business while pricing continues to decline and in some regions, where economic pressures are further dampening market conditions.

We don't have much to add to the variety of comments on pricing trends. We just continue to focus on underwriting fundamentals as we make decisions with an eye towards the long term, both our long-term relationship with the agent and that agent's relationship with the policyholder.

We believe our field staff are quoting prices appropriate for the quality of the risk 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 insureds, who know what needs to be done to maintain our relationship with the agent and who have the right information to decide when we should price aggressively and when we should walk away. 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, we are looking to the second half of 2008 for some recent initiatives to begin to contribute. For example, we are making new agency appointments and expanding geographically. We are opening for personal lines business some of our commercial line states by introducing our web-based personal lines policy processing systems. This will help spread and reduce our catastrophe risk. It will begin adding scale so we can continue spreading the expense of our ongoing investment and updated automation across a larger premium volume, improving our profitability.

In addition, we can use the policy processing system later this year to implement more pricing points based on risk data, fine-tuning our rates for each risk to produce very competitive premiums, for our agents, higher quality accounts. Only by receiving these benefits of scale can we are assure our agents access to a competitive stable personal lines market.

Finally, we believe our new ability to meet the needs of our agents' customers who require the flexibility of excess and surplus lines offers great long-term potential. That first E&S policy we wrote in January for $1500 contributed to the nearly $1 million in E&S written premiums we are reporting for the first quarter.

Our in-house wholly-owned brokerage CSU Producer Resources focused on working with Cincinnati's independent agencies located in Georgia, Indiana, Illinois, Ohio and Wisconsin during the quarter. Our plan remains on track to expand into additional states where Cincinnati currently offers standard market property/casualty policies and expand into additional coverage areas.

We structured our new E&S operations to serve the needs of independent agencies that currently market 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 can now write the whole account with Cincinnati, gaining benefits not often found in the broader E&S market. Our agents tell us this is working for them and that is a good sign of things to come. Ken, let me turn the call over to you.

Thank you, Jack. Thanks to all of you for joining us today. I will start today with some discussion of our investment performance and then turn to our insurance results and full-year outlook. First, on investment income: growth in investment income slowed as we expected. While both interest and dividend income rose, the lower growth rate is the result of lower interest rates, an unusually high number of called bonds and the dividend cuts of some financial sector stocks.

We remain committed to portfolio strategies to balance near-term income generation with long-term book value growth. However, we continue to believe that full-year investment income growth will be below last year's 6.6% for two reasons. First, as we have sold investments that no longer meet our investment criteria, we are moving the proceeds away from common stocks with high yields, reinvesting instead into fixed income securities with lower, but more secure yields and also repurchasing our own shares.

Second, some of our holdings are evaluating their dividend levels in light of their own capital requirements and earnings outlook. We plan to continue to invest new cash flow from operations first in high quality, fixed income securities to maintain a portfolio that approximates our insurance liabilities. As operating cash flow and other factors permit, we will look for opportunities to invest in equity securities to help achieve our long-term portfolio objectives.

The net loss this quarter happened because we recorded investment losses of $232 million compared with a gain of $62 million in last year's first quarter. Almost all of the investment loss in the quarter was due to the impairment of $214 million before income taxes in securities that were trading well below the price we had paid. Normally, market value fluctuations are simply reflected in book value. We impair securities as we did this quarter when we believe they will not recoup their value in a reasonable period of time. The non-cash charge adjusts our carrying costs to the period end market value, running the difference through income.

Going forward, we have a reduced cost basis on which we calculate future gains or losses. Often, we will continue to hold an impaired security and in the case of impaired bonds, our ability to hold the investment until maturity may allow us to recoup our full investment.

Unusual compared to past years, $172 million of the impairments related to equity securities that lost value over the past several quarters, as part of the fallout from the beleaguered credit markets and where the recovery outlook appeared to be more protracted. We lowered our cost basis for Wachovia and Huntington and, after the end of the quarter, we have initiated actions to reduce our exposure to both of these securities.

In addition to impairment charges to income, March 31 book value per share was $2.30 below its year-end level. This reflected the net loss, as well as the slightly less than 5% decline in investment assets to $11.6 billion from $12.2 billion. That was driven by a further decrease in the market value of our Fifth Third holding as it suffered from the same pressures as the rest of the financial services market.

While the pressures of the securities market have been challenging, we saw our ratio of written premiums to statutory surplus remain relatively stable compared with year-end. The ratio remains about 10% better than the estimated industry average according to A.M. Best. We remain a financially strong and stable organization as A.M. Best's affirmation in late March of our insurer financial strength rating attests.

We've continued to execute our capital management plan by repurchasing about three million shares in the first quarter, in part a function of what we consider to be an attractive price for our stock at a point in the quarter when we were able to be in the market. As we said in the past, we balanced the use of available cash flow between the repurchase and investments based on a number of criteria.

Now turning back to insurance, first-quarter premiums reflected the competitive market conditions. Softer pricing combined with normal loss cost inflation is putting pressure on our underwriting profit margins. Further, catastrophe losses swung from last year's extremely low level to $43 million, which our history would say is a bit on the high side for a first quarter, and savings from favorable development on prior period reserves made a lower contribution to profitability than last year.

With the higher catastrophe losses and uptick in other losses and higher other underwriting expenses offsetting a lower impact from commission expense, we ended up with a nine point rise in the combined ratio. There was no business line that had dramatically unusual results although the property intensive business lines bore the brunt of the catastrophe losses as one would expect.

The E&S operation added almost $1 million to written premium. Related expenses raised the combined ratio by about 1/10 of a point. All in all, the quarter's swing was broader than we anticipated, but as Jack indicated, we don't see any real problems in our business. We are going to maintain our strategic focus and keep working hard.

The Cincinnati Life Insurance Company contributed $0.05 to net income, down a few cents from last year because of higher mortality and policyholder benefits.

I expect many investors are interested in how current market conditions impact our expectations for 2008. We continue to believe our full-year net written premiums could decline as much as 5% if current commercial lines pricing trends continue into the rest of 2008. We believe that is 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 prudently work to keep our best accounts and help our agencies protect their accounts from competition while knowing when to walk away from significantly underpriced or low quality business.

We believe we can expect a positive contribution to premiums from our new excess and surplus lines operations and we haven't taken that into account in our targets for 2008. 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, that savings from favorable development reduces the ratio by approximately four percentage points. Second, it assumes the catastrophe loss ratio adds about 4.5 percentage points to the ratio. Third, we expect the current accident year loss ratio to be under further pressure. We are not 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 last year's record level offsets any increase in the 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 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. Thanks to all of you for listening, for your interest in Cincinnati Financial.

In closing, let me note that our 2008 annual meeting of shareholders will take place at the Cincinnati Art Museum this Saturday at 9:30 a.m. We webcast the meeting for those who cannot be in Cincinnati, but we encourage you to attend. We are thankful for the chance to personally meet some of our loyal shareholders and discuss our initiatives and goals. Chris, we are about ready to open for questions, but let me remind everyone that present with me here today in this room are Jim Benoski, J.F. Scherer, Marty Hollenbeck, as well as Ken Stecher and I to help field your questions. So Chris, let's go ahead with questions.

(OPERATOR INSTRUCTIONS). Meyer Shields, Stifel, Nicolaus & Co.

Thanks, good morning, everybody. In the press release, you note that policy counts were down in personal lines and I was hoping you could go into a little more detail as to what is driving that.

J.F., do you want to give it a try?

Yes, Meyer, we have been adjusting our rates throughout the country. We are seeing, in some areas where we have introduced tiering and sharpened our rates, we have lost some accounts there. The decline has been very modest though; we don't see any concerns with it. We would mention that later on this year in October, we will be expanding our pricing tiers for our agencies. That should make us much more competitive in certain areas where we are currently not. So though there was a slight decline in the policy in force count in personal lines once again, we don't see that as an alarming event.

Are you seeing any -- or let me rephrase that. What competitor actions are you seeing in terms of personal lines and commercial lines? Is there any reflection in terms of competition?

J.F., that's you again.

Well, Meyer, I don't know that we can add anything that hasn't already really been reported by a lot of folks. We are not seeing anything much different in terms of what is going on in the marketplace in the way of competitor trends. The pricing levels are extremely competitive, both in personal and in commercial lines, most especially in commercial lines, but as far as any changes in what has been occurring over the last several quarters, it just continues to be a very competitively priced marketplace.

A question for Ken if I can, when we look at the investment segment results, the other operating expenses declined pretty significantly on a year-over-year basis. Is that likely to continue?

Are you referring just to the investment side itself?

That's right.

I think that will probably be the run rate for the rest of the year, Meyer. I think there was a one-time item in last year's number.

Great. Thanks so much.

Charlie Gates, Credit Suisse.

Hi, good morning. I will pitch Meyer's question in a different form. My perception is that you write personal lines insurance as basically a concession to the agent. What do I mean by that? I believe personal lines insurance in the United States is becoming an oligopoly and the reality is you guys don't have scale. What is wrong with what I said?

May I go first, Charlie and I think that question is deserving of comments from at least J.F. and others. We try to market our home and auto insurance on a package basis to policyholders. We hope our agents embrace this idea. We see that it has been pretty well followed over the years. We continue to encourage it. We see the prior carriers on some of our new policies being one very prominent carrier for auto and a different very prominent carrier for home, but families like to have one source for all their coverages, one person to call when a the claim occurs and our best chance of meeting the competition, Charlie, is to go after the packaging of the home and auto insurance and we find our premiums are competitive. They aren't always the lowest, but they put our agents in the ballpark and our claim system is the one that we get accolades from our agents all around the countryside.

Our agents really hold our feet to the fire to take care of their policyholders. We have a contract with the policyholder. Those are very important. But we market to the agent and the agent is able to make an evaluation of when we are doing a good job or we are coming up short. So we very much rely on that agent keeping us in the game for their best home and auto accounts and it is not necessarily the largest premium accounts, but it is families who manage themselves pretty well, that look out for loss prevention, as well as any good business would look out for loss prevention. I am starting to ramble, so maybe I should ask J.F. if he would step in.

Charlie, all I would add would be is that it is not a concession. Our approach is that it isn't a concession at all. I think a couple of things have occurred over the last few years that we have reported on consistently and one has to do with the automation systems we provide to our agents to allow them to help us write insurance. We had fallen behind in that area, but we have caught up and we are providing better systems to allow our Company to be easier to do business with on the processing side.

And secondly, from a ratings standpoint or a rate calculation standpoint, there has been a lot of sophistication that has been introduced to the personal lines marketplace. That is most important, if you will, on the aspect or the part of the personal lines marketplace that would be commodity-driven. As Jack mentioned, we are not really trying to attract that business and our agents still, in the vast majority of those offices, want to put their valued personal lines clients with a company that is going to do an exemplary job in handling claims.

So I think overcoming the automation issue, overcoming some of the shortfalls we have had in terms of how we promulgate rates will put us back in a position to be a much more aggressive carrier and to write a higher and higher percentage of our agents' book of business. But to characterize it as a concession to our agency would not be our strategy and I think you would find this if you talk to agencies, they won't feel that either.

My second question, about three years ago, you sold an equity holding that had been a superb performer. It was number two in your investment holdings and I thought that you sold it in part because you had concerns over the future dividend. To what extent does that raise issue with regard to some of the financial stocks that you guys own?

Charlie, I will start and then I will let Marty take over. We do monitor all of our financial stocks and you are correct in that the cutting of the dividends or the eliminating almost of the dividends is a true concern for us. We have sold out of the National City position as previously announced and as we -- in my comments today said -- the fact that Huntington and Wachovia have cut their dividends, we are going to lighten up on those positions.

The dividend income is one of the keys for us as it contributes strongly to our investment income, our operating earnings and our ability to pay dividends to our investors. So this is something that is very critical to us and you are right. With Alltel, with them splitting the company, we felt like their dividend strategy was going to change and then it would not follow the guideline -- the investment parameters that we try to invest by. So I think with those comments, I'll see if Marty wants to add anything.

Ken, you pretty well hit the nail on the head I think. As you mentioned, investment income and dividend income are very key to any selection of any common stock we own. So we are in fact monitoring it very closely. We have reacted in recent months to several adverse dividend decisions by companies and as that presents itself going forward, we will do the same thing. So we will attempt to be proactive.

My third and final question, I had trouble getting on the call; that is not the question obviously. My question is, as I recall during the fourth-quarter conference call, J.F. made reference to the construction/building book. Could you provide update on that?

Charlie, 43% of our GL premiums are construction-related; 46% of our workers' comp premiums are construction-related. We are seeing, particularly in the residential construction area, obviously a decline in the payrolls and the sales, which are the basis of premium in those particular areas. That obviously has an effect on our overall premium levels. Correspondingly, it would have an effect on the exposures that are out there. If there are fewer electricians out, we would have a lower exposure. So we are seeing -- what we are seeing mirrors what you would see countrywide as far as the decrease in building.

On the commercial side, we continue to see some stability there. Certain parts of the country are having a decrease in that particular area. So we would simply, given the weighting we have of our premiums in the construction area, that would have a depressing effect on our premium growth.

I see. I have one more question. The one final question, I believe during the first quarter, you bought roughly 2.9 million shares, maybe I got that wrong. On an annual basis, what should the investor foresee that you might elect to acquire?

Charlie that's -- this is Ken. We did buy back more stock than normal in the first quarter. That was based off -- we felt the attractiveness of our price and the other alternatives that we have from the investment side. We don't have a guidance number out there on what we will buy for the balance of the year. But again, I believe our stock is attractively priced and when it is in that price range, we will be active in the market when we are not in a blackout. So I think that is probably the best answer I can give you at this point.

Thank you.

And before you leave, the entire Cincinnati Financial management team wants to wish you the best in your upcoming retirement. We are going to miss you on our calls.

Well, thank you very much there. Thank you.

Dan Schlemmer, FPK.

Hi, good morning. I wanted to ask a question on the guidance you provided. Specifically, I think you mentioned a 5% decline in P&C net written premium and during the quarter, I think it was about an 8.3% decline and is it reasonable to read into that a view that pricing competition is not going to get any worse maybe going to -- I guess I don't think people think prices are going up, but not go down as fast or are there other things behind that are more specific to Cincinnati or just any background on that?

Dan, this is J.F. I think what we are comparing this quarter to last year, that quarter is a tougher comparison for us, number one. There are some timing differences as far as bookings of premiums and I think we are seeing some reports of some stabilization of premiums in certain parts of the country. We feel that based on the flow of business that we are seeing and experiencing on renewals that the first-quarter results aren't reflective of what we can produce for the last three.

Yes, the earnings release does mention the timing differences. Is that something you can give us a little more background on or is that -- I guess I am not sure. It wasn't very clear what that meant to me.

Well, Dan, I think one of the things that is -- just the various reinsurance assumed pools that we have, just as an example, in that 8.3% decline, almost -- a little less than 1% of that was due to less reinsurance through some of the various pools that we participate in. So those kind of things that we are sort of referring to and we believe, as J.F. said, that with what our field staff looks at in the pipeline, they believe that we can get down to our target. If you look at our supplemental data, you will see the first quarter is the highest written premium quarter. So we think the comparisons for the rest of the year will be a little bit easier to attain.

That's helpful. Thank you. Also on the E&S book, can you give us a little bit of -- paint a little bit of a picture on what is actually being picked up as far as classes and types of business and if you can talk a little more about the geography? I am not sure -- I think you are still in just five states or if it started to expand out, but if you can maybe paint a little bit more of a picture there for what business you actually have already picked up.

Dan, this is J.F. Up to this point, we have only been writing casualty business. We started off in five states. In fact, we started off with a few agents in five states in January to get up and running. The kinds of businesses that we have been writing are I guess typical of the E&S business. We are not writing some of the more hazardous classes, but typical small to medium-sized accounts that we would write on the admitted side. We expect to add five more states by the end of May, some of our larger states and also to add property upcoming. So we will start writing some of the property risk.

We have received an excellent response from our agents to give us opportunities to write their business. Our excess and surplus lines underwriters are traveling into agents' offices. We have got an interesting I think value proposition for our agencies. The Cincinnati Insurance Company adjusters will be handling the claims that our excess and surplus lines company would have. We provide loss control services with the same field staff that we provide on The Cincinnati Insurance Company side.

The A rating that A.M. Best gave our E&S company right out of the chute was excellent from our viewpoint and the general confidence that our agencies have in us as a carrier and the way we are approaching this with them has really opened the door for us. So we would expect to continue to build on what we thought was an excellent start in the first quarter and by complementing the casualty writings with property writings here very shortly, we think the door will be open even wider.

Dan, this is Jim Benoski. The goal remains to be active in all states where we write premium by the end of the year. That's an aggressive goal, but that still remains the goal.

Just again on the current business, is it fair to say that the segments or classes that you are writing, they don't look -- let's say they don't -- the mix doesn't look that different from the rest of what Cincinnati's writing limits or coverage, that the book of business is somewhat comparable just with those somewhat unusual characteristics that generally knock them out of the standard market. Is that a fair statement?

Generally characteristic is absolutely a fair statement. The limits we are writing would probably be by comparison to Cincinnati Insurance Company, much lower on the excess and surplus lines side. We are not writing excess casualty right now for example. In excess and surplus, we are not writing miscellaneous professional currently. So the casualty lines that we are writing now would be the typical premises exposures that you would see in the E&S business and some of the less hazardous products exposures that you would see.

Very helpful. Thank you.

Mark Aydin, KeyBanc.

Good morning. My question just has to do with the equity investments that resulted in the temporary impairment. I was just wondering if you could give the four investments that you mentioned in the press release that were responsible.

Yes, they were Huntington Bancorp, People's Community Bancorp, Glimcher Realty Trust and Wachovia and Wachovia and Huntington were the predominant of those two -- the other two were relatively small.

Okay. Just the last question is in what way do you determine the definition of temporary? That's just the other thing I wanted to know.

That's a very good question. It is very fuzzy out there. There is no real definition that the accounting professionals can give you. It's become a very subjective matter. We looked forward about three quarters in this instance and determined that the likelihood was not very high that we would recover -- these stocks recover to the basis that we had paid for them. And so we chose on our own to go ahead and deem those as other than temporarily impaired.

Thank you very much.

And Mark, this is Ken, if I could just add. On page 29 of our 10-Q, we give the detail of the entire $214 million and it will give the four stocks that Marty mentioned with the actual dollar amounts.

Okay, I appreciate it. Thank you very much.

Dan Johnson, Citadel.

Great. Thank you very much. On the -- following up on the sort of 5% versus 8% first-quarter issue, would we expect that the better performance expected in the rest of the year is going to be coming on the new business front or some improvement in retention or improvement in pricing?

I would think on the renewals, perhaps a little more stability in the pricing on renewals and we are confident in our ability to produce new business for the rest of the year. So a combination of both.

Okay. And then given your geographic concentration, can you touch on maybe your top two states and talk a little bit about whether you feel like the underlying strength, especially in Ohio, is getting any better or deteriorating?

Dan, Ohio represents 19.5% of our premium. We were down 4.9% in Ohio last year. As a matter of fact, Illinois would be number two at 8.9% and Indiana at 6.8% of our overall writings, so we obviously have the concentration there on those three states.

I would not see in terms of new business writings much of an improvement in those three states. It's -- from an economic standpoint, and the same would be true for Michigan. It is a little tougher here in the Midwest. So we would not expect to see improvements from those areas. Most of where we are seeing some growth would be in some of the obvious areas -- the Southeast and some of our newer states.

Understood. And then finally, you talked about your desire to cut back exposure to banks that have cut their dividend. Are you willing to do that ahead of time as well, basically make assumptions on some of your holdings that may end up having dividends at risk?

Dan, this is Marty. We certainly would be willing to do that. On some of these cases, that wasn't always apparent until toward the end, but yes, we will attempt to be proactive here and try to get out or at least trim back. A lot of it depends on the amount of the anticipated cut, duration, things like that. There are other factors involved, but to the extent we can be proactive rather than reactive, we would like to do that.

All right. Thank you very much.

Scott Heleniak, Ferris Baker Watts.

Hi, good morning. Just a couple quick questions. Can you give the -- do you have the premium volume available for your new states that you entered last year -- Washington and New Mexico? Just kind of wondering if you have those numbers, first of all and then are the plans to expand in those states kind of on track or are you kind of paring back considering what has happened in the market over the past year?

Yes, in New Mexico we have written $415,000 in the first quarter and in Washington, $152,000. So as you can tell, it is just the beginning there. We are on track. In New Mexico, we have seven agencies appointed in the Albuquerque and Santa Fe area with eight locations and so we are satisfied given the population concentration in that area and the kinds of agencies we have appointed there. We are satisfied that we have got a good start in New Mexico. In Washington, we were a little slower in getting some of our filings approved. We have a field rep in place now, just had an agency visit this week for an appointment, so we would expect -- and I do know that we have some things in the pipeline already written in that state that those numbers would improve nicely as well. So as far as those two new states are concerned, we are pleased with our progress to date.

Okay. I guess the plan was always to start kind of small and then just add, what, five or ten agencies a year?

Actually in New Mexico, the areas we are likely to add agencies down the road would be in some of the smaller areas, but if you look at the population centers in New Mexico, it is pretty concentrated in a few areas. The size of agencies, the capabilities of agencies that we have appointed so far in New Mexico, it is our belief that they will be able to write a substantial amount of business for us. I wouldn't anticipate in the next couple of years that we would appoint eight or ten more agencies in that area. Probably we got everybody appointed right off the bat that we needed to with some minor adjustments. In Washington, on the other hand, and in northern Idaho, I would expect that we will probably see somewhere in the area of six to eight new agencies probably by the end of this year or towards the early part of next year.

Okay. And then I noticed the new business was down, but it wasn't down nearly as much as I expected it to be. Can you talk about sort of the average premium size of some of that new business that is coming in and are you writing much, if any, large account business, what you would consider large account business? Where does that stand versus last year?

Yes, actually as we take a look at our average premium per policy, it is not changing a lot. It has fluctuated a little bit. We are writing some larger accounts and it is not markedly lower. We are having some success there. Our agencies have appreciated our loss control services, some sophisticated services we have added. So in terms of overall changes in policies, typically we are seeing greater competition on the larger accounts, but that is just in general.

So as I take a look at some of these differences between '07 and '08, there is hardly any change to it. What we are seeing in general though is there has still been some pricing pressure obviously, but we don't like to be down in new business. I guess by comparison, you get a little bit of comfort in that, but we are hoping to, for the rest of this year, because last year's was a fairly strong new business January for us last year, comparative data for the rest of this year, we would expect that we could actually have an increase in new business.

Would you say the pricing declines on the middle-market business, are they almost approaching the point where they are as great as the large account? I know people have sort of moved down to the middle market as well. What is the disparity there? Big change?

I would still say that when you have -- large business for us let's say would be excess of $100,000 in premiums for the account. That is still drawing a lot of attention and we are seeing some pretty aggressive pricing in that area and you have to pick your spots. It is not always the case that it has to be aggressively priced. There are a lot of reasons that go into how accounts are earned and what kind of pricing exists. I think middle-market accounts let's say $10,000 to $100,000 in range. That would be our definition. It is plenty competitive. I wouldn't say as much as the higher though.

Thanks a lot.

(OPERATOR INSTRUCTIONS). Ron Bobman, Capital Returns.

Hi, good morning. My question was asked and answered, but I am also going to miss Charlie Gates. Hopefully he will dial in on an occasional bored day.

Fred Nelson, Crowell, Weedon.

No ladies on the conference call anymore; I am in a state of shock. What happened to the Cincinnati ladies?

Oh, Fred. Heather is with us in the room today, so be very careful what you innuendo.

All positive. I just wanted to share with you the great joy of hearing people like yourselves pride yourself on paying claims. Here in California, my agent tells me a lot of insurance companies pride themselves on having you sue them to get your claims paid and so I just want to commend you on that because being a consumer, it is so important to know that the people that run the business behind you when you buy insurance are there for you in the time of your need. And so I just really want to congratulate you and say that I support you on that and you cannot believe how important it is. So thank you.

Fred, thank you. You always brighten our day with your comments. It's really great to hear.

You deserve it.

Well, thanks very much. It seems like we are kind of winding down on our questions today. If any of you have any questions you would like to ask us today, we are available offline. Just let us know. We thank you for joining us. We appreciate very deeply your interest in Cincinnati Financial and we look forward to you tracking our progress and following us throughout 2008. Thank you.

This concludes today's Cincinnati Financial first-quarter '08 conference call. You may now disconnect.