辛辛納提金融 (CINF) 2008 Q4 法說會逐字稿

Good morning. My name is Jennifer and I will be your conference operator today. At this time, I would like to welcome everyone to the Cincinnati Financial fourth-quarter 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). At this time, I would like to turn the call over to Ms. Heather Wietzel, Investor Relations Officer. Ma'am, you may begin your conference.

Thank you, Jennifer. Hello, everyone. This is Heather Wietzel, Cincinnati Financial's Investor Relations Officer. Thank you all for joining us today. This morning, we issued our news release on our results along with our supplemental financial package. On Monday, we issued a news release on our dividend and published the listing of securities we owned at year-end. If you need copies of any of this material, please visit our investor website at www.cinfin.com/investors. From there, the shortest route to the information is in the far right-hand column via the quarterly results quick link.

On the call today, President and Chief Executive Officer Ken Stecher and Chief Financial Officer Steve Johnston, 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, which is required by Regulation G, was provided with the release and also is available on our website. Statutory data is prepared in accordance with statutory accounting rules and therefore is not reconciled to GAAP. With that, let me turn the call over to Ken.

Thanks, Heather. Welcome and thanks to all of you for joining us today. As we look at the results we reported for 2008, we see the advantages of superior capital and financial flexibility, which are allowing us to weather the current economic storms relatively well. In fact, fourth-quarter results contain some noteworthy items. We saw strong gains in new property casualty insurance business from our agencies, continued release of reserves established in prior periods and made big strides in the transition to a more diversified investment portfolio.

What is more important is what we are trying to accomplish for the future and how we are going to get there. In today's release, we defined the way in which Cincinnati's board and management plan to measure our progress going forward.

Between 2010 and 2014, we believe Cincinnati has the ability to generate an average return of 12% to 15%, calculated as growth in book value plus a dividend contribution. Achieving that target creates value for our shareholders, actually for all of our stakeholders.

I'm going to talk about why we felt it was important to articulate our longer-term performance objective and how we will be able to achieve that objective from where we are today. So let me begin with why we are looking at longer-term performance.

For years, we have said we are committed to long-term success. Our mission has been unchanged for over 50 years. We are distinguished by our commitment to the independent agency system, by our financial strength and by an operating structure that supports local decision-making, showcases our client service and allows us to balance premium growth with underwriting disciplines.

We have always looked for long-term relationships and invested for long-term returns. But our commentary and our investment attention generally was focused on results for the next several quarters. We don't want or expect anyone to ignore our results for 2008 or 2009. But we want to start the year by giving a broader view so that you can understand and measure the choices we make as the year progresses.

Now let me turn to how we are going to reach our objectives. I'll start with what we are not going to do. We are not going to change our agent-centered, field-focused approach. We are not going to abandon the long-term investment philosophy that includes building value through equity investments. What we are doing is looking to improve in three broad areas -- capital preservation, profitability and growth.

Our first strategic focus is capital preservation. We have talked a lot about this topic over the past six months. On Monday, we announced the Board was taking a conservative stance in maintaining our quarterly dividend at $0.39 per share for now. We would like to build on our 48-year track record of annual dividend increases, but agree that it is prudent to wait and see how this year progresses.

As a result of our efforts, book value at year-end was $25.75 and measures of our financial strength and liquidity include our $1 billion in cash, which gives us great flexibility. Applying our new investment parameters has helped maintain our highly rated and diversified bond portfolio and today, our equity investment portfolio also is balanced. Our insurance subsidiaries are highly rated, operating with capital far exceeding regulatory requirements. Our premium to surplus ratio for the full year was a healthy 0.9 to 1. The industry ratio was estimated at the same level at September 30. And our ratio of debt to total capital is just shy of 17% and we have reinsurance in place to support our ability to hold investments until maturity.

We also are identifying tolerances for other operational risk and calibrating management decisions accordingly. For example, we are developing programs to address the concentration of production operations at our headquarters location.

Our second strategic focus is a series of business initiatives to support improved cash flow and profitability for our company and for the agencies that represent Cincinnati. During 2009, you can expect to see measurable progress on technology projects designed to create critical efficiencies and streamline processes -- again, both for us and our agencies.

During the second quarter, we expect to have our workers' compensation predictive modeling system in use. This will not replace the local knowledge of our agents and field staff, but will enhance risk selection and pricing capabilities. By year-end, we expect to deploy a new commercial lines policy administration system for commercial package and auto to all of our agencies in about 10 states. The new system will include capabilities and features we need so we can seize opportunities and cement our spot among the go-to carriers for our agency.

Over the course of this year, we also expect to introduce expanded online services that agents have requested for policyholders. Later this quarter, personal lines policyholders who we bill for our agents will be able to visit our website to make payments. This is another incremental step in our efforts to become more responsive.

Early in 2010, our personal lines policy processing system will move to a next-generation platform. Later, we will be implementing a data warehouse to support more accurate pricing and underwriting across the entire business.

We are investing in all this technology to add efficiencies and improve management information. Our 2009 budget for these projects is about $50 million. We think we will start to see the full payoff for both Cincinnati and our agencies in two to three years.

One of the most important ways we will measure our progress here is our ability to sustain or improve on a key measure of our agency relationships. We seek to rank as the number one or number two carrier in agencies that have represented us for at least five years. We have earned that rank for standard market property casualty business in almost 80% of our agencies in 2008. We are looking to improve on that measure in 2009 and the years beyond.

Our third strategic focus is adding to our property casualty premiums largely without adding significant concentration of risk or infrastructure expense. Many of these growth initiatives have been underway for a year or more and began contributing in 2008. While total premiums were down on weak pricing, these programs help us achieve very respectable 13% new business growth for 2008. We expect they will contribute again in 2009 and should reach critical mass in 2010.

The growth initiatives start with our entry into excess and surplus lines to better serve our agents. Today, they write about $2.5 billion annually of E&S business with other carriers. We want to earn our fair share by bringing Cincinnati style service to those clients.

In 2008, our first year, we wrote $14 million in E&S premiums and met our operating objectives. This has probably been the most expensive of our growth initiatives, but even here, the costs are relatively low.

Entry into new states is another important source of new business in 2008 and has the potential to contribute substantially going forward. We generally are able to reach a 10% share of an agency's business after 10 years. In Delaware, New Mexico and Washington, we have appointed agencies that write about $400 million annually with all the carriers they represent. Our writings with these new agencies were less than 2% of that total in 2008, illustrating our potential. We appointed our first agencies in Texas late in 2008. Over the next 18 months, we expect to appoint agencies that write about $750 million in premiums annually. Texas is quite an opportunity.

Finally, we are preparing to enter Colorado and Wyoming in mid-2009 and considering additional states.

Another growth source is garnering additional business from agencies appointed in recent years in our active states. Plus, we are still making appointments targeting 65 in 2009.

Looking at personal lines, by midyear, we expect to have made more advances using tiered rating, helping to further improve our rate and credit structures. Personal lines rate changes made in 2008 have started to drive new business. Further, we had a good month this January after additional rate changes became effective the first of the year.

We are also tapping our potential to market personal lines insurance through agencies that already represent us for commercial lines. We began offering personal lines in five more states in 2008 or will do so in 2009. Based on the market share we captured in the late 1990s with similar expansion, we could generate another $35 plus million of premiums annually with the personal lines relationships when these agencies mature. These growth initiatives bring the advantages of expanding our geographic footprint and reducing our catastrophic exposure risk.

In summary, we are focused more on specific measurable strategies to help our agencies grow profitably and to let us achieve the objectives we have established for our company. Now let me turn it over to Steve.

Thank you, Ken and good morning. I'm going to make a few observations about the results highlighting our risk management initiatives starting with underwriting and catastrophe risk. Then we will cover loss reserve, investment, liquidity and capital risk management. I will finish up with some additional detail on the drivers of our long-term value creation that Ken just described.

We'll start with underwriting risk, including catastrophes. Despite experiencing the largest catastrophe loss in the company's history, our GAAP combined ratio for 2008 was 100.6. This is the first time we have been above 100 since 2001. Effective use of reinsurance helped us to manage our catastrophe risk relatively well. Our catastrophe reinsurance program attaches at a relatively conservative $45 million with co-participations that vary by layer up to $500 million. This limited the impact of our $129 million gross loss from Hurricane Ike to just under $60 million or about two loss ratio points for the year.

Our recently renewed catastrophe treaty still attaches at $45 million, although our co-participation in some of the layers above $105 million is higher as detailed in the press release. We also raised the retention on our 2009 property and casualty working treaties by $1 million. We continue to balance costs and exposure. By accepting higher but still conservative retention, we expect 2009 overall reinsurance costs to be about the same as they were in 2008.

You have probably noticed that our fourth-quarter expense ratio was an unusually high 35.3. This is a result of another risk management decision that we described in our third-quarter 10-Q. We incurred the cost of transitioning most of the associates out of the defined benefit pension plan and into a 401(k) with company match. The $27 million cost in the fourth quarter contributed about 3.4 points to the quarter's combined ratio. The new plan continues to provide associates meaningful retirement benefits, but should also help us manage pension-related expense and, more importantly, volatility going forward.

As respects to managing reserve risk, Cincinnati has a strong history of careful reserve setting and we continue to look for total reserves to be in the upper half of the actuarial range. Nothing changed in 2008 in terms of our reserving philosophy. As is the norm, the actuaries performed their typical thorough review in the fourth quarter, generating the outsized contribution of reserve releases we saw in the last quarter of both 2008 and 2007. Favorable development on prior years reduced the full year 2008 calendar year combined ratio by about 11 points. About $69 million, or just over two of the 11 points, came from a refinement that redistributed IBNR from prior accident years to accident year 2008.

Moving on to investment risk management. This is an area where our strong capital and liquidity have historically let us take on relatively more risk, both in terms of investing in equities and in our willingness to accept concentrations by sector and by name. Much has been accomplished since mid-2008 to reduce investment risk. Marty Hollenbeck and the investment team have done a great job repositioning the portfolio. The smaller portfolio is much more balanced with no sector share greater than 22% of the total and with the financial sector at 12% compared with 41% on June 30.

In terms of individual stocks, we completed the sale of the rest of the Fifth Third position in early January. We began selling Fifth Third in October of 2007. Over the 16 months, we sold a total of 72.8 million shares at an average price of $12.91 for a total realized capital gain of $654 million. Prior to their first dividend cut, our yield to cost was 37% and we have collected more than $560 million in dividends from Fifth Third just since 2003. We also reduced risk this year by ending our securities lending program and only 1.7% of the investment portfolio is categorized as level three.

Moving on to liquidity and balance sheet risk management. Our financial condition, as Ken mentioned, is strong. We have excellent liquidity with over $1 billion in cash. We also have two lines of credit. During the fourth quarter, we paid off $20 million that was drawn on one line and now have a total capacity on the lines of approximately $175 million. Our debt to total capital ratio is 16.7%. Most of our debt is from two nonconvertible, non-callable debentures that are due in 2028 and 2034.

For additional financial flexibility, at the parent company, we had an additional $1.3 billion in invested assets, including $344 million of our cash. At the property casualty subsidiary level, common stocks are near 50% of surplus and we are writing business at a premium surplus ratio of 0.9 to 1. We think we are in good shape to continue to invest to achieve our long-term objectives.

At this time, and we reserve the right to change our mind at any time as market conditions may dictate, we anticipate allocating approximately 80% of new investments to fixed income and 20% to equities, which is not inconsistent with our long-term historical practice.

In sum, we believe we have the capital to support our growth, fund our investments and pay our dividend without raising additional capital. The progress we have made managing all of our risk adds to our confidence about our longer-term results. As Ken said, we are turning our attention to our longer-term time horizon, recognizing both current market conditions and the number of initiatives we have underway.

To achieve the 12% to 15% measure of value creation that Ken mentioned, we are looking at three assumptions about our business. First, that our net written premium can grow faster than the industry over any five-year period. Second, that we can underwrite to generate consistently profitable insurance operations -- that is the combined ratio consistently below 100. Third, we expect investment income to grow and our investment approach to lead to a total return on our equity portfolio exceeding that of the S&P 500.

We are making two assumptions about the external environment as well. First, we are looking for the commercial lines market to begin to firm in 2009 and second, we are assuming that the economy and the markets get back on track during 2010.

In 2009, we will be very hard pressed to hit our five-year target of 12% to 15%. The economy is likely to create challenges for us, as well as for others. There is potential for business closures, shrinking payrolls, declining receipts and other exposure bases -- creating considerable uncertainty for any short-term forecast, both on the premium side and on the loss side.

That is part of the reason we are looking at a longer-term measurement. We have successfully navigated through tough environments before, guided by our long-term focus of cultivating our agency relationships, making decisions at the local level, providing excellent claims service, adequately reserving and investing for the long term. We are confident we will continue to do so. Ken?

Thanks, Steve. When you add it all up, we have everything it takes to build value for our shareholders, agents, policyholders and associates. We have strong human capital with agents who believe our business model brings value to their clients with the associates dedicated to quality and service. We believe we have the right plans in place to reach our objectives and we are eager to reach the opportunities that lie ahead for our company.

With that, let me open the call for questions. Just a reminder that Jack Schiff, Marty Mullen, J.F. Scherer and Marty Hollenbeck are here with Steve and myself and are available to respond. Jennifer, we are ready for questions.

(Operator Instructions). [Dan Miller].

Hello?

Good morning. Yes, Dan, this is Ken.

Hi, sorry. I wasn't -- I think I had my name in there wrong or something. A question on Fifth Third. I just want to make sure I heard you right. You are saying as of today, you don't own any Fifth Third? Is that what I heard correctly?

That is correct.

Okay. On the personal lines, the 11% up this quarter, is there -- you referenced the rate change. Is that really what is driving it and can you break it out into a volume versus rate change? And then is there anything else in there that is really driving -- the 11% is obviously your best performance on personal lines in quite a while. So just want to sort of understand where that is coming from.

Dan, this is J.F. The new business that we are receiving is concentrated on a lot of our new appointments. We increased our new business writings in personal lines by about $3.8 million in agencies that we have appointed in 2007 and 2008. Simultaneously with that, in accordance with our models and tiering for personal lines, we have improved our competitiveness on the better highly rated scores and we are gradually raising rates on the poorer scores. So that has resulted in some better results from us.

In the agencies that we have had on board previous to 2007, we about broke even in terms of the new business we wrote this year versus last. We like the signs that we are seeing in January. We had a good January as far as new business is concerned in personal lines. We will continue to tweak our rates based on the various tiering, but right now, we are seeing some of the benefits of the changes we have made.

And just staying on the personal lines, the rates in particular, can you give us a little more characterization of the rate changes that were made? Is it generally you are going up all over or down all over or is it more targeted? And that part of the question I was really thinking geographically. Then obviously you are changing your spread with the tiering. But really just thinking the aggregate rate level, are you seeing mostly up or down and where are you seeing that?

I think we are seeing mostly down on the better insurance scores. We found ourselves, and it is not consistent geographically that we were simply not properly priced. And so we have, as we've talked about previously, been examining various states and various regions of states as to what our competitiveness would be. We are guided by the scoring mechanism that we have in place right now, making certain that we are not being adversely selected against, so where we are too highly priced on the better insurance scores and to low priced on the worst scores.

So really I think our concentration, though we do know from agent feedback in any geographic area whether or not -- our base rates just simply have made us uncompetitive. We are really tweaking more towards the model at this point more so than necessarily geographical concentration. We want to be competitive with price obviously everywhere and the model's guiding us.

Sure. Last question and this is coming right out of the release, but it was also mentioned in the prepared comments. The savings from favorable development and you mentioned redistribution of $69 million in reserve. Can you give us a little more detail on that? Is that just a standard year-end adjustment that you guys have historically made or is that something unusual?

Sure, Dan. This is Steve and that particular adjustment is unique to this year. I think something to keep in mind is that none of the overall reserve-setting practices have changed. And if you look at the balance sheet, we are actually up about $119 million in total reserves from year-end 2007 to year-end 2008. They did do a thorough review looking at the risk by accident year and so forth, looking at how they allocate and handle and even in some cases in the older years negative IBNR and just did a redistribution of the IBNR by accident year that put the $69 million into accident year 2008, which has the effect of making the accident year 2008 maybe look two points higher than it would have been absent the change. I think on a go-forward basis, we're really pretty much in the same position because, as we move into 2009, 2008 will be part of all prior years.

I guess that sounds to me like you -- because you pulled that forward, your '08 is now being booked more conservatively than the '07 was booked a year ago. Is that accurate or no?

I think that is a fair characterization.

Okay, all right. Very helpful. Thank you. And congrats on a good quarter.

Thanks, Dan.

Paul Newsome, Sandler O'Neill Partners.

Good morning. First question, can we just think conceptually about your accident year and what -- it looks like you have got a pretty high accident year result. What immediate steps are you thinking about to try to improve your accident year?

You make a good point, Paul. I mean we haven't had a combined ratio that has been over 100 since back in 2001. I think 2008 was a satisfactory year given the adverse weather to come in just a tick over 100. As we do look at the accident year, even with this reserve adjustment that would say adjusting for the cats and the reserves, it would be say 102.5. That is higher than where we want to be. And so I think all the initiatives that Ken mentioned we are taking very seriously in terms of increasing the technology, increasing the pricing position, bringing in the predictive modeling for workers' compensation and more of the scoring in multivariate analysis on the personal lines side. So I think everybody in the organization throughout the organization knows that we have got a challenge ahead of us, but I think it is a great underwriting company and I think they will step up to the challenge.

Are you folks putting in price increases across the board to recover that or are you waiting for the market to give it to you?

Paul, this is J.F. The market really isn't giving it to us as of yet. However -- and it is all over the board in terms of what we are seeing in terms of just general market pricing. All of our field reps are meeting with all of our agencies to discuss renewal pricing. They are in conference calls with our underwriters in here on a weekly basis to discuss strategy.

In some cases, on accounts that aren't in the market that are renewing, we are able to get some firming of prices on the more high-profile accounts that draw a lot of attention competitively. We are still seeing some pricing pressure and so as a result, we would be renewing at some slight credit decreases. We are simply -- I guess in terms of what we are able to do as far as pricing, we are taking it right into the agents' offices and working very hard with that.

One conceptual question, slightly off topic. When I look at your 12% to 15% goal and I think about your investment allocations, it sounds like -- well, I guess this is a two-part question. One is you must be assuming some long-term return on the stock market effectively. And if you are doing that and my guess is it would be something like 10%, 12%, is that suggesting sort of a 0% to 3% return on the insurance business?

Paul, this is Steve and I think with the long-term forecast, it is kind of like having an equation with multiple unknowns. So we could get there under a variety of different scenarios. The one that you presented I suppose is one of them. I think as we look at the more likely scenarios, I think we would see it would be one that would have to be driven by a lower assumption on the investment return and a higher return on the underwriting side.

Great, thank you very much.

Mark Serafin, Citadel.

Good morning. Kind of really to follow up on Paul's question on the accident year. As I study, what is it, page 20 of your supplement and I look at the quarterly trend or the year-over-year trend. I mean is there anything else that is going on in there, especially in the fourth quarter, that you can help identify that would make that look a little bit higher than normal? And as we look out into 2009, what type of visibility do you have on that given inflation and pricing trends?

Those are good questions, Mark, and I think when we talked about this reserve refinement, the $[69] million, most of that did take place in the fourth quarter. So you're going to see the distortion for the whole year kind of showing up in the fourth quarter. We also had some reallocation between the lines with commercial auto and workers' comp taking some of the increases. So I think the year-over-year numbers are the more stable ones to look at. Kind of getting back to the answer to before, we do have a lot of work to do. I think Ken has laid out the initiatives and I would let him describe those a little bit more fully, but I think that everybody here realizes the work that needs to be done and we are prepared to attack it.

Thank you.

Mark, I think predictive modeling is something that we are starting with workers' comp. I think that it is something that we have to carry on to other lines. The data quality, data warehouse project that we mentioned, I mean those are the things I believe that other carriers are using to slice and dice their data, come up with better underwriting decisions. And those are the things that we are committed to and we have them on a fast track. And I think you would agree that with the -- what was described in my comments about when we are going to deliver technology, this is something that is a little unique -- it is not unique for other companies -- but to us, it is a new approach and the sense of urgency is being set there, something that we believe we need to do to really give us better data to help us provide better service to our agency customer. And at the end of the day, this is going to cement the relationship, which will deliver greater value in our view in the long term.

Thanks for the call.

Mark Dwelle, RBC Capital Markets.

Good morning. Several questions. First, on the technology initiative, you talked about these type of initiatives in the past. Will you be able to execute this plan within the context of your current expense ratio or would we expect to see some type of an increase there to allow for a more accelerated development process?

Well, Mark, what we do is we expense these projects over six or seven years, so I think there is going to be, assuming there is no increase in premium, the expense impact could be in the, say, 2/10 or 3/10 of a point range and that would be for that six or seven-year period. Obviously we believe that making it much easier to do business with us will give us opportunities to write additional business. And then also at the rates -- as rates do firm, obviously that will help offset some of those costs also.

But I think it is something that we need to do for multiple reasons. And this is the future I think of our industry. To not do it I think would put us at greater risk for maybe more reductions in premium, not being able to maintain the same relationships we have with our agency force. So I think there is going to be a small impact, but it could be offset with additional opportunities. But we have not baked anything into that at that point with our 2/10 to 3/10 of a point combined increase that I mentioned.

Okay. With respect to the investment portfolio, it sounds like you have completed the vast majority of the restructuring or reallocation that you had set out to discuss a couple quarters ago. Is that a fair assessment or is there some further evolution? I am not -- in terms of your specific tactical decisions, but in terms of broad mix of assets and classifications between taxables and nontaxables, etc.

Mark, you are correct in your assessment. Most of the heavy lifting has been done. Although there is continued tweaking of the portfolio and again, on an ongoing basis, we tend to be more responsive, a little more proactive. But some of the bigger changes have already occurred, yes.

Okay. A question in terms of the I guess pricing environment and business opportunities. As you are looking at renewals in particular, to what extent are you seeing sort of declines in unit count or people reducing levels of coverage? And is there a degree to which that is I'll say not offset by corresponding rate increases or upsides to keep that in line?

Mark, I think on the property side, we are not seeing at least nothing noticeable in the way of a decrease in property values, building values, contents values. Where you see it mostly is in the payrolls and the sales area, anything that is predicated on payrolls and sales -- manufacturing, construction, in that area. It is spotty.

We have been out on our sales meetings here a couple weeks ago talking to agencies. A lot of the feedback we get is on the commercial construction side, that many of the contractors still are fairly busy. We do business in a lot of college towns, state capitals, things of that nature, so interestingly enough, you would almost expect there to be a real negative view in construction area everywhere. But the pipeline is not particularly full, as you can imagine, for a lot of those commercial contractors. Residential contractors had already taken a fairly significant dive last year.

So in terms of terms, conditions, we are simply seeing what the economy is dealing to policyholders, nothing remarkable in terms of decreases in building values, probably not as aggressive of an approach at raising building values and we are trying to pay very close attention to that to make certain that the insurance to value doesn't get out of balance for our policyholders.

I might go back to a question Paul asked as well as far as how we are approaching renewals. We assembled a whole field team to try to work on the renewals, as well as the new business. They are meeting in agents' offices. Our field claims reps, our loss control reps are passing information on to our underwriters, as well as our agencies regarding accounts that perhaps have deteriorated and that we may need to walk away from.

So pricing is important. We certainly are close to where the insurance is being sold, so we are making certain that we can get what the market will bear and maybe a little bit more for our three-year policy. But I also think that we are attacking very hard perhaps the bottom 5% of our policyholders that because, for a variety of reasons, no longer qualify based on our underwriting guidelines.

That's very helpful color. And one last question if I may. With respect to the dividend, I guess it was fairly notable that it was not increased. Can you just maybe discuss a little bit how you're thinking about that and whether -- what circumstances would present themselves to make you decide to increase that later this year or alternatively, if economic conditions remain poor, if there is any chance that it would be reduced?

Well, Mark, this is Ken. What we are doing is we have gone through and did quite a bit of modeling. And the things we are considering is what is our payout ratio and what does it look like, say, for the next five to six years. We are also looking at how we would fund that. Normally for most companies like ours, the property casualty or the insurance group would pass an upstream dividend to help fund that dividend payment at the parent company level. So we're looking at the factors like if we do pass up a dividend from the property casualty group, what does that do to our written premiums to surplus ratio, things like that.

It is a record, as I mentioned in my comments, that we are very proud of. We do want to continue that if at all possible, but we also have to be cognizant of the fact that we do have to maintain the ratings that we have. The A+ Best still puts us in some pretty good company, so we want to be careful with that. But I think while we monitor all these things, we are going to be fine.

We don't know what the economy is going to do as some of the comments you made and what J.F. has answered with reducing opportunities for business. We don't know how much impact that will have on our sales. Being an insurance company, employees are one of the bigger costs and we have some infrastructure, so that comes into play also.

So I think, right now, we feel confident with the $1.3 billion of assets at the parent company level. We have liquidity to maintain that for three, four years easily. The decision would be do we want to eat away at that liquidity to maintain it or do we want to stabilize it or whatever decisions may we make. Hopefully that kind of gives you our thought process.

No, I appreciate the commentary. I will jump back in queue. Thanks.

Michael Phillips, Stifel Nicolaus.

Thanks, good morning, everybody. Steve -- I think Steve alluded to this earlier on one of the questions about the reserve reallocation by line, not the one by accident year, but by line, so that might help explain some of this. But I was looking at his comments I guess if it is that. If not, what else might be behind the scenes in the quarterly results in both personal auto and in workers' comp, which seemed to jump up quite a bit this quarter?

Yes, Mike, that is an excellent question. And the reallocation did have an impact there, but I don't want to candy-coat some of the work that we need to do with workers' comp either. I mean that's an area that we recognize that can be volatile, it could be cyclical and we are focused on it and introducing the predictive modeling and really rolling up our sleeves and making some improvements there. But I guess in answer to your question, the reallocation did have -- did certainly have an impact.

Besides that, nothing else in terms of random (inaudible) everything because it was a pretty big jump in both lines.

Marty, do you have --

Michael, this is Marty. Fourth quarter, we did see it in the particular details on the fourth quarter new losses. We did have a 15% increase in our new losses between $250,000 to $1 million. 15% of the dollars equated to that increase in regard to our general liability line. And of course, that is one of our -- our largest line in our commercial book. Fortunately, in January, that returned to normal range level in January '09. So that was some of the activity in the fourth quarter that we saw increase.

Okay, thanks. And then maybe for Steve, I think a lot of us talk about the overall economy and how that impacts I think mostly the top line for most insurance companies. What are your thoughts and how do you think about how all the effects of the economy could be impacting your loss costs?

I think most of the commentary is on the top line, but exposure base for workers' comp is payroll for a lot of our general liability policies. It is receipts and various exposure bases that are designed to go up and down as the economy goes up and down. The premium somewhat varies, as well as the losses with these economy-sensitive exposure bases. And I think that is what makes it so tough to predict is that we are going to have movement on both sides of the loss ratio.

Okay, fair enough. Thanks, Steve.

David West, Davenport & Co.

Good morning. First, a clarification. I think you mentioned, of your $1 billion of cash and equivalent, how much of that was at the holding company, but I missed that.

Right, we tried to highlight what we did have at the holding company and it was $1.2 billion in cash and cash equivalents and investments. $344 million of it was actually in cash.

Okay, that was all I had. Thank you for that clarification. You generated $14 million of premiums on the E&S effort this year. Could you talk a little bit about that momentum in 2009 and where you think that could go?

Sure. We were very happy with our first year, as was mentioned in remarks. Our agents write $2.6 billion in the aggregate of excess and surplus lines business. We are now up and running all lines -- property, casualty, miscellaneous professional and E&O in 33 of the 35 states we are active in. We are not active in Delaware, a state of domicile and we are not active in Florida at this point in the E&S business. We are not a market for the entire $2.6 billion obviously that our agents write, but we would have an appetite range for something -- a pretty significant portion of that. So we view that we have quite a bit of opportunity and quite a bit of momentum going into this year to write a substantial amount of E&S business.

David, as an example, last year, we got off to a slow start. We had a little less than $1 million in the first quarter. In the fourth quarter, the written premium was up to $5.7 million. You can kind of see the progression of our ability to grow this as we get acclimated to more states, get the agents a little used to our new technology and our process. So you could kind of geometrically kind of estimate what we might write in 2009. We haven't given any specific guidance on the E&S premium.

Very good. As you have gone through these strategic initiatives, have you rethought your use of multiyear contracts or do you think that is going to be a continuing part of your landscape for a long time?

No, it has been a part of the landscape since 1951 and we would anticipate that it would stay there. It is frankly right now on the new business side and for that matter on renewals. The stability that the three-year policy represents is a very attractive item for the renewal policy, as well as the attraction of new business.

I think it is worth mentioning and reminding that about 75% of our premium is subject to reunderwriting and repricing a year, even though we use the three-year policy. It does mean that if we reprice an account today that on the property and the liability, the rates -- not the premium -- but the rates will be guaranteed for three years for a policyholder. The auto, the workers' comp and the umbrella would all be subject to repricing and reunderwriting as we move forward.

But the sum total of all of that, I think our agencies would feel based on the cost of marketing insurance, as well as the stability and persistency of the policyholder that the three-year policy for the long term serves us very, very well.

Thanks very much.

Craig Rothman, Millennium Partners.

Yes, just going back to the question on the impact on loss trends from the weak economy. Are you pricing in or I guess factoring that into your loss ratio picks, the impact from potential moral hazard and that type of thing in this economy?

In terms of moral hazard, I mean that one is a hard one to get specific on in terms of picks because actually I have read studies on both sides of the issue as we hit tough economic times. I mean one would say for any workers' comp situation that a person would be maybe more likely to injure their back on the job before they got laid off. On the other side, in a tough economy, people may be that much more diligent and careful to not have a loss to exacerbate the problems that the economy is causing. So I have read studies on both sides of the coin in terms of the moral hazard that is presented by the economy. So no, we haven't really specifically pegged the target here.

Okay. And then within workers' comp and commercial auto, the quarter-over-quarter combined, the loss ratios jumped 30 points. So can you just elaborate on that? I know you touched on workers' comp before, but was it within any specific states where there were real issues or are you starting to see any sort of trends that are new?

I don't think it is a state-by-state issue. I think it is across the board. I do think the fourth quarter was impacted by the redistribution of IBNR. So I think the year-over-year annual number is the one to focus on, but, again, it is still a deterioration, it is still something that we need to really focus on in terms of our pricing precision and our underwriting and our loss control and everything that we do with decision-making at the local level, working with our agents, it needs to be an area of focus.

And commercial auto?

Same there. I think -- I think it is also impacted by the redistribution of the IBNR and again, just another area we need to focus on.

Okay. And did you talk about your reinsurance pricing, what you are seeing there?

Yes, it was -- Tom Joseph led our renewal here at the beginning of the year and basically, we are taking on a little bit more exposure. If a loss to the entire $500 million, heaven forbid, a loss to the entire $500 million limit during 2008 I believe would have resulted in about a $105 million loss to us. In 2009, it would be $118 million. We are also taking on a little bit more exposure on the excess and for risk contracts with a $1 million higher retention moving from four to five and five to six respectively. But when you look at everything, I think that is still a very conservative position for a company of our size and financial strength to have a cat program that attaches at $45 million and again, we balance the cost and the exposure. And we think we will bring the costs in just about equal to maybe a little bit down from where it was in 2008, but we are taking on more exposure.

Okay. So just thinking about this all together, thinking about the accident year loss ratio trends, the uncertainty about potential moral hazard with the economy, the investment environment, the higher reinsurance costs, how come you are just not raising pricing regardless of what the market is doing right now?

Well, that is a little bit more art than science sometimes when you are trying to preserve good accounts. We are trying to raise pricing on an account by account basis. We are protecting the very good accounts. As I mentioned earlier, we are having some luck in certain areas. It is really an account by account, agency by agency approach to things. Everyone out there is talking about firming pricing. The decision comes though when you get right down to the quality of the account, knowing the account, good communication between the agent and the home office. So we are very, very focused on them.

Okay, thanks a lot, guys.

(Operator Instructions).

Any further questions, Jennifer?

At this time, there are no further questions.

Well, thank you all for joining us today. We look forward to speaking with you again on our first-quarter call on April 30. Have a great day. Goodbye.

This does conclude today's conference call. You may now disconnect.