辛辛納提金融 (CINF) 2011 Q4 法說會逐字稿

Good morning, my name is Steve and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter 2011 earnings call for Cincinnati Financial. 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). Thank you. I'll now turn the call over to Dennis McDaniel, Investor Relations Officer. Please go ahead.

Hello, this is Dennis McDaniel, thank you for joining us for our fourth-quarter and full-year 2011 earnings conference call. Late yesterday we issued a news release on our results along with our supplemental financial package. To find copies of any of these documents please visit our investor website, www.CinFin.com/investors. The shortest route to all the information is in the far right column via the quarterly results Quick Link.

On this call you'll first hear from Steve Johnston, President and Chief Executive Officer, and then Chief Financial Officer, Mike Sewell. After their prepared remarks investors participating on the call may ask their questions. At that time some responses may be made by others in the room here with us including Executive Committee Chairman, Jack Schiff Jr.; Chairman of the Board, Ken Stecher; Executive Vice President, J.F. Scherer; Principal Accounting officer, Eric Mathews; Chief Investment Officer, Marty Hollenbeck; and Chief Claims Officer, Marty Mullen.

Please note that some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties. With respect to these risks and uncertainties we direct your attention to our news release and to our various filings with the SEC.

Also, a reconciliation of non-GAAP measures was provided with the news release. Statutory accounting data is prepared in accordance with statutory accounting rules and therefore were not reconciled to GAAP. With that I'll turn the call over to Steve.

Good morning, it's a pleasure to speak with you today from Murfreesboro, Tennessee where we will meet with agents this afternoon. This is the fourth state among 22 in total that we are visiting during the first and second quarters. Our agents, with their optimism, their commitment to our partnership and shared goals, really energize us.

After three straight quarters of heavy catastrophe losses the fourth quarter was profitable with commercial lines, personal lines, excess & surplus lines, life insurance and investments all contributing to strong operating earnings. Essentially all indicators of longer-term performance are moving in the right direction and that bodes well for creating shareholder value.

Various strategic initiatives are having a positive effect and I'll highlight several key areas. As we discussed during our last quarterly conference call, better insurance pricing is a top priority. We are experiencing improvement through a combination of our diligence plus somewhat more favorable conditions in several markets.

Our pricing precision for each policy continues to improve as we gain more experience with our pricing models. More thinly priced risks are getting significantly higher prices. Fourth-quarter increases in renewal pricing occurred for each property casualty segment and also for each major line of business within segments.

As we preannounced, commercial lines renewal pricing accelerated during the quarter with average increases in the low- to mid-single-digit range. Just over 80% of our commercial lines renewed at flat or higher prices. For our excess & surplus lines segment renewal prices continue to increase and are solidly in the mid-single-digit range. Pricing changes for that segment have been positive for the last 16 consecutive months.

For personal lines we believe our 10% increase in 2011 renewal premiums is roughly half from higher rates and half from higher policy counts. Policy retention has remained fairly steady over the past two years with fourth-quarter retention in the high upper 80% range for commercial lines policies and then a low to mid 90% range for personal lines policies. Our agents are able to sell the value of our products and services; they continue to work with us to implement price increases where they are needed.

The market remains competitive, particularly for new business. While agencies appointed since the beginning of 2010 drove our 6% new business premium increase for 2011, new business written premium for agents appointed prior to 2010 decreased approximately 2%. We are seeing plenty of opportunities to grow profitably and are comfortable declining new business opportunities we believe are underpriced.

We also continue to gain confidence that our pricing analytics are helping us to distinguish the more attractive new business offerings from the less attractive ones.

In 2011 we appointed 133 new agencies in areas we consider underserved, about a dozen more than we planned at the beginning of the year. During 2012 we plan to appoint around 130 agencies. It takes several years for a new agency to develop the double-digit market share we enjoy with agencies appointed for 10 years or longer.

The accelerated pace of appointments in recent years, plus our commitment to serving all our agencies and their clients, put us on a path where we believe we can achieve $5 billion of direct written premium by 2015. Above all our emphasis on premium growth is to do so profitably in order to raise the level of earnings in book value over the long term.

Our life insurance business also grew in 2011 with earned premiums up 4%. Term life, the largest product line, rose 9%. Although life insurance profits remain challenged by the low interest rate environment, our agencies value the ability to offer quality Life products and services to their commercial and personal insurance clients.

The year 2011 will be remembered by many for its violent weather and other natural catastrophes. From a financial perspective, our unprecedented catastrophe losses in 2011 were an earnings event rather than a capital event as we ended the year with higher shareholders equity than at the start of the year.

An important risk management element for keeping our capital strong is an effective reinsurance program, and we have renewed all our primary reinsurance treaties for 2012. For our per risk treaties property rates were up approximately 10% and casualty rates were down around 5%.

We chose to add $100 million more to our property catastrophe reinsurance coverage, raising it to $600 million per event and we now retain the first $75 million of loss. For a $500 million event our net retention is $115 million compared with $88 million in 2011 and $104 million in 2010.

Assuming stable levels of facultative reinsurance we estimate that our total 2012 premium ceded to reinsurers will be approximately $181 million, down roughly 16% from 2011 and up about 8% from 2010.

Another important aspect of 2011's high-level of catastrophe activity was that it allowed us to showcase our expertise in providing claims service. I can hardly say enough about how well our claims staff performed and about how our claims response and other elements of our service play an integral role in our ability to profitably grow the company.

We aim to give policyholders consistent value and service through all these storms and we believe shareholders deserve consistency too. The payment of our dividend to shareholders last October marked our 51st consecutive year of increasing dividends and we are committed to efforts that will benefit shareholders and other stakeholders for years to come.

For 2011 our value creation ratio was 6.0%. While that's below our target range for the annual average in any five-year period, we are encouraged that our book value per share increased despite a catastrophe loss ratio that was three times higher than the annual average for the prior 10 years. Further, we remain confident that various initiatives to improve profitability and grow premiums will continue to bear fruit, driving stronger value creation over the coming year.

Now our Chief Financial Officer, Mike Sewell, will further comment on results during the quarter and several points regarding our balance sheet.

Thank you, Steve. And thanks to all of you for joining us today. I'll start by highlighting important trends in our property casualty underwriting performance. While our full-year 2011 combined ratio of 109.2% was disappointing compared to our history and targets, we see several reasons to be optimistic.

On a calendar year basis the combined ratio before catastrophes improved by 7/10 of a percentage point. Factor out the effect of additional 2011 ceded premiums from reinstating our property catastrophe reinsurance treaty and that improvement was 2.0% of percentage points.

On an accident year basis before catastrophes the combined ratio for accident year 2011 improved by 2.7 percentage points over accident year 2010 after factoring out the effect of reinstatement premiums.

We remain confident about the strength of our loss reserves and development patterns. Our approach is consistent -- we aim to remain solidly in the upper half of the actuarially estimated range knowing that it is important for longer-term financial performance.

Reserve development on prior accident years recognized during 2011 was fairly consistent with 2010, down 9/10 of a point to a ratio of 9.4%. For favorable reserve development recognized during 2011, 63% was for accident year 2010, in line with 62% for accident year 2009 that was recognized during 2010. For both periods the balance of favorable development was concentrated in the two next most recent accident years.

Our updated loss and loss expense reserve estimates as of December 31, 2011, show accident year 2010 developed favorably by about 6 points on a ratio basis, while accident years 2009 and 2008 developed favorably by approximately 8 points over the years. For both 2011 and 2010 our commercial casualty lines of business was the majority beneficiary for the favorable development.

There is no absolute assurance that accident year 2011 will develop in a similar pattern, but we do aim to be consistent in our reserving practices. During the fourth quarter we refined our allocation to line of business, segment and accident year for loss expense payments and reserves known as adjusting other expense, or AOE.

While the refinement had a zero effect by consolidated property casualty loss expense reserves in total, some lines of business experienced higher incurred loss expenses and some lower. This was a one-time refinement of reserves among the lines of businesses. The full-year 2011 ratio effect raised the personal lines segment ratios by approximately 3 percentage points and lowered the commercial lines segment ratios by about 1 point. Some lines of business had larger effects.

Turning to expense management, our insurance operations reflect a focus on improving service and efficiency. The total number of associates and contractors is down 4% since the end of 2009. That includes a 4% increase in field associates offset by a 5% decrease in headquarters staff and a 30% decrease in contractors.

Our 2011 property casualty underwriting expense ratio at 32.2% was 60 basis points lower than last year. We anticipate the expense ratio continuing to benefit from future premium growth and more efficiency in our processes.

Investment income is an area where our trend continues to run counter to what the industry is experiencing. Ours rose 1% for the year 2011 on a pre-tax basis.

The pre-tax yield on our bond portfolio for the year 2011 was 18 basis points lower than the prior year, so interest income continues to face a headwind. The portfolio had an effective duration of 4.4 years at year end, down from 5.0 years at the end of 2010. Dividend income was the source of our investment income growth during 2011.

Dividends from our equity portfolio were up 4% for the fourth quarter and up 5% for the year. Our equity portfolio also had a nice rebound in valuation during the fourth quarter. The portfolio's fair value ended the quarter up 13%, reversing the 12% decline during the third quarter.

Pre-tax net unrealized gains for the total investment portfolio reached nearly $1.5 billion at the end of 2011, an increase of 19% from a year earlier. Our investment approach remains consistent and we think the long-term capital appreciation potential is important.

Our capital remains strong and we ended the year with over $1 billion in holding company cash and marketable securities. We are well positioned for capital management purposes and for growing our insurance business.

I'll conclude my prepared comments by summarizing the contributions during the fourth quarter to book value per share. Property casualty underwriting profit increased book value by $0.39. Life insurance operations added $0.04. Investment income, other than life insurance and reduced by non-insurance items, contributed $0.41.

Shareholders equity changes related to our pension fund lowered book value per share by $0.11 primarily due to the low interest rate environment. The change in unrealized gains at December 31 for the fixed income portfolio, net of realized capital gains and losses, increased book value per share by $0.07.

The change in unrealized gains at December 31 for the equity portfolio net of realized capital gains and losses increased book value by $1.22 and we paid $0.4025 per share in dividends to shareholders. The net effect was a book value increase of $1.62 during the fourth quarter to $31.16 per share. Adding the dividend our value creation ratio for the quarter was 6.8%. With that I'll turn the call back over to Steve.

Thanks, Mike. We have in place a strong foundation both financially and strategically and we will see better days ahead in terms of company performance.

In addition to having the most dedicated associates in the business, we work with the most professional independent agencies in the business. We look forward to strengthening our partnership as we meet with agents at sales meetings across the country over the next four months. We also look forward to meeting in person with many investors and shareholders throughout this year and we appreciate your interest in Cincinnati Financial Corporation.

With me today to further discuss our results and outlook are Jack Schiff Jr., Ken Stecher, J.F. Scherer, Eric Mathews, Marty Mullen and Marty Hollenbeck and we are all available to respond. Steve, we're ready to open the call for questions.

(Operator Instructions). Matt Rohrmann, KBW.

Excellent quarter. Two questions. First on the development side, obviously you had details on the pre-announcement about the favorable development on the property side and then the quarter came in with some excellent results on the casualty side. Just curious, what were the primary drivers of the favorable experience on the casualty side? Was there anything in there in terms of special settlements or was that just sort of overall trends?

Matt, I think it was overall trend. We tend to look at the full year and you're always going to have variation, but we think we have a very consistent practice, we think it's been consistent over time. We've got reasonable consistency if you look at full years across time. And we think the best is to come from a lot of the hard work that our associates and agents are putting in in terms of getting rate, knowing more about our risk, all sorts of underwriting initiatives, front-line underwriting by our agents. So we think that's been the primary driver.

It seems like workers' comp is heading the way you wanted it, right, Steve?

It sure does. That's one that we're feeling particularly pleased about. I don't know if J.F. would want to add any more comments because that's been a real team effort there.

Yes, we've talked a lot about workers' comp in the last couple years between a lot of help from predictive modeling and analytics on the pricing side, much more in the way of specialized loss control activity and most especially some of the specialized activity we've had in the claims handling area.

We're frankly pretty proud of the improvement we made this year. It appears that the industry is going to go in the opposite direction this year and we're confident that we can improve it even beyond what we've done already.

Okay, great. And then last question, as you guys travel around the country doing your meetings, I just want to get a sense of how balanced the strength in pricing is? I mean is it heavy in the Midwest post the storms -- property obviously? But just wondering how broad based that is as you guys meet with different folks across the board?

Matt, we feel it to be fairly broad based. There's a lot of enthusiasm, a lot of optimism I think amongst the agency force as we talk to them. Obviously every policy is different, every situation is different, we do things on a risk-by-risk basis. But the tone I think has been pretty uniformly positive in terms of affirmings.

Yes, and I guess I would add a little bit to that. We've only been in Charlotte, Atlanta and Birmingham so far on our trip, so haven't been out West or in the Midwest. But we travel a lot, talk to agencies, many agencies visit Cincinnati as well. And as Steve said, I think there is an acknowledgment universally that price increases are deliverable. Having said that, and you all have acknowledged that in many of your reports, that new business can still be pretty competitive.

So, if you will, the finesse that's being used is to raise rates appropriately, particularly when you're dealing with a very good account, one that you do want to retain, you don't want to go to extremes because if it gets to the marketplace it will draw attention. But we're not getting at all from any agent we talk to any sense of a lack of confidence on their part to be talking about rate increases with their policyholders.

Okay, great. Thanks very much, guys.

Hey, Matt, before we let you go I want to give just a little bit of a refinement on the workers' comp answer, just a clarification. And we talked about it in the press release in terms and Mike in his opening comments about the all other expense reserve. And for the year, again while the calendar year was the same, unaffected in terms of allocating to lines, the workers' comp did benefit by about 11 points on the calendar year by that refinement.

Okay, great. Thanks, Steve.

Vincent DeAugustino, Stifel Nicolaus.

In the press release commentary you had mentioned the possibility of writing as much as $5 billion in premiums by 2015. So just a few questions on that with the first being how much of that growth do you think could be driven by accepting business that Cincinnati is already quoting on but just not meeting your profitability hurdles, versus how much of that do you think would need to come from new agents or geographies and accounts?

And then second, what net written premium to surplus ratio would you anticipate running at if you could reach that $5 billion target? I'm assuming that you could up the leverage a little bit, but just curious if you'd have something in mind.

Yes, let me just touch briefly on the elements of it. I think the key point is that we want to grow profitably, that's key. We want to get as much of that growth from our same agents as we can. But we also recognize that we're underserved in certain areas where we are appointing new agents.

And in terms of the capitalization, we could go up a bit, we're running about 0.8 to 1 in terms of our premium to surplus ratio now. We feel confident that as we grow the book profitably, especially when you consider the capital at the holding company, we've got plenty of capital to support all the profitable business our agents can send us.

And I know you just mentioned the impact from work comp on the refinement in the adjusting salaries. But I was curious if you could maybe call that out for personal auto just because I think that the core underwriting results there looked a little abnormal.

Yes, this is Mike Sewell. For the personal auto the effect was that it increased 8.5 points for the quarter -- or for the year, I'm sorry -- for the year. We had the workers' comp was down, it benefited 11.5 for the year, personal auto was up 8.5.

I did comment that the personal lines, it was up 2.8, but commercial lines was down 1.0. But overall when you look at the AOE reserve in total, the net reserve from year to year, it's within $2 million between the two years. So it really had a zero effect on total reserves and it's really just between the lines.

All right, thank you very much. That was very helpful.

Ray Iardella, Macquarie.

Quick question I guess on the number of agency guys appointed during the fourth quarter, 32. How much of premium do those agents write? I think you had put out a number for the first three quarters. Just curious if those were larger, smaller, relatively similar?

Well, just in the fourth quarter those agencies would have not contributed a lot to the new business, they're just up and running. Agencies appointed in 2011 wrote $14.9 million. So it ramps up two, three, four months after they get on board with us, so there is a contribution there.

Maybe I'm asking the question a little incorrectly. But I think in your presentation it's about $1.6 billion in the agency you had appointed during 2011 up in the first three quarters. I'm just curious is that another $400 million of upside potential in premiums you guys could write from those new agencies or have you not released that number yet?

We do track not only the number of agencies we appoint but the total standard commercial lines and personal lines premium those agencies write. We average right now about 22% of the personal lines premiums that our agencies write.

So when we make those appointments we would think over a period of say 10 years that just from those agencies we could hit that type of mark. Same would be on the commercial lines side, after 10 years we write about 10% of the agency's volume. And so we would expect that the lift we'll get from making those appointments would be in that range.

Nothing that's happened over the last let's say five years would discourage us from believing we couldn't have the same kind of penetration in agencies we've been appointing recently.

Okay, that's helpful. And then I guess just talking -- I think on the last conference call you guys had talked about the delta between pricing for one-year policies and three-year policies and how it had expanded a little bit. I'm just curious, one, does the commentary about pricing of low- to mid-single-digits, does that encompass both one-year and three-year policies? And then, two, could you guys comment on maybe where the delta is between the one- and three-year policies right now or in the fourth quarter?

Well, yes, it does include the one- and three-year policies in terms of our averages. We would typically charge somewhere in the range of 5 percentage points different between a one-year and a three-year policy. And so, something would be typical right now for a one-year policy would be in the mid-single-digits, 4% or 5%. So we would go up as high as 8% or 9%, maybe 10% on a three-year policy.

The marketplace atmosphere right now is such that there is a lot of -- our three-year policy has always been a strength and most especially at a time like this. So we're being careful to make sure we're getting a premium for the three-year policy and our agencies are finding it sellable and very attractive to be able to offer that.

Okay, that's helpful. And then I guess lastly, just thinking about capital, I mean obviously 0.8 premium to surplus, a lot of capital at the holding company. And I know over time you guys have been able to grow book value given the size of the equity allocation. One, I guess, are you guys comfortable about 25% of equities for your total portfolio? And then two, I mean do you guys continue to believe you create more shareholder value by holding that extra capital in equities?

Yes, make sure by the end of this I've answered your question. So, I do believe that we feel comfortable with the 25% in equity. I think if we have growth patterns as the -- what is excess capital? The definition may have changed a little bit as we went through the '08/'09 period as we've seen the weather that we've seen.

We think for a growing company it's good to have strong capital. And that's been a great thing about Cincinnati; over the 60-year history we've never been constrained for capital to grow. And so we want to make sure that we have plenty of capital to grow.

We want to balance that with returning capital to our shareholders and we do that we think with the dividend, we've increased it for 51 consecutive years now. We repurchased shares in each of the last three quarters. So we're just going to balance it over that period of time and make sure we've got plenty of capital to grow, but also make sure that we're returning capital to our shareholders.

That's very thoughtful and helpful, thank you. And last question I guess -- and I know you guys had talked about the loss adjustment expenses and the change in allocation there. But I guess for the fourth quarter it looked like the accident year loss ratio excluding catastrophes was quite a bit lower just for the business overall versus the first three quarters of the year, your sort of 9/30 year-to-date number.

And just curious, was there a true up with the 2011 accident year going on during the fourth quarter or maybe can you talk about some of the thought process in the lower accident loss ratio?

We think we're getting a good improvement in the accident year loss ratio, we do feel we were benefited by -- a little bit by our true up -- doing the true up of the AOE during the final calendar quarter we think probably benefited the accident quarter by about 6 loss ratio points.

Okay, that's helpful. Thank you.

Scott Heleniak, RBC Capital Markets.

Just a couple questions. You gave the $5 billion premium target and I'm just wondering what you foresee E&S premiums being as part of that $5 billion and also personal lines roughly? Do you expect the mix to be sort of the same, personal lines versus commercial, and where do you see E&S fitting in there?

This is J.F. I'll give you a rundown on what we're projecting. In the commercial lines area we're looking at about $3.4 billion, and personal lines about $1.2 billion. CSU, our excess surplus lines subsidiary we're targeting about $160 million and in life insurance $290 million.

Great, that's helpful. And the next question I had was just on you guys have talked a lot this year, the past several quarters about predictive modeling. I know you've put a lot of effort into that. Just wondering, is that completely rolled out to -- fully to most of the lines that you want or is there more room for that in 2012 in the next couple years?

Well, on the workers' comp side it's fully rolled out and we've been using it now for almost two years. On the commercial lines side it's in the process. In other words our entire book of business has been modeled, but we're coming up on renewals for all of that. And so we still have a ways to go for all of our renewals to have received the contribution of the insight that the model is going to give us.

So it's in process right now, it's going we think very well. One indicator that we'd like to see is that -- and there was a question earlier about whether or not we can grow to these levels profitably, writing new business, the new business that will be required. The model is showing that the new business that we're writing has drastically improved.

By virtue of having the model and running the prospective new business through the model we're seeing the projected loss ratios on new business are actually very good. And so in addition to agencies being particularly careful with us when they first put business with us after a recent appointment, we have the benefit of the model helping us in that particular area.

So in all areas, both renewal and in new business, we're seeing a tremendous benefit from the model. It will continue to be refined, we'll be coming out with a next generation of our workers' comp model. As you all know, it's a process, the model is not a stationary target, but it's worked out very well for us.

And, Scott, I might just add a little more about the personal lines as well. It has gone through three rate revisions, three annual rate revisions now, it's really gained traction. We've got plans for a fourth. And so in addition to getting more rate we feel we're getting, on the personal lines side as well as the commercial, the rate where it's needed and we feel pretty positive about the rate increase and really the shift in the mix of our book towards what we feel to be a better risk characteristics.

And then along those lines a little bit (inaudible). As far as new business what's the differential between the price increases you're seeing on renewal versus new? And is there any class, geography in particular you're pulling back more because pricing is a lot more competitive? I know you kind of alluded to workers' comp a little bit, but is that where most of that is coming from?

Scott, I'll address the question on the differential between new and renewal. We think, as J.F. mentioned, we're getting rate adequacy in both areas, but we don't have, at least with us, a split between how much more adequate or inadequate new versus renewal might be for that part of the question.

Yes, I would say in terms of where we're getting the new business, as was mentioned in the release, we are getting a lift from the new appointments that we've made. That's the reason why we're growing in new business. Agencies that were appointed 2009 and previous, they were actually down a bit. That's a commentary on the fact that new business still remains fairly competitive.

Just by way of a description of the fourth quarter, on a direct basis our casualty premiums were up 3.7%, our property premiums were up 4.3%, commercial auto was up 2.5% -- this is all new business --- workers' comp was down nearly 30%.

We don't view that as an alarming amount, but it is a reflection on the conservatism that we're approaching comp. So I'd say as much as anything we're pretty satisfied with the flow of new business, the at-bats were getting, it's still competitive. But we're confident that how we're pricing what we end up writing is -- we're in a better position right now than we would have been a year ago.

Good detail, thanks.

(Operator Instructions). Paul Newsome, Sandler O'Neill.

I was hoping you might be able to help us get a better sense of the effective tax rate going forward. It's been jumping around a little bit and anything you can do to help us there?

Yes, I think might have Mike comment a bit, but I think the main thing is just the mix between our underwriting profit and our investment income and we've got a variety of tax rates -- underwriting tax that -- 35%, our gains are taxed at 35%. With our dividends received deduction and municipal bonds we've got varying tax rates there and Mike might have a little more color on that. But I think it's the variation in where the earnings are coming from and what the tax rate is for that particular bucket.

You're exactly right, Steve. And Paul, this is Mike Sewell. When you think about the effective tax rate, when we take our pre-tax GAAP book income at 35% with it being a little bit lower this year than the prior year, which was about $500 million versus $176 million this year, by the time you take the tax exempt interest and your dividends received deduction out, it ends up bringing you down to a pretty low number.

And so then when you calculate that we're at 5.61% effective tax rate in the current year compared to 24.7% in the prior year. So had our earnings from operations been higher we would have ended up with a more consistent effective tax rate.

So should we be thinking about tax rate in the 24% to 25%, 26% range that you historically have had?

If it were at the normal levels for our operating earnings, yes. Really when you look at it, Paul, the two drivers that's going to drive that down is the tax exempt interest and the dividends received deduction. And so then it's your operating earnings that's really going to be driving at the 35% rate.

Terrific, thank you.

Ian Gutterman, Adage Capital.

I guess first can I get a little clarification on the AOE? I think I follow what's going on, but I'm not quite sure. So, for example the 11 point improvement in workers' comp, was that a one-time catch up and 2012 won't include that? Or will 2012 have a worker's comp combined ratio all else equal 11 points better than I would have thought a quarter ago?

Yes, that was really a refinement that just occurred, that's not going to be re-occurring each and every year. So that 11.5 was really just the one time. And then on a go-forward basis things will look normal. The other -- if I look at this commercial -- some of the other ones were a little smaller fluctuations, commercial property was to the benefit of a 3.5, commercial casualty was up 2% because of it. On the personal lines side homeowners got a benefit of 1.6%.

Great, that's very helpful, thank you. Also the reinsurance (inaudible) and I want to clarify on that. You said your ceded premium will be less in 2012 than 2011. Was that because of the reinstatement paid in 2011 or was that apples to apples?

That's correct, Ian, that's because of the reinstatement premium and that's why we wanted to give two years. We're up about 8% from where we were two years ago. I think we did a good job, we looked at having had the largest two catastrophe losses in the history of the company, the new RMS 11 model has higher estimates for us.

So we thought it prudent and conservative to add another $100 million to the top of our layer. We also raised our retention up to $75 million. And I think one of the positives is if you look at it, and I don't even like to talk about it, but if you would have a $600 million event we estimate that would only be about 3% of our surplus with this new program where it would have been 4% of our surplus before.

So we think we've strengthened our balance sheet, our risk profile by adding that extra $100 million. And I think we'll pay about $10 million more for the expanded program.

Okay, great. So it sounds like if I take out the extra limit you bought on a sort of rate online basis your price actually didn't really move too much. It sounds like the 10% increase is essentially just for the extra limit?

That, but we did touch that layer of 100x of 100 and we got some rate increase there. It's a layer we hadn't touched before and we hit it last year with both events and in 2008 with Hurricane Ike. So we did have rate increase on apples to apples on some of the existing limits.

Okay. And were there any changes in terms, any restrictions on what's covered?

No, I think we were very stable there.

Okay, great. And then my last one I guess is a request as much as a question. But you mentioned obviously trying to get to $5 billion and obviously get there in the right way. Maybe in a future call you can give us a combined ratio target to go with that?

We tend to not be real granular in guidance. But we think that we need to be in the 95% to 100% combined ratio in terms of where we're going to be as we grow.

Great. I just want to make sure we're thinking below 100%, that's all I wanted to hear. Thank you.

Josh Shanker, Deutsche Bank.

I wanted to know a little bit about individual lines and reserving policies. There's a lot of movement going on in the reserve depending on what segment I'm looking at and so maybe you can go into it. Is there a chief actuary directing it? Are their various independent actuaries in each segment? How are we getting so much movement in various directions going on?

This is Steve, and we are consistent, we do -- this is actuarial best estimate recommendations. We think that there's been consistency across time in terms of the methodology and the way we go about our reserving. We have a reserve committee and definitely consistent over time. We have outside actuaries that also look at our reserves.

I think what added the volatility here in the fourth quarter is this all other expense refinement that we made in this quarter. And I think basically what drove it is we saw some of the catastrophe losses where we would have a big reserve go up and as we looked at the way it was being allocated and we talked to our claims people in terms of where they were actually spending the time, it was indicating that we needed to refine how we allocated the all other expense.

And so, our actuaries came up with a methodology that leans a little bit more on claim counts. Also in terms of interviewing the claims people. And so, that's the change. But in total for the calendar year it was not an impact at all. And again, we think we've got very consistent procedures and controls from our actuarial department.

So please interrupt me if I'm saying something incorrectly here. So on property, because of all -- you reserve very heavily for the significant claims and you found out claims count or claims severity was not as aggressive as you initially intended. So there was a significant reserve release based on claims offset slightly by allocating more AOE to those property lines? And then AOE was taken away from the casualty? I'm trying to figure out exactly how all the moving pieces are working there.

Yes, and we understand it's a little bit noisy here this quarter. But you're right, we did have favorable development on the actual estimates of these catastrophe losses. And that is also consistent with our history.

As we sit here near Nashville I remember the first estimate on the Nashville floods getting close to two years ago now. I think we estimated about $35 million for that and it came in mid-20s when it was finally settled.

So we are seeing favorable development. I think it's a strength or a tribute to our claims people in that we settled over 31,000 claims with our own people. And I think by getting boots on the ground, getting them out there, getting them settled quickly we were able to bring them in under.

So that's kind of a separate issue. And we benefited the quarter by about 3 loss ratio points there. A totally separate issue had to do with just how we allocate the all other expense and that was a refinement, as Mike described, here in the fourth quarter.

In a catastrophe heavy year why would the AOE rise in the casualty lines?

Well, I don't think that the AOE necessarily did rise in the casualty lines. In other words workers' comp, it actually went down some. So I think you've got it.

Josh, when you look at the AOE, the incurred for the calendar year ratio, there was no change between the two years. It was 6.3% for each year. So again, it's just the allocation between the individual lines.

Understood. And completely unrelated in a rising stock market like we've been having for the last say 15 weeks, does this give you an opportunity to take some profits on certain high dividend yield stocks reallocating to some that didn't meet the threshold? What's going on in allocation among equities?

This is Marty Hollenbeck. We haven't dramatically changed -- the big run-up in equities the last few months really largely just offset the decline in the third quarter of last year. In our type of stocks the high-quality dividend growers generally underperformed certainly in 2009 and to a lesser degree in 2010. So we think there's a little more room to run.

We like, as Steve mentioned earlier, the allocation to equities and the type of stocks we buy, not just for the long-term growth potentials, but for the income vehicles, low interest rate environment. Had we not had the allocation we have to type of stocks we buy we would have shown a decline in investment income both for the quarter and the year. So certainly dividend increases have carried the day for us on the income front and the investment income front.

Okay, thank you. And congratulations on the quarter. If I can suggest in the 10-Q or 10-K, please try and hold our hands through all these reserving changes. You guys give us great information and I expect you to do so again.

We will have that.

All right, thank you very much.

Ray Iardella, Macquarie.

My follow up on the reinsurance program was asked. So, thank you.

Fred Nelson, Crowell, Weeden.

It's a great conference call. I feel like I was watching the Super Bowl when Clint Eastwood said the players are in the locker room, it's halftime and when they come out, wake up, America, 'cause there's going to be some big changes for the positive coming. And I really appreciate the greatness that you gentlemen and ladies do and all the team effort to do this.

The question that I keep having coming to me in my little business world is if you're an insurance company and premiums are sold for checks and money comes in, and in an interest-rate environment at basically zero, what do you do with that money to protect so that you don't have a disaster with a money market fund or a bank failure? Where does the money go in the short-term and it doesn't bring one iota of income back?

Well, Fred, we certainly, like a lot of folks in the fall of 2008, took notice of what happened with the money markets. We're very cautious to spread that around and not have big concentrations. But the fact that cash yields nothing is literally unavoidable these days. So we have to be very careful and we don't -- we have not increased our risk profile in any attempt to chase yield or return. So we're very cautious out there and we do spread it around.

You can't increase your allocation to equities that pay 4% or 5% and do have -- that fit your parameters? You're kind of meeting that parameter right now in the maximum?

I wouldn't term it that way, Fred. No, we've got some room.

Good. That's important to hear because people ask me that. Thank you again, gentlemen.

There are no further questions at this time. I'll turn it back over to Steve Johnston.

Thanks, Steve, and thanks to all of you for joining us today and we'll look forward to speaking to you again in the first-quarter call.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.