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Cincinnati Financial Corp. (NASDAQ:CINF)

Q4 2008 Earnings Call

February 05, 2009 11:00 AM ET

Executives

Heather J. Wietzel - Investor Relations

Kenneth William Stecher - Chief Executive Officer, President and Director

Steven J. Johnston - Chief Financial Officer, Secretary and Treasurer

Jacob F. Scherer Jr. - Executive Vice President, Sales & Marketing

Martin J. Mullen - Senior Vice President, Field Claim and Headquarter Claim

Analysts

Dan Schlemmer - Fox-Pitt Kelton

Paul Newsome - Sandler O'Neill Partners

Mark Dwelle - RBC Capital Markets

Michael Phillips - Stifel Nicolaus

David West - Davenport & Company

Craig Rothman - Millennium Partners

Operator

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.

Heather J. Wietzel

Thank you, Jennifer. Hello everyone, this is Heather Weitzel, Cincinnati Financial's Investor Relations Officer. Thank you all for joining us today. This morning we issued our news release and our results along with our supplemental financial package. On Monday, we issued a news release on our dividend and published the listing of the securities we owned at year-end. If you need copies of the release and periods (ph) please visit our investor website at www.cinfin.com/investors from there the show for the information is in the far right column to view results quickly.

On the call today, President and Chief Executive Officer, Ken Stecher and Chief Financial Officer Steve Johnston will give prepared remarks after which we'll open the call for questions. First, please note some of the matters we discuss today are forward-looking. These forward-looking statements involve certain risks and uncertainties. With respect to these risk 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 is required by Regulation G is provided with the release and also is available on our website. Statutory is important for statutory accounting rules and therefore is not reconciled to GAAP.

With that, let me turn the call to over to Ken.

Kenneth William Stecher

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 advantage 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 establishing prior periods and many big strides in the transition to a more diversified investment portfolio.

What's more important is what we're trying to accomplish for the future and how we're going to get there. In today's release, we defined the way in which Cincinnati's Board management plan to measure our progress going forward. So in 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 stake holders. I am going to talk about why we felt that it is important to articulate a longer-term performance objective, and how we'll be able to achieve that objective from where we are today. So, let me begin with why we're 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, clearly was focused on results for the next several quarters. We don't want or expect anyone to ignore our results for 2008 or 2009. Well 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 have we're going to reach our objectives. I'll start with what we're not going to do. We're not going to change our agent center field focused approach. We're not going to abandon our 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've talked a lot about this topic over the past six months. On Monday, we announced the Board was taking a conservative stance and maintaining our quarterly dividend at $0.39 per share for now. We'd 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 $1 billion in cash, which gives us great flexibility. Applying our new investment parameters to self 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 surplus ratio for the full year was a healthy 0.9 to 1. The industry ratio was estimated at the same level at September 30th. In 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 risks in 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 represents Cincinnati.

During 2009, you can expect to see maximum 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 in 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 stock among the go through carriers for our agencies.

Over the course of this year, we also expect to introduce expanded online services that agency have requested for policy holders. Later this quarter, personal line policy holders who rebuild for our agents, will be able to visit our website to make payments. This is not a 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'll be implementing a data warehouse to support more accurate pricing and underwriting across the entire business. We are investing in all of this technology to add efficiencies and improved management information. Our 2009 budget for these projects is about $50 million. We think we'll start to see the full payoff for both Cincinnati and agencies in two to three years.

One of the most important ways to 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 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 re-pricing, these programs helped us to achieve very respectable 13% new business growth for 2008.

We expect they will contribute again in 2009 and should reach a critical mass in 2010. The growth initiatives start with our entry into excess and surplus lines to better server agents. Today, they're right about 2.5 billion annually of E&S business with other carriers. We want to earn our fair share by growing Cincinnati's client service to those clients.

In 2008, our first year we were 14 million in the E&S premiums and met our operating objectives. This is probably been the most expensive of our growth initiatives that made in here if costs are relatively low. Entering in the new states was never important source for new business in 2008 and as the potential we took very substantially going forward. We generally are able to reach 10% share of agencies business after 10 years.

In Delaware, in Mexico and Washington, we reported agencies that write about 400 million annually with all the carriers that represents. 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 to write about 750 million in premiums annually. Texas is quite an opportunity. Finally, we're 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're still making appointments targeting 65 in 2009. Looking at personal lines by mid-year we expect to have made more advances using Tier 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 at 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 2009 and we'll do so in 2009. Based on the market share we captured in the late 1990s and a similar expansion, we could generate nearly 35 plus million of claims (ph) annually as our personal lines relationships with the agencies mature. These growth initiatives bring the advantages of expanding our geographic footprint or reducing our catastrophic exposure of risk.

In summary, we're focused more on specific measurement strategies t help our agencies for profitability and led us achieve the objectives we have established for our company.

Now let me turn it over to Steve.

Steven J. Johnston

Thank you, Ken and good morning. I am going to make a few observations about the results highlighted on our risk management initiatives, starting with underwritings and catastrophe risks, then we'll cover loss reserve, investment, liquidity and capital risk management. I'll finish out with some additional detail on the drivers of our long-term value creation we can't just describe.

I'll start with underwriting risks including catastrophe, despite experiencing the largest catastrophe loss in the company's history, our GAAP combine ratio for 2008 was 100.6. This is the first time we've above 100 since 2001. Effective use of reinsurance helped us to manage our catastrophes risk relatively well. Our catastrophe reinsurance program attaches is relatively conservative $45 million with co-participations layer-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 2 loss ratio points for the year. Our recently renewed catastrophe still attaches $45 million although our co-participation in some of the layers about 105 million is higher as detailed in the press release. We're... with the retention of our 2009 property and casualty working treaties by $1 million.

We continue to balance cost 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'll probably notice 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 transition most of the associates out of our defined benefit pension plan and into 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 derive associates meaningful retirement benefits that should also help us meet pension related expense and more importantly volatility going forward.

With respect 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 actual range. Nothing changed in 2008, in terms of our reserving philosophy. As this is a norm the actuaries performed in difficult third year and the fourth quarter generating the outside 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 of refinement of redistributed IBNR from prior accident years to accident year 2008.

Moving on to investment risk management this is an area where our strong capital liquidity have historically now 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. Money is home back and the investment teams 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 30th.

In terms of individual stocks, we completed the sale of the rest of the Fifth Third position in early January. We began so Fifth Third in October of 2007. Over the 16 months with only totaled 72.8 million shares at an average price of $12.91 for a total realized capital gain of 654 million. Prior to the first dividend cut our yield to cost was 37% and we have collected more than $560 million in dividend from Fifth Third just in 2003. We also reduced risk this year by ending our securities lending program and only 1.7% of the investment portfolio which carries us just 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 non-convertible, non-callable debentures that are due in 2028 and 2024. For additional finding and flexibility at the parent company we have an additional 1.3 billion invested assets including $344 million of our cash.

At the property casualty subsidiary level common stocks are near of 50% of surplus and the line business premium surplus ratio of 0.9 to 1. We think we're in good shape to continue to invest to achieve our long term objectives; at this time and we reserve the right change our mind in anytime 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 historically practice.

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

To achieve the 12 to 15% measure by equation as Ken mention, we're looking at three assumptions about our business. First, there are net written premium can go faster than the industry over any five year period. Second, that we can underwrite to generate consistently profitable insurance operations, that is a 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 markets to begin differ in 2009 and second we're assuming that the economy and the market to get back on track during 2010.

In 2009, we will be very hard pressed to hit our five year target 12 to 15%. The economy is likely to create challenges for us as well as for others. It is potential for business closures, shrinking payrolls, declining receipts and other exposures basis; creating considerable uncertainty for any short-term forecast both on the premium side and on the loss side. So as part of the reason, we are looking at a longer term measurement. We successfully navigated through tough environments before guided by our long-term focus on cultivating our agency relationships, making decisions at the local level providing excellent client service, adequately reserving and investing for the long term. We are confident and we will continue to do so. Ken?

Kenneth William Stecher

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 the agency to 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're 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, Martin Mullen, J.F. Scherer and Martin Hollenbeck are here with Steve and myself and are available to respond. Jennifer, we're ready for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Dan Schlemmer.

Dan Schlemmer - Fox-Pitt Kelton

Good morning. Hello.

Kenneth William Stecher

Good morning.

Dan Schlemmer - Fox-Pitt Kelton

Hi sorry, I wasn't I think I heard my name in there wrong or something. Question on the Fifth Third, I just want to make sure how did you write. You are saying, as of today you don't own any Fifth Third is that what I heard correctly?

Steven Johnston

That is correct.

Dan Schlemmer - Fox-Pitt Kelton

Okay. And on the personal lines, the 11% up this quarter, is there... you reference the rate changes. Is that really what's driving in and can you break it out into volume versus rate change. And then is there anything else in there worst that's 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's coming from?

Jacob Scherer, Jr.

This is J.F. The new business that we're receiving is concentrated on a lot of our new appointments. We increased our new business writings in personal lines by about $3.8 million, and agencies that we've appointed in 2007 and 2008 are simultaneously with that and accordance with our models and curing for personal lines we've improved our competitiveness on the better highly weighted scores and we're gradually raising rates on the poorer scores.

So that's resulted in some better results from us. And the agencies that we've had on board previous to 2007 did not broke-even in terms of the new business we were at this year versus last. Like the signs that we're 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're seeing some of the benefits of changes we've made.

Dan Schlemmer - Fox-Pitt Kelton

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, down all over, is it more targeted and that part of the question I was really thinking geographically. And then obviously you're 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?

Jacob Scherer, Jr., Jr.

I think we're seeing mostly down on the better insurance scores. We found ourselves and it's not consistence geographically that we were simply not properly priced. And so we have as we talked about previously been examining various states and various regions of states as to where our competitiveness would be.

We're guided by the scoring mechanisms that we have in placed right now making certain that we're not been adversely selective against where we're too highly priced on the better insurance scores into low price on the worst scores. So really I think our concentration, though we do know from agency back in any geographic area whether or not are base rates just simply have made us uncompetitive. We are really tweaking more towards the model at this point, more so in necessary geographical concentration... we want to be competitive with price obviously everywhere and the models guidance.

Dan Schlemmer - Fox-Pitt Kelton

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 a redistribution of 69 million in reserves. Can you give us a little more detail on that or is that a just a standard year end adjustments that you guys have historically made or is that something unusual?

Steven Johnston

Sure Dan, this is Steven. 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're actually up about $190 million in total reserves from year end 2007 to year end 2008. As I did do a thorough review looking at the risk by accident year and so forth looking at how they allocate and handle and even 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 ends the effect of making the accident year 2008 that we look two points higher than it would have been absence of change. Think on a go forward basis, we're really pretty much in the same position as we move into 2009, 2008 will be part of all prior years.

Dan Schlemmer - Fox-Pitt Kelton

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

Steven Johnston

I think that's a fair characterization.

Dan Schlemmer - Fox-Pitt Kelton

Okay, fine. Very helpful. Thank you and congrats on a good quarter.

Steven Johnston

Thank you, Dan.

Jacob Scherer, Jr., Jr.

Thank you.

Operator

Next question comes from Paul Newsome from Sandler O'Neill Partners.

Paul Newsome - Sandler O'Neill Partners

Good morning.

Steven Johnston

Good morning, Paul.

Paul Newsome - Sandler O'Neill Partners

First question, do you really just think conceptually about your accident year and what... it looks you've got a pretty high accident year result. What immediate steps are you thinking about try to improve your accident year?

Steven Johnston

I think, you make a good point Paul. I mean we haven't had a combined ratio. This has been over 100 since back in 2001. I think 2008 was a satisfactory year given the adverse levels are coming just a tick over 100. As we do look at the accident year, even with this reserve adjustment, I'd say adjusting from the cash in the reserves that will be 202.5. That's higher than where we want to be.

And so I think all the initiatives that Ken mentioned, we're taking very seriously in terms of increasing the technology, increasing the pricing position, bringing in the predicted modeling for workers compensation and more of the scoring in multi barrier analysis on the personal lines side. So I think everybody in the organization throughout the organization knows that we've got challenge ahead of us. But I think it's a great underwriting company and I think we'll step up to the challenge.

Paul Newsome - Sandler O'Neill Partners

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

Jacob Scherer, Jr.

Paul this is J.F. the market really isn't giving to us as of yet however and it is all over the board in terms of what we're seeing in terms of just general market pricing. All of our field reps are meeting with all of our agencies to discuss renewal pricing there in conference calls with our underwriters and 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 affirming 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. I guess in terms of what we're able to do as far as pricing, we're taking at right into the agents offices and working very hard with that.

Paul Newsome - Sandler O'Neill Partners

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 stock market effectively. And if you're doing that and my guess would be something like 10 to 12%. Is that suggesting sort of 0 to 3% return on the insurance business?

Steven Johnston

Paul, this is Steve and I think alright, with the long-term forecast is kind of like having in a equation with multiple and knows (ph) and so we can get there under a variety of different scenarios, the one you presented... as oppose as one of them, I think if as we look at the more likely scenarios, I think we would see what... we wonder what has to be driven by a lower assumption on the investment return and higher return on the underwriting side.

Paul Newsome - Sandler O'Neill Partners

Great, thank you very much.

Steven Johnston

Thank you, Paul.

Operator

Your next comes from Marc Bermann from Citadel (ph).

Unidentified Analyst

Good morning. Kind of really to follow up on Paul's question on the accident year, as I study what is the page 20 of your supplement and I look at the quarterly trend or the year-over-year trend, I mean is there anything else its going on 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 in the 2009, I mean what type of visibility do you have on that given inflation and pricing trends?

Steven Johnston

That's a good question Marc. And I think that when we talked about this reserve refinement of 59 million, most of that did take place in the fourth quarter.

Unidentified Analyst

Yes.

Steven Johnston

And so, you are going to see the distortion for the whole year kind of showing up in the fourth quarter. We also have some reallocation between the lines with commercial orders and workers comp taking some of the increases. So I think the year-over-year numbers are the more stable ones to look at, and kind of getting back to refer, before we do have a lot of work to do. I think Ken has laid out the initially, I'll not describe those numbers more fully but I think that everybody here realizes the work that needs to be done, and we're prepared to attack it.

Unidentified Analyst

Thank you.

Kenneth William Stecher

Yeah thank you Marc, I think predicting the model is something that we're starting with workers comp I think it is something that we have to carry on to other lines. The data quality, data warehouse project we mentioned I mean those are the things I believe that our carriers are using to slice and dice to our data and 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 ... almost described in my comments about when we're going to deliver technology, this is something that has no unique... or unique for other companies but to us, it's a new approach and sense of urgency is being set there. It's 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 submit the relationship which will deliver greater value in our view in the long-term.

Unidentified Analyst

Thanks for the call.

Operator

Your next question comes from Mark Dwelle from RBC Capital Markets.

Mark Dwelle - RBC Capital Markets

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

Kenneth William Stecher

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 I'd say two tenths or three tenths 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 of may confirm (ph) obviously that will help offset some of those costs also.

But I think its something that we need to do for multiple reasons and this is the future I think of our industry. To not do what I think would put us a 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 the additional opportunities but we have not baked anything into that, at that point of, two to three tenths of a point combined with that increase that I mentioned.

Mark Dwelle - RBC Capital Markets

Okay. And with respect to investment portfolio it sounds like you've completed the vast majority of the restructuring or reallocation that you are set out to discuss couple of quarters ago. Is that a fair assessment or is there is some further evolution, may be I'm not in terms of specific tactical decisions but in terms of broad mix of assets and classifications between taxables and non-taxables etcetera?

Kenneth William Stecher

Hey Mark I mean, you're correct in your assessment there, most of the heavy lifting has been done although there is continued tweaking in the portfolio and again an ongoing basis, we intend to be more responsive, a little more proactive. But some of that, the bigger changes have already occurred. Yes.

Mark Dwelle - RBC Capital Markets

Okay. A question in terms of the... I guess pricing environment and business opportunities. As you're 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 not offset by corresponding rate increases or upsides to keep that inline?

Jacob Scherer, Jr.

Mark, I think on the property side, we're not seeing, at least nothing noticeable in the way of the decrease in property values, building values, content values, where you see it mostly is in the payrolls and the sales area anything that's predicated on payroll and sales manufacturing, construction in that area. Its spotty, we've been out on our sales meeting to a couple of weeks ago talking to agencies. Along the feed back we get as on the commercial construction side that many other contractors still are fairly busy.

We do business in lot of college towns, state capitals things of that nature. So interestingly enough, we almost expected to be a real negative in the construction area everywhere. But the pipeline is not particularly full as you could imagine for others commercial contractors. Residential contractors had already taken a fairly significant diet last year. So in terms of terms, conditions we're simply seeing what the economy is dealing to policy holders nothing remarkable in terms of decreases in building values probably not as aggressive an approach at rising building values. And we're trying to take a very close attention to that to make certain that the insurance to value doesn't get out of balance for our policy holders.

I might go back to your question Paul answered as well as for its outlook, how we are approaching renewals. We assemble the whole field team and decided to work on the renewals as well as the new business. They are meeting in agents offices are field claims reps or the loss control reps 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 what are the insurance is being sold. So we're 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're attacking very hard perhaps to bottom 5% of our policy holders that because of a variety of reasons no longer qualify, I mean based on our under writing guideline.

Mark Dwelle - RBC Capital Markets

Thanks for a 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 may be discuss a little bit how you are 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 any chance that it would be reduced?

Kenneth William Stecher

Well Mark this is Ken. What we're doing is we gone through in quite a bit of modeling. And the things we're considering are, what is our payout ratio and what does it look like, say for the next five or six years. We're also looking at how we would fund that normally for most companies like ours, the property casualty or the insurance group would pass up where upstream dividends will help fund that dividend payment at 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 premiums or written... written premiums of surplus ratio, things like that. It is a record, as I mentioned in my comments that we're really proud of.

We do want to continue that if at all possible, but we also have to be cognizant in the fact that we do have to maintain the ratings that we have, best to the A plus best, still puts us in some pretty good company. So we want to be careful with that. But I think while we margin all f these things, we're going to be fine. We don't know what the economy is going to do. Some of the comments you made is 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 cost and we have some infrastructure. So that comes into play also. So I think, right now we feel confident with 1.3 billion of assets to the parent company level. We have liquidity to maintain that for three-four years easily. The decision would be, do we want to either way at that liquidity to maintain at it or we want to stabilize or whatever decisions may we make. Hope that I can have give you the thought process.

Mark Dwelle - RBC Capital Markets

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

Operator

Your next question comes from Michael Phillips of Stifel Nicolaus.

Michael Phillips - Stifel Nicolaus

Thanks, good morning everybody.

Kenneth William Stecher

Good morning, Mike.

Michael Phillips - Stifel Nicolaus

Steve, I think Steve alluded to this earlier on one of the questions about the reserve reallocation time line, not doing that with the line and so that might help explain some of this. But I was looking at the comments, I guess if its back, what else might be behind the scenes and the quarterly results and both personal auto and workers comps it seems to jump up a bit this quarter?

Steven Johnston

Yeah Mike, that's excellent question and the reallocation did have an impact there. But I don't want to key any quote (ph), 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, can be cyclical and we're focused on it in introducing the predictive modeling and rolling up our sleeves and making some improvements there. But, I guess the answer to your question, the reallocation did have, did certainly have an impact.

Michael Phillips - Stifel Nicolaus

Okay. Besides that nothing else in terms of random worse... I think it was a pretty big jump in both lines, it can...

Steven Johnston

Mart if you have...

Martin Mullen

Michael, this is Martin. In the fourth quarter, we did see as in a particular details in the fourth quarter new losses. We have a 15% increase and our new losses between 250,000 to a million. 15% of the dollars equated to that increase, we can't do our general liability line and of course that's one of our largest line in our commercial book. Fortunately in January that'll return to normal range level in January timeline so, that was some of the activity in fourth quarter that we saw increase.

Michael Phillips - Stifel Nicolaus

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

Steven Johnston

I think most of the commentary is on the top line but exposure base for worker comps in payroll for all our general liability policies that's receipts in various exposure basis are designed to go up and down as the economy goes up and down, and as the... somewhat very as well as the losses with these economy sets and its exposure basis. And I think that's what makes it so tough to predict is that we're going to have movement on both sides of the loss ratio.

Michael Phillips - Stifel Nicolaus

Okay. Fair enough, thanks Steve.

Steven Johnston

Thank you.

Operator

The next question comes from David West from Davenport & Company.

David West - Davenport & Company

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

Steven Johnston

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 as it was actually in cash.

David West - Davenport & Company

Okay. That was that I thought ahead. Okay 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 when would you think that could go?

Jacob Scherer, Jr.

Sure. We are very happy with our first year as was mention in remarks, our agents write $2.6 billion in the aggregate of that system surplus lines business. We are now up and running in all lines property, casualty miscellaneous professional and E&O in 33 of 35 states we're active in. We are not active in Delaware State of domiciles and we're not active in Florida at this point in the E&S business.

We are not a market for the entire 2.6 billion obviously there are agents right, but we are.... we would have an appetite range for something pretty a 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.

Kenneth William Stecher

David, as an example, last year we got also slow start. We had less than 1 million in the first quarter and the fourth quarter as the written premium was up to 5.7 million. So you can kind of see the progression of our ability to grow this as we get back to in more states with the agency. Well we're used to our new technology in our process, so you could can see a amount or kind of a estimate where it land, right?

David West - Davenport & Company

Right.

Steven Johnston

In 2009. We haven't given a specific guidance on E&S premium.

David West - Davenport & Company

Very good. As you've gone through these strategic initiatives have you rethought your use of multi-year contracts or do you think that's going to be a continuing part of your landscape for Montana?

Steven Johnston

It's been a part of the landscape since 1951 and we would anticipate that it would stay there. It's 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. And I think it's worth mentioning and reminding that about 75% of our premium is subject to re-underwriting and re-pricing a year, even though we used the three year policy.

It does mean that if we re-price and account today that on the property and the liability, the rates of 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 re-pricing and re-underwriting as we move forward. But to some total of all of that I think our agencies would feel based on the cost of marketing and insurance as well as the stability and persistency of a policyholder. The three year policy for the long-term serves us very, very well.

David West - Davenport & Company

Thanks very much.

Operator

Your next question comes from Craig Rothman from Millennium Partners.

Craig Rothman - Millennium Partners

: Just going back to the question on the impact on loss trends from the weak economy. Are you pricing in or factoring that into your loss ratio picks. The impact from potential more hazard in that.... in this economy?

Kenneth William Stecher

In terms of more hazard, I mean that one is hard one to get specific on in terms of picks, because actually I've rate studies on both sides of the issue as we have tough economic times. I mean one, we'd say for workers comp situation that a person would maybe more likely to enter their back on the job before they got laid off.

On the other side, in the tough economy, people may be that much more diligent and careful to not a have a loss, to exacerbate the problems that the economy is causing. So I've rate studies on both sides of the coin in term of the more hazard that's presented by the economy. So, no we haven't really specifically picked the target there.

Craig Rothman - Millennium Partners

Okay. And then within workers comp in commercial auto that's quarter-over-quarter combined or the loss ratio has jump 30 points. Can you still average that I know you touched on workers comp before it was, within any specific states or real issues or are you starting to see any sort of trends that are new?

Kenneth William Stecher

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

Craig Rothman - Millennium Partners

And commercial auto?

Steven Johnston

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

Craig Rothman - Millennium Partners

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

Kenneth William Stecher

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 haven't forbid a loss to the entire $500 million limit. During 2008, I believe would have resulted in about $105 million loss to us, in 2009, that would be 118 million.

We're also taking a little bit more exposure on the access into risk contracts with 1 million higher retention moving from four to five and five to six respectively, but when you look at everything, I think that's still a very conservative position for a company of our size and financial strength to had a cap right there with, it attaches a $45 million and again we balanced the cost and the exposure and we think we'll bring the cost and in just about equal to maybe a little bit down from where it was in 2008. But we are taking on more exposure.

Craig Rothman - Millennium Partners

Okay. So just thinking about this all together, thinking about the axe in your loss ratio trends, the uncertainty about your potential warehouse or the economy, the investment environment, the higher insurance was... how come you're just not raising pricing regardless of what the market is doing right now?

Kenneth William Stecher

Well that's a little bit more our conscience sometimes when you're trying to preserve good accounts. We are trying to raise pricing on a account-by-account basis. We are protecting the very good accounts as I mentioned earlier, we are having some luck in certain areas. It's really on an account-by-account and agency-by-agency approach to thing. Everyone out there is talking about burning (ph) pricing. The decision comes though when you get right down to the quality of the account, knowing the account, and good communication between the agent and the home office. So we are very, very focused on them.

Craig Rothman - Millennium Partners

Okay. Thanks a lot guys.

Kenneth William Stecher

Thank you.

Operator

(Operator Instructions).

Kenneth William Stecher

Any further question Jennifer? Jennifer?

Operator

At this time there are no further questions.

Kenneth William Stecher

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

Operator

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

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