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Cincinnati Financial (NASDAQ:CINF)

Q1 2012 Earnings Call

April 27, 2012 11:00 AM ET

Executives

Dennis McDaniel - VP, IR

Steve Johnston - President & CEO

Mike Sewell - CFO, SVP & Treasurer

Steve Johnston - President & CEO

J.F. Scherer - EVP

Analyst

Mike Zaremski - Credit Suisse

Vincent DeAugustino - Stifel Nicolaus

Scott Heleniak - RBC Capital Markets

Paul Newsome - Sandler O'Neill

Ron Bobman - Capital Returns

Ian Gutterman - Adage Capital

Matt Rohrmann - KBW

Michael Zaremski - Credit Suisse

Ron Bodman - Capital Returns

Josh Shanker

Operator

Good morning. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2012 Financial Results 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. Thank you.

Dennis McDaniel

Hello. This is Dennis McDaniel, Investor Relations Officer for Cincinnati Financial. Thank you for joining us for our first quarter 2012 earnings conference call.

Late yesterday, we issued a news release on our results along with our supplemental financial package, including the final version of our quarter-end investment portfolio. To find copies of any of these documents, please visit our Investor website, www.cinfin.com/investors. The shortest route to the information is the quarterly results link in the navigation menu on the far left. On this call, you'll first hear from Steve Johnston, President and Chief Executive Officer; and Chief Financial Officer, Mike Sewell. After their prepared remarks, investors participating on the call may ask questions. At that time, some responses may be made by others in the room 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 Matthews; Chief Investment Officer, Marty Hollenbeck; and Chief Claims Officer, Martin 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 is not reconciled to GAAP. With that, I'll turn the call over to Steve.

Steve Johnston

Thank you, Dennis. Good morning and thank you for joining us today to hear more about our first quarter results. We posted a strong first quarter with nice premium growth, and most importantly, we grew profitably. Investment performance was also strong and we more than covered our dividend with operating earnings, allowing us to grow book value. Previously announced catastrophe losses at 11.1 loss ratio points were more than three times higher than our long-term average for the first quarter, and yet we produced an underwriting profit with a 99.1% combined ratio.

We continue to earn higher pricing and healthy level of premium growth in all of our property casualty segments. In our Life Insurance segments, earned premiums rose at a double-digit pace during the first quarter. Our ability to deliver more precise pricing through analytics and our strong underwriting combined with more favorable market conditions also continue to give us confidence that our premium growth meets our criteria for profitability.

Commercial Lines renewal pricing was a notch above what we experienced in the fourth quarter, with an overall average increase in the low to mid-single-digit range. Workers compensation led the way with just over a 10% increase in our smaller commercial property policies that renewed during the first quarter were in the high single-digit range.

For our Excess and Surplus line segment, renewal prices increased for the 19th consecutive month and were up in the high single-digit range for the first quarter. Our Personal Lines business is also benefiting from rate increases over successive years and renewal premiums rose 12% in the first quarter. Policy retention continues to remain steady for each of our property casualty segments and new businesses continuing is contributing to premium growth.

New business premiums rose 6% with the more newly appointed agencies driving that growth. Our goal for new agency appointments during 2012 is 130 and we appointed 56 new agencies in the first quarter. That puts us at over 40% of the full year target. We've been out visiting with agents at our annual sales meetings. So far we have met with agencies from 25 states and in May, we'll have meetings with the agents in the balance of our states. It is encouraging to see how skilled our agents are at conveying the value of our products and services and they continue to work with us to implement price increases where they are needed. Our pricing analytics are helpful in distinguishing the more attractive new business opportunities from the less attractive ones giving us a good sense of when to walk away from business that we believe is underpriced.

Loss experience that was favorable in many respects, added to the benefits we are seeing from better pricing. Paid losses other than catastrophes were down 1.3%, a good sign given that earned premiums were up 7.1%. Our catastrophe losses were limited to specific areas and most of our operating territory benefited from milder than usual weather.

Fewer new large losses, which we define as $250,000 or more per claim, were largely responsible for improvement in current accident year results. While we realized that large losses naturally fluctuate quarter-to-quarter, we are encouraged by overall paid loss trends, which were a big reason that we experienced favorable reserve development on older accident years. Mike will discuss that more in a moment.

The first quarter provided a good start toward reaching our annual value creation ratio target of 12% to 15% with a 4.6% contribution for the first three months. While we can't expect every quarter to include so much lift from a higher investment portfolio valuation, we like our investment strategy for the long-term and we'll stay focused on what we can control such as careful underwriting, adequate pricing and excellent claim service. Now, Chief Financial Officer, Mike Sewell will further comment on financial items including investment results and reserves.

Mike Sewell

Thank you, Steve and thanks to all of you for joining us today. Let's begin with investment results. Investment income remained steady, largely reflecting a 2% increase in the cost basis of our bond portfolio that offset a slight decline in average yield. The pre-tax yield for our bond portfolio for the first quarter of 2012 was 12 basis points lower than a year ago. The bond portfolio effective duration remained at the year-end level of 4.4 years. Both our equity and fixed maturity portfolios experience significant valuation gains during the first quarter and pre-tax net unrealized gains for the total investment portfolio rose 15% to over 1.7 billion. Our investment approach remains consistent balancing current investment income with long-term capital appreciation potential.

Our approach to loss reserving likewise remains consistent and we believe the adequacy of our reserves is as good as ever. Net favorable reserve development on prior accident years was 6.6 percentage points higher in the first quarter 2012 with nearly 40% of that favorable development coming from reserves for catastrophe losses. The first quarter 2012 ratio for favorable reserve development other than catastrophes was 26% higher than the full year 2011 ratio. The net favorable development of $116 million was broad based, spread over several accident years including 24% for accident year 2011, 32% for accident year 2010, 14% for accident year 2009, and 30% for all older accident years. Every line of business contributed to the favorable development, except for surety and executive risk line.

Moving onto expenses management, I'll simply say that we continue to carefully manage expenses as demonstrated by the first quarter property casualty underwriting expense. Before agency commissions on profitable business and wage increases for good performance, both of which we're pleased to pay, other underwriting expenses were essentially flat compared with a year ago. I'll briefly touch on the effects of our adoption of the new accounting standard for deferred policy acquisition cost known as DAC, which we applied retrospectively.

Adoption resulted in adjusting first quarter 2011 net income by lowering it by $1 million. Our year end 2011 DAC for our property casualty and life segments originally reported on the balance sheet was reduced by $33 million or 6% and the book value per share was reduced by $0.13 which is only 0.4%. Net cash flow from operations was strong at $148 million, up from $91 million in the first quarter of last year, and our highest first quarter level since 2008. We had our best first quarter in terms of net income since 2007. Our capital remained solid supporting growth in our insurance segments and we ended the quarter with over $1 billion in holding company cash and marketable securities.

I’ll conclude my prepared comments as usual by summarizing the contributions during the first quarter to book value per share. Property casualty underwriting profit increased book value by $0.04. Life insurance operations also added $0.04. Investment income, other than life insurance and reduced by non-insurance items, contributed $0.41. The change in unrealized gains at March 31 for the fixed income portfolio, net of realized gains and losses, increased book value per share by $0.20. The change in unrealized gains at March 31 for the equity portfolio, net of realized gains and losses, increased book value by $0.75 and we paid $0.4025 per share in dividends to our shareholders. The net effect was a book value increase of $1.4 during the first quarter at $32.07 per share. Adding the dividend, our value creation ratio for the quarter was 4.6%.

With that, I’ll turn the call back over to Steve.

Steve Johnston

Thanks Mike. Our associates and agents continue to work together to execute our strategy and to help us achieve our vision of being the best insurance company serving independent agents in the United States. We remain confident in our future and steadfast in our commitment to creating value for shareholders. With me today to answer your questions and further discuss our results and outlook are Jack Schiff Junior, Ken Stecher, J.F. Scherer, Eric Mathews, Martin Mullen, and Marty Hollenbeck. With that, Mike, we’re ready for you to open the call for questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Mike Zaremski from Credit Suisse. Your line is open.

Mike Zaremski - Credit Suisse

So, in regards to expenses, I know, you guys have been guiding to a lower expense ratio for a little while now. The decline was fairly pronounced this past quarter. Can you talk about whether there were one-time items impacting the ratio and would you expect further improvement?

Mike Sewell

This is Mike Sewell, and thanks for the question, Mike. Some of that we are controlling our expenses. As you've heard, we've got our other than commissions and our salary and wages, we're controlling those costs, keeping those flat. There was really not a one-time hit that was in there. One of the items that's really helping the ratio is everything that we've been doing to drive written premiums and to increase those which in turn will affect the expense ratio. So there's really a combination of increasing written premiums and then controlling cost, overall on the non-salary and commissions.

Mike Zaremski - Credit Suisse

Do those comments hold true for the loss and loss adjustment expense ratio as well which was pretty low?

Steve Johnston

Mike, this is Steve, and yes, I think, they're related and related to the level of loss activity and paid loss activity, and specifically which was down 1.3% for non-cat losses.

Mike Zaremski - Credit Suisse

Lastly, how are you guys thinking about the trade-off dynamics between retention new business growth and getting increased rate and I asked because your retention levels have stayed pretty steady and certain competitors have decided to look retentions fall in order to improve overall margins?

Steve Johnston

I will start out here. I think that we look at business for the long term, we have great relationships with our agents, we have a definite fundamental purpose to improve our underwriting profit. So, we are taking rate where we think it's needed. We think it's very much on a risk-by-risk basis, and we feel that we are gaining price adequacy, we got rate in the lines that we felt needed at the most with workers comp leading the way with just over 10% increase, the smaller commercial property policies that renew annually, we got real high single digit increases there. So, we think we are getting the rate when we need it but we also think we are conveying the value that we bring as a company in terms of our service, our products, our field representation and it's allowing us, I think, to benefit from maintaining pretty good retention. As we look at it, retention is a bit lower on the risk that we would like to not be on. So, I guess, also if we look at the three-year policies, the retention there is quite high when they come off of their three year policy, we've got quite a bit of loyalty there.

Operator

Your next question comes from the line of Vincent DeAugustino from Stifel Nicolaus. Your line is open.

Vincent DeAugustino - Stifel Nicolaus

If I look at Personal Lines on the statutory commission ratio it looks like that's grown a few points over the last few quarters and I am just curious you might be able to talk about that. I know, there was some changes to the agent compensation structure, but I thought that was going to be along the lines of pretty much being aggregate neutral?

Steve Johnston

I'll take a shot at that first. This is Steve. I think, couple things; one, we pay a little higher commission rate on our homeowners and we have been getting more rate on homeowners, which has allowed the premium to grow a little bit faster there in homeowners, so that's going to shift the mix a little bit in that direction. I think, the other, and you're right, we definitely target the profit sharing commission to remain pretty steady, and we think that's the case, so I think basically what we've seen is maybe just a bit of a shift in the mix of our commissions.

Vincent DeAugustino - Stifel Nicolaus

That's actually really helpful. Just following up again on the personal lines side, looking at the personal auto, I know, there were some adjustments that had flown through the core loss ratio last quarter, so my first question is just to make sure if there was any adjustments that I should be looking at this quarter, but if not, it looks like there was about a 5.3 point increase year-over-year in the core loss ratio, and just because ISO data seems to be trending towards higher inflation, and we're starting to hear some commentary from some of the larger auto players, I was just curious, of your thoughts in terms of loss cost inflation on auto.

Steve Johnston

What we're seeing, and really this applies to personal auto, it applies to commercial auto and really across our portfolio, and this is Steve again, we are seeing really pretty benign trends across the board. We have seen frequency down a bit, and severity up a bit, but all-in-all as we look at our trend, picking different time periods to look at trends, it's been very benign overall in the total paid loss trends. So, we feel that with the rate increases that we’re getting on a written basis, we’re making some ground.

Vincent DeAugustino - Stifel Nicolaus

So, for personal auto in 1Q 12, I should just look at the core loss ratio that’s moving around due to normal variability that should be expected?

Steve Johnston

I think there's some noise there.

Vincent DeAugustino - Stifel Nicolaus

Then if I could slide one last one in. Would you happen to know what the new money yield is on the bond portfolio?

Martin Hollenbeck

First quarter corporates, we were to hike threes, we were close to four. Municipal is about 2.625, and in government bonds, agencies around a 3.2 level.

Operator

Your next question comes from the line of Scott Heleniak from RBC Capital Markets. Your line is open.

Scott Heleniak - RBC Capital Markets

The first question I have was just on new business. Just wondering what kind of quote activity you’re seeing as far as new submissions? Have you seen a big uptick in that over the past couple of quarters as some of your peers kind of raise rates a little bit higher than maybe what you guys are doing? So, just first of all, just curious whether you’re seeing any big change over the past couple of quarters there.

J.F. Scherer

Yes, a substantial change in quote activity or submission activity in some areas. I would say its double, but field reps report that it’s just an enormous fee increase in submissions. Same would be true on the Excess and Surplus line side. Obviously, the hit ratio is down, we’re trying to ferret our way through all of those submissions, but it's clear that throughout the industry, carriers are pressing the price. In some cases, they're announcing that they are going to be very aggressive about their price increases which is provoking agencies to shop larger portions of books-of-business.

Scott Heleniak - RBC Capital Markets

So, should we expect new business growth to tick up from these levels? It hadn't been down last sort of couple of quarters, and it was up about 6% this quarter. So, do you think pricing will rise enough that your new business growth will sort of pick up in the second half of the year?

Steve Johnston

The primary driver for the new business for us were the more newly appointed agencies over last year and this year. So we'll continue to appoint agencies. We expect to get activity there. I would presume that as rates continue to go up, the attractiveness of the stability of the Cincinnati Insurance Company, our three-year policy. We continue to do a good job in how we handle claims that's causing agencies to take a closer look at us, but we would expect modest increase quarter-over-quarter of our new business to go up.

Scott Heleniak - RBC Capital Markets

You mentioned agency appointments, 56 so far this year. 130 expected for the year, obviously running ahead of schedule. Was there any particular reason why a lot of those that had that been planned for a lot of those to be appointed in the first quarter?

Steve Johnston

Yes. We've done some longer range planning in terms of growth rates that we would expect in different states, different parts of those states. We projected the number of appointments that we wanted to make this year based on conversations we've had with our agencies in those areas and the field reps in those areas, and asked the field reps to try to get all of those appointments done quicker than normal.

Scott Heleniak - RBC Capital

I had a question too about just the cat loss reserve adjustments that we’ve seen over the past couple of quarters have been pretty significant. Just wondering are most of those from the 2011 year and have most of those claims been settled now so we won't see as big significant adjustments over next couple of quarters?

Marty Mullen

Right, Scott, this is Marty Mullen. Correct, most of the reserve adjustments weren’t from the cat 2011 activity, a majority of it from the early second quarter cats and third quarter Irene and Lee. However, none of the adjustments were from cat 46 Tuscaloosa or cat 48 Joplin. Those two were not touched.

Scott Heleniak - RBC Capital

And just the last question was on the investment portfolio, what was the return for the equity portfolio and the fixed income portfolio in the quarter?

Marty Hollenbeck

For the equity portfolio we did 7:3. In a big up market I think the S&P did about 12.5. We tend to lag with our large cap quality although we did outperform in fourth quarter. And then for the fixed income, we break it out by asset class. Let me give you that, just a second here. For the corporate portfolio, we did 2.4 for the below investment grade portfolio which is not a particularly big portfolio for us, we did 4.25 and our muni portfolio did 70 basis points, that's our total return.

Operator

Your next question comes from the line of Paul Newsome from Sandler O'Neill. Your line is open.

Paul Newsome - Sandler O'Neill

Obviously, I don't have a ton of data points but one of the things I have noticed so far is that the regional insurers and I would include you guys in that seem to be growing their premium significantly faster than the large national writers. Do you get the sense that you are taking share from those large nationals, or is it just too many – too few data points that I'm looking at right now?

Steven Johnston

Paul, this is Steve and I'll give that a shot first. I don't know that I would say that and I do think its awful few data points. I do think where we're getting a lot of good growth, as J.F. mentioned earlier is we have newly appointed agents, and also we have agents in states that are relatively new to us that we're growing in, and so I would think that the appointment strategy, the geographic diversification and expansion strategy would probably explain more of the growth. I don't know that I would go to the place of saying that we're taking share away from the larger writers.

J.F. Scherer

Paul, this is J.F. I'd agree with Steve. I'd say in terms of our successes, they're pretty broad based as far as where the business is coming from.

Operator

Your next question comes from the line of Ron Bobman from Capital Returns. Your line is open.

Ron Bobman - Capital Returns

I had a question about renewals, and rates are picking up and at some point we will be lapping where insurers will be faced, I presume, with policy renewals, and I'm really asking about commercial insurance, policy renewals that will have a second year of increase and I'm wondering whether that is any reason to be concerned as a stockholder in insurers and your ability to sort of perpetuate and continue this shift to higher rates? And maybe sort of a related question, is that scenario for harder for you to achieve success, than it was getting the first rate increase. So is getting the first rate increase over years of declines far harder than getting the first renewal up again?

Thanks. I hope you understand my jumbled question.

Steve Johnston

Well as you look back to some of the hard markets and the kinds of increases that occurred, they were significant and it really created a lot of disruption. What we’re seeing in our book of business, and I think by and large in the industry, they have been fairly modest rate increases that are coming across for policyholders. So, having experienced a 3 to 4% increase, I'll pick that number out of the air, for a policyholder and then next year, something probably more than that, has been more palatable. What we’re seeing in our commercial book is that the economy is starting to show some signs of improvement. Payrolls and sales are going up, agents are conditioned and more prepared to deliver increases as long as they are not really significant.

And so, I would not anticipate. In fact, I think we're going into the rest of this year, next year knowing that rates will or at least based on what we’re seeing, that rates will continue to go up. We’re confident that we’ll be able to place those. We take a look at every renewal policy by policy and make certain that we’re as surgically as you can be, surgical about the approach that we take.

Operator

Your next question comes from the line of Ian Gutterman from Adage Capital. Your line is open.

Ian Gutterman - Adage Capital

Hi good morning everyone. Just to clarify, I think you guys said that about 40% of the reserve releases were from cat events, and when I look at the press release, it shows 22 million, which should be about 20% of your leases. What's the other 20%?

Steve Johnston

And I think the way I look at in terms of the favorable development here is maybe just a little bit of a higher level. We had about 116 million all in favorable development this first quarter. That's up 58 million from where we were the first quarter a year ago. Not that 58 million increase, 51 million of it came from what I call the property-oriented lines. Home runners, for example, there was 8 million difference there, there was 28 million in commercial property and 15 million in special properties which is what programs is what our Bob is.

I think what happened is, a year ago in terms of the comparative in the end of 2010 there were some pretty late catastrophes including like a hailstorm out in Phoenix and so forth and we actually had adverse development on those property lines in the first quarter of '11. This year and again with the large number of catastrophes that we had last year, the two largest in our history, we're working with a lot of larger dollars. We saw the favorable development. So of that 58 million in our overall increase in favorable development, 51 million of it came from the property short tail lines.

Ian Gutterman - Adage Capital

Okay guys. Now I understand. Also just want to clarify some things on the weather and large losses in the quarter. You mentioned obviously the favorable weather is kind of like non-cats were lower than normal. If I recall last year, they were higher than normal. Is there a way to get a sense for either how much an improvement it was year-over-year or just how much better than plan it was? What was the benefit from the non-cat weather in the quarter?

Steve Johnston

Yes, I think I'll give it a start and Marty will fill in here. We don't have non-cat across the board, because we touched on some of the catastrophe losses that we had this quarter were in a pretty specific area and overall over the broad spectrum of our territories we really did have pretty mild weather and so that's going to have an influence on that.

Marty Hollenbeck

That's right Steve. And just as a quick follow-up. Our non-cat weather in the commercial lines was down in loss just over 60% non-cat weather in commercial. And in the actually quarter, we saw a significant decrease in the new commercial fires over in the first quarter 2011.

Ian Gutterman - Adage Capital

Okay and that's what I was wondering also. I mean, normally when I think of sort of that large loss disclosure you give, I think of that as being independent of weather. That's just the normal like you said fire losses and things like that that are unpredictable. Was that the case this quarter or was there some kind of correlation that the good weather somehow led to us fire losses or are they independent?

Steve Johnston

I think it's just a good quarter. We had significant high number of commercial fires in the first quarter last year and that number and dollar loss has significantly declined in this quarter.

Ian Gutterman - Adage Capital

So, basically, two pieces of good luck to offset, the bad luck on the cash.

Steve Johnston

Absolutely.

Operator

(Operator Instructions). Your next question comes from the line of Matt Rohrmann from KBW. Your line is open.

Matt Rohrmann - KBW

Just again want to say really impressive job from all the Cincinnati folks at the agent meetings, and just wanted to actually follow-up on that a little bit. Obviously, the rate increases are great and you guys are getting some really solid growth. I know those meetings you had mentioned looking at growth in lines like umbrella, marine, surety, non-profit, D&O. Just wondering as you look ahead to some future agency appointments, how much of the appointment strategy goes into looking at those or other lines specifically?

J.F. Scherer

We really tried to appoint a generalist agency and we think that within that scope, the kind of agencies that you would meet at those meetings, they write across the board, all of those lines of business. So it would be an unusual circumstance for example, excuse the umbrella line that's an example. But you have an agency that specializes or has an outsized amount in that area.

So what we continue to do is a new appointment strategy is look for centers of influence in the community, agencies that are broad based in what they write, first lines as well as commercial lines, excess and surplus lines, and then go in and do our best to appeal across the board. And specifically because those lines of business that you had mentioned are especially profitable, ask for lots of opportunities in those areas.

Matt Rohrmann - KBW

Okay great. For those lines I know you guys have a lot of detail in the supplementary. Any lines kind of looking forward past 1Q where you see sort of a further divergence in your ability to get additional rate coupled with a decline in loss trends?

J.F. Scherer

Well, Steve had mentioned, obviously in the workers' comp area we're getting double digits, slightly more than 10% increases on renewed business there. We’re seeing an acceleration in our ability to get higher rate in property, as you could imagine, with the storms across the country and policyholders are prepared for, we’d expect increases in that particular area as well. Commercial auto we’re doing well in that line as well. So, those would be the three that I would point out that we are having some good luck in those areas.

Matt Rohrmann - KBW

And J.F. of the favorable losses on property, there was plenty of weather last year. But not a non-cat basis and I know you guys have been doing a lot of work on the workers’ comp side for a few years now, but loss trends have been in line with expectations thus far through the year?

J.F. Scherer

As far as non-cat losses?

Matt Rohrmann - KBW

Yes.

J.F. Scherer

Yes and I think it has been in line. We think we can continue to improve some areas. We’re focusing on property, non-cat property in terms of greater loss control, more inspections in addition to rate, but also making certain that we have a confirmation that we know exactly what we’re writing. I think everybody would recognize over the last few years, that the economy has taken its toll on property, in that there are a lot more vacant properties and there are tenant properties that might be unplanned. So, those are all areas that in addition to rates we’re making plans to make improvements.

Operator

Your next question comes from the line of Mike Zaremski from Credit Suisse. Your line is open.

Michael Zaremski - Credit Suisse

Quick follow up, in regards to the investment portfolio dynamics, should we not expect much of a decline in the absolute levels of investment income given the strong revenue growth? I didn't get the math. I haven't done the math that Marty stated earlier on the call?

Steve Johnston

Yes, we've written it down. As you know a lot of insurance companies are declining book yields. Our book yield declined six basis points last quarter and that's kind of in line with what we've been seeing last few years. That's been offset by the dividend increases in the portfolio.

However, that portfolio shrank a little bit in the last 12 months. There's a lot of moving parts here. Obviously, we pay our dividend, that's the money not available to reinvest. So, there's a lot going and we've been able to successfully tread water to the primary drivers. In fact, we've gotten very strong dividend increases out of our portfolio, which is our strategy.

Michael Zaremski - Credit Suisse

So, the answer kind of treading water probably continues?

Steve Johnston

By and large. I would say that our decline in book yield, the bonds we've been losing to calls has generally come in that yields, that piece of it is declining. New money rates haven't really spiked up much, periodically when they come back, 10 years now around (inaudible). So, yields are particularly attractive right now. So, certainly we love to grow it organically and profitable quarters do help that. So our goal is to squeeze out a small gain, yes.

Operator

Your next question comes from the line of Ron Bodman from Capital Returns. Your line is open.

Ron Bodman - Capital Returns

Hi thanks. I felt like we've been, as investors and followers of the industry trained to this concept that new business is always priced below renewal business because of the competitive aspect, I guess. But now I believe there is a couple of other insurance companies talk about the rate differential between new business and renewal business being higher in the case of new business. It's now sort of flip-flop and that these companies were commenting that they are now pricing new business at rates above like-for-like business on a renewal basis. Would you comment at all that what you were seeing in your book-of-business, again commercial lines, with these relativities?

Steve Johnston

No good question Ron. I think that they are pretty close together to tell you the truth and maybe some variation by line. I think one thing that's helped with the new business pricing is the deployment of the analytics we use and we get a lot more information a lot more intelligence on which pieces of new business to write and which pieces to walk away from, where is the walk away price.

And one line in particular I would like to point out is workers compensation where we actually feel in that line, that the quality or the price adequacy of the new business is better than the renewal business. So that we're moving the mix in that regard, but all-in-all I would say that they are pretty close.

Ron Bodman - Capital Returns

And what would you have answered that, and what was that relative a year ago, new versus renewal? Was new deficient relative to renewal?

Steve Johnston

That's a pretty tough question. We've been rolling out the analytics. As J.F. mentioned working on inspecting risk and knowing what we're writing. I think we're still being closed, but I think we're getting better and better all the time.

J.F. Scherer

I would I would agree with that, all new business there continues to be quite a bit of competition. And so when they a very good account makes it into the market place for re-pricing, there is still a lot of competition. As Steve said, the guidepost of analytics for us has much improved our ability to price the account closer to the price adequacy ratio that we need on the new piece of business.

Operator

Your next question comes from the line of Josh Shanker, your line is open.

Josh Shanker

Good morning everyone. I'm looking forward to the modeling this, but I'm having a little bit of difficulty, because the change in combined ratio came so suddenly in 4Q and this Q. I'm trying to figure out why the lack of gradualism and does it mean that there might be some back and forth or are you looking year-over-year, how should I think about that?

Steve Johnston

I think the way we look at it is we're looking at the accident year ex-cat for the first quarter and comparing it to the full year of 2011. We see in that metric a 4.9% improvement. We went from 73 down to 68.1. So a 4.9 point improvement in the ex-cat accident year loss ratio. Of that 4.9 point improvement, 4.1 points of it came from as Marty Mullen mentioned earlier, less large losses which we define as 250,000 per claim or more. So a lot of it was explained by fewer large losses.

Josh Shanker

So, when I think about that and to the extent to which large losses were elevated in 1Q, '11. I mean I guess it’s lumpy, but would you say that you have less large losses this quarter than you usually experienced and a lot more than you usually experienced in 1Q, and maybe cut the baby in half or something? How should I swear then just thinking about your business and that how large loss affect those numbers?

Steve Johnston

I think you would say that we did have less large loss this first quarter. We tend to look at the base as the full access year of 2011, but I think all-in-all, things were pretty favorable this first quarter in terms of large losses.

Josh Shanker

And so do you think that along with same lines it was 1Q '11 particularly unfavorable in terms of large losses?

Steve Johnston

I don't have that number right here in front of me but I think the answer is yes.

Operator

There are no further questions at this time. Mr. Steve Johnston, I turn the call back over to you.

Steve Johnston

Thank you, Mike and thanks to all of you for joining us today. We hope to see some of you at our annual shareholders meeting tomorrow at the Cincinnati Art Museum and those of you that can’t make it are welcome to listen to our webcast at the meeting and that's available at www.cinfin.com/investors. We look forward to speaking with you again and look forward to seeing you if not before, at our second quarter call. Thank you.

Operator

This concludes today’s conference call. You may now disconnect.

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