Cincinnati Financial Corporation Q1 2008 Earnings Call Transcript

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 |  About: Cincinnati Financial Corporation (CINF)
by: SA Transcripts

Operator

At this time I would like to welcome everyone to the Cincinnati Financial First Quarter 2008 Conference Call. (Operator Instructions) Ms. Wietzel, you may begin your conference.

Heather Wietzel

This is Heather Wietzel, Cincinnati Financial’s Investor Relations Officer. Thank you for joining us today for our first quarter 2008 conference call.

This morning we issued our earnings release, along with our 10-Q, supplemental financial package, and the listing of the securities we own. If you need copies of today’s materials please visit www.cinfin.com where all of the information related to the quarter can be found on the Investors page under the quarterly results quickly.

On today’s call Chairman and Chief Executive Officer, Jack Schiff, Jr.; and Chief Financial Officer, Ken Stecher, will give prepared remarks, after which we will open the call for questions.

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

Also reconciliation of non-GAAP information, as required by Regulation G, was provided with the release and is available on the Investors page of our website under financials and analysis. Statutory data is prepared in accordance with statutory accounting rules as permitted by the State of Ohio, including the National Association of Insurance Commissioners Accounting Practices and Procedures Manual and therefore is not reconciled to GAAP.

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

John J. Schiff, Jr.

Our first quarter was not the best that Cincinnati Financial can produce. It is no surprise that soft pricing and the property casualty insurance market pressured our growth and profitability, not so different from what many others have reported this quarter. Nor is anyone surprised at declining market values in the financial sector.

However, net income for the quarter suffered because we took some of those declines on a non-cash basis through the income statement rather than simply reflecting the fluctuation in other comprehensive income and book value.

We firmly believe and our 55+ year history let’s us say with confidence that Cincinnati’s strategies work through underwriting and business cycles. After reviewing our position we are confirming our previously announced outlook for full year performance and confirming our commitment to remain the financially strong and stable organization that our agents and policy holders can rely on.

We plan to do what we’ve always done to successfully compete in the insurance marketplace, supporting our agents’ strengths by providing them with local service and local decision making authority.

Our history also tells us that our investment strategy works and can lead to the accumulation of gains over longer periods of time. So our underlying strategies are the same as ever and we think that reserves are advantages that serve shareholders well. What we do refine continuously are the details as we respond to current conditions and update our initiatives.

This is an ongoing process that last year resulted in a higher profile decision, such as entering two states, moving into excess and surplus lines, increasing our share repurchase levels, more actively managing our common stock portfolio like we’ve done for the last three or four years now. More frequently it involves incremental improvement such as adding loss control services for our commercial policy holders and in many areas we are improving the competitiveness of our products on an ongoing basis.

Without dismissing the challenges of the first quarter, we believe we are in good shape to surmount them and keep moving in a positive direction. With that introduction, let me point to a few of the primary majors of the quarter.

As you saw in the release, operating income was $0.66 per share compared with $0.88 last year. Catastrophe losses reduced earnings by $0.17 this year compared with just $0.01 in last year’s first quarter. Softer pricing and normal loss cost inflation accounted for most of the remainder of the change.

We reported a quarterly net loss of $0.26 per share largely because of the non-cash investment write downs which Ken will discuss in a moment. Book value was $33.40 per share on the overall market weakness compared with $35.70 at year end, a decline of 6.4%.

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

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

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

We regularly review our products. For example, we have an update of our machinery and equipment coverage, including a new product to insure major mechanical systems under our home owner policies. Plus new agency appointments always receive careful attention at Cincinnati headquarters as well as by our field associates.

We are using our capabilities to pursue quality business while pricing continues to declines and in some regions where economic pressures are further dampening market conditions. We don’t have much to add to the variety of comments on pricing trends. We just continue to focus on underwriting fundamentals as we make decisions with an eye towards the long term; both our long-term relationship with the agent and that agent’s relationship with the policy holder.

We believe our field staff are quoting prices appropriate for the quality of the risk and avoiding the trap of competing solely on price. Our disciplined decision making remains in the hands of people who have direct local knowledge of the insureds, who know what needs to be done to maintain our relationship with the agent, and who have the right information to decide when we should price aggressively and when we should walk away.

We continue to evaluate new and renewal business on a case-by-case basis. Over the long run our history says that this steady approach works best for agents, for policy holders, and for shareholders.

Turning to our personal lines business, we are looking to the second half of 2008 for some recent initiatives to begin to contribute. For example, we’re making new agency appointments and expanding geographically. We are opening for personal lines business some of our commercial lines states by introducing our web-based personal lines policy processing systems.

This will help spread and reduce our catastrophe risks. It will begin adding scale so we can continue spreading the expense of our ongoing investment and updated automation across a larger premium volume and improving our profitability.

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

Finally, we believe our new ability to meet the needs of our agents’ customers who require the flexibility of excess and surplus lines offers great long-term potential. That first E&S policy we wrote in January for $1,500 contributed to the nearly $1 million in E&S written premiums we are reporting for the first quarter.

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

We structured our new E&S operations to serve the needs of independent agencies that currently market our standard market insurance policies. When all, or a portion, of a current or potential client’s insurance program requires E&S coverages, those agencies can now write the whole account with Cincinnati, gaining benefits not often found in the broader E&S market. Our agents tell us this is working for them. And that’s a good sign of things to come.

Ken, let me turn the call over to you.

Kenneth William Stecher

I’ll start today with some discussion of our investment performance and then turn to our insurance results and full year outlook.

First, on investment income. Growth of investment income slowed, as we expected. While both interest and dividend income rose the lower growth rate is the result of lower interest rates, an unusually high number of called bonds, and dividend cuts on some financial sector stocks.

We remain committed to portfolio strategies to balance near-term income generation with long-term book value growth. However, we continue to believe that full year investment income growth will be below last year’s 6.6% for two reasons.

First, as we have sold investments that no longer meet our investment criteria, we are moving the proceeds away from common stocks with high yields, reinvesting instead into fixed-income securities with lower but more secure yields. And also repurchasing our own shares.

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

The net loss this quarter happened because we recorded investment losses of $232 million compared with a gain of $62 million in last year’s first quarter. Almost all of the investment loss in the quarter was due to the impairment of $214 million before income taxes in securities that were trading well below the price we had paid.

Normally, market value and fluctuations are simply reflected in book value. We impair securities as we did this quarter when we believe they will not recoup their value in a reasonable period of time. A non-cash charge adjust our carrying cost to the period end market value writing the difference to income.

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

Unusual compared to past years $172 million of the impairments related to equity securities that lost value over the past several quarters as part of the fall out from the beleaguered credit markets and with the recovery outlook appeared to be more attractive.

We lowered our cost basis for Wachovia and Huntingdon and after the end of the quarter we have initiated actions to reduce our exposure to both of these securities.

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

While the pressures on the securities market have been challenging, we saw our ratio of written premiums to statutory surplus remain relatively stable compared with year end. The ratio remains about 10% better than the estimated industry average according to A.M. Best.

We remain a financially strong and stable organization, as the A.M. Best affirmation in late March of our insurance financial rating strength attests. We continue to execute our capital management plan by repurchasing about 3 million shares in the first quarter and part of the function of what we considered to be an attractive price for our stock at a point in the quarter when we were able to be in the market. As we said in the past, we balance the use of available cash flow between repurchase and investments based on a number of criteria.

Now turning back to insurance, first quarter premiums reflected the competitive market conditions. That softer pricing combined with normal loss cost inflation is putting pressure on our underwriting profit margins. Further, catastrophe losses swung from last year’s extremely low level of $43 million, which our history would say is a bit on the high side for the first quarter.

And savings from favorable development on prior period reserves made a lower contribution to profitability than last year. With a higher catastrophe losses, an uptick in other losses, and higher other underwriting expenses offsetting a lower impact for commission expense, we ended up with a 9 point rise in the combined ratio.

It was no business [inaudible] dramatically unusual results. Although the property and [inaudible] business lines for the brunt of the catastrophe losses, as one would expect.

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

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

I expect many investors are interested in how current market conditions impact our expectations for 2008. We continue to believe our full year net written premiums will decline as much as 5% as current commercialized pricing trends continue into the rest of 2008. We believe that’s a satisfactory comparison with our 1.9% decline of 2007 and the 0.6% decline estimated for the industry in 2008.

It shows that we expect to prudently work to keep our best accounts and help our agencies protect their accounts from competition while knowing when to walk away from significantly under-priced or low-quality business. We believe we can expect a positive contribution to premiums for our new excess and surplus lines operations and we haven’t taken that into account in our targets for 2008. We believe our GAAP to [inaudible] ratios to be between 96% to 98% for the full year.

As we noted in the release our target relies on three assumptions. First, the savings in payroll development reduces the ratio by approximately 12%. Second, it assumes that the catastrophe loss ratio adds about 4.5% to the ratio. Third, we expect a current and accident year loss ratio to be under further pressure.

We are looking for a change in the expense ratio. We believe it will be about even with 2007 as an anticipated decline in continued commissions from this year’s record level offsets any increase in other underwriting expenses. We believe the level of performance we have targeted will allow us to sustain our industry leading position in the commercial lines insurance marketplace.

We plan to take steps in our personal lines insurance operations to enhance our response to the changing marketplace. And we look for our life insurance business to continue to make a solid contribution to our earnings. We have been successful in recent soft market cycles outperforming the industry with lower combined ratios. Our case-by-case underwriting approach supported by field underwriters, loss control associates, and our claims team helps us retain quality accounts and places us in a position to benefit when the market changes.

With adequate revenues and a strong capital position, we expect to maximize opportunities in the future.

John J. Schiff, Jr.

In closing, let me note that our 2008 Annual Meeting of Shareholders will take place at the Cincinnati Art Museum this Saturday at 9:30 a.m. We broadcast the meeting for those who cannot be in Cincinnati but we encourage you to attend. We are thankful for the chance to personally meet some of our loyal shareholders and discuss our initiatives and goals.

Let me remind everyone that present with me here today in this room are Jim Benoski, J.F. Scherer, Marty Hollenbeck, as well as Ken Stecher and I are here to help field your questions.

So, let’s go ahead with questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Meyer Shields - Stifel & Company.

Meyer Shields – Stifel Nicolaus & Company, Inc.

In the press release you note that policy counts were down in personal lines and I was hoping you could go into a little more detail as to what’s driving that.

Jacob F. Scherer, Jr.

Meyer, we’ve been adjusting our rates throughout the country. We’re seeing in some areas where we’ve introduced tiering and sharpened our rates, we’ve lost some account there. The decline has been very modest, though, and we don’t see any concerns with it.

We would mention that later on this year, in October, we will be expanding our pricing process for our agencies. That should make us much more competitive in certain areas where we’re currently not. So though there was a slight decline in policy in force count in personal lines, once again, we don’t see that as an alarming event.

Meyer Shields – Stifel Nicolaus & Company, Inc.

What competitor actions are you seeing in terms of personal lines and commercial lines. Any function in terms of competition?

Jacob F. Scherer, Jr.

I don’t know that we could add anything that hasn’t already been reported by a lot of folks. We’re not seeing anything much different, in terms of what is going on in the market place in the way of competitor trends.

The pricing levels are extremely competitive, both in personal and in commercial lines. Most especially in commercial lines. But as far as any changes in what has been occurring over the last several quarters, it just continues to be a very competitively-priced marketplace.

Meyer Shields – Stifel Nicolaus & Company, Inc.

What were the investment segment results. The other operating expenses declines pretty significantly on a year-over-year basis. Is that going to continue?

John J. Schiff, Jr.

Are you just referring to the investment side itself?

Meyer Shields – Stifel Nicolaus & Company, Inc.

That’s right.

Kenneth William Stecher

I think that will probably be the run rate for the rest of the year, Meyer. I think there was a one-time line on last years number.

Operator

Your next question comes from Charlie Gates - Credit Suisse.

Charles Gates – Credit Suisse

My perception is that you write personal lines insurance as basically a concession to the agent. What do I mean by that? I believe personal lines insurance in the United States is becoming an oligopoly and the reality is you don’t have scale. What’s wrong with what I said?

John J. Schiff, Jr.

We try to market our home and auto insurance on a package basis to policy holders. We hope our agents embrace this idea. We see that it’s been pretty well followed over the years. We continue to encourage it. We see the prior carriers on some of our new policies being one very prominent carrier for auto and a different very prominent carrier for home. But families like to have one source for all their coverages, one person to call when the claim occurs.

And our best chance of meeting the competition, Charlie, is to go after the packaging of the home and auto insurance. And we find our premiums are competitive. They aren’t always the lowest but they put our agents in the ballpark.

And our claims system is the one that we get accolades from our agents all around the countryside. Our agents really hold our feet to the fire to take care of their policy holders. We have a contract with the policy holder; those are very important, but we market to the agents and the agent’s able to make an evaluation of when we’re doing a good job or we’re coming up short. So we very much rely on that agent keeping us in the game for their best home and auto accounts.

And it’s not necessarily the largest premium accounts, but it’s families who manage themselves pretty well, that look out for loss prevention as well as any good business would look out for loss prevention. I’m starting to ramble so maybe I should ask J.F. if he would step in.

Jacob F. Scherer, Jr.

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

And secondly, from a ratings standpoint, or a rate calculation standpoint, there have been a lot of sophistications been introduced to the personal lines marketplace. That’s most important if on the aspect or the part of the personal lines marketplace that would be commodity driven, but as Jack mentioned, we’re not really trying to attract that business. And our agents still in the vast majority of offices want to put their valued personal lines clients with a company that’s going to do an exemplary job in handling claims.

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

Charles Gates – Credit Suisse

About three years ago you sold an equity holding that had been a superb performer. It was number two in your investment holdings. And I thought you sold it in part because you had concern over future dividends. To what extent does that raise issue with regard to some of the financial stocks that you own?

Kenneth William Stecher

We do monitor all our financial stocks and you are correct in that the cutting of the dividends, or most of the dividends, is a true concern for us. We have sold out of the National City position as previously announced and as in my comments today the fact that Huntingdon and Wachovia cut their dividends, we are going to lighten up on that position.

The dividend income is one of the keys for us that contribute strongly to our investment income, our operating earnings, and our ability to pay dividends to our investors. So this is something that is very critical to us. And you’re right, with Alltel, with them splitting the company, we felt like their dividend strategy was going to change. And that it would not follow the parameters that we try to invest by.

Martin F. Hollenbeck

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

Charles Gates – Credit Suisse

As I recall, during the fourth quarter conference call, J.F. made reference to the construction/building book. Could you provide an update on that?

Martin F. Hollenbeck

Charlie, 43% of our GL premiums are construction related, 46% of our workers’ comp premiums are construction related. We’re seeing, particularly in the residential construction area, obviously a decline in the payrolls and the sales, which are the basis of premiums in those particular areas. That obviously has an effect on our overall premium levels.

Correspondingly it would have an effect on the exposures that are out there. If there are fewer electricians out we would have a lower exposure. So what we’re seeing near is what you would see countrywide as far as the decrease in building. On the commercial side we continue to see some stability there, certain parts of the country is having a decrease in that particular area.

So we would simply, given the rating we have of our premiums in the construction area, that would have a depressing effect on our premium growth.

Charles Gates – Credit Suisse

I believe during the first quarter you bought roughly 2.9 million shares. Or maybe I got that wrong. On an annual basis what should the investor foresee that you might like to acquire?

Kenneth William Stecher

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

Operator

Your next question comes from Dan Schlemmer - FPK.

Dan Schlemmer - Fox-Pitt Kelton

I wanted to ask a question on the guidance you provided, specifically it mentions the 5% decline in P&C net written premium. During the quarter I think it was about an 8.3% decline. Is it reasonable to read into that a view that pricing competition is not going to get any worse, maybe going to not go down as fast? Or there other things behind that more specific to Cincinnati, or just any background on that.

Jacob F. Scherer, Jr.

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

Dan Schlemmer - Fox-Pitt Kelton

In the earnings release it does mention the timing differences. Is that something you can give us a little more background on that, it wasn’t very clear to me what that meant.

Kenneth William Stecher

Dan, I think one of the things that is, just the various reinsurance pools that we have. Just an example, in that 8.3% decline, almost less than 1% of that was due to less reinsurance through some of the various sub-pools that we participate in.

Those are the things that we are referring to and we believe, as J.F. said, that what our field staff looks at in the pipeline, they believe that we can get down to our targets. If you look at our supplemental, you will see that the first quarter is the highest written premium quarter. So we think the comparison to the rest of the year will be a little bit easier to attain.

Dan Schlemmer - Fox-Pitt Kelton

Also, on the E&S book, can you give us a little bit, paint a little bit of a picture, on what’s actually being picked up as far as classes and types of business and if you could talk a little more about the geography. I’m not sure, I think you’re still in just five states, or has it started to expand out? But if you could maybe paint a little bit more of a picture there for what your business actually that you’ve already picked up?

Jacob F. Scherer, Jr.

Up to this point we’ve only been writing casualty business. We started off in five states. In fact, we started off with a few agents in five states in January, to get up and running. The kinds of businesses that we’ve been writing are typical of the E&S business. We’re not writing some of the more hazardous classes but typical, small-to-medium size accounts that we would write on the admitted side.

We expect to add five more states by the end of May. Some of our larger states. And also to add property upcoming. So we’ll start writing some of the property risks. We’ve received an excellent response from our agents to give us opportunity to write their business. Our excess and surplus lines underwriters are traveling into agents’ offices.

We’ve got an interesting adding value proposition for our agencies. The Cincinnati Insurance Company adjusters will be handling the claims that our excess and surplus lines company would have. We provide loss control services with the same field staff that we provide on the Cincinnati Insurance Company side. The A rating that A.M. Best gave our E&S company right out of the shute was excellent, from our viewpoint.

The general confidence that our agencies have in us as a carrier and the way we’re approaching this with them has really opened the door for us. So we would expect to continue to build on what we thought was an excellent start in the first quarter and by complementing the casualty writings with property writings here very shortly we think the door will be open even wider.

James E. Benoski

The goal remains to be active in all states where we write premiums by the end of the year. And that’s an aggressive goal, but that still remains the goal.

Dan Schlemmer - Fox-Pitt Kelton

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

Jacob F. Scherer, Jr.

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

Operator

Your next question comes from Mark Aden - KeyBanc.

Mark Aden - KeyBanc Capital Markets

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

Kenneth William Stecher

They were Huntington Bank Corp, Peoples Community Bank Corp, Glimcher Realty Trust, and Wachovia. And Wachovia and Huntington were the predominant of those, the other two were relatively small.

Mark Aden - KeyBanc Capital Markets

And what way do you determine the definition of temporary?

Martin F. Hollenbeck

There’s no real definition that we could give you. It becomes a very subjective matter. We look forward about three quarters in this instance, and determined that the likelihood was not very high that we would recover, these stocks would recover to the basis we paid for them, and so we chose, on our own, to go ahead and see those as other than temporarily impaired.

Kenneth William Stecher

If I could just add, on Page 29 or our 10-Q, we give the detail completely of the entire $214 million. And it will the four stocks Marty mentioned and the actual dollar amounts.

Operator

Your next question comes from Dan Johnson - Citadel.

Dan Johnson – Citadel

Following up on the 5% versus 8% first quarter issue, would we expect that the better performance expected in the rest of the year is coming on the new business front or some improvement in retention?

Martin F. Hollenbeck

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

Dan Johnson – Citadel

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

Martin F. Hollenbeck

Dan, Ohio represents 19.5% of our premium. We were down 4.9% in Ohio last year. As a matter of fact, Illinois would be number two at 8.9% and Indiana at 6.8% of our overall writings. So we obviously have the concentration there in those three states. I would not see, in terms of new business writing, much of an improvement in those three states.

From an economic standpoint, and the same would be true of Michigan, its little tougher there in the Midwest. So we would not expect to see improvements from those areas. Most of where we’re seeing some growth would be in some of the obvious areas, the Southeast and some of our newer states.

Dan Johnson – Citadel

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

Martin F. Hollenbeck

We certainly wouldn’t be wanting to do that. In some of these cases it wasn’t always apparent until toward the end, but yes, we will make an attempt to be proactive here and try to get out, or at least trim back. It depends on the amount of the anticipated cut, duration, things like that. There’s other factors involved, but to the extent we could be proactive rather than reactive, we would like to do that.

Operator

Your next question comes from Scott Heleniak - Ferris, Baker, Watts.

Scott Heleniak – Ferris, Baker Watts, Inc.

Do you have the premium volume for your new states that you entered last year, Washington and New Mexico? Just wondering if you had those numbers, first of all, and then are the plans to expand in those states on track or are you paring back considering what’s happened to the market over the past year?

Jacob F. Scherer, Jr.

In New Mexico we’ve written in the first quarter $415,000, and in Washington $152,000. So as you can tell, it’s just a beginning there. We’re on track. In New Mexico we have seven agencies appointed in the Albuquerque and Santa Fe area with eight locations and so we’re satisfied given the population concentration in that area and the kinds of agencies we’ve appointed there. We’re satisfied that we’ve got a good start in New Mexico.

In Washington we were a little slower in getting some of our filings approved. We have a field rep in place now. Just had an agency visit this week for an appointment. So we would expect, and I do know that we have some things in the pipeline already written in that state, but those numbers would improve nicely as well.

As far as those two new states are concerned, we’re pleased with our progress to date.

Scott Heleniak – Ferris, Baker Watts, Inc.

The point is always to start small and add what, five or ten agencies a year.

Jacob F. Scherer, Jr.

Actually in New Mexico, the areas where we’re likely to add agencies down the road would be in some of the smaller areas. But if you look at the population centers in New Mexico, it’s pretty concentrated in a few areas.

The size of agencies, the capabilities of agencies that we’ve appointed so far in New Mexico, it is our belief that they will be able to write a substantial amount of business for us. I wouldn’t anticipate in the next couple of years that we would appoint eight or ten more agencies in that area. Probably we got everybody appointed right off the bat that we needed to, with some minor adjustments.

In Washington, on the other hand, and in northern Idaho, I would expect that we’ll probably see somewhere in the area of six to eight new agencies, probably by the end of this year or towards the early part of next year.

Scott Heleniak – Ferris, Baker Watts, Inc.

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

Jacob F. Scherer, Jr.

Actually as we’re taking a look at our average premium policy it’s not changing a lot. It’s fluctuated a little bit. We’re writing some larger accounts and it’s not markedly lower. We’re having some success there. Our agencies have appreciated our loss control services and some sophisticated services that we’ve added.

So in terms of overall changes in policies, typically we’re seeing greater competition on the larger accounts, but that’s just in general. So as I take a look at some of these differences between 2007 and 2008, there’s hardly any change to it.

What we are seeing in general, though, is there has still been some pricing pressure, obviously, but we don’t like to be down in new business. By comparison, you can get a little bit of comfort in that, but we are hoping to for the rest of this year, because last year was fairly strong new business. January as far as last year. Compare the data for the rest of this year, we would expect that we could actually have an increase in new business.

Scott Heleniak – Ferris, Baker Watts, Inc.

Would you say the price declines on the middle market business, are they almost approaching the point where they’re as great as the large account? I know people of a certain group move down to the middle market, as well. What’s the disparity there?

Jacob F. Scherer, Jr.

I would still say when you have, large business for us would be in excess of $100,000 in premium for the account. That’s still drawing a lot of attention and we’re seeing some pretty aggressive pricing in that area. And you have to pick your spots. It’s not always the case that you have to be aggressively priced.

There are a lot of reasons to go into how accounts are earned and what pricing exists. I think middle market accounts, let’s say $10,000-$100,000 in range, that would be our definition. It’s plenty competitive, I wouldn’t say it’s much of a higher, though.

John J. Schiff, Jr.

It seems like we’re winding down on questions. If any of you have any question you would like to ask us off line, just let us know.

We thank you for joining us. We appreciate very deeply your interest in Cincinnati Financial and we look forward to tracking your progress in following us throughout 2008. Thank you.

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