Feb 6, 2008
Executives
John J. Schiff Jr.
– Exec. Chairman, Chief Exec.
Officer James E. Benoski - Vice Chairman, Pres, Chief Operating Officer Kenneth William Stecher- Chief Financial Officer Jacob F.
Scherer Jr. - Sr.
VP of Sales & Marketing Martin F. Hollenbeck - CFA Heather J.
Wietzel - Investor Relations Officer
Analysts
Elizabeth Malone - Keybanc Capital Mkts Meyer Shields - Stifel Nicolaus & Company, Inc Mark Dwelle - Ferris, Baker Watts, Inc Dan Schlemmer - Fox-Pitt Kelton
Operator
At this time I would like to welcome everyone to the Cincinnati Financial Year End 2007 Conference Call. (Operator Instructions)
Heather Wietzel
Cincinnati Financial’s Investor Relations Officer. Thank you for joining us today for our conference call.
This morning we issued the news release on our results along with our supplemental financial package and the listing of the securities we own. If you need copies of today’s material please visit www.cinfin.com where all of the information related to the quarter can be found on the investor’s page under the quarterly results quickly.
In the coming weeks, cinfin.com also will host our online proxy statement and annual report, in preparation for annual shareholder meeting. We are making all of our materials easy to find and search online and we are encouraging shareholders to do just that, especially for items like the expensive and bulky Form 10-K but instead of totally discontinuing our paper mailings to shareholders, as the SEC’s new notice and access regulations would permit.
We are planning more frequent shareholder communications with more condensed and digestible information that is mailed earlier within the past. Getting back to 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 investor’s page of our website, also 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.
Jack Schiff Jr.
Thank you, Heather, and good morning to all of you. And thank you for joining us today to hear about our 2007 results.
When I finished discussing our insurance operation, Ken Stecher will talk more about our profitability, our capital management and our outlook for 2008 then we will open for your questions. I will start by highlighting the board’s action last week to increase our indicated annual dividends by 9.9% to $1.56 per share for 2008 to set the stage for this 48th consecutive year of dividend increases.
Turning back to 2007 in total, operating income was $3.54 per share compared with $2.82 in 2006. Our market pricing trends tend to slightly lower written premiums and put pressure on our current accident year margins, several factors contributed to the excellent results.
First we recorded our lowest catastrophe loss ratio since 1991. Second, savings from favorable development on prior period reserves were well above our expectations.
Plus, life operations contributed $0.23 up $0.4 from a year ago. Investment income grew 6.6% bringing full year investment income above $600 million for the first time in our history.
On the other hand, book value at year end suffered from market influences on the valuation of the financial stocks and our equity portfolio, a topic Ken Stecher will also address. On the insurance side, we continued to build our company for the long term, offering the consistency that lets us earn a prominent position in our agency’s offices not just for one year but for 5, 10, 20 and even 50 years.
Agencies continued to successfully market our products to their better accounts. They gave us $325 million of new business in 2007 and helped us maintained the persistency of renewals at more than 90% of our accounts.
Two weeks ago, we began our 2008 sales meetings visiting with agents in Alabama, North Carolina, Tennessee, and Virginia. At those visits and other meetings, agents continued to report that competition in the commercial and personalized market places is rising.
In some reasons and for some types of business, we are also seeing economic pressure. That pressure can affect our policy holder’s revenues or payrolls, which are factors in determining the premium calculation for certain business policies.
Working closely with agents, we are using credits more frequently to retain renewals of quality commercial accounts with variations by geographic region and class of business. In many regional markets, to write the same piece of new commercial business, we would have quoted a year ago, pricing is down about 14% to 20% on average.
Pricing on renew business is also down in the range of 4% to 6% varying by account size. Terms and conditions generally remained the same and are satisfactory but are beginning to be pressured by some carriers.
Our agents brought us $71 million of new commercial business in the fourth quarter, bringing our full year new commercial lines business total to $287 million. There is no doubt it is a challenging new business market for our agents.
Many carriers appeared to be managing the soft market conditions at working very hard to protect their renew portfolios to reduce pricing. When the agency can influence the selection of the carrier or our agents and field teams to a great job of communicating Cincinnati’s advantages and of minimizing price as the primary selection criteria, for business that would be new to the agency, they may not have the same opportunity.
The results were not seen quite as many opportunities as we ordinarily would expect, nor is our hit ratio quite as high as we consider normal. We believe our field staff are quoting prices appropriate to the quality of the risks and avoiding the trap of competing solely on price.
Our discipline decision making remains in the hands of people who have direct local knowledge of the risk. We are not sitting in Cincinnati, making those decisions by line of business or geography.
We continue to evaluate new and renew 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, policy holder retention remained above 90% for both our personal auto and homeowner lines and new personal lines premium grew for the sixth consecutive quarter. The increased new business still does not fully offset the impact of lost business and lower rates on renewal business.
We continue to work to improve our personal lines operations, restoring the momentum to this business remains a priority. We know that access to Cincinnati personal lines brought coverages and great claim service is an essential piece of strategy planning for our agencies.
On December 31st, we accepted our first access and surplus line application, a policy with premiums of $1500.00 for the Cincinnati Specialty Underwriter’s Insurance Company. Our new wholly-owned brokerage subsidiary CSU producer resources is working with several of Cincinnati’s independent agencies in Georgia, Illinois, Indiana, Ohio, and Wisconsin.
In mid-February, we will be making E&S products available to all of our agencies in these states. These two subsidiaries will expand into additional states, where Cincinnati currently offers standard market property casualty policies as the new companies are paying the necessary state regulatory approvals.
This is a priority for our operations. We structured our new E&S operations to serve the needs or independent agencies that currently sell our standard market insurance policies.
When all or a portion of a current or potential client insurance program requires E&S coverages, those agencies now can write the whole account with Cincinnati gaining benefits, not often found in the broader E&S market, producers can submit risks from a variety of classes, reflecting the mix of accounts Cincinnati agencies currently wrote. CSU currently markets and underwrites general liability coverages and plans to expand this to include commercial property, miscellaneous professional and access casualty in 2008.
Agency producers have direct access to our dedicated E&S underwriters and they also can tap into their agencies broader Cincinnati relationships to bring their policyholders assistance with experienced and responsive loss control in claims handling. Our new E&S administration system delivers electronic copies of policies to producers within minutes of underwriting approval and policy issuance.
We will give extra support to our producers are remitting surplus lines taxes and stamping fees and retaining taxes and stamping fees and retaining admitted market declinations. We capitalized CSU with $200 million from its parent company, Cincinnati Insurance.
That high level of funding underscores our commitment to help our independent agencies grow by partnering with a carrier they can depend on. Everything we do to increase their competitive advantages and success also helps us achieve our own long-term growth and profitability goals.
CSU received an A (Excellent) from A.M. Best in December.
Ken let me turn things over to you.
Ken Stecher
I am going to comment today on insurance profitability, our capital management and investment strategies and our outlook for 2008. Before I do that, let me point out a couple of items in the information we provided with the financial supplement.
Large loss reports on pages 17 to 19 of the financial supplement. We refined these reports to show more detail.
We believe this will help us better distinguish between simple inflationary effects and anomalies in the data. A reserve analysis is on page 23.
On this report we now provide a detailed look at the effect of reserved development on our Loss and Loss expenses of dollars and the ratio. We hope you will find these useful in your analysis.
Now, first on the Property/Casualty business. A full year combined ratio improved 90.3% from 94.3%.
Jack mentioned the most significant influences on the improvement for both commercial and personal lines. Higher accident year loss ratios are more than offset by very low count losses and the benefit of favorable development on prior period reserves.
Turning to the factors ahead of positive contribution. First, our 2007 catastrophe loss ratio was at its lowest level since the early 90’s with the dollars at the lowest level since 1997.
Further, the year-over-year decrease was further influenced by our record level of catastrophe losses in 2006, even though the industry’s account losses are extremely low. Second, parallel development from prior year reserves continued at a healthy pace.
Improving the fourth quarter combined ratio by 15.3 points. In last year’s fourth quarter, parallel development improved the ratio by 10 points our actual rates performed their most thorough review of our reserve positions by accident year in the fourth quarter.
Full year savings from parallel development rose to $244 million or 7.8 percentage points of the combined ratio. About 0.7 points of that savings was due to bearable catastrophe loss reserve development.
Over half of the savings for the full year was attributable to our commercial casualty business line, which would seem to be in line of recent industry experience. Particularly for our longer tail lines, our ultimate loss ratio estimates are showing the benefit of reclassifications and reprising our commercial lines book of business, early in this decade.
During the same period, we also made changes to our policy terms, conditions and coverages of jobs and help manage limits or exposures. Further, we also continue to see positive payments and reporting pattern changes, partially attributable to the implementation of our client’s management system and to the use of a claims mediation process that promotes earlier liability to settlement resolution.
Looking at losses this year, our commercial lines, the accident year Loss and Loss Expense ratio, excluding catastrophe losses, rose to 65.2%, from 61.4%, as you can see on the report on page 23. In the year, the changes in the current loss ratios are for our larger business lines were largely due to softer market pricing.
About one point of the commercial accident year increase was due to higher losses from non-cat weather as we discussed last quarter. A few of those losses were unusually large as well.
Large losses including those from non-cat weather, contributed a higher percentage in 2007 and 2006. We are accountable that natural volatility was largely responsible for the uptake.
An accident year loss ratio in this range still translates into acceptable profitability for our commercial lines we are taking into account a typical level of reserved changes, catastrophe losses and expenses. In line with the soft market transfer experiencing, we are very pleased with the business are bringing to us.
For personal lines, the accident year loss and loss expense ratio excluding capacity losses rose to 64.2 from 61.9. For personal lines overall, we believe that losses from non-cat weather responds for less than one point of that change.
Personal auto results appear to be tracking what we are hearing from others. The effects of softer pricing were a primary reason for the four-point rise in the current and accident year-loss ratio excluding catastrophe losses.
In addition, the natural volatility of large losses may have contributed to the increase. The homeowner ratio excluding catastrophe losses improved, showing the gradual benefit of our actions.
The personal lines of 2007 loss and loss expense ratio excluding catastrophes were above our targeted range. As Jack said, we will continue to address pricing scale and growth and other issues to offer and store the financial health of this important business segment.
On the expense side, the total company underwriting expense ratio rose by about one percentage point for the year. Commission expenses were up because of our higher level of contingent or profit sharing commissions arising largely from the contingent profitability of our agent’s books of business.
The contingent commission approval on the fourth quarter was particularly high due to the large quarterly underwriting profit. Our commercial lines non-commission expenses also rose because of higher salaries and reallocation of expenses.
CSU and producer resources of the two companies conducting excess and surplus lines operations for us did add very slightly to our overall expenses in 2007 as we invested in people and systems. We are looking forward to 2008 when we will have premiums to offset expenses.
As Jack noted, agents are responding favorably to our entry into the surplus lines market. Those are my comments on the property casualty business.
I will reiterate the Cincinnati Life Insurance company contributed nicely to our net income for the year. Before I turn to our out look, I want to add some color on capital management and investments.
Including the ASR we announced in October, we made a record level of repurchases in 2007. As we said in the past, we balance the use of our available cash flow between the repurchase and investments based on the number of criteria.
One of the criteria we consider is the valuation of our shares. In 2008, we will continue to follow the strengths and same strategy but do not know the circumstances who will allow us to match to low our repurchase activity in 2007.
We do believe our stock has been a tranquility price to repurchase in recent months. The softness of the property and casualty markets is one of the factors putting insurance stocks under pressure.
As we said in the release, another concern is the industry’s potential exposure to the credit markets including Subprime Mortgages. Locating our investment portfolio, we believe that the market may have judged our company’s portfolio too harshly on the score in the short term and that we are all position for a long term.
Our investment portfolio contains little mortgage loans. Our following portfolio which has no mortgage tax securities continued to hold steady again in the fourth quarter.
Winding credit spreads in the corporate sector or more than offset by stronger man for low-risk securities. We do have a substantial month in this little bond portfolio selected for yield and quality with the emphasis on essential services.
Communities representing about 87% of that portfolio’s value are insured. Although many of the bond insurers are suffering from well publicized turmoil, our strong average underlying grading of A1 for the insured bonds minimizes our potential downside risk.
Now turning to our equity portfolio, -- and other financial sector stocks, make up of about 55% of the equity portfolio, and about 35% of the total portfolio. This concentration offers us the advantages of good dividend income, and exposes us to market volatility when sector issues arise.
Needless to say the sector is under pressure. Varying degrees of financial services firms in our portfolio are addressing and challenging credit quality environment and related issues.
To address their saturations, some of our holdings are evaluating their dividend levels in light of their own capital requirements and earnings outlook, potentially slowing our investment income growth. We have to size portfolio strategies to maximize both income and capital appreciation the over long term and we are monitoring our holdings in the financial sector closely.
We remain committed to sustaining strong and conservation. I know a lot of you are interested in how current marketing editions impact our expectations for 2008.
Here is what we are seeing at this time. First we believe our full year net written premiums could decline as much as 5% if current commercial lines pricing trends continue into 2008.
We believe that is a satisfactory comparison with our 1.9% decline of 2007 and the 0.6% decline estimated for the industry in 2008. This shows that we expect to lower prices to keep our best accounts and help our agents protect their accounts from competition.
We believe we can expect the positive contribution to premiums from our new excess and surplus lines operations. We have not taken that into account in our targets for 2008.
Second, we believe our GAAP combined ratio could be between 96% and 98% for the full year. As we entered in the release, our target relies on three assumptions.
First, the savings and farewell development reduces the ratio by about 4 percentage points. Second, the -- loss ratio is about 4.5 percentage points for the ratio.
Third, we will be watching the current accident year loss ratio excluding capacity losses. As Jack noted, the market trends had contributed to an increase in this ratio in 2007 are continuing and may put this ratio under further pressure.
We are looking for a change in the expense ratio. We believe that we are about even with 2007 as an anticipated decline in contingent commissions from this year’s record level offsets any increase in other underwriting expenses.
With legal level of performance we have targeted to allow us to sustain our industry’s leading position in the commercial lines insurance market place. We plan to take steps on our personal life in terms of operations is to enhance our response to the changing market pros and we look for a life insurance business to continue to make a solid and growing contribution to our earnings.
We have been successful on recent soft market cycles, how to perform in 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 our opportunities in the future.
Jack Schiff Jr.
Thank you Ken and thanks for all of you for listening and your interest in Cincinnati Financial in the Cincinnati Insurance Company. In closing let me note that our 2008 sales meetings will continue with meetings next week in Ohio and to other territories for the next two months.
Agents in the mainly southern states, we visited a couple of weeks ago were pretty upbeat and we expect more of the same as we continue these sales meetings. Our agents know businesses and families need insurance.
When the economy in less stable, they know people feel less secure and that is a great time to consider increasing security by getting a policy with a highly rated insurance company. We will work with those agents to take care of clients and earn loyalty?
So we are about ready to open for questions but let me remind everyone that Jim Benoski, JF Scherer, Martin Hollenbeck, Ken Stecher and I are here to help with all your questions.
Operator
Your first question comes from the line of Elizabeth Malone of Keybanc.
Elizabeth Malone - Keybanc Capital Mkts
I want to get a little bit clarification on your comments that, there were some economic pressures in certain markets that where having an impact on your top line. Could you give us a little bit more color?
Are we talking about residential construction or other types of businesses?
Jack Schiff
It is really across the board for liability coverages but I think when you get into particular policies and geographic areas, I like for JF to talk about it more specifically.
Jacob Scherer Jr.
Not bad but thank you and you have hit it. Certainly throughout the country on the residential side, everyone knows that there is abating of a new construction.
We like to turn them out construction, 43% of our general liability premiums are in the construction area, 46% is in workers com. Those ticker lines of business are based on payroll and sales.
So, as we observe it on the commercial line side, commercial constructions side, particularly in the areas of government construction, road builders and things of that nature, that is holding up reasonably well, but on the residential side it is obviously to everyone taking a bit of a hit.
Elizabeth Malone - Keybanc Capital Mkts
As far as that pricing pressure that you are seeing. I know that your strategy has always been the focus on your agent relationships.
Is there something else or is that a tried improved formula in a market like this that you can rely upon, to kind of keep your business a little bit more intact, or are there new things you are trying other than E&S would be one example but could you give us some color on that?
Jacob Scherer Jr.
Well, our strategy to work closely with our agency is to try to improve strength of the company. We continue to leverage whether it is our field underwriters, lost control, field claims, machine and equipment, all of our field associates to call on our agencies discerning which accounts to write work together to make sure that we are renewing the right accounts and we think that is the way we to do it.
We are on the spot, it seems the policy always on working very closely to decide which accounts are worthy of renewing, and which accounts are worthy of additional crediting. What we continue to do is we appointed our last two years, 121 agencies, so each year of this past year, 66 agencies was recorded.
We were targeting 65 to 2008. We selectedly pick agents to complement the rest of our agencies in the 34 states we do business in.
We think a great opportunity in terms of the quality of the agency that we would like to do business with us. It is a balance!
We have many agencies that do a great deal of business with us in geographic areas. They are working through the just as we are, and so we support them.
Certainly though, excess and surplus lines and the return of the momentum and personal lines are going to be two items that we think are going to contribute as time goes on.
Elizabeth Malone - Keybanc Capital Mkts
One more question, this is only on the investment portfolio. Given what is going on in the market especially as regards to financial, are there strategies that you are considering or diversifying a way from your traditional financial focus or have only waited in financials in to other sectors that maybe less sensitive?
Martin Hollenbeck
We are going to take a hard look at in all of that. Our general strategy is to buy and hold in dividend focus and dividend growth is going to stay very much intact.
I think on how we execute the strategy is something we will take a look at, hopefully. We are in something from all of this.
Interest various actions that there maybe to modify this in the future, I do not think you will see large whole sale changes because again I think we are still going through to that general philosophy but we are always trying to improve our execution of that events philosophy.
Operator
Your next question comes from the line of Meyer Shields with Stifel Nicolaus.
Meyer Shields - Stifel Nicolaus & Company, Inc
Jack, tell us a little bit about how you might change your best in approach if there will be a change in the dividend outlook for some of the financial companies, and I am wondering does that mean you are going to wait for an announcement or is there any proactive analysis you can do that will lead to a change in the investment strategy?
Jack Schiff Jr.
Well we will be proactive if we were fairly certain if something was imminent. Hopefully we could force off some of that if we really did see it coming.
We are patient, me and for example in early 2006. We have been (audio gap) large amount of that in response to what we thought was going forward, a dividend strategy that was not conducive to what we are looking at, so we will try to be proactive to the extent, we can, yes.
Meyer Shields - Stifel Nicolaus & Company, Inc
I brought a picture Jack, you talked a little bit about how contingent commission are likely to go down in 2008. Are you expecting any pressure on the core commission rate?
Jack Schiff Jr.
There is always market pressure for the regular core commissions that we play. Our commission’s structure for the most part has been the same for decades and you might that remarkable but it is true.
I think JF has better insight of what goes on in day to day on different lines of business. I wonder if JF would comment.
Jacob Scherer Jr.
We have constructed our base commission levels. I think it is competitive with the market place, maybe a little less competitive in the workers company area where we approach things conservatively.
We would not view a solution to any problems as cutting our agents income. What we unloaded if you will in terms of reward to our agencies for a job well done tends to be in the contingent area, but this require long term property building and that is what we are all looking for.
So we think the balance between a solid base commission’s structures is that we do not think really that it needs any attention, and the use of the contingent approach to provoke long term profitability in growth is a good balance for us. So I would say we are comfortable for where we are now.
Meyer Shields - Stifel Nicolaus & Company, Inc
One last question for JF. Are you seeing an up check in the number of your competitors that are looking for book rolls instead of competing on an account by company basis?
Jacob Scherer Jr.
I would say yes! We probably have seen a little more of that activity.
It is very competitive out there and so it is not in common for a carrier to come and do an agency and ask to take over entirely with the business.
Operator
(Operator Instructions) Your next question comes from the line of Mark Dwelle with Ferris, Baker Watts, Inc
Mark Dwelle - Ferris, Baker Watts, Inc
I just want to spend a couple of minutes talking a little more detail about the CSU. The first premium that quoted was seem fairly small, is that your ambition to focus on small size or will be relatively larger accounts?
James Benoski
It will be basically on the size of the accounts that we are in right now. The large accounts are the medium size account from probably in the $20,000 to $50,000 range.
That just happened to be the first policy that we wrote, and right now, we are only in about 10 agencies in five states. So it has not been extremely active but it will be very shortly.
I think we have pulled it on in some accounts in the $100,000 ranges.
Mark Dwelle - Ferris, Baker Watts, Inc
Similarly to the extent that you begin riding more business there, will you be reinsuring that or seeding any more premium there than your kind of a costume run rate or will be retaining most of that premium?
James Benoski
We already reinsuring. I think we are retaining a million dollars a lot lower that than they do obviously on the P&C Companies.
Mark Dwelle - Ferris, Baker Watts, Inc
And related to the uptake in commissions related to the profit share. I know you have not change your policy particularly related to those but is that directly related to the size of the reserve releases that you did in the quarter or is it just the trends for the 2008 or 2007 business
Ken Stecher
I think it is a little bit of everything. We have excellent quarter; the releases were part of the underwriting profit.
The agent’s profits would increase if the reserve take-down on the case reserve. So that would all factor into it.
So every year we enter into this, the three-year average may become a bigger profit picture as we have entered going through this profitability cycle. So these are multiple factors but the underwriting profit in this quarter is a part of that.
Mark Dwelle - Ferris, Baker Watts, Inc
With respect to the personal lines, so you come into the pond, the new business volumes there and that is obviously trending in the right direction. How are price decreases coming across in that business, so today is grade is what we are seeing on the commercial side where there are other signs that that *wedding* is off at all?
Ken Stecher
We are by territory by territory basis, adjusting our premiums and I do not know if that is necessarily reflected to the market place in general. It is a matter of true in up our grade as we mentioned before from where we may have got ourselves out of the market in some cases out of the market by a substantial amount.
What we are continuing to do then is adding more tearing, more scoring that allows us to further segment the business that we ride. We would not see in terms of the market place in general the kind of price the clients-- in personal lines that receiving commercial lines at all.
Mark Dwelle - Ferris, Baker Watts, Inc
Is that right, it is consistent with your strategy, it sort of focusing on agency relationship as compared to kind of a mass marketing approach.
Ken Stecher
That is correct.
Operator
We have a follow up question from the line of Elizabeth Malone of Keybanc Capital Mkts
Elizabeth Malone - Keybanc Capital Mkts
Could you give us an idea of with the pricing pressure in the market place that we are seeing and it is obviously we are in down cycle? Is there any catalyst you see out there that would change that pricing environment that we are in right now, or any sense of when you might there might be enough pain in the market place that you would see in some companies becoming a little more rational?
Ken Stecher
I do not see anything currently, I am having JF compliance in color but I think with the capital positions in the combined ratios that everyone are coasting that I think that the pricing pressure will continue at least to 2008 and possibly in 2009. I am not sure if it will be all 2009, I think we still have a ways to go from my perspective.
Jacob Scherer Jr.
All of our competitors seem to be in pretty good shape financially. I suppose everyone is going to watch accident in your loss ratios to see where they do go.
We have a good number of competitors, regional carriers that are expanding in to other states, appointing agencies. When you have no track record in an area, the differentiator, you use his price, and so its price value is very competitive.
It will be nice to sound as optimistic tone on that. We do like our strategy.
One again, we take the company into the field. We are seeing what is going on a case by case basis first hand.
Given that kind of competition on what is going on, we like our chances for the long term, but it is right now that somebody competitors that seemingly have income statements and balance sheets, they are in good shape. They are all looking for market share, so it is a tough competitive in Miami.
Jack Schiff Jr.
In some years ago, we would be faced with this soft market conditions. And the ideas was that if you could ride at a combined of 99 or a 100 you would be okay, and that is a pretty good idea, and all of a sudden through the elements of inflation, through some reserving systems that might not have been as exacting as you would have liked.
We found ourselves in our industry coming up with where we had thought to combine would be a 100, and all of sudden it was 103 or something even worst than that. We are mindful of that history and we want to guard carefully.
That that does to mean that we will, but we are aware of those kinds of elements and the leveraging effect can be severe if we are not careful, and we do not want to go in to a market place where we would impact our insurance operation to the detriment of our agents as they go forward. So it is difficult to speculate what possibly could be the one catalyst that would change the current marketing conditions, and I think JF and Ken both gave you superb answers on their views.
Elizabeth Malone - Keybanc Capital Mkts
And then just one last question on the catastrophe experience you had in 2007, I understand that a lot of that has to do with general weather and the fact that is was very mild, but are there any other factors you think in your catastrophe, is it the business that you are writing or some of the underwriting way from some of the more highly exposed catastrophic markets that maybe also influencing that?
Jack Schiff Jr.
One of the things that we have that experience is, the beginning in the hard market is the application of deductibles not only in general but when percentage deductibles are in more wind prone areas, that has a big significant effect. In fact I think it had a significant affect on frequency overall.
We have not seen as result of the market place softening, carriers or policy holders drifting back in to lower deductibles. So we view that as a real positive.
Operator
Your next question comes from the line of Dan Schlemmer with FPK.
Dan Schlemmer - Fox-Pitt Kelton
A follow up on the last question, talking about catastrophe, obviously it is way too early for any kind of claims data on basically the events from last night, the tornadoes but do you have any kind of picture of what your overall exposure just in that area? Can you share any to feed a general background with us?
Jim Benoski
Obviously we were right in Kentucky, Arkansas, and Tennessee, and that some of the areas that seem to be getting a lot of attention. In Tennessee it is more toward Memphis where we do very little business, Lower Rock was hit and we are active in the Little Rock area and also a lot of course in Kentucky but it is too early when we have a claims representative in those areas that will be making their surveys, in some areas I am certain that they have not even been able to get into the area yet because of security, but as soon as they can get in and start surveying what we have got, we will be able to—I would say, maybe a week from now we will have a better field.
We are big in Nashville and I know Nashville a lot and so with an area that had some attention from the media. Right now, it is just too early for us to put a number on it.
Dan Schlemmer - Fox-Pitt Kelton
If I can have a couple of different questions just on the loss experience. First of all, looking at – just the personal lines, I want to make sure I am understood, it looks to me like, just from the personal lines, just from the current accident year, you dropped your loss ratio down, at pretty significant amount, 12 points versus third quarter.
I want to make sure I understand that, is that based on experience this quarter being that good or is there a lot of through up there relative to the first three quarters of the accident year flowing in to that?
Ken Stecher
Just looking at the third quarter of 2007, we had 5.8 points of catastrophes, in the fourth quarter of 2007 that was a – 0.7. So that would we also most 6.5 points swing, right there if you are looking at it.
Including the cash, is that the point?
Dan Schlemmer - Fox-Pitt Kelton
Well, I guess my question is, I am looking at the 58.5 for the current accident year for Q4, I mean, quite a bit lower than anything you have booked over the last six quarters. I guess the real question I am trying to get at is, I mean, are you seeing that much improvement in the book or is this sort of a one time true up and you are right, the cats obviously flow into that, but I was wondering if a decent chunk of that is a one time true up from the first three quarters or it is really, basically looking at a pretty significant improvement in the actual experience this quarter.
That is really what I am trying to get at.
John Skiff, Jr.
I think, I do not know if I can answer it completely, but I do think that we did see some release in the personal lines on the personal umbrella through the IBNR, the fourth quarter as I have mentioned in my comments actually is to a lot larger, a lot more full blown loss test in the fourth quarter and the personal umbrella in the quarter, I do not have the exact dollars on what might have been on the current accident year, but I know that could be a part of the issue.
Dan Schlemmer - Fox-Pitt Kelton
And then just overall, they are not just personal, but personal and commercial. I mean, obviously, pretty substantial releases from the prior accident years, can you give us a little bit of background on, I am really wondering which accident years you are releasing from what the aging is on that mostly and if you can give us background on overall what the drivers were if there were specific drivers which I realize sometimes, it is with the aggregate data.
John Skiff, Jr.
That is true. I think, the fair amount of that was casually related and basically when I have talked to our actual real staff, what they basically said is when I am going back and looking at a lot of prior years and the years have been developing more favorably than they thought, so therefore, they are going back multiple years and saying, where we thought the losses would progress are progressing more favorably to us and so when they go back and look at those loss incurred ratio as we were looking at previously, it brings those down as marked clients get settled and there is less out there left for volatility and when I look across multiple years, they are finding that there is favorable development coming out of multiple years and so that is the biggest piece of it that is in the casualty line.
Now as it related to for like the full accident year, just talking about casualty by itself, there are fairly large amounts of federal development in 2006, 05 and 04 and 2002, so it is kind of spread across various years.
Dan Schlemmer - Fox-Pitt Kelton
For some of the big news I guess last quarter, I mean, not big news, but news last quarter was this whole issue with the Florida DOI subpoena and then that has been somewhat in the news with other companies since then, is there anything going on there that you can share with us and whether that is developing into an issue or where that is going?
Jim Benoski
We are at one point, we were subpoenaed to appear before the Department of Insurance and that subpoena was withdrawn. There has been nothing reset, I think what they are concentrating on are tiers that have a lot greater market share than Cincinnati and our share is, I think about $20 million and the areas they were looking at I think here is in the hundred million, so not much is going on from our standpoint.
We are waiting to hear if they do want us to come down and testify or not. Right now, there is nothing set and whether they will call us again, we do not have any idea.
Operator
Your next question comes from the line of Meyer Shields from Stifel Nicolaus.
Meyer Shields - Stifel Nicolaus & Company, Inc.
I was just wondering whether there has been any difference in the ramp up of the agency you have appointed over the last couple of years compared to your agency’s deplorable ramp up status?
Jack Schiff, Jr.
We have had a few more agencies appointed here in the last few years. Just to give you a little bit of background; on 2003 we had 47; on 2004, 56; 2005, 57; 2006, 55; and then 66 this past year.
It is not huge. It is deliberate and as we have gone into a couple of new states, that has helped us along, but the make up of our agency forces is very key to our strategy.
We carefully examined geographic areas. We would anticipate that level in the mid 60s, probably to continue for a few years.
We are ranking up business growth as a result of that. It does not explode on the same for us.
We tend to nurture those relationships for a couple of years, but we do well and we would expect that they are going to contribute to our growth.
Meyer Shields - Stifel Nicolaus & Company, Inc.
But the business growth that you are seeing so far is typical of your earlier year’s agency appointment.
Jack Schiff, Jr.
There have not been any changes as far as the percentage makes up of newer agencies or more mature agencies. It is all consistent, yes.
Jim Benoski
Thanks, Meyer, we appreciate it and we appreciate all of you for joining us today on our questions. We are available if you want to call us on the telephone and talk one on one.
Jim, Ken, Marty, myself, we are glad to speak with you at your convenience. We truly appreciate your interest in Cincinnati Financial and look forward to tracking our progress for you in 2008.
Thank you.
Operator
Thank you. This concludes today’s Cincinnati Financial Yearend 2007 Conference call.
You may now disconnect.