辛辛納提金融 (CINF) 2002 Q1 法說會逐字稿

This is an unedited realtime transcript. An edited version with proper case and full speaker names will be available shortly.

Good afternoon. My name is julie and I will be your conference facilitater today. At this time, I would like to welcome everyone to the cincinnati financial corporation first quarter 2002 conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star then number one and questions will be taken in the order they are received. With that, I will turn the call over to the public relations.

Welcome, everyone, to cincinnati financial corporation. Bring now, you should have received a copy of the first quarter news release by fax. If you've not received your copy, it is available on the company's web site at www.Cinfin.Com or call 513-564-0700 and a copy will be faxed to you immediately. On today's call, john schiff jr. Will begin after which the call will be opened for questions. With that, let me turn the call over to jack.

Thanks, heather. Thank you all for joining us today. To pref is our remarks, know that some of the matters we are discussing today are forward-looking. Forward-looking statements involve certain risked and uncertainties. We direct your attention to our news release and to our various filings with the sec. Now, before we talk about the quarter, I wanted to comment on the news release issued yesterdayably calpres. As we said, we are disappointed they apparently rejected the decision of our shareholders to retain our current board makeup. We also are not too happy they choose to group us with companies that have financial performance questions. Even the calpres prep represents say cincinnati financial management is doing a great job. We thank them for that compliment. As background, calpres wanted to offer a makeup of our board of directors to meet their definition of independence. At our recent annual meeting, more than 75% of our shareholders rejected that proposal. They agreed with our unique agent-centered business model works best with directors selected for their qualifications not to conform to an arbitrary quota or definition. We different yent yat our company by giving agents personal access to company executives and elevating them to our board. Currently, our 15-member board includes independent business executives, alongside independent insurance agents. As people who have studied our business, you know these agents bring us a special ability to serve policyholders and agents in local communities. We believe that by taking a cookie cutter approach, that all boards and all companies ar like, calpres has shown how limited their approach is. They have shown that they are willing to overlook how we create value for shareholders. For example, shareholders have received increasing dividends for more than 40 consecutive years. Analysts who follow the company and others who follow the industry like price water house coopers and morgan stanley have published stories commenting on the transparency and clarity of our disclosures. Further, we have a reputation for setting adequate reserves and have consistently received high financial strength readings from moody's investment services, standard & poors and most recently fisk ratings. Total return to shareholders over the last five full years was 193% versus 137% for the s & p property casualty index and 166% for the s & p 500 index. And beginning -- and since the beginning of 2002, our stock price has appreciated 19.8% compared with 12.4% for the s & p property casualty index and a decline of 4.1% for the s & p 500. As a final thought on the subject and something we feel very strongly about, we under a relationship business and we have responded to calpres's initial inquirys with personal conversations and face-to-face meetings. We would prefer to continue to dialogue in that manner either with representatives or others. We know our strategy is successful and we're willing to defend it. I might add that our agent members of cincinnati financial's board of directors are independent business owners. They have their own offices to staff and they have their own payroll to cover and people to motivate and to sell insurance in a correct way. They have many different insurance companies that they represent, as you all know, who follow the independent agency business. At a drop of a hat, all of our agent directors could replace the business with cincinnati insurance with darn near any one of their other insurance companies and then cincinnati financial would be the worse for it because these are professional agents that send us profitable business over time, and we have to continue to cultivate their interest and by example let others in our insurance organization see how we highlight the local agent and honor them and take account of what they can deliver to cincinnati financial. So with that out of the way, let me turn to the very strong first quarter with we reported record performance acrossed board. We're very pleased with the results and continue to see positives in the market and in our business. As we have said, we expect an improvement in our full-year results when compared with 2001. But we are maintaining our perspective. While we often have had good first quarters, our experience tells us that the first quarter performance is not predictive of full-year results. Our targets for this year remain to achieve premium growth well ahead of the industry average and to bring the combined ratio to about 101.3%, our five-year average from '95 through 1999. The excellent first quarter, particularly the very strong growth in earned premium makes us more optimist thak we are on track to that target. So with that introduction, let me talk a little bit about the marketplace and our results. Ken will follow with an overview of profitability and loss trends. Jim will cover investments. Briefly on the fist quarter, total written -- net written premiums were up 15% with commercial lines up 17% and personal lines up 11%. Quarterly net written premiums exceeded $600 million for the first time. We reported an underwriting profit for the quarter of $5 million. With the combined ratio at 96%. About even with last year's very strong first quarter. Pretax investment income was up 8.7% as we benefited from strong cash flow. Net operating income per share was a record 49 cents for the quarter and book value was a record $39.58 reflecting healthy, unrealized gains as the market improved. The first quarter really seemed to mark the start of the newest chapter for commercial insurance marketplace. While some firms, including cincinnati, began firming pricing several years ago, our agents report that many insurers now are drawing a line in the sand for price adequacy. Some competitors have announced decisions to exit geographic markets or specific lines of business. Others have instituted across the board price increases with little or no room for negotiation. And this context, our case by case approach is serving to further solidify our relationships with independent agents and setting the stage for our continued growth. While we are firmly insisting on insurance devalue, earning adequate premiums for property exposures, we continue to ask our agents to bring us business. We're accounting -- we are continuing to look at each piece of business on its own merits, while aware of risks and profitability, we are not shutting down markets or business lines. Our agents know they can count us to be reasonable about accepting their quality business and they are bringing us that business. We've heard their appreciation of this approach more than once at this year's sales meetings and remain convinced that it translates into more high quality accounts over the long term. Overall, commercial net premiums rose 16.8%, including new commercial business up 3.7% for the quarter. 3.7% for new, commercial business may sound low, but really, it represents a healthy trend. Because during the period, we decreased new workers' comp business, excluding workers' comp, the growth rate of commercial new business would have been 14%. On commercial renewals, increases averaged 15% to 20%, although the overall range is much greater because of our willingness to look at each risk individually. On the personal line side, our 11% overall growth was driven by a combination of factors, including the initial impact of rate increases that are working through the book and more accurately pricing the value. And we continue to work on new software tools, reunderwriting. In ohio our second rate increase in six months took effect during the first quarter and our first increase is helping to drive the premium increase. All in all, we're pleased with the direction of the property casualty business. Briefly, for the life insurance operations, except for an unusually high level of death benefits on older policies, it was a good quarter. Production was strong and it should stay that way due to new term products and staffing of a new field marketing person to expand the western region. Now, before I attorney everything over to ken, i wanted to spend a little time on the reinsurance treaties we finalized in late february. As we said in our year-end call in an effort to minimize the impact of the increase in rates, we raised our retention level for both the property catastrophe and working reinsurance treaties. We have the capacity to repain -- retain higher level of loss. As we announced earlier, the higher rates for the reinsurance are expected to impact earnings per share by about 12 cents this year. The first quarter impact was 3 cents or 1.3 percentage points on the ratio. We factored this impact into our outlook for the year. The structure of the new treaties is described in depth in our annual report, but one key element is the inclusion of terrorism coverage with certain limitations. Particularly for commercial risks over $50 million in exposures. These higher amounts of insurance will need separate terrorism coverage. On the certainly line side, policyholders have terrorism coverage. We felt that it was important to offer terrorism coverage to our policyholders, and we worked hard to get it included in our reinsurance treaties. But generally, we are quite pleased with the structure of the new treaties. So if things seem to be shaping up well, we continue to see a positive long-term for the company and believe things are headed in the right direction. So with that, let me turn things over to ken.

Thank you, jack. Once again, it's a pleasure to be speaking with all of you today. Before I talk about the loss trends, just a few items. First, we reported a net capital loss of about $5 million for the quarter. Several different types of gains and losses now run through that line, including fas 133. You may want to double check your models because in last year's first quarter, fas 133 was run through investment income. We changed that treatment in last year's second quarter and are showing last year's first quarter data on that basis in this release. Fas 133 had a positive impact of $1 million in both years. This quarter we also recognized asset impairments of $6 million or $4 million net of tax and three security writedowns. What you might call traditional net capital losses were $2 million for the quarter. As jack mentioned, the combined ratio of 96.3% was about even with last year's 96.5%. However, the total loss and l.E.E. Ratio was about 2 percentage points higher than a year ago with the expense ratio about two points lower. The loss and l.I.E. Ratio this year include 2.6 percentage points versus last year. And higher reinsurance costs had a point impact on the quarter. That doesn't quite capture what we're seeing in the loss trends because the larger losses were still at the higher levels we've generally been seeing for several years. In contrast, the category we labeled remaining incurred, declined as a percentage of earned premium to essentially its lowest level since the second quarter of 2000 while total claims in this category remained high, the dollar amounts are at the lower end of the range reported over the last seven quarters. In line with industry opinion, we're taking the approach that higher levels of severity are here to stay. We have to appropriately underwrite and price for higher severity so we don't see the remaining continuing at the first quarter level as we move forward. Now looking at the larger losses, we only had ten losses greater than $1 million in the quarter with 99 losses between 250,000 and 1 million for a total of 54 million dollars in losses greater than $250,000. Now moving away from that type of analysis, let's look at the loss trends by business segment. For commercial lines, the loss and lee ratio was versus 69.7% a year ago. The personal lines loss and l.I.E. Ratio was 76.1% versus 68.9% last year, including six percentage points this year compared to 2.5 points last year. Here are the first quarter loss and lie -- l.I.E. Comparisons we've been folk focusing attention on. This year versus 75.25 last year. Worker's comp 82.2 versus 88.3. Personal auto, 68.1 versus 65 plt 8 --.8. Homeowners, 79.The 7% with 16 points of c.A.T. Losses this year versus 77.5 in 2001. It's clear we're making progress toward underwriting profits with printings increasing and helping offset loss severity. Further, careful monitoring of expenses also is helping the expense ratio, although the lower ratio is the function of the strong growth and net written premium. First quarter net written premium benefits from a number of commercial policies that renew on january 1st. One last item. Claims continue to run high for umuim. As most of you remember in the wake of two ohio supreme court decisions, effecting all insurers in the state, we established a $110 million reserve for the claims. Incurred but not yet reported the fourth quarter of 2000. In the first quarter, we sauna another 9.75 million in reserve and already aware of almost 5 million dollars in claims. At quarter end, the result was as $36.5 million and we're carefully watching the trends in that area. With that back drop, let me reiterate that. Assuming a normal level of catastrophes, we expect to see the stabilizing near the 101.3% that was our average from 1995 to 1999. That improvement along with contingent strong premium growth will help return us to the consistent performance as traditionally been a hall mark and a high priority for management. So with that, let me turn things over to jim.

Thanks, ken. Good afternoon, everyone. This is one of those quarters that statistically we enjoy talking about. Book value as jack pointed out, 39.58. The book value is the highest we have ever reported to shareholders. Our equity portfolio has done well, 7.4% return for the quarter versus beating our benchmark which is the standard & poors 500. I might say again with that, seven of our top ten stocks increased in value. It looks like value investing may be back. Investment income. We are very happy with the 8.7 increase, but we must scale back our enthusiasm because last year, codification made our investment income look anemic. This year, it is making us look a little too good. We expect our investment income to increase for the year between 6% and 7% and we will feel very good about this because it will look very good in comparison to the rest of the industry. Ten of our 44 common stocks increased their dividends the first quarter but none were in our top ten. These are normally increased in the latter part of the year. Buyback. In the quarter, we have purchased 198,400 shares. Since february of '99, when we were given the authorization to buy back 17 million shares, we have purchased 9,1 290,305 shares at a cost of 324,770,000. So we are definitely looking at the buybacks. We are definitely in the market occasionally to by back our stock and we will continue to do that. Cinfin capital management. We have not talked much about cinfin capital management. This is our outside investment management company. We started with our first client in may of 1999 and now have almost 700 million under management without a marketing department. We plan to have a marketing department in place by june 1, and we look for this to really bear fruition starting in 2003. And with that, I will turn it back to jack.

Thanks, jim. Ken. And thanks to our listeners for bearing through that explanation and some of the elements of our business. We think it's helpful to add perspective on the numbers you see both to shed light on our business and to shed light on our industry. We hope these details give you a better idea where our company is heading. Before we open for questions, I'd just like to reiterate our confidence in the path we've chosen. First, our current experiences say we're on track. We have a number of things going for us. A very strong financial condition with capacity to write more business and excellent franchise through our relationships with independent agents and the right mind set to continue to move ahead on items that meet our careful attention. The insurance industry by its very nature dictates that some issues are outside of our control. But we think we are doing a good job in controlling the items we can and on the items we can't control, we are meeting our obligations to our policyholders promptly and personally. Our financial strength ratings, including the new ratings from fitch, demonstrate our reliability and our staff and independent agents demonstrate the values cincinnati delivers. We are committed to our approach to doing business. We're execute excited about our future. Operator, we're ready for questions now.

At this time, i would like to remind everyone, in order to ask a question, please press star then the number one on your telephone key pad. Your first question is from nancy of mcdonnell investments.

Good afternoon. Congratulations on a great start to oes 02. Thanks forb the detail. It was helpful. A couple follow-up based on your comments. If you could talk a little more about the reinsurance transaction. I think you indicated the 12 cents for the year and what the number was in the quarter. That with the fact that you have been talking about getting back to a 101.3 on an annual basis for this year. Certainly, we saw low combined ratio in this first quarter. Was the combined ratio for the quarter what was expected when you made the comment about the 101.3 or does that take into account the hit for the reinsurance contract, too? I'm just trying to see how that's baked into the number.

Nancy, good question. This is jack. I'd like ken to answer it, but I'd just like to offer an idea that the quarter surprised us very pleasantly. We didn't think things were going to work out that well. Honestly, on a week to week basis, you'd be surprised how the claims can jump around. The reinsurance was fully absorbed in the qifrt faurter expenses. Maybe if ken talks a little bit about it, to shed more light on it.

Thank you.

Yes, nancy. The reinsurance increases were take noon account when we set our target of 101.3. I think the way the wind blows and the weather occurs, we never can say for sure what each quarter is going to bring from catastrophes. We would have to say that this quarter was better than we thought. You know, ka catastrophes were higher than the first quarter last year. Severity continues to be, you know, a concern for us. The one thing that probably, as I mentioned in my comments, we were a little bit surprised at is that the remaining incurred just slightly under 220 million when that had been averaging about 240 over the prior three quarters. That drop in small claims is what is accounted for quite a bit of the improvements.

Okay.

And that -- so severity is still there. Frequency is not much of an issue. So, you know, the 101.3 is started. Catastrophes, we don't know what could occur the rest of the year.

Along those lines in terms of the commercial lines book, could you give us a sense of what the persist stensy of the commercial lines book has been right now, and as you've gone through and put in place, higher rates, do you feel that most of the commercial lines book has already been rewritten at this point with the view of the higher severity that you feel will be here for a while?

Nancy, this is js. We're still going through the policies we have and rewriting them. Keeping in mind, workers comp commercial auto and umbrella all have the ability to have annual treatment. So we've gone through and we'll continue to go through and make certain that as times change as the year goes through that any changes that occur in any of the policyholders, we're recognizing them and factoring them in. As far as persist stensy of our book is concerned, we have been nonrenewing worker's comp. We're not writing as much new comp. That is a line of business we have a special conservatism towards. As far as the rate increases we are suggesting, we're really not getting much push back there. They are able to place the business with us at the higher rates that we've been proposing. So we're satisfied with rate level increases.

In termed of persistentsy, you are keeping what you want at this point? Is that fair to say?

It's fair to say. The umbrella market is chaotic out there right now, so there have been some situations where on commercial umbrella, there's a wide variety of pricing that's out there in the marketplace. And so during the first quarter, there were a few surprises there, but nothing that we felt was especially alarming.

Great. Thanks very much. Appreciate it.

Our next question comes from ron frank of salomon smith barney.

Hi, everyone. A couple of things. One is, at the risk of beating a dead horse, I want to make sure I understand, you know, why you are issuing the caution about extrapolating the first quarter. Your large claim severity is about -- rather, your large seven veertty claims frequency is about stable. You've sort of indicated that's something you accepted to live with and you are pricing for it and are being successful at that. Pricing is the rest of the year. Did weather treat you extremely well in the quarter? It seems to have a lot of others or is it really just that small claims experience that you just think broke favorably for whatever reason and probably isn't sustainable?

Ron, I think the small claims experience was helpful in the first quarter, pleasantly to our surprise. I would say that the competition is more fierce out there than you read in the headlines. We talked with our agents and we hear and see competition, and it's tougher on a price base igs and a coverage basis. We deal with it all the time. On the caution for the first quarter, if you look at the last six or eight quarters that we've had, we've had quarters good and quarters bad. Not bad, but not satisfactory. And I just think we're smarter to be cautious and not relax ourselves on the underwriting things we're working on, on the pricing requests that we have, on dealing with agents one-on-one. I think if we keep all of those things this front of us, we have a better chance of completing the year in a good fashion.

Was weather a big help or was it really just the statistical break on the small claims?

Ron, this is ken. The weather was a little more than you normally might see in the first quarter.

So it really was just, i guess, serendipitous for lack of a better term?

Yes.

All right. Another question if I may, notwithstanding what you just said, jack, about the competitive environment, your prepared remarks seem to indicate that you saw a pretty pronounced improvement, specifically during the last few months in terms of competitors backing off and your ability to price and grow, et cetera. And I was wondering if jf could elaborate on that with a little bit of a ground up view? Well, part of our observation would be that we just finished 24 sales meetings throughout the country this spring talking with agencies. The national topic of conversations is in terms of pricing and also underwriting restrictions, if you will, that we've put on policies. And we're simply seeing, i guess, a comfort level on the part of our agencies that in general that the kind of increases that we're looking for, whether they would be workers comp, commercial auto certainly and commercial umbrella that agencies are successfully delivering those. Now, jack made the comment, and it is true that there still remains competition out there. There still are excellent accounts for which many carriers will go after. So you can't say that there isn't some competition or that everyone has their own way. But as we see it, we're getting great cooperation from our agencies. They are able to retain the good accounts that they and we want to retain. So we're confident at this point that we can move in the marketplace.

Okay. Thanks very much.

Your next question is from charles gates of credit swift first boston.

Hi, good afternoon. I have a couple of questions. One, in your news release, there's the following sentence. Something to the effect that in recent years, we have invested 35% of, I guess, new moneys in stocks, in 65% in bonds.

I would say, charlie this is jack. Would I say that's on target.

I thought it was more in stocks actually. So I guess I was just behind.

No, I think we're talking new money.

Okay.

And new money goes mostly into bonds and then maybe a third into stocks. If you look at it at a market value of the existing portfolio, jim's chomping at the bit to talk about this. But the market value is probably the reverse of that and more skewed toward stocks.

Okay.

Charlie, that's 35% really including convertibles, so we've invested in equity-related area in the first quarter, 35%, 65% in bonds.

I didn't understand your question -- your comment, jim, about codification as it related to investment incomes.

Okay. Last year, we were amortizing our investment, the premiums and the accrual discounts on a straight-line basis. We switched that to the see intefk or yield basis, which whapd what happens is it fronts loads the premiums. So by doing that last year, our investment income was artificially low. This year, because we're catching up right now because we're looking at a quarter to quarter basis, it's artificially a little high. So that will level out as the year goes on and so that is the reason I said it will be a 6% to 7% increase for the year.

So what was the increase actually in the first quarter?

8.7%.

Okay. So therefore my earnings were goosed up by some amount specific to that that you just made reference to?

Well, would I say this. Because of the codification and the increase in am ortization and the increase in accrual discount, we've got a little higher than it normally would be.

Okay. What's the minimum contribution you can put into cinfin capital management?

Half a million dollars.

You've got to change that. Lower it. [ laughter ]

You'd be a customer, charlie?

I could be. laughter ]

Okay, next question. On your reinsurance programs that Mr. Schiff and jf, i guess, spoke to, it says basically, the estimated seated premium in 2002 is 86 mill and it was 68 mill in 2001. Am I looking at the right numbers as far as the price of that program?

That would be last year's program. I think the property catastrophe program would be just one aspect of those premiums, charlie. I think those premiums that you mentioned in the annual report reference are working treaties.

Okay.

Which is the bulk of our reinsurance.

Okay so that's more than property catastrophe?

Yes, sir.

Okay. I didn't understand the -- my last question, I guess, well, there are two questions, and then I'll get off. One is the comment that the way js said that our broad coverages are chaotic. I need help on that. And then the other is in follow-up to ron's questions concerning the marketplace. Would you elaborate on your comment about competition?

Charlie, first on commercial umbrella. Pricing is what -- if I didn't, I meant to say commercial pricing on commercial umbrellas is a little chaotic right now. It's rising and in some cases enormously. Everybody's had their bout with severity, and so obviously it's showing up there. But there are a variety of competitors in there and the pricing is really not as predictable as you might expect it to be. As far as general pricing is concerned, we're still seeing as we have reported in the past, on good accounts, 15% to 20% increase as being a deliverable kind of increase. We haven't seen any backing off of that at this point.

The only question, I still don't understand the comment about chaos in umbrella. What do you want us to take away with us from that comment? The pricing is unpredictable.

And that depends on what?

Well, depends on the carrier that's quoting it. Depends on the class of business that's being quoted. It's changing a lot. It depends, I suspect, on the reinsurance treatys that various carriers have renewed with their reinsures so an awful lot has taken place in the first quarter in terms of carriers you would have predicted to be in certain areas, certain pricing structures. It's just a little hard to predict.

What portion of your premium is umbrella?

I'm watching him scramble through some papers, charlie. And now the adding machines are clicking. You don't want a play by play --

It's probably a good question.

Charlie it's about 7 1/2% on the net written in the first quarter.

Thank you, sir.

Your next question is from miami hallic of fox.

Good afternoon. Firstly, I wanted to thank you all for the tremendous disclosure you all provided in this year's annual report. I think that's reflective of the transparent and first class nature that you guys run your business. Anyways, my first question, can you expand on your comments about the large loss trends? In particular, how effective do you all think your efforts have been in stabilizing your large loss ratio?

Oh, we're looking around to see who should answer that. First, I would like to thank you for commenting about our disclosure assurances. We appreciate that. We think we're having some pretty good success on working on the pricing on an individual risk basis, making sure that the price we're asking fits the risk that's at hand. The hard part on the claims is that the big losses just seem to be staying big. And as we said in the release, we almost are at the point where we have to accept that and continue to price for that higher level of loss. Maybe jim benoski who adds up our claims, maybe he can add some light to it.

Mike, jim. The severity, I think is here to stay because there's nothing that's going to drive severity down. What we've been trying to do on the new claims that come in, the larger claims, we're trying to reserve those more on an injury basis than we are on liability because the injury now seems to be driving the value of the claim. So you're going to see probably more in the 250 to a million dollar range. That number is going to stay, hopefully, around the same, maybe up a little bit. Where we're triing to attack it is on the development. And that number we hope will come down. We're doing some extensive reviewing of the files on an individual basis. We do that anywhere from a 30 to 60-day -- well, a 30 to 90-daytime period. And we're paying strict attention to the severe injury cases and trying to get those reserve where's they belong. And hopefully, that number will not grow and maybe even drop a little bit.

So would it be -- I'm sorry. Would it be safe to say then in light of kind of how your differing attitude on the reserving and what you all did last year in terms of underwriting actions, that you all would not expect the large loss ratio to materially escalate in 2002 relate toif 2001?

I would not expect it to, no. One thing we have a track, mike, and we're going to start is how many reserves do we take down of 250 or more. You know, we have reserves going up and we track those but how many are reduced? And we're going to have to start taking a look at that to see how that balances. We think it's pretty stable and should be stable the rest of the year.

Thanks, jim. My -- I have another question in light of what you are seeing in the market. Can you talk about price increases and the potential to accelerate going forward and your appetite for new business moving forward? It seems like you may have increased your appetite on a go-forward basis. Well, I've mentioned as far as the pricing increase in commercial lines, once again, though there are some reports that pricing is starting to back off a little bit, I can say, once again, anecdotally from all of the meetings we've been to, the renewal pricing we're sending out and new business writings that we're still seeing the pricing levels holding pretty steady in the 15% to 20% increase range. As far as new business appetite's concerned, we're not doing anything out of the ordinary to change that. We continue to have our field reps calling on agencies with the same frequency. Those agencies are farley prosperous agencys that have carriers this their agencys that are in some cases dong a marvelous job and fine job of renewing their business. In other cases, they may be presenting us opportunities as well as the normal new business activity our agencies would handle. So we still are asking our field reps, adjusters, loss control people to spend an extraordinary amount of time with our agencies working on renewals, which is taking a bit of time away from new business production. In talking with all of our agencies, and we saw probably 800 of the 900 this spring, they indicate, also, that the time spent on renewing business right now is really extraordinary. And they're not getting out writing as much new business as they ordinarily would like. So having said all of that, excluding worker's comp factor, the 14% increase in new business in the first quarter is more elbow grease and availability than it is initiative on our part.

Okay. And I just have one last question. Someone somewhat unrelated on reinsurance. Can you talk about how the changes in your reinsurance treaty this year might impact underwriting volatility moving forward? And lastly, if you hit your target in 101.3 and have a normal loss year, would you expect to see rate increases again next year in your reinsurance program?

The rate increases in the reinsurance program is a hard juan to ask. We don't have much control over that, and our reinsurance apart from the marketplace have had three or four truly bad years of insurance results. And they might tri to get rate increases next year. I don't want to speak out of turn in the event that some of them are listening and will take that as a hint that it's to be available. But you never quite know what their business plans are. Changing back to the volatility question with the extra reinsurance questions we've assumed. Mike, I think we've sooem assumed not that much on a per claim basis and our working treat yis. I'm going to guess and see it's in dollar amounts maybe an extra $400,000 per case to as much as $800,000 per case. And we think that's manageable. It doesn't stick our necks very far out. We still have the high limits. It helps us share the premiums with our reinsures. We in effect become a little bit of our own reinsurer by absorbing those risks and by keeping them small like that, we don't think we endanger ourselves. The risk that we have is one of a great frequency of claims that fall in that category and the record shows pretty good. We've not had a great number of those claims over the years.

So on a historical basis, i guess you could say that your losss in that range would reflect similar ratio relate toif kind of what your underlying reported numbers are.

Yes, sir, mike, that's what our hope is. That's the way we're planing in our underwriting and our pricing.

Great, thanks very much.

Your next question is from richard baruk.

Hi, jack. Dick barush from philadelphia.

How are you doing?

Good. Historicallytion I think you participated in some of the aviation pools. Are you still participating this that sector and if so, can you give us some idea what kind of increases and pricing that you've seen in that category if you are still involved?

Yes, dick, we are still involved in the aviation pool. Usaig --

Yep.

And we've heard of their request from their policyholders that are multiples of what their expiring policies are.

Mm-hmm.

And we'll just see how that works out. We don't know what our plans are for the future participation. Those are highly professional skilled aviation insurance experts.

Mm-hmm.

We have a lot of confidence in their ability to do things well. But it's a line of business that if we don't do business with them, there's nobody else that we really have a source of aviation insurance. So from helping our agents, we wouldn't be able to do much. Now having said that, our agents don't often call us for aviation insurance as well because they know that we're not an underwriting company for it. So I'm kind of talking in circles a little bit but i think that's a fair assessment.

One quick question. I tried to get some insurance from you folks down in south carolina and ended up having to go elsewhere because you're not registered or licensed down there beyond a very limited coverage of just fire and extended coverage. Do you have plans to broaden your exposure down there as far as what you can write?

Dick this is js. We're licensed in south carolina but not personal line. That was more of a case of a regulatory frustration that goes back many years. I do know that the first lines division of our company is, in fact, considering a first lines present in south carolina in the future.

Having a house down there, I just got a renewal and went quickly to your savannah agent and I was hope hoing I could place my house with your good company but I was it was not possible.

You're a loss free kind of guy.

Should have seen my rate increase.

I don't want to see your rate increase. You're in the wind storm doan. I can only imagine.

Well, come to philadelphia, or outside the area because the rate increases around here are a lot higher than what I'm hearing from you guys.

Ooh. That's good market intelligence.

Well, I can guarantee you, it is healthy. Thanks very much and great quarter.

Yes, sir, thanks, dick.

Your next question is from john keith.

Thank you, good afternoon, all. Regarding the uim situation that you described earlier, does the judicial environment regarding the scott ponser and link coe cases stable or is that still an evolving situation? And could there be some more news on that front?

John, james benoski. It's still evolving. There's a case before the supreme court now to expand the link coe to the cases that predate, I think, 1997. We're waiting on that decision that could have a, if it's unfavorable, could have an adverse effect. There was one favorable decision in the supreme court just refused to hear a case that ruled in the insurance industry's favor on ponzer issues. So it's still changing. There's been some good and some that's still up in the air.

Of the two cases, the lynn coe is the, I guess the smaller?

The link coe is a smaller in number of claims and dollars to date. And the case is pending as a -- one of the cases is a linco case.

Mm-hmm.

But that has not developed as we thought it would. It's a smaller number of claims and the dollar amounts are not near what we thought they were when we put up the reserves.

Mm-hmm. I see. Thank you very much, jim.

Your next question is from charles gates of credit swiss first boston.

To what extent -- I know there was a company prior to 1985. I guess you got started in the early '50s around '52, '53, somewhere in there I believe. To what extent given that history do you feel you have exposure to asbestos?

Charlie, we were founded in 1950 and we started strong in personal lines. And as the '60s evolved, we got more in the commercial lines where most of the asbestos skpeez your is. Then the policy forms were changed. The exclusions and conditions came out to exclude certain types of pollution and so forth. And that was probably in the early '80s or so. Jim would be well tuned in. I wonder, maybe, jim, if you'd talk about it.

Yeah. Charlie in the '80s, our retention was much lower than it is now. So the as best is cases that would be there, we would not have a great skpeez your no to those because of the low retention we had.

When you say that, it would all go to your reinsurer or just -- you wouldn't have it because of the policy limit?

Well, some have as best is exclusions but the earlier wons would go to the reinsurer.

Thank you.

Once again, i would like to remind everyone, in order to ask a question, please press star then the number one on your telephone key pad. At this time, there are no further questions. Do you have any closing remarks?

Yes, I do have closing remarks. [ laughter ] and I'm please to the offer them to you. We are grateful that you've joined us today. We've got many good things to talk about and it's a pleasure for to us do so. Senate insurance companies under excellent shape and we look forward to continuing our record of providing value agents, policyholders and shareholders. Thank you.

This concludes today's conference call. Thank you for participating.