辛辛納提金融 (CINF) 2002 Q2 法說會逐字稿

Good afternoon. May name is Brook and I will be your conference facilitator today. I would like to welcome everybody to the Cincinnati Financial earnings conference call. All lines have been placed on mute. After the speakers' remarks there will be a question and answer period. Press the star and number one on your telephone key pad. If you would like to withdraw your question, press the pound key.

Ms. Weicksly [phonetic], you may begin the conference.

Welcome, everybody, to Cincinnati Financial's second quarter earnings conference call. You should have all received a copy of the news releast. If you haven't received your copy it is available on the website, www.cinfin.com, or call our company (513)564-0700 and a copy will be faxed immediately.

On today's call, Jack Schiff, Jr., our chairman and chief executive officer, will begin, and followed by comments from Ken Stecher, chief financial officer, and Jim Miller, chief investment officer, after which the call will be opened up for questions. With that, let me turn the call over to Jack.

Thanks. Heather. Thank you all for joining us today. To preface our remarks, please note that some of the matters we will be discussing today are forward-looking. These forward-looking statement involve certain risks and uncertainties. With respect to these, we direct your attention to our news release and to our various filings with the SEC.

With catastrophes losses and widespread pessimism around the economy, we feel we came in with an acceptable quarter performance in this quarter.

Although there are still issues that are of concern. We will be talking about those concerns today, but I would stress that there are also reasons for optimism. I want to point to those as well.

Let me go through the highlights of the quarter. Briefly, total net written premiums for the second quarter were up 14 percent with commercial lines up 17 percent and personal lines up 7 percent. Six month premiums are up almost 15 percent, keeping us on track to achieve satisfy premium growth this year.

New business premium resumes its growth rising almost 24 percent as we continue to gain opportunities to write our agents' best accounts at appropriate prices. Combined ratio came in 107.2 percent, compared with 106.2 percent a year ago.

That sure doesn't tell the whole story. First, catastrophes added 8.1 percentage points this year, compared with 6.9 points last year. Excluding catastrophes, the combined ratio was 99.1 percent, slightly better than last year's 99.3 percent.

Further, our six-month combined ratio is 101.9 percent or 96.5 percent excluding catastrophes.

Compared with 101.4 percent or 97.3 percent excluding catastrophes last year.

Finally, commercial lines at 96.7 percent combined ratio, excluding catastrophes with personal auto the stronger of the two personal lines products areas. Other than catastrophes, the homeowner line was the biggest drag on our results. I'll talk about that situation in just a minute.

Coming back to the bigger picture, second quarters are often the stormiest period of the year. With this one behind us and what we see ahead, we believe things are on track to achieve our target combined ratio of 101.3 percent by the end of this year. This assumes, of course, that catastrophes for the remainder of the year fall into the two to three percentage point range that we consider typical.

In other areas, investment income grew 1.4 percent in the quarter, despite the prevailing market conditions which are less than favorable, as you know.

Life operations contributed $6 million to net operating earnings. As a result, net operating earnings per share were 25 cents, including 19 cents for catastrophes losses. This compares with 28 cents and a 14-cent per share catastrophe impact in last year's second quarter.

Book value on the quarter had a strong $38.03, up from $37.07 at year end. This is a real testament to the portfolio management strategies of our investment department.

I should point out our portfolio, like almost everyone else's has not fared so well in July. This too will pass.

In the meantime, we see good earnings reports from the companies in our equity portfolio. They continue to pay and increase their dividends which is particularly valuable when the bond market is under pressure. Taken all together we are relatively positive about what the rest of the year will hold. And even more positive about the longer term future.

If I were looking at Cincinnati Financial from the outside, I believe the first question I would ask is why we feel our position is better now than it was a year ago. Given that there are similarities between the quarterly pattern of results this year and last and that issue still remains.

To consider that question, I will look first to our underlying philosophy. We are committed to providing our agents with products and services they need to serve their customers, the policyholders.

To do that effectively we make decisions about both new business and renewals that are risk specific rather than broad brushed. In this relationship business we won't walk away from an entire business line. We look for equitable solutions on a case-by-case basis to select the risks we can cover at an adequate price.

We will accept an applaud gradual improvement if it means we are appropriately positioning the company for the long-term.

Now on the commercial lines where pricing is much more flexible and we can begin to make changes as much as two years ago, we are seeing signs of progress. Looking ahead, in addition to continued benefits from the actions we have already taken, we know that more is in the works.

For example, we just started rolling out a carefully positioned change to our general liability coverage that sacrificed, that revises the way policy aggregate limits will be hand while maintaining our marketing advantages. In the meantime we maintained a carrier of choice for our agents.

They bring us their best business and they will continue to do so next year and the year after.

This is the key to our current situation and out look. While we are seeking adequate pricing for the risks we cover, we are working very hard to maintain pricing at a level that makes it possible for our agents to be successful in the marketplace.

Now, the personal lines have been a bit more of a challenge, primarily because we have have to develop, submit, gain approval and wait for effective dates of rate and policy changes on a State by state basis.

That is not to say we have ignored steps that we can take while we are awaiting rate actions.

For example, last year we began a reunderwriting program for the homeowners line, similar to what we began in 1999 for personal auto. This involves sitting down with individual agencies and making specific determinations about their book of business.

We believe the reunderwriting program for personal auto is one of the reasons that this is a stronger of our personal lines at this point. We expect the homeowners reunderwriting program will have a positive impact on our results over the next one to two years.

That is not all we are doing. As we discussed, homeowner rate increases averaging 10 percent have been going into effect this year. Further, we have additional product updates in the works. Such as the steps we have taken to make replacement cost and water damage coverage separately available at an additional charge.

We began filing these changes about six months ago. And they will begin to take effect in various states between August and December of this year, benefiting our results in 2002 and beyond.

Across the board we are still pursuing actions such as dividing territories to provide personal attention to our agencies. By year end we expect to have 82 property casualty field territories up from 74 at the end of 2000.

Now our approach doesn't necessarily have the immediately impact that exiting a business line or pulling out of a geographic area or instituting high across the board price increases might have. This is particularly true because of our commitment to three year policy terms which have other benefits. But we see our case-by-case approach serving to further solidify our relationships with independent agents bringing higher quality new business and setting the stage for continued new growth and return to our historically levels of profitability.

I will make the point that our confidence does not mean that there won't be variations in our levels of losses, both up and down, going forward. We are in business to pay claims. And severity and frequency will fluctuate from quarter to quarter. But we expect that we are going to see continued quarter after quarter improvement beginning in the second half of this year. We see the longer term out look as bright and getting brighter.

Now I would like to turn things over to Ken for the financial details.

Once again it's a pleasure to be speaking with you today. Before I turn to the insurance rut, we reported a $6.2 million capital loss net of tax this quarter versus a gain of 3.6 million last year. As we saw last quarter, several different types of gains and losses now run through that line, including FAZ 133. There is no impact from FAZ 133 this quarter versus a $2.6 million gain in last year's second quarter.

On a pre-tax basis, we recorded $25 million in asset impairments reflecting our assessment that selected items in the portfolio had experienced an other than temporary decline in market value.

This would include relatively small positions in WorldCom and those types of company. Pre-tax there was $15 million in traditional net capital gains versus last year's second quarter.

Turning to a few key items on the quarter. As Jack mentioned the overall combined ratio was 107.2 percent with the commercial lines at 102.3 percent, including 5.6 percentage points for catastrophes. Personal lines was at 119.8 percent, including 14.5 percentage points for catastrophes.

Primarily those were due to homeowners, as Jack indicated.

Total loss and LAE ratio was up two percentage points higher than a year ago. Looking at total loss LAE ratio evens out the impact of our reserve allocations. This quarter based on our actuarial analysis we allocated at a higher level in LAE bucket and somewhat lower in RBNR [phonetic]. That is consistent with our recent practice. The loss in LAE ratio including 1.8 in catastrophes losses percent 6.9 last year. The expense ratio is 1.4 points lower than a year ago because of strong growth in premium. The absolute dollars of expenses were up, but the expense ratio was lower on strong growth and net written premium and careful monitoring of expenses.

Before I talk about the loss trends, here is an update for some of the by line data we have been giving you the past few quarters. These loss ratios include catastrophes and large losses.

Workers' compensation loss and LAE run rate for the quarter was 81.2 percent versus 78.4 percent a year ago. Commercial auto was 74.2 versus 81.2.

Commercial, loss in LAE was 90.9 versus 97.0. The homeowners LAE run rate was 131.1 versus 123.1. Personal auto loss in LAE run rate was 78.3 versus 67.9.

Now, looking at the results by private loss as we reported in early July, the frequency of losses greater than 1 million made quite a jump this quarter. Interestingly the ratio of losses in case reserve changes greater than $250,000, which includes the million plus losses to earned premiums was well within the ranges we have been experiencing and lower than a year ago. Focusing on any one element or the absolute dollars of losses can be misleading.

The detailed review of the losses included in the million plus category supports that view. For example, seven of the 24 losses have been initially reserved above the $1 million level, reflecting the rising severity of losses overall.

A year ago these probably would have been estimated below $1 million initially. Beyond that, ten of the losses are contractor related and twelve are auto related. We think the changes being made to our general liability policy that Jack discussed will help us better manage contractor related losses without disrupting the relationships our agents have with this important source in their communities. Auto and contractor areas have task forces to study them and make recommendations.

Looking at the risk closely and making up guidelines based on these and restore profitability. Business growth and rising overall loss severity continue to lead to higher loss totals. We are continuing strong effort to ensure adequate pricing to compensate for the risks we accept. We believe that over the longer term we will be able to maintain a ratio of larger losses to total business in an acceptable range.

Also losses below $250,000, the remaining incurred category, came in at 43.7 percent of earned premiums, compared with the 44.4 percent average in the five previous quarters.

The claim count in this category of 84,500 compared with an average of 84,900 since the beginning of 2001.

As an update, claims continue to run high for uninsured or under insured motorists. In the wake of two Ohio Supreme Court decisions affecting all insureds in the state, we established a $110 million reserves for UM/UIM claims incurred but not yet reported in the fourth quarter of the year 2000.

In the second quarter we saw a jump to 18.4 million in claims against that reserve. At quarter end the reserve stood at 82.1 million. This is something we are watching carefully. We see the reserve adequate to cover anything that arises during 2002.

Looking further out we haven't made decisions about the next steps if the reserve balance comes down quickly. We would be expensing additional claims as they arise, but that is still to be determined. This is the way the other carriers appear to be handling this situation in Ohio.

Life operations had a profitable quarter with production up on annuity term and universal life premiums. Contributing to income of $6 million, however, was somewhat lower than we expected because of acceleration of deferred acquisition costs reflecting new premium growth and changes in some sues.

In addition, the capital losses we experienced in total had a more dramatic impact on the business because of the small relative size. We were pleased to see lower mortality. New product introductions continue to strengthen our portfolio and enhance Cincinnati Financial's position in the marketplace.

One subject subject to much commentary, expensing the options granted to employees has been reproposed as a step to help restore investor confidence in corporate America. We understand the reasons investors want to see options taken as expenses on the income statement, but are concerned that no methodology has been selected to make sure the expense values are comparable among various companies. There are a myriad of different ways of calculating the per share impact. We use the fair value approach, considered conservative. We developed the pro forma data that appears in our annual report.

We expect that a requirement to expense the value of stock options on the income statement would include additional guidance on methodology so the numbers of consistent across the universe and no company is placed at a disadvantage.

Using the current methodology, if we begin expensing options when they are granted, the effect of this fair value approach would have been to reduce earnings per share by approximately one and a half cents for the first six months of this year and by approximately 3 cents for the full year.

Over the next two years, we would expect the impact to rise to the 6 cents range.

Back to the quarter overall, we saw progress that, as Jack said, has us confident that we can achieve the profitability target and return to the performance that has been a hallmark of Cincinnati Financial.

Jim, let's now look at the investment side.

Let's start with the book value. We felt very good at the end of June with our book value at 3803 versus 3720 at the end of 2001.

These last three weeks even our stocks couldn't avoid that down draft. We are down approximately three and a half dollars from the 3803 as of yesterday.

Am I concerned? Yes. Am I worried? No. I have been in this business for too long. I have been there and seen that.

I like our stocks. I like our portfolio. And I sleep very and I sleep very well at night.

I got a call this morning congratulating me on the 1.4 percent increase. They said most insurance companies are down. But where we work from, that isn't satisfactory. What happened?

For one, cash flow. First quarter we had 152 million. Second quarter, 27 million. We have had bond calls, redemptions and maturities of 162 million the first six months. We can't replace that income.

We wrote off 25 million in bonds. That means no income. What were the bonds we wrote off? I think you can guess. Here are the big ones. Enron, Adelphia and WorldCom. I wish I could tell you we were smarter than the street. If they don't give you the information, you cannot analyze the bonds.

I would like to give you a forward look for our investment income. First, July cash flow alone was better than the whole month, or the whole second quarter. We received dividend increases from 15 of our 45 common stocks in the first half of 2002. And none were in our top ten. Two of our top ten increased their dividends in July, matching the total income increase from the other 15 we received in the first half.

People, I could go on and on about how optimistic I am for the next six months. But the proof will be in the figures. And we will see.

One last comment. We bought back 86,000 shares in the second quarter, and in July we purchased 2,264,000 shares.

With that I will turn it back to Jack.

Thanks, Jim. Thanks Ken also. Before we open for questions I would like to inject a personal observation.

I have had the privilege of having a front row seat to the activities of our company's investment Department for many, many years. And, therefore, to the capital markets as a whole. I have watched Jim and his team manage through the bull markets of the 70s, 80s, and 90s and see them through the bear markets of the 70s, 80s, and 90s. I have seen the interest rates move up and down as the economy moved through cycles. Over the years our business has taken me into the businesses and communities that form the back bone of our economy.

I watch with concern as recent events shake the confidence in corporate America. As we discuss our business with you in terms of our interest in achieving long-term success with stability and consistencies for our agents, our policyholders and our associates, I encourage that same long-term view about our country's economy and its good future.

Yes, we are going through a rough time. Yes, it is clear that some people in positions of responsibility have abused that privilege. And yes, this has an impact on all of us in the short-term.

But we need to remember the ultimate strength of our country and its economy. We need to remember that most, in fact by far and away the largest majority of corporate managers and business people are honest, caring and committed to doing what is right. They manage their businesses knowing that shareholders, customers and employees are depending on them.

That is the approach our company has taken for more than 50 years. And it is the approach that we plan to take because we know it works. I personally believe that it is the best approach for our country as a whole.

Fixing what needs to be fixed calmly without overreacting or making wholesale changes that may have unforeseen effects.

Well, enough of this lecture. In addition to Ken Stecher and Jim Miller, we have Jim Benotsky [phonetic], in charge of claims, and J.F. Shearer [phonetic], our sales and marketing, are with me. So we are ready for questions. 11:54:06

At this time I would like to remind anyone, in order to ask questions, press the star and number one on your telephone key pad.

First question comes from Nancy Benacci with (McDonald) Investments. Please go ahead.

I want to talk a little bit more about the larger losses in the quarter. If we look back over the last couple of quarters, I think you indicated you have been focusing on the severity issue.

Could you give us a sense now as to if you feel that most of the large losses per se are out there and that most of the book of business has been rerated at appropriate rates at this point?

Also a feel for where reserves are and sort of if there has been a change in your attitude in terms of sort of the way you are setting reserves this day.

Nancy, this is Jack. I thought you were only going to ask a claim question. Then you brought in rating and premium levels, too. Maybe Jim been ascii might be best to cover that part.

Nancy, this is Jim Benotsky [phonetic]. We have changed our reserving philosophy a little bit. We are more conservative now in the initial reserves set up. As Ken mentioned earlier, the impact of that is more claims now with initial reserves of a million dollars or more.

We are tracking what we do daily. We are not finding any real trend, although we have considerable number of contractors claims. Claims are coming in from all over, not one particular state.

And not from any particular sized agency. But we monitor them daily. We have very experienced claims handlers in Cincinnati. We are not doing anything than what we have done in the past. It's a matter of the claims having more severity than they have.

But the initial reserve, I think, is what is making the number higher. We are just being more conservative when we set it up.

It may be too early to track this yet, but can you sense if any of those claims where you have set the higher reserves end up getting settled at lower levels? Is that something we will see?

Nancy, we started tracking that in the second quarter. And we have taken down a reduced reserves on the larger claims by $14 million. So there are some going down as well as going up.

And again, just a question as to July, from where we are, you know, 25 days into the month. Can you give us a sense if you are seeing the same type of larger number, million dollars plus claims? Is there a difference so far?

We have one booked, $1 million claim booked so far in July. There is another pending we haven't put a number on. So the million dollars claims appear to be down.

I caution you, there is another week and two days to go. You don't know what will happen. But the 250 to a million and the development are also down.

Thank you.

Nancy, did you want to know a little bit more about the rates that we are charging for the severity issue?

Yes, thank you.

We don't assume we are at the level we need to be at. Our reinsurers cautioned us last year when we were negotiating our treaty, they are seeing claims inflation in the larger claims, ten, twelve, 15 percent range. Our assumption would be that we need to get that kind of an increase to cover claims inflation on larger losses.

We are seeing some substantial increases on our commercial umbrella pricing. In terms of our commercial auto where there is a fair amount of obvious activity there, we are continuing to see right now our rate increases there are running around 17.8 percent. I should say the increase in written premium is 17.8 percent. That is after last year's first stab, if you will, at increasing rates substantially then -

(Lost audio.

... bodily injury can continue to be a problem. But I think we are working on it pretty well. The Montrose case. That is a continuing trigger case and I think right now that has not had a tremendous impact on us.

What is a continuing trigger case?

It triggered more than one policy over multiple policy terms.

Not your problem?

Sir?

That's not your problem with regard to the contract?

No.

What is the problem with regard to the contractor related?

The number of claims, basically.

When we say a contractor loss, it's any type of loss that can involve a construction risk. It can be, like Jack said an automobile liability claim which would be commercial auto. If it happens with a contractor risk, we call it a contractor claim. It can be a construction defect. It could be a, an injury of a subcontractor on the job. It's any number of claims.

But it would all be triggered by the risk being a contractor.

The reason that contractors are important to us, we insure a lot of them across the territories where we operate. When we see commonality of these claims, there's different insurance legal type mechanisms that we use with just a little bit of thoughtfulness and pre-planning that helps agents and policyholders.

I think it's an education process. We don't practice law, but we do give them guidance that the policyholders can use with their attorneys to help make the system more clear when they are on the job.

My other question, you see the melt down of the equity markets in the United States. What do you see as the ramification of that on your insurance business as opposed to your investment business?

That's a good question, Charlie. You ask us to think about things before we come to conclusions. On our insurance business, we rely on cash flow to pay claims.

Whether it's cash flow from investment, from dividend income or interest income or premium income, all that is important to us.

Fortunately, we have selected stocks over the years that pay a continued dividend. In most cased, they have increased dividends. Jim Miller did some research on the amount of increase that our common stock issuing dividend payers have increased their dividends in the last three to five years. It's more impressive than I would have guessed.

We expect them to continue that same philosophy. Will the economy be strong enough the next five years as it was the last five years to support their continued success in dividend paying? I don't know if they are going to be able to continue them at the same high rate. I think they will continue to make payouts in the same ranges as they have done before.

We think the investments that we have, and I think Jim Miller - the more I ramble on, I think Jim is the person to answer this. I think the investments in common stock that we have are the type of industries that we suspect to increase their earnings even in years when the economy might not be doing as well.

I look at our banks that way. I look at Proctor and gamble that way. Maybe Exxon won't, but I think the majority of those top ten holdings should have continued success in the year and two years ahead.

Jim, would you help me out on that, please?

I think part of his question was how do we think it will effect our insurance?

Okay.

I was interested, for example, because I don't want to lose my house. I get a lot of benefit. Maybe I would move the wife out. But seemingingly there should be claims coming. That was the question.

The biggest area we have of exposure is director and Officer liability insurance. As companies have claim problems, and profit problems, that's probably where it's going to be noticed by us.

I would say the strength of our D and O premiums, the vast majority of them come from non-profit organizations rather than for profit organizations.

The for profits, I would say we have a very limited number of Fortune 500 companies in our makeup. But you ask good questions. You mentioned arson. That possibility? You could mention worker's comp. There is always the chance that some injuries may be feigned. Those are things you have to work on on a case-by-case basis, Charlie.

My final question and I'll let somebody else in. Hey, what is your approximate, on an annual basis, directors and officers' liability insurance premium.

May I ask J.F. if he can look up figures?

This year we estimate it will be $32 million in directors and officers liability premium.

Thank you.

Next question comes from Stephen Peterson with Cochran, Caronia and Company.

My question concerns homeowners. It looks like you've already instituted, you said, rate increases of about 10 percent coupled with sort of some changes in your policy wording.

I was wondering if you would help me isolate the effect of those two things. Looking forward into 2003, how much of a benefit do you think you may be able to get on your combined ratio in homeowners, primarily just from the changes that you are making to your coverage wording?

This is J.F. here.

I understand it's kind of difficult to estimate.

In addition to the 10 percent that we talked about, we are also charging now for water damage coverage in our homeowner policy. We would calculate a range, depending on the base premiums, and those changed based on geographic areas of anywhere from ten to 20 percent increase in addition to the 10 percent that we have by rate.

Insurance to value a, addressing insurance to value issues, by that I mean getting a higher amount of coverage on the house, keeping in mind we already guarantee the replacement house, but getting the higher amount of coverage on the house should contribute five to 10 percent as well.

As you add those up, homeowner increase coming off a three year policy could be up anywhere from 25 to 40 percent.

I guess to hazard an educated guess at 2003, we would anticipate somewhere in the ten to 12 percent improvement to the combined ratio as a result of all of those changes, keeping in mind all of our policies are three year policies for homeowners. Not all of them will come up in 2003 for renewal.

It's going to take awhile. That's one of the negatives of the three-year policy. We think we've got, in addition to agency by agency reunderwriting, an awful lot going to help us get on track throughout 2003.

Okay. Just so that I make sure I understand this, you're roughly figuring somewhere you will be in the high teens roughly a year from now? Is that - 119, 120? With subsequent improvements in following calendar years?

Stephen, I think right now if you looked at the first six months you might come to that assumption. As you know, the second quarter is a heavy catastrophes quarter. We expect that to back out in the third and fourth quarter as they wind down. It might be high, but still well above 100 combined ratio.

That's very helpful. Thank you.

Next question comes from Ira Zuckerman from Nutmeg Securities.

What percentage of your commercial book, Jim, is on three year book now and how much will becoming up in the next, let's say the next 18 months for renewal?

Glad to, Ira. May I ask J.F. to help me?

We did a study, 13 percent of our premium is not subject, of our commercial lines, not subject to annual rerate. At that point in time probably 92 percent of our packages would be on a multi year contract.

This year, new business that was written, 56 percent of these accounts have been put on one year policies. As you can tell, a tremendous amount of the activity right now is drawn more towards a one-year policy. I would estimate based on last year's commercial lines premium of a billion, five, we are at the point where approximately 300 million of that is not going to be subject to annual rerating, but a billion two throughout this year would be.

Are you going to phase out the three-year policies? Are you going to continue to offer them maybe once we get past the period of uncertainty?

We plan to continue offering them.

I assume the same on homeowners.

That would be correct.

Thank you.

at this time I would remind everyone in order to ask a question, please press star and the number one on your telephone key pad. We will pause just a moment to compile the Q and A roster.

Your next question comes from Mike Hallet with Fox-Pitt Kelton.

I have a question for Jim Miller on the share repurchase. I didn't catch the amount of stock you bought back in July. If you could just update us on where you stand on repurchase authorization.

264,000 shares.

Where are those, the repurchase program, where do you stand there?

We have under our present program we have 3.9 million to buy.

Okay. And would you anticipate this pace to continue through the rest of the year? How are you thinking about share repurchase on a going forward basis?

We are always cognizant of our stock price and we will always be looking to look to buy stock, but we never advertise it.

If the stock stays at these levels, does it make sense you would continue - you certainly have the capital and you are in the position to continue this type of pace?

I would not speculate that we would buy this amount at this pace.

Okay. Can you talk about what you are doing with your new cash flows in terms of investment allocation?

Yes. The first six months - normally over a twelve-month period we are, we buy anywhere from 30 to 35 percent of our free cash flow goes into common stocks. The first six months, that's only been about 16 percent. And under the present situation in the market, it looks very enticing to us to maybe pick up the pace as far as common stocks are concerned.

Now, we have been very heavy into convertibles over the first six months. And we hope to continue to do that. Because convertibles have been a very, very profitable place for us over the last 30 years.

So if that gives you a better picture.

Uh-huh.

That's just about where we will be.

How are you managing the values of some of these, these distressed investments that you own? Have you written them off entirely in terms of Adelphia, WorldCom and Enron?

We have basically written them down to the market. We have taken the income off our accrual basis and we are doing it - we cannot take, you know - as far as accounting rules, we have to keep them on the books. We cannot write them off for tax purposes. They've got to stay on there.

So, because they have a value. So again, they are very conservetively.

Where does the portfolio stand in terms of exposure to the telecom sector at this point and some of the other problem sectors?

Our big exposure right now is telecom is all tell which we feel very, very comfortable with. They are probably one of the better companies in the industry. They are one of the few that has cash flow.

Okay. I just have -

But we do have Broadwing as a convertible that we listen to this morning and their broadcast and so that's, that may become a distressed issue.

What is the size of that?

I think we've got, I think it's somewhere in the neighborhood of 12 million.

That's equity?

Convertible.

How are you thinking about the current market now in terms of your portfolio and potentially - you know, what about distressed securities and things of that nature?

We feel we have taken all the steps possible to make our portfolio that much stronger because each quarter we look at the portfolio and take the steps as necessary to make it very, very conservative. And we have done that in the second quarter. So we will continue doing that.

I feel very comfortable with our portfolio.

Do you have a sense of how many other issues are on your watch list beyond broad wing?

I would say, you know, if we include Broadwing, maybe somewhere in the neighborhood of 20 million.

20 million of -

Things that we feel are a distressed area.

I have one other question. That's on more an operational side. Had you had your prior reinsurance program, the program that you had last year, would that have impacted earnings in this quarter?

Mike, this is Ken Stecher. You know, the additional premium that we are paying, you know, impacts the, combined by seven or eight tenths of a point.

On the loss side we did incur an extra $1 million because we increased the retentions on our working treaties.

Great, thanks, Ken.

Next question comes from Fred Nelson with Cowell Weeden [phonetic].

Would you mind for a second, the cash flow that comes in to pay your claims, would you share with me, when is the last time you had to touch anything from your investment portfolio at all in terms of principal or interest or dividends?

Fred, that has never happened.

Thank you. I really appreciate that. The other thing that maybe you can touch on, if Fith Third Bank goes up or down a dollar, that's a value of what, 52 million, $800,000 we're talking about?

I think you are right on.

the distressed securities in this portfolio I heard you talk about, if you take 25 million add another 20 to it, it's about $45 million? Is that correct?

Hmm, yes.

$45 million if Fifth Third goes up, that's 72 million, $800,000. The distressed securities in the overall picture are very, very minute; is that correct?

I would say that's true, Fred.

the income on that 45 million that came in may be also very minute; is that correct?

I would say that's pretty close.

the cash flow coming in from the investment foam and the cash flow coming in from the premium income that you don't need, what was that figure you gave us for the first six months that you had of money to reinvest back in the portfolio?

Well, we had 170-some million that we reinvested in the first six months.

That would include new cash or include cash plus cash from the portfolio?

That is total cash flow.

Total cash flow?

Right.

That's pretty darn good, I think. Thank you. How is the little investment counseling business doing? You didn't mention that at all. Could anybody comment on that?

It's going very well, Fred. We just got a new $33 million account in July. So it is going very, very well.

If I read between the lines on your dividend increase, you gentlemen and ladies were very cautious with the raise you gave us in the first quarter or the first half, anticipating some type of consequences in the markets that we are seeing now.

Is that kind of on target?

Well, I think Jack should answer that question.

Okay.

Well, you put me on the spot

Then don't answer. I like to put the ladies on the spot.

That's right. You know, we have raised our dividend every year for maybe the last 40 years. Twice has it been less than 10 percent.

Jim Miller gave us excellent leadership this year on the dividend increase that we ultimately adopted.

I will tell you that some of us had a different view than the wisdom of Jim's philosophy is born out by his recommendation.

Who knows what the next three to nine months will be on that same score. But we think our dividend is a highly critically important item for our shareholders. All of a sudden the last two years we start to hear good things about companies paying dividends rather than just relying upon capital gains.

We are going to hear more of that talk. What I was trying to do is commend you on such a great board, willing to listen to different viewpoints and perceptions of what they see in the few turn and listening to that wonderful wind. It's commendable you didn't do as much as you could have done. I want to commend you for the graciousness you do to give all the shareholders a sense of security that you will be here.

Fred, it's difficult for me to find words to say thanks. You do it beautifully. I can't match you. My fourth quarter used to have an expression for your kind of talk. I won't say it out loud over the airways. You do it beautifully, sir. (Laughter)

If the ladies in my life would say the same thing, I would be delighted. (Laughter)

I want to commend you, all of you for the love and the joy you pass on to the people in your organization and how you support them

Okay.

to get college and masters degrees. I think it's wonderful what you do. And it's so necessary in our country today. Keep going.

I say a serious thank you. You do know about the inner workings of our company and the way we try to boost along people in our organization. We say a sincere thanks to you, Fred, for pointing out these things and reminding us as well.

It's one of those things that I use to put capital to work. It's so important to see that for me, and people's money that I represent. Thank you, gang.

At this time there are no further questions.

Mr. Schiff, are there any closing remarks?

Yes, I would like to say thanks to everyone for joining us today. I want to reiterate that we see many positives for our business and for Cincinnati Financial. The Cincinnati insurance companies are in excellent shape. We look forward to continuing our record of providing value to agent its, policyholders and shareholders, thank you.

This concludes today's Cincinnati Financial 12:23:04 conference call. You may now disconnect.