辛辛納提金融 (CINF) 2002 Q4 法說會逐字稿

Good afternoon, my name is Tamera and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Cincinnati Financial fourth quarter earnings conference call. All lines have been place 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 and then number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

Miss Wexell, you may begin your conference.

Thank you. And welcome everyone again to the Cincinnati Financial Corporation call.

By now you should have received a copy of the news release. If you have not received it, it is available on the company's web site www.cinfin.com or you can call 513-564-0700 and a copy can be faxed to you immediately.

On today's call, Jack Schiff, Jr., Chairman and Chief Executive Officer will begin. He will be followed by comments from Ken Stecher and Jim Miller after which the call will be open for questions. So with that, let me turn the call over to Jack.

Thank you, Heather and thank you all for joining us today. We realize it's a busy day and thanks for tuning us in as well.

With our year-end conference call we have the entire management team on the road today. We will be talking to agents in the Evansville, Indiana market area later this afternoon. Earlier this week, we were in Lansing, Michigan, Indianapolis, Indiana and Springfield, Illinois.

Before I turn to the quarter, please note that some of the matters we're discussing 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 the news release and to our various filings with the SEC.

Let's all welcome Ken Miller as the new head of our investment department. Also, I would like to say a special thanks to Jim Miller who retired as of the first of this year, although I believe he is listening today.

Under Jim's direction, our investment portfolio grew to over $10 billion from $64 million just a little over 30 years ago. Throughout his career, Jim championed the same equity focused total return investment approach preferred by our company's early leaders. Jim worked to know the people and the operations of the larger holdings in our portfolio. That gave him confidence through all economic cycles that these companies would continue to build value for their long-term shareholders. His team of portfolio managers achieved outstanding results by operating from a solid base of knowledge and relationships instead of trying to anticipate the timing of market peaks and valleys.

While many thought that philosophy unusual, it's fundamentally the same relationship approach we take in our insurance business. It has consistently benefited our agents, policy holders and shareholders. While we're a bit jealous that Jim is in Florida and we're in the cold mid-west, we also recognize that he certainly has earned the right to relax and enjoy his retirement now. At the same time, he knows he has left our portfolio in great hands.

Ken Miller, no relation to Jim, who many of you know, has been a member of the investment department since 1979. For several years now he has been a Corporate Vice President and is also President of CEC Investment Company and Cinfin Capital. Ken is a believer in Cincinnati relationship based philosophy and has helped build our strong and unique equity portfolio. Ken will talk in a few moments about the investments area.

Back to the quarter and the year and the year. All in all we're pleased with the results for the fourth quarter in 2002. They show the impact that prices, rate increases and our approach to the marketplace can have on growth and profitability. We're particularly pleased with the progress that we saw in the third and fourth quarters. With significant improvement in key loss related ratios over the first half of the year.

Briefly on the fourth quarter, total adjusted net written premiums were up 10% with adjusted commercial line premiums up 10.2% and adjusted personal line premiums up 9.4%.

By the way, Ken Stecher will talk about a few items in the property casualty results in a moment.

New business growth moderated as we continue to make deliberate case-by-case decisions to leave some risks on the table. Excluding the worker's compensation line, where we are being very selective, new business gross for this quarter was similar to the early quarters of the year. Our fourth quarter GAAP combined ratio came in at 95% compared with 103.2% a year ago. Putting us at a very acceptable 99.7% for the year. Versus 105% for 2001.

Investment income grew 5.3% in the quarter despite the prevailing market conditions which continue to be rough. Many companies in our equity portfolio continue to increase their dividends which is particularly valuable when the volume market is under pressure.

In total, net operating earnings per share were a very strong at 59 cents including eight cents for catastrophe losses. That compared to 36 cents and four cents per share for catastrophes in last year's fourth quarter Book value end the year ended at $34.65 up from $34.14 at the end of the third quarter. And down from the $37.07 at year-end 2001. You all know what is happening in the market. But we're not immune and our portfolio has had some of the issues, we believe that the book value declined less than 10% over the course of the year of a major market indices saw declines in excess of 22%.

So all-in-all, the fourth quarter results put 2002 very much on track with where we wanted to be at this point. We're confident and committed to keeping up our strong efforts so that we can move closer to our long-term profitability targets in the coming year.

Now, I want to touch on three suggest. Reinsurance and the related subject of Terrorism Risks Insurance Act of 2002. Our current read on the commercial lines market, and profitability in the personal lines area particularly homeowners.

For 2003, we have in place reinsurance agreements that are similar to the programs for 2002. With slightly higher retention levels and an incremental cost increase of $3.8 million or two cents. We have the financial strength to absorb losses at the slightly higher level if needed and we feel this approach makes sense as a means of balancing cost and risks.

Under the Terrorism Risk Insurance Act, we have until about February 26th to notify our commercial policy holders about the requirements of the law. Let them know that we must provide terrorism coverage and let them know how we will price the coverage. Under the act, insurers also must for all policy holders that they have 30 days to opt out either in writing or by not responding.

As you can imagine, we work closely with our reinsurers following the passage of the act to develop the protect programs. We're in the midst of a notification process as we speak. Nearly 400,000 disclosure notices have been sent to our enforce commercial policy holders explaining the act and notifying them of their coverage. Except for a few selected cases related to reinsurance limits, full policy limit coverage has been provided for terrorism for our policy holders. We have completed development of a terrorism rating plan with rates that vary based upon geographical and risk type factors. Our plan is to begin charging all commercial policies a nominal terrorism premium once all internal programming efforts are complete with the selected cases noted above we're working with our reinsurers to develop rate quotes based on facultative coverage programs.

Turning to commercial lines, we saw adjusted written premiums rise 10.2% in the fourth quarter. Bringing the full year of growth rate to 15.8%. In addition, the combined ratio continues to improve.

On a statutory basis, the adjusted commercial lines combined ratio was the best we've seen in more than two years. Commercial lines new business growth did moderate in the fourth quarter to 4.7% although new business was up 14.4% for the full year due to a very strong second a and third quarters.

As we look at new business growth by business line and geographic areas we saw trends and we sought growth rate in new business varying dramatically from the regional growth rate. For example, in worker's come while we're being selective renewal premiums were up 8.9% on rate increases while new business was down 17.4%. That partially reflects the hard work our field reps have been putting into renewals and it also reflects our reduced appetite for worker's comp business. While we want to be a market for our agents best accounts, we're holding firm on rate adequacy for the risk exposure and are walking away from some opportunities.

For 2003, we've chosen not to renew several very large worker's compensation policies for the aggregate risk was very high. In addition, when we see strong renewal growth trends, it often means our field marketing representatives are so hard at work that effort that new business activity have to compete for their time. We continue to address that challenge by dividing our field territories, adding seven in 2002 and planning five or six additions in 2003.

We divide territories to improve service to agents by allowing our field representatives to spend more time in each agent's office, more time working with agents on developing quotes, more time working with the agent on risk evaluation for renewal customers and just spending more time on every piece of business. We think this strategy will continue to payoff as we work hard in the coming year to earn our agent's best business.

And finally on personal lines, we saw some nice progress for homeowners. Personal lines adjusted written premiums were up 9.4% and the combined ratio was 97.9% on an adjusted basis. As you know our process to develop and submit gain approval and reach the effective date of homeowner rates and policy changes are well underway. With more rate changes taking effect in the first half of 2003.

As we move into the second half of our three-year policy cycle with the higher rate of policy changes, we expect to start seeing substantial benefits from these actions.

With that let me ask Ken Stecher to lead us from now on.

Thank you, Jack. It's a pleasure to be speaking with all of you today.

As you saw in the release, fourth quarter property casualty results benefited from a real adjustment and a premium adjustment. When given you this factory claims analysis adjusted for the impact of these items. The actual real analysis we go through each year in the fourth quarter led to two actual real adjustments that resulted in a reclassification statutory reserves by line of business. The effect netted out to a positive four cents per earnings or about 1.4 percentage points on the fourth quarter GAAP combined ratio.

The first of the two actual real adjustments was a pickup in the estimated value of future salvage and segregation for claims already incurred. Our loss reserves reduced by the pretax amounts of $74 million for salvage and segregation. Salvage relates to when we pay a property claim. The related property is ours to do with as we wish and while it may be damaged it often still has value to someone. Similarly, segregation relates to recoveries from other insurance carriers under a variety of circumstances. Although there may be fluctuations from quarter to quarter as various claims and related salvage and segregation work through our systems, going forward those difference are likely to be immaterial to earnings in any single quarter or year.

Second, based on the findings of the actual real analysis, we added $65 million to IB&R and LAE. This modest addition will move our reserves higher in the range of adequate levels. What the analysis found was slightly higher than prior estimates and the development for worker's comp, commercial multi-parale, commercial umbrella, homeowners, and other liability lines for accident years 1999 through 2001.

Going forward, the actual review indicated that our current premium levels, the quarterly total of IB&R and LAE reserve increases may be in the $20 to $22 million range up from about $15 million over the past fourth quarters. In addition, we refined our estimation process for matching written and earned premiums to policy effective dates. An example for the fourth quarter might be a policy effective December 15th, 2002 for which an agent has accepted premium payments but not yet provided information to us or a policy with December effective dates that's still in the policy issuing process. By booking these estimates in the policy effective period, for the fourth quarter we've added $117 million to written premiums, $15 million to earned premiums and $2 million or one cent to net operating operating income. That premium impact is a pretty big just one time but in the over all scheme of things it's a fairly small amount for us.

While each quarter there will be new premium estimates. One would presume that the bulk of the premium estimates from the prior quarter would have worked through the system in the intervening months. We may see very small increases in this total as we grow.

We also saw an up tick in the level of estimated premiums for audits. With the expected decline in worker's comp going forward we think these estimates will move back down which may affect our growth in 2003.

Now back to the property casualty performance. There are a few items that deserve mentioning.

First, for the year, our GAAP loss and LAE ratio excluding caps was down by 4.4 percentage points from 2001. Those unusual items we just reviewed in total accounted for about 5/10 of a percentage point of that decline. The other 3.9 points were primarily due to the strong growth in our earned premium as the loss increase has slowed. This is a reflection of our focus on adequate pricing and underwriting. Also for the year, you'll note that the GAAP expense ratio is down 1.4 percentage points which is almost entirely due to the increase in earned premium.

And quickly, here is an update for some of the line by line rate data we've been giving you the past few quarters. Note that these ratios include catastrophes and large losses. The worker's comp loss and LAE run rate for the quarter was essentially even with the third quarter at 74.6% and down from 79.6 in last year's fourth quarter.

Commercial auto loss and LAE run rate rose to 69.9 from 66.6% in the third quarter. It was well ahead of the 76.2% a year ago.

The commercial umbrella loss and LAE run rate was at 58.5% up from 52.7 in the third quarter but improved from 87.8% a year ago.

The homeowners loss and LAE run rate was 86.2% verse was 85% in the third quarter and 89.2% a year ago.

The personal auto loss and LAE run rate picked back up 77.7% for the fourth quarter versus 72.5% for the third quarter but is well below the year ago 82.6%.

These are the five lines we've been discussing most closely from a profitability standpoint this past year. But in fact, they represent only about 60% of our total $6.2 billion in premiums. Several other lines such as multi-parale which accounts for 28% of the total or underwriting acts are also having an effect. So, a nice improvements in the run rate in the fourth quarter helping to bring about the over all improvement in the combined for the period.

Also going back to the run rates, both homeowners and personal auto were disproportionally impacted by caps in the fourth quarter. Over all, the personal lines run rate excluding caps was down about 3.8 percentage points from the third quarter.

As an update, favorable development for UMUIM claims [INAUDIBLE] actually let us put about $1 million back into that reserve in the fourth quarter. Although we're still seeing a flow of new claims.

As most of you remember in the wake of two Ohio Supreme Court decisions affecting all insurers in the state, we established a $110 million reserve for UMUIM claim incurred but not yet reported in the fourth quarter of 2000. At year-end, the reserves stood at $26 million. We're continue to watch this carefully but are more comfortable at this point than we were six months ago.

Life operations hit another quarter with production and mortality, including realized gains, life contributed $7.4 million to net income.

Briefly on our outlook, we were very pleased to end the year with a combined [INAUDIBLE] the 100% we thought looked within our reach as the year progressed. At this stage with the growth level we see on adjusted earned premiums we believe that the combined 2003 should continue to improve. As always, catastrophes are the biggest risk factor. Our outlook presumes catastrophes will fall into the 3% range for the full year.

So let me turn things over to Ken Miller to discuss the investment area.

Thanks, Ken. Good afternoon everyone. It's a pleasure to be here.

Before I turn to the specifics of the fourth quarter and full year investment performance let me echo Jack in giving special thanks to Jim Miller. Jim was my friend and mentor for over 20 years at CinFin Corporation, I will always value the insights that he gave me.

And now on to investments. Everything we do is based on the compounding of cash flows over the long-term. That's the way we've managed our investments portfolio. And I see no change in that philosophy.

We remain committed to balancing long-term growth and short-term income. As long-term investors we manage our investments the way we manage our insurance operations through personal knowledge and relationships. Our philosophy is based on knowing and understanding the companies in which we invest and on keeping the number of companies manageable. That's philosophy is our culture and it will not change.

Looking back at 2002 we saw an economic environment with historical low interest rates and an equity market suffering through a third year of substantial decline both affecting our ability to invest cash flows. Pretax investments income rose 5.6% for the year lower than our expectations but quite satisfactory in the light of the market conditions. Dividend increases by 28 of the 46 stocks in our portfolio will add $12 million to annualize investment income moving forward.

In terms of the portfolio, for the fourth quarter we had $60 million in pretax capital losses. As we have seen this past year, three different items contributed to that total. First SFASB-133, which measure the change in the imbedded option within the convertible securities, resulted in the gain of $4 million this quarter versus a loss of $4 million in last year's fourth quarter.

Secondly, we reported $60 million in asset impairments in the quarter reflecting our assessment that several issues in the portfolio had experienced other than than temporary declines in the market value. This totaled approximately one-half of 1% of invested assets. With the market still generally weak we'll continue to review any declines in asset values on an issue by issue basis. Further impairments may be necessary.

Third, ordinary, realized capital losses were $4 million verse a $5 million gain in last year's fourth quarter. I would be amidst not to mention Fifth Third Bank in their decline in market value over the past several weeks. A dollar change in Fifth Third's market value equals approximately 29 cents to our book value. Be that it may, we are a long-term investors. We are not concerned about what we perceive or short-term valuation swings for any question company in our equity portfolio.

Turning to our outlook for our investment portfolio in 2003, when we look at our fixed income investments we're shortening the duration of the portfolio and emphasizing higher credit quality to address current market conditions. On the equity side, we'll continues our emphasize on long-term investments in companies with increasing sales, earnings and dividends, strong management teams, and favorable outlooks. On the investments side, it's going to be tough to beat 2002's growth unless market conditions start to change. Under currents conditions we would expect growth to stay in the 3 1/2 to 4 1/2% range.

Jack, with that I'll turn the call back to you.

Thanks, Ken.

Briefly in closing, I think it's important to remember that the insurance business is a good business. We're providing an important backstop to businesses and individuals allowing them to sleep at night knowing that their assets are protected by the financial strength of one of the top-rated insurance companies in the country. Our challenge more than ever is to make sure that we with the help of our agents work hard to bring policy holders appropriately priced policies that adequately protect their businesses, homes and automobiles. When we do this right, we are able to provide our shareholders with the growing return on their investment as illustrated by the 12.4% increase in the indicated annual dividend the board declared earlier this week. We think that the result of the second half of 2002, in particular, showed that our strategies will keep us at the forefront of our industry in terms of growth, profitability, financial strength, and some less tangible but no less important measures such as high quality service, prompt and personal claims service, and deep relationships with our agents.

Finally, I would like to pay a special tribute to our agents. We've asked a lot from them during the past year. More paperwork, more scrutiny and more plain old-fashioned selling. While a firm market generally means more profitability it also means a good deal more work for our agents. Agent representing the Cincinnati Insurance Companies have come through again and again. Affirming for us the value of our relationships and proving that the focus of our founders was wise indeed. Our agents have built our success and we are grateful.

As we look back at 2002, to our improving profitability, to our continued growth, to our strong cash flow, to our above average investment return, we see all signs that tell us the future will be bright. As always I'm going to stress that we take a long-term view of our business. We know there will be variations in our results both up and down and going forward. We're in business to pay claims and severity and frequency will fluctuate from quarter to quarter. But most important, we see the longer-term outlook as bright and getting brighter.

Operator, we're ready for questions.

At this time I would like to remind everyone in order to ask a question, please press star and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q-And-A roster.

Your first question from Nancy Finachi with McDonald Investments.

Good afternoon. I wanted to talk about the comment on the reserve strengthening of the $65 million and Ken, you indicated the different lines that you mentioned. Could you give us more clarification as to, is more of it in one line versus the other or is it pretty evenly spread? And then also any indication that we may have going forward in terms of any other previous accident years where we might have some issue.

Nancy, we've studied this closely. We believe that all of the other years are in good shape. I would say that the multi-parale casualty line had about 25% of the reserve strengthening. Worker's comp was slightly larger and then commercial umbrella was the largest, so those are the main lines we did strengthen.

Was there anything in particular within the last quarter that prompted that move whether it was toward any type of litigation issues increase in severity frequency, those types of things?

No. We've been just doing a loss test on the third quarter and the fourth quarter and as we continue to grow, with what we're noticing is that we are trying the make sure we don't run anything are everything into the fourth quarter so we are going to be going back and start looking at everything maybe like other companies do but I'm not sure. We're going to start doing some reserve analysis on the larger lines in the second quarter along with the third and fourth. Hopefully what we'll find is that [INAUDIBLE] earlier point in the year. So as I said in my comments, instead of going for maybe $15 million it might be up in the range of $20-22 million for a quarter and over time that will hopefully prevent the need for adjustments like we had this quarter.

Okay, along those lines either you or Jack mentioned as you look for '03 to improve off of the combined that-- the final number for the year what basically is the net combined based on all of the changes that we've had in the year that you're anticipating to improve from?

If we do not run the three items through our numbers, the GAAP combined would have been 100.2.

100.2.

On a statutory basis without the adjustments it was 99.7.

Okay. Thank you. And then the last question for Ken, more in terms share buyback certainly with the where you indicated book value was at end of the quarter and where it is right now and considering having a lot of excess capital and cash flow coming in, could you give us your thoughts on your share buyback going forward?

Nancy, it hasn't changed much from Jim's view. We will always look at where book value is or where we think book value is since it's a moving target.

Does it improve our earnings per share? What other opportunities are available for us in the marketplace?

And then we try the make that decision.

I would tell you so far in the first quarter of 2003 we have bought some stock back, approximately well it's 285,000 shares. But keep in mind that we've been out of the market during this quiet period for probably I would say close to a week now. Maybe 10 days.

Okay. And when does your quiet period end?

That is a good question. Nancy, we'll have to chat when we think information is fully disseminated in my own mind, that may be as quickly as Monday.

Okay. And then as you've been out on the road at your agent meetings, can you give us a sense of what the agents are sharing with you, what they are seeing out in the marketplace right now? Is competition starting to come back?

If so, is it from regionals or mutuals or the bigger players?

Nancy, as you might expect JF Scherer is in the room and we had neglected to mention the individual folks that are here. I think they have to chase after this.

Nancy, I would say there is a sense that there is a bit more competition creeping back into the marketplace. Not in a drastic way. Agent are indicating that they still are delivering renewal increases both from us and from other carriers. Low double digits and some some cases high single digits increases depends on the carrier and the class of business. But there is a sense that the firming marketplace I guess will become somewhat more neutral as the year goes on. At least based on what agencies are indicating us to.

Similar to what you would expect?

Yeah. Not surprising.

Great, thanks very much.

Your next question from Stephane Peterson with Cochran, Caronia.

Good afternoon. Just a couple quick questions. My first one is for Ken Miller. I'm wondering if we get your statutory blanks, is it likely that your largest equity holdings will look pretty similar to what we've been hearing in the past?

Stephane, it will look very similar. I would be surprised if you could see any difference.

Okay. Great. Next question and I'm not sure who to direct this to.

Just a quick question on your reinsurance. I'm not sure if you went through a renewal period at the beginning of this year or not and if you did, if you could provide a little bit of color as to what the reinsurers were saying to you and whether or not there was a change in any of the fundamentals of the reinsurance program?

Stephane, again, there are more people in the room than you can imagine here. Jim Benoski is present and he's had some contact with a variety of our reinsurance people. I wonder if he could address the question.

Yes. We did renew the reinsurance treaty with the three reinsurers that we had last year. The terms are a little different. There are some terrorism issues but the basic treaties are about the same. There is an increase in cost based on the increase in premium.

Our property rate was about the same. The liability rate was up a little bit. I think the commercial umbrella is an issue that they have concerns with not just with us but throughout of the industry so we got the treaty resolved the last day of '02. It took us into '03 before we could get it resolved and we're happy with what we do have.

Are your retention essentially the same as they were last year?

The retention on the casualty treaty is up. We retained two million plus 60% of the second two million. And on the property treaty we are retaining two million plus 40% of the second three million.

Can you give us a sense of what the price increase was? Was it about what you were expecting? Were you surprised by the additional cost this year? Maybe was it more than 20%, less than 10?

This is Ken Stecher. With the additional retention that we're keeping. The premium for both the working treaties and the property treaty is up 3.9% over last year. So we kept the cost down by taking on the extra risk.

Okay.

Again we did study losses. And we feel that again it was a good business decision that we made. To take on the additional risk.

Okay. Terrific. Thank you very much.

Your next question comes from Ira Zuckerman, Nutmeg Securities.

Jack, can you give us an idea of what you're seeing in terms of frequency and severity?

I think I would like to defer to Jim Benoski. [INAUDIBLE] but Jim tuned into the claim there. And I think he can help us both on that.

Thanks, Jack.

On the personal lines we -- we're seeing severity and when I say severity we're talking about the $250,000 reserve up. The homeowner fire claims seem to have risen in the third and fourth quarter. Not too much different from the fourth quarter of '01. But homeowner fire I would think would be an area and also our personal umbrella continues to be an issue on the severity side.

Because a number of the companies we've been listening to are reporting certainly on personal auto and in some degree of homeowners that frequency claim is declining again and I was wondering if you were seeing the same package?

Yes. That's correct.

Do you have an answer for it? Nobody else seems to?

On the decline in frequency?

Yeah.

I think one thing that we're doing I believe is risk reviews. We're having the claims representatives when they are out on a risk whether it be a good risk or bad we want a risk review report is helping us with the underwriting. We're also looking closer at the insurance to value but that has nothing to do with frequency, that has more to do with severity.

And I think just better underwriting is helping us with the frequency.

Good. Thank you.

At this time I would like to remind everyone in order to ask a question, please press star and then the number one on your telephone keypad.

Your next question comes from Nancy Benacci with McDonald Investments.

Just a couple of follow-ups. On the worker's comp business you indicated that you're really shrinking the amounts of business that you've written there.

As you look at what you have now and the fact you've added to reserves, any concerns with some of that business still developing unfavorably? Or do you think you've got pretty much the rate baked in that you need?

Nancy this is Jim Benoski. I can tell you that we don't have a severity issue on the comp. That's not been a big problem for us. Frequency I don't have a handle on that. But the severity is not an issue for us in work's comp.

I don't know if anyone else has a comment on that. Looks like no comments.

Okay. And then the last one is booking your business going forward into '03, JF, this is for you, is your business done on a multi-year basis? What is the make up right now?

You'll likely see an increase in the number of multi-year policies this year, Nancy. Last year we were in the process of instituting a coverage change where we were adding an annual aggregate to our generalized liability policy form. That has been approved in all states and we did not want to renew policies on a three-year term just for that reason.

But with that in place now, we're mor comfortable going back to the approach that we have on multi-year contracts. It will be similar as it has been in the past in that the premises liability, completed operations, and the building incompetence coverage will be that part of the policy that will be guaranteed for a three-year term. The commercial auto, the commercial comp and the commercial umbrella will continue to be parts of that package.

Okay. And then just the last question on private passenger auto. As you look at the kind of rates that you're putting through right now, with that, one, what kinds of levels are you using? And then are you starting to see competition in that market in that line at all?

There is pretty serious competition in that line, Nancy. We continue to go to our agents and try to market a whole range of coverages. The homeowner auto package being one. Commercial coverages and then try to get a baffle insurance. Maybe JF has more specific notes on the marketplace.

As Jack said, our approach is to market the package. We've seen a sizable increase in our private passenger auto writings as we've had in the past not been quite as demanding on our agents to include the auto as part of the homeowner writings. We were up in new business in the fourth quarter 43.8% in private passenger auto on the annualized new business there. So we're writing more of what we're doing best in and that's the auto portion of the package.

As we've talked in the past, the initiatives we've put in place on the homeowners are taking hold. All of those policies are on three-year policy terms so it's a going to take a bit of time to work its way through the system but we're pretty happy with all of that.

Great. Thanks very much.

Your next question comes from Nick Pirosos, Sandler O'Neill.

Good afternoon. Ken, should the proposed elimination of double taxation of dividends come to pass, have you done any work on your investment income?

Nick, actually for us, it would have no effect on investment income. We think that it would give a boost to the overall equity portfolio but the -- from what we've seen, there is no talk about reducing the 70% dividend exclusion that exist right now.

Okay.

So for us there would be no effect.

Okay. Great. Thank you.

And Nick this is Ken Stecher. I will say there is one thing that we're not clear about. And that is on the property casualty side, a few years back they had us add back 15% of the DRD on dividends received. On the property casualty companies. What I have read and I don't know if -- they don't know if this is the interpretation but if possibly if this goes through that 15% add back, for right now [INAUDIBLE]1986 and their afraid that if this goes through it might go all the way back. In other words, it would be on your entire portfolio. So that's something that we have to watch closely.

Okay. Great. Thank you.

Your next question comes from Stephane Peterson, Cuchran Caronia.

Thanks. I'm just going to circle back and maybe ask for a real quick couple three sentence outlooks for some of your smaller operations. Obviously life would be a good place to start and then if someone might be able to maybe Ken could comment on the CinFin Capital Management, as well as the general outlook for '03 on CFC.

Why don't we take them in that order? JF, would you comment on the life sales prospects?

Sure. We have experienced some excellent results in the term insurance area. First year term premiums were up 34.1%. Total were up 21%. Work side which is an area payroll deduction, life insurance is an area that we concentrate on the industry has been basically flat in that area. We were up 7.3% first year premiums in that regard.

We have a dual strategy, I guess you could say, in that we're writing quite a satisfactory amount of business through our property and casualty agencies. We've been aggressive about also appointing, especially in states where we're not active on the property and casualty side, life insurance representatives in those states we're in the early stages of that but we're satisfied that that is taking hold as well. Ken might be able to give you more specific information but in terms of strategy, things are progressing really pretty nicely there.

I think that with the increased production that we have and the growth of our portfolio, the excellent cash flow that the life company has generated that I believe we can see a good increase in investment income. I think the earned premium is starting to pick up on the products that we've written, so we're getting more mass so I believe that some of the issues that we had this year such as the regulatory charge that we took in the third quarter, and that's behind us. Mortality looks very good so I think we have positive outlook for the life company.

Stephane, on the capital management, the assets under management at the end of the year were $726 million up approximately 8.9% over the prior year-end. Number of counts at 35 was actually static although what did change, we lost some individual accounts and we've picked up some institutional accounts in replacement of those and that's really the area if we had our choice that we would like to grow is on the institutional side.

Okay. Ken, and while I've got you real quick, I'll ask you to help me maybe plan my own portfolio a little bit.

What are you thinking about in terms of going forward with your cash flow in terms of your equity versus bond mix as you look out at the current market?

Historically I think what you would have seen from our portfolio is that between 30% and 40% have gone into equities and 60% to 70% into fixed income. 2002 was actually no different than that.

On the equity side I think we ended up including convertible prefers around 41%. Common stocks were down for us a little bit as far as the percentage. I think we were at 27% of new money in common stocks for 2002.

I don't think the overall percentages will change much. What is perhaps likely to occur in this market with low interest rates we actually find municipal bonds in the 8 to 12-year range a bit more conducive to what we're trying to get accomplished. Than ten-year investment grade Corporates.

At this juncture I would say that the over all mix will stay pretty similar. I do think that, you know, right now if you were to pin me down I would say the best values were finding are in intermediate maturities of municipal bonds.

Is -- are you sort of discounting then some of the dividend tax issues that are kind of being floated around right now? I know Munis have taken a hit or may not be as popular if what's being proposed is actually enacted.

Could you comment -- is that part of why you think the valuations are attractive and you think the risk is fairly low?

Sure, well, I'm sure if the risk is fairly low, we do find the municipals compelling right now because what we're faced with if we buy investment grade corporates out in say the ten-year range we struggle to find 5%. In insured AAA municipalities we're finding that you know in the 4 to 4 1/4% range. When you look at that on an after tax basis it's nowhere near, you know, your taxable equivalent above 6%. So, to us that just makes sense. Now, will President Bush's dividend package or investment package change that with municipal bond? It could but the lobby that exists to prevent that from happening is pretty strong. And who knows when it would even take place.

Terrific. Appreciate the insights, thank you.

Thank you.

Your next question comes from John Keefe [INAUDIBLE].

Good afternoon and good quarter. Ken Stecher, I've got a follow-up to Nancy's question, I didn't hear the answer. One is, what would the GAAP combined ratio had been in the quarter and the year excluding the accounting adjustments?

For the quarter it was 96.8. For the year 100.2.

Very good. Thank you very much.

You're welcome.

Your next question comes from Richard Baruth, Janney Montgomery Scott.

Jack, I'm out the office today so I don't have the results in front of me but it sounds like you had a good quarter and year. The one thing that you can't predict in your business as you will know is what your combined ratio is going to be in going forward in any one year. Because you're such -- it's such an exposure to the weather and you're not weather men and you don't know what catastrophes you're going to run into. So it makes it hard to predict earnings and give guidance. One area you can give guidance on though is your investment income.

Do you have any per share figure on your investment income projections as to focusing on that one segments of your business, ex the insurance business?

Thanks for asking that question, Dick. I'm going to ask Ken Miller to take a stab at trying to investment income. One of the hard things about it is that we don't tax effect it. In other words, we just use the raw dollars and if you try to take some sort of an average for the dividends that receive the DRD and then any more with some of the mandatory convertibles, we don't get the dividends reduction advantage and then you have the corporate taxable income and you just heard Ken's comment on the muni bonds so we have quite a package and mostly we look at the gross dollars without trying to guess at what the tax rate would be if we were to tax effect it. Ken, do you have something to add?

This will be a pretty broad range that I will give you but on a perfect share basis and this would be before taxes and fully diluted.

Right.

I would tell that you we should be in the range of $2.50 to maybe $2.95.

And then you just go plus or minus your underwriting as to the profitability plus your taxes, et cetera.

Correct.

Well that's a pretty nice number to shoot for, frankly. Thanks very much.

You're very welcome.

Your next question comes from Sam Harvey with Harvey Investments.

My question has been answered. Thank you.

Next question is from Hugo Warren with J.P. Morgan.

Good afternoon. It's Dave Schoucy. Couple quick questions. One on the number side, just wanted to get a sense on the accident year result. I didn't know if you have this those available for the 2002 year of account.

We're going to look for -- we think we can find them. But --.

I'll pepper you here with another question. Just taking a look at the claim information the detail data that you guys provide in the large accounts. It looks like on a margin perspective, it looks good because we're seeing very rapid rising amounts but I would sense that the $100 million that have been tracking over the last several quarters would have started to trend down and I guess should we start to see that with some of the new policy terms being implemented?

What we're seeing, Dave is the staying high level of big losses. Maybe Jim would have some comments.

Dave, I don't know if it will or not. I think the aggregate will help. It will reduce the severity because that aggregate will be reduced by the number of claims during the annual period.

I don't know that we're going to have a great reduction in the number of the large claims. I think the more risk we write, the more large claims we're going to have. If you look at it from the comparing the fourth quarter of this year to fourth quarter of last year I think the number of claims is pretty close to being the same. Also comparing fourth quarter to third quarter, there is not a big difference in the numbers so it looks like that is a fairly steady number right now. But the only thing I think will change is probably the annual aggregate like I said would certainly be a help. We're writing some lower level umbrellas that will probably have an impact on that also.

Dave I don't have the full accident rate that you're asking for but I know that like I said with the reserve increases that added about 2.4 points to the loss ratio.

Okay.

I'll check that when I get back to the office.

I will follow-up on that.

And that will be in schedule P when everything is available.

Right.

Your next question comes from Fred Nelson with Crowell Wheadon

It's warm in Los Angeles. I went down for breakfast and poured myself a cup of coffee and order a burrito when a beautiful, beautiful gal about 26 walked by and of course being a man of 64 1/2, I looked and tripped over my feet and spilled my coffee and the lady that owned the place said my behavior was unacceptable.

And I said, "What? Looking at the beautiful lady or spilling my coffee."

And she said, "Both."

And I was wondering if you folks write insurance to protect me against my own incompetency?

You're on your own.

When I got back to the office, I got a call from one of the young men that defends our country and he has been a shareholder since the '90s since he was referred to me and appointed by our congressman to Annapolis. And has has graduated and passed the test to go to flight school in Pensacola and [INAUDIBLE] over to Corpus Christi, Texas and he asked me the following question for me to ask all of you. We're involved in the period of stress and there are call up of reserves of people of both sexes, races, colors and traits that defend our freedom, which is we all love.

And he said does Cincinnati Financial and the companies help the men and women that defend our company that are called up and the military pay is not equal to the civilian pay to make sure that they can make their house payments and pay for their babies and things. I said, "You know, I'll ask them that question."

It's a great question, Fred. I'll like to -- since Jim has been investigating that a little bit inside our company.

Who has been?

Jim Benoski. And I wonder if Jim would help us.

Fred, we will make up the difference in pay for the length of call up time.

Beautiful.

Obviously the jobs remain open. And will be available when the person returns.

Beautiful.

So we're proud of these people and certainly wants to help take care of them and their families.

Does this apply to the companies that are in the portfolio? Do you know if those companies are going to be doing the same thing?

I don't know. We haven't looked at that. I can't answer that question.

Thank you so much. That is so meaningful. It brought tears to my eyes because it's a precious gift that you folks provide. Thank you.

Thanks for the question, Fred.

You're welcome.

At this time, there are no further questions. Mr. Schiff, are there any closing remarks?

Thank you everyone for joining us today. I want to reiterate the many positive that we see in the industry and in our company company. Cincinnati Financial and the Cincinnati Insurance Companies have built strong relationships, strong results and a strong outlook. We're in excellent shape and we look forward to continuing our record of providing value to agents, policy holders and shareholders. Thank you.

This concludes today's Cincinnati Financial fourth quarter earnings conference call. You may now disconnect.