辛辛納提金融 (CINF) 2003 Q2 法說會逐字稿

Good afternoon. My name is [Tanya], and I will be your conference facilitator today. At this time I would like to welcome everyone to the Cincinnati Financial Corporation Second Quarter Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Caller instructions.) Thank you. Miss Wietzel, you may begin your conference.

Thank you [Tanya]. Hello everyone. This is Heather Wietzel, Cincinnati Financial's new Investor Relations Officer. Welcome to today's conference call. Many of you have heard my voice before on these calls. But this time I'm speaking as an associate of the company. I'm happy to be here, and look forward to talking with each of you personally in the months ahead.

I also look forward to meeting you at the headquarters visit we have scheduled for September 24 and 25. We are planning an interesting day that should give insight into our strategies and outlook. Invitations will be mailed in the next several days. If you have any questions in the meantime, please call me directly at (513) 870-2695.

Turning back to the business of today, by now you should have received a copy of the news release. If you've not received a copy, it is available on our Web site at www.cinfin.com. Or you can call (513) 564-0700 to have a copy faxed to you immediately.

On today's call Jack Schiff, Jr., our Chairman and Chief Executive Officer, will begin, followed by comments by Ken Stecher and Ken Miller, after which we will open the call for questions. Before I turn the call over to Jack, please note that some of the matters being discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties. With respect to those risks and uncertainties, we direct your attention to our news release, and to our various filings with the SEC.

Also, reconciliation of non-GAAP information, as required by Regulation G, was provided with the release, and is available on the Investor page of our Web site, under the Operations tab. Statutory data is prepared in accordance with statutory accounting rules, as defined by the National Association of Insurance Commissioners, Accounting Practices and Procedures Manual, and therefore is not reconciled to GAAP. With that, let me turn the call over to Jack.

Heather, thank you for dealing with those introductory items. As many of you may know, Heather has served as an Investor Relations Consultant for Cincinnati Financial for a number of years. With her knowledge of our company and her broad-based investor relations experience, Heather was the logical choice to fill a full-time internal position, helping us to be responsive to the needs of our investors, and analysts.

One way we're doing that is by hosting the visit to our headquarters this fall. As Heather mentioned, invitations will go out soon. And we sincerely hope to see you in Cincinnati in September. We have a good deal to talk about, especially with the results starting to reflect the fruits of our labors.

And I might add that in addition to Ken Stecher and Ken Miller in the room with me today to talk about your questions, we also have Jim Benoski, our Vice-Chairman and head of the Claims Department, and J.F. Scherer, our Senior Vice-President of Sales and Marketing.

I'll take this as a chance to thank Jim Benoski very, very much for his stepped up efforts, duties, and responsibilities these recent weeks during my absence from the office. I'm very grateful to Jim. And I know the associates of CFC welcome his comments and his input on any subjects they want to bring to his attention.

The solid second-quarter results reflect the support and cooperation of our agents, combined with firming prices, careful attention to underwriting, and a top-notch investment strategy. Just as important, the second quarter results build on strong results from the previous three quarters. This marks our fourth consecutive quarter of sub-100 GAAP combined ratios.

Clearly this progress is pleasing. But we're not yet finished with our efforts. And we see significant up side going forward. So let me hit on the highlights of the second quarter, then turn to key business areas and the level of performance we think is achievable for the remainder of this year, and into the next.

For the quarter we had 16% increases in net written premiums for both commercial and personal lines. New business written rose 6% over a year ago level, with commercial new business growth at 9%, offsetting a 5% decline in personal lines new business.

The second-quarter GAAP combined ratio came in at 98.4%, including 7.1 percentage points from catastrophe losses, compared with 108.1%, including 8.1 points in last year's second quarter. We achieved that strong performance, even though there was continued weakness in our homeowners' book, which I'll touch on in a moment. Ken Stecher will also address the homeowner topic, along with some comments on the other more favorable profitability trends we are seeing in our other lines.

For the life operations, we saw a 5% increase in earned premium, and a 15% gain in operating income. Consolidated pre-tax investment income grew 4.8% in the quarter, despite the low interest rate environment. We are benefiting from the 2002 dividend increases paid by many of the equities we own, as well as the 2003 increases by 14 of the 47 companies in the common stock portfolio.

Operating earnings were a second-quarter record at $83m. And operating earnings per share doubled to $0.51, compared with $0.25 last year. In both years, catastrophes reduced earnings per share by about $0.19. Book value was $36.57 at June 30 versus $34.65 at year-end 2002, due to the recovery in the bond and equity markets, although we're still below the year ago level.

And we recorded realized gains of $2m before tax, as other than temporary impairments came in below the level we had anticipated, again due to the market recovery. Ken Miller will go into this in more depth. But we feel comfortable with the portfolio's potential for growth and income. With the realized gain, net income was $0.52 per share, compared with $0.21last year, when we had $0.04 in realized losses. Well that's the big picture.

As I mentioned, Ken Stecher and Ken Miller will be going into detail on some subjects. But I want to spend a moment talking about key areas of the business, and our outlook. We are in the third year of our commercial lines re-underwriting cycle, looking at pricing discounts, insurance to values, risk profiles, and other metrics of each renewal account. Those efforts are largely responsible for the continued improvement in the commercial lines combined ratio of 91.4% for the quarter.

Our agents, field staff, and underwriters have worked incredibly hard to get us where we are today. And we can look at the last four quarters as verification of how valuable their efforts have been. By staying true to our agent and field center philosophy, we believe we can continue to win our agents' best business. And we're staying very focused on maintaining the appropriate balance between growth and profitability.

As much as our willingness to evaluate each risk individually benefits our agents, it also allows us to make deliberate case-by-case decisions to leave some risks on the table. But, as we had anticipated in our comments to you last quarter, we saw some pick-up in the new business side, with particular growth in the various components of the package programs, including commercial property, general liability and commercial auto.

We're comfortable looking for total commercial lines premium growth in the 10-15% range on an apples to apples basis over the remainder of 2003, and potentially into 2004. This would reflect renewal price increases for the good to high quality accounts in the high single digits, and the contribution of new business.

While competition is intensifying, for the most part our agents are reporting that carriers are not looking for market share at the expense or rational pricing, echoing market comments from other sources. This should help us maintain a steady growth rate, while working for additional incremental improvement in commercial lines profitability.

For personal lines our challenges are a bit different, but ones we can meet. On the auto side, we're beginning to get the benefit of rate increases that took effect in the first half of the year. And we have additional increases coming on line in the second half.

Homeowners, however, continues to struggle. Additional substantial rate increases are approved for the second half of this year, which should help offset the rising severity we're seeing. We also are continuing to implement changes to make sure the risk we assume is in line with our expectations. While we don't see any change in frequency, we're taking a hard look at severity by cause of loss, because profitability in this business area simply isn't improving as quickly as we would like.

While we addressed the homeowner profitability, we're maintaining realistic growth projections for personal lines overall, as we prepare for the roll-out of our new personal lines processing system in the key states of Ohio, Michigan, and Indiana in early 2004. The new system will make it easier for agents to place business with us, while increasing our policy issuance efficiency. Already up and running in our Kansas agencies, they are currently undergoing a series of upgrades and modifications for other states.

On the investment front, we also had a good quarter. As Ken Miller will discuss in just a moment, we see the opportunity for investment income growth to be at the high end of our 3-1/2% to 4-1/2% target for the remainder of the year.

Finally, in terms of overall profitability, with the improvement in our underwriting results and the potential for continued improvement, we're now looking for a strong full-year combined ratio in line with the 96.8% we reported for the first six months. So met let me turn things over to Ken Stecher.

Thank you Jack. It's a pleasure to be speaking with all of you today. Let me first touch on a couple of brief items. And then I'll turn to the commercial and personal lines profitability details, and the trends in specific business lines. I'll also give a bit more detail on our outlook.

First, a note on the supplement financial data you should have received this morning. We've expanded the detailed material we provide, while including the necessary Regulation G information as well. This material is available on our Web site.

Second, just a reminder of the re-filing we implemented in the fourth quarter to the estimation process on matching written and earned premiums, and policy effective dates. In the 2002 fourth quarter, that added $117m for written premiums, and $15m to earned premiums. This leads to two items.

In this year's second quarter, the change in premium estimates added about $18m to written premiums, contributing to the growth rate, since we didn't adjust the 2002 quarter. And looking out to the full year growth estimates, we just wanted to remind everyone that we will measure 2003 progress against the adjusted $2.6b number for 2002, as that will be more representative of our underlying performance.

Third, catastrophes for the quarter came in at the $47m we had estimated in our preliminary release on the quarter, adding 7.1 percentage points to the combined. Through July 22, there have been two catastrophe storms that affected our policyholders, which we're estimating in total at $21m.

Finally, looking at the large loss analysis, we're trending in the right direction. While our total large loss category is up a bit from the first quarter - 14.7% of premiums, compared with 12.4% - it was still below every quarter of 2002, as was the count of losses in these categories.

Now, looking at commercial lines, the second quarter GAAP combined ratio came in at 91.4%, including 2.9 percentage points for catastrophe losses, compared with 103.3% and 5.6 points in last year's second quarter. The year over year improvement, excluding cash, was primarily due to a seven point improvement in the pure loss ratio. That reflects gains versus last year's second quarter, across virtually every commercial business line.

The lines of business we've been discussing in the 10-K and 10-Qs included catastrophes and large losses. We saw the commercial multi-peril loss and LAE ratio decline to 65.2% from 80.2% a year ago. The workers' comp loss in LAE was 78.2% for the quarter, our second best level in six quarters, and a slight improvement from 81.2% in last year's second quarter. Workers' compensation growth also picked up in the quarter. With small favorable profitability trends we're now seeing in some states, we are in a better position to help our agents by including workers' comp in packages.

The commercial auto loss in LAE had a nice improvement to 64.1% from 71.9% in the second quarter last year, although it picked up slightly from the first quarter, which was unusually strong. And the other liability loss in LAE ratio was 57%, compared with 75.3%.

For the personal lines, the second quarter GAAP combined ratio was 116.1%, including 17.8 percentages points for catastrophe losses, compared with a ratio of 120.2% or 14.5 points from catastrophes last year. Now by line, the homeowners' loss in LAE, including catastrophe losses, was 133.9% versus 137.8% a year ago. Taking out the catastrophes, the loss in LAE was 85.1% versus 96%. But compared with this year's first quarter, the loss in LAE, excluding cash, rose by almost 18 points.

While we normally see a seasonal deterioration between the first and second quarters in the loss ratio, we're concerned about the current level. More detailed loss trends show rising severity, measured by significantly higher average claim payouts. While the particular mix of catastrophe losses in the second quarter did contribute to this increase, that was not the only factor. And we'll continue to take a close look at this issue.

We do think that the rate increases we have approved for the second half of this year will help improve the ratio, as will the changes in coverages, such as water damage coverage, that are taking effect at renewal dates all when new policies are written.

We're just approaching the end of the first year of that effort, and should begin to see more benefit in the next several quarters. The personal auto loss in LAE was 72.7% versus 84.1% a year ago. As we mentioned last quarter, meaningful rate increases weren't effective until last year's fourth quarter, with many taking effect in 2003.

These increases are running in the mid single digits. In Ohio, rates rose by 7.1% effective the first of the year. With our one year auto policies, we should see the benefit of these higher rates and a satisfactory loss ratio as the year progresses.

Now on the UM/UIM reserve, the Ponzer and Linko cases. In the wake of two Ohio Supreme Court decisions affecting all insurers in the state, in the fourth quarter of 2000 we established a $110m reserve for UM/UIM claims incurred by not yet reported. In this year's second quarter we brought the reserve down by about $4.2, which leaves a balance of $17.5m at June 30.

As we mentioned last quarter, we reviewed the level of the reserve in light of several recent Ohio Supreme Court decisions. Based on the reviews of those cases, as well as the fairly low level of activity in the second quarter, we now believe that the reserve for these UM/UIM claims is in good shape.

Briefly on our outlook, we were pleased to see the first half bill on the results of the second half of 2002. As Jack noted, at this stage, with the growth level we see on earned premiums, and the profitability improvements, we're looking for a full year GAAP combined ratio in line with the 96.8% we reported for the first half, or on a statutory basis, 95.7%.

And we're comfortable with this, even if catastrophe losses end up slightly above the three percentage point measure we'd normally use. Reaching this target level will make our 2003 combined ratio the best in over 10 years by almost two percentage points. So let me turn things over to Ken Miller to discuss investments.

Thanks Ken. Good afternoon everyone. Taken as a whole, second quarter investment results were much more acceptable than the first quarter. While the low interest rate environment and the slow to recover economy are keeping us on our toes, we believe we're in pretty good shape. Investment income rose by 4.8%, in large part due to dividend increases this year and last.

Strong cash flow from insurance operations in investment income allow for $169m of net new investment in the second quarter. The breakdown was $142m in fixed income, $54m in common stocks. And convertible securities had net sales of $34m during the quarter.

With the market recovery restoring some of our internal flexibility, we were able to allocate more of our new investment dollars to common stock, returning to a level more in line with our historic practice. Over 80% of our common stock purchases in the second quarter were allocated to our top 13. These are the individual equities, where the market value of current holdings approaches a minimum of $100m each.

As I mentioned, $142m of net funds were invested in the fixed income side. And we remain focused on high quality intermediate maturities in the 8-12 year range. With the tightening of spreads between municipal and taxable bonds in the second quarter, we saw fewer opportunities in the municipal markets. During the first half of the year, slightly more than 25% of net new investment was in tax-exempt securities.

In our investment grade portfolio, we now have a total of $212m in agency paper on the books. New to our portfolio in 2003, we find the risk adjusted returns compelling in today's market. We also bought back 326,800 shares of our stock during the quarter, at a cost of $12m, bringing our year to date purchases to 1,265,500 shares, at a cost of $45m. The average price picked up slightly in the second quarter to $36.73 from $35.34 in the first quarter.

On the valuation side, the equity portfolio did under-perform the S&P 500 over the first half of 2003, but made up significant ground in the second quarter, as Fifth Third and the other bank stocks recovered nicely. On Fifth Third, they reported good second quarter results. And we believe they're on track with their regulatory compliance steps. Our equity standards in any market continue to be sales, earnings, and dividend growth, plus proven management and a favorable outlook. And we believe Fifth Third continues to meet those standards.

The market recovery also was a very significant factor in the $2m in realized capital gains we reported. Keep in mind there are three components of realized capital gains. First, FASB 133, which measures the change in the embedded option within convertible securities, resulted in a gain of $11m this quarter. Second, realized capital gains from sales of securities were $8m versus $14m in gains a year ago.

This quarter's gains were primarily normal trading activity, including calls and sales of convertible securities, although we did have about $3m in gains from the sale of previously impaired securities. And for the third component, we reported $17m in asset impairments for market declines we deemed other than temporary. Well below our estimated ranges, the improvement in the economy has benefited many troubled companies. While we believe the portfolio has improved, further impairments may be necessary.

Before I close, I want to expand on Jack's comment that we anticipate investment income growth to be towards the high end of the guided range we had set for the year. The single biggest factor in this boost is the contribution of dividend increases. As we said, dividend increases in 2002 by 28 of our holdings are adding about $12m to annualized investment income this year, which alone will result in about 2-1/2% growth in investment income.

Through the first six months of 2003, 14 of our 47 stocks have raised their dividends. And four more increases have been declared in July. These increases will also add about $12m to our annualized investment income moving forward. The accelerating rate of dividend increases bodes well for us, as do indications that companies are seeking to leverage the new tax dividend law to maximize their stock potential with higher payouts. For example, Wells Fargo raised their dividend by 50% last week.

I'm not ready to start predicting specific interest rate levels in 2004 and beyond. So it's a bit difficult to pin a growth rate on investment income next year. But the dividend increases will form a strong basis. And we'll benefit from any rise in interest rates, even though bond values might decline in a rising interest rate environment.

In summary, this was a good quarter. And we believe our portfolio is in good shape to allow us to continue to benefit from the compounding of cash flows over the long-term. Jack, with that I'll turn the call back to you.

Good job Ken and Ken. This run of growth and profitability is welcome. However, it is no accident. It's the result of hard work on the part of our agents, our field people, and our headquarters staff. We're asking more and more of our agents and of our own associates. And they are coming through again and again.

The fact that Cincinnati has been able to grow and flourish says something very good about the relationships we hold and maintain. That is the heart of our business, whether it is insurance or in investments. And we are happy that these relationships are strong and growing more so. We have great confidence in our ability to find and retrain dedicated employees and agents. We have great confidence in our ability to protect policyholders, market insurance, and to do it profitably. And we have great confidence in our ability to reward shareholders.

We know that some things in our business are unpredictable. But we also know that the Cincinnati has the people and the strength to consistently deliver. That is a very energizing situation, and we look both forward and backward with confidence.

Great. Excuse me. This is Heather Wietzel. We understand that there are some technical difficulties with the web cast. For those of you who are listening on the telephone line, you may not be aware. For those who are able to hear this on the web cast, we wanted to reassure everyone that we will be making sure that the replay is fully audible.

We're going to continue with the question-and-answer session. And once the call has completed, we will be going back and making - again, making sure that the web-cast is fully audible - the Web broadcast replay is fully audible. We apologize very much to our listeners. But we do want to make sure that the people who can hear now get their questions answered. And we will move forward and be available for follow-up calls after the call is done. Thank you. And I think we can open for questions Jack.

Yes. Let's go forward.

(Caller instructions.) We'll pause for just a moment to compile the q-and-a roster. Please hold while I continue to compile the q-and-a roster. Your first question comes from the line of Nancy Benacci of McDonald Investments.

Thank you. Good afternoon. Congratulations on a very solid quarter. I wanted to ask a question of J.F. regarding the commercial lines book, which has had some good strong growth. And you indicated substantial rate increases in the second quarter. As you are looking out into the third quarter, I think you indicated high single digit in renewal. Are you starting, one, to see any push-back at all? Any competitive forces out there?

And then secondly, in the commentary and then in the release, the indication was that you are expanding more in workers' comp a bit in your package policy. Can you give us some comfort regarding your outlook for the comp line? We've seen a number of companies certainly have continued problems with comp.

Nancy, as far as the competition is concerned out there, we're seeing it remain fairly steady. First of all, there really is not a carrier that's out there, or a group of carriers that are overly, I guess in our opinion, overly aggressive, as Jack mentioned in his comments, throwing out underwriting disciplines for market share. We're seeing pretty steady price increases, as I said, on renewals, in the high single digit area. For tougher lines, into the double digits.

As far as push-back is concerned, I really don't think so. I think right now it's a fairly - the marketplace, I guess, in somewhat equilibrium from that standpoint. The competition tends to be for those who are showing that they can do a good job in claims, that they can be responsive, as we are with our field approach to things. So we're seeing things be fairly steady in that regard. Does that answer your question in that regard?

It does. But also along that line, you typically had the three year policy. Is that still generally in effect for the good - the major portion of your commercial lines book?

Yes. As we talked about over the last several conference calls, during the last year or so, we've probably wrote significantly fewer three-year policies, as we were reforming our general liability forums in the construction area, and making certain that our rates were where they needed to be. But we're back to writing three year policies on a pretty regular basis. That remains a very good competitive tool. And it's a very stabilizing tool as far as our book of business is concerned. So we continue to be very happy with that as a part of our arsenal.

Okay.

As far as workers' comp is concerned, workers' comp is a $300m line for us. As it is right now, about 11.6% of our book of business is comp. To say that we are aggressively pursuing comp any differently than we have in the past would probably be going too far. We continue to want to make a market for our agencies for their best comp business. And we've been doing that over the last several years.

Our loss ratios have been pretty good in that line. We've been sub-100 last year on workers' comp. And over the last three years, we've averaged about 18.1 points better than the industry when compared with the Fitch report that was just out.

So from our standpoint, we don't do business in California. We are very state-specific as far as our strategy in workers' comp. And so when we see a state where we feel that the environment has changed to the negative, we remain very, very conservative there. What we're wanting to do is to continue to compliment very desirable accounts, that being the auto, the package, the umbrella, with the comp, when we see that there is an opportunity to write it profitably.

That's fair. And then just a follow-up comment on homeowners. It's certainly taking some time to get that line turned around, as you've had three year policies in place here. When do we start to see the benefit of the rate increases really start to come through to the bottom line?

Nancy, we've been at it about a year now. As you know, the three year policies will defer longer than we really would care, obviously, for recovery in that line. But we had some pretty substantial increases go into effect within the last year, in Ohio and Indiana, for example. And one third of the book of business will have been affected by that. We're seeing overall premium increases.

And that includes some coverage increases in Coverage A, which would be the dwelling amount, in the 30% range. So we would expect to see, as this year goes on, and early next year, improvements to continue. The loss ratio that we saw in the second quarter, we studied it, as I already mentioned, but we try to separate cats from non-cats, and try to discern how we're doing there.

I think what we saw to a great degree in the second quarter as well would be weather claims, but those not classified as cats. They too were fairly high in that particular quarter. So we think we're starting to make a lot of progress. We've got a fair number of rate increases in the works right now, in addition to what we've already seen. So I would say certainly as this year finishes out, and early next, we'll see some improvement.

Great. And then just a last question for Jack. Based on Ken Miller's comments on the number of stocks held in the portfolio that have had substantial dividend increases here, could you give us any commentary on how you're thinking about the dividend at Cincinnati going forward?

Oh, Nancy, we like dividends. We like to collect them, and we like to pay them. I think the dividend record of Cincinnati Financial over the years has been - I won't call it generous. But I'll call it in line with the growth in the wealth and the profitability of the company. I think we plan to continue that program.

There have been some companies who have declared extraordinary increases. Ken mentioned Wells Fargo as one of them. That's quite remarkable. And yet when you look at it as a percent of their earnings, I think that you'll find our dividend payouts will be kind of in a similar range. Although we would like to retain more after we pay the dividend in the company than we do before the dividend is paid.

Okay. Great. Thank you.

Our next question comes from the line of Charles Gates of Credit Suisse First Boston.

Hi. Good afternoon guys. I had three questions. The first, Jack, in your introductory remarks you said that you were out of there for a period of time?

Yes sir, Charlie.

Why?

The doctors put me on the shelf for a couple weeks. Have you had your heart surgery yet Charlie?

No. I probably need brain surgery.

Well, I salute you if you haven't had it. You don't want to have it.

Oh, I'm sorry sir.

No. That's quite all right. I'm glad to talk about it. The angels have been on the shoulders of my doctors and nurses. And they've pronounced me in pretty good shape. But in the meantime, I'm just tired all the time. And I don't get to work. And I've been in the office for the first time on Saturday morning this week since my surgery. And it's comforting to be back. I tell you that I miss not being at work. But when you're away from work, you're not tuned into the details and the status. And even missing a couple of weeks puts you behind in the currency of what's going on. So I think you'll find me answering not very many questions today, although I'd like to try and be helpful to you.

Well it's nice to have you back sir.

It's a pleasure to be here Charles.

Two other more mundane questions. I guess question number one would be could one of you opine as to what kind of tax you're looking at on dividend income as a result of the change in the Tax Act?

Charlie, this is Ken Miller. There is actually no change for corporations. Our dividends, assuming that they're qualified, where we received the 70% dividend exclusion, we pay tax on the remaining 30% at our corporate tax rate, 35%. So we pay a 10-1/2% tax on dividend income.

Now keep in mind Charlie that if the dividends are from a real estate investment trust, or a master limited partnership, those would be taxed at the full 35%. There is no dividend exclusion.

You said, Ken, that you had bought stocks in a number of the companies you already own. You didn't buy any more Fifth Third did you?

That is correct Charlie. We did not. We actually placed all of those funds in the bottom line of the 13 stocks that I referred to. The top four, being Fifth Third, Alltel, National City, and Exxon-Mobil, received no new funds during the second quarter.

The other question I had was what portion of commercial line sales were representing by multi-year policies in 2003 in the quarter versus 2002?

We're grabbing papers Charlie.

Are you talking about new business Charlie?

Is that the right way to look at it I guess? Or total? If you had $100 worth of commercial lines writing in the second quarter of '03, what portion of that would be represented by these multi-year programs? And then in contrast, what would have been last year.

Well let me - I guess if I could answer the question. Let me try it from a different angle. The percentage estimated number of policies to be renewed in 2003 for our company, on workers' comp, 98% of our policies are one year policies, and renewed during the year.

Yes sir.

On the package policies, 51%. So we had a fair number of one year policies that we went through the last several years. Historically, about 52% of our package - I'm sorry, 92% of our package policies were on a multi-year term. And I don't know that we'll head back to 92%. But it will be close to there.

As we've mentioned before, I think the thing to remember - commercial auto is a one year policy, workers' comp is a one year policy, our commercial umbrellas are annualized as well. At any point in time, last year being specific, 74.5% of our premium was annualized. In other words, we underwrote it, and we also re-priced it. And that will likely go up slightly - I'm sorry, will go down slightly with more three year policies in line. But still, with those lines of business, that would be considered to be the most volatile - the ones I just mentioned - we get a chance to take a look at it every single year.

Are there other companies that you think that have big books of multi-year policies?

None that I'm aware of.

Why - and this is the last question. Why do you think that there aren't more companies that embrace it?

I don't know that they - I can't tell you. I don't know that they have the confidence we do in the advantages that it provides for us and our agents. This might sound like a small item. But we find this to be one of the challenges as we build our automation systems.

To have automation systems that support three year policies is a very, very difficult endeavor. I don't know it, but in their particular cases that might be part of it. There are some companies that do issue coverages on a three year policy. But when you asked large books of it, I'm just not aware of that.

Thank you. Jack, take care of yourself.

Thank you Charlie. I appreciate it. May I add one other comment to J.F.'s remarks on the three year policies?

Yes sir.

I really think it's a plus for Cincinnati Insurance to go to a professional agent and say, "Here's a program of insurance that's meant to be received by your policyholder on a long-term basis. And to give evidence of that, here is a three-year policy on the core lines of insurance - your property and your general liability - that you'll have as an independent business person."

And when an agent can do that, and put it in the proper light, that it's not a guaranteed premium, that it's something that possibly could change over a period of time, but it's meant to cement a relationship that's going to occur over maybe 10, maybe 15 or 20 years. The professional agent can do a very good job selling this, and retaining the policyholder, and moving the policyholder away from thinking that it's time to discuss insurance changes this year, because the renewal date is in 90 days.

And we had some use of annual policies in our general liability maybe a year or a year and a half ago when we changed the general aggregates and our general liability coverage. We put them all on an annual basis, so we could have as many of them expire as possible. Well now that we've gotten through much of that, we're going back to three-year policies in those areas. We find the agents receive it well. The policyholders enjoy it. We think it builds long-term relationships.

And I know it's a controversial item. And I can see why it should be. But in the same time, look what inflation has been the last two or three years. And inflation, for the first time, has not worked against us like inflation had in the 70s and in the early 80s a little bit. So I don't mean to belabor the three year policy. But I think it's a plus for our company. And I agree with J.F. I don't know why some of the other companies don't use a three year policy. And maybe that's to our good fortune that they don't.

Thank you very much sir. Take care.

Thanks Charlie.

Your next question comes from the line of Ron Frank of Citigroup Smith Barney.

Yes, good afternoon. First of all Jack, let me add my well wishes to Charlie's. I didn't know you were ailing. I'm delighted for you that you're back on your feet.

Thank you.

I wanted to make sure that I understood what was going on in the homeowners business. From the press release comments, and from the earlier conference call comments, it seemed like you were concerned that there really was a new element here in terms of severity, after extracting cats and so on.

Then it seemed as if there might have been a hint that some of that may have been weather related, and it might not be a shift. I want to sort of get a clarification of what the view is on that. And if it is indeed a shift in severity underlying that you've seen, should we assume that it's, again, a long-term fix, given the three-year nature of the policy?

In other words, we were pricing in for what we had in homeowners. Now we only now begin to price for this new element that's emerged. And that takes three years to catch up with. I know that's long-winded. But I'm just trying to make sure I understand the dynamic there and the view.

Ron, this is J.F. I think you have it correct. The severity has bumped up. And I think others that have reported their earnings have indicated that they've seen that. We also saw in the second quarter, as I mentioned, a lot of non-cat related weather that impacted the loss ratio. We are confined by the three year policy in how quickly we can get things approved and then put into effect.

We do think, however the fixes that we have in place right now between rates, charging for water damage coverage, improvements in insurance to value, just now coming into its first year, will have a significant effect. The long-range effect of the severity that we're seeing, to say that we're studying is about where we can say that we are right now.

We had, in some of our claims, a hailstorm that hit a very affluent neighborhood in Columbus, Ohio. And as a result of the hail there, the costs of repairing those roofs were substantial compared to perhaps a more ordinary area. So it's a little quick to decide that the severity is so strong and so significant that what we've done already in the way of fix will not succeed.

Thanks for that. What assumption for the homeowners business over the balance of this year are you making, excluding cats, underlying your overall combined ratio guidance? Are you assuming that it gets no better or no worse? Or that it gets a little better? What assumption for homeowners underlies the overall assumption?

This is Ken Stecher. I think when you pull out the cats, we are assuming that it will show some improvement the balance of the year. The rate increases are starting to flow in. And so the earned increase should start to pick up. I'm not going to say that it's going to be - we're going to have a profitable book there. But if you could pull out the - we did see the seasonal variation that I mentioned between first and second quarter. And then you look at last year's numbers for non-cat. We had 96% loss on LAE. This year it's 85.1%.

Okay.

So it's apples and to apples there. So I would expect it to show some improvement going forward.

Okay. And lastly, if I may, it looks like - when I look at the overall personal lines loss ratio, excluding the cats and even the large losses, after improving significantly for two consecutive quarters, it looks like it stabilized at about 64 for both first and second quarter. I guess that implies to me that personal auto's consecutive quarter improvement offset the consecutive quarter deterioration in homeowners. Do you expect continued consecutive quarter improvement of that magnitude in auto?

Well I'm not sure if we would - of that magnitude. But as I mentioned, I think we are getting some rate increases in effect now. So we're not seeing an issue at all with frequency there. Severity is bumping up just slightly, but not significantly. So I think with additional rates, we should be trending down slightly.

No signs of frequencies bottoming as others have observed?

I don't think we're going to say that. I mean we're not seeing an issue of increasing.

Okay.

I don't know if we've reached the bottom yet or not. I wouldn't be able to comment on that.

Last one, I promise. What's the June 30 book value of the Fifth Third stake?

Ron, it was $4,179,000,000. And I'll just drop there.

Thanks very much. Sorry to take so long.

Thank you.

Thanks Ron.

Your next question comes from the line of Paul Newsome of A.G. Edwards.

Good afternoon. Just a couple of quick questions. One was on the investment portfolio. I'd like to know a little bit more about your philosophy about concentration of risk. I was a little bit surprised to hear you're putting the capital increasingly into some of your larger, while not your largest, investments. And are you worried about, or not worried about diversification of the portfolio. That's my first question.

Okay. Paul, this is Ken Miller. It's always a little bit of a concern. But we've made the decision that what we want to do is to own fewer companies, know those companies extremely well, management and everything that they do. And we're going to continue along those lines.

I spoke about our top 13 holdings. Now at some point in time that number may expand to 15 or 16 companies, but not much beyond that. And we've always said that we would like to own between 5% and 10% of 10-12 companies. And that's what we're shooting for.

The number of common stocks in the equity portfolio has remained somewhat constant over I would say at least the last 10 or 15-year period. And it's ranged from probably a low of 40 companies, and a high of maybe 50. That will not change.

And my second question is on a different topic. A number of your competitors - say an Allstate or Safeco - have kind of gotten their act together or improved their underwriting systems, using more credit scoring, adding more tiers. Maybe you can sort of compare and contrast what you have done. And is there - and do you feel like you're keeping up with these companies? Or are you falling behind, or ahead? Or what's your view in terms of the mechanics of the underwriting systems? I'm just wondering if some of the issues that you're having in the personal lines may be that some of your competitors are just getting a little bit sharper with the pencil.

Paul, it's J.F. Scherer. We have opted, with the controversy related to credit scoring, we have gone slow in that particular area, which isn't to say that we don't use it some, and that we're investigating it further. There was a lot of controversy with the Departments of Insurance. We've continued to use, and are posting fairly decent results, in the private passenger auto side, using the more traditional methods of underwriting, which would be the MVRs, the driving record reports, and then also relying on agencies to do some front-line selecting of business.

We recognize though that what other companies are doing in credit scoring, the science, if you will, associated with the underwriting, is something we need to continue to study, and perhaps go a little further with. But right now, we're continuing - as I said, we use credit scoring some, but not to the tiering method. But a little bit more traditional. But we are studying them.

How about on your homeowners insurance book?

Homeowners, we do not use credit scoring at all.

Any sort of insurance scoring?

No insurance scoring on the homeowner book.

Okay. Thanks.

Your next question comes from the line of Mike Dion of Sandler O'Neill.

Good afternoon everybody. And Jack, my thoughts go out to you as well. Welcome back.

Thank you Mike.

My question is concerning competition. J.F., you alluded to it a bit on the call today. But last quarter, if I recall, you had spent some time talking about, particularly on the small commercial side, that you were seeing some increased competition there. Do I take it as saying that that's moderated somewhat as we move into the second half of this year? Or is that still the case?

No. I think in the small commercial side of things, it is a pretty steady stream of carriers, at least announcing - now how successful ultimately they will be - but at least announcing more and more online approaches to underwriting, whether it be a commercial auto, or packages, that type of thing.

And that does present competition for us. But, as I also said, we think we can measure up to it, that it's, for an agent trying to decide with whom they'll do business, it's the whole package that they have to consider, how reliable the carrier is. Is this just a temporary foray into that business? Do they handle claims well? Do they have field people on the spot that respond well? Are they consistent and stable?

There's an awful lot going on out there relative to automated underwriting, if you will. But we still like our chances, to go out and compete person to person in the business, the way we always have. It will be competition. At the company we're continuing to develop systems that help with processing, not automated underwriting. But we still like our position in the marketplace very much. Right now is a great time, in our view, to be in the business, given what we think are strong advantages in the field.

And just a follow-up - in the remarks in the press release you said that between 8% and 15% rate increases on the commercial line side, is that similar rate increases on the small commercial book that we're talking about as well?

Yeah. At any given time, someone will come up with a surprisingly low price. I suspect every carrier will be accused of that. Some carriers will, in terms of taking a look at measuring their small commercial accounts, they may target certain elements of it. We're not seeing huge decreases, for example. Really for that matter, I can't say that I've heard any agency talk about any decreases from renewal premiums in certain lines. I think that range is reflective of small commercial as well.

Great. Thank you.

Your next question comes from the line of Mike Hallett of Fox-Pitt, Kelton.

Thank you. Jack, good to have you back. And let me congratulate you all on your No. 1 ranking by agencies. As far as I can tell, that's a well deserved accolade. I was hoping you all could expand on the homeowners comments, and in particular on your price increase comments, in light of the multi-year policies that you have there. How much of your earned premium has been re-rated? What has been the average rate increase embedded in that? And how long is it going to take to get the entire portfolio re-rated?

I think we'll all look at one another, and try to answer that question Mike. There's a lot of components in there. And while people are looking for specifics, I might add that you have hit the nail right on the head when you say it takes a number of years.

If we put a rate increase in effect today, by the time we engineer it through the Departments of Insurance, and we get their authority and approval, then we have to wait for our policies to expire before we can implement that rate increase.

So, in the case of a three-year policy, you can see how the benefits easily won't be fully received until maybe the fourth year after the implementation of that rate increase. And then it takes a while to roll through them. J.F., you've got some notes?

Mike, let me kind of help you a little bit, I suppose. Year to date, we've written $125m in business. We have a fair amount of concentration of homeowners business in Ohio. That represents 31% of our book. If you take Indiana, Georgia and Michigan, those four states, they total 55 - almost 56% of our entire book of business.

We've gotten very strong rate increases on - in February of '02 we had a 10% increase in Indiana, in May of '03, a 21.3%. So the cumulative effect there is sizeable. We're averaging in Indiana a 37% increase in premium in that particular state. In Ohio, a 30% increase.

We've probably made it through, in those larger states, about a third of our book of business in that first wave of increases. We will continue to have, and get increases in Ohio. We have, just on a rate increase, a 14% increase filed to take effect on 1/1/04.

I don't know - as Jack said, it gets a little complicated to tell you precisely how much of it has worked its way through our book of business. Ken, I don't know whether you've got anything closer. In those states, as I said, where we've got the greater concentration. Illinois, for example, is the number six. We've got a 17% increase that took effect on July 1. So they're coming on board. But they will - all of those that I just mentioned - take three years to fully implement.

Right. So just using those four or five states that you gave us as the bulk of your business, is it a rule of thumb, as kind of a third of your book has seen some rate - or your earned premium I should say, has seen some rate increase? And the trend has improved sequentially here in 2003, and you look for continued improvement. Is that a fair characterization?

Yeah. That's fair.

Okay. Can you just comment briefly on the impact of the new agency automation systems that are coming on line in terms of premium growth? If there is any near-term impact to the combined ratio? Just kind of go into a little more detail on that.

Boy, I don't know. On the near-term, on the combined ratio, we're seeing - I don't know. Ken, do you have anything? I haven't. No. I can't say -

Do you expect any - I guess my question is with rolling out to new states. Do you expect any impact over the near term on either premium growth or underwriting profitability? Or is that more of a longer-term issue?

I think Mike - this is Ken Stecher - I mean when we roll out the new system, we believe it's going to be a lot easier for the agents to do business with us. The key decision will be do they want to roll the book, or do they want to change from their current carriers. That's one of the things that we're going to offer them, is the capability to do agency bill, which is what they currently do with us, or direct bill on personal lines. And that's the key with our new Diamond product on personal lines that is rolling out. It is rolling out in Kansas, as we said. And we have a target for early next year for the three main states of Michigan, Indiana and Ohio. But again, it will be up to the agency as to how much additional business they want to place with us. But right now, we really haven't tried to quantify that or build that into our models.

Okay good. And I guess I just have - my last question just has to do with capital management and the share repurchase. The volume was down in the second quarter. Is there any particular reason why that was?

Well Mike, this is Ken Miller. The price of the stock did pick up a little bit, at least for a portion of the quarter. The market itself didn't particularly cooperate for us. And as we kind of estimate our book value, I don't want to give away too many trade secrets, but we do look at that. And also, to a large degree, it's what other opportunities exist for us in the marketplace. So, as we see opportunities in the marketplace, our stock becomes less compelling to us compared to buy-back.

Okay. Fair enough. Thanks.

And Mike, this is J.F. again. I wanted to - I don't know whether you or Mike or Paul asked the question about credit scoring on homeowners. I wanted to clarify one thing. We use credit scoring primarily - and depending on the score - to determine payment plans. I mentioned that it doesn't come into play much on homeowners at all, mainly because most homeowners are paid through mortgages, and on an annual basis to begin with. And I just wanted to clarify. We do use it from time to time on the homeowners. But it does not come into play nearly as much as it would on the auto.

Great. Thanks.

Your next question comes from the line of Nancy Benacci of McDonald Investments.

Just a couple of quick follow-ups. Are you doing anything with your commission levels at this point, based on what you're seeing with rate increases?

No Nancy. Right now we think the agents are properly compensated. They're doing a great job for us. They're earning a great underwriting profit for us, and particularly in the commercial lines area. And so right now we're pretty happy with where they are.

And then any just other follow-up comments that we haven't discussed yet that came out of your recent round-table meeting with your agents, if you could share those.

Well, Nancy, I don't know how to. Nothing in particular. I think the thing I guess I would emphasize at this point is that our agents appreciate our consistency in the marketplace. We're making the market. We're responsive to them.

As I mentioned - and it's not just cheerleading - the fact that we've got, in our case, 85 territories, staffed by adjusters, loss control reps, field reps, that are walking into our agencies' offices, confident with the fact that there is nothing broke in our company - we've got very good loss ratios, and a lot of confidence, asking what we can do to help them write business, I think they would probably give us pretty darn high marks, as Mike mentioned, in what we're doing. We're very encouraged by our position in the marketplace and what we can do to help our agencies succeed.

Thanks very much.

(Caller instructions.) Your next question comes from the line of Ron Frank of Citigroup, Smith, Barney.

Yeah. I thought I'd break with tradition and ask a life question. I noticed in the press release that you're adding individual DI riders to the life policies, and having some success with that. Can you give me an idea? I know it's a small business for you overall. But what kind of magnitude of activity there are you contemplating? Obviously that's been another somewhat controversial area lately.

Ron, this is J.F. We don't appoint and do business with a DI specialist. We, as we do in almost every case, put together a portfolio of products that compliments our property and casualty agency force that also writes life insurance. We would not anticipate on a great magnitude writing with DI, but complimenting the professional liability risk that they write - other professionals in their communities that they write with disability income insurance.

J.F., I don't want to beat a dead horse, because obviously it's a small business for you. But just as a quick follow-up, is there any possibility you get selected against doing it on that kind of basis? Your P&C agent comes to sell you DI. You also have specialists marketing that product to you. Chances are if you were going to buy it, you would have thought of it to begin with. Could you get selected against that way?

Well I think you can't minimize the progress property & casualty agencies have made in adding life insurance specialists to their shops. I think that's the first issue. There are some very talented folks writing disability insurance there.

I guess the other key issue is that we underwrite it here. It's one thing altogether for our agency to locate, if you will, the lead, the prospect. But, like property & casualty insurance, where an awful lot of judgment about what gets written and how it gets written is contributed by the agency, on the disability income/life insurance side of things, those applications are completed in the field, and sent in here for 100% of the underwriting.

Okay. And separately, Allstate and Progressive have both talked about ramping up their ad spend in the second half. Are you starting to see and/or feel that from your perspective?

Not any more than normal, to answer your question. No. There's no question Allstate seems to be doing very well. Progressive is very prominent in the marketplace. That tends to be a bit more of a commodity marketplace, more so than what we're involved in. And so our agents, once again, we're looking to write the accounts that are associated with the commercial lines accounts that our agencies write. That tends to be what they would specialize in, and be a little less commodity driven.

Okay. Thanks again.

Your next question comes from the line of [Don Driehause] of R.W. Baird.

Gentlemen, congratulations on a very nice quarter. And it looks like, to me, that with the combined ratio down around 96.8, the book value up, and revenue and earnings growth up, that those numbers put together should be a pretty bullish outlook. And yet I don't want to rain on your parade. But when do you see these types of numbers?

When do you think the market is going to appreciate this type of growth and good news, and start reflecting it in your share price? Do you see something in the market in general that's kind of holding the industry back from factoring in the numbers that look so good?

[Don], we think our price in the stock market today presents a pretty good value to a buyer. But we've felt that for some time. I think there's a lot of intrinsic value to Cincinnati Financial shares today. A lot of assets stand behind each share, and not just assets that are in the financial statement.

I think person for person, when you go into our field system, the composition of our agents, you can see that I'm biased, but I don't think there's a carrier out there that can match the composition of our agency force, our field marketing force.

We don't often talk about our field claim representatives as much as we should. But there are 700 of these people out there. They live in the same communities where our agents are located. These people do an outstanding job representing the interests of the policyholder, the agent, and Cincinnati Insurance to secure a good settlement, and a fair settlement. And they spend time to do this on sometimes weekends, and sometimes on five minutes noticed before they're involved in a claim.

I could go on and on with the positives of Cincinnati Insurance and Cincinnati Financial. I won't do that to you. I just think we have a great value in the stock. I have compassion for you folks on Wall Street, because you have to recommend to others investments that they need to make to secure their families and their livelihoods. And I think that's a severe and huge responsibility.

I think everybody on Wall Street today is cautious about these kinds of things. I think they're very careful about the things that they pronounce to be correct, the things that they've studied to be fair. And I think there is nothing wrong with that. But I think in the meantime, stocks like ours don't get the full value of the appreciation that they're due. And all we're going to do is continue to make Cincinnati Financial a more valuable company for the shareholders.

And all the things that we've done, we're going to continue to try to do them in an even greater way. I'm not saying that very well. But I hope you get the gist of what I'm trying to represent.

Well Jack, I appreciate it. And one other quick question. What is your total percentage of institutional owners of Cincinnati Financial stock?

This is Heather. It looks like it's about 44%.

Forty-four percent? Okay. Thank you. And Jack, I'm happy to hear you're feeling better as well. Thanks.

Thanks [Don].

Your next question comes from the line of Charles Gates of Credit Suisse First Boston.

Hey, St. Paul, I guess, opined about six months ago that they wanted to build a small commercial lines book. To what extent do you see them as a competitive entrant in the fray?

I think the marketplace has tremendous respect for Jay Fishman. St. Paul is an excellent company. I think he brings a good track record with him. You're really better to ask a lot of agencies how they feel about that relationship overall. They are advertising heavily. They had taken themselves out of that marketplace many years ago. I think they're a fine company, and one that we're not discounting at all. Overall, long-term, Charlie, I really don't know how it will all turn out.

Do you recall why they took themselves - that was what they called the BOP, right?

Yeah. Well, the BOP. Yeah. Service center kinds of things.

Why did - do you recall? Two questions, and then I'm done. Maybe I'm done already. The first question is do you recall about what year they got out? And two, do you recall why?

I can't recall exactly when. I think a lot of carriers, seemingly the larger national carriers, soured on smaller accounts, and opted for the aroma of great big policies, where you could sink your teeth into a lot of premiums, and doing business with very large national brokers, where seemingly the opportunity for growth was the greatest.

About what year was that do you think?

I think that was in the middle of the soft market. I think in the early to mid-90s probably.

Thanks. Take care.

Uh-huh.

Your next question comes from the line of [Fred Nelson] of [Paul Weedon].

Jack, I wanted to share with you the joy and happiness that I've received from the great gift you give to people, and empower them to go to the highest level of their life possible. And the importance of relationships and people is so meaningful to me, that I wanted to say thank you from one human being to another. And all the people around you that I talk to have been empowered by you to go to the highest levels of their life. And I think that's a great gift you give to people, to this country, and to the shareholders. And I want to say thank you, thank you, thank you.

Fred, we appreciate your words of inspiration. We really do. Thank you very much.

And I have just a question in the investment counseling business for Ken. How's that coming along?

Fred, we continue to make in-roads. At the end of the second quarter we had 48 accounts under our tutelage now. And assets under management were actually down slightly. I would tell you that we did lose a fairly substantial account during that period. But overall our performance, I think, has been pretty good.

Thank you.

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

Yes. First, briefly, we wanted to apologize again for any inconvenience the webcast technical difficulties may have caused people who were trying to listen in on that forum. I'll reiterate that we're going to be working as quickly as possible now that the call is completed to make certain that a replay of the full call, including all of the introductory comments, is available on our Web site, as soon as possible. So thank you Jack.

Heather, thank you very much. And thank you all for being interested in Cincinnati Financial. We enjoy your participation and questions. We see many positives in our industry and in our company in particular. The Cincinnati Insurance Companies are in excellent condition. We appreciate your interest, and hope to see you in September, here in Cincinnati. Thank you.

This concludes today's Cincinnati Financial Corporation's Second -Quarter Conference Call. You may now disconnect.