辛辛納提金融 (CINF) 2003 Q3 法說會逐字稿

Good afternoon. My name is [Letangie], and I will be your conference facilitator today. At this time I would like to welcome everyone to the Cincinnati Financial Corporation Third 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 [Letangie]. Hello, this is Heather Wietzel, Cincinnati Financial's Investor Relations Officer. Welcome to our third quarter conference call. By now you should have received a copy of the news release. If you do not have 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. Also, our supplemental financial information is available on our Web site in the investor sections under the operations tab.

On today’s call, Chairman and Chief Executive Officer, Jack Schiff, Jr., will begin, followed by Ken Stecher and Ken Miller. Afterwards, 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 these risks and uncertainties, we direct your attention to our news release, and to our various filings with the SEC. Also, reconciliation of non-GAAP information, as required to Regulation G, is provided with the release, and is available on the investors page of our Web site, under the operations tab. Statutory data, prepared in accordance with statutory accounting rules, is defined by the National Association of Insurance Commissioners Accounting Practices and Procedures Manual, and therefore are not reconciled to GAAP. Jack, I think that covers.

Thank you Heather. It almost seems like yesterday that we were talking with many of you who came to Cincinnati for our headquarters visit. We believe that this quarter’s results effectively demonstrate one of the main points we made during the visit – that Cincinnati performs on a steady path. It is our intention to be a stable market, earning our agents' best business, and performing in a predictable fashion for our shareholders, without dramatic shifts in strategy, or dramatic swings in results.

This quarter showed that we are moving forward at a steady pace, that we believe will take us where we wish to go. Just some highlights – third-quarter written premiums rose 13.4%, with commercial lines growth at 14.9%, and personal lines at 12.2%. We broke even from a property casualty underwriting standpoint, excluding the recovery, even though catastrophe losses were well above last year’s level and contingent commissions were higher.

Our life business provided a nice gain, and investment income rose 3.3%. As a result, operating income before recovery was $0.49 per share, compared with $0.51 a year earlier. Things are looking good for our investment operations. The markets are generally improving. The companies in our equity portfolio continue to increase their dividends. And we are generating consistently strong cash flow for new investment. Ken Miller will say more about this in a few minutes.

Book value at September 30 was $35.94, up $1.29 from year-end, although down from $36.57 at June 30. Looking first at the commercial lines marketplace, there is no doubt things are becoming competitive. Generally the industry is reporting healthy profitability, and insurers want to write good business. In the small to mid-size commercial markets, our agents continue to report competition that is rational but aggressive. We have to work to earn our share of the business available. And we’re doing just that.

In Cincinnati last month, J.F. Scherer talked about subdividing territories to improve service to our agents as a key to our continued growth. We believe that the 86 field marketing representatives we have in place today are a talented group. They have the skills needed to help our agents be effective front line underwriters. They have the ability to reinforce our commitment to the agents, and the local communities, and emphasize the value we place on stability. They have the motivation to ask for business.

With smaller territories, they will be able to be at agents’ offices more often than ever before. They have the products they need. They bring to the table decision-making authority, and insurance expertise. Based in the local markets, they are in an excellent position to judge the quality of accounts.

As we look back at industry cycles, and examine the consistency of our results through those cycles, we are certain that our agent and field-centered philosophy is right on target. We are confident that despite more challenging market conditions ahead, our business strategy will allow us to continue to achieve steady progress to benefit our shareholders, agents, policy holders and associates.

Now, turning to personal lines, I wanted to revisit a key subject touched on at the visit here, the reasons we believe this business area adds value. First, personal lines products help round out the agents’ offerings to their clients. Both agents and policy-holders know what they’re getting with the Cincinnati.

Second, personal lines help agents strengthen their ties with decision makers in their communities. Personal lines offer another layer of protection, and another avenue for independent agents to nurture personal relationships with their policy-holders. Finally, personal lines provides another opportunity for agents to expand their volume with Cincinnati, and to increase their commission income.

These arguments are compelling reasons for us to devote the time and energy to resolving our profitability issues in personal lines. We are seeing the potential of personal lines in current personal auto results, where we have a nine-month loss and loss expense ratio of 69% compared with 73.1% a year ago.

In homeowners, the steps we’ve taken should lead to incremental gains in a strongly positioned homeowner line over the next several years. Rate increases are, of course, integral. This year our average rate increase when we renew a three-year homeowner policy is about 25%. And we have additional double-digit rate increases approved.

Feedback from our field marketing representatives indicates that we are not pricing ourselves out of the market. The field marketing representatives collaborate regularly with our agents about homeowner pricing. What they are relaying to us is that while our renewal pricing is substantially higher, we are not out of line with market rates. To reduce our losses, we’ve modified policy terms and conditions, and are working very closely with agents on a re-underwriting program that is very similar to the successful program we use with personal auto.

Finally, our personal lines technology initiatives offer the potential for accelerating improvements as we move forward in 2004. As we focus on the re-underwriting and other initiatives, we’re seeing an acceptable decline in new business. Personal lines growth is being driven by the higher rates. We’re generally optimistic about the future of personal lines, because we have a long-term focus in its value to our property casualty business over time. We’re committed to achieving our objectives for profitability improvement.

Before we move on, I should mention that work continues on development of our new personal line system, with three major states scheduled for 2004 deployment. Our new claims management system, CMS, that was the subject of one of the headquarters visit’s breakout sessions, is rolling out during the fourth quarter. We are now training 100 claims representatives each week. And they are excited about the productivity gains that CMS brings to them. CMS is designed to let our field claims representatives spend more time with policyholders and agents. And we think that is a big thing.

To sum up our outlook overall, we expect steady premium growth in the low double-digits for the property casualty operations. We continue to see commercial lines premiums growing in the 10-15% range, with renewal price increases in the high single digits. We also see the company on track to achieve record revenue and earnings for the full year, with the combined ratio at the best level in more than 10 years. And we have every reason to believe that 2004 will build on that strong performance, with further improvements. Ken, would you tell us about the financials, please?

Thank you, Jack. It’s a pleasure to be speaking with all of you today. There are quite a number of items for me to cover on today’s call. And I’ll try to move quickly. I’ll start with the recovery, which was the result of a negotiated settlement. We recovered $22.7 million of the $39.1 million one-time pre-tax charge we incurred in the third quarter of 2000.

We are recognizing the recovery in the third quarter. And it is shown as a negative expense under other operating expense on the consolidated statement of income. The first-year impact was $0.09 after tax. And the impact on the reported GAAP combined ratio was 3.3 percentage points in the third quarter. To the extent possible, we’ve excluded the recovery in our discussions of third-quarter results, so it doesn’t obscure the business trends.

Also, just a reminder of the improvement we implemented in the fourth quarter of 2002, to the estimation process for matching written and earned premiums to policy effective dates. In last year’s fourth quarter, that added $117 million to written premiums, and $15 million to earned premiums. In this year’s third quarter, the change in premium estimates added about $9 million to written premium, contributing slightly to the growth rate, since we didn’t adjust 2002 by quarter.

Looking out to the full-year growth estimates, we just wanted to remind everyone that we will measure fourth-quarter and full-year 2003 progress against the adjusted $2.5 billion in written premium for 2002, as that will be more representative of our underlying performance.

Now let me touch on the expense-related items, before I turn to loss trends. As background to the contingent commission increase mentioned in the release, in the first half of this year, we were accruing for contingent commissions at a rate that would have put the full-year cost about 31% ahead of 2002. As has been our standard practice, we reviewed agency-by-agency profitability at the end of nine months.

That review indicated that contingent commission levels this year will be closer to two times last year’s level. As a result, contingent commission expense was about $20 million in the third quarter. And we expect it could be in the range of $12 million in the fourth quarter. On a per share basis, this increase cost us about $0.04 in the third quarter, but probably qualifies as a win rather than a loss; our contingent commission structure rewards agencies for sustaining profitability in conjunction with growth, and can be a real incentive for doing business with Cincinnati. By meeting their targets, the agencies are helping us improve our performance over the long -term.

Now on expenses, on our major technology initiatives - specifically Diamond, CMS and e-class software - through the end of the year, we will have capitalized approximately $50 million. Looking out to next year, we’re looking at another $18 million in capitalized costs. With Diamond in use, and CMS on schedule to roll out in the fourth quarter, we’ll be depreciating about $40 million of previously capitalized costs by year-end.

In 2003, the depreciation is expected to have less than two-tenths of a percentage point impact on the combined ratio, and less than two cents a share impact on full-year earnings per share, although the CMS depreciation won’t start until November. Next year, depreciation with Diamond personal lines and CMS systems should ramp up slightly, although we would expect the impact on the combined to be about even with 2003, and for there to be about a $0.03 per share impact on earnings per share for the full year.

Further out, there are too many variables to give an estimate. But we will continue to provide guidance. On the loss side, the catastrophe loss information is detailed in the release. The UM/UIM situation was extremely stable this quarter. So I will let those subjects go for this call, unless there is a question later.

Our large losses saw an up-tick in the quarter in the number of new losses over $250,000. A detailed review didn’t show any specific items of concern. With stability in the large case reserve increases, on a year-to-date basis, the total large loss category is running well below last year’s level. The contribution to the loss ratio is 14.5 percentage points, compared to 17 percentage points in the first nine months of last year. Overall, the year-to-date loss ratio remains at a healthy 59.2%, including 4.6 points for catastrophes, compared with 63.9%, including 3.8 percentage points in the first nine months of last year.

Now for commercial lines – the third-quarter GAAP combined ratio, before the recovery, came in at 95%, including two percentage points for catastrophe losses. That compared with 94.9% and 1.3 points in last year’s third quarter. The contingent commission expense ratio was up two percentage points, due to the contingent commission accrual.

Now I’ll review the lines of business we’ve been discussing in the 10K and 10Qs, including catastrophes and large losses. We saw the commercial loss and loss expense ratio decline to 65.5% from 71.8% a year ago. Workers’ comp loss and loss expense was in line with the second quarter at 78.3%. At last year’s third quarter, we had a recent low of 74.5%.

The commercial auto loss and loss expense was 65.4%, compared with 66.7% in the third quarter last year. In the other liability, loss and loss expense ratio was 60.6%, compared with 54.7%, a relatively small fluctuation for this area.

In personal lines, the third-quarter GAAP combined ratio, before the recovery, was 112.7%, including 16.6 percentage points from catastrophe losses, compared with a ratio of 104.0%, with a savings of six points in catastrophes last year. Now by line, the homeowners loss and loss expense, including catastrophe losses, was 132.5% versus 88.5% a year ago. Taking out catastrophes, the loss and loss expense was 83.2% versus 92%.

While we normally see higher losses in the second and third quarter, as we’ve said, we consider the current loss and loss expense level to be unacceptable. Jack discussed some of the strategies already in motion to address this issue. Over the next 24 months, we do expect incremental improvements to take us toward a loss and loss expense ratio in the 72-74% range.

I would note that severity did not appear to trend higher than the second quarter, with catastrophes losses playing a large part. Excluding catastrophes would have resulted in flat total losses for homeowners, and a better quarter for the loss ratio, given the premium growth.

The personal auto loss and loss expense was an excellent 62.4%, versus 72.5% a year ago. As we said, meaningful rate increases weren’t effective until last year’s fourth quarter, with many taking effect in 2003. With our one-year auto policies, we are seeing the benefit of these higher rates, and a satisfactory loss ratio as the year progresses.

Now briefly on our outlook, we were pleased to see another solid quarter. We believe a full-year GAAP combined ratio before the recovery in line with the 96.8% remains within reach. Keep in mind, however, that achieving this level will require fourth-quarter catastrophes, and development of catastrophes, to fall in the range of $6 to 7 million, or 1% on the combined – not out of line for a fourth quarter, but definitely on the light side. Reaching this target would 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. Investment income for the quarter rose by 3.3%, in large part due to dividend increases this year and last. Our year-to-date increase is holding up at 4.8%. This bodes well for full-year growth at the high end of our 3-1/2% to 4-1/2% guidance.

Overall I am feeling very positive about investment operations in our outlook. Our insurance business is generating very strong cash flow. Our equity holdings are increasing their dividends at a healthy pace. The market is sustaining a slow but steady recovery. And the economy continues to show signs of firming. These conditions set the stage for us to contribute steady increases in investment income moving forward.

So let me run through some of the key elements of the quarter’s results. First on the income side, 22 of the 48 common stocks in our portfolios have increased their dividends so far this year, adding $13 million to annualized investment income. Dividends from common and preferred stocks will account for almost half of all investment income for the full year, showing the real value of our equity strategy in this rate environment.

We had pre-tax realized gains of $15 million in the third quarter, compared with a realized loss of $16 million in last year’s third quarter.

Looking at the three components of realized gains:

FASB 133, which measures the change in the embedded option within convertible securities, resulted in a gain of $9 million this quarter, versus a loss of $10 million last year.

Realized capital gains from sales of securities were a net $14 million, versus $2 million in gains a year ago. This quarter’s gains were primarily normal trading activities, including calls and sales of convertible securities.

Finally, we reported $8 million in asset impairment. While we believe the portfolio has improved, further impairments may be necessary.

As we noted in the release, we put a net $127 million into new investments in the third quarter. $71 million net went into fixed-income securities; $93 million net were invested in investment-grade bonds; and $26 million net in municipals. These purchases were offset by the net sale of $72 million in high-yield bonds.

We remain focused on high-quality intermediate maturities in the 8 to 12 year range. With the continued tightening of spreads between municipal and taxable bonds, we saw fewer opportunities in the municipal market during the third quarter.

We put $71 million net into common stock during the third quarter. Over 60% of our common stock purchases were allocated to our core equity group, where we have positions approaching a minimum of $100 million. In the third quarter, Wells Fargo joined this list, bringing the number of those positions to 14. Year-to-date, we have put about $138 million of the net $442 million in total new investments into common stock. As a note, the buyback of 91,600 shares of our stock, at an average price of $39.13, accounted for $4m additional dollars.

On the valuation side, the equity portfolio as a whole slightly underperformed the market. But Fifth Third reported another healthy quarter, 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.

In summary, this was another good quarter for investment operations. As interest rates rise with an improving economy, we believe our fixed-income portfolio is fairly well positioned by investing in income-paying securities and allowing our cash flows to compound. Our investment model remains intact, a long-term horizon with an equity focus, balancing portfolio growth and income. Jack, with that I’ll turn the call back to you.

Thank you Ken, and Ken. I’d like to close by echoing the confidence of my colleagues. We are in a good business. And we are in a position of strength during these times of uncertainty. As we have noted before, people know what to expect with The Cincinnati Insurance Company. That in itself is a strength.

Our fundamental strategies have not changed in the 50 plus years we have been operating. Our way of doing business remains a personal way of doing business. Professional, independent insurance agents remain the heart and soul of who we are. That stability has delivered rewards to our agents, our policyholders, our shareholders, and our associates. And we expect that stability to continue to deliver real value in the years ahead.

I’d like to add here that joining Ken Stecher and Ken Miller and me today are our Vice Chairman and Senior Vice President of the Claims Department, Jim Benoski, and Senior Vice President of Sales & Marketing, J.F. Scherer, to answer your questions.

So with that I ask [Letangie] if we – I think we’re ready for questions. Would you please let us know the first question?

Yes sir. (Caller instructions.) We’ll pause for just a moment to compile the q-and-a roster. Your first question comes from Nancy Benacci of McDonald Investments.

Thank you. Good afternoon. First Ken, could you talk a little bit more on the contingent commissions? And you gave an indication of what you might expect in the fourth quarter. With having had good strong underwriting results the last couple of years, could you give us an indication of what kind of commission number we should see through ’04, if you have a sense of that?

Nancy, this is Ken Stecher. I haven’t really come up with a target contingent commission part of the combined for 2004. Our contingent commission payment is comprised of multiple parts. One is just the regular basic commission for this year. There is a growth factor. There is a three-year average factor. There is a bonus, depending on when they pay their accounts. We also have stop-loss agreements and things like that, that all come into play.

But when we look at setting up the additional accrual for this quarter, on the average 48 points, we’re looking at possibly one point...close to about 1.5 - 1.6 for the year...when we’re at the $34 million, which is what we were at... at six months, that would have been 1.2 points on the combined.

Okay.

If we go back to – we’d have to go all the way back to 1997 before we saw a percentage that would be greater than that. So I think obviously we did miss the accrual. Results are continuing to be very positive, and we believe they will continue to be positive in the future. So we’re not in uncharted waters. The rates back in the early 90s have crept up over the 2% mark. So I think this is something we have to continue to monitor.

As we go through and finish out the year 2003, and we see how much actual contingent payments we make, I think we can probably give you a little better sense of what 2004 may be, as guidance, on our conference call for year end.

Okay. But you wouldn’t anticipate it would be substantially higher than we’ve seen in ’03?

It would be hard to tell. I think we have to look and see what kind of loss events we have. Catastrophe losses are included in the calculation. We don’t exclude those. So the combineds can move a lot with that, with catastrophes. But that may or may not substantially move the contingent commission payments.

Okay. That’s fair enough. And then just a question in terms of the comment that you’re seeing the competition increasing. Could you just clarify whether that is getting significantly worse than what we saw at the end of the second quarter, from what you indicated before, in terms of putting some parameters around there? And then again, just refresh my memory as to what you indicated the kind of rate increases you’re putting through on the commercial line side right now.

Nancy, this is J.F. As far as the competition out there, Jack used the word rational. An agent was in from Baltimore the other day, a member of the Council of Agents and Brokers. I think you quote their index of competition. And he called it a discriminating marketplace, and that’s what we’re seeing. But we don’t see irrational pricing. We see carriers continuing to verify that accounts are in fact good, and that there is some competition then to write those good accounts.

Our field reps are telling us that in order to write business as a general statement, they’re having to price slightly more aggressively than they did last year this time to write business. So it’s nothing drastic. But it certainly is reflective of the fact that everyone seems to be posting some pretty good results. And they’re interested in writing business.

When you indicated that your new commercial lines business was up 6.2%, is that around what you would have anticipated at this point? Or are you anticipating that to drive higher as we move through the rest of this year into next?

We were a little behind where we would have hoped to have been real early in the year. And so it has improved as the year has gone on. We’ve come out of a period of time where we’ve been especially conservative in some areas where we should be – workers’ comp...umbrella, which is obviously the coverage that addresses the severity issue. So from a pricing standpoint, we’ve been very conservative in that area.

We intend to continue to be conservative, but we do feel that we can be a little bit more selective, and write a little more in those lines. And we’re seeing some improvements in both workers’ comp and the umbrella, which will be a part of the package, and therefore enable us to write more business. So I would say that looking to the fourth quarter, based on what the field is saying, that we could probably see a slight up-tick in new business.

Great. Thanks very much.

Your next question comes from Mike Dion of Sandler O’Neill.

Good afternoon everyone. My question concerns the loss ratio – loss and expense ratio going forward in the commercial lines segment. I know you’ve given guidance for the personal lines of around 72-74%. I was just curious if you would give similar guidance on the commercial lines side, albeit there is a lot of moving parts, with the contingent commissions, although that’s not going to affect the loss ratio. But in terms of catastrophes and what-not, where do you see that kind of popping out in ’04?

Well Mike, this is Ken Stecher. I don’t have a definitive answer for you, although I think we are going to maintain the profitability of the commercial lines where we are, which is a low 90 combined ratio. I would think that with the rate increases that are still being able to be placed, there is a little bit of severity, which we have talked about.

But I think we’re targeting right now to at least maintain that. And then as we see how pricing develops, we’ll see if we can do better on that. But I have not arrived at a range, like we have on the homeowners, since that has been such a large problem for us. We wanted to at least let you know that we think we can get to a specific place.

On the commercial line side, as you know, there’s many major lines that we’re dealing with. So I haven’t looked at combining all of those. But we do believe that we can maintain the commercial lines profitability we are seeing.

Okay. Fair enough. Thank you.

Your next question comes from Charles Gates, Credit Suisse First Boston.

Hey, good afternoon gentlemen. Hey, my first question – I am looking at your news release. And I look at this decline in the personal lines expense ratio. Could you talk for the slower students in the class as to why that declined so much?

That’s a fair question Charlie. We’re going through some notes to mentally refresh ourselves. Ken, what do you think?

Charlie, I think the one thing that is occurring right there is that number – I assume you’re looking at the quarterly ratio?

Yes sir. It’s 26.5 to 21.8. Was that basically this thing with regard to the – this is the benefit you got?

Yes sir, 4.3 points of that was due to that recovery. So if you add that back in, we’re back to 26.1. So there you’re seeing some benefit, just from the increase in premium.

Is that one time, like – well it is one time.

Yes it is.

So that’s basically like just having some real good luck? Would that be a correct – or is that the wrong way to look at it?

It’s definitely a one-time event. You won’t see it – if you’re trying to look at our book going forward, say to the fourth quarter or into 2004, you won’t see any impact of that item in those financial statements. So I think what you may want to do is just add the 4.3 points on to the 21.8 that we give you there. And that’s basically the difference between the 108.4 and the 112.7 that you see on that chart.

Yes sir.

If you just add that back in, then I think that would be more representative.

My second question, I think possibly an answer of one of Nancy’s questions, or in your general presentation, one of you made the comment we missed the accrual. And I wasn’t sure what that meant.

We were referring there to the continent commission accrual that she asked about previously. We were targeting, as I said, a 31% increase over what we did last year.

Thirty-one percent in what sir?

Contingent commission payments that we’re going to pay to our agents for profitable business.

Cool.

And things are improving. And as I mentioned, there’s four key parts to that. And as we develop further into the year, we noticed that the payments – if we stay on the same schedule of profitability - that payment is going to be quite a bit higher. So what we had to do for this quarter is basically make up about a $3-1/2 million shortfall in the first and second quarter to get us on target for where we think our full year accrual needs to be.

All right. I’m sorry, do that one more time for the slower students. What does it mean?

It means that the first half of the year, we accrued about $17 million of contingent commission accrual for 2003.

Yes sir.

When we did the full analysis, we decided that number needed to be approximately $48 million. So instead of setting up $8-1/2 million a quarter, we should have been setting up $12 million a quarter. So this quarter – you okay now?

Yeah. I am okay. My third and final question – I think a couple conference calls ago, St. Paul Companies’ Mr. Fishman opined that he wanted to build in your marketplace, that is smaller commercial lines than he had historically been familiar with, with his new company, St. Paul. Could you elaborate on to what extent that is a factor in this environment that you see?

Charlie, this is J.F. Scherer.

Yes sir.

I think they, along with seemingly all carriers right now, are targeting the smaller accounts, the BOP kind of business. I can’t say that St. Paul at any greater degree or lesser degree has been a factor there. Many of the carriers are aggressively pursuing that business. They seem to be doing fairly well at it. So we’re finding there to be a substantial amount of competition there.

Does that reflect the fact - ? What do you think would be, if you were to give people two reasons as to why all these bees are headed for the honey, what would those be?

Well you'd have to ask them, but I guess my general feeling would be that very large accounts tend to draw an awful lot of people. And they also draw tremendous pricing, probably irrational pricing first. And my guess would be that there is confidence on the part of these carriers that they can specifically target through some high level of analysis which classes of business are the better. Perhaps they’re using some form of credit scoring or other type of analysis along those lines. And they just don’t want to be dependent on the highly volatile huge accounts. And that would be my sense as to –

So going down market, because of the fact that you believe that down market somewhat less exposed to the competitive pressures that larger cases might experience?

Well I can tell you what we think. We think the small- to medium-sized marketplace is more stable. And we’ve always played in that range. And we like it there.

Thank you very much.

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

Good afternoon. I have three questions. Firstly, I was wondering if there were any prior-years reserve development impacting the third-quarter results. Secondly, I was hoping you all could update us on the time frame of the personal lines automation roll out. And my last question is for Ken Miller. I was just hoping you could amplify on your prepared comments regarding further impairments in the bond portfolio.

Hi Mike. This is Ken Stecher. I’ll start with the first one. On a net basis for the third quarter, we saw about one point of improvement to earnings on development from prior-year losses. So that’s a small benefit, not dramatic.

Now it’s coming out of the commercial lines?

That would be total lines. I’m sorry. So that would include loss adjustment expenses.

Okay.

At this time -

Operator, he had a couple more questions we’ll touch on. Mike, on the personal lines automation roll-out, as we mentioned at our headquarters visit, Kansas is still going very well, with the finishing up of the testing and implementation of the personal lines system there. We would anticipate towards the end of the first quarter of next year a roll-out in Michigan and Indiana. Then, depending on how quickly that goes from an educational standpoint, bringing those agents on board, later on in the year, Ohio. So everything we talked about at the headquarters visit is still on schedule as you heard it.

Okay. I don’t know if it’s too early to tell, J.F., but in the – on the business that’s been written through the Kansas rollout, has there been any material difference in either the growth rates and/or the underwriting margins on that business?

Well I’d say on the underwriting margin standpoint it’s too soon to tell there. But new business was up 50% at one point from that. So without question, personal lines will be pretty significantly impacted by the value that this system brings. The agencies in Kansas gave us a good strong vote of that.

Okay. And then finally on that last question?

Mike, this is Ken Miller. On the impairment issue, I would expect if things continue as they are right now – and we’re only a month into the fourth quarter – that our impairment number would be very small. The improvement in the economy has definitely helped us. We could still, as we move forward, have an unexpected bankruptcy of some corporate bond that we may hold or something like that. But we certainly believe that the worst is behind us.

The only other item that I can think of where we may have an impairment issue would be if we decided to sell towards the end of a quarter an item, and we were unable to sell that particular security, we would have to impair that in the quarter when the determination was made to sell the security. But short of that, we would tend to believe the worst is behind us.

Okay great. And obviously your comments weren’t aimed at all at any issues surrounding Ford at this point, an exposure to Ford bonds?

Not at all.

Okay, thanks.

Mike?

Yeah.

I’m sorry. I was reading that report, and I was one line off. So I have to revise that statement. The benefit in the quarter was 3.8 points, not one point. The one point was the benefit for the first six months.

Okay great. Thanks Ken.

You’re welcome.

(Caller instructions.) Your next question comes from Hugh Warns of J.P. Morgan.

Hi. It’s actually [Meyer Shields]. I have two quick questions. First of all, at the end of the second quarter, catastrophe losses for the second quarter were estimated at $14 million, and that almost doubled in the third quarter. I was wondering what happened, specifically with the late filed claims in Ohio and Kentucky.

[Meyer], this is Ken Stecher. Just one second. I have to find my catastrophe reports. The cat losses for the second quarter were $46.6 million and this quarter were at $41.2 million. There was some further development, as you said, about the second-quarter claims. Those claims basically are coming out of the hail-storm that occurred in Columbus, Ohio, earlier this year, back in April. We’re continuing to receive some of those claims on a weekly basis, and Jim Benoski may have some update on that. But we are now into our property cat treaty. So we will start to see some relief from those as we go forward.

Okay great.

Yeah, Meyer, the claims down in Tennessee also have developed greater than we thought. That was a nine-day storm, and it covers May 2 to May 11. And we’re up to about $32 million on that storm. But none of that is into the cat treaty, because you have to have 72 consecutive hours, and we don’t have any 72 consecutive hours to the excess of our cat retention. So that was a May storm. And then the April storm – the hail damage in Dayton is up to about $31 million, of which $3.5 million is into the cat treaty.

Okay. Got it. Thanks. One other quick question. I noticed the cash count kind of doubled in the quarter. Is that just timing?

Cash on the balance sheet?

That’s right.

Yes. We had some difficulty, I would tell you, in the latter half of September, finding securities that we thought made good sense for us. So it was a timing issue. And I would tell you most, if not all of that cash has been put to work here in the month of October.

Okay great. Thanks a lot.

Mmm-hmm.

Your next question comes from Kelly Schawk of Cochran, Caronia.

Hi. Good afternoon. I just have a quick question for Ken Miler, just a numbers question, if you have offhand the duration on your portfolio.

It’s 4.96 years.

4.96 years. Great. Thank you so much.

You’re very welcome.

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

Thank you [Letangie]. And thank you, everyone, for joining us today. 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. Thank you.

Thank you for joining today’s Cincinnati Financial Corporation Third-Quarter Conference Call.