辛辛納提金融 (CINF) 2003 Q4 法說會逐字稿

Good afternoon. My name is Tina, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Cincinnati Financial Corporation Fourth Quarter and Full Year 2003 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 Tina. Welcome everyone. This is Heather Wietzel, Cincinnati Financial’s Investor Relations Officer. Welcome to our fourth-quarter and year-end conference call. By now you should have received a copy of the news release. If you have 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. Also, our supplemental financial information is available on the Investors page of our Web site, 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, 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 these risks and uncertainties, we direct your attention to our news release and to our various filings with the SEC.

Further, reconciliation of non-GAAP information as required by Regulation G was provided with the release, and is also on 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.

Thank you Heather. Before I discuss our results, it seems appropriate, with the excellent year we had, to begin where our success begins. That is, of course, with the professional independent insurance agents who represent Cincinnati. Last month we began our annual sales meetings, a series of 25 visits with agents in our markets. These visits let us thank our agents personally, and tell them we are there to meet their needs, offering strength and stability through all market cycles. The visits are a real treat for us headquarters folks. We’re always invigorated by the enthusiasm and energy of our agents. And this year is no different.

Although we’re just starting our round of visits, we’re sensing a lot of encouragement. In a minute, I will talk about what the agents are saying to us. But I am beginning with a sincere thank you to those quality professionals. They deserve our thanks and our commitment that Cincinnati will be tomorrow all that Cincinnati has been over 50 years – a consistent, steady performer in protecting their clients and growing their business.

I also want to provide some brief context on recent announcements we’ve made. In the past week or so, we have announced a settlement involving pricing of some policies issued before CFC even owned Cincinnati Life’s predecessor. We have announced the release of our new claims management system. We have announced our 44th consecutive annual increase in the indicated cash dividends, as well as a stock dividend. We have announced some officer promotions, and finally some governance actions.

All of this is good news for Cincinnati Financial Corporation, and for our investors, as was the Ohio Supreme Court’s limiting of the Scott-Pontzer decision back in November. I’ll refer you to our Web site for specifics on this week’s announcements. But suffice it to say that, taken together, these are signals that as bright as the year behind us was, we have every reason to believe the year ahead will be even more satisfactory.

We have strengthened our service, rewarded our shareholders, and positioned ourselves to comply with new governance regulations. In short, we have the opportunity to build on a year that was a record by just about every measure. We essentially met or exceeded the 2003 targets we had set for ourselves, even without the benefit of the released uninsured motorist/underinsured motorist reserves.

I will highlight some of the achievements: Net written premiums rose 11.8% for the year on a comparable basis, with commercial lines up 11.9%, and personal lines up 11.4%. For the year, new commercial lines business premiums written directly by our agencies rose to a record $268m. For personal lines, we reached $60m, our second highest level of new business in any year. In total, new business reached a record $328m.

Fourth quarter growth remained healthy, particularly for commercial lines new business, where the growth rate was 17.6%. From an underwriting standpoint, things looked even better, with commercial lines recording a full year combined ratio, before the software recovery of 92%, benefiting two percentage points from the uninsured motorist/underinsured motorist reserve release.

Personal lines came in at an incredibly better 104.7%, not counting benefits from the software recovery. And that’s a step in the right direction. Our life business contributed $22m to full year net income. As a side note, the life company is focusing on its very successful term life, worksite, and disability income areas, and has discontinued writing new long-term care policies during the fourth quarter.

Investment income for the year rose 4.7%. Conditions continue to look good for our investment operations. The markets are generally improving. Companies in our equity portfolio continue to increase their dividends. We are generating consistently strong cash flow for new investment. As a result of all of these elements, full year operating income, before the recovery, gained 28.7%, to $2.39 per share, including a $0.15 benefit from the released uninsured motorist/underinsured motorist reserves. Book value at year-end was a record high of $38.69, up $4.04 from a year ago.

Now, in terms of the marketplace, let me summarize for you some of what we’re hearing from the agents. First, there is no doubt there is increased competition in commercial lines. But that broad statement gives little justice to the realities of our agencies’ businesses. While the agents report striking differences across the markets we serve, in most markets it appears careful underwriting does remain the norm. The focus is on pricing, rather than changes in policy terms and conditions.

There is competition for high quality commercial accounts. And they may be offered little or no rate increase. However, we can be successful under these current market conditions since some other accounts still require rate increases. Our agencies’ doors are open to our field marketing representatives, who are in their offices regularly, working side by side with them, and asking for the business.

We are doing the reviews, assessing the risk, providing the support our agents want as they grow their businesses. We compete with personal service. And we constantly look for ways to provide even more service. In 2003, for example, we subdivided four territories, adding another Ohio territory in the third quarter, and another in Metro Atlanta in the fourth quarter, to bring the total to 87. In 2004, we expect to split off another four to six new territories, beginning with up state New York, Cleveland and St. Louis in the first part of the year.

The smaller territories that result from subdividing ensure our people have more time to be with our agencies, making decisions, and helping agents, with effective front-line underwriting. And the claims management system should make our field claims staff even more available to policyholders and agents, a chance for us to stand out even more in the claims area.

Now, turning to personal lines, Cincinnati is, again, viewed as a consistent partner for agents. That isn’t the case across the industry. Some of our competitors change appetites. Agents know what they can expect from us – solid, dependable products, and good service. With the diamond processing system rolling out this year in Michigan, Indiana and Ohio, which account for 53% of our personal lines agency direct premiums, we expect renewed enthusiasm for our homeowner/auto insurance products.

Personal lines is an important part of our business, at 28% of our earned premiums. It offers the added advantages of helping agents round out accounts and increase ties to decision makers, as well as expand their volume with Cincinnati. We fully expect to continue making progress on homeowners’ profitability, and remain committed to this business area. Ken Stecher will be talking about commercial lines and personal lines performance and cover the specifics of our outlook. But we had a strong year. And we’re looking ahead to another good year.

I mentioned officer promotions a few minutes ago. I want to quickly congratulate Jim Benoski, who was named Vice Chairman and Chief Insurance Officer at the holding company level. Jim, who is here with us today, is contributing to our cause well beyond leading our headquarters claims department. He very much deserves this recognition. And I also want to salute Ken Miller, who was promoted to Chief Investment Officer and Senior Vice President. Ken has been heading up the investments area for a year now. And he is doing a great job. You will hear from him shortly. But first, let me turn things over to Ken Stecher. Ken?

Thank you Jack. It’s a pleasure speaking with all of you today. I am going to try to move quickly through a number of items, to give you some added insight. And then I will talk a little bit about our performance targets for 2004. On the old business list, the software recovery in the third quarter was recorded as a negative expense under Other Operating Expense on the Consolidated Statement of Income. The full year per share impact was $0.09 after tax. And the full-year GAAP combined ratio impact was 8/10 of a percent. We’ve excluded the benefit from the recovery in most of our discussions of full year results so it doesn’t obscure the business trends.

Secondly, in the release and on the call today, we talk about statutory written premium growth on a comparable basis, which adjusts for the refinement we implemented in the fourth quarter of 2002, with the estimation process for matching written premiums to policy effective dates. As we told you last year, that technically added $117m to written premiums. Without the adjustment, the written premium growth rates don’t show the true picture of what was accomplished this year. The impact and the adjusted numbers are detailed in the financial supplements on pages 18-23.

When I discuss the line of business data in a moment, you may find it useful to have page 24 of the Financial Supplement available for reference. Now we’ll move on to new items, starting with underwriting expenses, particularly commissions, before turning to loss trends. For the property/casualty business, the full year expense ratio, excluding the recovery, was 27.8%, compared with 26.8% in 2002. The increase was essentially the result of higher contingent commissions. We ended the year with $52m in contingent commission accruals, up from $20m last year. The incremental impact was $0.13 per share for the year, and 1.3 percentage points on the expense ratio.

The fourth quarter included $16m in contingent commission accruals, or about 2.4 percentage points to the quarter’s expense ratio. Since the contingent commission is paid on growing profitable business, we do consider this to be a good investment in the agencies that can keep these positive trends going for us.

Now for the major technology initiatives, specifically Diamond, CMS, and e-CLAS software, through the end of the year we capitalized $49m, and expect another $23m in capitalized costs in 2004. For 2003, the depreciation had less than a 2/10 of a percentage point impact on the combined ratio, and less than $0.02 a share impact on full year earnings per share. Next year we would expect the impact on the combined to be less than 3/10 of a percentage point, with the per share impact at about $0.03.

On the loss side, the catastrophe loss information is detailed in the release. The fourth quarter catastrophe loss ratio was just under 1%, as we had hoped. And, as Jack briefly mentioned, the UM/UIM situation made a 180 degree turnaround in the fourth quarter. In December, when the Court rejected the Motion to Reconsider, we were able to move ahead on our review of pending case reserves. We’re pleased with the Court’s decision. It removes some of the uncertainty from the uninsured motorist/underinsured motorist area in Ohio, and indicates that the Court may be more rational moving forward.

In terms of the financial benefit, in December we noted there were approximately $75m in reserves that could potentially be released. In the fourth quarter, we released $38m pre-tax, which included the $17m in IBNR we had at the end of the third quarter, and $21m of the related case reserves. Jim Benoski and his claims staff are continuing to review case reserves that account for the remaining $37m, some of which may not have been affected because they involve circumstances not addressed in the Court’s November decision. We’ll release what we feel is reasonable as quickly as possible, based on a review of the circumstances of each claim.

On large losses, the million plus category was down. And the total large loss ratio for the year improved by 2.1 percentage points over 2002, primarily due to the premium increase. The remaining incurred ratio improved by 4.7 percentage points, with the decline in actual losses and the premium increase both driving the improvements. Including the 1.4 point benefit from the UM/UIM reserves, the overall 2003 loss ratio came in at a healthy 56.1%, compared with 61.5% in 2002. Catastrophe losses contributed 3.6 percentages points each year.

Now to look at the commercial and personal lines separately, for commercial lines, the fourth quarter GAAP combined ratio came in at 88.5%, with a 7.7 percentage point benefit from the release of the UM/UIM reserves. As I noted, the details of the line of business data is in the financial supplement on page 24. I will review some of the factors behind the trends for each line.

The full year commercial multi-peril ratio has come down steadily over the past three years. This is our single largest business area, and the loss data are one of the best indicators of how our growth and underwriting strategies are coming together to bring results to the bottom line. The numbers here are pretty straightforward, although in the fourth quarter of 2002 we increased reserves slightly, and saw a benefit from salvage/subrogation.

Workers’ comp has generated very steady results over the past three years. With a lower commission ratio than the other lines, it remains in a loss ratio range that can make workers’ comp a viable component of our packages in selected states.

The UM/UIM reserve releases had their most substantial impact on the commercial auto line, as one would expect. And the full year 2003 loss ratio includes a 6.9% benefit. For reference, there was a 26.7 percentage point benefit on commercial auto’s fourth quarter ratio. In 2002, the commercial auto ratio benefited from salvage/subrogation by about 7.5 percentage points. From our perspective, the underlying data shows that this line is performing satisfactorily, with the potential for incremental improvements.

For other liability, which includes our non-discounted general liability and commercial umbrella products, along with other liability business, there also was a UM/UIM benefit of 2.6 percentage points for the year, and a 9.8 percentage point benefit in this year’s fourth quarter. In 2002, we had increased IBNR reserves, adding about 6.9 percentage points to last year’s ratio. On a trending basis now, things are looking good, although umbrella liability losses can be very volatile.

The sum of all of this is that we focus on writing commercial package business, and see the overall results as most significant. But on both a total and line by line basis, commercial lines are doing very well, with the potential for incremental improvement moving forward.

Now for personal lines. The fourth quarter GAAP combined ratio was 90.7%, including a savings of 3.9 percentage points from catastrophe losses, compared with a ratio of 100.3%, including 8.6 points from catastrophes last year. As usual, personal lines fourth quarter shows seasonal improvement. Note that there was about a 40 percentage point swing in the impact of catastrophe losses on this year’s fourth quarter homeowners’ loss and loss expense ratio.

Full year numbers give us a much better picture of the current status of personal lines. The full year combined came in at 104.7%, excluding the software recovery. That compared with 107.6% in 2002. The full year loss and expense ratio was 77.6%, compared with 79.7%. And Cat losses were pretty level between the two years. We are making incremental progress in improving the homeowners’ loss and loss expense ratio, as we move toward our goal of a quarterly ratio of 72-74% in late 2005.

The improvement in the full year homeowners’ loss and loss expense ratio to 92.7% from 98.6% was entirely due to premium growth. With actual loss and loss expense at $222m versus $207m, severity continues to increase. Rate increases continue to take effect, and a number more have regulatory approval for 2004, as we noted in the release.

In late 2002, we started the process of renewing homeowners policies with revised water damage and replacement cost terms and conditions, which should play a part in improvement going forward. The move to one-year policies, in conjunction with the rollout of Diamond, our personal lines processing system, should also contribute to our growth and increased profitability.

The personal auto loss and loss expense ratio was 71.1%, versus 67.6% a year ago, which had a benefit of about 3.5 percentage points from salvage/subrogation. As we’ve said, more sizeable rate increases took effect in various states, beginning in 2002’s fourth quarter, with many states getting them in 2003. With our one-year auto policies, we should see the benefit of these higher rates, and maintain a satisfactory loss ratio, with room to improve as the year progresses.

Briefly, on our outlook, we were pleased to see another solid quarter, and very pleased with the full year results. All things being equal, we hit our full year target for the combined ratio, right on the nail, to put us at the best GAAP ratio we’ve had in over ten years.

Now, looking out to some 2004 and longer-term performance targets, as we’ve often said, we want premium growth to be stable over the long term, and believe that we can achieve growth in most market conditions. Over any three- to five-year time period, that should lead to a net written premium growth rate ahead of the industry average. Over the past five years, the industry growth rate has been about 6-7%, although it has risen in the past several years, due to market conditions. We’ve achieved a 12% plus compound growth rate over the same five years.

Looking just at a single year, we’ve seen data that indicates analyst targets for 2004 industry net written premium growth are ranging from 5-10%. We want to start 2004 with a conservative view. We’re initially targeting growth in the high single digits, pending the rollout of Diamond, new agency appointments, and the growing benefit of territory subdivisions.

In terms of profitability, we also want to outperform the industry each year, and over the longer term. In 2003, the industry average statutory combined is estimated at 100.3% for the first nine months. Looking ahead, the same data shows an average forecast for the 2004 year combined also at 100.3. We think we can easily beat that mark. We’re targeting a GAAP combined in the range of 95% for 2004, equivalent to about 94.5% on a statutory basis, based on incremental gains in commercial lines, and continued improvement in personal lines.

Our assumptions include Cat losses in the 3 to 3-½% range over the full year. We are not taking into account the benefit of any additional UM/UIM reserve releases. And as the final piece of the puzzle, as Ken will cover, we believe that investment income can continue to grow in the 3-1/2% to 4-1/2% range. To reiterate Jack’s comment, we see opportunities to build on the solid year, and make next year even better. So let me turn things over to Ken Miller to discuss investments.

Thanks Ken. Good afternoon everyone. As Jack commented, we ended the year on a strong note, with investment income growth of 4.2% in the fourth quarter, and 4.7% for the year. This kept the full year above our guidance, and we continue to feel positive about investment operations in our outlook.

Investment income in 2004 will benefit from the dividend increases declared in 2003 but not fully earned, as well as expected increases during the year. When the dividend increases are coupled with interest income from the bond portfolio, we’re comfortable with targeting growth for investment income in the 3-1/2% to 4-1/2% range for 2004.

We had pre-tax realized gains of $4m in the fourth quarter. This compares with the realized losses of $60m in last year’s fourth quarter, when there were a number of economy-driven impairments. For the year, pre-tax realized losses were $41m, compared with $94m the year before. Looking at the three components of the realized loss for the year… FASB 133, which measures the change in the embedded option within convertible securities, resulted in a net gain of $9m, versus a net loss of $4m last year.

Realized capital gains from sales of securities were a net $30m in gains, versus $8m in gains a year ago. Finally, we reported $80m in asset impairments this year, with $69m of that total occurring in the first six months of the year. This compares with $98m in impairment losses in 2002.

With the market recovery and the increased quality of the bond portfolio, we’re comfortable that impairments going forward should be limited to securities marked to market because they have been identified for sale, or possibly those related to issuer-specific events.

In the fourth quarter and the year, the allocation of new funds to fixed income and equity investments tracked with our historic ranges. For the full year, about 75% of the new money was put to work on the fixed income side; $507m went into investment-grade bonds; and $139m into municipals. These purchases were offset by the net sale of $188m in high-yield bonds.

Economic conditions have dictated our focus on higher quality bonds with intermediate maturities in the 8-12 year range. We now have 15 equities where the market value of our position is at least $100m. In the fourth quarter, Johnson & Johnson joined this core equity group. Our total equity list grew to 51 names in the fourth quarter, due to conversions and a spin-off from another holding.

Equity-linked securities accounted for the other 25% of the net new investment dollars; $199m went into common stocks, including $180m in our core equity group. A net $51m of sales, conversions or calls within the convertible portfolio reduced the total amount invested in equity-linked securities.

As a note, we bought back 142,900 shares of Cincinnati Financial common stock in the fourth quarter, at an average cost of $40.41. This brought the year-to-date repurchase to 1.5m shares, at a total cost of $54.5m. We have 5.3m shares remaining on the repurchase authorization. At a minimum, we would expect to offset the dilution of option exercises as we move forward.

Looking at the portfolio overall, we were pleased to see the market value rise to $12.45b at the end of the year, up 11.35% from year-end 2002. During 2003, our equity portfolio, with a total return of 9.3%, underperformed the broader S&P 500’s return of 28.7%. While this difference is a little disappointing, we remain confident in the long-term potential of our core equity holdings. Our long-term investment horizon and strong financial position make it possible to wait out a period when market values for this group are under pressure. And that’s what we’re doing.

Before closing, just a few comments on our Fifth Third holding. Fifth Third has reported another good quarter. And while uncertainty always weighs heavily in the marketplace, we continue to believe they’re on track with the regulatory compliance steps and will emerge as a stronger company. Our equity standards in any market continue to be sales, earnings and dividend growth, plus proven management and a favorable outlook. We believe Fifth Third continues to exhibit those standards.

In summary, we believe this was a good year for investment operations. As interest rates rise, with an improving economy, we believe our fixed income portfolio is fairly well positioned. We have been investing in income-paying securities and allowing our cash flows to compound. Our investment approach is total return with a long-term horizon, an equity focus, and a portfolio that is structured for both growth and income.

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

Thanks Ken and Ken. It’s always a pleasure to share our enthusiasm about our business and our company. We see every sign that we are doing things right. And what we’re hearing in the marketplace backs that up. We thank our agents and associates for their day-to-day contributions to the success of our company, and assure them their trust and confidence are well placed with Cincinnati. We’re proud of our record and committed to a steady path of growth. I might also add that joining us today for questions and answers is J.F. Scherer, Senior Vice-President Sales and Marketing. Operator, I think we’re ready for questions.

(Caller instructions.) And your first question comes from Charlie Gates of Credit Suisse First Boston.

Hey, good afternoon guys.

Hi Charlie.

You had a tremendous quarter. I take my hat off, well if I had one on. But here is the question. Could you elaborate on, Jack, what your initial comments were concerning the competitive environment in commercial lines as it is emerging?

I am glad to Charlie. And I wonder if I could ask when I am finished if J.F. would also comment.

That would be wonderful sir.

Okay. That’s great. Charlie, I think with insurance companies becoming more prosperous in commercial insurance, they’re seeing good combined ratios. They’re looking ahead a year, maybe two years. Their capital is strong from the bond and the stock markets over the last ten years. And they think they can reach out and write more business. They’ve got reinsurance available to them. And all of this makes for a competitive marketplace.

I see, and I sense – I don’t know what J.F. is going to say. But we get much of our competition from local insurance companies, regional carriers I guess you’d call them. And I won’t use any names, because I don’t want to tout our competitors. But they’re tough competition. They get to know our agents. They call on them much the same way that we do. And when you combine the number of different competitors in different states and in different marketing territories, commercial lines is becoming more competitive.

However, I also think that the way Cincinnati Insurance does business with our field marketing reps empowered to quote and bind coverages, and do it on the spur of the moment, the way we get to know our agents, day in and day out, both with field travel from the home office, with our claim representatives also making calls on our agents, to remind our agents of our claims system. I think all of these things wrap together to help us in a competitive market like this.

I still think there are sensible actions going on by insurance companies and agents. I think still that the rates are generally going up, rather than leveling off or going down. And I’d like to hear what J.F. thinks about these things too.

Yes Charlie, I’d have to endorse what Jack said. When we travel around and talk to agencies about the kinds of renewal increases that they can deliver, they’re still talking about renewal increases in the 3 to 7, 8, 9% range on good accounts.

What we are seeing in the marketplace is a recovery on the property insurance side. Everyone has done very well there. And so when you have some property-intensive accounts, there is a bit more of an aggressive posture taking place there. We do see, in addition to the regionals, quite a few of the larger carriers getting into the smaller account area. And the aggressiveness that we see there tends to be for more property-intensive accounts.

So it’s – there are so many predictions about whether the hard market lasts through the year, and what’s going on from a pricing standpoint. We still see a fairly sensible market out there. A lot of confidence on the part of the agencies in talking about what they can deliver, and quite a bit of confidence on the part of our field marketing reps and what they think they can do in writing new business this year.

J.F., you said that pricing was up 3 to 7%. That was overall. What would property be doing sir?

Property accounts would probably be, if they’re very intense property accounts, would be fairly flat.

And is the election of Travelers to merge with St. Paul, is that to some extent an opportunity for you, because the agent isn’t going to want a disproportionate amount of his livelihood with one company?

With both of those carriers, we tend to nibble around the edges in terms of what they have the strongest appetite for. I think whenever there is a merger of companies, that creates a certain amount of uncertainty in the mind of an agent. And the one thing I think we have with our agents is a high degree of certainty.

So that feeling will change from state to state, from branch office to branch office. I think what most agents are saying to us is that it reduces the options for them in terms of the marketplace. And they view that as, I guess, to a degree a slight negative. But I guess I would gauge it anywhere from a non-event for us, to a slight advantage. I guess that’s fair to say.

Charlie, may I add a comment?

Of course sir.

I think there is a larger picture here. And we had, in the calendar year ’03, several insurance companies disappear from the horizon. They just went out of business. Good companies. I won’t mention their names. You know them. But our agents relied on them. We respected them.

And I think as you look at the longer term, the next six to eight to ten years, with the question of some of these companies possibly leaving the marketplace, our opportunity is not so much that we would take business away from carriers that are merging with one another, but that we would be balanced out as a half a decade or a decade passes, that we would be a prominent carrier in these big agencies, along with other prominent big carriers in those agencies. And I think we’ve got a future that way.

But I think when it comes down to an account here or an account there, or what’s going to happen in the next 18 months, I agree with J.F. I think it’s marginal at best from our standpoint. But I think long-term, with our agents knowing our dedication to property casualty insurance and life insurance, they see putting business with us provides stability for their policyholders, a good continuity for their businesses and families. And I think that’s where our opportunity is Charlie.

The other question I had is historically some people have scratched their heads as to why you didn’t buy back more stock. And so I am looking at the share repurchase during the quarter. And I’ll ask that question.

Charlie, is the question why we didn’t buy more stock during the quarter?

Yes sir, 143,000 shares or $6m. to me means you do have the wherewithal. And I just wondered, you have got this huge amount of stock that you possibly could buy back. I just wonder why you haven’t bought back more.

Well, in the fourth quarter, Charlie, we did put a fair amount of new money into the marketplace. And, quite frankly, we are always looking at the trade-off between the opportunity to invest new money in the marketplace versus buying back our own securities. And what we are trying to do is to position the company for the long term. And so a lot of our investment dollars in the fourth quarter went into the common stock market. We felt that there were some values there in our core holdings. And we wanted to be able to take advantage of that.

We’ve also said all along that one of our goals is to cover the dilution from the exercise of options internally within this company. And right now we are doing that. So I know it disappoints some people. It’s a constant trade-off. And we do try to be mindful of that, is all that I can tell you.

Congratulations on a good quarter. Thank you for your time.

Thank you.

Your next question comes from Richard Baruch of Janney-Montgomery-Scott.

Jack, once again, another great quarter. One observation, and one question, if I may. The one thing that really keeps coming back to me about the history of Cincinnati Financial – and I’ve been lucky enough to be involved with it since 1982 - is, unlike most companies in the industry, you guys really have a brand. And very few companies that I know of have the identity, and also the kind of ownership in your corporation that you share with your agents, and gives you a certain long-term perspective, unlike most other companies that are going through mergers, etc. That’s my observation, which I think is terrific that you have that identity.

Secondly, the question I have, is you have raised your dividend, which I think is a very nice thing to do, again, which is rather predictable every Saturday morning in early February. You’ve also declared a 5% stock dividend. My question is, is that 27-1/2 cent quarterly dividend – I think I am correct on this – going to be paid on the additional 5% stock that you will be distributing later on this year?

Dick, it’s kind of tricky. May I ask Ken Stecher to describe the dates and the dollars?

Yeah.

Thanks.

Yes Dick, what will happen is the April dividend will be 27-1/2 cents per share. When the July dividend rolls around, you will have 5% more shares.

Right.

And the 27-1/2 cents will be paid on the additional shares.

Well that’s terrific. And I think you’ve been very generous. And I’m indebted to you forever. And I just wonder when that fellow out in Omaha is going to discover you guys. Thanks very much for your time.

Thanks for your kindness Dick.

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

Good afternoon everyone. I’d like to also congratulate you guys on a good quarter and the year. My question is on the workers’ comp line. I know you spent a little time at the outset of the call going line by line, and addressed that a little bit. But if you would just remind me how much of the workers’ comp line is part of the overall commercial lines package? And then how much is separate? And then if you could just elaborate a little bit more on some of the trends. You had mentioned that it’s been somewhat level for the last three years. Do you expect that to improve at all in ’04 and beyond?

Mike, I think J.F. is in the best spot to answer that question.

Mike, workers’ comp – we have been a conservative writer for workers’ comp. And though we’re writing a bit more of it right now, we remain so. It represents about 11.6% of our total writings. And that’s probably, for a dominant commercial writer, a little on the low side. Overall, in terms of the – we finished the year at $301m total written premium in that line. And I think, as Ken mentioned in his remarks, it’s been consistently profitable for us.

Our strategy with comp is to continue to write it as part of a package. There are a few companies out there that like to write it on a monoline basis, and I guess would be labeled as very aggressive in that area. But we see it as a positive for an agent to be able to tie together all lines of business in one company, particularly a company like ours that takes a long-term view of things. And we believe that it can stay at the same positive levels that it’s been at for the last several years for us.

So you’re not looking for any kind of meaningful improvement on the loss ratio side going forward? You may expect it to kind of remain steady here, and as part of the package, maybe this is kind of one line that tends to lag, where you make it up in pricing on the other lines?

Well, I will say that we don’t believe it’s anything close to a loss leader. Our combined ratio in comp is in the – what Ken – 95-96 range?

That’s what we estimated, since we don’t break out the expenses exactly by line of business at this point.

So we believe we can maintain it at that level. That would be the way we would project it out. But we’re certainly not using it as a leader to get – to write an account.

Great. I understand that. Thank you very much.

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, has there been any change in the level of competition for personal lines within the independent agency forum, both in general and in terms of the Travelers/St. Paul merger?

I can’t say that we’ve seen any marked change. The whole industry has gone through a tremendous rate increase relative to homeowners’ insurance. And we’ve not seen any new players in there that would be doing anything particularly unusual within the independent agencies that we represent. There’re still a lot of good regional carriers out there, providing a good marketplace, just as we do. But I would say at this point, nothing remarkable going on.

Okay great. The second – a lot of personal lines competitors have noted that frequency trends in personal auto continue to be actually negative, although they tended to flatten out. Can you talk about how your experience compares with that?

Yeah, this is Jim Benoski. The frequency in personal auto has been relatively flat for probably three years. But our severity has inched up a little bit. On the personal auto side, I think we’ve gone – let’s see – the severity is up about 13% from the fourth quarter of ’01 to the fourth quarter of ’03. So relatively flat on frequency, and severity is up. Average paid claim about $1,342 to $1,517 in a two-year period.

Okay great.

(Caller instructions.) Your next question comes from Mike Hallett of Fox-Pitt, Kelton.

Good afternoon. I have a couple questions for you guys. Firstly, I was hoping – I apologize if you covered this. But I was hoping you could provide us with a little more clarity on the results of the Diamond rollout in Kansas, and what that has – if there has been any change in production related to Kansas personal auto. And then I was hoping, beyond that, you could give us some more clarity on the timing of further rollouts for both Diamond and the commercial lines quoting software as well. Thanks.

Mike, this is J.F. Scherer. Kansas was a test state for us. Only 12 agencies were involved in the rollout of Diamond in Kansas. The results were, we thought, excellent in terms of the shake-out for the system itself. New business was up nearly 50% in that state, for those 12 agencies. I don’t know – I would not extrapolate that out to all states we do business in. I would simply say that the system was very well received, and that it did result in us writing new business that we probably would not have written, simply because of the administrative preference the agency has for that system.

As far as further Diamond rollout, we’re targeting late first quarter, early second, for the rollout in Michigan, our second state. And we’re simply ramping up to the larger state – the largest state, Ohio, which would be later on this year. So we would see Michigan, Indiana and Ohio as states that, by the end of the year, would be up and running for the Diamond product. And we’re, as I think our release indicated, very optimistic about it, looking forward to it. And I think it’s going to be a very big year for us in personal lines.

Okay. And on the commercial lines system?

The software system in commercial lines?

The policy quoting system? Yeah.

At this point, still in development. Ken, did you want to - ?

Mike, I think we’d hoped to have it in the state of Ohio, for the BOP product alone, close to the end of the year. So as far as production for this year, it would be a minimal impact I would think.

Mike, are you talking about the rating system?

I am talking about the WinCPP.

Oh, I’m sorry. I was talking about e-CLAS Mike. I’m sorry.

Yeah, WinCPP is going very well in all states. We’re, I think, at slightly over 70% of our premium volume states have been – it’s been introduced there, and continues to go well. It’s mainly just an educational event relative to getting it out into all states. So that’s going fine.

And how much of your business is actually being written on that? Is that 100% of all the business in those states?

Not written, but quoted. This is simply a rating system.

Okay, simply quoted. Okay. Also, can you guys just quickly comment on reinsurance renewal experience? Did you do anything with your retentions? And what were the price changes at January 1?

Mike, this is Jim Benoski. We did not change the retentions on the property and the casualty treaties. We still have $3.2m retention as the maximum retention on both. Our rates, we think we came in pretty well. They were relatively flat on the property side. I think just a little bit of an increase on casualty. Is that right Ken? Or have I got that backwards?

Slight decrease in casualty.

A slight decrease in casualty, and about flat on the property. The cost is up, but that’s because of premium.

Any changes in the carriers that you’re using?

No. We still use three carriers. They share it on a third quota.

Great. Thank you very much.

Your next question comes from Fred Nelson of Crowell, Weedon.

I looked to see who is coming on the board. And we looked up the Web site of this bank in Wisconsin. And it was not a surprise to me to see that their mission statement fits in exactly with Cincinnati Financial – ethics, honesty, community, people, support people, and relationships with people. And I’ve always learned we attract where we’re at. And I commend you Jack for attracting the quality of people you have in your organization, and supporting them with your love and your generosity. It is such a gift to all of us that are shareholders. And I want to say thank you.

Fred, you’re welcome. I appreciate it. Since you looked up the Web site of the bank in Oconomowoc, Wisconsin, you might have noticed also that they’ve raised their dividend to their shareholders 38 years in a row. And we like that kind of mentality among our directors, to think about that love of dividends also.

I will tell you that these two new directors are fine folks. The sad part is that the two directors who are not standing for re-election are also fine folks. And they’ve been wonderful to our company. They’re leaders in the insurance world and leaders in their communities. And we’ll miss them. We wish that they weren’t leaving our board. But I appreciate you bringing up and commenting on Dirk Debbink from Wisconsin.

Yeah. I am not through yet. But we looked it up, and there was no public market in the stock.

I think that’s right. I think they traded on the left side of the desk of the president.

How is your investment counseling business doing? That’s another question I have.

Fred, it’s going very well. At the year end, we had 53 accounts, the breakdown being 29 individual accounts, and 24 institutional. And we had $762m under management. So all things considered, we think they’re going very well.

One of my customers asked me the following question to ask you gentlemen. If you’re on the dividend reinvestment program, and it’s payable the 15th, and you reinvest that dividend, will you be entitled to the 5% stock dividend?

Fred, you’d be entitled to the 5% stock dividend if the shares are held on April 30.

Okay.

That’s the record date for the stock dividend.

And then will your repurchase pick up a little bit, since you’re paying a 5% stock dividend and there will be more stock outstanding? Or is that an unfair question?

The short answer Fred is that is an unfair question.

Thank you. That’s all I need to know. No, thank you gentlemen. And thanks for taking my calls and being so thorough and open. And I just really, really appreciate everything you do for all of us.

Thanks for your kindness Fred.

You deserve it.

At this time there are no further questions. Are there any closing remarks?

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. Thanks for following us. Goodbye.