辛辛納提金融 (CINF) 2004 Q1 法說會逐字稿

Good afternoon. My name is Pashanta and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Cincinnati Financial Corporation first quarter 2004 conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a questions and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Ms. Wietzel, you may begin your conference.

Thank you and hello everyone. This is Heather Wietzel, Cincinnati Financial’s Investor Relations Officer. Welcome to our first quarter conference call. If you need a copy of the release, financial supplements or other information on quarterly results, please visit our website where we’ve recently restructured the investor section. All of the information related to the quarter can now be found in the financials and analysis section. You may find it useful to have page 23 of the financial supplement available when we discuss the property/casualty line of business data later in the call. If it’s more convenient, you may call 513-564-0700 to have a copy of any of this material faxed to you immediately.

Also, I wanted to mention that our annual meeting of shareholders is this coming Saturday, April 24th, at 9:30 a.m. at the Cincinnati Art Museum. It will be web cast if you would like to listen in. On today’s call, Chairman and CEO, Jack Schiff, Jr., and CFO Ken Stecher will give prepared remarks after which we will open the call for questions. Before I turn the call over to Jack, please note that some of the matters to be discussed today are forward-looking. These forward-looking statements involve risks and uncertainty and 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 by Regulation G, was provided with the release and is available on the website. Statutory data is prepared in accordance with statutory accounting rules as defined by the National Association of Insurance Commissioners’ Accountings 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 turn to results of the quarter, I know you are used to hearing from Ken Miller on these calls and I would like to give you an update. He continues to recover from a serious March automobile accident. While the timeline for his return remains uncertain, he is actively participating in physical therapy and each day there is progress. Under Ken Stecher’s interim direction, our investment department officers are managing the day to day activities of the department with strategic direction from the investment committee of the Board of Directors. Ken Stecher and I will cover the various investment topics in our remarks. In addition, three assistant VPs from investments, Mike Abrams, Marty Hollenbeck and Steve Soloria, as well as our usual team of Jim Benoski and J.F. Scherer, are here with us today and available to take your questions.

As our release described, 2004 is off to a strong start. Net written property/casualty premiums rose 15.1% for the quarter with commercial lines up 15.9% and personal lines up 12.3%. New commercial lines business written directly by our agencies rose 25.7% to $67 million. For personal lines, new business was $13 million compared to $15 million last year. In total, new business rose 17.8% to $80 million. From an underwriting standpoint, the overall combined ratio came in at 87.1% including 4.4 percentage points from the release of $32 million in UM/UIM reserves. Commercial lines recorded a combined ratio of 82.6%, benefiting 6 percentage points from the UM/UIM reserve release. Personal lines came in at 98.8%. Investment income for the quarter rose 3.9%. As a result of all of the segment contributions, operating income grew to 87 cents per share including the 13 cent benefit from the released UM/UIM reserves. Book value at March 31 was $38.70, a penny ahead of the year end record of $38.69. Those strong results were in large part due to the record $93 million in pre tax property/casualty underwriting profits. Profits were driven by the combination of strong growth, the results of our underwriting programs in recent years, and a very low catastrophe losses as well as the unusual benefit of the uninsured motorist/underinsured motorist reserve release.

Ken will cover the underwriting results. I will comment briefly on the marketplace trends that contributed to our growth. As we said last quarter, there is no doubt that competition is increasing for commercial lines. But there do seem to be distinct market by market variations in the level of competition and disciplined underwriting appears to be still the norm in most markets that we serve. We firmly believe that our approach to the marketplace gives us a decided advantage under these conditions. We work with our agents to meet the needs of their customers and in addition to our willingness to evaluate each account individually, offer the stability and financial strength that can be a key criteria in the insurance selection process.

Our approach is to continue to improve service to the agencies even as we remain committed to our underwriting standards. As w often discuss, one key element of this key effort is subdividing our field territories. The smaller territories that result give our field marketing representatives more time to be in our agencies quoting new business, making decisions, and helping agencies with effective front lime underwriting. They also have more time to identify and selectively appoint new agencies. In addition in the first quarter, we completed the underwriting review of our renewal book of business. The agents who worked so diligently with us on that effort over the past three years, also can now turn more of their attention to the new business effort. Our renewal efforts also give us an unusual advantage. Our agents make certain that policy holders understand what has occurred in the market over the last several years when working on renewal pricing and policy structure for our three year commercial policies. We think we’ll continue to see benefits in commercial lines from the review of underwriting program as well as the renewed emphasis on new business.

Now turning to personal lines, agents are renewing more than 90% of the personal lines policies even though new business is down. Groups of agencies in Michigan and Indiana began to receive training on Diamond in late March. The first group of Ohio agencies will start that process in late June and additional groups will receive training through year end. Over the next 6 to 12 months these states, which account for 53% of our personal lines agency direct premiums, will give us a preliminary sense of how significant Diamond will be in moving forward.

In addition, we are carefully monitoring our rate status to make certain we remain competitive in the marketplace at rates that will allow us to restore profitability. We fully expect progress on this front and remain committed to the personal lines business. In a moment I’ll turn things over to Ken to talk about property and casualty and life performance, some details of the investment results, and the specifics of out outlook. But first I want to comment on investments in our financial strength. Looking at the portfolio overall, in light of the first quarter market conditions, we are pleased to see the market value of our invested assets rose to 12.5 billion at March 31st, up 24 million from year end 2003. Our long term investment horizon and strong financial position make it possible to wait out a period when market values for our equity investments are under pressure. Plus these equity investments continue increasing dividends that play such an important role in the growth in the investment income.

Out total return investment strategy relies on our equity investing to create long term value for shareholders, but as we commented in today’s release, the next quarter or two will be a bit different. Our financial strength and the ratings that support it are a key selling point for our primary customers, the independent insurance agent. Our financial strength supports the consistency and predictability that our stakeholders have always expected and received. It must be able to withstand worst case scenarios. The most effective way we can make sure we can be consistent and predictable, is to give outstanding service and compensations to earn our agents’ best business and align their interests with ours. We also maintain exceptionally strong surplus, a solid reinsurance program, sound reserving practices, low debt, low interest rate risk, and strong capital at the parent company level in addition to strong surplus in the subsidiaries. Our board and management recently reviewed the risk factors that affect our surplus and the property for the ratings that confirm our strength to our agents. In light of that review, we now are establishing parameters around the property/casualty surplus position including first, we will make a modest adjustment to the equity exposure of the property/casualty company portfolio, and second, we will manage our capacity exposure to the one and 250 year level. Initially meeting these parameters does involve taking three short term actions during the second quarter to nudge us into position. First, in the property/casualty portfolio, we will change the allocation of new investments for a quarter or two until the ratio of common stock through statutory surplus gain moves below 100%, a level we maintained throughout the 1990s. The ratio moved as high as 120.5% after we adopted codification in 2000 and was 114.3% at March 31, 2004.

Second, we plan to sell equity investments in the property/casualty portfolio that the investment committee believes no longer meet our investment parameters. The planned sales are equivalent to less than 5% of the consolidated equity portfolio. The proceeds will be reinvested in fixed income and convertibly securities. Finally, we added another $100 million layer to our reinsurance program raising the limit to $500 million and we have begun moving homeowner earthquake deductibles to 10% from 5%. These property/casualty actions do not signal a change in our overall investment philosophy. We are fully committed to a long term equity focus. Our equity focus is key to the long term growth and stability of our company. We will continue to invest for both income and growth, seeking total return for steady dividend income. Over the longer term, we anticipate continuing to allocate approximately 25 to 35% of new money to equities on a consolidated basis. The planned short term actions to enhance our property/casualty surplus quality should support the predictability view by rating agencies as one of our company’s primary strengths, and by agents as a competitive advantage. I’d like to ask Ken to take us into some of the financials. Ken?

Thank you, Jack. It’s a pleasure to speak with all of you today. With the exception of the UM/UIM reserve release, which I’ll discuss in just a moment, the numbers for the first quarter are pretty straightforward. I’ll take a moment to cover a few details of the property/casualty and life operations and then give some additional information on the investment related topics after which I will try to add some color to or full year outlook.

I’ll start with the property/casualty loss trends which continue to be favorable. You should note there was essentially no catastrophe activity in the first quarter of either year. Typically, we’ll see more weather activity in the second and third quarters although it appears at this very early stage that the storms and tornadoes in the Midwest the past several days may not have caused any substantial losses for our policy holders. Before I go into more detail on the loss trends, let me start by summarizing the UM/UIM situation. As you know, in the fourth quarter we release $38 million pretax of the UM/UIM reserve we had established in 2000. During the first quarter, Jim Benoski and his claims staff were able to complete their case by case review for case reserves that we had estimated totaled about $37 million. Their objective was to file motions for dismissal in the various jurisdictions. Based on those steps, we released $32 million in reserves in the first quarter. Going forward, we’re going to stop tracking this as a separate item because there is little left that might be released in light of the court’s decision. Overall, loss results were very favorable in the quarter with the pure loss ratio at 47.6% including the 4.4 percentage points from the reserve release compared with 55.8% last year. New losses above $1 million rose on both an absolute dollar and percent or premium basis primarily because the number of these larger claims was high. With new losses between $250,000 and $1 million and case reserve increases above $250,000, at the lower end of the range we’ve seen overt he past several years, the total large loss category is in the range we’ve been seeing.

Now to look at the commercial and personal areas separately. For commercial lines, the first quarter GAAP combined ratio came in at 82.5% with a 6% benefit from the reserve release. The details and line of business data are in the financial supplement on page 23 as Heather mentioned. A couple of observations. Commercial auto’s loss ratio benefit of 18.7 points in the first quarter from the UM/UIM reserve release and 26.7 points in the fourth. Other liabilities was the other line with a major impact from UM/UIM. The first quarter benefit at 8.4 points, after benefiting 9.8 points in the fourth quarter. Workers compensation and to a certain extent some of the auto physical damage lines, may be trending differently because of the recently implements claims management system. There are two areas where notice of claim is received very quickly. We’re looking at this and the severity, frequency and development trends in workers comp just to make sure we’re on top of any issues.

Otherwise, the sequential fluctuations seem to be the normal ups and downs that we see on a quarterly basis. As always we keep an eye on those lines when there is movement to see if a trend develops. Overall, commercial lines are doing very well with the potential for incremental improvements ex the impact of catastrophes over the levels we Saw in 2003. Now for personal lines. Results followed the seasonal pattern we’ve seen over the past several years including savings from catastrophe. As a result, the combined ratio was below 100%. We do not consider this performance to be acceptable because we know that the level of catastrophes of the course of the full year will be significant. Taking into account that personal auto is performing at an appropriate level, the key will be improving homeowner results.

Looking at the 12 months ended March 31, 2004, the homeowner loss and loss expense ratio, not the combined ratio, was 93.4%. This illustrates the substantial progress that needs to be made before we can reach the 72-74% level we have target by the end of 2005. Jack talked about the strategy for growth we are pursuing in homeowners. The rate and policy changes that have been going into effect over the past one and a half to two years also will play a part in restoring this business line to our profitability targets and improving overall personal lines results.

Now on the expense side. For all property/casualty business, the first quarter expense ratio was 29.5% compared with 28.4% last year. The increase was essentially the result of higher contingent commission accruals. With the first quarter’s very strong performance, contingent commission accruals were set at $19.5 million versus $8.5 million a year ago, although we paid a total of $50 million in commissions for full year 2003. We think the first quarter accrual was an appropriate level and was stressed that contingent commissions are paid on growing profitable business. This is one place where we don’t mind a higher lever. We consider it to be a good investment in the agencies that are keeping our positive growth and profitability trends going for us.

Now for the major technology initiatives, specifically Diamond, CMS and E-class software. During the first quarter, we capitalized $6 million, in line with our expectation of $23 million in capitalized costs over the course of 2004. The depreciation in the quarter adds two cents of a percentage point on the combined ratio and less than a one cent impact on the first quarter earnings per share. For the full year, we would expect the impact on the combined to be less than 3/10 of a percentage point, with a per share impact at about 3 cents.

For life operations, earned premiums increased 16.1%. Mortality was in line and expenses rose slightly because of incentive programs. Operating income was $8.3 million compared with $8.2 million last year. Now to summarize some of the Investment operations data. Investment income grew to 3.9% in the first quarter. Investment income in 2004 will benefit from the dividend increases declared in 2003 but not fully earned, as well as expected increases during the current year. On the dividend increases are coupled with interested income from the bond portfolio. We’re comfortable with targeting growth in investment income for 2004 in the 3.5 to 4.5% ranges.

In addition, pretax realized gains were $7 million in the first quarter as summarized in the release. With the signs of an economic recovery and the increased quality of the bond portfolio, we remain confident that impairments going forward should mainly be securities mark to market because they have been identified for sale or possible those related to issuer specific events. For the quarter, cash flow remains strong. In the first quarter, the allocation of new funds to fixed income and equity investments tracked with our historic ranges, although as Jack discussed, during the second and third quarter we expect fixed income and convertible securities will make up virtually all of the new investments. The equity sales we anticipate will put capital gains at a typically high level in those quarters.

Briefly, on our outlook, we are pleased to start the year so strongly and continue to believe we can generate record results for the full year. Looking at the premium side, we want growth to be steady 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, industry growth rate has averaged about 6 to 7%., although it has risen in the past several years doe to market conditions. We’ve achieved a 12+% compound growth rate over the same 5 years. Looking just at a single year, we’ve seen data that indicates analysts are expecting 2004 industry net written premium growth to range from 5 to 10%. Although we started the year very strongly, we’re maintaining a conservative view and targeting commercial lines growth of about 10% for the full year and overall growth in the high single digits pending any progress in personal lines, 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 was estimated at 100.1%. Looking ahead, BEST is forecasting a 98.1% combined for the industry for 2004. We are targeting a GAAP combined ratio of 94%, equal to about 93.5% on a statutory basis. At that level, we will beat the industry mark as we benefit from incremental gains and commercial lines profitability and continued improvement in personal lines. Note that while we are very confident that the year will be strong, we’re not lowering our target from the 95% we discussed at year end. We’re simply adjusting our target to take into account the impact of the already realized UM/UIM reserve release on full year results. Our assumptions also include CAT losses in the 3 to 3.5% range over the full year. Finally, we believe that investment income can continue to grow in the 3.5 to 4.5% range.

To reiterate Jack’s comments, we see opportunities to build on a solid year and make next year even better. Jack, back to you.

Thanks, Ken. It’s always a pleasure to share such strong results. We see every sign the was are doing things right and what we are 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 we assure them their trust and confidence are well placed with Cincinnati We’re proud of our record and committed to taking a steady path. We hope that we will see you at the annual meeting if your schedule permits. Pashanta, I think we’re ready for questions now.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We’ll pause for just a moment to compile the Q&A roster. Your first questions comes from Nancy Benacci of McDonald Investments.

Thank you. Good afternoon. Thanks for the encouraging update on Ken Miller and we certainly hope things continue to go well for him. Just a couple of questions. On the commercial lines side, a premium volume very strong with good renewal business and very strong new business. Could you give an indication, as you analyze your commercial new business, where do you think it’s coming from? We’ve seen some consolidation within the industry. Is it coming from any of that kind of result? And also, as you talked about your overall premium volume numbers for the full year being upwards of high single digit 10%, that would imply that we’re going to see a slowdown in overall premium on a quarter over quarter basis and just talk a little bit more about your exceptions with that.

Thanks, Nancy. This is Jack. Thanks for your kind words about Ken Miller. Into your questions, there’s so much to discuss. It’s mostly marketing related. How about we let J.F. talk with you about that?

Hi, Nancy. As fast at the new business was concerned, I’ll start there. The new business in the first quarter of ‘03 was actually a little down and so while the percentages look excellent, and it was a good quarter for us in new business, I think the overall percentage increase over last year’s first quarter maybe overstates what’s really happening. We are just slightly below what we’re projecting for new business if you extrapolate out to the end of the year which means we’re having a decent go at it. I can’t say that we’re seeing any of the consolidation really having any affect on what’s going on. Probably as much as anything, we have completed the re-underwriting program we went through over the last several years and we did get the field reps involved in that re-underwriting of the renewal book a little more than we would normally do. With that behind us and with all of our territories fully staffed and in good shape, we just have more time and we’re being more effective at doing what we’ve always done and that’s just to call on agencies more frequently and get a look at a lot of the business.

I think our financial strength, the A++ reaffirmation, the 3 year policies, all the things that we do well, the claims service, these are all strengths that in a market that is a little bit uncertain, draws agencies to have a certain amount of comfort with us. So in terms of new business, field reps are telling us that they’re getting plenty of at-bats. We are seeing probably in the way of complexion of the business, a lot of opportunities in what I would call medium sized accounts, in the $10,00- to $100,000-$150,000 account range. And those are some areas where I think we’re really shining. So so far this year, a lot of good positive comments coming from the field on the new business side.

Overall, I think it was a pleasant surprise for us to see the growth rate where it was in the overall commercial lines business. For example - - we’re seeing some competition out there as our release would indicate. We’re not seeing irrational underwriting. We are, as you would note - - a lot of companies are having pretty good results this first quarter and I suspect they’re all - - probably everybody will be feeling a little bit more confident as the year goes on. So we do expect competition to continue to heat up, but I wouldn’t say That we’ve seen any evidence of a deteriorating market or anything as pessimistic as that.

As you look at your book and you look at it by line, you’ve done a fair amount of business in the package category, Is that where a lot of your growth is coming from? Or what lines are you starting to see become more competitive than others right now verses where we were at the end of the year?

Well, package business - - that’s key to everything. We write no model line workers comp for example and probably hardly any model line commercial auto. So everything tends to be part of a whole package. We’re still seeing some strength in the lines of business that would be what we call non-discounted packaged which means that they’re the higher rated package policies. In the smaller account area, a lot of discussion has been had over that. There is a lot of targeting going on there by a lot of players. And so in terms of where we’re seeing less growth than we are in other areas, it would be on the smaller account side.

And then if you could clarify a little bit more on the higher dollar losses in the large claim area. If you look at those that are over that big category, it sort of spiked up as I think Ken mentioned. Can you give a little bit more clarity as to what you think is going on there? Is it sort of a one quarter aberration or is there something bothersome that you’re seeing?

Nancy, Jack again. May we switch people who can answer? I think Jim Benoski, this is right down his alley. Jim, would you please?

Yeah, Nancy, the spike up on the million dollars and plus claims, that, I think that’s the second highest number, 27, that we’ve had since we started reporting it and it’s really spread out pretty evenly. We had no more than 4 of those claims in any one state and that was in Ohio where we expect to have the larger number of claims. About 25 to 30% of them were large fire losses. The greatest number were in commercial auto and that seems to be the area where we do have most of the larger claims. There’s not any thing unusual about it. It’s spread evenly over a number of states and I think maybe hopefully that it’s just an aberration as you might say. But we keep an eye on it but we are reserving more conservatively as we’ve said all along and that might have a little bit to do with it.

It’s not a specific line where you maybe have much higher limits than in the past then?

No.

Okay, good. Thanks for the clarification.

Our next question comes from Stephan Peterson of Cochran Coronia.

Good afternoon. Ken Stecher, if I could put you back sort of in the spotlight - - first of all just a quick question. Did you say you were going to take your earthquake deductibles down or up?

We’re raising our program to up to $500 million and then on the individual policies in the personal lines, we’re increasing the deductibles from 5% to 10%.

Okay, good. I just wanted to makes rue I hear that correctly. Second of all, I wonder if you could provide just a little bit more color behind the motivation in terms of sort of marginally changing the equity portfolio a little bit and then in addition to that I’m wondering if you’re just going to be sort of trimming positions across the board or are we going to see that 5% come from a particular name, a few names in particular that you think would provide money better used elsewhere?

Stephan, there‘s a couple of things. Number one, we probably - - we always have managed our equity positions in the property/casualty group and kind of looked at that as a percentage of surplus. And over time, the success we’ve had in the market has caused our equity position to increase dramatically as you know, which has kind of driven our book value. That does present some additional risk to the surplus just because of the volatility. We believe the investments are very good investments but the number has gotten quite large. So we’re just looking at trying to get back to maybe some historical levels that we’ve had in say the 90s.

Okay. Am I misunderstanding the change in terms of are you just sort of moving investments from the statutory operating companies up to the parent and just sort of flip flopping the portfolios or will you actually be trimming the positions with cash being reallocated directly within the subsidiaries?

We will probably do a little of both. We will reallocate some securities but we will be trimming positions. The investment committee meets on a regular basis and there has been numerous securities that they have given the investment department the authority to sell when the time is appropriate. So I think you asked if we would be trimming multiple positions. I think that is a true answer.

Okay, terrific. And then I was just wondering if I could put J.F. back on the line and ask him - - I think it said in your release you’re looking at up to 3 new territories yet this year. I’m just curious as to where they might be? And then maybe a quick follow up on whether or not any particular - - the St. Paul/Traveler’s merger, which is on the verge of being completed, has changed the competitive landscape at all.

Stephan, the territories we’re looking at are Milwaukee, Greater Chicago area, and greater Kansas City area. In fact, we’re probably - - looking at subdividing a territory in Alabama as well. How quickly we can get all four of those staffed is really the issue and we’re looking to make certain we have strong field underwriters ready to go in all those areas and I think pretty likely we’ll be able to staff all four of those areas before the end of the year. As far as the Traveler’s St. Paul merger is concerned, as we said before, I think to a large degree, we nibble around the edges, I think, in a lot of the businesses that they write, meaning that they write some specialized larger accounts. Notwithstanding the service center approaches that they take. I think as is always the case, there are strong relationships territory by territory, branch by branch and it’s certainly possible there could be some realignment or some directional changes that agencies would take. But I could say that we don’t spend really much time at all viewing that this merger is going to create for us some kind of a windfall in terms of business activities. We’re enjoying very strong activities and seeing both of those companies as good strong competition as they have been in the past and haven’t seen any change in that.

Okay, terrific. Thank you very much.

Our next question comes from Dave Sheusi from J.P. Morgan.

Hi, good afternoon, everyone. Just a macro question. I wanted to kind of get your thoughts in the case of the personal lines rate environment and what you see as the top 3 or 4 key differentiators just in talking with your agents and building the new business platform as we go forward?

Dave, I’m inclined to suggest that’s more marketing than it is financial even though you mentioned rates and so forth. I think J.F. has been deeply involved in the Diamond project and how agents are looking towards it. Maybe J.F. can comment about that plus some other things.

Dave, I want to make sure I answer your question right, but as far as the differentiating factors for our agencies, certainly the administrative issue in managing their books of business with us - - a great advantage of the Diamond system for us comes in the fact that it matches up well with the agencies’ agency management systems and allows for upload and download with us and a more paperless environment. So as far as administering policies, that works to our advantage in introducing this program. We’ll also, unlike in past year, where we asked the agency to print and assemble the policies, both new and renewal, we give our agencies the option of having us do that. So they like that a lot. And then also, equally important, is the billing issue. Up to the introduction of Diamond, our agents have actually done all of the billing. I think you’ll find a lot of agencies will continue to do that because they feel strongly that that ties them all the more closely with their policy holders. But we have that option now, so agencies can ask us to do both the policy issuance as well as the billing so I think the strength is there.

The strength will always be though, I think you’ll find, in our consistency in our claims service. In the spring of every year, a tornado will hit, a hail storm will hit somewhere and the question doesn’t become did I save $50 on my homeowner premium, but how will I be treated in the event of a claim? And I think we really shine in our persistency. Our current book of business in personal lines is very strong in the low 90s and I think a great reason for that is because of the phenomenal reputation we have in the claims area. So I think you add all that together and that’s the platform upon which we’re going to build our growth.

Great. Thanks so much.

At this time, I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. Our next question comes from Mike Dion of Sandler O’Neill

Good afternoon, everyone. Just a couple of follow up questions. First, on the investment portfolio - - not identifying specific securities - - but as you look out at potential sales there, are there any sectors that you identify as being particularly ripe to realize some of the gains there? And secondly, if you could just take a moment, J.F. to talk about the commercial lines technology initiatives and how those are coming along?

Mike, I’m going to just comment quickly. The securities that we may sell are ones that have been determined not to meet our investment criteria of future increase in revenues, profits and dividends. So that will be kind of the first pass that we look at. Secondly, I’m going to ask Mike Abrams to ask the part of your question on the different sectors.

Mike, this Mike Abrams. We really focused in more on individual companies, not necessarily sectors.

Okay, so that could be, as you said earlier, across the board in terms of the realization in terms of the sales?

That’s correct.

I might add, Mike, that as much as the universe of potential sales are across the board, I think what Ken and Mike answered about which are being stock we’ll probably consider for sale, I don’t think it will be across the board. I think we’ll select certain companies who don’t meet the criteria that Ken mentioned of increase in sales, increases in earnings, increases in dividends or the outlook for those things and I think we’ll selectively sell among those companies rather than just take an across the board cut.

Okay, thank you, that’s helpful.

Then Mike, on the commercial lines automation initiatives, there’s really 3 major initiatives that I think have impact. One called WINCBP which is our web based commercial rating system which is a good enabler for our field reps, our agents and also our home office folks to administratively manage all of the quoting that we do on new business and we’re able to transmit all of that quickly and easily and compare it. That continues to be introduced in most states. I-view is a new initiative we have in going to a more paperless approach in commercial lines which allows us - - where we’re scanning All of our policies. It allows our commercial underwriters to gain access to files without having to rely on the paper files that we have right now. We believe that within 24 Months that we’ll be in a position to have all of our commercial lines in that system. And then finally E-Class is the one that you’ll probably hear most about over the next several years and that will be the policy administration system for our entire commercial lines department. We’re in the early stages of that development and right now developing the business owners policy for the state of Ohio and we would expect to have that out in agencies in Ohio before the end of there. From there we’ll build onto other lines of business.

Okay, great and just one last follow up if I could. The company repurchased roughly 250,000 shares in the first quarter. Do you see a similar rate going forward or is it more opportunistic when you’re in the marketplace?

Mike, I think it will be more opportunistic. As we’ve said before, we try to make sure we cover dilution from our stock option program. Then the rest of it will be based off of book value versus market price and things like that.

Okay, great. Thank you.

You have a follow up question from Nancy Benacci of McDonald Investments.

Just one quick question. J.F., are you seeing any change or pushback in terms and conditions? Starting to see any of that yet?

No, Nancy, I wouldn’t say that we are seeing is an identification of excellent accounts in terms of what’s really going on in the marketplace, the anecdotal stories we review from the field, that very little in terms of conditions. More in the way of targeted classes of business, lines o business. And where I think - - a this is the good news is that people aren’t making believe that average or below average accounts are good accounts for purposes of just simply cash flow underwriting but there’s more simply targeting going on by carriers and a little more aggressive pricing for the better accounts.

And along those lines, sort of the opposite really. When you’re talking to your agency force, are you getting the sense that they’re still very focused on the quality of the balance sheet of the underwriter more than they were even six months ago?

J.F. Scherer. Yeah, without question. And that’s why we’re proud of the A++ rating we have with Best. That takes that issue completely off the table for us. But there have been quite a few carriers that have gone through some transition in that regard and agencies have to be careful not to get caught with a carrier that could get into the sub A- rated areas. So I can’t say that it’s talked about every day with our field reps. We’re in good shape, It doesn’t have to be talked about with us. But I think if you talk to agencies in general, that’s something they’re very concerned about.

Thanks very much.

Your next question comes from Charlie Gates of CSFB?

If a commercial lines company loses the A- Best rating, are they effectively out of the market?

This is Jack, Charlie. I think if a commercial lines company loses the A- rating, I don’t think they’re out of the market because there’s a lot of tough competition out there. But I think J.F. really is the person to talk about this.

Well, Charlie, it’s not good news for the carrier, that’s for sure. That’s obvious. It makes it very tough for agencies. I hind the question becomes if they lose the A- and fall below that, is there more to come? I think the uncertainty associated with that type of situation creates the challenge for the agency to decide do I renew this policy with this carrier if in fact have a much higher rated carrier willing to rate the account? It would be a very difficult situation. You’d be in as good a position to assess that as we would.

So in that case basically I would lose both one my relationship with my insured, or two, basically expose myself to some type of errors and omissions litigation, wouldn’t I?

The issue of errors and omissions consequence is something that agencies factor in on that particular situation and in many cases, sometimes in the surety bond area where the financial rating of the carrier is very key, those are things that simply can’t be debated. And so an agency has to be very conservative about their approach in how they pick carriers in that regard.

I think I’d much rather sell for you guys than a company with lower ratings.

Well, we’d like to hope everybody feels that way.

Thank you.

You have a follow up question from Stephan Peterson of Cochran Coronia.

Good afternoon. Ken, one last quick question. On the contingent commission accruals. Is that something you look at every quarter?

That is something that as we have become more profitable, yes, we would look at it each quarter. And there was quite a few factors, as you can imaging, that went into the first quarter accrual. We obviously don’t believe - - because there was no CAT activity in the first quarter. We also had the UM/UIM reserve release in there. So the combined - - just because of those couple items, it will probably rise in the second quarter and subsequently. But we tried to set an accrual for the contingent commission that would kind of match up somewhat with the profitability that we’re seeing. But we are Going to look at it each quarter, yes.

Is that sort of a rolling four quarter number?

We’re setting it basically just tied to the quarterly results.

So it gets trued up at the end of the year essentially?

Yes, it does.

Okay, and do CATS play a role in that?

Yes they do.

Okay, terrific. Thank you.

Your next questions comes from Fred Nelson Crowell Weedon.

I just want to thank everybody there for the mission statement you have of people and our relationship with people and it’s really been effective and I’ve seen it happen with what happened to Ken. And the staff of the investment counseling department with Mike and Marty and Steve being so well trained and so well though of by you people and the people who have been so supportive to his wife and children. I think this is a good example of what’s needed in our country and I want to say thanks to all of you for that.

Excuse me, Fred. It’s difficult to respond to a statement like that, but I’m looking at Steve, Marty and Mike and their smiles are from ear to ear on their face.

They deserve it.

I agree with you.

And everybody who has been so supportive deserves a pat on the back.

Thank you very much.

It shows you how life can change in an instant. All of our lives. Can you comment a little bit on the storms in the Midwest and the development of more of your investment counseling business at all?

Yes. I think Jim Benoski’s the person to talk about the storms in the Midwest and then Marty would be the person to talk about the investment business. Jim?

Fred, there were storms in about 6 or 7 states as far south as Alabama and Arkansas also. But in the areas where these tornadoes hit, we had very little exposure and I think there are a number of claims that have been reported in the 6 or 7 states are less than 100 claims and nothing of any significance at all. There’s nothing in six figures. They’re all relatively small claims. At the present time, we don’t think it’s an issue for us.

Thank you.

Fred, it’s Marty Hollenbeck. At the end of the first quarter had 57 accounts, 31 of those were individual accounts. We currently manage $790 million with the vast majority of that being institutional money. It’s coming along slowly but steady. At January 1st of this year, we hit the five year anniversary which we are optimistic will provide an opportunity to open some doors that prior to this weren’t open to us, so we are very optimistic.

Thank you.

Fred, I might add, since you’re complementing our investment department, you really should complement present members and prior members. Jim Miller - -I spoke with him last night. Are you aware that he is the golf course champion of his country club in Florida?

No, I am not.

Well, that’s new news and Jim is quick to say that it’s on a net basis not a gross basis and the rest of the membership does not recognize a net basis winner. So he is trying to fight that battle to get some recognition. And you can imagine that he won’t give up.

No. When I talked with him last he said he was heading home to Ohio to make sure that his pension checks got to him.

And that’s probably true, too.

He’s a super fellow and he’s given a lot of great support to your organization.

Thank you, Fred, very much.

Well, thank all of you.

At this time, there are no further questions. Mr. Schiff, 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. Thank you

This concludes today’s Cincinnati Financial Corporation first quarter 2004 conference call. You may now disconnect.