辛辛納提金融 (CINF) 2004 Q2 法說會逐字稿

Good afternoon. My name is Tonja and I will be your conference facilitator today. At this time I would like to welcome everyone to the Cincinnati Financial Corporation’s second quarter 2004 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).

Ms. Wietzel, you may begin.

Hello, this is Heather Wietzel, Cincinnati Financial’s investor relations officer. Welcome to our second-quarter conference call. If you need the release, financial supplements or other information on quarterly results, please visit our Web site, where all of the information related to the quarter can be found in the Financials & Analysis section.

If it’s more convenient, you may call 513-564-0700 to have a copy of any of this material faxed to you immediately. On today’s call are the Chairman and Chief Executive Officer, Jack Schiff, Jr., and Chief Financial Officer, 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 some of the matters to be 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 by regulation G was provided with the release and is available on the investor page of our website in the financials and analysis section. 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.

Finally, all prior period per share numbers we’re discussing today has been adjusted for the 5 percent stock dividend paid in June. With that, let me turn the call over to Jack.

Thank you, Heather. And, before I turn to the results for the quarter, I wanted to let you know that Ken Miller is making great progress after a serious automobile accident in the spring. While there is not yet a firm timeline for his return, it has been great to see him in the office for short periods of time in recent weeks.

Under Ken Stecher’s interim direction, our investment department officers continue to manage the day-to-day activities of the department with the 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 of our investment officers, Mike Abrams, Marty Hollenbeck and Steve Soloria, as well as our usual team of Jim Benoski and J.F. Scherer, are here today and available to take your questions.

As our release described, we ended the second quarter inline to meet or exceed our objectives for the full year. For the quarter, adjusted net written property casualty premiums rose 7.6 percent with the year to date growth rate at 11.2 percent on an adjusted basis and 7.9 percent on a reported basis. Ken will discuss the adjustments for the premiums. On the adjusted basis, commercial lines net written premiums were up 8.5 percent for the quarter and personal lines net written premiums were up 5.6 percent.

New commercial lines business written directly by our agencies rose 9.6 percent, correction, 5.9 percent to $75 million. For personal lines new business was 12 million, compared with $16 million last year. The overall combined ratio for the second quarter was 91.9 percent including 6.5 percentage points from catastrophe losses. Commercial lines reported a combined ratio of 84.4 percent, including 3.0 points from catastrophes. Personal lines came in at 111.6 percent, including 15.7 percentage points from catastrophes. The life operations contributed $10 million to earnings, compared with $7 million, including their capital gains and losses. Investment income for the quarter rose 5.6 percent. As a result of the segment contributions, operating income grew to 70 cents per share. These strong results were in large part due to the $58 million in pre-tax property casualty, underwriting profit. Profits were driven by our growth in healthy underwriting profitability, a result of the hard work of our agents and our associates to maintain underwriting discipline.

With net realized gains of 21 cents due to the planned sales of equity holdings, net income rose to 91 cents per share, compared with 50 cents last year. Book value at June 30 was $36.27, compared with $36.86 at March 31. In a moment, Ken will delve more deeply into some of the numbers, but first I will comment briefly on the insurance marketplace trends and some of the activity in our investment area during the quarter.

As we have seen in each of the last several quarters, competition in the commercial lines market continues to ratchet up. While market-by-market variations and the level of competition remain, we are seeing instances of more aggressive pricing for higher quality accounts. What we aren’t seeing poor accounts being priced by good accounts. Disciplined underwriting remains the norm. Our agents continue to tell us renewal price increases are running in the low single digits with pricing for property line softening somewhat and modest pricing increases for casualty driven line holding steady.

It is not a market like the past several years where extremes of pricing and underwriting decisions were pushing many accounts to review their coverage. But out approach is tailor-made for us to thrive. Our field marketing and underwriting puts us in the right place when the agent needs us, in particular for the mid-sized accounts that require negotiation in today’s market. As a result, we can react quickly, helping to assess the quality of the policyholder and differentiate the agent from their peers. We can be in the agent’s office and the policyholder’s place of business. Our agents and these accounts appreciate this in-person service.

On catastrophe teams and also on a day-to-day basis, our field claims staff continue to make a terrific contribution. Their efforts are supported by field specialists in key areas, such as worker compensation claims; property claims specialists and loss control. It really is personal service that we’re known for. And agents seek out Cincinnati’s personal service for their more prestigious accounts. Those accounts tend to be in the mid-sized range for most of our agents and that suits us just fine. Automation and direct bill capabilities developed by our competition sometimes attracts some agents who sell as a commodity what we would define as small accounts, say under $10,000 in annual premium. These accounts don’t get the same attention as the mid-sized accounts where our approach is so clearly an advantage.

Of course, we’re working on a solution here. Our future e-CLAS system, which will start with business owner policy processing, while the smaller accounts are more challenging than in the past, we continue to see nice growth in commercial lines as our capabilities dovetail with our agents’ needs. Plus, we have the financial strength that can be a key factor in the insurance selection process. To leverage these advantages we continue to work to improve service. Within the 31 states where we actively market, we continue to subdivide territories to give each field marketing representative more time to be in our agencies and policyholders’ offices. With more time, the field marketing reps have the opportunity to ask for the agency’s business, work on new business efforts, make decisions and help agents with effective frontline underwriting. The field-marketing representatives also have more time to identify and selectively appoint new agencies. We’re looking for about 30 new appointments in the next six months as we work towards our objective of adding 150 new agencies over the next several years.

Now turning to personal lines, growth again this quarter was driven by higher premium per account on renewal business, reflecting recent rate increases, deductible changes and modification in policy terms and conditions with new business now. We continue to work on our rate structure to do two things, bring homeowner profitability inline with personal auto and establish prices that will attract our agencies’ quality accounts. The personal lines 90 percent retention level shows that policyholders recognize the value that their agents and our company bring to the table. The slow down in new business isn’t what we had hoped to see. But our agents are guiding us in refining our current rate structures while awaiting the introduction in their states [inaudible], our new personal lines policy processing system. That process is moving along very well with training for agencies in Michigan and Indianan completed in the second quarter and training begun for Ohio agencies in late June and is due to be completed by the end of September. We expect to achieve progress here and continue to be fully committed to the first personal lines business.

Before I talk about investments, please note there is no news to report regarding the application to clarify the status of our holding company under the Investment Company Act of 1940, which we announced on June 28. While we are awaiting the SEC’s response to the initial application, we’ve consulted with the Ohio Department of Insurance on options that could quickly address the level of investments at the holding company level. Nothing has been formally filed for official Ohio Department of Insurance consideration at this time. I want to stress that with our financial resources, we do not expect the SEC’s deliberations or its ultimate decision on the holding company to effect our insurance company operations.

During the second quarter we implemented the changes we had discussed last quarter to modestly adjust the equity to surplus ratio in the property casualty company portfolio and manage our catastrophe exposure. To make the ratio adjustment, we sold $350 million in equity securities, reducing the size of several of our larger holdings. We also transferred some equity holdings to the parent company in exchange for bonds and allocated investment dollars to fixed maturity and convertible securities. We selected for sale holdings where we believe the issuer was less likely to meet our sales, earnings and dividend parameters going forward. The sales were equivalent to less than 5 percent of the consolidated equity portfolio. To reduce our catastrophe exposure, as we had indicated, we added another $100 million layer to our reinsurance program, raising the limit to $500 million. We also began moving homeowner policy earthquake deductibles to 10 percent from 5 percent. These short-term actions to enhance our property casualty surplus quality should support the predictability viewed by rating agencies as one of our company’s primary strengths and by the agents as a competitive advantage.

These property casualty actions did not signal a change in our overall investment philosophy. Over the long run, we anticipate continuing to allocate approximately 25 percent to 35 percent of new money to equities on a consolidated basis, although we anticipate a lower allocation for the next quarter or two. Our long-term focus on dividend paying equities is key to the long-term growth and stability of our company. We will continue to invest for total return.

Now for the more technical explanation, here’s Ken.

Thank you, Jack. It’s a pleasure to speak with all of you today. I’ll start with a few comments on written premiums and then talk about property casualty profitability, investments and the balance sheet.

As you saw in today’s release, we continue to see ourselves on track for high, single-digit, full-year written premium growth. You remember then in the first quarter we reported net written premium growth of 15.1 percent, which we thought was on the high side and now, for the second quarter, we have 1.1 percent reported to that written premium growth. Some of you may be wondering about the sequential change in the growth rate, and before I go any further I want to clarify that this was the result of a process change that has essentially no impact on GAAP results such as earned premium. As we explained when we initiated the unbooked premium estimate in the fourth quarter of 2002, these premiums are for policies with effective dates before quarter-end that are still in the policy issuing process and we closed the books for the quarter.

On developing the estimate for the second quarter, we realized that the actuarial model used to develop these written premium estimates did not reflect our success in increasing the speed at which we book policies each quarter, mainly because this progress occurred even more quickly than we had anticipated. That said, this isn’t about a change in our business or fundamentals, but rather about better staffing and improved processing procedures, which are beginning to reduce the number of policies still in the policy issuance process at each quarter-end.

For example, our online rating system for quoting commercial accounts now is available in 13 states that account for 77 percent of commercial lines premium. With rate and price data captured online for agents, underwriters and other associates, the policy issuance process is accelerated. But because the estimation process did not fully take into account the speed at which these efficiencies would reduce the amount of premium process, our first quarter estimate was high. Adjusting the estimate this quarter slowed the second quarter growth rate on a reported basis. We are currently in the process of refining the actuarial estimation model to take these new efficiencies into account and expect our estimates going forward to more accurately reflect our success in expediting the policy issuance process.

First, we now have more history for our actual receives in developing the data. Second, they are incorporating more information on transaction counts and policy processing days into their model. To help you look at the underlying trend, we’ve including the first quarter adjusted numbers that we hadn’t provided when we put the supplements out last quarter to today’s data. Our first and second quarter net written premiums on the adjusted basis grew 14.9 percent and 7.6 percent respectively. We continue to expect high single-digit growth for the third and fourth quarters.

Turning to the loss trends, commercial lines results were excellent and there was further progress on the personal lines side. The overall large loss results were inline with recent experience with nothing really noteworthy to discuss. Second quarter catastrophe losses of 46 million are slightly below our original estimates due to favorable development of some earlier catastrophes and close to last year’s experience in both commercial lines and personal lines for both the three and six-month periods.

For commercial lines, the second quarter GAAP combined ratio was an excellent 84.4 percent, comparing favorably to the first quarter ratio of 82.6 percent that’s benefited 6 percentage points from the UMUIM reserve release.

New business growth rate did slow from the first quarter level as we had mentioned last quarter, first quarter 2003 new business was actually down a little to the first quarter 2004 year-over-year growth rate was a bit higher. During the second quarter we actually made up ground toward our full-year new business targets. The details of the line of business data are in the financial supplement on page 26. A couple of observations, as we had anticipated, workers comp and, to a certain extent, some of the auto physical damage, trended differently in the first and second quarters because of the recently implemented plans management [inaudible-audio gap] system. But ended the six months right about where we would expect. These are two areas where notice of claim is received very quickly. Commercial auto and other liability data for the fourth quarter of 2003 and the first quarter of this year benefited from the UMUIM reserve release.

Most importantly, our results are strong across all lines of business and we’re enthusiastic about the outlook. Although the three-year re-underwriting program is complete, we’re continuing to apply the broad based underwriting and re-underwriting approach, both at headquarters and in the field. It’s paying the dividends we expected it to pay.

Now for personal lines, results follow the seasonal pattern we’ve seen over the past several years. The combined ratio is 111.6 percent, including 15.7 percentage points for catastrophes, compared with 116.1 percent or 17.8 points for cats last year. The personal lines loss and loss expense ratio, excluding catastrophes, has trended down over the past six quarters 65.9 percent in the second quarter. On a rolling 12-month basis, the homeowner loss and loss expense ratio, including catastrophes, not the combined ratio, declined to 90.4 percent from 93.4 percent at March 31, 2004 and 92.7 percent at year-end 2003. While substantial room for improvement remains, we believe we are seeing indications that our plan is working that we will be able to reach the 72 percent to 74 percent loss and loss expense ratio we have targeted by the end of 2005.

For all property casualty operations as a whole, the second quarter expense ratio was 30.4 percent, compared with 25.1 percent last year. The increase was the result of a 2.1 percentage point rise in the contingent commission accruals and a 3.2 percentage point rise in the other expense ratio. With the continued strong profitability contingent commission accruals are set at 24.5 million in the second quarter, inline with the first quarter’s 29.5 million. Year to date, we’ve accrued more than we’ve paid in total for full-year 2003. We think the accruals are at the appropriate level and would stress that contingent commissions are paid only on growing profitable businesses.

In addition to several items such as differed acquisition costs, that tend to fluctuate from quarter to quarter, operating expenses were higher because of investments to improve our processes, including technology and staff additions. In some instances there relate to IT projects that are now live, and, therefore, current expenses are not capitalized. For the major technology initiatives still in development, specifically CMS and e-CLAS systems, during the second quarter we capitalized an additional 4 million keeping us on track to meet our expectations of $23 million in capitalized costs over the course of this year.

The depreciation in the quarter had a .2 of a percentage point impact on the combined ratio and less than a 1 cent impact on earnings per share. For the full year we would expect the impact on the combined to be less than .3 of a percentage point with the per share impact at about 3 cents.

Turning to investment, pre-tax investment income grew at 5.6 percent in the second quarter as we continue to benefit from dividend increases by companies in the common stock portfolio and higher interest income from the cash flow invested in bonds. In light of the strong year to date growth in investment income, we now believe that the growth rate for the year will be above the target we initially set. Realized gains were primarily due to the equity sales. And I’ll note that the supplements this quarter include a summary of the 14 common stock holdings we now had with a market value about $100 million, that’s down from 15 due to the sale of the significant portion of our Merck holding. We also reduced several of our larger positions along with some sales in our smaller holdings.

Impairment charges were very light at $1 million versus $17 million a year ago. With the increase in quality of the bond portfolio overall, other impairments going forward should mainly be securities mark to market because they have been identified for sale or possibly those related to issuer or industry specific events. For the third quarter there was up to $10 million in potential impairments with several airline related bonds that we’re monitoring.

Quickly on the change in book value since the first quarter, first quarter book value was reported was $38.70. Adjusted for the 5 percent stock dividend, that became $36.86. Starting with that, book value changes by adding second quarter earnings of 91 cents and subtracting both the dividend of 27.5 cents and the change in unrealized gains, net of tax, of 206 million, or $1.23 per share. The sum of the four pieces is a $36.27 book value at June 30.

Jack discussed the portfolio actions we took during the second quarter. On a cost basis, fixed income securities still represented 65 percent of the total portfolio at June 30. Although essentially 100 percent of second quarter investments were made in this area. With those short-term changes, the market value of our fixed income securities rose to 34.8 percent of the total consolidated portfolio with equities of 65.2 percent, in part due to market value declines in the portfolio, including [inaudible]. The actions move the ratio of property casualty common stock to statutory surplus 100 percent as we had targeted. It will be more heavily weighted to fixed income investments during the third quarter. We also believe we remain well positioned for the anticipated rise in interest rates.

In addition to the 350 million in net proceeds from equities, operating cash flow in the second quarter was very healthy due to the excellent profitability of the insurance operations. We’ve put as much of the money to good use as we good, investing a net $234 million in agency paper, 53 million in municipal bonds and 16 million in convertible securities. But during the quarter supply was very tight in the corporate bond market, investment grade or not, with calls leading to $47 million in net sales. We used only $1 million for CFC stock repurchase this quarter, buying 25,000 shares. This isn’t indicative of any change in philosophy. Simply put, we were out of the market foremost of the quarter to comply with self-imposed trading blackouts.

At quarter-end we had $285 million in cash on the balance sheet, some of which was used to fund our common stock dividend and pay off the short-term line. Otherwise, we’ll continue to look for appropriate times to repurchase CFC shares and invest on the fixed income side for another quarter or so.

Before I turn the call back to Jack, let me quickly summarize the comments in the release regarding our outlook. Premium growth in the first half of the year has kept us on pace to achieve our full-year target of high single-digit growth with commercial lines closer to the 10 percent mark. Our premium target isn’t changing we are looking for even better profitability than we initially anticipated. Assuming catastrophe losses remain in the range of 3 to 3.5 percentage points, we believe the full-year GAAP combined ratio could be in the range of 92 percent or 91.5 percent on a statutory basis. This target includes about a 1-percentage point benefit from the UMUIM reserve release in the first quarter.

As I mentioned a moment ago, we also believe that investment income growth with be above the 3.5 to 4.5 percent range we had anticipated. Taken together, these would bring us another record year and deliver the steady growth and industry leading profitability that is our long-term objective.

Jack, back to you.

Thanks, Ken. Good job. It’s a joy to bring you news about a great quarter like this one. We’ve covered a lot of ground today in the introduction with a look at various aspects of the commercial lines business, personal lines and the investment operations. But each part of our business plays an important role in achieving the results we see to bring about the results for our shareholders, our agents, our policyholders and associates. We thank each for their trust and their confidence in our company.

Operator, I think we’re ready to take questions.

(Caller instructions).

Your first question comes from the line of Nancy Benacci with KeyBanc McDonald Investments.

Thank you. Good afternoon. Congratulations on a solid quarter. I just wanted to talk a little bit about the competitive environment. We’ve heard about increasing competition out there. You’ve obviously shown some good results here in the quarter and indications that you are still able to get some good rate increases. Could you talk more about what you’re seeing in specific lines and, more importantly, as you spend time out in the field with the agents, what are they seeing right now for the rest of this year with competition and what you anticipate for next year.

Nancy, this is J.F. The competition isn’t increasing. We still don’t see, across the board, aggressive pricing. You asked what agents are saying. Most agents are saying that they’re running into an aggressive price from time to time but they still describe things as stable. What we continue to see is property intensive accounts getting more attention and more aggressive pricing, casualty intensive accounts and that tends to be in the construction marketplace, still worthy of some modest increases. So we read what you read. And every so often you’ll see someone come in and do something that surprises you. But, all in all, we’re still not seeing drastic across the board, slashing of any prices.

If you looked at where you saw the market in January, you know, at the end of the first quarter and where you saw July 1 was it dramatically different?

I think it’s just gradually increased since January. Clearly, the results that you’re seeing from all carriers, particularly in commercial lines, are all very good. It seems that all of our competitors are breathing easier and they’re interested in writing business. I think the bright spot of all of this, as Jack mentioned in his remarks, is that we really have not seen what I would consider the real evidence of a soft market and that’s where we make believe that poor accounts or even average accounts are good accounts. So, where you see the real strong competition tends to be property intensive that are very, very good, high quality accounts. And I would say, in fairness to those accounts, we see justification in some cases of reducing pricing. When the pendulum swung over the last several years, and a lot of accounts were getting very high increases there were a lot that were swept into there that properly were not as deserving. And I think the marketplace probably, as much as anything, if I were to characterize it, would be that some of the accounts that got swept into the high rate increase category probably are simply the pendulum swinging a little bit back more the other direction.

You’ve always been using the three-year policy and can you give us a sense of what percent of your book right now would beyond three-year policies as typical kind of numbers or as it accelerated here.

It’s accelerated a little bit over the last year so we went, particularly in the construction marketplace, to one-year policies where we wanted to be a little bit more aggressive about implementing some policy changes into our book of business. All of those where, unless the pricing is particularly aggressive, which is not the case usually in the construction area, we’re going back to the three-year policy. So I think we’re back to where we’ve always viewed that in the 75 percent range of our accounts would get -- premiums would get annualized treatment, as we’ve talked about with commercial auto, umbrella and workers comp on a one-year basis. But I would say that 90 percent of our accounts right now, new business would be a three-year policy.

And then just a question on personal lines, certainly if you look at the combined [inaudible] are better than we saw before, how do you feel -- where do you feel you are in terms of turning around that personal lines sector right now?

Nancy, I think, as you know, we’re working our way through the three-year policies on the personal lines. And as much as we’d like to see that get over with quickly, we still have about a year and a half or so to go to do that. In terms of the retention rate, it’s very high. The increases we have in premium are substantial, higher deductibles are being used. We believe we’re right on track, however deferred it is because of the three-year policies, right on track with getting profitability’s Ken mentioned in his remark where we want it to be by the end of 2005, beginning of 2006.

And just a follow up question, again, looking out to next year you gave us some good indication of high single-digit premium volume growth, better investment income growth the rest of this year, combined around 92, what kind of parameters are you looking for out to ’05 in terms of volume growth in combines?

Nancy, I’ll talk about the combined and the premium growth also. I think with the comments and the questions you’ve asked about maybe the marketplace just heating up a little bit, I think that the models that we have looked at currently I think we would be best to just defer any kind of guidance on 2005 until we see what happens here in the next quarter or last half of this year. Obviously, if the market conditions change, the model that we have developed would also have to be adjusted to reflect those market conditions.

So I think right now it would be a little premature to put out a 2005 target.

Fair enough. Thanks very much.

Your next question comes from the line of Stephan Petersen with Cochran and Caronia.

First question for J.F. and maybe picking up a little bit where we left off with Nancy, how do define mid-sized accounts in your world? Because we have heard on other conference calls about price competition picking up and it seems that you guys ended up with numbers that, on a comparable basis, were a little bit better than we’re seeing with some other names right now. And I’m wondering if maybe the market is just sort of shooting over what you consider your typical account.

Stephan, I think I guess we would view mid-sized as 10,000 in premium and up, probably in the $100,000 to $150,000 range. And in terms of commentary in the marketplace, the Council of Agents and Brokers, which is a group of very large agencies that would be writing, as far as a general appetite, fairly large accounts and not at all unusual excess of the $150,000 that I just mentioned. Those accounts always grab a lot of attention. And I think probably in terms of the intense competition, perhaps more intense competition that you maybe hearing about from some quarters, that’s where it lies. Our, I guess, high activity opportunities right now would be in the $10,000 to $100,000, $150,000 range.

And then just a clarification on the Diamond rollout, it sounds as though training is moving along nicely. Does training equate to turning on the system or has the system actually been turned on in states outside of Kansas yet or are you proceeding through a system of training everybody and then sort of turning the system on all at once?

No, the system has been turned on and operating in Kansas. It’s, if you will, turned on and operating in Michigan and Indiana. So the system is working. It’s a matter of actually agency-by-agency personnel training them on how to navigate their way through the system, how it works and how to be efficient at it. So the system’s up and running. It’s simply a matter that each agency would then be trained on how to use the system and then start converting from our, what we call, CFC rate system, which was the system that was in place, and converting everything to that, to Diamond, plus write new business on Diamond.

Okay. And it sounds like you’ve begun training in Ohio, which is obviously your key state. And when do you expect that to be done by the end of the third quarter?

Yes, we do. Yes, it should be done by the end of the third quarter and then we’ll get into a variety of other states.

Okay, terrific. And one last quick question for Ken, the elevated expense ratio a little bit, the 3.2 percent that you sort of attributed to near-term IT investing, should we kind of expect that to continue for the next couple of quarters or was that sort of a one-time...

Stephan, that’s just part of the increase of the 3.2. The commissions are 1.6 points of that. Just the fact that we have written less business this year to date period versus last as far as increase in growth, that was about half a point, guarantee funds affected us about .3 of a point. The equipment and technology was .4.

I see, okay.

And so some of that, you know, besides the software systems, the fact that we are building these large systems, you know, we need things like hardware, servers, mainframe storage space. We also need different pieces of software that will help implement these systems on a quicker basis, identify problems, you know, when you’re installing these systems. So all that is part of it. It’s not, like I say, equipment and technology would just be .4 of that.

I understand. Okay. Terrific. Congratulations, nice quarter.

Our next question comes from the line of Paul Newsome of AG Edwards.

Two quick questions, one I want to know if I have this correct, when you sold the equities at the insurance to bring down the proportion of equities in the investment portfolio, then I think you had, as well, upstreamed some of the equities into the holding company from the subs, does that make your issues with the 1940 act a little bit worse by putting even more of a proportion of your invested assets, which were in equities up at the parent company versus the sub?

Paul, this is Ken. That did not aggravate that situation because they look at either corporate bonds or stocks in the total. So we replaced basically equities for bonds, kept the total basically the same. So the percentage basically did not change because of that transaction.

So what you’re doing there doesn’t have any effect on what’s going on with the investment act?

That’s correct. That is correct.

And then the second quick question I was hoping you could just say a few more things about the property, buying more property cat. Were the terms and conditions particularly attractive? And we’ve heard a couple of things today about a fair amount of competition on July renewals. Did you see that in your own purchasing?

We were just buying at a very high level, top layer. I would say maybe the price was a little higher than we would have anticipated, but it was not overly aggressive or anything. You know, it wasn’t overly overbearing charged for that coverage. But I think it did move up slightly over what we would have anticipated.

Paul, this is Jack. I think the July 1 renewals are a little different in pricing by the reinsurers than were the April 1 renewals. And that’s just my guess. But I think at the time we were buying, Ken’s description is quite accurate. But I think it’s two different market timeframes and I think we’re not able to give you much clearer direction of what the July 1 renewals really are for the reinsurance market.

You were buying in April?

We bought in April, that’s correct.

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

Just as a follow up to the combined ratio question on the commercial line segment, do you look at your various business lines within the commercial line sector, maybe if you’d just elaborate a little bit on the progress that you’re making in terms of reducing the loss and loss adjustment expenses ratios in those various segments. It’s looks like, in particular, workers compensation has seen a meaningful decline there. And, of course, x out any, you know, kind of cat noise or UMUIM noise as well.

We’re putting our notes together, Mike. I would just offer at the onset that work comp still needs attention. And I think when I say attention it’s not just pricing, it’s underwriting. And we’ll continue to work on that. We’ve got a couple of lines that are along that line. I would say our director and officer liability premiums and charges need more attention in the coming months and you’ve probably read about the competitive situation in DNO coverage in the last three years, volatility up and then maybe a little softness. In our market for DNO coverage we are a lot in the private market rather than the public owned corporations. And I think we’ll be able to work our way through on our typical accounts. I wonder if we’ll be able to write as many DNO’s policies as we would like, but I think we will find our way.

J.F., would you like to add?

I guess I would echo with Jack. You know, one of the lines that we always watch very closely is worker’s comp and while we had a good first six months, a reasonably good first six months, that’ll always be a line we’ll watch very closely and monitor the volatility there. I think all in all for the standard property and casualty coverage’s though, we’re pretty happy across the board with what we’re seeing, which doesn’t mean we don’t think that there’s still opportunity. We believe insurance to value issues on the property side still exist and that we can improve that particular issue. We still are asking our adjusters to submit to us what we call risk reports so that when they’re out handling claims and they see something that just doesn’t look quite right, our agents are anxious to hear from them and, so as good as it’s gotten, it doesn’t mean that there still aren’t accounts out there that may not be quite as good. We conduct renewal review meetings with agencies. Here in a week and a half we’ll be convening all of our field associates here in the home office. And we will be going through every single agency with all of the associates in the company that serve the agency, both internal underwriters and all the field staff, to make certain that in no one agency at all that we’re letting anything fall through the cracks.

Our loss control department in the company is expanding and that’s been a real bright spot for the company. And they make a significant contribution to helping policyholders with their loss issues. Jack mentioned in his remark, workers’ comp claim specialists and property claim specialists. So, as good as it is, we’re still approaching it that the quality of the account can continue to be refined. But I would say all in all that we’re pretty satisfied with what we’re seeing on the commercial property and casualty side.

And as far as any specific lines that are seeing more competition than others, would you point to anything or is it pretty much across the board?

I would say property driven accounts, that’s what’s really drawing a lot of attention.

Your next question comes from the line of David Sheusi with JP Morgan.

Jack, just a quick question, I was interested to here your thoughts or just a little bit more color in terms of your commentary on the agency appointments. If I have the numbers right you’re looking over -- I didn’t understand the timing and really the number and selection process and how you’re targeting on geography with the appointments of new agencies. So can you sit on that a little bit?

David, I’m glad to. And then I think J.F. probably should supplement what I would say because you’ve asked more than just one question. We have a good outlook that we can appoint maybe 40 agencies over the next by year-end. How productive they’ll be we’re not sure because these are the kind of appointments that you make to develop the relationship to agree on business understandings for insurance and then really try to make it effective two and three and four years from now. But those 40 agencies in the next six months we think we can appoint them into territories that won’t overlap our existing agency relationships. We think we can match that in. And that’s part of the art of agency appointments. And J.F.’s department does that quite well.

Then the addition of maybe 140 or 150 agents over the longer term, maybe two, three, four years out. Again, they won’t be productive at the time of appointment, but they’ll be getting together to know one another process. And this really secures Cincinnati Insurance in the years further out. It gives us the replenishment to our agency base. It gives us a stronger footprint from which to grow. These agencies will all be in our existing sales territories so that we won’t be going beyond what borders we know or already areas where we can handle claims and know the clientele. There’s always the opportunity of going into states that we are not active in currently. And we haven’t solved how to go into those states. We think we have some good opportunities, however, and these present territories and maybe J.F. -- maybe I’ve talked too much and J.F. I think can supplement beautifully on this one.

David, I think Jack covered it. Our geographic targeting. We’ve been in, the last new state we went into was Utah in 2000. And we are in the process now, because things have gone very well, the process of creating a second territory there. And with that will come probably I’m going to say six to seven new agency appointments. And for a relatively small population area, that’s pretty heavy. But I would say that geographically it’s spread throughout the country. The receptivity continues to be excellent for us in terms of visiting these agencies. I think in terms of what we’re looking for, as you might expect, we do not take a shotgun approach to appointing agencies and hope for the best. We take our time. We appoint agencies. We expect long-term to be writing 20, 30, maybe even 40 percent of an agent’s book of business. And we want to make sure that we’re profiling each other as well as we should.

So, over time, as Jack mentioned, we’ll have 150 more agencies over the next three years or so. We’re very happy with who’s interested in doing business with us and with the territory subdivision that we have been having over the last several years we think that we can accelerate the development of the relationship by having folks call on them with great frequency.

Just as a follow-up, just for perspective, how many agency appointments have you had to date?

To date we have...

How does that compare to last year as well?

We’re a little head of last year’s pace. Last year we appointed about 38 agencies, 36 agencies. So far year to date we’ve got 22 either appointed or about to make their visit in here, which is part of the appointment process. And they’re scheduled to come in the next couple weeks. We asked the fields -- we set a goal of 50 this year. We’ve asked the field force to complete that goal by September 30, just accelerate the activity to get that done. And I don’t think we’re going to miss it much. We probably should have all 50 appointed by the end of September.

And, as I said, that’ll be about 12 more than last year.

Your next question comes from the line of Meyer Shields [phonetic word] with Legg Mason.

Two quick questions, if I can, first of all, the spike in underwriting expenses and personal lines in the quarter is that all Diamond or mostly Diamond?

Meyer, no that’s not -- there’s some contingency profit in there, obviously, because some agents are being successful. The Diamond impact for the quarter was about a million dollars. So that would not have a major impact on the expense ratio.

Okay. Second issue, in terms of the competitive environment for commercial lines, is there any difference in price aggression by size of the account?

The larger accounts tend to attract the attention and that’s where we would see the anecdotal evidence of a big change in price. And I would say you’re looking at the 50,000 and higher range.

Great. Thank you.

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

Good afternoon, guys. Earlier in an answer to a question from Nancy Benacci, J.F. indicated that he felt that he saw greater interest in the three-year policies, that is a greater level of three-year policies being sold. And seemingly that’s counter intuitive because one would think that if the customer knew, if I’m the customer, and the agent knew that pricing was going down and that’s seemingly all other things being equal, why would you want a three-year policy?

Charlie, I don’t think across the board there is that perception out there. There are accounts that are attractive. I think what you find is that most people rely on their agent to provide them a stable marketplace for their accounts and to deal with the transaction once every three years versus once a year is an attractive prospect. Even if only, as we’ve talked in the past, 25 percent of that premium is actually guaranteed for the full three years. They know that the worker’s comp; the commercial umbrella and the auto will be annualized. It’s an attractive prospect to sit down with an agent and a policyholder and say let’s talk about the long-term. There aren’t any guarantees what’s going to happen over the next three years. What an agent can say to a policyholder is Cincinnati Insurance Company is a stable market. They do have a fair and competitive price. They handle their claims beautifully. They’re financially secure. They’ll make a commitment to you. And we’d like to talk to you about sitting down and writing your insurance for a three-year period. That’s the kind of tone that exists in a sale [inaudible]. There’s no question about it, some percent of the insurance buying marketplace are price shoppers, they take bids, they’re looking for the cheapest every day. And every so often we will end up on an account like that. But, generally speaking I think you’ll find that what people want most is just a good, stable, sound insurance program.

Thank you very much.

(Caller instructions).

Your next question comes from the line of John Keefe with Ferris, Baker Watts.

Congratulations on a very good quarter. Ken I believe you mentioned this number earlier, did you say that in the quarter you had liquidated $353 million of equity securities?

That’s correct.

Very good. And, secondly, concerning large losses, losses of a million dollars or more, that seems to have trended down from last year, but losses just below that have actually increased in frequency. Are there any trends there or is this just a number that typically bobs around from quarter to quarter?

This is Jim Benoski that number does jump around. It did trend up in the second quarter if you would compare it from the first quarter, but if you would compare it to the second quarter of ’03 it’s a pretty stable number. We had 114 of those claims in the second quarter of ’04, 110 in ’03 and the dollars are only a million dollars difference. So that number is pretty stable from a year ago. The first quarter it was down. We had a tremendous first quarter. But that number does jump around a little bit, just as the million dollar claims does also.

Very good. Thank you, gentlemen.

Your next question comes from the line of Nancy Benacci with Key McDonald [phonetic word].

Just a follow up regarding contingent commission levels, certainly that has impacted the combined ratio in the quarter, but again I think the agents are getting paid for quality business. Have you done anything to change the contingent commission program going forward or is it pretty much that you’ve had in place the last couple of years.

Nancy, it’s the exact same contract we’ve had, I guess, in place probably for the last 14 years. It provides a nice formula. It incentivizes the right things. From time to time we’ll take a look at the contracts and we’re doing that right now just to make sure that we can probably as much as anything make the calculation as easy and seamless as possible. But we’re very happy to have a fairly consistent approach in this area.

And if you could refresh my memory, is it a rolling three-year loss ratio that primary determines what the contingent number is?

That is a component of it. There’s a component that’s based on the current year’s profitability and then based on a three-year average profit you could actually double your pay out from 10 percent to 20 percent. And then we have based on growth and payment of accounts early, another 8 percent possibility. It’s a little tough for really anybody to compare when you talk about percentages because our definition of profit, that being, if you will, the income statement we create for each agency is a little different than our competitors as well. Needless to say, based on if you take a look at the overall and the aggregate, the percentages that we pay out as a part of our written premiums, or I should say, as part of commissions to agencies, standard commissions, plus profit sharing, tends to be on the high side, if you will, industry leading. And it provides ample motivation we think for agencies to be thinking long-term about the profitability in their agency.

Thanks very much.

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

Yes, I would like to thank everyone for joining us today. We see many positives in our industry and in our company in particular. The Cincinnati Insurance Companies are in great shape. We appreciate your interest. Thanks.

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