辛辛納提金融 (CINF) 2004 Q4 法說會逐字稿

Good afternoon. My name is Vonda and I will be your conference facilitator today. At this time I would like to welcome everyone to the Cincinnati Financial Corporation fourth quarter and full-year 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. (Operator Instructions). Thank you. You may begin your conference.

Thank you, Vonda. This is Heather Weitzel, Cincinnati Financial's Investor Relations Officer. Welcome to our fourth quarter conference call. If you need this quarter's release or financial supplements, please visit www.cinfin.com where all of the information related to the quarter can be found on the Investors page under Financials & Analysis. Or 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 Chairman and Chief Executive Officer, Jack Schiff, Jr. and Chief Financial Officer, Ken Stecher will give prepared remarks. Afterwards, we will open the call to 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 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 it's available on the Investors page of our website under Financials & Analysis. Statutory data is prepared in accordance with statutory accounting rules as defined by the National Association of Insurance Commissioners, the accounting practices and procedures manual, and therefore is not reconciled to GAAP.

With that, let me turn the call over to Jack.

Thank you, Heather. Our agents and our Company associates deserve tremendous thanks for the value and service they bring to policy holders and for the record results and favorable trends they are generating for shareholders. As a result of their efforts, we met or exceeded our performance goals for 2004 and look forward to achieving similar success in 2005. Results of the quarter were covered thoroughly in our release and I am going to leave some of the detail for Ken.

I'll come back later in the summary of a few items of interest, but wanted to jump right into 2 of the key topics that contributed to our expectations for 2005, our approach to the changing commercial lines market and our progress in personal lines insurance.

Turning first to commercial lines, we reported excellent results and are looking for another strong year in 2005. But the marketplace is changing. As we've seen in each of the last several quarters, competition continues to increase, particularly to attract new business. Careful underwriting remains the norm, while the level of competition varies market by market, aggressive pricing for higher quality accounts is becoming more common although carriers appear to be holding the line on terms and conditions. Cincinnati Insurance is continuing the efforts that have brought us where we are today, taking advantage of our local market presence.

Our field staff and agents continue with the help from underwriters working from our headquarters location to continue to conduct renewal reviews in agents offices. Our agents and field staff are personally inspecting risks. Agents are highlighting the real pluses of Cincinnati's 3-year policies, personal claim service, coverage packages, and high financial strength ratings. Agents value the local team of Cincinnati people who serve them and their clients.

In that context, our agents continue to tell us they can obtain renewal price increases in the low single digits for most quality smaller accounts. However, our agents are communicating that winning new business may require more pricing flexibility. In the fourth quarter we wrote $67 million in commercial lines new business, compared with $72 million in the fourth quarter of 2003. We have a strong appetite for new business as we look to help our agency succeed.

We intend to remain the carrier of choice for our agents' quality business. In each agency we have reiterated our interest in working together. Because we look at each account individually, we believe we have a decided advantage in determining where to be flexible on pricing. And our field marketing staff believes that they can use that advantage to attract new business. As they look for commercial lines new business to grow more quickly in 2005 than it did in 2004.

Today's release revisits our plans to continue subdividing marketing field territories, both to enhance service to our current agencies, and to create opportunities to appoint new agents. We see these steps all coming together to allow to us achieve mid-single-digit commercial lines written premium growth in 2005 as we look to exceed property casualty industry level growth over the long-term. According to recent early forecast, 2005 industry net-written premium growth now is estimated at 3.4 percent. Ken will talk about our combined ratio expectations, which are also positive.

Now turning to personal lines, where we are focusing most of our energies on 2 subjects, returning to profitability and deploying Diamond, our policy processing system for all 6 personal lines of business. Ken will talk about the profitability picture, although I will say that we're on track -- we're on the track we had projected.

Looking at the Diamond deployment, personal lines, agencies in Alabama, Indiana, Kansas, Michigan and Ohio are now using Diamond. These agencies represent almost 60 percent of our personal lines premium volume. We now have issued policies on the system with about $150 million of in-force premiums. In 2005 we plan to introduce Diamond in additional states. By the end of the year, we anticipate Diamond will be available in 13 states representing more than 90 percent of the total personal lines premium volume.

The emphasis on restoring profitability and the time spent on the deployment of Diamond have put pressure on our personal lines growth, particularly new business. By mid-year 2005 rate changes scheduled to become effective in many territories should position our personal lines products appropriately in the marketplace. At the same time, our personal lines retention rate remains near 90 percent, showing that current policy-holders recognize the value that their agents and our Company bring to the table. We expect to make head way and continue to see the personal lines business as an important component of our overall relationship with many of our agencies and their relationships with clients.

There are a few other items I wanted to touch on briefly before turning the call over to Ken. First, reinsurance provides important protection to our Company by allowing us to invest for long-term total return. We work closely with our reinsurance partners. This year's agreement renewed our longstanding relationships with three, American re, Swiss re, and G.E. Insurance Solutions, while bringing Partner re on as a new participant. At the same time we made some very minor changes on the treaties and anticipate about a 12 percent increase in seated premiums in 2005, primarily due to our growth.

Second, like the rest of the insurance industry, we continue to follow developments related to the New York probe of brokers. We regret the mistakes made by a few that have caused pain for so many. We've seen the National Association of Insurance Commissioners model regulation and think it's satisfactory. Although we have questions about the timing of required fee disclosures. While Cincinnati has not received any subpoenas, we have received information requests from a couple of departments of insurance that are serving all carriers in their states.

We are responding with full confidence that this Company and our appointed agent representatives have acted ethically and appropriately in our sales practices and our profit sharing contracts. We designed those items with the benefit of our policy-holders in mind. Further, we believe the independent agency system creates healthy competition in the marketplace where we operate. It inherently motivates local agents to give solid value to people who are their neighbors and their future client base.

Finally, we announced on Monday that Bud Stoneburner will be taking the helm of our Field Claims department. That area is uniquely structured with 750 field associates working out of their homes and assigned to agencies, not claims. Dean Dicke, who managed field claims and its reputation for the past 15 years recently retired. You heard me say before that our claims representatives and the service they give are our best advertising program. Bud has the experience and the drive to manage our professional staff and keep that high satisfaction level with our agents, policy-holders and claimants.

Now to get back to our outstanding results and outlook, Ken?

Thank you, Jack. It's a pleasure to speak with all of you today. Jack has taken you through the premium growth, our growth outlook and issues that affect it. I'll comment on the details of property casualty profitability, life, investments and the balance sheet, as well as specific targets for 2005. Overall, Property & Casualty profitability was excellent for the fourth quarter and the year, with the full year pretax underwriting profit more than doubling, $298 million. A handful of items were outside of what we would consider the normal range in terms of their impact on a full year combined ratio and I thought it would be useful to look at each.

First, the higher than anticipated level of catastrophe losses, which affected the full year combined by 5.1 percentage points breaking down to 3.4 points on the commercial lines combined and 9.7 points on the personal lines combined. In a similar vein, the reinsurance reinstatement premium contributed 4/10 of a point to the overall combined. Offsetting these 2 items was higher than normal favorable development, both in the reserve redundancy across the book of business and from the UM/UIM reserve release in the first quarter.

Similar to most insurers, we conduct our most thorough evaluation of reserves as of the end of the third quarter of each year. And as a result, the most significant refinements in reserves are implemented in the fourth quarter. Due to our reserving philosophy, this review has historically resulted in moderately redundant reserves and favorable development has reduced our combined ratio each year by approximately 2 percentage points, after taking into account the addition of the salvage and subrogation receivable in 2002. Modestly redundant reserves support the Company's business strategy to retain high financial strength ratings and to remain a market for agencies, business, and all market conditions.

In addition we now are seeing the benefits of the claims departments initiative begun in 2001 to establish higher initial case reserves on liability claims, better capturing the full claim cost and the period when the claim is reported. We intend to apply the same reserving philosophy going forward. In 2004 favorable development reduced the fourth quarter combined ratio by about 9.8 percentage points and the full-year ratio by about 5.6 percentage points from non-UM/UIM development.

As you might expect, the favorable development was much more significant for commercial lines than personal lines and more pronounced for some lines of business than for others, which I'll point out in a moment. For commercial lines this favorable development reduced the fourth quarter combined by about 12.3 points, and the full-year ratio by about 8.5 points. For personal lines, development reduced the ratio by 2.8 points in the fourth quarter, and 1.9 points for the full year.

We've talked all year long about the UM/UIM reserve release, but to summarize, it lowered the overall combined by about 1.1 percentage points, primarily through a 1.5 percentage point reduction in the commercial lines combined. So looking at full-year commercial line results, you will see a 9.5 percentage point improvement in the loss and loss expense ratio. The items I just discussed accounted for most of that improvement. The remainder is due to continued application of our broad-based underwriting and reunderwriting strategies, both at headquarters and in the field.

The details of the commercial lines of business are in the financial supplement on page 26. A couple of observations. As you compare the line of business stated to other periods, keep in mind that commercial auto and other liability results for both the fourth quarter of 2003 and the first quarter of 2004 included a benefit from the UM/UIM reserve release. Commercial multi-peril continued its year-over-year improvement due to the reunderwriting efforts of the past several years. Even though 2004 catastrophe losses were slightly higher than 2003, and we strengthened some liability reserves in this business line.

Workers' Comp is another line where we strengthened reserves due to trends in medical costs. Nonetheless, for the year, results were satisfactory. Commercial auto continued to generate strong results, benefiting from rate increases, favorable development, and moderately -- moderating industry-wide severity and frequency trends. For the other liability line, favorable developments serve to offset current accident year activity in the fourth quarter.

Since this line includes umbrellas, it tends to fluctuate with the large loss trends, which were down this year compared with last. As a result, the fourth quarter and full-year loss and loss expense ratios for other liability were unusually low. The commercial lines combined ratio includes -- improved slightly, improved less rapidly than the loss and loss expense ratio primarily because of higher commissions in 2004 and the softer recovery in 2003.

Now looking at full-year personal lines results, as we described in the release, the loss and loss expense ratio, excluding catastrophes improved by 4.4 percentage points. This was due to improved performance in both the personal auto and homeowner lines. This improvement did not translate into a lower full-year combined ratio for 3 primary reasons. First, a 2.4 percentage point increase in the catastrophe loss ratio. Second, the reinsurance reinstatement premium which had a 5/10 of a percent effect on the full-year combined ratio. And thirdly, an unfavorable expense ratio comparison because of the software recovery in 2003, and expensing of Diamond cost in 2004.

With the system alive, we are no longer capitalizing Diamond development. However, we continue to invest in new states and upgrades to enhance performance. In addition, the expense ratio was affected by continued refinements in our cost allocation processes. Also personal lines benefited proportionately less from the favorable development in the UM/UIM reserve release. We are confident that personal lines will return to profitability in 2005, assuming catastrophe losses are in a normal range as we look for continued loss ratio improvement in homeowner and steady performance in personal auto.

Looking at homeowner in some more detail, the full-year loss and loss expense ratio, excluding catastrophes was 69.3 percent and remains on the path we have been projecting. It improved from 72.8 percent in 2003. While substantial improvement is still required, we continue to work through the book of 3-year homeowner policies to bring premiums more in line with exposures, through the rate and policy terms and conditions changes were implemented over the past 18 months. We see this line returning to profitability in 2006 assuming catastrophe losses for the homeowners line are in the 17 percent range.

Turning to several expense items. First our contingent or profit sharing commissions. We calculate these commissions on the profitability of an agent's aggregate book of business, taking into account longer term profit with a percentage for prompt payment of premiums and other criteria. From 1998 through 2002 these commissions average approximately 1 point on the combined as the Company incurred underwriting losses.

In 2003 the profit sharing commission expense contributed about 2 points to the combined, reflecting the underwriting profit of 117 million before the recovery. In 2004 profit sharing commission expense contributed about 3.5 percentage points, reflecting the substantial growth in the underwriting profit of 298 million.

Second, for the major technology initiatives still in development, specifically our future commercial processing system and phase II of our new claims system. We capitalize an additional 2.6 million during the fourth quarter. Technology depreciation in the quarter had a 2/10 of a percentage point impact on the combined ratio, and less than a $0.01 impact on earnings per share. For the full year, the impact on the combined was less than 3/10 of a percentage point with the per share impact at about $0.03.

Briefly, the life insurance segment contributed 38 million or $0.22 to full year earnings compared with 22 million or $0.13 in 2003. The [inaudible] decline in the fourth quarter was primarily due to a reclassification that had no effect on earnings. The reclassification was identified through the Section 404 internal controls evaluation process. We are continuing to look at term life reinsurance options and have mortality covered under an excess over-retention program. We are evaluating additional options that will moderate the reserve strain to the statutory income statement.

Now turning to investments. Pretax investment income grew 7.3 percent in the fourth quarter as we continued to benefit from dividend increases by companies in the common stock portfolio, higher interest income from the cash flow invested in bonds, and the current allocation of new investment dollars to fixed income. Our investment committee and investment department continued to evaluate potential equity purchases and anticipate the return to our historical allocation sometime by the end of the first half of 2005.

Our equity investing strategy has been integral to our Company's long-term success and book value growth. Our current holdings, which we closely monitor and evaluate, are making a significant contribution to current income through dividends and dividend increases and they hold the potential for future appreciation.

The realized gain for the quarter was primarily due to FAS 133 adjustments and gains from sales of previously impaired convertible securities. Impairments for the fourth quarter were minimal. With the increasing quality of the bond portfolio overall, impairments going forward should continue to be minimal. Book value at December 31 was $37.38 compared with $36.85 at year end 2003, primarily reflecting the strong earnings and equity portfolio market value fluctuations.

We used $43 million for CFC stock repurchases this quarter, buying 1 million shares in a private transaction. We will continue to look for appropriate times to repurchase CFC shares while investing in fixed income securities for another quarter or 2. At year end we had $306 million in cash on the balance sheet after making approximately $310 million in net-new investments during the quarter. The $368 million net proceeds for the debt offering in November were used to pay off our credit lines and are available to fund our headquarters expansion and general corporate purposes.

That was a Rule 144 offering. We are waiting a go ahead from the SEC under a registration statement for the exchange offer on those notes. We hope to have that transaction completed in the next several months for the bondholders convenience. The exchange won't change anything for us. Following the offering, debt was $791 million at year end, the incremental interest expense over 2004 will be about $0.05 per share.

As a quick update on the few items we've been measuring lately, for the Property & Casualty companies, the ratio of common stock to statutory surplus was 103.5 percent at year end. The release noted a 99.4 percent ratio which is for the Cincinnati Insurance Company only. On the Investment Company Act, our application for an exemptive order is still in the hands of the SEC and there is nothing new to report. The ratio of parent company investment assets to the total parent company assets was 36.3 percent at year-end 2004 versus 58.5 percent a year ago. Also, we will begin to expense options this year. We anticipate the impact on net income will be about a penny less than the pro forma $0.06 per share we reported each of the past several years.

Before I turn the call back to Jack, let me quickly summarize the comments in the release regarding our performance outlook. As Jack discussed, conditions in the commercial lines market are changing and in that market our agents and field associates are focusing on balancing growth and profitability. Meanwhile, in personal lines, our agents and associates are focused on full Diamond deployment in our rate structure and profitability. With the mid-single-digit growth expectations for both commercial lines and personal lines, we are looking for full-year Property & Casualty written premium growth in the 4 percent to 6 percent range.

In a quick note here, the premium estimate adjustment that has made our written premiums somewhat difficult to compare on occasion, have less than a 1 percentage point impact on fourth quarter or full-year 2004 written premium growth. However, when comparing first and second quarter 2005 written premium growth, we are anticipating the impact will be greater than 1 percent. On pages 23, 24 and 25 in the supplement, you can see how the adjustment affected 2004 and why comparisons in the first 2 quarters of 2005 may not be helpful.

Back to the outlook. We are looking for a 2005 GAAP combine ratio in the range of 91 percent or about 1 point higher than 2004, assuming catastrophe losses are about 3.5 percentage points on the combined. Our target does presume that favorable loss development will be more in line with our historical levels and, of course, we won't have the help we had in 2004 from the UM/UIM reserve release.

For commercial lines we anticipate maintaining the positive underlying improvements in profitability, but don't believe favorable reserve development will contribute as much as it did in 2004. As a result, we are estimating a 2005 commercial lines combined ratio in the range of 90 percent. For personal lines we believe the combined ratio for the year will be in the range of 95 percent. We are estimating first quarter 2005 catastrophe losses of about 5 million for January storms and affected policy holders in Iowa, Illinois, Indiana, Kansas, Missouri, Ohio, and Pennsylvania.

Finally, we believe that investment income growth will be in the range of 5 to 6 percent this year. Taken together these anticipated results would make 2005 another good year. With the steady growth and industry-leading profitability, it is our long-term objective.

Jack, back to you.

Thank you, Ken. I started this call by thanking our independent agents and Company associates for their efforts to give policy-holders high quality insurance programs and services, thus building the long-term future of our Company. I want to conclude in the same way. Because I simply cannot say enough about their dedication and focus and professionalism. As shareholders, we benefit from their ongoing efforts with 2004 net income up 56 percent, operating income on a comparable basis rising 36 percent, and dividends paid gaining 10.5 percent. 2004 was another record year and 2005 and beyond holds great promise.

Before we go to questions I would like to also mention that Jim Benoski our Vice Chairman are present with me in the room today and J.F. Scherer, Senior Vice President, Sales and Marketing to assist with your answers. Vonda, I think we are ready for questions.

(Operator Instructions). Your first question comes from Mike Dion with Sandler O'Neill.

Good afternoon. Just a couple of questions. First off concerning the guidance for 2005, to what extent does the guidance assume traction from additional field underwriters, the subdividing of the field underwriters, as well as the additional new agencies? And then secondly, a question on the favorable development and if I heard you at the end, Ken, correctly, you indicated that you didn't expect to see as much favorable development in 2005. Could you just elaborate on that a bit? I would certainly appreciate that in light of the changes that you made in 2001 that have -- you've seen some favorable development there.

Thanks for the questions. May I suggest that Ken Stecher take the second question and then go to J.F. Scherer for the new territories and growth projection.

Absolutely.

Thanks.

Okay, Mike, throughout 2004 we have 5.6 percent development from prior years. Historically, we've been in the range of about 2 percent. We believe that we will return to that range. So looking at those 2, you could say that our development will be about half of what it was in 2004 if you exclude the benefit of the UM/UIM release that was done in the first quarter. So we expect with our reserving philosophies we will continue to have favorable development, just not to the extent that we had this year.

Okay, fair enough. Thank you.

Mike, as far as new territories are concerned, new agency appointments are concerned, last year we did complete 5 new territory splits and we expect contribution there. This year we have 8 on the drawing boards, including activation of the State of Delaware and in Delaware we'll have, not only Delaware agents, as you can imagine it's somewhat of a smaller area but also a few additional agencies in Maryland. That territory will be staffed March the 1st this year. We subdivided the Chicago area, which we think has a lot of potential for us. That will be staffed March the 1st. Birmingham, Alabama, we've had a territory down there. That state has been a bit challenging from a legal environment over the years and we had less of an appetite to grow down there. We now have a lot more comfort in Alabama and we have an associate ready to go down there the 1st of April.

Bloomington, Indiana, is a relatively rural area, as you know, but we also think we have some potential there and so we've got an individual ready to go in May. So we are real optimistic about all of that already. Utah will be subdivided. We are interviewing an individual there. And then we are looking in Michigan, 2 splits in Tennessee as well. So as far as actually pinning down specifically how much of that particular growth rate comes from any particular territory, it's very difficult to do. All I can tell you is that we are very satisfied with the territory splits that we've had. We are especially satisfied with the individuals we were able to secure to send out to those territories and really hope to have most of the territory subdivision accomplished by mid-year.

Now as far as new agency appointments are concerned, last year we had 48 new relationships that we established, and we look to appoint another 50 or so this year in 2005 and another 50 in 2006. And that's going, once again, very well. So in terms of just getting the horsepower out there to the agencies that represent us and bringing all the field associates together that will call on all those agencies, we are very satisfied with the results we are getting.

So if I'm hearing you correctly, it sounds like in terms of your top-line growth projections for 2005 you are not really counting on at least the subdivisions to really supply a lot of that as far as the outlook goes, but certainly the potential is there for outperformance from those subdivisions.

We think so, yes, that's right.

Maybe just a quick follow up, if you could just characterize the overall marketplace. We've heard on a couple of conference calls this quarter about how the competition for new business is much more intense than it has been in prior quarters. And what is Cincinnati Financial doing with respect to that, some of it's new business goals, as well as retaining some of its more profitable accounts?

We found that to be the case in the fourth quarter, the kind of pricing that we felt that would generally secure the account ramped up a bit. I will say that I don't think it's -- we haven't seen a lot of examples of irrational underwriting or irrational pricing, the thing that everybody I think is most concerned about. Very good accounts are attracting a crowd and it requires good pricing. And we think we have the room to do that. We mentioned the territory subdivisions and agency appointments. We are concentrating on a number of areas, more property intensive accounts for us, some light manufacturing are some areas that we've been getting indications we can do a little bit better at. Our loss control services continue to ramp up and so agencies comfort level of putting somewhat more complex accounts with us is improving things.

One of the things that we have to keep in mind, though, is that while we do think we have an opportunity to write more new business in commercial lines particularly, we also want to make sure that we are writing better business. We are fortifying one of the things that we think helped improve our loss ratio over the last couple of years and that's by bringing all the field associates together for what we call renewal review meetings in agencies where we formalize the process in the field of redoing all the businesses currently on the books. That process also opens the opportunity for a dialogue relative to new business opportunities.

So a lot going on there as far as opportunities. Jack mentioned in his remarks that in the -- on the personal lines side the Diamond deployment is going very well. The learning curve that's associated with that, most especially this year in some of our heavier states, Indiana, Michigan, and Ohio, will be behind us, fine-tuning of rates that will allow to us continue to be a good market for business will have been accomplished as well. So we are looking for an improvement in the first line side in terms of new business.

Great. Thank you very much.

Your next question comes from Stephan Petersen with Cochran, Caronia Securities.

Good afternoon. Ken, I was wondering if building on Michael's question if you could kind of review the -- re-review the positive development particularly in other liability? It looks like that's where the bulk of the positive development took place. And if you could just run through those numbers again for me I'd appreciate it?

Sure, Stephan. That is the umbrella line and the other liability line is where more of the favorable development did occur. What we are seeing is that the, for the quarter, the fourth quarter, the other liability development was about 7.9 points of the combined improvement. For the year it's about 4.5 points. It's basically going back and seeing the benefit of the prior year's activity, looking at the -- as we said in my comments, the third quarter results, the actuary is kind of used to go back and look at how things are developing and we are looking at the prior year loss ratios were trending downward. And so that resulted in the release of the reserves for the prior accident years, basically for the umbrella line was the biggest item there.

Was there -- in any of the other reporting segments was there a close second in terms of positive development?

Second would have been commercial auto which is about 1.8 points for the quarter. I will say there was some offsetting development, as I mentioned, on Workers' Compensation and commercial multi-peril. Those offset those a little bit.

Just another quick question to follow up on the equity investing kind of going forward. I'm trying to figure out if sort of the lack of additional investments in equities this quarter was a policy change temporarily or was that just a function of not seeing opportunities in the market?

Basically, we're just trying to get our balance sheet -- not the balance sheet in orders per se but getting through the percentages under the 100 percent target that we had established, the surplus and the Property & Casualty group is growing so, therefore, I think the opportunity will represent itself in the second half of the year. On the parent company side where a lot of the equities did reside, we were working towards getting below the 40 percent threshold, and now that we have transferred the fifth third shares and we were well below the 36 -- or down -- well below 40 percent at the 36.3 percent level, I believe now as cash flow becomes available we will be able to look at additional equities as Cincinnati Financial itself.

Terrific. I just needed some clarification there. Thank you very much.

You're welcome.

Your next question comes from Kelly Nash with KeyBanc Capital Markets.

Good afternoon. A couple of questions. First, regarding your mid-single-digit premium forecast for '05, how much of this is relative to rate versus a policy count.

Kelly, I think that's going to be a tough one to determine. I think rate will be less part of it and policy count has been declining, but that also reflects that we've been writing accounts that just are a larger number of auto schedules, sales and other factors that affect the overall premium. Maybe J.F. could go into better detail on what he expects from these areas.

Kelly, I think Jack really summed it up pretty well. What we see out there in the marketplace where we are hitting a bit of a stride is in the area of larger accounts and our definition of large would be 10,000 in premium to let's say, 100,000 to 200,000. We play in that ballpark, we are doing a better job in that area. So we are writing fewer policies, but the policies we are writing are larger in premium, which reflects what Jack said about the fact that they have greater exposures.

And what are your expectations in terms of retention going into '05?

Well, in the personal line side, retention has been hovering around the 90 percent range. On the commercial lines side we've been slightly less than that, but what we have found though is that the number of accounts that we've not renewed because of for underwriting reasons has started to let up historically, we've operated around the 90 percent range. I think you're aware of the fact that we have used the 3-year policy term to a real strong advantage in our Company. That right now is just as strong an advantage as it ever has been. So the fact that really only a third of policies that are on the books right now will come up for renewal also aids in the retention. We are very comfortable with our retention levels both in personal and commercial lines. We have seen no trends whatsoever that alarm us there.

Then regarding in the first quarter it looks like you are expecting an impact from a $22 million reserve increase. Is that included in your guidance and could you provide a little bit more color on that?

Kelly, I will answer the part on the -- it would be included in the guidance. I mean, it's a large unusual loss. However, I think when you spread it over the year the impact on the combined would be less than 1 point and when we are talking similarly in the beginning of the year process I think from where I sit it is included in the 91 point guidance that we've given.

Okay. And then could you provide maybe a little bit more color around exactly what that incorporates?

Kelly, this is Jim Benoski. As far as loss a manufacturing plant in Kentucky and the reinsurance, property reinsurance has a $25 million limit. We had lost some facultative insurance but it was not sufficient to cover the entire loss.

Anything unusual in the either large losses or loss cost trends that you are seeing across the board?

Nothing that would jump out at me, Kelly, no.

Okay. Then finally, is there a metric that we can track to follow the productivity of the agencies on the life side, for example, the number of agencies that are issuing life policies or anything along those lines?

Kelly, on our life company just to give you a little bit of flavor there, we receive about 75 percent of our premiums from the Property & Casualty agencies that represent our Company and that would be nearly all of the 980. And 90 percent of those agencies produce something with us. Obviously, some more than others but we consider it a success that we've had such great penetration there. We also have 300 life-only brokers that are, reside not only in active Property & Casualty states but also some states where we are not active on the P&C side.

One of the areas that we promote pretty heavily is worksite marketing of the sale of life insurance and on the Property & Casualty side 62 percent of our agencies have at least 1 account there. You know, we are very upbeat about our prospects on the life insurance side. As our agencies continue to grow larger, they are merging, they have more capital to invest in other avenues of income within the agencies and while we would be the first to say that 10, 15 years ago just an impossible task to right life insurance in Property & Casualty agencies, those agencies are now diversifying and we think there's a lot of potential there.

The results of the life company have been excellent on the worksite, first-year premium up 7 percent, terms up 8.8 percent, universal life up 12.9 percent, our ap [ph] count in the fourth quarter was up 4.5 percent. These are all trends that you don't find in other life companies. So we are very confident in the approach we are taking and we think we can continue to make good progress not only in our Property & Casualty agencies but in life insurance in general.

Just to clarify the 62 percent regarding the worksite marketing, how does that compare with maybe a year or a couple of years ago just to get a sense of the improvement there?

You know what, I would be making a stab at it, but I would say probably 2 or 3 years ago it might have been in the 50 percent range.

Great. Thank you very much.

Your next question comes from Ron Frank with Smith Barney.

Yes, I had 2 things. One is I guess for Ken. Ken, the personal lines, personal auto loss ratio X CAT surged in the fourth quarter and the homeowner dropped very noticeably and the same thing happened last year fourth quarter versus third. And I was wondering if there is any quirk in the way you account for that business or what have you that I am seeing there or if it's just a coincidence?

And more broadly I guess a strategic question. You mentioned in the press release and in your own remarks on the call the greater need for flexibility on new business in terms of price and your confidence that you could identify the accounts where you had the room. To play devil's advocate for a minute, I can't help but remember that that's sort of how you got into hot water in commercial a few years ago that competitors were letting go of a lot of business you felt you could underwrite it better and select out the good risks from the bad and ended up getting hurt. I'm wondering how as you sharpen the pencil on new business this time around you are confident that you are going to stay off that slippery slope?

Ron, I will answer your question first on the personal auto. From where I see I think it's just basically coincidence. I don't see anything in the numbers that would point to anything jumping up that would increase the loss ratio or loss expense ratio in the fourth quarter by itself like.

And likewise for the opposite trend in homeowners?.

I believe so, yes.

Okay.

Ron, relative to the new business and the flexibility I guess I would take exception a little bit about getting hurt a few years ago. Our commercial lines loss ratio for example held out very nicely. There were a couple of things that happened back several years ago that I think maxed that, one of which would be the UM/UIM, and also our automation write off. As a general statement we outperformed the market significantly there.

Oh, yes, I didn't mean to misspeak, J.F., I'm sorry. What I meant was -- maybe it was the wrong way of putting it, but your results weren't so much disappointing relative to the industry but relative to your own history, you yourselves, weren't satisfied with them and talked about implementing various corrective measures at the time.

I follow you there. And you're right, no, we weren't satisfied internally. I think in terms of how we feel right now, I mentioned the fact that it's subdivided territories, more people in the field, clearer communication I think with our agencies, renewal reviews, more adjusters involved in taking a look at accounts that we write and discussing the accounts that we might like to write. Loss control services that have been improved and folks out in the field that team up with our field marketing underwriters to go out, take a look at accounts. I think all contribute I think to our ability to, if you will, differentiate the good from the average.

So it sounds like a lot of the confidence arises from just for lack of, as a risk of oversimplifying the feeling like you just got overall more touch on the business now maybe than a few years ago.

I think so. I think without question everybody is feeling great about the results that we are getting in that particular line. Everybody has had a hand in it and we know we just have to continue to be as thorough as we have been.

If I could just follow up and ask you for one other observation. A lot of people are talking about what might be called a softer landing for the cycle this time and there are all kinds of reasons given, low interest rates, rating agencies vigilance, market failures, et cetera. You've seen a lot in the industry. As now that we are about a year or 2 depending on how you define it into the next soft market, how does it look to you? Does it smell like previous cycles, does it smell like it could be a little different?

Ron, I guess we have a third of our field reps in tonight for a meeting just to talk with them about what's going on. I really think what you described about softer landing seems to be what we're seeing. There is an awful lot of war stories that you hear out there that someone got surprised by an aggressive quote and then they argue from the specific to the general. One scary story means that there's a lot of crazy stuff going on out there. That's just not what we are hearing.

Sure. From time to time you hear of something particularly aggressive going on, but from what we are hearing mostly is that our agencies on renewals with us are guiding us to a low single-digit increase, which would not imply a lack of confidence either on our agents part and consequently on our part that we can't deliver some stable pricing. We still see good underwriting by and large.

Where we see the aggressive pricing on our truly excellent accounts. So I can't say that we are seeing anything that would give you the feeling that the bottom is going to drop out of this. I think by and large what we are seeing is that there are a lot of good companies out there still paying attention to underwriting, identifying very good accounts and concentrating on them. And that's, I don't think that portends really a crisis in our view.

Okay. Great. Thanks very much.

And, Ron, if I could just add, just to give a little more thought to your question, there was in the fourth quarter this year there was a little bit of favorable development in the homeowner line. I can't give you a comparison to fourth quarter last year. But there is about a little less than 4 points favorable development in the fourth quarter this year.

Okay. Thanks again.

Your next question comes from John Keith with Ferris, Baker, Watts.

Good afternoon. Excellent quarter. Most of my questions have been asked, but I would like to get back to something that Jack said at the start. Jack, you mentioned the Partner re is now on your catastrophe CAT program. Who did partner replace? That's a 1/1 program, I believe, is that right?

That's right, John, it's a January 1 inception date. We've been operating with only 3 members on our treaties for the last 2 years and we are glad to bring in Partner. That brings in 4. We've historically, if you go away back, have had 5. There is room for 5, but at this point we are not looking to add a fifth partner.

Jack, can you talk about pricing in terms and conditions and how the renewal negotiation period went?

I think the renewals for our reinsurance went satisfactorily. I think maybe Jim Benoski really is the person to talk about it. As he's putting his thoughts together, maybe I should just comment that we had a rough year on claims. And one of the topics that they always talk about in Property & Casualty is what the market is doing, what are the exposures. Well, those are accurate. However, we had a rough year on claims. So we have a little bit in our renewals that add some to our cost. I think we adequately described a 12 percent increase in our premium sessions this year coming from a variety of things, but I think that's the bottom line increase. We are not at all upset about it. It's not a 12 percent increase and it's certainly not across the board.

I think the larger part of our premiums go into our working treaties. That's where the big money goes. We rely on those partners, on those 4 organizations to help us out for the long-term, not 2 or 3 years, but I'm looking out 20 years, we have confidence in their credit ratings, their people, their capital base. We think they are strong for our Company. I probably rambled into the answer. Maybe Jim can be a little more specific in our January 1 renewals.

John, you mentioned Partner re being on the CAT. They've been on the CAT treaty for quite a while. They came on the P&C treaty 1/1 of '05. And they are sharing in a lesser percentage than the other 3, but they are now a partner with us. The property losses on the P&C treaty were up and higher than the reinsurers would like and obviously much higher than we would like. So the price increase was driven more on the P&C treaty by the property. Also there is an increase in the seated premium. And that added to the cost also.

And that 12 percent that Jack mentioned, well, there are other things that are involved. It's the change in retention on both the property treaty and also on the CAT treaty. We took a little bit more -- a little bit more retention ourselves on the P&C treaty. We had the reinsurers accept a little more on the CAT treaty and also we've got an additional layer of coverage on the CAT treaty.

Okay. Very good. Thank you.

Your next question comes from Meyer Shields with Legg Mason.

A quick question, first of all, the combined ratio guidance for 2005, I'm assuming that that also includes the options expense?

The combined ratio would not be impacted by the option expense. That will be recorded at the parent company level. So that will be a Cincinnati Financial, a parent company adjustment.

Second question, within the life unit there seems to have been a fairly dramatic increase in commissions and other operating expense when compared to net earned premium . Am I looking at that correctly, and if so, is there a anything important driving that?

I think from a commission point of view probably is the one that's driving it the most and that's basically driven by the fact that annuity commissions have increased 1.1 million over the prior year. The life rise in term commissions were 14.5 million, an increase of 1.2 million from the prior year. So I think those are the 2 big increases. The operating expenses were down slightly. It does get a little bit complicated when you look at the -- you throw in the deferred acquisition cost. But on the cost like the commissions and the expenses there is not a lot of change there. I think for the most part the expenses are well under control.

Great. Thank you very much.

(Operator Instructions). You do have a follow-up question from Stephan Petersen from Cochran, Caronia Securities.

Ken, just real quick, and I know you don't release net-written premium by segment, but looking at the homeowners line I'm trying to gauge where you stand in terms of the movement from 3-year to 1-year policies. Could you hazard a guess in terms of the net-written premium was percentage of the homeowners book would have incepted in 2004?

Stephan, I'm not sure. J.F. just said he thinks maybe about 2/3.

So you are well on your way. Okay. Terrific. Thank you.

I think at the end of this year we are going to be well on our way and that's one of the reasons why we think, we believe that 2006 we will return to profitability on that line.

Terrific. Thank you.

One thing, Stephan, on that, it takes 3 years to get the rate changes. Then it takes another year to earn them. So it really is a long, patient process that we are looking at.

Absolutely. I just kind of wanted to know kind of when we could start thinking about the potential earnings boost heading into later this year or early next. So thank you.

Thanks.

Your next question comes from Michael Phillips with J.P. Morgan.

Michael?

Good afternoon. Everybody can hear me?

Hello, Michael.

Thanks, a quick question on your share repurchase. I see you stepped it up quite a bit in the fourth quarter. Just wanted to know if you could add any thoughts on your plans for that in the '05 year?

Mike, this is Ken Stecher, I believe we will continue to follow the policy that we have. That was an unusual transaction where we had the opportunity to do a private transaction for 1 million shares. We do want to continue to the buy back program. We are interested in returning cash back to shareholders, that's one way to do it, obviously. We do want to continue to buy a certain number of shares each quarter at a minimum to offset any dilutive effects that may be there from exercise of options and so on.

I think the other thing in returning cash to shareholders, our dividend policy has been to increase dividends for 44 straight years. Most years the increase has been over 10 percent. So I look at both of those thing as returning value to shareholders. And that is a program that's been very well-received. I think it's a good way to help the shareholders share in the profitability of the Company. But we would look at any kind of blocks of CFC stock that would become available at the -- each individual time. We would kind of look at our book value as we said before and then make a decision on whether to purchase shares.

Great. Thank a lot.

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

Ladies and gentlemen, you are just lucky you don't write automobile insurance in California. It's 75 degrees and when I came in this morning all these beautiful college co-eds are driving their convertibles with the top down and the distraction is unbelievable. I would like to ask a general wonderful question. You have a great gentlemen that works for you by the name of Ken Miller and maybe you could report on his wonderful progress.

Fred, Ken is doing great. He's coming in a little longer each day. He comes in about 3 to 4 days a week. He and I have conversations when he's here. We talk about investment strategy and policies. I think he is getting closer to coming back on a more full-time basis. So I think right now the progress is excellent.

That's beautiful. I know you've got some wonderful people in the department that are very well-trained and very competent. I congratulate you on the gift you give people to go to the highest level of their life. Do you have any comment on your wonderful investment counseling business and its direction any more.

Fred, I think we continue to try to sign up new accounts. We have some good objectives for the coming year. We will see how those play out. At the end of the year we had 60 accounts. We're managing about $870 million.

Beautiful.

And I will just add the 3 gentlemen you are referring to, I obviously count on them a lot to run the various segments of the investment department, the bonds, the stocks, the convertibles. I couldn't be overseeing that department without their help.

They are gracious people. Don't forget the ladies in that department, too. They do a great job of supporting them.

The whole department does a great job.

The whole firm does a great job. Thank you for the report on Ken. I really appreciate it.

Thank you, Fred.

You're welcome.

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

Thank you all for joining us today, we see many positives for the Cincinnati Insurance Company. We appreciate your interest. Good bye.

This concludes today's Cincinnati Financial Corporation fourth quarter and full-year 2004 conference call. You may now disconnect.