辛辛納提金融 (CINF) 2005 Q1 法說會逐字稿

Good afternoon. My name is Missy, and I will be your conference facilitator. I would like to welcome everyone to the Cincinnati Financial corporation first quarter 2005 conference call. [OPERATOR INSTRUCTIONS] Thank you. Ms. Wietzel, you may begin your conference.

Thank you, Missy. Hello. This is Heather Wietzel, Cincinnati Financial's Investor Relations Officer. Welcome to our first quarter conference call. If you need the release, financial supplements or other information on quarterly results, please visit www.cinfin.com, where all of the information related to the quarter can be found on the investor page under financials and analysis. If 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, after which we will open the call for questions. Before I turn the call over to Jack, please note that some of the matters to be discussed today are forward-looking. These forward-looking statements involve some risks and uncertainties. With respect to these risks and uncertainties, we direct your attention to news releases and 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, again under financials and analysis. 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, we wanted to give everyone a heads-up that we're going to need to change our release dates for the second and third quarters this year. The additional steps that are being required under Section 404 of Sarbanes-Oxley have made it very difficult to pull together all the details as quickly as we have in the past. We anticipate scheduling the release phone call closer to 30 days after quarter end, rather than the 20 days we had planned. We'll also, at the same time, be looking at scheduling the call at 11:00 a.m. rather than 2:30. By May 15th, we'll post the new dates to the second and third quarter releases and the times for the calls on our website. And anyone can contact me with questions in the meantime.

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

Thank you, Heather. Good afternoon to all of you and thank you for taking your time today to hear about first quarter developments at Cincinnati Financial.

I'm pleased to be back in Cincinnati after wrapping up our annual spring sales meetings. They take us, in pretty rapid succession, to 24 cities across 31 states, where we actively market property casualty insurance. At these events, our sales travel team probably spends as much time listening to agents as speaking to them. We hear, up-close and in person, good news and, sometimes, bad news about how our actions are affecting customers and all of that energizes us to follow up with good business decisions.

Of course, we also take the opportunity to ask them, in person, for more of their good business. And we have returned to Cincinnati more confident than ever that Cincinnati can work together with our agents to make 2005 a successful year for all of us. Results of the quarter were covered thoroughly in our release and I'm going to give some of the details -- leave some of the detail for Ken.

I'll cover the marketplace for commercial lines and personal lines. Let me just point out that operating earnings came in at a strong $0.78 per share. That's within just a penny of last year's $0.79, which included $0.11 from the release of uninsured/underinsured motorist reserves.

Turning to commercial lines, first quarter profitability was outstanding. We continue to anticipate that 2005 will be another industry-leading year for the commercial lines segment. We're achieving this strong profitability because of front-line underwriting of our agents and field and headquarters associates. The message has come through, loud and clear, from these folks that competition is strong, particularly to attract new business.

From the reports we've heard, careful underwriting remains the norm. So, while aggressive pricing for higher quality accounts is becoming more common, in general, carriers appear to be holding the line on terms and conditions. First quarter results confirm that we have been maintaining our pricing discipline on both renewals and new business, even if the short-term cost is slightly slower growth.

Our agents continue bring -- to bring us good business opportunities and Cincinnati Insurance continues the underwriting efforts that have brought to us where we are today. In that context, we need -- we now need to use more credits to retain renewals. The larger the account, the higher the credits.

On the smaller accounts, we are seeing some opportunities to get small increases. And clearly, winning new business is requiring more pricing flexibility. We continue to have a strong appetite for new business at appropriate prices, as we look to help our agencies succeed by balancing growth with profitability. Because we look at each account individually, we believe we have a decided advantage in determining where and how to be flexible on pricing.

In the first quarter we wrote $63 million in commercial premiums, commercial lines new business, compared with $67 million in the first quarter of 2004 and $53 million in 2003. Today's release revisits our plan to continue subdividing marketing field territory, giving our field associates more time to look at each account and improving service for our current agencies. It also creates opportunities to appoint new agencies. As we hold the line on underwriting, we now see commercial lines written premium growth of 3 to 5% in 2005, letting us continue to exceed property casualty industry growth over the long term. A. M. Best estimates that industry net written premiums for commercial lines will actually decline by 1% in 2005.

Now turning to our personal lines segments, results for the first quarter were mixed. Overall, the combined ratio improved by 4.3 percentage points, excluding catastrophe results. Personal automobile profitability was the best it has been in more than nine quarters. Homeowner profitability still needs much improvement, but we anticipate it will continue to trend in the right direction. However, written premiums were down almost 7%, with the retention rate slightly below the estimated 90% of last year, and new business at $8 million compared with $13 million last year or about 38% lower. Generally, we win or lose personal lines business at a package level, as our agents work to give their clients broad protection with package discounts and convenience. Some rate changes are planned to be effective starting in late summer in selected territories. These changes should help agents in the marketplace.

In some states, the changes consider insurance scores as one of the factors that determine credit. With the slowdown in personal lines growth, we no longer anticipate a sub-100 combined ratio for the homeowner line in 2006. Although we do anticipate that full year 2005 GAAP-combined ratio for personal lines will be near break even, as Ken will discuss in a moment.

The deployment of Diamond, our personal lines policy processing system, to additional states is a top priority for personal lines, as well as a sign of our commitment to the home-auto insureds. It is currently in use in six states that represent about 60% of personal lines earned premiums, and premiums in force on the system have risen to $218 million from about $150 million at year-end. Our deployment schedule has Diamond in use in 13 states by year-end representing approximately 90% of the personal lines earned premium. When this push is completed, we will be able to react much more quickly on a market-by-market basis in the personal lines area.

We continue to see personal lines business as an essential component of our overall relationship with many of our agencies and their relationships with clients. Now to get back to our results and outlook here's Ken Stecher.

Thank you, Jack. It's a pleasure to speak with all of you today.

Jack's covered significant market trends in the commercial lines and personal lines area. I'll comment on the details of property casualty operations, life, investments, and the balance sheet, as well as summarize our specific targets for 2005. I would note that per-share data has been adjusted for the 5% stock dividend that will be paid April 26th.

Looking briefly at premiums for commercial lines, the actuarial estimated premium adjustment has made our written premium somewhat difficult to compare on occasion over the past few years. It took about two percentage points off the quarter-over-quarter written premium growth rate. You may recall in the 2004 first quarter this estimate for premiums in process, but not yet booked, was too high and we adjusted it down in the second quarter. As a result, the first and second quarter comparisons are affected, but at six months commercial premium growth will be comparable. On pages 21, 22, and 23 of the financial supplement we show how the adjustment has affected quarter-over-quarter comparisons.

Jack commented on personal lines premium trends. The premium estimate did not affect the personal lines written premium growth rate. Overall property casualty profitability was strong for the first quarter. I'll go through the commercial lines and personal lines trends separately.

As we mentioned in the release, the commercial lines loss and loss-expense ratio rose 7.3 percentage points, but the comparison is cluttered with atypical items in both first quarters. The loss and loss-expense ratio was 60.8% for the first quarter of this year. That Includes 4.3 points for the previously announced large loss that was insufficiently covered through our facultative reinsurance programs. The loss and loss-expense ratio in last year's first quarter was 53.5%. That reflects the benefit of the release of UM/UIM reserves, which lowered the ratio by 6 percentage points. The commercialized commission expense ratio declined by 2.9 percentage points, due to the release of an over-accrual of our 2004 liability and a lower accrual for our estimate of 2005 contingent commissions. The run rate for the rest of 2005 should be around $23 million a quarter. As a result, the commercial lines combined ratio was 87.5% compared with 82.6% in last year's first quarter.

I would reiterate comments we have made in the past that our commission program appropriately recognizes the results of our agents’ marketing and frontline underwriting, as well as service they provide to policyholders on our behalf. Our profit sharing contract increases rewards for those agents whose Cincinnati business, in total, not particular accounts, is profitable over several years and who pay their accounts promptly. We think this is fair to everybody. Details of the commercial lines of business are in the financial supplement on page 24.

Note that first, as you compare the line of business data to other periods, keep in mind that commercial auto and other liability results for the first quarter of 2004 benefited from the UM/UIM reserve release. Second, the 2005 large loss I mentioned is included in commercial multi-peril, adding 12.2 percentage points to the loss and loss expense ratio for that line. Note that same large loss is included in the losses greater than $1 million on the large loss detail report. Third, workers’ comp. had an excellent quarter with the loss and loss-expense ratio at 76.5%. Finally, for the other liability line, results were very strong. Since this line includes umbrellas, it tends to fluctuate with the large loss trends.

Now, looking at details of the first quarter personal lines results, the loss and loss-expense ratio, excluding catastrophes, improved by 5.7 percentage points. This is primarily due to the profitability for personal autos. Plus, in the first quarters of both 2005 and 2004, personal lines benefited from favorable development of prior period catastrophe losses. Further, the 1.8 percentage point decline in the personal lines commission expense ratio helped to offset a higher underwriting expense ratio. That ratio rose because of higher expense for Diamond, continued refinements in our cost allocation processes, and higher amortization of deferred acquisition costs because of the premium decline. After these plusses and minuses, the personal lines combined ratio improved by 6.1 percentage points.

Personal lines of business data are also in the financial supplement on page 24. We sent out a revision of this page this morning to correct the 2004 data for personal auto and homeowners. The release also had incorrect 2004 data for personal auto and homeowners in the last paragraph on page 4. First quarter 2004 personal auto loss and loss-expense ratio, excluding catastrophe losses, was 66.5%. The first quarter 2004 homeowner loss and loss-expense ratio, excluding catastrophe losses, was 68.9%.

Now back to this year for personal auto. The first quarter 2005 loss and loss-expense ratio was outstanding at 60.6%. As we modify our rates and credits on a territory-by-territory basis, we have some room for some upward movement in this ratio. A.M. Best data indicated their estimate of the personal auto loss and loss-expense ratio was in the 68 to 69% industry wide in 2004. Using their industry expense ratio estimate, we would like to stay below the average.

For homeowners the first quarter loss and loss-expense ratio, excluding catastrophes, was 71.1%, not quite where we had wanted it to be, primarily because of the decline in written premiums and resulting slower growth in earned premiums. Substantial improvement is still expected, as we continue to work through the book of three-year homeowner policies, bringing premiums more in line with exposures to the rate and policy changes we've set in motion over the past 18 months. We currently estimate that about 33% of homeowner policies have been converted to one-year policy terms. We've been writing one-year policies in Ohio, Indiana, Michigan, and Kansas for more than a year, with the other states falling six months in advance to deployment. It will take until sometime in 2007 to convert all homeowner policies in those states, some of our largest. In Ohio, we're seeing very different renewal pricing pictures for the one-year and three-year renewals. Policies coming off a three-year term are seeing average premium increases in the range of 30 to 35%.

The one-year policies are renewing at about 6 to 7% higher rate. While agents have not indicated as much concern about our homeowner rate structure as they have with personal auto, we have refinements to our pricing plan for later this year in some territories.

The Cincinnati Life Insurance Company contributed 10.4 million or $0.06 to first quarter earnings compared with 8.4 million or $0.05 in last year's quarter. Earned premium decline for the same reason it did in the fourth quarter. During the Section 404 review, we identified an immaterial calculation error for the interest-sensitive products, and had no effect on earnings. It changes both earned premiums and losses in policy benefits for the first quarter of 2005. But the first quarter of 2004 was not reclassified, so the comparison was skewed. We will be seeing this comparison through third quarter this year.

We are continuing to look at our options to reinsure our term life business. Mortality is covered under an excess over retention program. We are evaluating additional options that would moderate the reserve strain to the statutory income statement. Now turning to investments, pre-tax investment income grew 5.6% in the first quarter. The increase was driven by higher interest income from the fixed income portfolio.

Common stock dividend income was down slightly from last year's first quarter, primarily because of the equity sales and last year's second quarter. Dividend income also was down from the fourth quarter because of special one-time dividends. Investment income growth in 2005 is likely to be driven primarily by interest income, although dividend increases announced by holdings in the equity portfolio over the last 12 months add $19 million to annualized investment income.

Our Board's investment committee and the investment department continue to look at potential equity purchases as we evaluate uses of cash. We also are monitoring the ratio of common stock to statutory surplus, which was down to 101.9% at the end of the quarter, and the ratio of parent company investment assets -- total parent company assets, which was 35.3% at quarter end.

Going forward, parent company investment activity will need to be monitored to keep that ratio below the 40% level. That said, we think we will be able to use some portion of cash flow for equity purchases by the end of the second quarter. Our equity investing strategy has been integral to our company's long-term success and book-value growth.

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 calls and maturities of convertible securities offset by a FAS 133 loss. There were no securities impairments in the first quarter. With the increasing quality of the bond portfolio overall, impairments going forward should continue to be minimal. Book value at March 31st was $34.04, compared with $35.60 at year-end 2004, primarily reflecting market value declines in the equity portfolio. The decline in Fifth Third market value accounted for $1.15 in change of book value.

With regulatory issues and associated expenses behind them, we feel Fifth Third is poised for out-performance. Given the difficulties over the past couple of years the market is now skeptical of Fifth Third business model. We strongly believe the model is not broken. In 2005, we see them returning to their historic, clean double-digit growth rate. We continue to view this as one of the best growth stories in the group.

We used $5 million for CFC stock repurchases this quarter, buying 115,000 shares. We'll continue to look for appropriate times to repurchase our stock. At the end of first quarter, we had $117 million in cash on the balance sheet, down from $306 million at year end, after making approximately $300 million in net new investments during the quarter.

Debt was $791 million at March 31st. The exchange offer currently underway for our 6.9% senior debentures will add about $84,000 to annual interest expense, so we're still looking at an incremental increase in interest expense over 2004 of about $0.05. Also, we're evaluating the timing of when we begin to expense options. Just last week, FASB announced a change in the required implementation date. We are looking at the pros and cons of different timings in light of their announcement, but may reconsider our plan to begin expensing options in the third quarter this year.

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 our agents and field associates are focusing on balancing growth and profitability. Based on results for the quarter, we now anticipate commercial lines written premium growth in the 3 to 5% range.

Meanwhile, in personal lines, our agents and associates are working on full Diamond deployment, conversions of three-year policies to one-year, and adjusting our rate structure to be both profitable and competitive. Based on results for the first quarter, we now anticipate written premiums may decline approximately 5% for the full year. As a result, we now anticipate overall full year property casualty written premiums to grow in the low single digits. Because of the change in our outlook on personal lines, we're now looking for an overall 2005 GAAP-combined ratio near 93% assuming catastrophe losses are about 3.5 percentage points on the combined, and that favorable loss reserve development is in line with our historic levels. Of course, we won't have the help we had in 2004 from the UM/UIM reserve release.

For commercial lines, we're still estimating a 2005 commercial lines combined ratio near 90%. For personal lines, we now believe the combined ratio for the year may be near break even. Finally, we still believe that investment income growth may be in the range of 5% to 6% this year, which I will remind everyone is for consolidated portfolio. Taken together, these anticipated results would make 2005 another good year, supporting the steady growth and industry-leading profitability that are our long-term objectives. Jack.

Thank you, Ken. Good job.

I wanted to end by thanking our independent agents and company associates for their efforts to give policyholders high-quality insurance programs and services, leading to our inclusion in this year's Fortune 500, based on 2004 revenues. We're honored to qualify, although our 2004 record was helped by unusually high capital gains. Whether or not our revenues grow to qualify again next year, we will still be the same regional property casualty company that we are today, proud to be serving our agents, helping them succeed in their local communities and building a long-term future for our company. Before we open for questions, I'd like to mention that, again, Jim Benoski, our Chief Insurance Officer, and J. F. Scherer, Senior Vice President, Sales and Marketing, along with the folks from our investment team, as well as Ken Stecher, are with me in the room today to respond to your questions. So, Missy, we're ready to go ahead with questions, please.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q-and-A roster. Your first call comes from Mike Dion of Sandler O'Neill

Good afternoon, everyone. My question is concerning the personal lines segment. Just curious, with the revised guidance and the increased, I guess, pessimism in that segment just from a few months ago, my question is what has changed in that segment that has caused you to reduce the guidance there for 2005 and, related to that, does it have anything to do with the conversions from three-year to one-year policies and/or the Diamond rollout? What are the impact from those two events on the reduced guidance on personal lines?

Mike, this is Ken Stecher. The change in guidance didn't have anything to do with Diamond or the rollout of that system. Basically we looked at the homeowner comments looking at the pricing,, loss reserve tr -- or loss cost trends and noticed that, as we said we thought it would return to profitability in 2006, now our model shows that maybe that will not occur. Also, the decline in the private passenger auto premium, the earned premium, and the fact that has been a very profitable line for us, so we're losing some profitable business potentially, which could drive up the combined ratio.

And then with the fixed cost that we have on a smaller premium base, those were the reasons for, you know, moving the guidance up. And then as it relates to the overall guidance, with personal lines being about 25% of our business, the fact that we were not going to hit the 95 we had previously announced, closer to break-even, was basically the reason to move the total combined from 91 to 93.

Okay. And just with respect to the three-year policy conversions moving towards one-year, and I think you had mentioned you're roughly in the 38% range, as far as the conversion process goes, I think the release mentioned heightened competition within personal lines. Are you saying those are two unrelated events?

Mike, it's 33% on the -- This is J. F. Scherer. I think what we found is that, as we increased premiums and rates through the country -- in some areas auto, in some areas homeowners -- that we overshot the mark a bit. And so, as a result, we've seen the slowdown in personal lines that's been noted.

What we're going to do now, and have been doing, is selectively taking a look at certain states, certain territories, and the lines of business that are appropriate and simply fine-tuning our rates. It's mostly, as Ken said, more of a rate thing than a Diamond thing. The agencies, after their learning curve of getting used to Diamond, are telling us it's a fine system. They're comfortable with using it and so, we're satisfied as we go through that process state-by-state that Diamond is, in fact, hitting the mark. I think the issue is to make certain that our rates are fine-tuned.

One of the things that we're seeing is that, in the heightened use of credit scoring, that some of the competition, when you say it's heightened, I don't know so much it's a case that rates have been reduced as reliance on credit scoring, tiering, things of that nature, has risen, and so we're responding to that.

Fair enough. Thank you.

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

Hey, good afternoon.

Hi, Charlie.

I have a couple questions, also. My first question, seemingly your stock was under some attack, or under some pressure, in the first quarter. In that context, with this $3.6 million share authorization, you only bought back 115,000 shares. Could you elaborate on your thinking with regard to share repurchase?

Charlie, I think -- this is Ken Stecher. One of the things, in the first quarter we were under a little more of a blackout period because of the exchange offers on our bond funds. And then, of course, we released earnings early February, and just depending on the timing of our stock price at the time we were not in blackout, had some impact on that. I think we continue to look at the same parameters we described before, as to when we would buy back our stock, so that has not changed. I think it's the price at times we were able to buy. And also, looking at liquidity of the company, you know, in the parent company at that point in time. All those factors came into play.

That was my first question. My second question, to what extent is -- Mike asked the questions about import of three-year policy specific to your personal lines business. To what extent is the import of the three-year policy for your commercial lines business some kind of adverse factor today with regard to commercial line sales? Because, seemingly, if I think that commercial lines pricing is falling, wouldn't that -- I'm not sure why I would want to I would a three-year policy.

Well, Charlie, this is J. F. We view the three-year policy is just as much an advantage today as when the pricing was going up, and our agencies feel the same way. Our willingness to make a three-year promise on the part of the account that we do guarantee is still very attractive in the marketplace. It is true that pricing is going down somewhat, but the fact of the matter is, policyholders are looking for a longer term solution than a year-by-year decision they make on their insurance.

Many facets of the three-year account that we offer, and we've talked about it in the past, the Workers' Comp, the commercial auto, and the umbrella, those are all annualized. We take a look at the accounts on an annual basis, for that reason. If there is pricing pressure at anniversary, on some of these three-year accounts, we can address it then.

But having said that, to an agency, to a producer, they view the three-year policy as a stabilizing effort on their part to offer their policyholders long-term insurance protection. And I know your reaction would be that with pricing going down it's not a good deal, but no one knows what's going to happen over the next three years. And I think the stability of a three-year policy with an A plus plus rated company, with claim service in the communities we serve that is as good as we give, is very attractive proposition.

What kind -- J. F., what kind of pricing erosions are you seeing in commercial property liability and then casualty liability?

A lot of it depends on the size of the account. On the large account we are seeing some erosion. I can't give you a specific percentage but it could be on the property side perhaps in the 5% range on a renewal. On the casualty side, perhaps not as much. We write a fair amount of construction business, and on the construction side, the rates are holding pretty stable. A recent study that we made here on what would probably be characterized by us as medium-size accounts in the, let's say, $50,000 premium and less, we actually are finding that, over the last three months we've been able to get a modest increase in property and fairly decent increase in the 6% range on average on the casualty side of things. So an awful lot of it is predicated on the size of the account.

My last question, in your news release, you indicated, as did Ken, that you thought that the personal lines business might operate at break-even this year. Where do you think that might be from a combined ratio standpoint in 2006?

Charlie, at this point, we think that there could be a slight deterioration, but it all depends on, you know, where the rates settle out, how our retention rates are, and so on. I've looked at the model but I don't have with it me. Trying to recall from recollection, I don't believe there is a material change. I think it was almost the same. Maybe a slight increase in combined.

So that's for personal lines?

That's personal lines. Did I misunderstand your question?

No, you did just fine. So maybe one to two percentage points?

I don't believe the model is that dramatic. I think it's in tenths of points.

Did you say what portion, what kind of rate decline that you're taking in personal auto?

No, I think what we were looking at with our guidance, as you know in our 10-K we had stated we thought the -- we just did a total personal lines outlook of approximately mid-single digits and we took that to now a decrease of approximately 5%, as a result of the first quarter activity. Thinking that probably could not make that up in the balance of the year. That's the reason for the adjustment.

So maybe -- if I understood that question, maybe rate reductions on the order of possibly up to 5% in personal auto?

I'm looking at total premium and trying to take into account, you know, first quarter as we announced, we didn't have as much new business as the prior year, so that comes into play. You know, what would happen with renewal rates, would some business be taken to another carrier. All those factors come into play.

Charlie, I might add, on marketing home and auto insurance we really do rely on the model package which includes personal umbrella, scheduled personal articles, those other type of family property. To some extent we're finding out that the interaction between home and auto insurance rates may be related. There's no correlation that we can see dollar-for-dollar but we see that, if our attempts to overcorrect on homeowner diminish our results on auto, it's hard to see how the two weave together.

So, from a marketing standpoint, we plan to carefully look at the home and the auto rates by territories, not necessarily even by state, and see where we have a chance to write some business that we don't currently write in those particular territories and, thereby changing the rates on accounts of certain dwelling amounts that we don't write. If we reduce those rates, somewhat, to be competitive maybe that will earn us some premium that's really currently not in Cincinnati insurance. So it's a marketing evident, and I think I have confidence that we can -- that we can find the balance that we need along these lines.

For personal lines of a business of scale, do you ever think in where seemingly you lack that scale and where you do so well in commercial lines insurance, and I realize there are probably some cross benefits, but do you ever say, you know, let them buy their personal line insurance from State Farm or Allstate?

No, we won't surrender the personal lines marketplace. I think there is something to the scale part you mentioned. I think we are enough low overhead in our operation that we can match in satisfactorily. I think one think we don't have is some of the high-performance technology software systems that some of the automobile carriers may have. And that might work against us a little bit, but I'm not even sure about that. I don't think it's appropriate now to get into that discussion, but I think as much assurance is by scale for home and auto, I think it's also a lot by marketing. And if we're marketing right, and we're talking to policyholders about the risks and their families and we're protecting this them right, we're finding out the right details on the exposure of who drives the cars, I think there's opportunity for us to offer did products to our insureds. J. F. mentioned the claim payment system that Cincinnati Insurance follow, we think it's second to none for an agency benefit, let alone the policy holder. So those are just some rambling thoughts on how I think we can continue to work on our home and auto insurance coverings.

Thank you.

Thanks, Charlie.

Your next question comes from Stephan Petersen of Citadel.

Charlie had some of my questions, but I have a follow-up for J. F. Was wondering if J. F. may be able to talk about competition, maybe specifically from the St. Paul Travelers. We've been hearing through the grapevine that they have you guys a little bit more in their sights lately than in the past. I'm wondering if maybe them specifically or any one else particularly active in your marketplace.

If they're in our sights, it would be because they say so, I guess. I can't say that we've heard any reports to that effect at all. Most of the areas that we operate, the regional carriers are really always the tough competition for us. I think everybody, in terms of small accounts, Travelers -- St. Paul Travelers, a variety of companies are going after that. Stephan, I guess that, in a lot of areas where we operate, and in a lot of agencies that we're located, you're aware that we're generally the number one or number two carrier in the agency, and in many cases by long shot. That automatically paints a target on us, so consequently in the battleground in each agency where each carrier is trying to elbow their way in to a preferred position, I don't doubt that we have a bit of a target on us. So but I wouldn't say really any particular carrier stands out.

Okay, I appreciate it. Thank you.

Your next question comes from Ronald Frank of Citigroup.

Hi. I want to revisit, in a way, some of issues that have been addressed so far with respect to personal lines. I want to understand first why new business is expected to help results in the homeowners line. That's ordinarily counter intuitive. Is it because of the dynamic of the three-year policy so the renewal focus is that much more underpriced by way of spread versus new business that creates that? That's my first question.

I think what you're referring to, obviously, is new business. You have additional acquisition costs and things like that. Of course, those should be deferred to match up with your premium.

That can and ordinarily, the common wisdom is you just tend to experience a little worse experience on new business versus the seasoned renewal book.

Well I think -- I can't speak to other companies, obviously, but I think, you know, I believe, and maybe I should have let J. F. answer this. But I think we look for our agents to provide us a personalized business maybe that’s been in their office before and maybe they have some loss history. So maybe that's slightly different for us. I think, overall -- I mean I think it's the entire book of business, as you say, that we look towards any additional premium increase and we're trying to get through this three-year policy we're not quite through. But I think, you know, anytime that you have a drop in revenue or a flattening of revenue, some of your expenses are already in place. So that could impact the overall profitability.

Okay. A broader question, and this gets back to the question that was asked about whether you would look at the personal lines business overall in terms of how involved you should be, ordinarily I would think, you know, that given the fact that, although it's mainly the homeowners as opposed to the auto, they are tied together as you've indicated, to an extent.

You know, ordinarily the fact that the best result achieved in the cycle is going to be about 100, which is clearly not a return level that would approach what you would want, what would cause you to take a strategic relook at the business? Should we conclude from that that, you know, the real issue here is being a company committed to the independent agent that the real tension is the commercial lines versus the personal lines business? In other words, that you sort of have to tolerate at the end of the day some subsidy of the personal lines business by the commercial lines business, because the whole book continues to deliver a good profit and you really can't have the one without the other?

Ron, this is Jack. Let me chime in first, and maybe J. F. would want to give a market view. No, I don't think we can afford to have one line of business subsidize another line. I think from an underwriting standpoint, the fact that home and auto insurance is connected, we think, you can satisfactorily underwrite those things and not have to rely on commercial lines to bail them out. We have this three-year policy.

As an industry, over the last 10, 12 years, we shot ours in the foot with homeowner pricing. Well, the industry was able to recover faster than we were. We used these three-year policy terms and the rate increases that we put in effect three years ago really are just, till now, maybe more than halfway through, maybe further through than that. Then once we have all the policies in force agree to the rate increases, then we have to go another year to earn those premiums. So it's a process that just requires more patience than probably all of us are willing to put up with.

But at the same time, I think our brand of insurance agent is a community-based agent. They rely on a lot of different sources of revenue for their agencies and for the careers for their staff, so, yes, I think homeowner-auto has a definite place in our agencies. And I think Cincinnati Insurance has to be thought of as one of the premier carriers to provide this homeowner-auto packages. Now, I'm prejudiced, I'm biased, but I still think that can be accomplished. Maybe J. F. would want to comment from his marketing view.

Ron, I think Jack pretty much covered the importance of it strategically in terms of how we serve the agent and the products we provide them with. Our loss ratio in auto, for example, compares very favorably with anyone. We're capable of producing very good results in personal lines. Homeowners, once again, our ability to return to profitability has taken longer because, as Jack mentioned, the three-year policy. We did overshoot the mark in some of our rate increases that's caused obviously new business to slow down. But we're sighting it in, we're doing things that will cause that line in business to be profitable. Our agents want it to be profitable, they're careful about what they put with us.

It is frustrating that it's taking so long, but I think from a standpoint of who we are and who our agents are, and they are organizations that protect not only commercial lines but personal lines clients in their community. They like the fact that the adjuster that does such a great job on commercial lines will do the same good job in personal lines. Their reputation in their community is tied to not only the results of claims and settlement on commercial lines but also on personal lines. So we've got something to market. I think we can do it profitably. It is frustrating. ,It's taken awhile to get there but we're very much committed to it.

Okay, and finally Ken, you get the easy one, hopefully. That is, I looked -- I was listening to your comments regarding the special influences on the expense ratios for the segments, but they went by me a little bit quickly. At the end of the day, was there an overall aggregate distortion to the expense ratio for the quarter or did these effects cancel out to a degree?

Ron, I think the biggest thing on the overall expenses was basically -- you're referring to the 21.5 to 18.9?

You made a comment about a run rate of 23 for one of the expense lines.

That was in the contingent commission.

Right.

Basically in 2004, we accrued $104 million. We estimated $104 million for our contingent commission payments. We paid approximately $96 million. So that $8 million was released into earnings this quarter. We also then -- the statement I did make is that we are looking, at least with where we think things are currently, estimating $23 million per quarter for our contingent expense in the second and third, fourth quarter. So that would run through at about $92 million payment.

Okay.

So that is the unusual activity. Now, that was offset by the fact that we're writing less business and the growth rate has slowed. You know, we're amortizing our acquisition costs off a little faster than we're deferring.

Okay.

So those two things kind of offset each other.

Okay. All right. Thank you.

You're welcome.

Your next question comes from Kelly Nash of Keybanc.

Hi. Good afternoon. I just wanted to get a little bit more color as to why the sudden change personal lines in the first quarter. I mean, what was different between the first quarter versus what you were starting to see in January or even December of last year?

Kelly, I think, first of all, it's -- I guess the growth in the earned premium on the auto -- did not expect that to decrease the way that it did. It was going up just ever so slightly from the second, third, fourth quarters, and then have a drop in the first quarter, that was something that I did not anticipate. Secondly, I think the earned premium increase from the first quarter on homeowner was also a little less than I would have anticipated when we set our guidance up in the -- you know, year end. Now, when we put that guidance in the 10K, basically the month of January results were in, but February, March were not.

So I think as we saw the, you know, the growth rates in those last two months kind of changed our guidance on the personal lines side. I think on top of that, the a -- our expense ratios have gone up slightly from an operating standpoint because we do have the technology out there and that is being amortized off, parts of that system that were in development for years. We've allocated a little more contingent commission there because, you know, just the way our program works, the overall personal lines, the combined ratio is coming down so there's more profitability for the profitable agent.

And then, there is a little higher loss cost ratio trends. So those are the things that kind of changed, I guess you'd say, between January and today.

And what are you seeing in terms of personal lines pricing in the market, and had that changed significantly since year end or the beginning of the year?

Kelly, this is J. F. I don't think we've seen terrific changes in that regard. As I mentioned earlier there are probably an awful lot of tweaking of insurance scoring approaches that carriers are taking. But I don't know that we're seeing anything too drastic going on there. Very modest changes, I think you've heard very low single-digit changes and tweaking. State Farm is doing some changes out there but nothing drastic.

And how much of your personal lines and commercial lines business incorporate any level of credit scoring?

That's a very modest amount. Nothing on commercial lines, as far as any formal insurance scoring. On personal lines, the use that we have of credit scoring tends to be not to necessarily identify a superior risk but to exclude a poor risk. So we are introducing it modestly along with some -- some of the more traditional methods of underwriting.

Then can you discuss what you're seeing in terms of loss cost trends in homeowners? Sounds like that is also having effect on your expectations for the year.

Kelly, the loss cost trends is about a point and a half, higher loss cost trends on the loss ratio side.

Anything in particular there in terms of maybe inflation or --.

I'm not sure. These were the numbers that we've looked at through our model. I'm not quite sure what they're attributable to.

I was just trying to get a sense if it was an industry trend you're seeing or maybe something more specific to your book of business.

I'm not sure at this point.

Okay.

Sorry.

No problem. Then on persistency, you noted in personal lines that persistency is a bit less than last year, primarily I would imagine because of the three-year -- the price increases as consumers roll off the three-year policy. Can you comment on persistency in the commercial end?

Kelly, the persistent -- there's two aspects of looking at that. Since we have a tremendous amount of our policies, our accounts on a three-year policy term, the persistency on those are terrific. We've been running in the high 80s on accounts that have renewed. There are in the process of renewing, and we're not seeing anything alarming right now as far as any trends on persistency.

Okay. Then finally, you commented on Fifth Third, which obviously has been a little bit of a disappointment from an investment perspective. Any thoughts there as to is this time to continue to maintain your significant position there, or anything you might be relooking at from that perspective?

Kelly, I think along with the comments that I made in my prepared remarks, I think that, you know, we look at the market value of our position on a very frequent base.

We also want to look at where we believe they're going. The current price of the stock, I think, is lower than we would have anticipated. We believe, as I said, they still are a well-run bank, they have the ability to deliver above-average earnings. I think right now we think that they're turning the corner. So I think the balance of this year will go a long way toward our viewpoint on, you know, the long-term viewpoint of that investment.

Great. Thank you.

Your next question comes from Meyer Shields of Legg Mason.

Good afternoon, everyone. I'm sorry to keep beating up on personal lines but I think it's a sign that the commercial lines results are very good, therefore no questions. Were there any trends -- in terms of the lower persistency within personal lines was that because more profitable than the business that you retained?

You know, it's really hard -- Meyer, this is J. F. Scherer. Last year, I think about 6-8 months ago, we did a study where we credit-scored all the new business that we wrote just to test whether or not the traditional methods we use in underwriting business were in any way flawed, or what we were seeing, and did not find that to be the case. We -- our study in whether or not the fact that -- and I guess this is -- tends to be the $64,000 question. We do see on very high credit scores drastic differences in premiums, based on what we would normally charge. So much so that you just have to step back and wonder, if it is really possible that it can be worth that much less. And so based on higher credit-scored business, we do hear some comments that we're not as competitive on that as our agents would like to see us. But I can't say that we feel that we're losing -- as a general statement, high quality business.

Okay. Just a few quick other questions, then. First of all, were there any reserve releases on the quarter of note?

Meyer, this is Ken Stecher. There was not much in the way of reserve releases in the quarter. Very immaterial. And overall, on our overall book, in fact, personal and commercial, there was a slight deficiency in the quarter. Mostly related to property loss development. So basically, the bottom line is the earnings were not benefited from reserve releases in total.

Okay. Fair enough. Last question. Was the agency appointment count, is that suppressed at all because of the agency meetings? Is there any seasonality in the appointment process?

A bit, Meyer. Early in the -- January 1 tends to be the busiest day of the year for us in terms of writing new business so the field reps, in advance of that in December and through January, spend a lot of time quoting it, inspecting it, then putting it together to get it issued. The sales meetings obviously take up time. We've got quite a few folks in the line right now to come in for what we call the pre-appointment visit to make the appointment. So it will pick up in the second quarter, the third quarter -- hopefully be almost done with our goal of 50 this year at the end of the third quarter.

But you're comfortable that you're still on track?

Completely comfortable.

Thank you so much.

[OPERATOR INSTRUCTIONS] We'll pause for just a moment to compile the Q-and-A roster. Your next question comes from Paul Newsome of A. G. Edwards

Actually, my question was asked. Thank you, guys.

Thanks, Paul.

You have a follow-up question from Kelly Nash of Keybanc.

Two quick questions. First, regarding -- you mentioned a study you had done when you had credit-scored the business to see how your underwriting methods were compared with utilizing the credit score. Could you just walk through some of the initiatives that you guys have in place for your disciplined underwriting, especially as we get into a much more competitive environment?

Kelly, we work together closely with our agencies. As far as monitoring profitability, we're looking to increase deductibles. Obviously our agencies are expected to, and they do, monitor the business that they write. The more typical approaches of taking a look at accident ratios, MVRs, driving records, age of property, things of that nature would be all the things that I think would be typical for a carrier. As I mentioned, we're integrating some insurance scoring to identify those accounts that would be at the very low end of the insurance score. Those folks would then not qualify for credits that folks with better credit scores would have. So it's -- and then, you know, on an agency-by-agency basis, there's a fair amount of attention that we ask our agencies to pay to what's going on in the first lines area in their agency. And so we work together with them to make certain that everyone is paying attention to those items.

Okay. Then looking at just in terms of contingent commissions there's been a lot -- you know, obviously a lot of discussion around it, but even more recently some industry executives have been commenting that they -- the industry should eliminate contingent commissions. Could you just comment on that? Again, reiterating your position as well as longer term how you see that you've got planned.

Kelly, I'd like to comment first this is Jack. And then I think J. F.'s comments are closer to the agents than mine. I think profit sharing is time-tested in American business, and if we keep using profit sharing we end up keeping costs low. I think it makes good sense to share profit with the people who have judgments and eyeballs on the risks in place. And it's not so much on a risk-by-risk basis, but in The Cincinnati Insurance Company case, we aggregate all the premiums for a given agency, and then we aggregate all the claims and expenses related to those, to that agency's operation. And at the end of the year, if that agency's operating profitably, we share part of the profit with that agency. And how the agency uses it to expand their headquarters or their office or their -- reward their staff, that's kind of up to them. But I do think profit sharing is pretty well received in American business today and I would hope Cincinnati Financial and Cincinnati Insurance are able to continue with the use of the profit sharing concept that we have in place now. But J. F., maybe you have some ideas.

Kelly, you can read from day-to-day various items where different executives make comments about disclosure and profit sharing, and what may or may not happen in the industry. In traveling to the 24 sales meetings that we went this year, and in asking agencies what are you hearing? Are policyholders testing you on either disclosure or how much you make? And I can count on one hand in 24 meetings talking to thousands of agents where, in fact, at the local level this is an item of concern. Fact of the matter is, at the local level the public trusts their agent. They know they earn their money. The fact that they earn profit sharing on the business is not anything different. As Jack would say, it's probably the people buying the insurance in the businesses that they work for. I guess there's certainly a question as to whether or not, when the 50 departments of insurance or attorneys general weigh the disclosure laws and what to do, that there could be a variety of approaches to things. But we're not seeing, nor hearing, anything that would imply that profit sharing contracts, ala what we do, the aggregated amount of premiums in an agency are in jeopardy at all.

Thank you.

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

It's been long meeting, and I'm pretty exhausted, and when I get exhausted, I can foul things up. Like my neighbor said, I'm the only man that can mismanage a two-car funeral, and I told her that's okay as long as I'm in the second car. One thing I want to reiterate that's really important that I've been through is, man, when you want an insurance company to pay the claim when you have one, you don't want any hassle. And that is so important to me, and I get a lot of feedback, that it's very important to the people that buy insurance through your organization.

Fred this is Jack. You're a friend to say that and compliment our sales program, whether it's our claim philosophy or the people out in the field who are paying claims face-to-face for policyholders or claimants, we value their judgments highly. We think they do a great job. You're kind to call their attention to us.

I'm not quite through. One thing that's been important in building the wealth for people, and you talked about it in your releases, is the compounding of cash flow and Fifth Third has been just wonderful in doing that with their dividend raise every nine months. And I have not read anything that says that they're going to stop that procedure. So that will give you more money to put back to build the wealth for shareholders. Is that still correct?

That's correct, Fred.

And one thing, you're so big on people and human beings, I just would like to say, is how is our wonderful man that's in charge of the investment department doing?

He's doing quite all right. He's getting a little bit of feisty and nastiness back to him. He's a little more disagreeable than he used to be, which we view as back to the same old Ken.

That's positive. I told him if he thinks he has it easy now, wait until those two daughters get a little older.

Thank you, Fred.

Thank you for a wonderful people and what you do for all of us as shareholders. Thank you.

You're welcome.

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

Yes, there are. Thank you, Missy, and thank you, everyone, for joining us today. We see many positives for Cincinnati Financial and The Cincinnati Insurance Companies. We are grateful and truly do appreciate your interest. Good-bye today.

Thank you for participating in today's Cincinnati Financial Corporation first quarter 2005 conference call. This call will be available for replay beginning at 3:30 p.m. Eastern Daylight Time today through 11:59 p.m. Eastern Daylight Time on Wednesday, May 4th, 2005. The conference ID number for the replay is 5253521. Again, the conference ID number is 5253521. The number to dial is 1-800-642-1687 or 706-645-9291. Again, the number to dial for the replay is 1-800-642-1687 or 706-645-9291.