辛辛納提金融 (CINF) 2005 Q3 法說會逐字稿

My name is Meredith, and I will be your conference facilitator. At this time I would like to welcome everyone to the Cincinnati Financial Corporation 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 session. (OPERATOR INSTRUCTIONS) Ms. Wietzel, you may begin your conference.

This is Heather Wietzel, Cincinnati Financial's Investor Relations Officer. Welcome to our third-quarter conference call. This morning we issued the third quarter release, 10-Q, financial supplement and portfolio of securities owned. If you need copies of any of these materials please visit www.CinFin.com for all of the information related to the quarter can be found on the investor page under financials and analysis. Also we wanted to let you know that our intent is to follow a similar schedule in future quarters. At the year-end we will issue our release on Wednesday, February 8th, and the call will be at 1 PM due to a schedule conflict. We’re going to go back to the 11 AM call time for the first quarter.

On today's call, Chairman and Chief Executive Officer Jack Schiff, Chief Investment Officer Ken Miller and Chief Financial Officer Ken Stecher will give prepared remarks after which we will open the call for questions. First please note that some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties; with respect to these risks and uncertainties we direct your attention to our news release and to our various filings with the SEC. Also reconciliation of non-GAAP information required by regulation G that is provided with the release and is available on the investor page of our website also 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. So with that let me turn the call over to Jack.

Thank you, Heather, and good morning to all of you, and thank you for joining us to hear about the third quarter developments at Cincinnati Financial. I am going to get things started by talking briefly about the commercial lines market and the status of our personal lines business. And I'm pleased to report that chief investment officer, Ken Miller, will give today's investment update. Then Ken Stecher will fill in some additional detail on the insurance results and review our outlook.

Our results were covered thoroughly in the information you received this morning, notably third-quarter operating earnings per share were $0.61, up 15.1% over last year with nine-month operating earnings at $2.23, up 12.1%.

Now turning to the property casualty business. Obviously the headline news for our industry and Cincinnati Insurance over the past few months has been hurricanes. Third quarter hurricanes Katrina and Rita were followed by hurricane Wilma just a week and a half ago. We preliminarily estimated Wilma losses at $23 to $25 million. That estimate will be updated as information becomes available and included in the results for the fourth quarter.

As a company and an industry, it’s our job now to get our policyholders back to normal, to support their resolve and their resilience as their family's businesses and communities work to return to the same or even better conditions than before these events. Hurricanes Katrina and Rita were a bit unusual for us with a higher proportion of commercial claim losses than normal. Cincinnati does not appoint agencies to actively market property casualty insurance in Louisiana, Mississippi or Texas. Our Katrina and Rita losses in those states primarily were associated with commercial policies written on accounts controlled by agents in other states. Prior to those hurricanes, we had anticipated commercial lines insurance market trends would reflect accelerated competition. But the industry's increasing surplus and improving profitability is putting some pressure on pricing. At this stage one of the unknowns is the effect of the hurricanes on commercial lines pricing.

Insurers with significant exposures in coastal areas either directly or through the reinsurance markets will bring one perspective to the debate. However, as we look across our market areas, we see that much of our competition comes from healthy regional insurance companies that had little or no exposure to the markets affected by the hurricanes. In that light we cannot comfortably draw any conclusions about potential changes to the competitive environment. While market conditions resolve themselves, our approach will be the same we have had over the past 55 years. We will continue to leverage the skilled underwriting of our local independent agents and field and headquarters' associates. We have maintained pricing discipline on both renewals and new business even though the short-term costs so far this year have been slightly slower growth. Because we look at each new opportunity individually, we believe we have a decided advantage regardless of the state of the market. By taking authority to the field, making our decisions account by account, we continue to get a highly informed view of what to do state by state, agency by agency, and that is truly a competitive advantage.

Now turning to our personal lines segment, the third quarter showed further progress in our program to return this business to consistent profitability. With catastrophe losses at lower than normal levels, personal lines reported a nine-month underwriting profit, putting them on track for the best year since 1999. With that positive news we also moved ahead with planned actions to address the recent declines in policyholder retention and new business activity.

In September we modified rates in selected territories to make our own and personal auto rates more competitive. Other rate modifications are planned for later this year and into early 2006. As we continue to respond to local market conditions reported by our agents and field marketing representatives. To put current results in context you may remember that we've been addressing homeowner profitability since 2002 by bringing premiums in line with exposures through substantial rate and policy changes. We also started transitioning that book of business to one year policies as each state receives Diamond, our web-based policy processing system.

On the plus side with the rate increases now in place for many of our homeowner policies, we are seeing improvement at the bottom line for the homeowner's business line. Personal auto continued to report strong results. The downside of the increases was that agents began to report that our homeowner and auto rates in certain markets were not satisfactorily competitive. We believe that rate and credit changes we have already made in selected territories plus the others we have scheduled will move us closer to the right balance, further opening the door to our agents to sell the value of our homeowner auto package, superior claims service and financial strength.

Now let's get back to our results, and here is Ken Miller on investments.

Thanks, Jack. It's a pleasure to speak with you all today, especially with such favorable investment results to report. Pretax investment income grew at 7.7% for the third quarter and 6.9% for the first nine months. The increase was driven by higher common stock dividend and growth in interest income from cash flow invested in fixed income securities. We now believe for the year that the investment income growth will be 6.5 to 7%. Our outlook is based on the anticipated level of dividend income increases and the strong cash flow from insurance operations. And the higher than normal allocation of our new investment dollars into fixed income investments over the last 18 months. Dividend increases within the last 12 months by Fifth Third and another 32 of our 48 common stock holdings in the equity portfolio should add approximately $23 million to annualized investment income.

We used $7 million for stock buyback purchases during the first -- well, actually the last 90 days buying 160,000 shares and bringing our year-to-date total to 1,125,000 shares. We will continue to look for appropriate times to repurchase our stock. At the end of the third quarter we had $98 million in cash on the balance sheet, down from $306 million at the year end. During the first nine months of 2005, we used a net of $622 million for investing operations compared to $301 million in the first nine months of 2004. We allocated essentially all new investment dollars to fixed income investments during the first nine months of 2005. We used $1,134,000,000 for the purchase of fixed income investment. Sales calls and maturities of fixed income total approximately $624 million.

In the first nine months we sold approximately $70 million of equity securities and purchased $136 million, including $90 million of nonconvertible preferred stock. Nonconvertible preferred stocks are regarded as fixed income investments by the rating agencies and offer attractive relative yields, both pretax and after-tax. This year the proceeds from the equity sales were reinvested in common stocks. The sale of equity investments that no longer met our investment criteria can provide cash to invest in new common stocks that we perceive have greater long-term potential for capital appreciation and income growth.

Book value is still below year end 2004 on lower unrealized capital gains. The decline of Fifth Third's market value accounted for approximately $2.84 of the change in book value since year end. Fifth Third's market value recently has been affected by growth and earnings performance below the bank's historical levels. We believe the regulatory issues and associated expenses are behind them and Fifth Third is much more refocused on their core business. They continue to meet our investment criteria, and we believe we do review the holding on a regular basis.

Over the past 12 months Fifth Third has increased their indicated annual dividend by 18.8%, contributing an additional $17 million to our investment income on an annualized basis. I think that covers all the key points that I wanted to. I will turn the call over to Ken Stecher at this time.

It is a pleasure to speak with all of you today. Jack covered the significant market trends in the commercial lines and personal lines area. I will give some key points to the property casualty and life operations, comment briefly on our status with the Investment Company Act of 1940 and summarize our specific targets for 2005.

Let me begin by noting that all of the property casualty premium data we are discussing today is on a reported basis. The adjusted numbers that we referred to in the past quarters are shown on pages 21 to 26 of our financial supplement for your reference. Overall, property casualty profitability was excellent for both the quarter and nine months. As we had anticipated, third-quarter capacity losses came in at $66 million, which was below the 2004 level of $86 million. We did have a net $3 million in development from 2004 and prior catastrophes. The biggest culprit was a wind and hail storm in the Midwest in July with 1.8 million in unfavorable development. Favorable and unfavorable development on last year's four hurricanes is netted out to about zero. Overall, commercial lines continue to report strong results, and personal line results continue to improve. These positives serve to offset the rise in the underwriting expense ratio, which we hadn't fully anticipated when we commented on our third-quarter outlook in early October.

The year-over-year 2.2 percentage point rise in the underwriting expense ratio for the third quarter was due to several factors. First, there was an additional 0.3 percentage points of higher technology expenses, largely related to Diamond, our personal lines system. In addition to depreciating previously capitalized expenses, we have been incurring a higher than projected level of expense for the enhancements we've chosen to develop. As a result, the cost of Diamond-related activities was $3.3 million for the quarter versus $2.5 million in last year's third quarter when the amount we were expensing was lower.

Second, there was a 0.6 percentage point due to a change in deferred acquisition expenses because of the slower premium growth, amortization of prior period that more than offset back on current period written premiums. Another contributing factor was the write-off of older policy years and involuntary assumed pools which added 0.3 percentage points, affecting commercial lines only.

And finally, in the third quarter of 2004 there was 0.8 percentage points of non-recurring expense savings which reduced last year's ratio. As a result, the noncommissioned underwriting expense ratio totaled 11.3% versus the 9.7% average of the past six quarters. Taking an analytical look at the different types of expenses on a sequential quarter basis, everything seems pretty consistent except the technology spending, which is an important investment in our future and our deferred acquisition cost changes. These two expense items could result in expense ratios near the year-to-date level in future quarters.

While talking about items for the whole property casualty business, let me update you on reserve development. Overall we are seeing favorable development at about the level we anticipated for this year, which is somewhat below last year's level. And this year's third-quarter overall favorable development of $50 million reduced the loss and loss expense ratio by 6.5 percentage points. And last year's third quarter we had $61 million of favorable development, which reduced the ratio by 8.3 percentage points. In the nine months there was $80 million of favorable development this year or about 3.5 points compared with $122 million or 5.6 points last year when we had the benefit of $32 million or 1.5 points from the uninsured motorist, uninsured motorist reserve release.

Looking at the first nine months of this year, we had favorable development in commercial, auto and other liability, but at levels generally below the year ago level because of the UM/UIM release. We think our reserving practices for overall claims played a part in the favorable development for the other liability lines.

For workers’ comp year-to-date unfavorable development was slightly below last year's level because the quarter had about $3 million in favorable development compared to $2 million in favorable development last year. Rate in commercial multi peril to the property and casualty components, on the property side in the third quarter there was no further development. Casualty showed favorable development in total, mostly for accident years 1999 through 2004. We think this reflects our reserving practices for liability claims, as well as the effect of moving policies to nondiscounted packages. The other reserve development details is pretty much business as usual in commercial lines, showing the benefits of our attention to underwriting and careful risk selection.

You'll find a discussion of each business line on page 21 of the 10-Q. Personal lines reported a small underwriting loss for the quarter and underwriting profit for the nine months because of the lower level of pass-through losses and the start we've made toward restoring the homeowner line to profitability. We are beginning to see by line benefits from the homeowner rate increases we initiated over the past several years. With a nine-month loss and loss expense ratio excluding catastrophe losses at 63.9% compared with 73.3% last year. The recently implemented rate change that Jack discussed won't give back all of the homeowner rate we've added over the past several years, but will better position our homeowner and auto package in a competitive market which should help with growth and new business.

Overall, loss and loss expenses for homeowners are tracking better than anticipated, but we are not ready to predict a profitable 2006 due to our outlook for growth and expenses. The rolling 12 month homeowner loss and loss expense ratio excluding catastrophes, was 62.6% compared with 69.0% in the prior twelve months. Personal auto continued to report strong results with the uptick in the third-quarter loss and loss expense ratio primarily due to the lower premium levels and normal quarterly fluctuation and losses. The loss and loss expense ratio was 62.4% for the first nine months of this year.

Cincinnati Life Insurance Company contributed $0.18 to net income in the first half of 2005 compared with $0.13 last year. The higher contribution reflected higher earned premium, more stable expenses and mortality experience within pricing guidelines. Higher realized capital gains added $0.03. Overall, the life operation continues to provide a consistent income stream for our agents and the Company, helping to offset some of the inevitable fluctuations in the property casualty results.

Before I comment on the Company's outlook, I want to give a brief update on the status of our application for exemptive relief from the Investment Company Act of 1940. As Ken Miller mentioned, our equity investments in the third quarter were made with proceeds of equity sales. Since the second quarter of last year almost all of our available new cash flows have been used to purchase fixed-income investments to bring the ratio of common stock to statutory surplus more in line with our historical average. And last year's third quarter we also reduced the parent company's ratio of investment total assets by moving some of our Fifth Third holdings to the property casualty company from the parent company. We now plan to maintain that ratio below 40%.

After the discussion with our attorneys, we have come to the conclusion that the SEC does not see a need to respond to our application for exemptive relief under the Investment Act of 1940. Moving forward, we will consider insurance to cover regulations and rating agency comments, as well as the trends in these ratios to determine what portion of new cash flow could be invested in equity securities at the parent and operating company levels. Equity investment has played an important role in achieving our portfolio objectives, contributing to net unrealized investment gains of $4.988 billion at September 30, 2005. We remain committed to our long-term equity focus, which we believe is key in the Company's long-term growth and stability. Current holdings, which we closely monitor and evaluate, are making a significant contribution to investment income through dividends and dividend increases, and they hold the potential for future appreciation.

Before I turn the call back to Jack, let me quickly add some details to the comments in the release regarding our performance outlook. As Jack said, there is some uncertainty about the direction that pricing may take in the commercial lines market. In that context we are going to stick with our estimate of commercial lines written premium growth in the 3 to 5% range for 2005. For personal lines we now expect a decline in written premiums will be in the low single digits. Homeowner rate increases are partially offsetting the lower policy renewal retention rate, and weaker new business.

With about 70% of premiums coming from commercial lines we continue to see our overall full year property casualty written premiums growing in the low single digits. In early October we lowered our combined ratio target after assessing the impact of the third-quarter hurricanes. For the first nine months of 2005 catastrophe losses contributed 3.6 percentage points to the overall combined ratio of 91%. Subsequently, Hurricane Wilma affected the Cincinnati Insurance Company's policyholders in Florida. Taking that fourth-quarter event in consideration we remain comfortable with the revised target of a combined ratio at or below 92%. As is our usual practice, that target assumes a full year catastrophe losses to contribute approximately 3.5 percentage points to the ratio. Our calculations also presume that favorable loss reserve development will be in line with our historical levels, particularly since we won't have the help we had in 2004 from the UM/UIM reserve release.

Our commercial lines we are estimating a 2005 combined ratio at or below 90%. For personal lines we are expecting the combined ratio for the year near breakeven assuming a normal level of personal lines catastrophe losses. As Ken mentioned for investment income we're now looking for growth for the consolidated portfolio in the range of 6.5 to 7%. We believe achieving our growth and profitability targets could make 2005 another good year for Cincinnati, supporting a steady growth and industry-leading profitability that are our long-term objectives.

Thank you, Ken. That about covers our prepared remarks. Before we open up for questions, I will summarize our perspective. In commercial lines our agents continue to bring us insight on their local markets, and we continue to maintain the selective and pricing that will keep our results strong. The personal lines area is heading in the right direction, and the life business is making steady contributions. Our investment group has strong cash flow to work with and is generating excellent results. We think we're in good shape to bring more value to the agency and policyholder relationships while also working for shareholders.

Please let me remind everyone that Jim Benoski and J.F. Scherer are here to help me, Ken Stecher and Ken Miller to field your questions. So Meredith, let's go ahead with questions.

(OPERATOR INSTRUCTIONS) Charlie Gates, Credit Suisse First Boston.

To summarize, basically you see only limited impact potentially from the hurricanes on your pricing segment? Would that be a fair comment?

Charlie, I think the hurricanes from our standpoint is mainly a reinsurance question, and we have not gotten into our reinsurance discussion yet with the folks that we rely on. Quite frankly, we want those reinsurance healthy. Sometimes we get concerned when you see back-to-back years, like we have had with those storms. At the same time we see the reinsurance business being replenished with capital. We see pretty good experience among the managements of the reinsurance companies. We look forward to the renewal negotiation and putting in place our programs for 2006 that those won't occur for another couple months in our view yet. I don't know if that helps with --.

That was fine. What is the current status of Diamond?

Diamond continues to make good progress, and the more states and agents that we get on the system, the more we find little things we can tweak to make it better. We now have about $380 million in the Diamond system out of our overall personal lines business. And what we would like to do is get the ability to account bill. That is on the horizon and we think that will help a lot with our agents in having fewer questions from policyholders on billing items. J.F. is always involved in these marketing areas on Diamond, maybe J.F. would have some thoughts on it, too.

Charlie, as far as Diamond was concerned, we had held up the distribution of Diamond in Illinois to address some performance issues, which have been addressed. And as Jack mentioned the issue of direct bill, specifically account bill and monthly bill was also added. So we're resuming our rollout in Illinois here over the next few weeks, and we will be adding the feature -- a couple features with billing that will be appealing to our agencies.

My final question, I think some portion of the strength in property casualty stocks has reflected the perception that pricing change as a result of these horrible hurricanes. And I guess where you fellows sit given the fact that you've had pretty damn good underwriting results and pretty much isolated from whatever has occurred there, at least some segment of the commercial lines market in the United States you don't see much positive impact of those events. Would that be a fair comment?

Charlie, as Jack mentioned before in his remarks, that where we operate to a very great degree, the Midwest, Northeast in some areas and out in the Western areas, most of the competitors that we're dealing with have been relatively unaffected by the hurricanes. They are all enjoying pretty strong loss ratios. And as you point out, we are, too. We would expect that because of exposures we have in coastal areas, that is going to affect things as far as the kind of premiums we would pay for catastrophe reinsurance, things of that nature. But we would expect those costs would be passed on to those folks locally. We haven't seen anything. I traveled a fair amount of late. So has Jack. Most of our management has. We haven't seen any changes in the marketplace as a result of the hurricanes to date. A lot of talk, but where we operate there just doesn't seem to be much motivation for people to change their pricing significantly from a relatively stable marketplace to an aggressive marketplace. And so we're not anticipating there to be much change.

I should let somebody else ask a question. Thanks, guys.

Meyer Shields, Legg Mason.

A couple of agency questions, if I can. Can you describe -- I am not looking for number specifically but can you describe the processes you use to monitor the production of the agency you have appointed over the last couple of years?

Each individual agency we produce a production and loss report for each of those agencies. We keep track of our agencies by date appointed so we can do analysis going all the way back to agencies that were appointed in the '50s. From time to time we do take a look to see if there is any appreciable difference between agencies appointed, let's say more than ten years ago versus agencies that have been appointed recently. We do that analysis, and we do not find that there is anything appreciably different there, that there is a consistency about the quality of the book of business we write in most agencies. But we monitor that on a monthly basis. So as far as the production and loss reports the field reps that pass the nearly 100 territories now that we have also monitor it. And so we are on a pretty regular basis aware of how we're doing in each agency.

From a premium production standpoint are things progressing in line with your expectations?

Sure, on newer agencies where we are giving a shot at writing some business that in certain communities had been excluded from us because the newer agencies controlled certain centers of influence. We are very happy with the results we are getting from the new appointments we are making.

Just to clarify one issue, also, I think Jack mentioned in the prepared remarks that your primary competitors in commercial lines are regional companies. Is that equivalently true in personal lines?

That is a good question. I would say yes. Now you cannot escape the fact that State Farm, Nationwide, Allstate are huge in the marketplace. And they are competitors. But Meyer, we compete with other companies within our agencies, and we try to put together programs that our agencies can use to market to in their particular style. So we particularly want to match up in those agencies with the companies that are representing our agencies. J.F. deals with these things more often than I do and I wonder J.F. if you comment.

I think that's true, but probably on the personal lines maybe to a slightly lesser extent than in commercial. In commercial if you were to ask me who our competitors are I probably would start off -- not that the nationals aren't very good competitors -- but I would probably start off by listing a long list of regional carriers. But as Jack mentioned, the names the cast of characters that everyone hears about a lot are also the ones that are most competitive for us in the personal lines area.

Great. Thanks so much. That's very helpful.

Michael Dion, Sandler O'Neill.

Two questions. First maybe just a follow up to the initial question about pricing in your core market in the Midwest. Maybe you were phrasing that a little bit differently. Would you look to perhaps increase your coastal exposure if the market hardens such that you determined it was a good risk reward scenario?

No. We don't have any plans formulated to increase coastal exposures. We carefully examine what's going on there; we're examining the kind of losses that have occurred, the resiliency of buildings that were built let's say before or after certain dates that held up well in the hurricane areas. And we will target our writings to write those that obviously those risks that perform best there. But we really have no -- have really not talked about any changes in terms of strategy. We are carefully committed to all the states we're doing business in -- we have been cautious in coastal areas, and will continue to be.

Fair enough. Thank you. Just one follow-up, if I could. Maybe just a little bit more color on the investment portfolio strategy going forward. If I took your comments at the outset, based on what you said it looked like there was really no change to the existing portfolio holdings in terms of common stocks, fixed income. But in terms of the go forward strategy, do we still expect more fixed income purchases given the fact that you are basically managing the portfolio to keep the ratios in line, below 40% and under 100% there?

What you say is basically correct.

I think you are right, we are going to have to manage, and it is going to be a factor of how profitable our property casualty group is and how that surplus number grows, which will give us through to invest in equities there. If they are profitable that gives them the opportunity to pass more dividends up to Cincinnati Financial. There most of the investments are equities but we will have to monitor the 40%. But keep in mind as the equity in the property casualty group and subsidiaries grows, that is considered a good asset on a parent company only financials. That could give us potential room to invest in equities at potentially greater levels at some point.

Okay, that's helpful. Thank you very much.

(OPERATOR INSTRUCTIONS) Stephen Peterson, Citadel Investment Group.

Good morning. Just a quick question for Ken in terms of the agency appointments. From the press release, it sounds like another 50 next year. Do you anticipate those to be spread evenly throughout the year, or is there some lumpiness expected in terms of when you might be appointing the 50 new agents next year?

This is J.F. We do tend to experience a little bit of a light period of time in the first part of the year. January 1 is a very heavy competitive date, and so our field reps aren't spending as much time prospecting for agencies or getting them set up for appointment. So the bulk of the activity tends to take place in the middle of the year, let's say beginning in April and finishing up in the October area.

And of the 50 that you would like to appoint next year, is there a concentration in any particular geographic area?

No, I would say they are spread around the country. Certainly in some the heavier population areas, Greater Chicago, Greater Detroit, Minneapolis/St. Paul, Greater St. Louis; obviously where there are heavier population concentrations -- Greater Atlanta would be another -- would be good examples of areas where we think the opportunity presents itself.

Okay, and last quick question. I mean there has been as discussed by some of the previous callers some chit-chat about rising prices in the marketplace. Have you seen any significant behavioral changes on the part of your major competitors?

No, I can't say that we have. We've heard an awful lot of discussion or speculation about it, but in terms of what we've seen and talking with field reps about what's going on on a day-to-day basis, so far we haven't seen that.

Terrific, thank you.

John Keefe with Ferris, Baker Watts.

First of all, it's awfully good to hear Ken Miller's voice. J.F., I've got a question. Anticipating personal lines rate cuts or continued rate cuts in 2006, how do you reconcile that with a declining combined ratio?

What we've found, John, is that for the highest- quality accounts that we want to write, as Jack mentioned in his remarks, we haven't been in the ballpark for that. So what we wanted to do is attract the above-average accounts. And what we've tried to do in terms of homeowner, as well as auto rate changes, is get very targeted in areas where we know from experience that we have had good quality business, and get our rates back in line to be more attractive in that particular area.

So I guess the most important driver is risk selection, rather than simply pure price?

That's correct, and as we have in the past, we together with our agencies work to make certain that that can be accomplished. We don't view ourselves as a commodity player in personal lines. We are, if you will, a value player. Centers of influence in the community, the folks that buy their commercial lines from our agencies, if you will, is a slightly higher-valued homeowner buyer.

So together with our agencies, we're simply trying to target that segment, make certain that we're in the ballpark. Our agencies don't ask us to be low dollar and we're not intending to be, but we need to be a little closer than we are right now, which our new business is down and it tells us that we're not. And between adjustments in our rates and collaboration with our agencies, we hope to reverse the trend and get back into the areas where we were.

I see. Thank you very much.

Ron Frank, Citigroup.

I would just like to echo the sentiments. It's nice to hear your voice, Ken. Two questions, if I could. One is on the market, J.F., I'm going to ask you to just beat a dead horse one more time. And you commented that partly because you mainly compete with regionals that were relatively unhurt by the hurricanes, you haven't seen much indication, if any, of this talked-about hardening of the market. I was wondering specifically to the extent that you do see the nationals in your market, is there any indication that they are attempting to lead the market up because they are feeling more pain, or do you not have that kind of granularity yet?

The obvious question on every agency visit we make is what are you seeing in the marketplace, what are you hearing from all of your lead competitors; in many cases, they are nationals. Certainly if there is a risk that has exposures in coastal areas, it is tough right now, and there have been changes and we do hear that. Really, Ron, at this point based on the day-to-day competition that we're observing and what our agent -- what our field reps are telling us they are or are not writing, what we're hearing is conversation. We are not seeing anything in particular.

There has certainly been leaders of other companies make statements, but in reality so far -- and it may change. As Jack mentioned in his remarks, we haven't started our negotiations with our reinsurers yet, and I guess January 1st would be a huge date for everyone. I suppose that could be the start of it. But if, in fact, everyone anticipated it, I would have thought probably there would have already been some changes. So we at the strongest level hear things of stabilizing in the Midwest, as far as pricing. There is also speculation that the carriers that have been prevalent on the coastal areas might refocus their aim to middle America. And just the opposite could occur, that there might be a more aggressive marketplace.

Yes, that sort of occurred to me, too.

So right now, all we would be giving you is speculation.

Okay, thanks. On homeowners, a few related questions. The 63 ex-cat loss ratio for the quarter is pretty close to the six and the nine-month numbers. Should I infer from that that you are getting more comfortable with that loss ratio pick as we go along notwithstanding the volatility we've seen on a quarterly basis? And then I have a follow-up.

I think we are becoming more comparable. We're seeing that the homeowner rates are starting to become a lot more effective for a larger part of our book. And I think we are trending down the way we expected. And like the comment on the last quarter like a three-year comparison in non-cat loss and loss expense levers coming down on a rolling basis, we continue to see that again this quarter. So we're not there yet. Obviously on the expense side because the premium has not risen as we had hoped. That ratio is rising a little bit. So as I commented we're not ready to say that it is going to be profitable next year, but I think the trends are in the right direction.

And on the subject of profitability, Ken where does that 63 need to go for you to declare this business long-term profitable with an appropriate cat load, et cetera? Are we there, are we almost there? What is the bogey for when you do your return arithmetic for that ratio to be consistent with return objectives on an ex-cat basis?

There is -- I will give you -- I know it -- right now we are targeting in the mid 50s. And I have to say, though, that that means that we reversed the trends of our written premium to the point that we can really use the economies of scale and this new system we're developing. That will bring our expense ratio down.

We are talking about loss ratio now, though. I'm sorry.

(multiple speakers) the total profitability, I'm sorry, if we get the mid 50s non-cat --

That assumes that the expense ratio also gets where you want it to go?

That is correct, that's the point I wanted to make.

And that leads to the last question, which is when you shake down to the anticipated effects it's sort of an extension of the previous question that was asked before, but not zeroing in on homeowners, as you shake down the perspective effects in '06 of these rate adjustments you are making to get more competitive, and what you currently see in loss trends, what realistically can you accomplish on that ex-cat ratio for homeowners in '06? Can it really fall a lot further given that you've got that need to get a little more competitive here at least short-term?

That's a tough question. I think we're going to continue to make progress. As I had mentioned, the rates that we are giving back -- we are not giving back wholesale large rate decreases. What we're doing is tweaking what I would consider somewhat minor adjustments to make them competitive. Because as we mentioned the rate increases we put in place kind of have a three-year policy -- we are at 30, 40, 50%. And I might ask if (indiscernible) want to add on the rates on top of that. But I believe that we are still going to be able to continue to bring that ratio down just because we retain some good business; we are also going to be able to write some good additional business. I think those things all play into that scenario.

Also we still have a number of policies ruling off of three-year policy terms that will be able to affect -- they've been insulated from fairly significant increases so far. And they will contribute, as well.

Can you give me a rough percentage on that, J.F.? And then I'll stop.

It's about 50%.

Okay. Thanks a lot for those answers.

Steve Virgili, SF Investments.

I was wondering if you could maybe explain for me a little bit more with respect to the losses in Louisiana, it almost sounded like you are a little bit surprised to see those. It sounds like the agencies who wrote those weren't necessarily authorized to write that business. Could you elaborate on that for me a little bit, please?

We're glad to. Yes, the agencies were authorized to write that business. We are fully aware of those exposures. It is just you don't count on hurricanes coming in with the force that they did. And one of the minor difficulties, and I think Jim Benoski should really talk about this because its claim related, because we don't have agents on the ground selling in Mississippi, Louisiana or Texas we have to import our -- either our claim representatives from our Company to work in states where we are not set up with all the internal machinery to do it or we have to bring in outside claim representatives to help us out. So it is a little bit different working relationship in those states. Maybe Jim would have something to add to it.

I think that's correct. Also, the risks that we had were as we said before, written by agents that in states where we do business like Alabama, agents had some coastal exposures over in Louisiana and Mississippi. And an agent in Arkansas had some exposures, too. So these were not agencies that are writing out of New York. They are agencies that are near the area where the storm occurred, and they just had some commercial properties over there.

(OPERATOR INSTRUCTIONS) Justin Maurer, Lord Abbett.

Just a quick follow-up on the comment about the reinsurance rates as we go into the first of the year. Can you maybe talk about maybe the different scenarios under which you guys would approach that given what may or may not happen rates? I know its a lot of conjecture, but just maybe in the instance that things get crazy on the upside, would you guys look to do a little bit less? And maybe even (indiscernible) back a little bit on growth, or how would you think about that?

I'll start. I think what we would do is we would look at the different rates that are proposed and the cost there, what impact there may be if we do decide to change our retention. What the effect will be there to our potential earnings and balance sheet exposures. And I think you know on the working treaties themselves, which is the pro risk type of things, I think those rates there we haven't started our discussions yet but I don't know that necessarily we would expect a whole lot of change there. The property cat is the one that was alluded to earlier where the first layer, which is 20 X to 25, we have hit that pretty hard the last two years. So that is where some rate increases we would probably anticipate there. And I guess there is a risk, too, if how many people would want to reinsure us at those levels. Last year we retained 40% of that. We may have to change that retention percentage. I think from a balance sheet standpoint we obviously have the capability of doing that. So I think those are unanswered questions but we would look at all those different factors when we arrive at our decision.

I suspect it could paint a pretty ugly scenario in the sense that those rates are going through the roof at the time you have alluded to, that your core markets aren't necessarily reflecting the ability to pass that through. So therefore, you may just end up hanging onto a little bit more of the risk to offset it somewhat.

I think overall our property cat program is in very good shape. In that we have not attached it very frequently, and we have not gone through the very -- we've never attached a very high layer to our program which does contribute profitability to the reinsurers.

Thanks a lot.

Fred Nelson, Crowell, Weedon.

I always get to be last. It's amazing. I wanted to thank all the wonderful women that are with your company and on your Board that allow courtesy and kindness to be reflected in the great support they give to the organization and I think it is fabulous what goes on there.

Thank you, Fred. We appreciate that. We have a lot of good folks that both work here and in the headquarters office, as well as out in the field. We rely on them greatly.

I wanted to just ask on inflation on automobile replacement parts, original and those made in foreign countries. And on the wind damage with roofs blowing off, if you could comment on what you're seeing on the cost of parts, on the cost of materials, the cost of labor on replacing things in some of your territories.

Fred, Jim Benoski. On the wind damage to the structures, the labor rates and material rates always go up in the affected areas. That is because of the supply and demand. The auto parts, I don't think there is a big difference there. We have never used aftermarket parts. We've always used the manufacturer of parts and those seem to be readily available.

But they are going up in price, too?

I would assume, I haven't noticed that to any great degree. I think the price increases are more on the properties, the building structures.

Thank you. The investment counseling business, is it still moving forward?

Fred, it is actually doing very well.

So are you, my friend, and thank you.

You're very kind. Thank you.

You deserve it. That's all from me.

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

Yes, there are some closing remarks. I would like to thank everyone for joining us today. It has been another solid quarter and nine months with Cincinnati Financial and The Cincinnati Insurance Companies. We have good people and good plans, and we want to keep the momentum going. Thanks for your interest. Talk with you at the next visit.

Thank you. This concludes today's conference call and you may now disconnect.