辛辛納提金融 (CINF) 2005 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the Cincinnati Financial Corporation's 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.

Hello, this is Heather Wietzel, Cincinnati Financial's investor relations officer. Welcome to our year-end 2005 conference call. This morning we issued our release, our financial supplement, and portfolio of securities owned. If you need copies of any of these materials, please visit www.cinfin.com, where all of the information related to the results can be found on the Investors page under financials and analysis.

Also, we wanted to let you know that our intent is to return to the 11 AM conference call time in the first quarter. That call is scheduled for Wednesday, May 3, and our annual meeting of shareholders is scheduled for Saturday, May 6, if you would like to join us here in Cincinnati.

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.

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, which contained our Safe Harbor statement.

Also, reconciliation of non-GAAP information as required by Regulation G was provided with the release and is available on the Investors page of our Web site 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. With that, let me turn the call over to Jack.

Thank you, Heather, and good afternoon to all of you. Thank you for joining us to hear about Cincinnati Financial's fourth quarter and full year. A group of us are on the road again this week for 2006 agent sales meetings, and another group is on the line from headquarters to help respond to your questions. After my remarks, Ken Stecher will provide some details on the investment and financial results, and he will review our 2006 outlook assumptions, after which we will open for questions.

In summary, we achieved record net and operating earnings for the year, as the information you received this morning describes. On Monday, we announced that the Board of Directors increased the cash dividend 9.8% to an indicated annual rate of $1.34 per share, setting the stage for our 46th consecutive year of higher dividends.

All three of our insurance areas contributed to this year's strong underwriting results. Commercial lines, which provided 71% of total earned premiums, brought us $285 million in underwriting profits. Personal lines, which provided 26% of total earned premiums, added $45 million in underwriting profit, our first full year of personal lines profitability since 1999. Life insurance, which provided 3% of total earned premiums, contributed $0.20 to operating earnings, up from $0.18 last year.

I'm going to move right into what we're hearing from our agents about conditions in the commercial and personal lines markets and what we're doing to meet our agents' needs.

In commercial lines, we're focused on staying the course through the market cycle. While the fallout from last year's storms appears to have relieved some of the downward pressure on commercial rates, the market remains competitive, though still rational. Almost without exception, the competitors in our regional markets are profitable, financially strong, and working hard to achieve growth at satisfactory levels.

We have worked side-by-side with our agents through similar market cycles in the past. While soft markets can be challenging, they also bring opportunity. We believe our approach gives us a decided advantage regardless of the state of the market. Each new opportunity and renewal gets individual attention, and we're continuing carefully to underwrite each risk, even when the short-term cost can be slightly slower growth.

We work with our agents to market the worth of their professional services, together with Cincinnati's value propositions: customized coverage packages, personal claims service, and high financial strength ratings, all in a convenient three-year commercial policy.

We're also improving our infrastructure–our technology in particular–so that our agents and associates can work together more effectively. We're not heading out into new directions, though; we are following the same steady course we believe assures that, when the cycle turns further, we will still be a profitable and financially strong competitor, and we can continue to be a viable market for 75% of the accounts our agents typically write.

Now turning to personal lines... For 2005, the combined ratio came in ahead of our expectations. We made substantial progress in lowering the homeowners’ loss and loss expense ratio closer to the breakeven level. We also reported a decline in written premiums that was expected, but nonetheless disappointing.

We spent a lot of time listening to our agents in recent months about what they are seeing in the personal lines marketplace and how we can rebuild our status as a carrier of choice for our agents' quality personal lines accounts. Loud and clear, our agents have indicated that they want to recommend Cincinnati personal insurance products to their value-oriented clients. These are clients who care about the balance between quality and price, and who fully appreciate our superior claims service and the benefits of our package approach.

The vast majority of the agents who have begun using Diamond, our personal lines automation system, say they like this system for the control it gives them over their accounts and are beginning to benefit from the advantages it has at policy renewal. But agents have told us that a good system is not enough, which means we need to work further to reach appropriate pricing levels.

On a territory by territory basis, we began modifying selected rates and credits in mid 2005, to help position our auto and homeowner products more appropriately in the local market and bolster retention rates. In mid 2006, we will also introduce a limited program of rate segments in our Diamond states. These segments incorporate insurance scores to further improve our pricing for our agents' best accounts.

We believe we're taking the right steps to set the stage for our agents to successfully market the advantages of our personal lines products to their clients, which would help us to grow again profitably in this business area.

Before I turn the call over to Ken Stecher, I wanted to comment briefly on our investment operations and particularly on the sale of our ALLTEL holdings. We remain committed to our “buy and hold” equity investing strategy, which we believe is key to the company's long-term growth and stability.

ALLTEL was a tremendous investment for Cincinnati Financial for over 40 years. Their management is excellent, their financial performance strong, providing growing dividends. Their talented leaders have chosen to pursue a strategic course that bodes well for their future, but they have indicated that they will be using their cash to reinvest in the business rather than continuing to increase their dividend. We wish them the best in their endeavors and will applaud their progress.

For Cincinnati, however, we felt the need to continue building our portfolio with stocks that have both the potential for capital appreciation over the long term and an increasing income stream. That is part of what our investment department is working on doing, with the substantial proceeds of the ALLTEL stock sale.

Whether we're talking about insurance or investment, the message that we want to convey above all else is that our focus is on creating enduring value for our agents, our policyholders, our associates, and our shareholders. Our focus, our planning, our decisions, and our efforts are intended to position our company further out in time.

We seek to meet our agents' needs and are doing so with an eye toward solutions and approaches that will give us an advantage for five, 10, or even more years. As we appoint new agencies, we're looking to build relationships that will grow as successfully as those we have had for 40 or 50 years.

We treat newly appointed agents with the same respect, and give them the same support, that we give our established agencies. In turn, we expect to increase our business with them to become their number one or number two carrier after five years. We do that by learning what they need. That is what we're doing in Knoxville today and in 24 other cities we will visit on the 2006 sales meeting tour.

Now let's get back to our financial results. Here is Ken Stecher.

Thank you, Jack, and thanks to all of you for joining us today. Jack covered our response to the significant market trends in the commercial lines and personal lines area. Overall, our insurance and investment performance was excellent in 2005.

Rather than go through information that is well covered in our written materials, I'm going to walk through a few specific details of the property, casualty, and life performance; update you on our investing activities; and review the assumptions behind our 2006 performance targets.

For the property casualty businesses, I'm going to cover four specific subjects: loss reserve development, expense trends, homeowner performance, and our new reinsurance treaties. I will start with loss reserve development.

We have provided a schedule that summarizes development by business line on page 21 of the financial supplement. As we said in today's release, savings from favorable development of loss reserves from prior years reduced the 2005 combined ratio by 5.2 percentage points. Last year, favorable development reduced the ratio by 6.7 percentage points, including the 1.1 percentage points from the release of UM/UIM reserves.

Looking at this for fourth quarter, we had another $80 million of savings from favorable development on top of the $80 million in the first nine months of the year. For the full year, favorable development of liability lines accounted for most of the savings this year.

Since 2001, we have been establishing higher initial case reserves on severe injury claims because our experience indicated that juries often ignore significant liability issues in cases involving seriously injured claimants. These higher initial amounts produce reserves that reflect our full exposure more accurately.

But some claims settle before reaching a jury, and some juries make awards that are less than the worst-case scenario. As a result, we're seeing some change in our case reserve development patterns, which allowed us to reduce IBNR in 2005.

In addition, re-underwriting the commercial book of business between 2000 and 2003 improved its overall quality significantly. Consequently, we're now seeing lower levels of losses from this business than in the past.

Savings in commercial multi-peril was entirely due to multi-peril casualty, which reflects underwriting improvements such as the changes to our general liability coverage, more accurate risk classification, and adherence to stricter underwriting guidelines, as well as the effect of moving policies to non-discounted packages. Through nine months, savings on multi-peril casualty had about equaled reserve strengthening for multi-peril property.

In the fourth quarter, the casualty savings more than offset about $2 million in reserve additions for multi-peril property.

We also had savings in non-liability lines, homeowners and auto physical damage. For homeowners, savings in the fourth quarter offset modest development in the first nine months of 2005.

The net favorable development number also includes reserve strengthening for the workers’ comp line of business. That primarily was due to medical cost inflation, although improving – or lower – mortality rates also played a role. The higher level of reserve strengthening in 2005 accounts for most of the year-over-year difference in the workers’ comp loss and loss expense ratio.

Turning to expenses, as you saw in the release, non-commission or other underwriting expenses rose by about $45 million year-over-year, raising the commercial lines combined by 0.7 percentage points, and the personal lines combined by 2.0 percentage points. For both commercial and personal lines, the biggest reason was the lower growth rate, which makes for an unfavorable deferred acquisition cost comparison.

Both lines also had higher staffing costs. For personal lines, there was also increased spending for technology, as we continue to roll out Diamond to support our agencies.

Discussion of personal lines expenses leads us directly to the homeowners subject. That business line reported excellent progress in 2005 in reducing the loss and loss expense ratio. Excluding catastrophes, the ratio declined to 58.4% for 2005 from 69.3% in 2004 and 72.8% in 2003. A 58.4% ratio excluding cats is putting homeowners closer to breakeven.

Further, catastrophe losses were in our targeted range, down about 10 points from last year. Our model for homeowners assumes that catastrophe losses will contribute about 17 points.

But as Jack discussed, even higher renewal pricing was not able to drive written premium growth in the fourth quarter, due to the decline in new business and drop in policyholder retention levels. Until our homeowner line is competitively priced for the good accounts we target, and we are able to restore the retention level and new business growth, we may be facing declining premiums.

Further, we have a rising fixed-cost base at the same time we are seeing declining premiums. As a result, homeowners may not reach breakeven as quickly as we had hoped, more because of the expense ratio than underwriting issues. Again, as Jack discussed, we're moving ahead with rate modifications that could position our homeowner line for growth.

Finally, a quick comment on our 2006 reinsurance treaties, which we covered in our release last Monday and in today's announcement. We have raised our property cat retention to $45 million, giving up the layer where we retained 40% of losses between $25 million and $45 million.

Under the 2006 treaty, $45 million in losses from a single event would cost us $45 million instead of $33 million, or $12 million more. We would not have to pay a reinstatement premium, which means the net incremental increase is closer to $7 million on a $45 million event. From $45 million to $500 million, our retention stays at 5%.

There are reinsurers from the U.S., Bermuda, London, and Europe on the property cat treaty, as is our normal practice.

We raised our retention on the property and casualty per occurrence treaties to a flat $4 million. The models made it pretty clear that this move made sense, and the pricing made it even clearer. We have the same group of reinsurers on the working treaties this year as last, at the same shares.

We have been asked by a few people if we could supply “rate on line” and other details of our 2006 reinsurance pricing. Generally, we have not disclosed that information and are going to stick with that approach for competitive reasons.

We’re estimating our incremental savings on the treaties will be approximately $7 million, which doesn't take into account the reinstatement premium we had in 2005. We have the financial strength to handle the slight increase in retentions as we balance cost and risk.

The Cincinnati Life Insurance Company contributed $0.02 more to operating earnings this year, reflecting higher earned premium, with stable expenses and mortality experience within pricing guidelines. Higher realized capital gains added another $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 property casualty results.

Turning to investments and the balance sheet, during the year we used approximately $700 million for investment activities on a net basis. The majority was put into fixed-income investments, weighted to tax-exempt bonds. Sales and purchases of common equities were about a wash, because the initial ALLTEL sales occurred in late December. $125 million of our investments were in preferred stocks during the year.

We used $62 million for share repurchasing, buying back 1.5 million shares during the year. We ended the year with $119 million in cash and equivalents. The January ALLTEL sale added about $550 million on an after-tax basis. Our investment department is using that money in line with our overall investment objectives, including evaluating equity investing opportunities and share repurchase.

At year end, book value was $0.72 below the year-ago level. The major components of that change were Fifth Third's market value decline during 2005, which had about a $2.50 impact, and another $0.40 of other unrealized losses on the remainder of the portfolio. That primarily was offset by a retained earnings increase of about $2.30 per share.

For the year, pretax investment income rose 6.9% and we're estimating our 2006 pretax investment income growth will again be in the range of 6.5% to 7%.

Before I turn the call back to Jack, let me quickly add some color to the assumptions that form the basis of our preliminary 2006 property casualty outlook. As Jack said, there is some uncertainty about the direction the pricing may take in the commercial lines marketplace. Like many of our peers, our outlook for commercial lines growth is largely predicated on what happens in the coming months.

We are more certain of our expectation that we will see rate-driven declines in personal lines written premiums. The rate changes we're planning may start to reverse that trend in the third and fourth quarters, but we're going to start with a conservative full-year view.

Looking overall at our property casualty written premiums, we do expect to grow, and we expect to do so faster than the level of the overall industry. We are reasonably confident that commercial lines, which provides about 75% of our property casualty premiums, should see sufficient premium growth to offset the personal lines decline. Hopefully, as the year progresses we can be a little more specific on the growth target.

We've given a more specific combined ratio target of 92% to 94% for the total property casualty operation. There are a number of assumptions behind that level:

• One, we will perform better than the industry.

• Two, catastrophe losses will contribute between 4 and 4.5 points. We are taking into account the potential for severe weather like we have seen in the past two years and the higher retention on the cat treaty.

• Three, savings from favorable reserve development might be in the range of 2% to 3%, down from this year's 5.2%.

• Four, softening in the commercial lines market could lead to a slight uptick in the commercial lines loss and loss expense ratio.

• Five, we're assuming that we have taken the right actions to maintain the personal lines loss and loss expense ratio near the 2005 level, and that our planned rate changes will help us be more competitive in that market.

• Six, the expense ratio is likely to be between 30% and 30.5%. Keep in mind that we have the potential for further unfavorable DAC comparisons because of slower growth. Also, some of our costs are more fixed, such as our planned investments in technology. As a result, their contributions to the expense ratio in 2006 may be higher because of slower premium growth.

That is a bit longer than our usual list of assumptions, but gives you a sense of the many factors that are playing a part in our thinking. I would add that a combined ratio in the range of 92% to 94% would be excellent, and we would anticipate that result keeping us among the most profitable companies in the property casualty industry.

And a final reminder; we will begin expensing stock options in the first quarter per FAS 123®. Under the pro forma method, option expensing would have reduced earnings per share by about $0.07 for the full year or about $0.02 per quarter because of rounding. With that, I will turn it over to Jack.

Thank you, Ken. We have talked you for a long time and now we're ready to switch to the listening mode. So we will open for questions in just a moment. Later today we will be listening again, this time to agents tell us about what is going on in the Knoxville area; and then we will do the same thing in Birmingham tomorrow, and in other cities over the coming weeks.

Sometimes people commiserate with us about our aggressive travel schedule. What they don't realize is how inspiring and energizing it is to listen to our agents and our local field associates. We come away with confidence that we have the right people and the right plans to help our agencies prosper by doing a good job in their communities. We appreciate your interest in that strategy and the value it creates.

Operator, we are about ready to open for questions. But let me remind everyone that Jim Benoski and J.F. Scherer are here Knoxville to help Ken Stecher and me field your questions. Ken Miller and Marty Hollenbeck of our investment team and some others are on the line from Cincinnati. So let's go ahead with questions.

(OPERATOR INSTRUCTIONS) Ms. Nash, your line is open.

My first question is on loss cost trends. I wonder if you could address any changes that you're seeing in terms of frequency and severity at this point.

Kelly, I think that is one for Jim Benoski on loss cost.

Kelly, the frequency -- our number of claims are down. There is a little bit of increase in frequency in the ones we track that are -- new claims are $1 million or more. We are up about 13 from '04; about one a month, so that is not too bad. The loss cost trends, though I think we're seeing an increase in the building material construction, building material cost. That is because of the pressure on the industry from the storms of '05. We're seeing an increase in construction cost. I think on balance, personal auto has not caused us any great concern.

In terms of the favorable frequency trends that we had seen, the industry has kind of seen on the personal lines side, do you see that continuing at this point?

The frequency trends are basically on the personal lines side. I think our increase, if we have one, would probably be in commercial auto.

Okay. Then could you specify the computer investments that you're making at this point? Or what you expect going forward as you continue to roll out the Diamond project?

Kelly, I think that's pretty good, and I think Ken might be the best person to handle that one.

Kelly, I think this year we expensed about $10.4 million between the three major projects, Diamond, the CMS claims system, e-CLAS™, most of which were Diamond-related.

At this point, the e-CLAS™ – which is the commercial lines development project, a lot of those costs are still being capitalized as we are working on second lines and third lines of business. There is a little bit...of that $10.4 million there is about a $1.1 million to that number.

The Diamond project, I would expect expenses to be approximately $7 million this year, as we have targeted six states to be delivered on that system. So I think the capitalized cost on e-CLAS™ probably will continue around the $5-$10 million range. But those again will not be amortized until later, when those lines of business are delivered.

Okay, thanks. Finally, I wonder if you could touch a little more specifically on what you're seeing in pricing in specific lines, both in commercial as well as in personal lines.

J.F. Scherer would be tuned in to answer that. This week we’ve had a pretty good meeting in Virginia and in North and South Carolina. So J.F., why don't you help?

Kelly, the larger lines, the auto, workers’ comp, have tended to have some targeting to them. But I really can't say that the field reps were necessarily reporting it by line so much as they might be reporting that there is increased competition.

Very good accounts are attracting a lot of attention, as we have mentioned and Jack mentioned in his remarks. There are a lot of healthy companies out there, in some cases trying to recapture some market share. So our agents are reporting to us that they are getting a lot of attention from a variety of carriers.

So it is a healthy, competitive marketplace out there. We're not seeing -- you will hear war stories, and every so often you will hear something that really is especially aggressive. But I guess we still characterize it as a pretty responsible marketplace.

Are you seeing any changes in terms and conditions at this point?

No, not a lot. I think people are trying to pay attention to the good underwriting practices that they have found themselves in for the last several years. What we are tending to see, tends to be more price related than it is an across-the-board enhancement of coverage or giving coverages away that up to this point we or other carriers had not been giving.

Great, thanks for the details.

Kelly? I should add that the expenses number I gave you is the expenses that are normally being run through. On top of that there was about $8.4 million of depreciation, mainly on the Diamond and the CMS systems that are already delivered. We are amortizing or depreciating those systems over a six-year period.

Great, thanks Ken. I appreciate that.

Mike Dion, Sandler O'Neill.

Just a follow-up to the last question, maybe just driving down a little bit further. In terms of commercial lines pricing, you indicated that there is some uncertainty right now; and we have been hearing that quite a bit this earnings season. Maybe you could just elaborate a little bit as far as geographically, where you are seeing more of the price competition; where there is more uncertainty than less.

I believe it was last quarter's conference call we had talked about the possibility of some maybe national carriers looking to increase exposure in the Midwest and moving away from the coastal areas, and if you have seen that at all.

Mike, to your last comment, we were in Virginia, and last night in North Carolina, in Charlotte, North Carolina. A few agents did mention that some of the carriers that would be operating out of the same branch office that would serve coastal agencies were indicating that there had been some conversation about a bit more aggressive activity inland on some of those carriers' part.

I can't say from our standpoint that we have seen a measurable change. We're not getting reports back from field reps that would indicate that. But that was unique to the conversations we've had in Virginia and North Carolina so far.

I think in terms -- and overall, we have not seen any price relief, if you will, or firming of the marketplace as a result of reinsurance renewals or anything that happened that was hurricane related. We're simply seeing a continuation of a lot of competition out there, from a lot of carriers that are doing pretty well.

I think I missed maybe the first part of your question, Mike; would you repeat it?

Yes, I think maybe if you just elaborate a little bit on the trends. I guess separating property from casualty if you could just -- is there a material difference between those two lines? And if so, where?

In the Midwest, further away from the coastal areas, with the possible exception of risk that would require facultative reinsurance by us or another carrier, the property market is a fairly competitive marketplace for us. We write a fair amount in the construction area; that's less soft. In fact, we might get some rate increases at renewal in that particular area.

Another thing that -- I don't know [necessarily] -- it certainly doesn't insulate us from competition, but the fact that we operate using three-year policies, when we are coming in with a renewal, with a three-year promise, the kind of pricing that we would use to retain the business might be slightly different than a one-year policy company.

So I can't say that there are any specified trends out there relative -- that would be identifiable. I think we deal against regional carriers in most of the states we do business with. Most of those folks are doing pretty well. And so nothing measurable. In North Carolina, our field reps had a terrific January in terms of new business. So it can be a bit spotty.

You would say that is the same for casualty as well?

Yes, I would say so. We're not seeing any unique changes relative to casualty.

Okay, that's helpful. Thank you.

Charlie Gates, Credit Suisse.

I have three questions. The first one, approximately what portion of your agents now own your stock?

Charlie, this is Ken. As we said, that is -- I still think it is a very high percentage. But most of the agents now put the stock in street names, and I just can't track it like we used to historically. Even though we still do act as our own stock transfer agent, most of the time it runs through some investment banker, some brokerage company, things like that. I just really don't know.

But I know there is a fair amount of interest. I believe it still is a fairly large percentage. And I believe a lot of them have it in like their 401(k)s or their agency pension plans, things like that.

Charlie, may I offer just a comment? We've appointing a lot of new agents in the last three years, and as they come through the home office, when I am able to meet with them -- I am not always there when they come through, there's so many of them -- but when I'm able to meet, I've got sort of a little comment that I make at the end of our discussion. I just ask them if they would consider buying some Cincinnati Financial stock when they have a particularly good year, and they just want to buy some and put it away, and forget they own it.

You would be surprised the number of agents who we have never represented before who say, well, we’re already are shareholders. So I don't think it is of the percentage volumes that it was, say, 25 or 35 years ago. But I think relative to their interest, it's important to them.

When it's important to them, I think they reach out and build a little stronger bond with the people of The Cincinnati Insurance Company, even though they are a new appointment. So I think the presence of the agents owning stock is important, but I think in the absolute dollar quantity I don't think it's as great as it was 25 years ago.

My second question, during the quarter you repurchased 374,000 shares for $17 million. With an authorization of 2.7 million shares, I believe, I guess the cynic would say, how come you ain't buying back more?

Charlie, this is Ken. I think again, we do look at it opportunistically. I think at certain times maybe the cash was not available, or there's some other factors. But I think, since that is handled in the investment department, I would like to turn it over to Ken and see if he has additional comments.

Charlie, I really don't have any other comments on that. It is really what we can find in the investment area other than our own common stock to invest in.

My final question, I believe J.F. made reference to the fact that he thought competition was healthy, competitive, and the competition was responsible. I don't know what that means. Does it mean that property pricing is off five to 7% and casualty is slack? I realize the two guys ahead of me have asked questions about competition; but is there some way you could quantify it, roughly?

Charlie, from time to time we are seeing some very intense competition. As a general statement our agents are reporting to us, and in terms of what we are writing on new business, renewing, that yes, property would be off, perhaps in that range; and the casualty would be fairly flat.

When I say healthy and when I say responsible that's -- when you think about a soft market out of control, you see across-the-board pricing decreases that are enormous by a lot of carriers a lot. We are simply just not seeing that. From time to time you will see a carrier that does something very aggressively. But I can't get any more specific as far as the quantification in terms of what we are seeing, but I think you would be fairly close in those numbers.

Thank you, guys.

Meyer Shields, Stifel Nicolaus.

I bumped myself off, so I apologize if some of these have already been asked. But one quick question in terms of personal lines growth. If I understand correctly, you have been implementing rate decreases beginning in the second half of 2005. We have still seen the net written premium growth rate actually trend more aggressively downward. Can you explain why that is going on?

This is J.F. Scherer. Our rates throughout -- and where we have been implementing some rate changes have been in a few states; they have been staggered. The rates that we have been charging on homeowner and even auto -- simply we just got too high. Our agencies found that our pricing was not sellable.

And we have been, over the last year, filing these decreases. The departments of insurance sometimes take some time to approve them; and then we get them implemented. So there is a lag in our ability to recover our rates to where we want them to be.

As Jack mentioned in his remarks, midyear we will be adding insurance scoring in Diamond states, which we believe will help us target more precisely the types of premiums we want for the desirable business. That is why we mentioned in our remarks that we think that the recovery will start more in earnest towards the third and fourth quarters of 2006.

Okay, that's helpful. The second question, should we be concerned that the fastest-growing line of business, now that you are reporting growth by segment -- I'm sorry, by line -- is workers’ compensation, where you had to take a reserve increase?

I can't speak for the rate so much as -- I think workers’ comp, I think it's just, as I said in my comments, there is some medical inflation as everyone knows. I think we are trying to be and follow the strategy that we normally have on trying to be a little conservative.

What we are seeing is, taking the studies out of California and Oregon that have had longer-term workers’ comp state programs, and because of the medical technology claimants are living longer, and things like that, so most of this increase, I believe, is for older years.

The pricing today, I don't know how competitive that is; and maybe J.F. can comment on that. But I think that we would still be -- if we are writing the workers’ comp and we are trying to do it with a package, and we're trying to do it in states where we have a favorable environment, and we would believe that we have a fairly decent chance of making a profit.

I would complement what Ken says, that in a sense that where you are seeing the growth for us, we are not -- we do not write monoline workers’ comp at all. Simply taking a look at the accounts we write now, where we may not write the comp, and complementing the rest of the account with it.

But I would also add that the addition and development of our loss control division of our company, as well as some specialists in the workers’ comp claims area, we think will continue to contribute positively to our abilities to do that.

Okay. One last question if I can. I noticed, and I think this was good news, that the commercial lines new business actually grew year-over-year in the quarter, despite being down for the year. That suggests that you have turned some sort of corner. I was wondering if you could let me know why you think that happened.

I don't know that it was necessarily so much turning the corner. We actually finished the year at almost dead even with 2004 on commercial lines new business. I think as the year went on, our field reps together with our agencies just got a better feel for the marketplace.

We received -- fields reps, particularly in North Carolina last night, were telling us that they have got a tremendously full pipeline of agencies offering accounts to us. One of the things that is attractive, particularly in years when you have catastrophes like Katrina and some uncertainty in the marketplace, there are some of the strengths that Jack mentioned in his remarks -- the financial strength of our company at A++ is an often-discussed issue for our agencies when they are selling.

A multi-year policy, creating some stability for policyholders is something that we leverage a lot. The fact that our adjusters do such a great job in handling claims; and that was evidenced by what we did in the Katrina and other hurricanes area.

So our field reps felt good about how things ended last year. I think 13% increase year-over-year may have been to some degree an issue of bookings and the timing of bookings, so much as a turning the corner.

At our end we did not view it as a corner being turned so much as just a comfort level with what we were going after in the marketplace. We do go into 2006 optimistic about what we can do in the new business area.

Okay, thank you very much.

Ron Frank, Citi Investment Research.

Yes, two things if I could. One is, J.F., you mentioned that you were not seeing in general a trend toward competitors trying to expand further into the Midwest to offset their coastal exposures. Does that comment apply specifically to homeowners as well?

Yes, we haven't seen nor have heard from agents describing to us that that is occurring. I think most of that has been anecdotal. I think a lot of it has just been speculation.

Okay, and second, question, I guess for Ken or for Jim. You mentioned mortality in connection with the workers’ comp reserve increase. Believe it or not, a Bermuda company mentioned that this morning with reference to their reinsurance operations. That is two more times than I've heard it mentioned ever in recent memory. I was just wondering if you could elaborate a little bit.

I don't have a whole lot more than what I said in my prepared comments. I think that is just part of what the actuaries are seeing, that with the medical technology people that have serious workers’ comp claims, the payment period is going to be extended.

Okay, so it is not an issue of -- are you using new mortality tables or anything like that?

I'm sorry, I don't know. I know he referred to the California and Oregon studies. I don't know if he really has commented on the mortality piece specifically and what that cost would be.

Okay, good enough. Thanks.

(OPERATOR INSTRUCTIONS) Paul Newsome, A.G. Edwards.

I wanted to ask about how quickly you think you can invest the proceeds from ALLTEL; and whether or not that makes a difference in your guidance for net investment income over the full course of the year.

Paul, that is a good question. We have had quite a bit of discussion on that. I know that Ken and Marty have done some work on that, so I will let them answer your question.

I would be very hopeful that by the end of the first quarter we will have all the proceeds invested. What was the other part of your question, Paul?

Whether or not that assumption is important to the earnings, the net investment income guidance that was in your press release?

I don't really believe so. I think we have included those thoughts in there already. Marty, do you have any comments.

No, I agree, Paul. We have determined that we think we can offset any loss in ALLTEL dividend, net of taxes over the course of the year with reinvestment rate (technical difficulty).

Then a separate question. This is not an investment question. You have put on a lot of new agents over the last year or two. I was wondering if you have seen any difference in the profitability of your new agents versus your old through this recent expansion.

Paul, generally speaking, when we do appoint an agency it is a walk before you run relationship. There is a conservatism with which we'd approach putting business on the books; and the agency feels the same way. So generally speaking, we see improved profitability overall, compared to the agency census as a whole just because everyone is being especially careful.

But in terms of looking out five years, we are very happy with the quality of business we are getting from the newer agencies in our agency force. We try to measure by year appointed, by size of agency, if there are any trends; by ownership, banks or broker-ownered agencies. And we don't see any negative trends showing up in any of those kinds of measurements.

Great, thanks. Good luck in 2006.

Kelly Nash, KeyBanc Capital Markets.

Just two follow-up questions. One, could you address if you've seen any changes in retentions in either personal lines or commercial lines?

Kelly, on the personal lines side, we have seen a little bit of a drop obviously in our retention rates there. On the commercial lines side, slight. I think we are holding our own on the commercial lines side of things.

We're not seeing the need, as was mentioned before, the re-underwriting we have done over the last several years, we're not seeing any need to non-renew anything or anything unusual from that standpoint. So it is something we are monitoring. There is a little bit of a dip to it, nothing alarming at this point.

Secondly in the personal lines, could you talk about Diamond more specifically? I know you have it in use in states representing close to 70% of the personal lines written premium volume. Can you specifically talk about how much agents are actually using the system?

In states where it's been introduced, they are using it exclusively. So Ohio, for example, Michigan, Indiana. So they would be using it 100% of the time relative to the personal lines of business they put with us.

I might add that as with anything there is a learning curve; but once that learning curve has been carried out, the agencies are pretty positively disposed to the Diamond system. We believe, particularly with some of the upgrades we continue to make, it's what the doctor ordered for us.

Kelly, may I add in on the Diamond system that we used to use three-year homeowner policy. We have some of those policies still yet to come up for renewal. It is not so much the advantage for the new business that goes into the Diamond system, but it's the renewals that start 12 months after the policies have been put into the Diamond system that really get the benefit for the agency's administrative effort.

So we have good prospects for Diamond, but it's going to take another couple of years by the time we go through all the states that we are working on. Then even in some of the new states, the Diamond opportunity is going to be our first effort at automation for those agents, and we're not quite sure how much those agents have been deferring business from us because we have not been automated.

We will find out over the next several years what kind of an impact we may have there if we set our rates appropriately. The Diamond system today operates at a much higher level of confidence than it did two years ago when we first introduced it to our major states. So I hope that helps out with what J.F. reported to you.

Thanks for the details.

Richard Veruck, Janney Montgomery Scott.

Jack, just two questions. Since you were in Charlotte, I am just curious if you guys are involved with the Wachovia Insurance Agency, part of the Wachovia Bank.

Secondly, the biggest drag on your book value obviously has been Fifth Third Bank. The good news about the Fifth Third Bank, if there is any right now, has been they have been able to continue to pay a decent dividend increase every year. But you keep waiting for that bank to turn around every quarter and it just doesn't do it.

Do you have a lot of confidence in that situation working itself out sooner rather than later? Do you expect them to be able to continue to increase the kind of dividend increases that they have had over the last 20 years? I assume your interest is still around 9%, but I haven't looked at that lately.

Yes, Dick, a comment first, though, on the Fifth Third Bank; and then I think J.F. would be the best person to talk about our Wachovia agency participation.

Fifth Third Bank has one of the difficulties that many banks in America have today with the interest rate difficulty. Banks own in general some federal, high-quality paper, high-quality fixed income. As the Fed has raised the short-term interest rates over the last 12 to 15 to 18 months, they just keep bumping up against those yields on those fixed rates.

As those bonds mature and come up for reinvestment, many of the banks today are able, I think, to reinvest those proceeds in higher-yielding securities, typically with commercial loans or in some cases personal loans, with some of their banking relationships, and it helps mitigate or helps to offset some of that interest rate squeeze.

I think Fifth Third is a fine bank. I think they are prominent in their market areas where they serve. All the things they have reported in their SEC filings you are fully aware of, because I could tell from the questions you asked how familiar you are with Fifth Third Bank. I think they have got a good future.

I think J.F. maybe should comment now on the agencies of Wachovia Bank.

Dick, we are in four, only in four Wachovia locations. We're not in the North Carolina, which is a fairly large operation for them; we are down in Savannah, another location in Georgia; Lexington, Kentucky; and Northern Virginia. So it is four good relationships for us, but relatively small.

It is not a bad bank. I don't know whether you have any investment in it, but it's not a bad bank with a pretty good dividend that is growing rapidly. Just a thought.

Dick, this is Ken Stecher. Our ownership percentage of Fifth Third is 12% or a little greater at this point.

Has that been increased?

I think it's only increased because they bought back some shares.

Okay.

We have not purchased any additional shares.

Okay, thanks very much.

(OPERATOR INSTRUCTIONS) [Fred Nelson], Crowell, Weedon & Company.

We are using a lot of Neutrogena out here and Aveeno made by Johnson & Johnson, because it's 85 degrees and it's like summer every day. So I'm delighted to report that to you, because I know where you folks are it may not be quite as warm.

Well, it's sunshine here today in Knoxville; but you're right, the temperature may only be in the high 40s or low 50s. But it's a nice day today, Fred; thanks for asking.

The sale of the ALLTEL after-tax is less than what you sold it for pretax. Will you be able to invest the full proceeds into the compounding of cash flow through rising dividends (technical difficulty) any effect on the percentages you have?

Fred, that is a good question. I am going to let Ken Miller answer that for you.

Fred, when we look at the proceeds after-tax, hopefully we will be able to invest all those back into the equity markets.

The full proceeds or the after-tax proceeds?

The after-tax proceeds.

Okay, because the value of ALLTEL obviously was more. So I'm just curious. Okay; so I hear that. No loss carryforwards to offset against any of the ALLTEL; is that correct?

Well, I think --.

I can answer that, Ken. There is a very minor loss carryforward, 30 million or something like that. So that will reduce the tax payments slightly but not greatly.

I think that the one thing at the parent company, the ratio that we are tracking with the 40% test, under the 1940s Investment Act, that ratio is down slightly under 34% or 33.9%. So if we have available cash that is going to give us some opportunities to invest in equities where we have not been able to do as much in the past few years.

That is what my question on the ALLTEL was. Because obviously if you have to pay a tax of $200 million that came out of equities, let's say, --

That's correct.

That could be available, so that you do have a little better window to put that back to work for the compounding of cash flow.

That is true.

Your investment counseling business is still (technical difficulty) to me. Is it still going forward okay?

Ken, you want to handle that one?

Sure. It is going along very well, Fred, thank you.

You guys are terrific people. On the thing about workman’s comp in California, people living longer because of the quality of the medical care we're getting, I just want to share with all of you and your counseling business, it is happening also to individuals. I have people that have to go back to work and come out of retirement to support their family, because their parents are living to be in their 90s with very good health.

So that compounding of cash flow and dividend raises as Fifth Third does or Johnson & Johnson or Pfizer -- so important. So I want to thank all of you for being a gracious role model on how to build wealth. You do a super job. Keep it up.

Thank you, Fred, we appreciate your words very much.

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

Well, thank you very much and thank everyone for joining us today. We will excuse ourselves now to visit with agents. We do appreciate your interest. Goodbye.

Thank you. This concludes today's Cincinnati Financial Corporation conference call. You may now disconnect.