辛辛納提金融 (CINF) 2006 Q2 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the Cincinnati Financial second quarter 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).

Thank you. Ms. Wietzel, you may begin your conference.

Good morning, everyone. I am Heather Wietzel, Cincinnati Financial's Investor Relations officer. Welcome to our second quarter 2006 conference call.

This morning we issued our earnings release, financial supplement, 10-Q and portfolio of securities owned. If you need copies of any of those materials please visit www.cinfin.com where all of the information related to the quarter can be found on the investor's page under Financials & Analysis.

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 that we discuss 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 releases for our various filings with the SEC. Also reconciliation of non-GAAP information as required by Regulation G was provided with the release and is available on the investor page of our website.

Statutory data is prepared in accordance with statutory accounting rules as defined by the National Association of Insurance Commissioners (NAIC), 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. Good morning to all of you and thank you for joining us to hear about Cincinnati Financial's second quarter. After my remarks, Ken Stecher will provide some details on financial results and review our updated 2006 outlook assumption. Then we will open for your questions.

Before I go any further, I wanted to highlight the announcement we made in May regarding the Board's recognition of the contributions of Ken and our Vice Chairman Jim Benoski, who many of you know in his previous role as head of our headquarters claims operations. In May the Board promoted Jim to President and Chief Operating Officer and Ken to executive vice president of Cincinnati Financial and elevated both of them within our property casualty subsidiaries.

The Board chose to recognize the roles Jim and Ken have been filling for the past several years and the depth they add to our leadership. Their guidance has extended beyond their respective areas, greatly influencing our Company's success. I look forward to continuing our working relationship into the coming years.

Turning back to business the efforts and cooperation of all of our associates and agents continue to pay off in the second quarter with healthy property casualty the insurance underwriting results, despite higher weather-related catastrophe losses.

At the same time, our income from investment operations set a new record. That new record and our higher target for full year growth of investment income reflects our strong cash flow from insurance operations, our allocations over the past two years of a larger portion of new cash flow to fix maturity securities and the increase in the general level of interest rates. Our investment department continues to invest in a mix of fixed maturity and equity securities.

They balance our priorities, first matching fixed maturity investments to insurance liabilities and then leveraging the long-term advantages of our equity investing strategy. The steadily increasing dividend income we receive from our equity investments help support our earnings through all insurance market cycles.

We also are feeling confident in our insurance operation. Our Commercial Lines insurance business reported its 12th consecutive quarter of underwriting profits, along with healthy growth and strong new business activity even as market conditions slowly grow more competitive.

Echoing our comments of the first quarter, credit for our strong new business growth over the last three quarters goes to the special effort of our field marketing teams and good agency relationships - not to any easing of price pressure that's for sure. Our field associates are our in our agents offices asking for business, emphasizing the values Cincinnati Insurance brings to them, calling on prospects of those agents, carefully evaluating risk exposure, and working up the best clothes for good accounts.

Working equally as diligently, our headquarters' underwriters are talking to agents well in advance of policy renewal dates, communicating our willingness to work with agents and to retain good accounts. For quality risks, they are offering special policy extensions that add two years to the term of an expiring three-year policy. Eligible policy holders retain the terms and conditions that they had selected three years ago, backed by our superior claims service and our A++ rating from A.M. Best Co. plus they get stable rates on some of the shorter tail coverages within the policy.

All of these initiatives are helping ensure Commercial Lines growth above industry levels with strong profitability.

Our Personal Lines business also continues to move forward, although high-catastrophe losses and a jump in umbrella and dwelling fire losses resulted in a small underwriting loss.

A few highlights. Policy counts and premiums for new home owner business rose in some of our higher volume Personal Lines states. We reported substantially improved six month results on home owner business excluding catastrophes compared with a year ago.

And effective July 1, we introduced a limited program of policy credits to incorporate insurance scores into home owner and personal auto pricing. Our Personal Lines associates are working hard to leverage the strides that have been made so that we can resume growing profitability in the homeowner automobile market.

Finally, our agents deserve a good deal of credit for making our results possible. Independent agents who market our insurance products appreciate our strong catastrophe response and everyday personal claim service. They appreciate our ability to maintain the highest available rating that we've maintained for 50 years, and our commitment to giving them a local field team that includes loss control, premium audit and other specialists beyond marketing and claims.

These are the things that help them decide their best clients should be protected by Cincinnati. We will keep working to honor that.

Now I would ask if Ken would shed some light on the financials.

Thank you, Jack. 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 investment and investment performance continued strong in the second quarter and first six months of this year.

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 investing activities, and review the assumptions behind our updated 2006 performance targets.

First I wanted to mention last week's announcement that Standard & Poor's revised their outlook on us to stable from negative. Maintaining their AA- rating on our insurance subsidiaries and A rating on the parent company.

Turning back to the Property Casualty businesses. I will start with loss trends including new large losses, catastrophe losses and loss reserve development.

Losses greater than $250,000 and case reserve increases greater than $250,000 rose in the quarter for both Commercial and Personal lines. The Commercial Lines saw higher new large losses in our surety and executive risk business lines. For personal lines we saw more new large losses and case reserve increases in our newly broken out other personal business line, primarily for personal umbrella and dwelling fire coverages.

Both the surety and executive risks and other personal business lines are relatively low premium business lines for us. Losses for each can fluctuate significantly and we do not believe that the increase in the second quarter indicates any new trend or risk. Overall, commercial lines loss and loss expenses excluding catastrophe losses was unchanged from the first quarter.

Looking at the more significant personal business lines, personal auto's loss and loss expense ratio was up slightly from last year. The Six-month home owner ratio excluding catastrophe losses actually declined to 56.5% from 65.9% last year, moving this business line close to breakeven.

On a trailing 12-month basis, the home owner loss and loss expense ratio including catastrophe losses was 79.3%, compared with 82.9% in the year earlier period.

Catastrophe losses weighed heavily on both Commercial Lines and Personal Lines this quarter. Three Midwestern storms in April and another storm and rain and flooding that hit the East Coast in June all took a toll on our policyholders.

People buy insurance to get through such storms and our claims representatives do a great job, often in difficult circumstances. They have the human touch as they get in there and gather the facts of each claim and deliver what is due under the terms of the policy.

In total, we are estimating losses from the storms in April at $57 million, and losses from the June storms at $10 million. The impact of cat losses on the second quarter combined ratio was four times the year ago level. Year-to-date our catastrophe loss ratio is at 6.5%, compared with 1.1% last year. I'll talk about what this might mean when I cover the outlook in a moment.

Now for a brief update on loss reserve development. Through six months development has been immaterial. I'm still comfortable that we are on track to see full year savings at about half of last year's 5.2%. This year, about $17 million in savings in the second quarter offset about $20 million of adverse development in the first quarter.

Last year, about $45 million in the second quarter savings offset about $14 million of adverse development in the first quarter. Development of commercial casualty losses - which can fluctuate due to the nature and size of commercial umbrella policies and limits largely accounts for the year-over-year differences.

Turning to expenses as you saw in the release, noncommission or other underwriting expenses seemed to settle down a bit in the second quarter although they still are up $21 million year-to-date. Stock option expensing accounted for about $12 million of the six-month increase.

The release points to some of the different items influencing expensing for the Commercial Lines and Personal Lines businesses - although everything looks like pretty much in line. I would note that Personal Lines' deferred acquisition costs are showing the seasonal trends that are the norm for this business line.

However Personal Lines' written premiums continue to decline. We may end up with a larger charge earnings for DAC this year than last.

Also we are expensing more and more of our technology costs as various systems move into production. Our activities now focus on adding product lines and/or states to systems that are in use as well as adding agent-requested enhancements. The Personal Lines' underwriting expense ratio also reflected lower earned premiums.

The Cincinnati Life Insurance Company contributed $0.06 to operating earnings in the second quarter compared with $0.05 in last year's second quarter. For the first half of this year Cincinnati Life contributed $0.10 to operating earnings.

Overall the Life Operations continues to provide a reliable income stream for our agents and the company, helping to offset some of the inevitable fluctuations on the Property Casualty side.

Turning to investments and the balance sheet, just a few highlights. During the quarter we reduced our balance of short-term investments to 0 as we use cash to pay some of the taxes related to the sale of our Alltel holdings. We purchased $143 million in equity investments including 79 million of common equities primarily adding to our existing positions. That brings six-month equity purchases to $585 million. And we repurchased 150,000 of our shares bringing the six-month total to two million shares.

Shareholders' equity at June 30 was essentially unchanged from year-end. Book value was up slightly over year-end. Our continuing repurchased activity reduced shares outstanding used in this calculation by about 1% since year-end.

We also saw a strong investment income growth from both the equity and fixed maturity portfolios. For the quarter, dividend income was up 11.2% and interest income was up 9.2%. In addition to the earnings we generate on the cash we used to pay the taxes on our Alltel sale, investment income benefited from strong cash flows from insurance operations, a higher than historical allocation of new cash flow, fixed maturity securities over the last two years, and an increase in the general level of interest rates.

We are recognizing those trends by raising our estimate full year pretax investment income growth to be 8% to 8.5% range.

Before I turn the call back to Jack, let me also touch on the changes we are making for our full year outlook for Property Casualty. As Jack said we are confident that Commercial Lines - which provides almost 75% of our Property Casualty premiums - will continue to perform strongly. We now believe that that should lead to total net written premium growth of at least 2% for the year despite the decline we anticipate for Personal Lines.

We are still looking for a full year GAAP combined ratio of 92 to 94% for the total Property Casualty operations. We are doing so knowing that, based on cat losses through the first six months, it is very possible that the full year catastrophe loss ratio could exceed our previous assumption of between four to four-and-a-half points.

It's looking as if the non cat loss expense ratio is staying in a very favorable range. Importantly, we have the financial strength and flexibility to accommodate catastrophe losses above the 4.5% level. It is also still looking like the expense ratio could come in around 30.5 to 31.5% taking into account the option expense.

Some of our costs are more fixed, such as our planned investments in technology. Their contributions to the expense ratio in 2006 might be higher because of slower premium growth.

Even with bad whether, we expect 2006 will be another outstanding year. Back to you, Jack.

Before we open for questions I want to note that we are welcoming more than 1,100 of our field associates home to Cincinnati this weekend. It is our tradition to do this once a year.

We get a tremendous business benefit out of their visit. In this short time, we are going to jam in a lot of business. Each and every agency relationship will be reviewed, with input and evaluation by everyone who works with that agency in the field, along with the agency's headquarters, underwriters, and a couple of officers of the Company.

Plus we will do some training sessions on products and technology and we will all get to know each other a little better, making it easier to understand each other all year round. This is one of those unique hands-on things we do that makes us a good company to work for; and we think makes us a good choice if you are a policyholder, agent or investor.

[Julianne], we are about ready to open for business. I wonder if I could remind everyone on the call that Jim Benoski, J.F. Scherer, Ken Stecher and Marty Hollenbeck are here with us to help field your questions.

So Julianne, let's go ahead with questions.

(OPERATOR INSTRUCTIONS) Kelly Nash with KeyBanc Capital.

Good morning. I wonder if you could touch on a couple of things? One regarding your 92, 94 expectation for the year how much favorable reserve development are you incorporating into that assumption?

I'm figuring about two-and-a-half points. Right now we are basically at about a breakeven as I mentioned in my comments. But there is a little bit of as a -- development normally occurs, a little adverse in the first quarter and then develops favorably the balance of the year.

So we are looking at those same trends this year. I think it'll be about half of what was in 2005. And 2004 was even greater than 2005 favorable development.

Thanks. Then regarding your increase in your premium growth assumption that obviously is stemming from the strength you see on the Commercial end. How has your view on Personal Lines changed or has it changed in your premium growth assumption?

I'll start off and then J.F. can add comments. What I've done basically is I've tried to be a little conservative and even though we've got new pricing going into effect on July 1, I kind of kept the Personal Lines factored about the same 5% decrease for the balance of the year. Then I kept the Commercial Lines growth rate at about the same range as we have experienced.

So those are the two factors that entered into the decision to raise it slightly to at least 2%.

Kelly, I guess in terms of Personal Lines, as Ken mentioned, we have instituted some insurance scoring rating methods in both homeowner and private passenger auto. Little too early to tell based on July business the effect that it is going to have; but we are encouraged that it will spur new business growth there.

It'd also have some effect on our current book of business in that those accounts with an above average insurance score will see a decline. So we would expect that the recovery in Personal Lines is going to take several months. I think we mentioned before probably, really hit more of a stride in early 2007.

On the Commercial Lines side - as you have seen from the release - Commercial Lines' new business has been strong. Policy retention is strong and loss ratio is holding up very well. So in terms of growth in Commercial Lines we think that things are going pretty well there.

Regarding the growth in Commercial Lines, it certainly has been impressive. Is that stemming from any particular lines or coverages? New products, any kind of compensation for your field representative, anything like that?

No change in compensation for anyone. I guess the thing that I would probably observe on new business would be that we are writing a bit more in the way of larger accounts on new business. Once again we are not into the very large accounts that some carriers are, but larger accounts. And that has been a trend that we have seen for quite a while.

A lot of teamwork out in the field. Not only are the field marketing reps who are our field underwriters involved in the process but loss control has a significant part in that, premium audit for meeting as teams with agencies. We are identifying above average accounts and more frequently than we have in the past, that team of Company folks are going out and visiting policyholders when the agency makes the presentation for the new business.

So new business is spread throughout the country. We are not seeing it come from any particular area. By way of lines of business, we typically sell packages, anyway. We are trying to write the whole package. Our workers' comp premiums are up a bit but so are payrolls and sales.

So we are seeing some bump in some of that because the economy is improving and the basis of premium - which tend to be on the Casualty side and workers' comp side, payroll and sales - that is contributing as well. So I would have to say that very encouraged about the new business in Commercial Lines and we think that we can continue to sustain it.

Charlie Gates with Credit Suisse.

Good morning. Congratulations today on what Procter & Gamble is doing. I believe it's your third largest investment and I guess it's up $2.60.

(MULTIPLE SPEAKERS)

Yes; nice going on that one.

We worked hard to get that one, Charlie.

Congratulations. I have three questions. I guess the first question. If you go back in recent years some quarters you have substantial share repurchase, in the following quarters there isn't really any. To some extent, that has occurred in '06. Could you opine as to how you assess share repurchase in the light of what you've done in the first and second quarters?

Charlie, I think that's a good question to talk about and I might - at this time since we are talking about investments - mention that when I said Ken Stecher is in the room to answer questions I should have also said Ken Miller, our Chief Investment Officer, is in the room to answer questions so I think between the two of them, they will come up with a pretty good response. So I will turn it over to and ask if Ken Miller would lead us off, please?

Charlie, what we really look at with the share repurchase is what other alternatives are available to us. That is a key and then in addition to that, we want to make sure that for the year - not just quarterly but for the year - that we hit a certain number of shares that we bought back. I think we have announced that number. I thought we did. Didn't we?

Yes, we have.

Yes. So I think at a minimum what we would like to have would be 2.5 million shares for the year.

I think the other factor, Charlie, as you know as a result -- result of the Alltel sale, we had a lot of cash available and as Ken said - looking at other investments and our stock price at that time - the cash availability was there. We didn't have to borrow or use other cash flow to accommodate the repurchase.

It just worked out that we bought quite a few shares first quarter and not so many in the second.

My second question, you guys have, I believe, superb disclosure. On page 11 of your 10-Q you've added something new, I think, that we haven't had before. And that was the line about Scottish Re and it stated that you've got a reinsurance receivable from those guys of $28 million. Given what's occurred in the last week - and I don't know what occurred there but I know it's bad - how do you handicap that?

That was something that really developed Monday there. They released earnings guidance; earnings were down. All four rating agencies downgraded them. To be honest, at this point, we are not quite sure what the outcome is going to be.

Most of what the receivable we have was through a cession from us to another company and then they passed it on to Scottish Re through some kind of agreement at which point we are not 100% sure at this point in time how that agreement reads.

What we thought we would do is just try to have open and clear disclosure and at least point to the fact that we do have an involvement with Scottish Re. We thought it was best to at least get that out there in the public domain. Let everybody know that, yes, it is a receivable. The $28 million - I will tell you the majority of that is on reserves that were ceded on life insurance contracts. It is not claims receivable at this point in time.

But obviously if claims did occur in the future the normal process would have been we would have recovered on those reinsurance contracts. So right now, there is quite a bit of uncertainty. But I just wanted to get out there the size of the number. It's not overly large to Cincinnati Financial Corporation.

What would be the worst case? You lose the $28 million?

I think that's the worst case right now. Then I guess that would open up to what could we do to find another carrier to take on those contracts. Because those policies I believe are part of our terms sales which is kind of a coinsurance agreement. We only retain a certain percentage of the in face -- in force amounts.

But is my thought pattern correct? That that would be pretty much the worst case?

I believe so yes.

My final question. I'm looking on page 27 of your 10-Q and clearly if you didn't send out your 10-Q I wouldn't be asking the question so see these other companies know what they're doing maybe. I'm looking at the table that shows the breakdown on expenses of your Personal Lines business. This year's quarter versus last year's quarter and I see that basically combined ratio rose 12 percentage points.

I see that a lot of that was this year catastrophe losses which explain -- which go up nine percentage points. And I see your expense ratio down some. I guess the question is, if one of you could opine as to the factors contributing to the erosion in underwriting profitability ex catastrophe?

I think ex catastrophe, let's see that would be - we do have a mention of the dwelling fire and the personal umbrella losses that are up. You point to the charts on page 29, that would show the Homeowner, Personal Auto and Other Personal lines.

You'll see there that the Other Personal, the loss and LAE, ex cats went from 37 to 70. That's a smaller line of business but that does have an impact.

What is Other Personal?

That's basically the dwelling fire and Personal umbrella are the biggest parts of that.

Then the Personal Auto ex cat has also deteriorated slightly. Some of that we believe we have seen in the past has been seasonal. So we do see seasonal volatility. We also think that, potentially, with some of the rate increases -- rate decreases I'm sorry -- that have occurred just because of various competitive issues, that that could possibly raise that ratio by about 1%.

So I think it's a combination of those things. I'm sorry. Go ahead.

Just two more questions and I will let somebody else ask a question. Could you elaborate on how you see Commercial Lines' competition effectively at this point and how it's evolving?

It is competitive there certainly and to write new business it requires you to be very aware of the account you are writing and willing to get a very good price. In talking with agencies around the country it's spotty.

I think it is clear that we try to approach things on the basis of selling the value that the Company brings, claims service, A++, a three-year policy, all of those things. Agencies are not telling us it's as bad as it has been in the depths of the soft market. It's certainly very competitive out there but we are finding the ability to write high-quality accounts without doing anything that we would consider to be reckless.

So no question about it, though. There's a lot of competition out there. Obviously in the noncoastal areas.

Do you see some shift of large multiline companies like, say, a St. Paul Travelers to attempt to refocus sales away from the coast to -- or where you guys operate?

You know we've really -- that is something that has been up for debate here from the last three or four quarters and to be honest, Charlie, they were good competition before. Their presence is significant already. We haven't seen any changes in terms of either announcements that they've made or commentary from agencies that they are more involved or more likely to put more capital in our area.

I think a carrier like that and larger carriers have already had a fairly significant presence here. They would really be in a better position to tell whether they are deploying capital differently.

My final question. What's the basic commission -- over and above the basic commission if I were a Commercial Lines agent, I also get an extra commission or bonus if I get my premium in on time. Isn't that correct? What is the typical commission payout and what is the typical extra incentive I get if I get my premiums in on time?

The premium in on time is a component of our profit sharing agreement. So we do have a standard commission contract that's - there are different levels of commission by line of business. Pretty standard in the industry. There is nothing particularly remarkable about ours versus others. And then we have our profit sharing contract, a contingent contract that all of our agencies participate in.

Within that contract we to try to create if you will an income statement for each agency as to whether or not they created a profitable book of business for us, in total, in the agency. Then we share that profit with them. The component to which you refer in the early paid bonus is if the agency pays their account current with us, they are collecting premiums for us, and so when they pay as we ask them to pay us in 45 days. If they will pay us in 30 days we will pay them 1/2% for each month that they pay early or a total of 6% for the year of the profits they would generate if in fact the agency does generate a profit.

So once again it gets back to the situation they are not being paid a bonus purely because they paid early. They would be paid an enhanced profit sharing if in fact the agency produced a profit on their entire book of business.

So say if my other commission was 15 this would basically be another 20% on top of that? Yes.

No. That's not the way -- that's not the way you would calculate it.

Okay. Congratulations again on Exxon and Procter & Gamble.

May I go back to your profit sharing question again. I think J. F. answered it beautifully, correctly, and the early pay idea, Charlie, is to remind agents of good business practice of collecting cash when they sell the policy, of remitting that cash to us in a timely way. And by putting these comments in our profit sharing agreement I think it heightens the need for just good quality, cash flow business practices that any agent would normally practice.

And we just want to say to them that we recognize that. We think they do a good job with it and it gets probably more attention than it should. I think the way J. F. answered it was right on target.

Congratulations again.

Michael Phillips with Stifel Nicolaus.

Good morning, everybody. Two questions from me. First I was wondering if you could give us a sense of a breakdown on your new business production in the quarter for P&C? I think you said it was around $94 million. Wonder how much of that came from new agents versus older agents.

I can't give you a real exact answer at this point. Newer agencies take a bit of time to gear up. We have seen a fair amount of business, I guess a somewhat disproportionate amount of business, from agencies that have been with us six to ten years. Now why that is the case I don't know but we have done some study on that. Newer agencies rev up with us a guess you might say versus hit a stride.

We are seeing, though, good new business across the board in all of our agencies.

That's fair. Secondly, speaking of agency appointments, it looks like you did around 18 new appointments in the first quarter, 26 in the second quarter. But plans for the second half of the year looks like they are down a bit. I was wondering if you can comment on that.

Well, not so much down a bit. We have a goal of appointing this year in the 55 to 60 range in terms of new agencies. And what we have tried to encourage the field to do is get that done as early as possible in the year. Fact is, that our strategy has to continue to have as many agencies as we should in all areas. We have been targeting, roughly, 50 a year.

This year a little bit more, because of a group of agencies - a better opportunity in one of our states. But we think the new agency appointment process will continue on and that 50 to 60 new agencies a year probably for the next five years or so. Beyond that, not really -- can't really tell. An awful lot that is a factor for us in that is the level of consolidation that occurs with agencies. We might target a city for an appointment but before that is done, agencies may have merged into one of our agencies which creates an opportunity for us.

Very important part of our strategy as a company to keep, continue to replenish our agency plant for us. It's a high priority for every field rep.

I just wanted to make sure there's nothing behind the scenes that says we've done so much this first half and we expect -- it looks like you are on now eight or so, second, third, and fourth quarters. Just wanted to make sure that wasn't the case.

No. No problem there.

Thank you that's all I have.

Scott Heleniak with Ferris, Baker Watts.

Just want to ask about the new business a little bit more. Just wondering how much is coming from new account growth year-over-year versus maybe getting some larger accounts and some larger business and maybe fewer accounts? Just wondering if you might be able to comment on that?

I think the characteristic that we are seeing - and this has been something that has probably been going for a couple of years - is that we are writing larger accounts. So that would be what we would see would be larger and I would say in the context of beyond $10,000 up to the $200,000 range is what we would call larger accounts for our Company.

I think that's a reflection of the services we are providing in the field. Jack mentioned it in his talk and in our release. Loss controls a more significant presence in the field for us. Field audits, underwriters traveling going out and visiting folks. The fact that our rating comes up more and more the A++ rating with A.M. Best is, in this marketplace, a big selling tool for agencies - particularly with larger accounts. Our three-year policy - right now granted the market is soft but I think it's very attractive for policyholder to know that, if they've negotiated with a high-quality agency A++ rated carrier that's been willing to make a commitment of three years to them on a huge part of their account, that enables us to write larger accounts as well. So that's how I would characterize our success in the field right now is that, on those larger accounts, I think we are an attractive marketplace.

And you've talked a lot about signing the people for the three-year policy. Anything more you can offer on that as far as what kind of trend that is? And how fast it is accelerating?

Well as a company that has been a standard approach for us to use the three-year policy. One of the comments that we have made also is that we are extending policies at renewal. If we have an excellent account that is in good shape - and we have a good relationship with the agency we will take a policy that perhaps has gone through a three-year term and extend it for another two years.

Or for that matter a one-year policy and extending it to make a total of three. We are very big into long-term relationships. Our agencies are and we think most policyholders appreciate that as well.

In terms of use of three-year policies, for us right now that would be considered the norm. To issue a policy on an account on a one-year term is the exception for us. And not a whole lot has changed from that. The only thing I would say that has changed that several years ago as we were changing some policy forms in the construction insurance area we put a lot of contractors on one-year policies. Now that our policy forms are what we want them to be, we are converting many of those back to a three-year term.

Fair enough. That's all my questions.

Kelly Nash with KeyBanc Capital.

First regarding the three-year policies, could you remind us again which coverages are renewed and which ones are actually priced on an annual basis?

The policies that are -- those parts of the coverage that our on a one-year policy would be the workers' comp. Workers' comp is actually issued on a one-year policy, renewed and underwritten on an annual basis. The commercial auto very well is a part of the three-year policy term but is annualized. So we will update coverages. We will update pricing. We will take a look at underwriting and reprice the auto as appropriate on an annual basis. And then the commercial umbrella, also, is subject to annual re-rating.

That part of the policy therefore that is left over would be the building, the contents, the general liability, the basic package coverages. All of those rates are then guaranteed for three years.

Then regarding your investment purchases in the quarter, could you elaborate a little bit more on the equities? At least give us an idea of the investments? Particularly whether or not you invested any additional money into Fifth Third?

That is an easy answer, Kelly. We did not. This is Ken Miller. Invest additional money in Fifth Third.

And the investments then were spread -- were they spread across some of your top -- some of your core investments in terms of your new purchases?

That would be correct. We did invest a little bit of money in Procter & Gamble. It would look like we did a little bit like in J&J, Pfizer, Wachovia Bank. But we weren't really going wild with financial institutions. We were trying to fill in some of the other equities that we had authorization on, but that were not financial institutions. And I might let Ken or Marty or -- .

Just to reiterate, Kelly, we spread it over quite a number of names and I think probably it'd be 17 total names existing (indiscernible) with what new addition in there. So it was pretty diverse.

And I think our portfolio is out on our web site now so you could really take a look at first quarter versus second and get the exact detail purchases that we did have.

Then, finally, I wonder if you could just touch on loss cost trends, what you are seeing in terms of frequency and severity of this point?

Kelly, Jim Benoski. I think our frequency is fairly flat. The severity is up. We are having -- seems like we are having more claims or losses of a large nature in the last quarter or two. So I think severity on the larger losses is an issue for us but frequency is relatively flat.

Thanks.

Charlie Gates with Credit Suisse.

I feel like Jason in the Halloween movie. First a comment. I don't think there is another insurance company in the United States publicly owned that lists every single investment on a quarterly basis. Maybe there is but I haven't found it. Here is the question. With regard to three-year policies, if the agent and the insured think that pricing is slowing or possibly working lower wouldn't there be less inclination from that individual to buy a three-year policy?

If an agent and the policyholder collaborate and then come back to us and ask us about pricing we are receptive to that. The question really becomes, today, can you look into the crystal ball and know that there are no crises, there are no significant events out there that could affect insurance availability or pricing over the next three years.

I don't think anybody can, with confidence, say that. We feel very strongly and our agents do as well that you have a company with financial strength that we are willing to make a commitment that we are willing to make over a three-year term that has value. We are -- as a company, we think we've priced fairly to begin with.

And so I think over that three-year period if something drastic happens, if competitors come in and for whatever reason require us to bring that policyholder back into play, we are receptive to talking to. But I think in terms of most policyholders would love the idea on something as complicated as insurance to negotiate it, to get a commitment and to be able to say it is put the bed for three years. That is what we experience.

Thank you. No more questions.

(OPERATOR INSTRUCTIONS) Fred Nelson with Crowell Weedon.

I'm always impressed with the women and the men in your business and your Company that reinforce a living of making meaning and every conference call I'm on, that is reinforced; and I just want to say congratulations for who you people are and how you handle people and it was neat to hear Ken Miller on the conference call today. Congratulations on that. It is a gift and thank you so much and that is all I have to say, guys and gals.

Good. Thank you Fred. We will work to merit your confidence.

You do.

We appreciate it very much. You put a smile on Ken Miller's face and that's rare, you know. Operator, are there some other questions?

There are no further questions. Are there any closing remarks?

There are and I would like to thank everyone for joining us today. We are truly grateful and appreciate your interest continuing in the Cincinnati Financial Corp. Thank you.

This concludes today's Cincinnati Financial second quarter conference call. You may now disconnect.