辛辛納提金融 (CINF) 2006 Q3 法說會逐字稿

Good morning. My name is Elizabeth and I will be your conference operator today. At this time, I would like to welcome everyone to the Cincinnati Financial third-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. You may begin your conference.

Thank you, Elizabeth. Hello. This is Heather Wietzel, Cincinnati Financial's Investor Relations Officer. Welcome to our third-quarter 2006 conference call.

This morning we issued the final news release, financial supplement, 10-Q and our 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 Investors page under Financials and 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 to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties. With respect to those risks and uncertainties, we direct your attention to our news release and to our various filings with the SEC.

Also, reconciliation of non-GAAP information, as required by Regulation G, was provided with the release and is available on the Investors page of our website under Financials and Analysis.

Statutory data is prepared in accordance with statutory accounting rules, as permitted by the State of Ohio, including the National Association of Insurance Commissioners, the Accounting Practices and Procedures Manual, and therefore is not reconciled to GAAP.

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

Thank you, Heather. Good morning to all of you and thank you for joining us again today to hear about our final third-quarter results. After my remarks, Ken Stecher will provide some details and review the assumptions and our updated outlook for full-year 2006. Then we will open up for your questions.

Last week, we discussed with you some items that led to lower-than-expected profitability for the third quarter. The final results we're reporting today are in line with preliminary estimates we released October 23. At the same time, many aspects of our third-quarter performance were exemplary and strengthened our confidence in our long-term outlook. Let me run through a few highlights and then I will talk about what we are seeing in the commercial and personal lines marketplaces.

Final operating income for the third quarter was $0.66 compared with $0.61 we reported in last year's third quarter. Overall, property casualty premium growth was 2.4% for the third quarter, with commercial lines up 6.5%. New business written by our agents grew for both commercial and personal lines. Third-quarter commercial lines new business growth of 25% was very strong, as agents continue to successfully market our products to their better accounts. Personal lines new business rose 14%, the first quarter-over-quarter increase in new personal lines business since the fourth quarter of 2002.

Policyholders have responded favorably to rate changes we made to better position our products in the marketplace. Our life insurance operation made another contribution to net income. Life insurance provides a stable source of revenue and profitability for our company and our agents.

Our investment operations generated the best news of the quarter. Growth in the investment portfolio and retained earnings resulted in a $2.44 increase in book value from year-end 2005. The $37.32 we reported is an all-time high book value for us.

September 30 invested assets reflected higher new investment, higher bond values and gains from our equity portfolios. Further, investment income grew at a healthy pace we had been anticipating, up 7.5% for the quarter.

Our company is well positioned for the long term and has the financial strength and stability to accommodate short-term fluctuations in some areas, like those we've seen this quarter.

Turning to the marketplace, in commercial lines, market conditions continue to slowly grow more competitive. Echoing our comments of the first and second quarter, credit for our new strong business growth over the past four quarters goes to the special efforts of our field marketing teams and our good agency relationships, not to any easing of price pressure.

In recent months, we saw some instances of very aggressive pricing. In some cases, we're facing pricing so aggressive even on better accounts that we pass on the account. But on balance, we continue to see underwriting taking place, and we would call it a competitive but healthy market.

For new business, our field associates are in our agents' offices emphasizing the Cincinnati value proposition, calling on prospects with those agents, carefully evaluating risk exposure and working up their best quotes for good accounts.

Anecdotally, on average, we're seeing pricing down about 10% to write the same piece of new business we would have quoted at 2005.

On renewals, our headquarters underwriters are regularly talking with agents, and for quality risks, they are offering policy extensions of one and two additional years on similar policy terms. Eligible policyholders appreciate the convenience of retaining the terms and conditions that they selected three years ago, still backed by our superior claims service and our A++ rating from A.M. Best Company. Plus they get stable rates on some of the shorter-tail coverages within the policies. Overall, single-digit declines seem to be typical on the renewal side.

Putting the hard work of all our associates together, writing business policy by policy is leading to commercial lines' growth above industry levels.

On the competitive front, our personal lines business also continues to move forward. We continue to focus on several areas that may help us resume growing overall in this business area. First, in July, we introduced a limited program of policy credits to incorporate insurance scores into homeowner and personal auto pricing. That program is leading to increases in new business for both personal auto and homeowner. It also was designed to lead to improved retention of current business.

While these pricing refinements have reduced premiums for some policyholders, we believe they present an opportunity to work with our agents to market the advantages of our personal lines products to their preferred clients. We are refining our rates on an ongoing basis to make sure our personal auto and homeowner rates are competitive and produce profitable business.

Second, the Diamond system, now in use by agencies writing approximately 90% of personal lines premium volume. In addition to the advantages for our agents, Diamond also provides the ability to make territory-by-territory rate changes more quickly.

Third, we are working to introduce product enhancements, including replacement cost coverage for new autos and identity theft expense litigation.

Finally, we are working to increase the number of agencies that offer our personal lines products. These steps should help us leverage the strides that have already been made.

One last comment. Our agents deserve a good deal of credit for making our results possible. We are firmly committed to continuing to provide strong catastrophe responses and everyday personal claims service to maintain the high financial strength ratings and to ensuring they are served by a local field team with strong local knowledge. These are the things that help them decide their best clients should be protected by Cincinnati. We will keep working to honor that.

Now Ken will shed some light on the financial details. Ken?

Thank you, Jack, and thanks to all of you for joining us today. I'm going to take things a little differently this quarter. First, I'll walk through some details for our four largest commercial and two largest personal business lines, and follow that with observations on the life business, and then touch on our updated 2006 performance targets. I'm not going to review the investment area, as Jack covered the key points.

The premium and loss data for the business lines I'll be reviewing are on pages 20 and 21 of our financial supplement, with additional details on pages 27 and 31 of the 10-Q.

When we made our preliminary announcement, we briefly referred to the strong performance of commercial casualty and commercial property. Together, these two business lines account for about 55% of commercial lines' premiums. And I'll reiterate that growth in profitability for each remains within the range we consider appropriate in light of competitive trends.

Commercial casualty written premiums rose 7.6% in the first nine months of 2006. While casualty pricing continues to become more competitive, new business is strong and we're getting a boost from the healthy business economy and business growth over the past several years, as well as higher exposures.

The commercial casualty loss and loss expense ratio has stayed relatively stable over the past seven quarters, except for the fourth quarter of 2005, where we had an unusually high level of favorable development. This year, savings from favorable development reduced the commercial casualty ratio by 13.6 percentage points in the third quarter and 9 points year-to-date.

Commercial property written premiums are up 5.5% through the first nine months of the year. That is overstated 1.5 percentage points because last year's 5 million ceded reinsurance reinstatement premiums reduced the 2005 written premiums we reported. We continue to work to ensure we receive adequate premium for covered risk, which is helping to offset more competitive market conditions in the non-coastal property markets.

Excluding catastrophes, commercial property's loss and loss expense ratio has remained relatively stable over the past six quarters. Savings from favorable development reduced the ratio by 4.5 percentage points in this year's third quarter, although for the nine months, adverse development added 1.8 points to the ratio. While it's likely that increasing competitive market conditions may pressure margins in this area, we believe we are well-positioned.

Commercial auto and workers' compensation are the third- and fourth-largest business lines, together accounting for about 35% of commercial lines' premiums. As we said on October 23rd, in the third quarter we saw increased new losses and case reserve increases greater than $250,000 for these two lines.

In addition, commercial auto results reflecting increasing competition. Commercial auto written premiums are up 1.2% in the first nine months of 2006, with a 2.4% decline in the three months due to lower pricing on new and renewal business. Commercial auto is one of the business lines that we renew and price annually, so the market trends may be reflected here more quickly than in other lines.

Commercial auto also is generally one of the larger components of the typical package. Adjustments may be made here to help price the entire package more competitively. We believe the downward pressure on pricing is part of the reason that the commercial auto loss and loss expense ratios rose for the three and nine months of 2006. Some of the increase in the third quarter also can be attributed to a modest increase in the contribution from large losses in the $1 million plus category when compared with last year's third quarter, although the contribution is pretty close to the average of the prior six quarters.

We analyzed large collision claims for the first nine months and identified 10 large claims over $100,000, eight of which occurred in the third quarter. These were physical damage losses for high-cost vehicles, for example a concrete pumper. Taking away these large claims would place the third quarter right back in line with the previous 10 quarters.

Finally, we are continuing to see favorable reserve development overall for commercial auto, but it was below last year's unusually high level. The savings reduced the 2006 three- and nine-month ratios by 2.3 and 2.8 percentage points, respectively. We remain focused on commercial auto underwriting and rate levels, making certain that vehicle use is properly classified and driver suitability is monitored. Those actions and a declining industrywide frequency trend should help mitigate the projected increases in industrywide severity.

Turning to workers' compensation, written premiums rose 11.6% in the first nine months. Premiums are benefiting from payroll growth for our policyholders as the business economy remains healthy. We also continue to work to modestly expand our workers' compensation business in selected states where regulatory and market conditions are favorable.

As we said on the 23rd, a couple of different factors played a part in the rise in the loss and loss expense ratio. First, four losses greater than $1 million represented approximately 12 percentage points on the ratio, well above the norm for this line.

Second, over recent months, we have reviewed each of our established workers' compensation case reserves above $100,000 to take into account current trends in medical cost inflation and estimated payout periods. That review led to the allocation of approximately $60 million to the case reserves held for those specific claims, which were from accident years going back as much as 20 years. Reductions to IBNR offset approximately $44 million of those reserve increases.

We had raised workers' compensation IBNR in the fourth quarter of last year in light of the trends identified in the workers' compensation markets. In total, net workers' compensation reserves increased $28 million, or 4.2%, to $689 million at September 30th this year, from $661 million at June 30, 2006. We believe we're on the right track to have our workers' compensation reserve patterns fall more in line with our other business lines.

Before I turn to the personal lines side, let me observe that overall commercial lines results remain very strong. Premium growth in the first nine months of this year was an excellent 6.4%, even including the 0.3 percentage point benefit of last year's reinsurance reinstatement premium. And nine months new commercial business rose 18.5%.

At 91.4%, the commercial lines combined ratio is a bit higher than we had hoped for at this point. But the difference is almost entirely one we anticipated, the lower level of savings from overall favorable developments. But we also have had the higher catastrophe losses. We are in great shape in commercial lines, with the people and relationships and commitment to achieve our long-term objectives.

When we made our preliminary announcement, we also noted the strength of our personal auto business line, which accounts for about 50% of our personal lines premium. While personal auto premiums continued to decline, the pricing changes Jack mentioned contributed to a rise in new business levels and a slight uptick in retention. The personal auto loss and loss expense ratio has remained very stable over the past seven quarters in the range of 60%.

We continue to monitor this line closely, but are pleased that profitability remains consistent. This consistency gives us confidence as we focus on growth initiatives.

For homeowners', the pricing changes we made in July also contributed to an increase in new business. The loss and loss expense ratio for the quarter rose to 93.9%, including about 15 points from catastrophe losses. In the quarter, we incurred over $8 million for four homeowner losses greater than $1 million. That total represented approximately 11 percentage points of the quarterly loss and loss expense ratio.

We believe that overall severity of homeowner claims is climbing industrywide because of higher material and labor costs. Further, we are seeing a shift to higher insured value, reflecting both insurance-to-value initiatives and the overall construction cost increases across the country.

Homeowners is one of the most competitive insurance marketplaces, so these loss trends are making our return to profitability in this line challenging. Looking at the trailing 12-month performance for homeowners, the loss and loss expense ratio, including catastrophe losses, was 83% compared with 71% in the year-earlier period, due to 12 additional points from catastrophe losses. But as Jack said, we're committed here for the long-term and believe we have initiatives in place to help bolster premiums.

Personal lines is an important part of our relationships with many of our agents. We believe that by helping our agents grow in this line over the long term, personal lines can contribute positively to their results and ours.

That summarizes the key points on these important business lines. Let me turn briefly to The Cincinnati Life Insurance Company that saw operating earnings rise 8.2% for the quarter, leading to a $0.05 contribution to consolidated earnings, unchanged from last year.

For the first nine months of this year, Cincinnati Life has contributed $0.15 to operating earnings. Overall, the Life operation continues to provide a reliable income stream for our agents and the Company.

Before I turn the call back to Jack, let me also reiterate the key change we've made for our full-year outlook for property casualty. Catastrophe losses through nine months totaled about $130 million, as we said last week. We've already experienced one major hailstorm in October. We are estimating that we will include at least $35 million in cat losses in the fourth quarter for this storm.

Without any additional storms, we're already at a record level for catastrophe losses that will add at least five points to the full-year combined. As we said last week, third quarter ex cat loss results have taken away some of the cushion we had in our target to handle a higher level of catastrophe losses. With the five-plus point cat loss contribution and the lower level of favorable development we anticipate, we now believe the full-year GAAP property casualty combined ratio will be in the range of 94% to 95%. That will generate underwriting profit, and we believe that we are positioned for long-term success, providing a stable market for our agents' business and producing steady value for our shareholders.

Our history has been to produce above-industry-average growth in written premiums and industry leading profitability. Over the long term, we believe our current book of business can continue to achieve that mark, but for the normal ebbs and flows. Jack?

Thank you, Ken. In the interest of time, Ken's comments did not go into any detail on investment results.

Before we open for questions, I wanted to stress that our cash flow remain strong. We are continuing to make new investments to build our investment portfolio. We also take appropriate opportunities to buy back our shares. Through the first nine months, we repurchased 2,150,000 shares at a total cost of $95 million. We believe there will be opportunities in November and December to bring the full-year repurchase to approximately 2.5 million shares.

The repurchase is one of the ways that we build value for shareholders, supporting our focus on increasing net income, increasing book value and increasing dividends paid over the long term.

Elizabeth, we are about ready to open for questions. But let me remind everybody that our President, Jim Benoski, our Senior Vice President of Sales & Marketing, J.F. Scherer, our Chief Investment Officer, Ken Miller, and our Vice President of Investments, Marty Hollenbeck, are here to help us field your questions.

Elizabeth, let's go ahead with questions.

(OPERATOR INSTRUCTIONS) Kelly Nash with KeyBanc.

Good morning. I wonder if you could start with the average account size. I know you noted that average premium per account, particularly on the commercial lines side, is increasing. Can you give us a sense of where that has been historically and maybe where it is now?

J.F., maybe?

Kelly, on the account size, we've monitored our account size throughout the year. And right now, the highest volume of accounts are in the $10,000 to $25,000 range. That is up slightly, but that has been a consistent pattern for us probably for the last several years.

On a median basis, the new policy premium size still is relatively low; it is $1,863 in September, for example. We've had some success writing larger accounts throughout the year, but I guess you might say the strike zone for us tends to be in that $10,000 to $25,000 range, occasionally inching up.

We've seen over the last several years a decline in policy-in-force count for policies that would be $5,000 or less in premium. We attribute a fair amount of that reduction to automation issues, a lot of other carriers providing some automation. We're in the process now of doing that ourselves. So while we are seeing the opportunity to write some large accounts and we have been successful in that area and we are happy that we are, we are still in that low five-digit range.

Okay. And then as far as agencies that write personal lines, can you give us an idea of ... in the states where Diamond is available, what percentage of the agencies are using the system? Or -- I'm sorry -- using or writing personal lines.

I think it is a pretty high percentage of agents, because we've gone to the states where we write a lot of commercial lines. That has been the principal use of the Diamond system, is to get our agents who have a lot of premium volume on those coverages in an automated way, and that is what the Diamond system has set up for us. J.F. might have some specifics.

Yes. Kelly, we are in 13 states now for Diamond, and that represents about 90% of our personal lines premium. So in all of those states, the agencies would be using Diamond, which is to be expected; there is nothing surprising there. Were you heading someplace more than that with the question, though?

I guess I was just trying to determine what kind of potential we might have as agents are using the system, are they adding more policies, are you seeing agents as they use the system add more personal lines policies?

I think the agents have received Diamond positively. I think the challenge for us right now tends to be more in rate setting. I think the July 1 change that we made, as Ken mentioned in his remarks, has accounted for a modest increase in our new business in July, August and September. As we continue to implement the insurance scoring mechanism in all these states, that is exactly what we are hopeful for, that the new business will pick up in all of those states.

I think the thing that we are watching is that over the last several years, as we implemented Diamond, and as we reported before, our premium levels, we overshot the market a bit in some areas. We weren't writing the new business, the flow from agencies was not there.

Our goal right now is to earn back the agents' attention to us in personal lines, both in terms of providing the better automation system, which we've done, but importantly at this point, making certain that our rates are competitive for agencies to sell.

And Kelly, if I could just add, in the 2005 10-K, we have some information on the personal lines agencies, and there's reporting locations -- for like Ohio, it was 211 for personal lines and reporting locations for commercial lines were 224. Another state for comparison would be Indiana for commercial lines was 99 locations; personal lines was 65. So there is some information that we gave in the 10-K that maybe can give you some insight into how the differences are and how many agencies were not writing personal lines at year end.

Kelly, J.F. again. In Diamond states right now, we've got targeted 65 agencies who are now commercial-only agencies with us that we believe are going to be great opportunities for us to start writing personal lines. Of those 65, actually here recently, about 13 have already been appointed. We're in contact with the other 52 and we're hopeful by the end of the year or early next, we will be up and running, have them licensed with us and start trying to convert the opportunity in those agencies.

Great, that is very helpful. Thanks.

Meyer Shields with Stifel Nicolaus.

Good morning. I want to talk about commercial auto briefly. I guess we talked about the -- this is going back to the preannouncement conference call -- Ken had talked about the need to implement rate decreases of about 6% to sort of keep in line with market trends. Are you seeing any difference in how much you need to adjust rate levels between the most recently appointed agents and agents that have been with you for five years or more?

This is J.F. I can't say that we've seen anything remarkable in terms of agencies that have been with us or not. What you do see, obviously, at renewal time -- and we've talked about our three-year policy concept -- we have package policies, including the auto, that are written over a three-year period. The auto section of those policies is rerated on an annual basis.

What we have observed on renewals is that beginning with the first quarter of this year, we were showing an average decline in rate on commercial auto of 5%, a median decline of minus 4. In the fourth quarter, it's exactly the same on average, minus 5, but the median decline in rate is actually minus 2. So I'd still call that pretty level throughout the entire year.

New agencies with us -- can't say that -- certainly when you're writing new business, and it was mentioned in Ken's remarks or Jack's remarks, that we have to be pretty competitive to write a new piece of business, both commercial auto or really any other part of the package. But we are not seeing newer agencies for us being more price sensitive in how they approach us than agencies that would be with us for more than three or five years.

Okay, that is helpful. Also, Diamond gives you the ability, I think, to introduce a little bit more price segmentation within personal lines. I was hoping to get your thoughts or plans for implementing something like that within commercial lines in general or commercial auto specifically.

Meyer, on commercial lines, we are studying what is a much talked about topic related to multivariant rating in commercial lines. And so we are trying to gather as much data, talk with folks that supply that data, and provide software to crunch the numbers.

We are less convinced in the commercial lines area that that is a route that we should take or even would take, in that commercial lines has so much variation to it and that we think the importance of seeing the risk, visiting the risk, having independent agents that coach us on all of that, that is a different animal in commercial lines than it is in personal lines. Personal auto, for example, there is so much frequency in that, it lends itself much more to the multivariant rating than commercial lines would.

What we've observed so far is that by way of lines of business -- and this is no secret to anyone --that obviously workers' comp would lend itself a bit more to that. But we are studying it, have done nothing and have no plans right now in the short-term to be implementing anything along those lines.

Okay, thank you very much.

Charlie Gates with Credit Suisse.

Good morning. The only question I had -- hey, first of all, a comment... Disclosure with regard to claims activity that you guys went through in your conference call, there might be another company to do a better job than that, but I'm not sure what the company is. So that is the comment.

Can one of you speak to competition and how you see that competition unfolding?

J.F., you're closest.

Okay. Charlie, I guess competition, we're all out traveling and talking with agencies, visiting policyholders. I guess the bigger picture of the comment relative to more competition inland off the coast, otherwise, we are continuing to see good, strong regional carriers, as well as the national carriers aggressively going after business in all the areas we operate in.

In terms of pricing, anecdotally, you will hear the war story from time to time where someone did something extremely aggressive. But all in all, I had an agent from Augusta, Georgia who is an excellent agent, very active in the marketplace. And almost assuming you might get the comment that it is irrational out there, he called it a level playing field.

So while you do see from time to time carriers aggressively trying to retain their renewals on excellent accounts, you also and we see opportunities out there to write business at prices that are aggressive compared to last year, but we think reasonable. Once again, underwriting is taking place. We don't see evidence of poor accounts getting great pricing. We don't see evidence of cash flow underwriting from competitors, and we certainly aren't doing that.

But there is no question about it, with the aggressiveness the carriers are applying to retain their renewals, it is a very healthy, competitive marketplace.

The only thing I didn't understand, J.F., was the comment about the level playing field. What does that mean or would you elaborate?

Well, I guess the agent's comment would be that professionalism, value-added, you're going to have some carriers, at least in the recent soft market, that had little to differentiate themselves than price. This is how an agent would look at it. And so they would "be buying business."

What our agent was saying and I think what we observe is that pricing is reasonably predictable in terms of going out and trying to write a piece of business. And the discussion that -- and the playing field is relatively level from there, and that the agent feels that showcasing his professionalism, our three-year policy, our A++ rating, our great claims service, are all the kinds of things that account for allowing him and us to earn more business.

This is my final question, and I said it before. Do you see the competition coming from one specific group of type companies? You know what I mean by that? Say is there any way you can generalize?

Charlie, I guess you could generalize that some of the national carriers are very aggressively going after smaller accounts. There is BOP business, service center kinds of approach. That is conspicuous. However, you would note that many regional carriers also have automation and service centers that they are touting.

From our viewpoint, we tend to characterize competition coming from other regional carriers -- we characterize ourselves as a regional carrier -- that for the kinds of business that we go after on a pretty regular basis, which I mentioned is in the $10,000 to $25,000 range, but really smaller than that and occasionally larger, we see a lot of competition from the regionals in that area.

And it really would not be fair to generalize. Everyone's reasonably healthy in terms of their loss ratios and their desire to write business, and they are all pretty energetic.

Thank you.

Daniel Baransky with Fox-Pitt.

On your large account business, how big of premium size are you talking about when you refer to your large accounts, just so I have a sense, versus your competitors?

Well, large accounts for us, I would say, when we're describing it, would probably be above $50,000. I'd say a small account for us, we've generally said less than $10(,000). And then from $10(,000) to $50(,000), maybe $100,000 would be a medium-size account for us. And then above $100,000, six figures, tends to be a large account for us. For some of our competitors, that is called middle market.

Okay. My next question was, dovetailed on that, is we keep hearing from just about everyone that larger account business is where the most competitive pricing pressure is. And you seem to be indicating you are getting some traction writing larger account business. I’m just kind of curious how it is that you are seeing traction there.

I think probably a couple reasons. Number one, this tends to be a fairly important or marquee account for our independent agents. They are looking for stability. Those kinds of accounts, I think, appreciate things like A++ ratings, the fact that we will offer the stability of a three-year policy.

There is certainly a realization that it's a competitive marketplace out there, but I think our agencies appreciate, because of their long-term relationship with us, what it means to have an important account, larger account with a company like us. We'd added loss control services over the last six, seven years, and in many cases that has been the deciding factor -- that in addition to great claims service, the fact that we can offer loss control services where heretofore perhaps we had not.

We are offering infield audit services with company employees now; in the past, in many territories, we did not. And we're trying to pick and choose on those larger accounts as well. It is not always about price when it comes to writing a larger account.

I had the opportunity when I was in North Carolina -- or South Carolina last week to visit a couple that would fall into the category of large accounts. And I got just the opposite from talking actually to the owners of the business with the agents. And in those cases, he never once brought up price. He brought up service, financial strength, he knew about our rating.

So that is approach that we are trying to take is, if you will, somewhat surgically approach it. We also have an account -- I think a real advantage in our company in that we have a department within Commercial Lines that is dedicated to providing support and service on larger accounts. Those folks -- and we've been using that department for quite some time they are hitting the road in many cases, going out and visiting policyholders. So I think as a company we continue to mature in our ability to safely, from an underwriting standpoint and providing good service to our agencies, to be able to fit the bill for many larger accounts for our agencies.

Great. I guess dovetailing that question, your new business production has been pretty good this year. And hearing about how people are pretty competitive for their own renewal business and the slippage in rate increases, I guess how do you feel or what do you attribute your traction on gaining new business to?

I think we've added quite a few territories over the last several years. Right now, we are up to -- we started the year with 100 new territories. And we're back up -- if we finish the year at the projected new commercial lines business that we are tracking at right now, we will be at about -- close in on about $3.3 million average commercial lines premium per territory, which is exactly what it was in 2004 and 2003.

So I'd give a lot of credit to the fact that we've simply been able to expand the service that we can provide by subdivided territories. We have added agencies at a more aggressive clip over the last several years; that has been helpful. The team approach to selling for us out in the field, I don't think there has ever been a time when all of the field associates that work serving our agencies have worked in a more coordinated fashion.

We've made a point of inviting ourselves, if you will, out, with loss control claims and our field underwriters, to go out on sales calls with our agencies. Senior officers that travel with our company have been visiting policyholders and actually going out on sales calls. We've simply ramped up what we would consider elbow grease in terms of being able to write business, and I think our agencies really respond to that.

I think there is -- many cases, there is -- perhaps our competitors would argue, what is the value of a three-year policy in a competitive marketplace? And I may have mentioned this on another conference call, but one of our field reps' in Indiana response to that, was, tell me when the next airplane could fly into a building and we will tell you how valuable stability in the marketplace is. So all of these things really add up, I think, to us working out very well in terms of new business.

I just have two sort of correlated questions. I know it is pretty early -- we've only had one month to look at the fourth quarter. Are you seeing any sort of continuation of what prompted your prerelease on the earnings for the third quarter as far as loss trends? And I do know it's sort of early in the quarter, I guess, on your large loss activity as well.

This is Jim Benoski. The month just ended yesterday and we've really not started compiling that information yet. I really can't give you much information on that at this time.

Okay. And then lastly, based upon the level of cat losses this year, has there been any thought process about sort of what your reinsurance buying appetite would be next year as opposed to this year?

Dan, this is Ken. I think we have to look at the complete economics of the situation. I think it would be difficult to go back and re-establish the first layer that we bought last year. In other words, going back from the $45 million retention to $25 (million), I think that would be difficult. I think the new models are still out there, they are raising PMLS. I think that is still a concern for the reinsurance industry.

It is a good thing, though, that the hurricane activity this year was very benign. So hopefully, that is going to help somewhat with the pricing. But those are the things that we're going to start discussing here this month. But to this point really had not reached any conclusions.

Okay, that is all I have. I don't want to monopolize the call. Thanks.

[Andy Walters] with (indiscernible)Duvall??? Partners.

Good morning. Given the mediocre performance of Fifth Third shares, have you ever considered perhaps lightening up on your holdings and using those proceeds to add to the $95 million of your own buyback and, quite frankly, you're more directly benefiting your shareholders with that move?

Steve, this is Ken Miller. I would answer that in a couple different ways. You are probably aware we have an investment committee that is made up of a few of the members of the Board of Directors that really direct that. All that we really do are make suggestions to them.

And then the other thing that I would mention is the dividend income that we get from Fifth Third is a very big part of our overall investment picture.

Thank you.

Scott Heleniak with Ferris, Baker, Watts.

Good morning. I was just wondering if you can talk about agency appointments for 2007, if you have any kind of target on what you are targeting for '07 -- what kind of ending number you might see yourself at?

Scott, we are targeting 50 new appointments in 2007. It seems like the merger activity has slowed down a bit. So in terms of the ending number, we'd hope it would be a net 50 increase. But sometimes what we find are that agencies will merge and we will end up with fewer than the total 50 increase.

We have very few, if you will, divorces; most of our agency relationships are very stable. We have relatively few that we close because things aren't going well. So I think if we were to net out 40 for next year, increase over year end this year, we'd be happy.

Okay. Is that going to be focused on some of your lower volume states, appointing agencies there, or do you think there is more opportunity in your core states?

Well, there is core opportunity in a variety of core states. For example, in Georgia, particularly in the Greater Atlanta area, that place is booming in terms of growth. North Carolina is going very well for us. We've considered even subdividing territory there because the activity level remains very strong. We are doing well in the Twin Cities.

So a lot of areas where we've -- and I would say probably mostly areas we have been in for at least ten years is where the activity will take place. Our newer states, Utah, Montana, Idaho, we've probably got as many agencies appointed in those states as we will have relative to low population areas.

So what we will continue to do is take a look at any area where agency relationships we have right now may be diminished in some way because of activity level. But we are probably going to target -- in addition to those I mentioned, Greater Chicago area would be another area simply where demographics would lead us.

Okay. And just one other question here. Can you talk a little more about renewal rate trends, any more detail on that? And are you seeing a big difference in commercial versus personal lines, any big deviant there?

J.F., why don't you give it a try?

I've got a few numbers just in terms of -- I mentioned the auto renewal rate changes. Commercial auto, we're averaging about minus 5 points on that. General liability is -- right now, being in the third quarter, we are showing about -- on a rate basis, down minus 1. Interestingly enough, on a median basis, up 1% in general liability.

And unlike what you may be hearing from the -- some of the reports from the accounts of agents and brokers and things of that nature, what we are experiencing is more a fair amount of pressure on property. We write obviously more business in the Midwest, and so therefore, that is more desirable than on the coast.

But we are seeing right now into the third quarter, on average, minus 5 percentage points at renewal on property, on a median basis, minus 6% down. So that would be how we would characterize our renewal book of business in terms of pricing.

As far as personal lines is concerned, obviously, a pretty competitive marketplace out there. In terms of what we are hearing or seeing from other competitors, it is tough to address that, simply because insurance scoring tends to be so much the factor than simply a base rate going down. People continue to perfect their systems and use different formulas, and so characteristics of risks make it difficult to characterize things. We're seeing obviously a need on our part to be more competitive both in private passenger auto and homeowner.

Okay. Actually, just one more thing here, too. Your Florida business, do you think -- as far as exposure, do you think that's kind of leveled out? I know it is sort of a small part of your business, but are you kind of comfortable where that is right now?

I think that a couple of us should comment on the Florida situation. We got a reprieve this year on hurricanes, but I think the exposure outlook is pretty clear. Florida is a growth state and they know how to bring people into the state. That is going to cause property value increases, improvements in building, personal property, business interruption. They've got a pretty good thing going in Florida.

How we are going to deal with that Florida opportunity over the years ahead, that will be interesting to know. We have spoken with the Florida Department of Insurance to attempt to get an adequate rate on the different property lines down there. We have found them to be very open with conversations with us and very accessible on these things.

We have to find a way, I think, in our company and possibly in the insurance industry to make Florida successful from an underwriting standpoint in the insurance business. I think we can do that through varying price and rate changes, through acceptance of risk in some tougher areas. But the wind problem in Florida is one that is serious for them, and it's a guess at this point how it will play out over the next five years.

J.F., would you have some comments on the agents that you deal with down there regularly?

We have relatively few agencies. We have 13 agencies in Florida, so it is not a lot. And many of those agencies -- well, they all do a fair amount of business with us. We take a very, as you would imagine, a very conservative approach on anything new that we are writing. We are trying to concentrate on non-property lines.

But one of the things that you would observe in Florida would be those buildings that were built, particularly after 2001, and weathered the storms quite well relative to damage susceptibility. And so in addition to limiting how much we will write, we're also limiting what we will write essentially to that kind of business.

So we are trying to do what we can to contribute, as Jack mentioned, to our efforts down there. But we do it in a very conservative way and it is just -- it is very challenging.

Thanks.

Kelly Nash with KeyBanc.

Thanks. I wonder if you could talk a little bit more about the claims closure rate that you provided, which was great detail, just in terms of how we should think about the claims being closed -- 68% I think you indicated from the October hailstorm. Just being November 1 here, is that unusually good or how should we think about that?

This is Jim Benoski. No, I don't think that is out of the norm. We send in teams of our people -- we had three storm teams go in, and you'll get a high percentage of closures pretty quickly. I think that is up to 74% this morning. It depends on, really, the volume coming in also. And they are still coming in about -- I think we got 55 yesterday.

But the number of people that we have on the ground really is what causes us to be able to reduce that claim count pretty dramatically. We brought one team out of there; I think we have still have two in. So we will continue to see a pretty significant drop in those claims. And if it slows down a little bit, those percentages should go up dramatically.

Kelly, I think maybe the way you are looking at it -- just to add to Jim's comment -- is in the fact that the hailstorms, the reporting of the claims seems to lag at times. And that is the one thing that we all have to keep in mind, is that Jim can settle the claims very quickly once they are reported, but if the insured takes a while to notify us, it can cause the tail or the reporting to drag on.

One other point too, Kelly. A large percentage of the claims in the Columbus area that we have in now have been auto, and those tend to close out a lot quicker.

Thanks. And then finally, I wonder if you could touch on homeowners’ retention. Was that primarily due to the expiring of the three-year policies as you are rolling people into one-year policies, or is there something else going on also with your core book of business?

Kelly, I think it is primarily price. Whether it is a policy that is coming off of a three-year, that tends to be a big event, because the rates that were in effect perhaps three years ago were much more attractive now. So there is a bit of an opportunity, if you will, for the policyholder to debate the premium at that point.

And then just the pricing that exists in general. The insurance scoring that we've implemented will apply to homeowners and we are hopeful that that will cause the retention to improve in that particular line.

But otherwise, no, nothing going on. The coverage form we have is excellent. The claims service we provide is excellent. Our agents provide excellent service. So everything else is sound.

Great, thank you.

Daniel Baransky with Fox-Pitt, Kelton.

I just had two quick numbers questions. On your thoughts on repurchase activity for 2006, was that 2.5 million shares or was that 2 to 2.5?

Dan, it would be to purchase up to 2.5 million.

And can you just remind me how much you've done year-to-date?

I believe about 2,150,000. So it would be about 350,000 shares to reach that 2.5 million target.

That 2.15, is that as of the end of the third quarter or as of --?

As of the end of the third quarter, yes.

Okay. And then in the workers' comp line, you indicated that reserves went up by $28 million. I don't think that is the level of any adverse development you might have had. Was there any adverse development per se?

In the third quarter, basically workers' compensation was a very insignificant amount. There is about $245,000 of development favorably.

Okay, that's it.

-- for the quarter.

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

I wanted to think everybody in your organization for how you empower people to go to the highest level of their life by getting out and reviewing policies and policyholders and your agents and helping them. I think that is such a precious gift and I just wanted to say thank you so much.

Fred, we can't comment. You are very courteous and thoughtful to say those things to us. We appreciate your following in Cincinnati Financial and we will work hard to merit your confidence. That is all I can say.

Thank you.

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

Yes, Elizabeth. I'd like to thank everyone for joining us today. We appreciate your interest in Cincinnati Financial and look forward to talking and seeing you in the future. Goodbye.

Thank you. That does conclude today's conference call. You may now disconnect.