辛辛納提金融 (CINF) 2010 Q2 法說會逐字稿

Good morning. My name is Michelle and I will be your conference operator today. At this time I would like to welcome everyone to the Cincinnati Financial second-quarter earnings 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)

I would now like to turn the call over to Mr. Dennis McDaniel, Investor Relations Officer. Mr. McDaniel, you may begin your conference.

Hello. This is Dennis McDaniel of Cincinnati Financial. Thank you for joining us for our second-quarter 2010 earnings conference call.

Late yesterday we issued a news release on our results, along with our supplemental financial package; and we filed our quarterly report on Form 10-Q. If you need copies of any of these documents please visit our investor website, www.cinfin.com/investors. The shortest route to the information is in the far right column via the quarterly results QuickLink.

On this call you will first hear from Ken Stecher, President and Chief Executive Officer, and Chief Financial Officer Steve Johnston. After their prepared remarks, investors participating on the call may ask questions. At that time, some responses may be made by others in the room with us, including Chairman Jack Schiff, Jr.; Executive Vice President J.F. Scherer of Sales and Marketing; Principal Accounting Officer Eric Matthews; Chief Investment Officer Marty Hollenbeck; and Chief Claims Officer Marty Mullen.

First, please note that some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties. With respect to these risks and uncertainties we direct your attention to our news release and to our various filings with the SEC.

Also, a reconciliation of non-GAAP measures was provided with the news release. Statutory accounting data is prepared in accordance with the statutory accounting rules and therefore are not reconciled to GAAP.

With that I will turn the call over to Ken.

Thank you, Dennis. Good morning and thank you for joining us today to hear about our second-quarter and first-half results. While there are no big surprises, we do have updates on some recurrent themes of recent quarters.

We have come a long way since this time last year, and we know we have a lot farther to go. What we see now, midway through 2010, strengthens our confidence that what we started can raise our profitability to an acceptable level and then drive it to new heights, creating significant value for shareholders.

First, our premium growth initiatives continue at a good pace. Our strategy has been to seek new growth opportunities to offset the effects of unhealthy price competition in commercial lines, by far our largest business area.

We found those new avenues for growth. Their contributions in the second quarter allowed us to report six-month new business and net written premiums at a level essentially flat with last year, despite lower commercial lines volume.

With very little positive developments in an ultracompetitive commercial insurance market, we have made sure our value proposition is strong and helping drive sales in our other lines of business, in new states, and through additional agencies.

Earned premiums for our excess and surplus lines operation, which will soon begin its third year of operation, roughly doubled compared with the 2009 comparable quarter and six months. Our E&S growth is carefully managed with a focus on writing lower limits on risks considered moderate for the E&S markets.

Life insurance earned premiums continued healthy growth at a double-digit rate for the first half of the year, and the profit margin remained steady. Agents in our three new Western states wrote an additional $11 million of commercial new business in the first half, offsetting a good portion of the 18% new business decline in our established states.

In personal lines, a third of our $25 million growth in year-to-date net written premiums came from newer states activated for personal lines since 2008. As personal lines renewal pricing improves, we're glad to have that larger footprint and more agencies in established states too.

We saw about a 6% rise in personal renewal premiums, in part reflecting rate increases. That contrasts with commercial lines, where average renewal pricing continues down about 1% and our policyholders' insurable exposures continue under pressure.

With significant growth in other areas, we have taken the opportunity to walk away from underpriced business in commercial lines, protecting future profitability. Just the same, we aren't skimping on our support for commercial lines business. Business insurance tends to be the main focus in our independent agencies, positioning them to be centers of influence in their communities.

We're increasing the value we bring to agencies and their policyholders by strengthening our local field staff, including loss control representatives, workers' compensation claims specialists, and personal lines field marketing representatives. Staff additions are offset by efficiencies at headquarters achieved through technology.

We are keenly aware that local field service distinguishes Cincinnati, and that is even more of a factor than our technology progress in making it easy for agents to do business with us. Additional state rollouts of our new commercial policy administration system continue on schedule, and feedback from our agents is very favorable.

Balancing our need for growth with consideration of pricing and profitability, we are stabilizing our ex-cat underwriting performance and seeing signs of improving trends. On a consolidated property-casualty basis, the combined ratio for accident year 2010 so far is just under accident year 2009, as reported last December. Steve will elaborate on our continuing care to manage underwriting and expenses in the current environment, so those improving trends can go forward.

I will make just a brief comment on investment income, then turn it over to Steve for details. We are pleased that second-quarter investment income is higher than a year ago. As we invest new money and reinvest matured securities, it will be very difficult to achieve favorable growth comparisons given today's low yields.

One thing working in our favor is the growth potential in our diversified equity portfolio. We continue to direct a share of funds available to invest into equities for long-term capital growth. Over time, our equity strategy has been very successful. Unrealized gains still represent 19% of equity portfolio fair value.

Steve is ready to review details, including the effect of reserves on the quarter. So we will go ahead now with his remarks. Steve?

Thank you, Ken, and thanks to all of you for joining us today. As Ken mentioned, there were no real surprises this quarter; and that applies to the financial information as well. The second-quarter combined ratio improved by 9 points over the second quarter of 2009. Still, with average -- with higher than average catastrophe losses it was an unprofitable 107.6%.

Catastrophe losses contributed $99 million or 13.6 loss ratio points during the quarter, almost twice our historical 10-year average of 7.7 points for a second quarter. The largest catastrophe loss was one we previously announced, a $34 million event in Nashville, Tennessee. Our claims associates responded on all of the claims with their hallmark prompt and fair service.

Our conservative and consistent reserving philosophy remains unchanged, which is important given continued pressure on the property and casualty industry. Total property-casualty reserves on prior accident years developed favorably, benefiting the second quarter by 10 loss ratio points.

Excluding from both periods the effect of workers' compensation, where we strengthened the reserves in 2009, development on all other lines of business benefited the second-quarter loss ratio by 9.6 points, consistent with the 9.0-point effect in the second quarter of 2009. And we appear to be on track for our 22nd consecutive year with favorable loss reserve development.

Looking at recent accident year loss ratios excluding catastrophes, the first-half 2010 for our commercial lines is fairly stable compared with the full-year 2009, despite the continued competitive market. For the personal lines segment, the ex-cat accident year loss ratio improved almost 4 points, in large part due to better pricing.

The consolidated property-casualty underwriting expense ratio for the quarter improved to 31.6% from 32.1% a year ago. During the first-quarter earnings conference call, we communicated an expected full-year 2010 run rate of 33% to 34%; and at the midway point we stand at 33.6%.

In terms of investments, second quarter over second quarter, pretax investment income increased by $11 million or 9.3% to $130 million. If one factors out dividends with irregular payment patterns, we've had four consecutive quarters with a sequential quarter increase in dividends and a year-over-year increase just over 3%.

Our equity portfolio strategy is fairly unique for the property-casualty industry. Dividend-paying stocks offer short-term income growth advantages in a declining interest rate environment, while also providing the potential for long-term book value growth through capital appreciation.

A high level of liquidity and our overall strong capital in combination provide great financial flexibility, putting us in a solid position to grow profitably and return capital to shareholders. In addition to the regular shareholder dividend payment, we repurchased $10 million worth of our shares; but that is a relatively small amount, it is immediately accretive to book value and earnings per share. It works to offset the dilutive effect of Treasury shares used to fund our various stock-based incentive programs.

We repurchased the shares at an average price of $26.49 per share, well below book value. And we see that as the best time for this type of repurchasing activity.

At the Holding Company level, we had just over $1 billion in cash and marketable securities, a total that exceeds our $839 million of debt, and at the property-casualty subsidiaries also remain extremely well capitalized, with a 0.8-to-1 premium-to-surplus ratio.

Summing everything up, book value per share decreased in the second quarter with components of the decrease as follows. The property-casualty underwriting loss reduced book value by $0.22. Life insurance operations, which is a core component of the agent-centered strategy, added $0.06.

Investment income other than life insurance and reduced by noninsurance expenses contributed a positive $0.435. The change in unrealized plus realized capital gains on investments was a negative $0.61. And we paid to our shareholders $0.395 per share in dividends.

The net effect for the second quarter was a decrease in book value per share of $0.73 or 2.4%. The value-creation ratio, a long-term measure that factors in both growth in book value and dividend contribution, finished the first half of 2010 at 2.3%, which compares with 2.0% at the midway point of 2009.

That concludes my prepared comments and I will turn it back over to Ken.

Thanks, Steve. Before we begin the question-and-answer session, I will comment that two years have gone by since Steve joined us as CFO and I became CEO, halfway through 2008. Those two years turned out to be unlike any other period in the Company's history -- or for that matter unlike any other period in the broader economy -- and our Company continues to feel some effects.

We are grateful that our agents, associates, directors, and the investment community fully support our executive team through changes such as restructuring the portfolio, introducing new automation systems for both commercial and personal lines, activating more states, and becoming more data-driven. Time will tell; but we believe these were the right updates to support our agent-centered business model, making us more competitive, reducing our risk, and increasing our readiness for all of the opportunities that the future will bring.

So let's get back to today's program. To address investor questions Jack Schiff, Jr., J.F. Scherer, Eric Mathews, Marty Mullen, Marty Hollenbeck, and myself are here with Steve and me; and we are all available to respond. Michelle, we are ready for questions.

(Operator Instructions) [Vincent D'Agostino], Stifel Nicolaus.

Morning. Thanks in advance. Just three quick questions here, all focusing on commercial lines. If we look at commercial line net written premium growth, based on your 10-K I am assuming that commercial line other written premium is mostly reflecting premium ceded to reinsurers.

Is there anything that you can talk about in regards to lower ceded premiums this quarter? Or if perhaps changes in audit premiums might be flowing through that and impacting the lower Q2 '10 number compared to 2Q '09?

Vincent, I might just touch on the question about the Other bucket; and that is by and large reinsurance pools and other such items. You're correct.

Is there anything -- I'm just looking at it; I guess it's about a $10 million increase or favorable difference from last quarter which is about 2%. So I guess the reason I am asking is it looks like if the renewals and new business pretty much net out from year-ago totals, pretty much seeing the change in Other as being the driving force in commercial lines' 2% net written premium change.

I think one of the issues is we were in a pool that dealt with reinsurance actually going back to 9/11; and we had some settlement there that worked out according to plan, but it throws an issue into that particular bucket. It is also running through the direct as well.

Okay. Then just touching again on renewal premiums, the sequential change from last quarter is great to see. I am just curious what is changing from last quarter.

And based on the press release commentary it doesn't look like the change in average premium per policy, being down about 1%, so it looks like that is about the same. But is there anything you can talk about on the underlying catalysts and perhaps any sustainability when thinking about that going forward?

Vincent, this is J.F. Scherer. I am not quite certain I follow your question, the first part of your question.

You did make reference to audits. We are seeing -- I'd just give a little commentary on that. We are starting to see a moderation in the net return premium audits as exposures that were projected throughout last year are starting to reflect actuals. So one of the things that we think will have some effect on growth is that we're not going to see quite the significance of the return premium audits; and that as policies renew, really from this point forward, we are not going to see a decrease in projected payrolls and sales. So it does seem like things are evening out in that regard.

We are seeing still a modest 1% net rate decrease on renewed business. We are continuing to do our best to drive that up and get better rates in that regard.

Our new business in commercial lines was down. However, interestingly enough -- and this is consistent with what is -- we have seen going on in the industry. Our policy count for new business was actually up, was up 3.4%. Property was up 6.2%. Casualty was up 4.1%. And workers' comp was actually down 16.9% in policy count new businesses.

That is a line of business that we're really digging into. We continue to write some very good business in comp, but we are being very attentive to what we are writing.

So all of that is consistent with the fact that from a new business standpoint and the pressure on renewals for us, that larger accounts continue to see the greatest competition.

Right now, at least through the second quarter, we haven't seen any moderation in that. So hopefully that gives you a little bit of complexion that you are looking for.

Actually, when I look at the renewal written premium for commercial lines it's up 1%; and when I compare that to last quarter being down 4%; and if I am seeing the average premium per policy is still down 1%; I guess I am looking at the negative 4% from last quarter compared to the positive 1% this quarter.

So I'm just seeing a 5% sequential swing. And if rates really aren't changing much, I am just looking to see what is the driving force behind that change from 1Q.

Yes, Vincent, you're right. I mean I think we are seeing positive direction in our pricing. If you go back to '08 we had high single-digit decreases; and then last year it was mid; and now we are moving in the right direction.

But I think we also had an easy, relatively easy comparative against on a quarterly basis the second quarter of 2009. So as we look at these things and the timing of things I think it is probably best to look at the six months.

Any quarter is going to have some swings, and if we look at the full six months of 2010 with that 3/10 of a percent, I think that is probably more indicative.

Then also I want to go back to your initial question. Kind of getting out of the chute here, I really shouldn't have brought up that US AIG. That was more on the loss side in terms of going back to 9/11 and that pool.

But you are right, on the Other bucket it is just a $10 million change for the quarter and it is largely due to just reinsurance pools premium and then timing, as we look at the bookings of our premium. So I wanted to correct myself there.

Okay, great. Then I just have one last one looking at favorable reserve development. So accident years '08 and '09 I guess are still the primary sources based on the 10-Q this morning.

Just curious. In the Q we comment on moderating loss costs; but last quarter we talked about returned audit premiums driving some of that release. I am just curious with this quarter if it is the audit premiums again, or if it is pure loss cost moderation this time. And that is the last question. Thank you.

Thanks Vincent, I think the thing to stress is it is a very consistent and analytical approach that we have put to the reserves. You are right, most of the favorable development has been coming from the more recent accident years. And I can see how that kind of kicks up a red flag in a competitive environment.

But this is more anecdotal than actuarial. If we look at our exposure, if we look comparing the four quarters of written premium and compare the most recent four-quarter rolling written premium to the rolling four quarters ended at June of '08, they are down 5.2%. So exposure over that period of time is down.

At the same time, we increased our case reserves such that case reserves now that we hold are 5% higher than they were at June of '08. And our IBNR is actually up 15.7% from June of '08.

So we put reserves up in the current year at a very consistent pace. So everything is playing out in a consistent fashion. But I can understand why people would ask about releases from the more recent years.

Great. Thank you. That's all I had.

Paul Newsome, Sandler O'Neill.

Thank you, and good morning. I just wanted to ask about the buyback. I know you have done this in the past but it's been a while. Maybe you could talk about sort of the philosophy of when you want to buy and when you don't.

Your comments suggested to me a little bit that this is more of a plan to just offset whatever option and other dilution you have. Is that the case?

Or are you looking to buy back whatever your book value, or is this supposed to -- going to turn into a more regular use of capital?

Paul, this is Ken. I'll start and then Steve can add comments if he wishes. Our buyback program, as you know historically, we are -- we do look to repurchase shares when we are below book value. We did stop being active purchasers the last year or so because the capital did drop through the economic challenges that we faced.

As you know now, last couple quarters our capital balance has rebounded and we are in a much stronger position. Along with that -- and so we do have an active interest in that.

Along with that, though, we are still very proud of the fact of the cash dividend we pay shareholders on a quarterly basis. So that is going to be a balance as a return of capital, between that and the share repurchase program.

So, we will look at those kind of things together and then figure out how active we will be in our share repurchase. The comments that were made in the Q about us buying back enough to offset the dilution, that is valid.

And I think the added activity will be based off of our share purchase -- what the current market value price is, and our book value. So I think we're going to use these as a combination going forward, and the activity will just vary just depending on where our stock price is and how comfortable we feel about our earnings and what our dividend policy on a quarterly basis will be.

But would you be attempting to buy back enough to offset the dilution on a regular basis? Or is the driving factor it's got to be below book value? The stock has got to be below book value?

Well, we're trying to increase our book value overall, so I wouldn't say that we wouldn't. Historically we have bought back stock at times when it was above book value. And as you can imagine that all comes into play on what we feel the true value would be.

So there's possibilities where we could, but it's obviously more attractive when we can buy it back under book value.

Thank you. I will let some other folks ask questions. Appreciate it.

Doug Mewhirter, RBC Capital Markets.

Hi, good morning. I just had two pretty quick questions. First, Steve, I was looking at the tax rate. Even if I backed out -- if we back out I guess the credit for the realized loss, what was left seems to be unusually low, if you just look at your operating taxes on your operating earnings. Was there any accrual in the quarter or a true-up or anything like that?

Good question, Doug. No, there really wasn't any true-up or anything like that. It was just in this quarter the pretax book income was rather small, especially when we compare it to then the permanent differences such as our investment income from municipal bonds. I think it was just the way that worked out with the very small book tax income, pretax book income, relative to the permanent differences.

Okay. Thanks. I suspected that was the case; I just wanted to confirm that.

The second I guess is a more broader question, less numbers-oriented. With the -- we have two pretty bad years in terms of non-hurricane type of catastrophes, inland type of catastrophes. Do you -- does that give you any kind of leverage on your commercial property rates?

Or is it more of a philosophy of, well, these things happen and they are relatively small so you don't have quite the fear factor of maybe wind rates on a coastal community?

Doug, this is J.F. Scherer, I will try to answer that for you. There is no question that the dramatic effect of a hurricane does have a way of tightening up a market in a Florida or coastal areas a little differently than in the Midwest. We have been seeing more rate increases in homeowner that has been explicitly ascribed as being driven by weather.

However, particularly in commercial lines, the marketplace at least really doesn't react the way it would in a hurricane circumstance. We haven't seen that.

There is a presumption that some of these storms are isolated. In the aggregate, it is a big deal. It has been a big deal for us. But from a marketplace reaction standpoint, we haven't seen the opportunity to leverage in a real meaningful way rate increases on property.

Okay, thanks. That's very helpful, and that's all my questions.

(Operator Instructions) [Ian Gutterman], Adage Capital.

Hi, guys. Good morning. Just wanted to clarify a couple things. The cat losses were a bit higher than the prerelease; it looked like there were a few events that came out post-release that looked like they were part of it; but even without that it looked a little higher.

Were there some events that came in worse than you expected?

I'll start and maybe Marty Mullen can jump in. This is Steve. One of the points is that when we put out the prerelease it was for the events through June 10.

Okay.

We had normal events -- well, I hate to call them normal. We had events for the rest of the month of June right up to the last day when some weather hit Bozeman, Montana, where we write. So I'd say it was more the playing out of the rest of the quarter. But maybe Marty might want to add some color.

Sure, this is Marty. We had approximately five new cats following that release, mostly in the Midwest related to hail and significant rainstorms. But no individual cat that really strikes a huge number, but just a cumulative effect that added to that increase.

Okay, great. Thank you. Moving on, on the E&S side, it looks like the first-half loss ratio was about 100. You didn't report any cats in there. Is there a reason the loss ratio has been so high in that business?

This is Steve. I think it is a startup business. We are happy with the way things are going. But in typical Cincinnati style, we are conservative. We are conservative in our reserving.

I think with any startup there are going to be expense issues that you have to grow into. I think also when it comes to even loss adjustment expenses, and a good part of the loss ratio is coming from loss adjustment expenses where we are gearing up our staff to handle those for a bigger company than we have right now.

So I would have to say, yes, you are doing the math correctly in getting to that point. But we are happy with the way the E&S operation is going.

It's writing the smaller, what we would consider safer risks within the E&S world. But we are taking a conservative approach in terms of our reserving and expense accruals and so forth.

Okay. Fair enough. Is the -- can you give a sense of what kind of scale you need before you get to a more normal LAE ratio?

It is in flux. I think that we probably will be looking to really 2012 before we see -- before we plan for profitability there. We are hoping that it could come earlier if we start to see the favorable development from some of the conservatism that we've done with our reserving. But on the more conservative plan, we are looking to 2012.

Okay, got it. Then you said earlier there is about $1 billion at the Holding Company. I think you said cash and securities. Are you counting any equities in that securities? Or is that true like money market T-bill type liquid stuff?

No, that would be stocks, everything.

Okay. About how much is cash and short-term, I guess? Because I assume you probably wouldn't want to sell equities to buy back stock.

Right. Do you have that (inaudible)?

Not off the top of my head.

I have got it here somewhere, but --

Ian, I think the cash balance for the parent Company is about $95 million at the end of June.

Okay, then I assume probably some portion of the other, of the rest is in short-term fixed income that is easily --

Well, we have fixed income of about $266 million, equities of about $650 million.

Got it, okay. Then just going from there to the dividend. Any updated thoughts on that? You just earned it first quarter. You didn't earn it this quarter.

Can you just talk about that in the context of capital management? And maybe does repurchase start to look more attractive than the high dividend?

Well, I don't know if you heard our comments earlier about the repurchase, but on the dividend itself, you are right, we earned it based -- almost earned it the first quarter; second quarter we missed.

What we're looking at is, A, we're very proud of that record. We don't believe at this point in time that -- I think at this point in time we can warrant continuing it, because we do have the capital.

One thing, if you would look at -- if we had a normal cat quarter of 7.7 points as was mentioned, we would have had about $0.16 or $0.17 more of additional earnings. So even in this tough environment we would have earned our dividend in this quarter.

Got it.

So that gives us some comfort that over time things are improving. As you noticed the accident year loss ratio's slight improvement, starting to stabilize. And we think we have some real growth initiatives -- the new states, the personal lines is improving -- that are going to generate some future profitability for us.

So all that being said I think the one thing that we do have to pay attention to, obviously, is where the tax laws go and what that could do as to the attractiveness of dividend payments. But I will say in the long time I have worked here, most of our investors really treasure that quarterly dividend.

The 49-year record that we have of increasing it is something we really treasure. So that would -- we would look at that very carefully in our discussions.

Understood. Okay, and if I could sneak one last one in. Do you have any color on what lines of business a prior period emerged from? What was it? Was there one that stood out like auto or comp or anything like that, or was it kind of spread out?

I have got that one. For the first quarter -- it is generally commercial casualty.

Okay.

In the first quarter, of the $73 million in favorable development, commercial casualty had $43 million. And I think for the first half, $112 million in total, $64 million for commercial casualty.

Got it. Okay. Thank you very much.

Dan Schlemmer, Macquarie.

Hi, good morning, everybody. Wanted to ask a little bit more on the personal lines. Ken, you were actually just referring to it. Just on the growth there, can you talk a little bit more about that?

Are you seeing more rate? Are you growing the number of exposures? The 7% during the quarter and during the first half of the year, written premium growth versus basically flat for full year during -- for full-year 2009. So just where it's coming from and also maybe if you can talk a little bit about how you are seeing the new technology affect that.

Yes, I will take a first shot at that, Dan. This is Steve, and turn it over to Ken. I think that we are seeing it from a combination of things. I think we're seeing a lot of good there.

One thing that is positive that shows some evidence of the rate we're getting is the table in the press release on personal lines shows that we've got 6% increase in our renewal premium. So I think our retention is holding well. The rates that we have talked about before seem to be coming in.

And then I think also as you mentioned the technology is helping well. We have our new Diamond system is rolling out, and we think that that is being received well by the agents. Also our predictive model on the homeowner side is having a chance to take effect. We are getting increases on the risks that need them the most.

So we are starting to see things come together. It's a tough quarter from a cat-prone -- from the cat situation, and we recognize we have got further to go. But we think we're making nice progress there.

Dan, I will just add a couple comments and maybe J.F. might want to add to this. But from where I see it, we needed the technology to really let us be competitive in some of the new states that we entered. And we held off on those states until we could get the technology.

Then on top of that some agencies that we did business with prior to the technology, they didn't have quite the same, if you want to say, interest in placing as much business with us because we lacked the technology. A lot of those agents are coming back on board because our products have been priced with the additional pricing tiers you have heard about before. So the pricing is more competitive.

And it is easier to do business because of the technology, and we have offered many different additional billing and payment options. All the things that they had an interest in.

So we now have those, so I believe we are much better positioned to really take advantage of the agency relationships we have. But J.F. has more on-the-spot commentary because he deals with these agencies all the time, so I may ask him to add some color to that.

Just to complement what Ken said, just to give you an idea, in 2008-2009, 6 months this year, we had new locations appointed, just new agents to the Company, of 116. But we also appointed 203 agencies that had only previous to those dates had done only commercial lines with us. So that was 319 more distribution points for us, many of which are out West, where we want to expand our footprint.

So, add all that together we are getting a significant share of new business from those newer agencies, most particularly the agencies that have already put in commercial -- have been using us for commercial lines. They have seen in practice the quality claims service that we provide to their commercial lines clients. So they have been a bit more anxious to put personal lines with us.

So we have had a big change over the last several years. As Ken said, the automation has taken the issue of ease of doing business and direct bill off the table. I think for us, having the automation and our ability to use that data to more precisely price our product is also going to be a big help for us moving forward.

When you talk about those agents who have previously done Cincinnati commercial only and have now picked up the personal line, is it pretty much all of those agents are coming onboard for personal lines because of the technology? It is not something maybe market-driven or other things? It is really just a matter of they wanted the easier to use technology and that pulled them in? Or I guess curious how much of that is just technology driven.

A big part of it has been technology driven. Without direct bill, many of those agencies said that Cincinnati wouldn't be an option.

The fact that -- and without our ability to produce the policies, send it out to policyholders, it was just in their view, not having used us, simply going to be too much expense for the agency to use Cincinnati.

I will say that they are drawn to us because we have taken those concerns off the table. It is not a case that in the marketplace that other carriers are doing something and they are going -- they are running away from them. We are competing favorably based on strengths.

I might just throw one last point in too, is that we are getting the diversification in new states. We've got seven states that we had not previously written personal lines in. Of the new business, if you look at year-to-date, where we had about $8 million in new business, almost $5 million of that is coming from states that I would not consider to be Midwest states, newer states to us.

I think so that -- we're looking to that to help us with the diversification of our book and over the long pull helping with the catastrophe loss situation.

Great, thanks, then a separate question, switching gears here. On the investments I think we're seeing across the industry -- and there is a reference in your release -- about just the struggle to replace bonds that are currently maturing in the current environment and with a similar -- basically there is pressure on investment income as bonds mature and rates are now lower.

Can you talk a little bit about where you are putting money right now and how you see that? Or how you are doing with your new money investments?

Yes, this is Marty Hollenbeck. We are still by and large keeping with our historical tendency. About three-quarters of new money going into bonds. We are looking for value. We are finding some benefit from the Build America bonds, getting some yield out there with some higher quality.

Really our best defense in this low rate environment probably is our equity portfolio and dividend increasing stocks. We can over time count on that to hopefully get dividend increases consistently that we are seeing.

But, you hit the nail on the head. We are facing the same headwinds that everybody else is facing. It is very tough out there. You still have a relatively steep yield curve, so trying to manage to a lower duration is particularly costly.

So we are kind of trying to play both sides of the fence in a low rate borderline deflationary environment, still with an eye on potential inflation down the road.

Your distribution I think is mostly or more than half munis on the bond portfolio and then mostly corporates, and a small portion of US Treasuries. Is that -- are you implying a shift there in what you are saying? Or is it pretty much that distribution staying similar with new money?

It's fairly consistent. I think we are probably buying somewhat fewer tax-exempt municipals these days and a little more taxable. Again with those Build America bonds. And we are still putting money into the corporate bond market.

Great, thanks.

There are no further questions at this time. Mr. Stecher, I turn the call back over to you.

Thanks, Michelle. Thank you for all of you for joining us today. We look forward to speaking with you again on our third-quarter call. Have a great day; bye.

This concludes today's conference call. You may now disconnect.