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Executives

Dennis McDaniel - IR

Steve Johnston - President & CEO

Mike Sewell - CFO

JF Scherer - Chief Insurance Officer & EVP

Marty Mullen - Chief Claims Officer

Analysts

Vincent D'Agostino - KBW

Mike Zaremski - Credit Suisse

Chris Maimone - Macquarie

Scott Heleniak - RBC Capital Markets

Ian Gutterman – Adage Capital

Cincinnati Financial Corporation (CINF) Q1 2013 Earnings Conference Call April 26, 2013 11:00 AM ET

Operator

Good morning my name is Brad and I’ll be your conference operator today. At this time I would like to welcome everyone to the Q1, 2013 financial results conference call. (Operator Instructions). Thank you. I will now turn the call over to Dennis McDaniel, Investor Relations Officer. You may begin your conference.

Dennis McDaniel

Hello. This is Dennis McDaniel from Cincinnati Financial. Thank you for joining us for our first quarter 2013 earnings conference call. Late yesterday we issued a news release on our results along with our supplemental financial package, including our quarter end investment portfolio. To find copies of any of these documents, please visit our Investor website, www.cinfin.com/investors. The shortest route to the information is the quarterly results link in the navigation menu on the far left.

On this call, you'll first hear from Steve Johnston, President and Chief Executive Officer; and then from Chief Financial Officer, Mike Sewell. 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 Executive Committee Chairman, Jack Schiff Jr.; Chairman of the Board, Ken Stecher; Chief Insurance Officer, JF Scherer; Principal Accounting Officer, Eric Matthews; Chief Investment Officer, Marty Hollenbeck; and Chief Claims Officer, Marty Mullen.

Please note that some of the matters to be discussed today are forward-looking. These forward-looking statements may involve certain risks and uncertainties. With respect to these risks and uncertainties, we direct your attention to our news release and 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 statutory accounting rules, and therefore is not reconciled to GAAP.

So with that, I'll turn the call over to Steve.

Steve Johnston

Good morning and thank you for joining us today to hear more about our first quarter results. We’re very pleased with our strong operating results for the quarter. They continue to reflect the steadily growing benefits and initiatives designed to improve insurance profitability to drive premium growth in creating shareholder value overtime. The continuing improvements resulted in a 91.2% combined ratio and 15% growth in net written premiums. Catastrophe losses contributed just 1.2 loss ratio points down from the 11.1 points in the same quarter a year ago. The favorable trend in exercise-catastrophe current accident year result continued. The ex-cat current accident year combined ratio for the first quarter was 90.3% reflecting a 9.4 point improvement over the first quarter a year ago. A 6.5 point improvement over the full accident year 2012 and it was 2.9 points better than the second half of 2012. Loss and loss expense reserves for all prior accident years in aggregate developed favorably during the first quarter of 2013 benefiting the combined ratio by 1.1 points. The comparable number a year ago was 14.5 points.

While that’s quite a change in the amount of benefit we follow a well-defined and consistent process every quarter with just a few weeks passing since our year-end analysis of accident years 2012 and prior. Our estimate for those years in total did not change much resulting in the lower than usual 1.1 point favorable development in the quarter.

Net reserve development for our personal auto, commercial auto and surety and executive risk lines of business was unfavorable. We will continue to keep a close watch on those lines. Those same three lines contributed to net unfavorable development on an all-lines basis for accident year 2012. Accident year’s 2011 and 2010 developed favorably as did all older accident years.

The higher reserve estimates in total were primarily for losses incurred but not reported or IBNR as the consolidated property casualty ratio for prior accident years case reserve development was the same this quarter as the first quarter of 2012. During the past 12 months we have observed a turning a point in terms of performance by accident year separate from catastrophe loss trends. Accident years 2012 with a combined ratio of a four catastrophes of 96.8% started an improving trend that has continued into 2013. When more time is passed and more information is available we can verify any improvement and incorporate that into our future estimates or reserves. While net favorable development on prior accident years is lower this quarter we remain confident in the process, and confident in the reserve position that continues to be well into the upper half of the actual range of estimates.

Turning to premium growth, each of our property casualty segments continue to increase at a steady pace again benefiting from greater pricing precision and higher overall pricing. Renewal price increases remained ahead of expected loss cost trends and each of those segments. Commercial policies that were renewed during the first quarter continued to average price increases in the mid-single digit range. Though moved into the higher end of that range since the fourth quarter.

Increase on our smaller commercial property policies remained in the low double digit range. Our excess and surplus line segment experienced higher renewal prices for the 31st consecutive month reaching the low double digit range. (Inaudible) our personalized segment that renewed in the first quarter averaged a price increase in the mid-single digit range with home owner’s policies continuing in the high single digit range. New business written premiums for the first quarter continued to show strong growth for both our commercial and personalized segments reflecting higher pricing in accumulative effect of growth initiatives including new agency appointments.

Our pricing analytics and modeling tools once again indicated that our new business pricing is adequate providing confidence to compete for good accounts and to avoid the under-priced ones. For our commercial line segment, policies with annual premiums of $50,000 or higher represented just over half of the 22 million first quarter increase in new business written premiums. Given recent quarter growth in larger commercial policies. We have reviewed results by policy size and continue to find no correlation to large losses. We drew a similar conclusion when studying large losses compared to length of time and agency has been appointed to represent us.

We believe the larger accounts we wrote resulted from our efforts to increase loss control services and client specialization making Cincinnati a more attractive market for agencies mark-key accounts.

Our life insurance business continued to grow with first quarter term life earn (ph) premiums rising by 7% as operating profit more than doubled the result for last year’s first quarter well a onetime adjustment lower 2012 profit. The first quarter of 2013 also benefited from more favorable reserves for life insurance policy benefits. We continue to emphasize growing premiums only when we believe we can (inaudible) profitably and we’re encouraged by our progress so far.

We also remain well positioned to continued growing earnings, dividends and book value per share adding value for shareholders over time. The first quarter produced a satisfactory level of investment income given the head wind caused by low interest rates. Our primary financial performance measure, the value creation ratio was also excellent and was up compared with the first quarter of 2012. I will now turn the call over to our Chief Financial Officer, Mike Sewell to discuss that further along with other financial terms.

Mike Sewell

Thank you Steve and thanks to all of you for joining us today. Our first quarter 2013 value creation ratio was 7.0% including a 5.8% contribution from the change in book value per share plus 1.2% from our dividend to shareholders and was well ahead of last year’s first quarter. The dividend payout ratio for the first quarter was below 50% and was 15 percentage points less than the full year annual average since 2002. The stock portfolio grew during the first quarter with pretax net unrealized gains up $381 million to $1.4 billion. This quarter end fair value represented 29% of invested assets. The bond portfolios pretax unrealized gains declined $25 million during the quarter. Our company continues to benefit from its equity investing strategy during periods when investment income is pressured by the low interest rate environment.

Dividend income was up 4% for the quarter despite accelerated dividends received in the fourth quarter of last year that we normally would have received in the first quarter. Of the 50 companies we held in our core common stock portfolio at March 31, 2013 46 have increased their dividend rate in the past 12 months, we also continue to invest new money in that portfolio helping to offset declining bond portfolio yields. Yields for our bond portfolio continue to move lower as its first quarter 2013 pretax yield of 4.93% fell 27 basis points from a year ago that contributed to a 4% first quarter decline in interest income.

Our bond portfolios effective duration measured 4.2 years at the end of the quarter unchanged from the end of last year. Cash flow from operating activities continues to benefit investment income and contributed to a $102 million in net purchases of securities during the quarter. Compared to a year ago first quarter consolidated net operating cash flow was lower mainly due to higher payments for income taxes and profit sharing with agencies.

Careful management of expenses continues to be a priority, our first quarter property casualty underwriting expense ratio rose 0.6 percentage points primarily due to higher commissions to agents. Our financial strength and liquidity remained at healthy levels. We had over 1.3 billion in cash and marketable securities at the parent company level up 14% from the end of last year. Our premiums to surplus ratio remained at 0.9 to 1 a reflection of our capacity to support continued premium growth in our insurance segments in addition to capacity for other capital needs. I will conclude my prepared comments by summarizing the contributions during the first quarter to book value per share.

Property casualty underwriting increased book value by $0.31, life insurance operations added $0.08, investment income other than life insurance was reduced by non-insurance items contributed $0.38. The change in unrealized gains of March 31 for the fixed income portfolio net of realized gains and losses lower book value per share by $0.09. The change in unrealized gains at March 31, for the equity portfolio net of realized gains and losses boasted book value by $1.66 and we paid 40 and three quarter cents per share in dividends to shareholders.

The net effect was a book value increase of $1.93 during the first quarter to $35.41 per share. With that I will turn the call back over to Steve.

Steve Johnston

Thanks Mike. The moment we’re building is encouraging and our progress is being recognized. Forbes recently issued this list of America’s most trustworthy companies where we’re again the top performing large cap insurance company. The year ahead of us still has plenty of challenges. We will continually seek to improve our performance while fulfilling our insurance promises to policy holders and providing outstanding service to agents. We appreciate this opportunity to respond to your questions and also look forward to meeting in person with many of you through the year. As a remainder with Mike and me today are Jack Schiff Jr.; Ken Stecher; JF Scherer; Eric Matthews, Marty Mullen and Marty Hollenbeck. Brad we’re ready to open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Vincent D'Agostino of KBW. Your line is open.

Vincent D'Agostino – KBW

Just I would like to first start with acknowledging what you guys have accomplished just because it's been quite a week over the last few years and then secondly I would just like to preamp my questions with saying that it's on our side unfortunately tend to overly focus on some of the negatives on these calls and our questions which doesn’t really often reflect our optimism. So in that way don’t want to come across as being too critical but I would just like to spend a moment on the reserve development in the quarter specifically the comment in the press release on the IBNR reserves and just from my side when going through the scheduled (inaudible) share on some of the lines. I thought I could easily justify the lower carried IBNR reserves on accident year 2012 just understanding that in a lot of these lines workers comp a really good example where you have pulled forward a claims reporting and have done an excellent job on managing the loss cost side. Of all things in my opinion that would allow you to carry a little less IBNR reserves, so is there anything that has emerged that would maybe change your thinking in terms of some of the progress that you have made and just how that impacts your estimates on the IBNR side?

Steve Johnston

Good question and we really appreciate and respect your balance Vincent. There really hasn’t been a change, I think that we’re very consistent in our process and I might just kind of start at the beginning on these sort of things and I know you’re expert in this and so I just want to make sure that I cover this fully as I can and I know I’m not telling you anything that you don’t already know but just to kind of put a framework around our discussion we do have a consistent process where our actuary makes an estimate of the accident years losses for each line and then these estimates are used to calculate the best estimate of IBNR and for this quarter and really for every quarter as I can remember management then adopts actual best estimate.

So when we show a 1.1 favorable development during the first quarter overall that just means that our estimate of accident years 2012 and prior didn’t change much during the quarter and I think where you’re coming from that is different than the first quarter a year ago but I think it's very explainable and it's very much indicative of us as a company that prides ourselves on maintaining a strong and conservatively state of balance sheet. We consider a lot of factors when we’re saying reserves including that are growing at a strong pace that our result have turned as you mentioned and that our accident year loss ratios are improving in a strong fashion. So we look at all these information and we just think it's prudent that the best estimate for accident year 2012 and prior did not change much in the short period of time from then they will review at your end.

And to be clear and I think answer to your question, it doesn’t mean that we think reserves weakened during the quarter. In fact on the contrary we’re confident that reserves remain low into the upper half of the actual range. To better that position when we compare the first quarter of 2013 to the first quarter of 2012, the emergence of case incurred (ph) for prior accident years was the same. Virtually the entire amount of the change was due to change in IBNR released on prior accident years. Just to summarize and I think that we maintain the consistent process that was a big difference from the first quarter year ago to this quarter but I think it's indicative of us in terms of prudent reserve setting and I think we’re reflecting the progress as you mentioned that we’re making in a lot of areas in terms of our pricing and our underwriting.

Vincent D'Agostino – KBW

That’s really helpful again from our side your track record is virtually unparalleled. So really good color, As far as just because the time of the year that as you guys go through and meet with a lot of agents with the point of sales meeting that you do. I’m always curious. I usually get to go to one or so but as you go through these, is there anything that you’re hearing that it's a bit of surprise or just really any good feedback that you might be getting some agents that you’re thinking about implementing?

JF Scherer

I would say nothing surprising coming from agencies, I think we’re always anxious to hear about pricing and how agencies feel about the industry overall, industry and their agency if you will and how comfortable they feel we’re delivering rate increases and we upto this point we have four more meetings to go of the 19 we have attended, it's been consistent that they are comfortable with the approach we’re taking that rates are up and pricing is up. A lot of discussions about particularly in win proven areas about the use of higher deductibles, percentage deductibles, wind and hail deductibles or something that we’re focusing on a lot and there is a generally consistent comment from everyone that we’re going to be able to implement some of those initiatives. So I wouldn’t say that there has been anything at all surprising this spring that relative to the types of things we have talked about on previous calls and what is in general happening in the marketplace.

Vincent D'Agostino – KBW

Okay perfect and then one last one if I can seek it in, just on auto premiums from accounting standpoint. When you have a dollar of auto premium come in is there a corresponding incurred losses that or because of the way that you do your reserving. Have you already necessarily booked the incurred loss regardless of the auto premiums coming in and so would it end up just falling all to the bottom-line as far as audit premium tail winds?

Mike Sewell

That would basically fall to the bottom-line because we have already incurred the losses. So that has been a very positive for us over the last so many quarters.

Operator

Your next question comes from the line of Mike Zaremski of Credit Suisse. Your line is open.

Mike Zaremski - Credit Suisse

First I was curious your goal to the expense ratio is 30%, I was curious if that’s what the time frame is around that goal, I was curious is the driver to that 30% largely premium growth leverage?

Mike Sewell

And part of that is premium growth leverage, you’re exactly right. As we grow the top-line there that will have a natural effect to bring down the expense ratio. We’re controlling expenses, one of the I can say the problems that we have but as we have more income, more profitable a lower combined ratio the offsetting effect of that is that our profit sharing for the agents tends to go up and so that works against us. So the commission side is a very large item and that’s really what affected the increase for the current year. We do have a lot of initiatives are going on that are also helping to reduce our loss and expense ratio. So we’re controlling those, we watch them we have got an expense committee, a head count committee and we’re committed to drive it down to the 30 but it's a good problem to have with the profit sharing to the agents.

Mike Zaremski - Credit Suisse

Secondly clearly a really great combined ratio on an accident year, ex-cat basis I was curious if there was a non-cat weather benefit versus maybe what you call “normal” or versus last year 1Q. A number of peers are larger insurers have cited the benefit this quarter so far of their earning season, thanks.

Steve Johnston

We don’t track that for all lines. I mean we could track it for certain personalized and so forth. I do think though to your point that it's just kind of natural that when we do have high catastrophe losses what we will have more what you call non-cat weather it's just because there are losses in the region that may not fall into that particular cat but their weather losses nonetheless. So I would think this is more of an opinion than something I can back-up with a fact because we don’t keep up for all lines but I do think that there would be a benefit because we had lower cats that would naturally fall, that they would be less non-cat weather as well.

Mike Zaremski - Credit Suisse

Yeah that makes sense, so probably a correlation between the cat level and non-cat weather. Okay, thank you.

Operator

Your next question comes from the line of Ray Iardella of Macquarie. Your line is open.

Chris Maimone - Macquarie

This is actually Chris Maimone calling for Ray, thanks for taking the question. I just couple of quick ones. I was wondering if you could just comment on what you guys have been seeing that’s being driving the E&S pricing since we last heard from you guys, just generally as far as any incremental negatives that might be behind the slowdown in pricing there.

Steve Johnston

First of all on our renewals for our E&S business we have had 31 consecutive months now where we have great increases and they have actually risen for us. So relative to our book of business the business that’s renewing we’re continuing to get strong pricing increases. One thing that we’re seeing and in particular on larger E&S accounts is that there has been a fair number of standard market carriers that have taken business out of the E&S side for us. So it's I guess somewhat of surprising circumstance but I say in terms of how we size up how things are being going on E&S side. Good progress on renewals, still some competition relative to some larger accounts are being taken out of the E&S market.

The model for us continues to work nicely. We’re still having good experience working with our agencies and writing more E&S business from them so we still feel very good about how things are going for us.

Chris Maimone - Macquarie

Great thanks for that and then just one follow-up I was wondering if you could just run me through with little more detail on what was behind the life insurance benefit this quarter?

Mike Sewell

What we had there is on some of the smaller lines there we were refining a little bit of the reserving process between gap and stock reserves and so that was under a $4 million effect on the total net income. So it was a minor item but it was a refinement of our reserves.

Chris Maimone - Macquarie

Okay that’s just going to be one time refinement or is there sort of huge?

Mike Sewell

I would put as a one time, there may be smaller ones in the future but if you were to adjust let’s say that refinement out of 2013 and out of 2012 first quarter and then kind of come to maybe what I will call it core adjusted. We would end up actually with about a 24.4% increase in net income when you adjust those out so that might help you out go from call it may be 7.8 million to 9.7 million for the current quarter. So hopefully that would help you in your analysis.

Operator

Your next question comes from the line of Scott Heleniak of RBC Capital Markets. Your line is open.

Scott Heleniak - RBC Capital Markets

I was just wondering if you can talk about the new business growth, you mentioned more of the half of the accounts are from have more than 50,000 in premium. Was that part of the strategy when you pointed all the new agents over the past few years, was the intention to get more large account business or is that the way the mix just kind of happen. Did you get more of that from your existing agency based, just wondering if you can give more detail on that.

Mike Sewell

I don’t think half of our new business is coming from $50,000 premium, half of the increase comes from the larger accounts but as far as the strategy is concerned no we haven't appointed agencies with the idea of writing larger accounts. The strategy continues to be the same, we expect as a company to write by our definitions continue to write small to mid-size accounts. Our definition of medium would be from 10,000 to 150,000 or there about. We write our share of larger accounts, large and larger for us I would call perhaps in the $50,000 range and higher. One thing that we have done though and Steve referred to in his remarks was that we have progressed quite a bit in the lost control area; we have also done a much better job in claim specialization. Consequently agencies had greater confidence in us to write these larger accounts. They are still on awful lot of accounts out in the marketplace right now being shopped. Many carriers continue to describe very publically that they are going to get substantial rate increases on their renewals that provokes agencies to shop their accounts to protect themselves, I think we have done a good job of reinforcing to our agencies that we’re a consistent market and that in addition to rate claim service and loss control our pricing is consistent. So it hasn’t been a specific strategy to increase larger accounts, it's just evolved to that.

Scott Heleniak - RBC Capital Markets

Okay that’s helpful and then could you give a little bit more detail just on the large claims that you had the ones were, they were 4 million is that just, those are in the three areas that you talked about where I guess you strengthened the reserves in the quarter. Is there anything (inaudible) in that? Was there any other areas besides that or? If you can give any detail on that.

Mike Sewell

I can give a start and maybe Marty can follow-up. You want to give this?

Marty Mullen

Sure the majority of the large claims over 4 were in those lines mentioned assuring executive risk played a big piece of that more so in the area of the FI accounts, some 2000 in those areas that mainly was the main driver of those 4 million increase reserves.

Steve Johnston

So I will just tag on this, it is consistent with the question that you’re asking. We agree.

Scott Heleniak - RBC Capital Markets

Okay and then the only question I have was just on pricing in April you said was up toward the higher end of the mid-single digit range and are you saying that pretty broadly in other words is pricing the price increases that you’re seeing in April is a little bit bigger than you were seeing at the end of or the beginning of the quarter?

JF Scherer

We have really consistent pricing for example in the commercial fire area we were in the low end of the double digit increases on our small to medium size accounts in the fourth quarter of last year, it's been sustained this year as well. And pretty level net rate changes and casualty and auto as well. So we haven’t seen a change up or down, it's been very consistent trending a little up.

Operator

Your next question comes from the line of Ian Gutterman of Adage Capital. Your line is open.

Ian Gutterman – Adage Capital

So I guess I will add a couple of specific questions on reserves but I guess if I can ask a big picture one first and I admit I’m grasping (inaudible) here but just want to make sure there is not a relationship here. On taking sort of two unrelated statements and trying to tie together possibly. One is that you have seen a very good growth from agents appointed since the beginning of 2012 and then you have seen average development on 2012 and it makes me wonders or maybe some kind of tide or maybe the agents that you have added have produced worst business than agency you have added in prior years?

Steve Johnston

I will go ahead and take the first shot at that Ian, the short answer is no and we have studied that. We feel that the production of the new agents is of high quality and in particular of our new business whether it's coming from more recently appointed agents or more mature agents. We feel that the new business premium that we’re getting is adequately priced in we’re confident that throughout the various appointment periods.

Ian Gutterman – Adage Capital

Then just couple of the detailed ones and I know it's hard to sometimes draw chances you have lot of quarter-to-quarter volatility in your lines of business but for example I’m looking at commercial auto which has been showing average sale and for a few quarters now and the accident year throughout the last fourth quarters prior was averaging at low 70s and this quarter it dropped to 60. So I’m kind of wondering if you’re seeing adverse trends or why do we see such an improvement in the accident year.

Steve Johnston

Well that’s a good question and that is one that we specifically study so it's very insightful. As we look at what we’re getting in price versus what we see in the lost trends, we have seen a favorable trend there where we feel we’re getting rates over and above lost cost trend which I think supports the decreasing trend. I think as we do look back at the prior year’s we’re taking I think a prudent view of particularly given the growth, given this as your point out that there is a turning point and with consistent improvement in the results I think we’re being prudent to not release the IBNR on the prior year’s consistent with what we’re seeing in our accident year picks.

Ian Gutterman – Adage Capital

But is that translating how is that translating into how you set the pick? I guess and this is oversimplifying but I guess I would have thought if you feel a less comfortable with the IBNR from the prior year’s then maybe put up a little bit of extra IBNR cushion in the current year.

Steve Johnston

That’s a great point in one we debate but I think the overwriting factor is what we see in terms of the improvement, in terms of the price versus what we’re doing and the underwriting loss control all the other elements we think it justifies the pick that we have for the current accident year.

And that’s the overwriting factor there.

Ian Gutterman – Adage Capital

I just had a couple on personalize. I might have missed this going a little fast for me, did you say specifically on the personal auto what drove the adverse was that the same trends or was it just something changing in severity or loss trends or something?

Steve Johnston

It's the same overall trend and I do think we had a little bit higher in terms of large losses. I think that it's a severity or something that we’re keeping a close eye on there and I do think, I made the statement that overall our case incurred emergence in the first quarter was very much equal to first quarter year ago, I think personal auto might have been one exception there where we did see a bit more emergence this first quarter than we had seen the first quarter of 2012. So we’re kind of reflecting that as well.

Ian Gutterman – Adage Capital

And then my last one, I promise on home owners obviously you’re taking a lot of rate there, things are getting better, there is sort of time back to I think was (inaudible) question but non-cat weather. When I’m looking at the accident year before cat of a 40 the prior four quarters are between 50 and 80 so I assume a fair chunk of that is the real improvement from the pricing underwriting actions you have taken but I assume some of its non-cat as well. I mean is there any way to sort of get a sense for maybe just what a normal target is for home owners. I mean is your goal to be able to have a 40 ex-cat loss ratio or was that really just kind of an outlier number?

Steve Johnston

I think your question is very intuitive, very spot on and we have been seen the improvement in the price, we do think that the losses have been benefited from some of the action we’re taking. We do see, we think favorable movement in terms of the non-cat weather and we do, we built 26 points of catastrophe, expected catastrophe losses into our home owners pricing. So, we’re shooting for pretty low ex-cat loss ratios.

Operator

(Operator Instructions). Your next question comes from the line of Vincent D'Agostino of KBW. Your line is open.

Vincent D'Agostino - KBW

I just had two quick ones, you have talked a little bit more about enhanced property inspections lately and I was just curious how the retention for policy is going through that process or kind of playing out just because in the aggregate it doesn’t really seem to be a drain which would imply that you’re getting the rate and you have to push through the terms and conditions as you kind of won on those policies which would be good, you know or if they, you obviously didn’t retain them that would also be a margin enhancing so just curious of any thoughts on how that’s trending.

JF Scherer

We’re not renewing a huge percentage of that business. I think and I don’t have the exact numbers with me but I think something into the turnaround 6% of the property we think has been inspected on home owner side. We have non-renewed gotten rid of them in some fashion and awful lot of what we find our things where we have increased the premium because the policy wasn’t rated correctly it wasn’t in the right protection class. There might have been for example in personal lines it would burn in stove (ph) for which we have a surcharge, a variety of different ways that premium has been increased which improves the margins but even at 6% I think that’s a reassuring amount of that we’re finding properties that have deteriorating since we first wrote them and we’re going to be getting off of them.

Another area of inspection that has paid off has been in terms of rough conditions where we discover in some cases dwells in that (inaudible) is much older than we anticipated. We’re using an actual cash value endorsement for example and those houses that we would choose to stay on are in poor condition. So we’re at really attacking it from a whole variety of directions on the inspection initiatives feeling very good about the return we’re getting.

Vincent D'Agostino - KBW

And then just one last the agency appointments were pretty strong and it's about 50% of your full year target which is a little bit ahead of kind of the first quarter waiting that we had seen last year. Is it possible that we might see appointments getting closer to maybe 80s and 65s?

JF Scherer

At this point I don’t necessarily think so. One of the things that we feel better about I think a little more encouraged about is that we’re coming off a couple of years a pretty strong agency appointments. We have talked to all of our agencies throughout the country about the aspirations we have to grow premiums in their areas. In more cases than perhaps we would have planned for our current agency force is responding a bit better, the alternative being that we would point another agency and their general community and they prefer us not to do that. So right now I don’t believe that we would go much higher than the 65, I think we’re getting obviously good new business out of our agency force in general. And so I think I still plan on 65.

Operator

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

Steve Johnston

Thank you very much Brad and thanks all of you for joining us today. We hope to see some of you at our Annual Shareholder’s Meeting tomorrow at the Cincinnati Art Museum, others are welcomed to listen to our webcast of the meeting available at cinfin.com/investors and we look forward to speaking with you again at our second quarter call. Thank you.

Operator

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

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