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Executives

Steve Johnston - President & CEO

Mike Sewell - CFO, SVP and Treasurer

Analysts

Vincent D'Agostino – Keefe, Bruyette & Woods

Cincinnati Financial Corporation (CINF) KBW 2013 Insurance Conference September 25, 2013 8:45 AM ET

Vincent D'Agostino – Keefe, Bruyette & Woods

Hi, good morning everybody. It’s my pleasure to introduce our next set of speakers from Cincinnati Financial. Today we have CEO Steve Johnston with us, CFO Mike Sewell and then we have Dennis McDaniel who heads up Cincinnati’s IR here in the front row. And just on a personal note, Cincinnati is probably my most favourite company to cover because it’s really the gold standard in so many things that they do and one of the things that I think is most amazing is they have been able to grow Cincinnati Financial into all standards of relatively large company but still maintaining a very agent-focused kind of relationship that we tend to see with smaller companies. So this is a company that’s managed to do both things very well and has really mastered and have the best of both worlds. And so it’s my pleasure to introduce the Cincinnati Financial management team. Thanks guys.

Steve Johnston

Thank you, Vincent. Thanks for the kind introduction. It’s great to see everybody today. This is a wonderful conference. We’re going to have to start off with our forward-looking statement here. Just to keep in mind, we may be covering forward-looking information and go to our website to look for any other details that you may need. So just take a quick look at the disclosure here.

We’ll talk a little bit about who we are, what differentiates us, how we’re performing and what might give you confidence on our future performance. We are, as Vincent mentioned, among the 25 largest P&C companies in the United States. We’re very financially strong, A+ rated by A.M. Best, and that puts us in the top 10% of the roughly 900 companies that A.M. Best rates.

One thing that we are known for is our dividend. We've increased our dividend now for 52 years in a row. We just increased it at the last board meeting which sets up next year to be the 53rd year in a row of increasing our dividends. And not just paying the dividend but increasing it every year, we’re going on 53 years and we can only find nine other publicly traded companies that can match or better that record.

In terms of premium volume, we ended the year at $3.5 billion net written premium. We write in 39 states. We really do focus, as Vincent mentioned, on the independent agents. We have relatively few relationships but if we’ve been in an agency for five years or more, we’re number one or number two nearly 75% of the time.

In terms of the pie chart, you can see how we are differentiated there in terms of our writings with commercial lines being the largest at 67%. In terms of that dividend, when we look at the yield, we’re at about 3.5% yield. If you compare that to the S&P 500, it’s a little bit over 2% and we rank a fairly high in terms of I think 60th, in terms of where we rank in terms of our yield in the S&P 500.

What we’re really focused on in terms of our primary financial goal is the value creation ratio. You can think of it as total economic return. It is the summation of book value growth and dividends. Since we focus so much on dividends, we found that this has had a – has a high correlation with the performance of the stock. And so we really focus on growing that book value.

We have three drivers as you can see on the slide. One is the combined ratio. We really need to be at 95% or better in this interest rate environment. We ended the first half at 93.9% and that's an improvement over 96.1% for the full year of 2012, and that's I think what P&C companies need to be in terms of this interest rate environment.

Premium growth, as Vincent mentioned, has been strong. We are up 12% year-to-date. That's roughly three times the industry average and it's building on 2012 where I think we were about twice the industry average. And then investments is very important to Cincinnati Financial. We are a bit of -- more invested in equities than in most companies with about 30% of our portfolio invested in common stocks. And we have a goal to outperform the S&P 500. I am happy to say that both for the last five years and for the first half of 2013, our investment portfolio has outperformed the S&P 500. So that’s our primary financial goal, the value creation ratio, those are the three drivers and we think we are performing pretty well in terms of delivering value to shareholders.

To emphasize that we have this next slide. And basically what it shows is a relative comparison of the performance in total shareholder return of Cincinnati Financial Corporation to both the S&P 500 and S&P’s index of 26 property and casualty or 26 insurance company stocks. The chart all shows various purchase points in time held through September 16, 2013.

So as you can see here, if we go back to the longer pole from the year end 2001, we are up 113.9%. That compares to the yellow bar, which is the S&P 500 which is up 87% and the S&P index of 26 companies, up 100.4%. So over the long pole purchasing at year end 2001 holding to September 16, we are performing on a relative basis quite well. We moved that up to purchase of year-end ’09, again 112.9% and faring relatively well against the indexes. As we get closer to the current date, again strong performance purchase dated year-end 2010, we’re up 67% versus dated year end ’11, up 64.5%. Year-to-date we’re up 22.6%, which has outperformed the S&P 500. We are just a bit behind the S&P’s index of insurance companies. So I think in terms of focusing on value, we’ve been able to deliver whether it’s been over the long pole or over the short pole.

We think that comes from focusing on our strategy. Our strategy as depicted on the slide has four pillars. One is the agent-focused. We are represented by just over 1400 agents, so relatively few agents. But we have that deep penetration number one or number two on 75% of those agencies. I think what drives that is our field focus. All of our field people work from their homes, in the communities with the agencies. So they can get out, see risks, develop strong relationships with a relatively few agents and really get the first look we believe at the best business.

We also focus on our claims service, and again our claims representatives work from their homes, in the neighborhoods with the agents. They develop relationships and are known by the agent in terms of who will handle the claims. I'd like to tell all of our people that we never earn that first dime of our compensation until we deliver excellently on our claims service. It’s the promise that we sell and we really focus on excellence in claims service and it also helps to tie us tighter to the independent agent.

The fourth pillar is our financial strength. We mentioned before A+ rated by A.M. Best. We have about $5.7 billion in GAAP equity supporting at year end 2012 $3.5 billion in net written premium volume. So very financially strong, plenty of capital to continue to grow.

And then we also really focus on doing things the right way. The foundation of our strategy is to behave in an ethical way. We focus on the golden rule to treat others the way that we would want to be treated. You don't seek awards. You seek to do that, but we are happy to say that for three years in a row now Forbes has ranked us number one in terms of trustworthiness based on our openness and our integrity in terms of our financial disclosures and so forth. So for three years in a row we have been number one in the large-cap insurance company category.

Within that philosophic framework of our strategy, we’re focusing on improving everyday. An example where we’ve been successful has been workers’ compensation. Just a few years ago we were a loss leader in workers’ compensation. Over the last couple of years we’ve driven that combined ratio or loss ratio down by about 30 points and it’s been a very much a team effort, everything from our pricing to loss control, underwriting, claims, sales, everyone has chipped in to improve our experience in workers’ compensation. We’re now rolling that out as property is next in line in terms of where we need to work on. We’ve been increasing our specialized staff in terms of loss control and claims. We’re getting out and inspecting more and more businesses and I would expect between now and 2015, we’ll look at around 300,000 properties and we want to really have a deep understanding. I think that’s the first step, have a deep understanding of the property that you’re on.

We’re using wind and hail deductibles much more. And we're also really focusing on roofs, inspecting roofs and also moving to a more actual cash value approach to our claim settlement and selling the policies for roofs that are older.

We are continuing to work on our pricing and I’ll cover that on the next slide and also on our data. And our data is making us more efficient and I think that’s showing up as we grow, we’re able to do with actually less staff. We now have 6% less staff than we did in 2009 but the way we work that we’ve actually increased our staff in the field by – I guess we’re down by about 3% -- yes 3% overall since 2009, we’ve done it by increasing our staff in the field by 6% and actually decreasing it in the home office by about 6%. So we’re putting more emphasis out in the field.

Here’s what we talk about the pricing, it’s very important. We've been averaging about a mid-single-digit in terms of our rate increase which is we feel ahead of our loss cost trends. We think that's important to have overall rate increase ahead of loss cost trends, and I think that is showing up as our combined ratio continues to improve. I think even more importantly than that overall figure is to get more granular and look how we are treating on a policy-by-policy basis each risk in terms of the rate that’s needed.

This chart just kind of breaks it down into three groups. We would call the blue bar, our most adequately priced policies, the greenish, near price adequacy and the yellow, those that need rate or the least priced adequate. So you can see we’re getting much more rate while we may average mid single-digit, we’re getting much more rate on the policies that need more rate and really focusing on retaining the policies that are more adequately priced. So I think even more important than the overall, while that’s important to look at your overall rate increase to loss cost trends, it’s very important to manage where you’re getting the rate, how you're managing the retention so that you’re getting more rate on the policies that need it and make sure that you’re retaining the policies that are at price adequacy. Very important part of our strategy.

In terms of growth, we set a goal at the beginning of 2012 to get to $5 billion in premium volume by the end of 2015. The point of this chart is to show that we are on track. We’re actually a little bit ahead of the pace. And it also breaks it out by line of business. So here if you see where we were at the end of 2012 at $3.9 billion with most of it in the commercial lines, $2.6 billion as we head towards $5 billion at the end of 2015. You can see the breakouts there getting to $3.3 billion in commercial lines, $1.2 billion personal lines, $0.2 billion in excess and surplus lines and $0.3 billion in life insurance.

These columns show what we would need to grow from when we set the strategy in each of the lines. So in other words, we would need to grow 9% in our largest segment, commercial lines. The farthest chart to the right shows our annualized growth since the beginning of 2012, about 18 months and you see we’re ahead of schedule in terms of our growth and we feel confident at pretty much the midway point that we are on track towards hitting our growth goal to get to $5 billion by 2015.

This shows a little bit more that would give you more confidence in terms of the growth. This chart shows how we do as we are in an agency for various periods of time. We develop the deep relationships – we grow at about 1% a year in terms of our market share in the agency. So here if we’ve been in an agency for 10 years or more, at about the 10 year point, we’re at about 10%. If we’ve been in there 20 years it’s about 20%, five years it’s about 5% and so forth. So we, by executing our strategy, continue to gain share within our agencies. And so as we make agency appointments and we have increased our agency footprint by about 20% over the last few years, we fueled this pump so to speak and in fact, we've appointed about – the premium written by agencies since 2009 there is about $11 billion. So you can see as we build the potential and then we execute the strategy to gain greater share in each of the agencies.

So I think in conclusion on my part of the presentation here, I just want to share a little bit of who we are, our strategy, what we focus on financially, how we are delivering value and showing up in our total shareholder return and then also some points that should give you confidence on where we're heading as we go forward.

At this point, like to turn the presentation over to our chief financial officer Mike Sewell.

Mike Sewell

Great. Thank you, Steve. I am first going to start a discussion on the favorable trends of our property-casualty insurance and then I am going to talk a little bit about the investments and then about the reserves on our liability side of the balance sheet and I’ll wrap up with some expense management type topics.

So with that, let’s kick off with our combined ratio, over the past two has really shown a steady pace of improvement but lower catastrophe losses account for some of that and are included in the light colored bars on the right hand side of the chart. We pay very close attention to the dark bars that are on the left, that are – so the combined ratio before, excluding the cat losses. So on [both] basis, when you look at the 2011-2012 years, you see a nice sloping down from the top left to the bottom right and then same thing when you look at year-to-date through the six months.

With a profitable growth in our property-casualty and life insurance segments along with the steady contribution of our investment income operations, our earnings and book value are well-positioned for further growth into the future.

Now we’ll take a quick look at our investments and Steve mentioned a little bit how unique we are. The most unique aspect of our investment approach is our higher than typical allocation to common stocks, which is consistent with our aim to create value through book value growth. That allocation is much higher than most publicly traded insurance companies. And the chart on the left shows that it is more than 1.5 times the P&C industry as a whole. On a statutory accounting basis, that measures bonds at amortized cost.

So you will see our common stock portfolio is about 31% compared to the industry of 18%. One benefit of that higher allocation to stocks is a potential for investment income to increase relative to fixed income securities. Our declining interest income from bonds have been offset by the rising dividend income that we’ve received from our stocks and that has been true through this year also except for the first quarter. If you remember at the end of last year, income tax rates were being changed and so some of the dividends that we typically were received in the first quarter were pulled into the fourth quarter of last year.

Looking at the vertical bars on the right, there’s one way to illustrate that benefit from the mix of our investments. The yield measure is simply annualized investment return on average investment assets. The dark bars on the left are for the property-casualty companies and the lighter bars on the right are for the P&C industry both measured on a statutory basis. Our higher dividend income helped limit our decline in the yield for the first half of the year. It’s a two-thirds of the decline that was reported by the industry.

Another benefit of the higher allocation to stocks is the potential for capital appreciation. Our stock portfolio helped buffer the negative book value effect of the lower bond valuations from rising interest rates during the first half of this year. Our six month 3.6% decline in book value due to lower bond valuations were offset by a 5.6% increase in book value from our stock portfolio.

The structure of our stock portfolio also provides some hedging benefits during periods of inflation relative to portfolios more heavily weighted in bonds. We strive to maintain adequate diversification to help limit volatility and unrealized gains.

Exxon Mobil was our largest holding at June 30 at 3.4% of the common stock portfolio. Our bond portfolio is also more diversified. In addition to having a generally laddered maturity structure, our largest single bond issuer was only 0.7% of the total bond portfolio. The fair value of our bond portfolio exceeds our insurance reserve liability by 36%, a testament to our financial strength.

Now let me turn to reserves. Moving to the liability side of the balance sheet, we have a great track record for loss reserve adequacy resulting in 24 straight years of net favorable reserve development on prior accident years. The horizontal line represent carried reserves consistently crosses the vertical line in the upper half. That illustrates that we set the reserves in the upper half of our actuarial estimates for the range of ultimate losses. As of year-end 2012, our carried reserves were in the 67th percentile of the range. While our history does not guarantee favorable reserve development will continue in the future, our approach to reserving is steady.

I will leave a brief comment on an issue that we believe could make it more difficult in the future for investors to compare financial performance, particularly with respect to reserves. And that's the new proposed accounting standard for insurance contracts that was issued by the Financial Accounting Standards Board towards the end of June of this year. We encourage investors to study the matter carefully and consider responding to the FASB exposure draft before the comment period ends one month from today.

Our use of reinsurance seeks to optimize the balance between maintaining strong capital to maximizing the earnings over the long period. The reinsurance we work with are highly rated and our loss retention levels are relatively low based on our overall capital levels. On individual risks we retained the first 7 million in losses. For a $700 million catastrophe event, our maximum exposure is $145 million. And we further diversified our credit risks in the past year through our collateralized catastrophe bond. We feel confident about the quality of both the asset and the liability side of our balance sheet. And our consistent approach to managing our business while also addressing areas that need attention, increase our confidence that recent trends and improved performance will continue.

The last area I will touch on is the importance we place on prudently managing expenses. As Steve said, we are seeing benefits in investing in data analytics, technology and expanding our field staff. We also believe our profit sharing arrangement with agents provides the right incentive for our agents to produce more profitable business with us. However we seek to avoid unwise spending and that combined with our centralized organizational structure, thereby avoiding branch office infrastructure costs help our total underwriting expense ratio.

These three bars show how we rank among our publicly traded peers in terms of 2012 property-casualty expense ratios. The box on the left is for all underwriting expenses other than commissions, and we have the lowest expense ratio in the group. The middle box is for commission expense. Our base commission expense rates are generally in line with the industry but the portion related to agency profit sharing is what made our commission ratio the highest in the group last year as in most years. Only agents who are profit sharing through low loss ratios receive it, and we believe that lowers our overall combined ratio.

Careful management of expenses is one of the ways we can add value for our shareholders. And it’s in an area where we have relatively more control compared to weather patterns and macroeconomic trends as an example. Steve talked about the drivers of the value creation ratio. This slide provides a historical view and you can see how some of the components changed significantly over time. The tan and green colored bars represent investment portfolio gains. The contributions from gains in our equity portfolio has been positive in every period shown in the last four and half years and we see it as an important contributor to VCR over the long term. The contribution from gains in our bond portfolio were similarly positive until 2013 when rising interest rates resulted in a negative contribution to book value. We knew that bond valuation gains from recent years would ultimately reverse as either bonds mature or if interest rates rose and consider that in setting our long-term target of VCR.

While we have worked hard in recent years to improve, there is a contribution to the property-casualty underwriting represented by the dark blue bars. Its contribution over the past 18 months has been positive following a period of years whose contribution has been negative. Our average VCR for 2009 through 2012 was within our target range and on an annualized basis 2013 is on track.

Management incentive plans include the value creation ratio in addition to total shareholder return as performance measures. So our interests are aligned with the shareholders. As we continue to execute our strategic plan, we see excellent opportunity for the company and for the shareholders.

To wrap up, there are several good reasons to invest in Cincinnati Financial. We have a history of successfully growing the business with a clear strategy for improving underlying results and increasing earnings and book value over the long term. Steve explained how our strategy includes specific initiatives for improving profitability while driving premium growth.

Our record for increasing shareholder dividends is clearly outstanding, reflecting the long-term value we take in managing our business. And the current dividend yield is attractive, as Steve mentioned, was about 3.5%. Our capital also remains strong and the quality of our balance sheet is excellent. The company’s management and Board of Directors remain confident about its future and how that will create value for its shareholders.

At this time, Steve and I will be available to answer questions.

Question-and-Answer Session

Vincent D'Agostino – Keefe, Bruyette & Woods

Thanks guys. Thank you. Just I would start off with a few questions of mine and one of the things that really struck me as you’d gone through the prepared remarks is the improving everyday. And from my standpoint, one of the things that I am impressed most about is that in recent years you guys keep surprising me with things that you are doing from being really cutting-edge on technology. And so I guess the question I have is, has there been a change in the culture or a transformation since you guys have come on board? Or is it that we are just seeing the efforts of the team bearing fruit now or again, is it something that you put in place through the way that you look at, at the business?

Steve Johnston

Thank you. That’s an excellent question. I think if there is a two-parter to that with the yes and a no. In terms of the philosophic framework of the company that we described in our strategy slide, that remains the same and has remained the same since our founding. And that is to focus on appointing relatively few high-quality independent agents, putting our people out in the field, working with the agents in their communities, giving our people the ability and authority and really the expectation to make decisions. And if one of our field underwriters goes out with an agent and they look at an account and they decide on the coverage and the price, it’s their responsibility. And I am the only person in the organization that can override that decision.

So we’ve got really good authority in the field. Claims excellence is something that we are known for. We focus on that and our financial strength, we’ve always been strong, we’ve never been constrained to grow by lack of capital. And then the foundation of ethical behavior is so important. Those are the fundamental tenents that have not changed since the founding of our company. I think what we, to the point, really have focused on is continual improvement and within that philosophic framework, trying to improve on every aspect of our operations everyday, whether it be the underwriting, the pricing, loss control, technologiy as you mentioned. We are trying to just improve the execution within our philosophic framework everyday that we think will be successful in that and I think it’s showing up in the numbers.

Vincent D'Agostino – Keefe, Bruyette & Woods

You’d mentioned capital and so that happens to be one of the biggest topic areas where I get questions and for Cincinnati it’s a bit of high class problem, because you mentioned that you have excess capital and understanding that on the financial crisis, maybe there isn’t a such thing as excess capital. As far as the capital build for Cincinnati, your earnings have improved and we still see an above peer dividend but the yield is not as attractive as it once was. So as we look forward and think about in the context of Cincinnati’s improving earnings outlook, how does the capital picture change or just how do you think about those leverage going forward?

Steve Johnston

That’s a great question. We get asked that quite a bit. I think the point that we focus on is that total value creation, the total economic return. So in addition to just operating return, since we also invest in equities and also pay a good dividend, we look at the total economic return, all-in book value growth plus dividend. We set a target from 2013 to 2017 that we want to have that value creation ratio in the 10% to 13% range. As Mike mentioned, we’ve been in the 12% range historically, so far year to date we’re at 6.5%. So we are on target. So in terms of the return on capital where I think a lot of companies that don’t invest in equities the way we do, we focus more on operating return. We think it’s more prudent to look at the total value created for shareholders in terms of the value creation ratio, all-in set a double-digit target there 10% to 13%, we know to hit that we won’t have to do to grow, we are going to have to do – we’re going to have to grow profitably and only grow and we can grow profitably, we’re going to have to perform on our investments. So that’s it and then just continually return capital to shareholders with our dividend and increase the amount that we are returning. So that’s the way we look at the capital.

Vincent D'Agostino – Keefe, Bruyette & Woods

Mike, just something you’d mentioned about the FASB accounting proposal. Right now I am hearing there is a lot of companies that aren’t necessarily feeling comfortable talking about that as far as what their opinion on the matter is and Cincinnati has been, lot of companies, I think you said in a call last week and so just for investors that may be unaware of what the proposals would mean from an impact to their lives and work, what would be some of the things that investors should think about it and I think there would be a bias towards the negative and how they should think about taking some time now to respond to the FASB’s proposal?

Mike Sewell

Great question and thanks for giving me the opportunity to maybe just say a few words on that. There is a new accounting exposure draft that’s out there that the FASB issued as I mentioned towards the end of June. There is only one more month where you are able to respond to it. And really this new accounting pronouncement is going to fundamentally change the way we report, insurance companies report to the public and to investors. And it really almost turns it upside down. So it’s a drastic change versus typically you will see maybe smaller adjustments. So there will be new ways to set the reserves. Currently you look at what has been incurred or what has happened, you estimate incurred but not reported. In the future it’s going to be more on projected cash flows. So you’re really looking at future cash flows versus what has incurred.

There is two different primary methods of how you report the reserves, based on the duration of the contracts one year or less, or a year or more. It introduces discounting of reserves. And so you may have two companies that have maybe similar products but one might account for one way saying that it’s a 12 months or less. Another company may account for under the long term. So one company will not discount it, another company will discount it. And let’s say everyone does discount it, what is the discount rate, what are the periods, it’s going to be really adding complexity. It’s already complex setting reserves today but it will be adding complexity on top of complexity. Another example is recording of premium income. Today it’s pretty much of a year over year policy, let’s say for a homeowner’s policy, and it’s a year long you’re doing [112] kind of through the passage of time.

Under the new proposed standard it would be looking at the risk that is covering. We have a lot, we’ll say, in the Midwest that we cover. We are probably more prone to tornadoes in the second quarter. So we like change and recognize say 20% in the first quarter, we might recognize 40% of that premium in the second quarter and then start to wind it down and then may be recognized only 10% in the fourth quarter, where if you have another insurance company that writes more homeowners let’s say on the coastal line, let’s say, the East Coast that you’ve got hurricanes, they are more prone to have losses in the third quarter. So they may recognize income 15% in the first quarter, 15% in the second quarter, 50% in the third quarter and then the remaining in the fourth quarter. So there is going to be really – I guess probably the best way to say it is it’s adding complexity on the complexity. It totally turns it upside down and any models that investors like you all are using, you really will not have data that will go back, you will just have really three years of data when the new reporting comes out.

So it’s very important that you get involved. I know it takes away from your daily time but it’s something that’s very important. You ought to take a look at it and we encourage you to write into the FASB. And there are some webinars that are out there. We did participate one in last week. There will be a playback. I think there is another one coming up tomorrow that folks are involved with. So we encourage you to get involved and if you like to learn more about it, feel free to reach out to us. That’s something that our IR is also involved. A great question, thank you.

Vincent D'Agostino – Keefe, Bruyette & Woods

If you like rebuilding models, don’t worry about responding but otherwise it’s definitely worth reaching out. Going back on some of the analytics, on the second quarter call one of the things you mentioned was working through the process of deploying a predictive claims tool later this year. So just curious how that process is going and then in terms of we understand it’s a pretty powerful process, just what would -- a range of loss ratio kind of impact could you expect when you reach full maturity over a period of time?

Steve Johnston

Well, that’s a good question. In terms of quantifying at this point, I think I have to just be honest to say we are confident as you mentioned that will be powerful, but it will have an improving effect. I don’t know that I am in a position yet to give a number on how many loss ratio points. But just a little background on that, we’ve used the predictive modeling in the pricing to be very prospecting and estimating future loss costs and as we mentioned in our chart, we will put the medicine where it’s needed with more rate on those with the highest future loss cost expectation.

We can do similar things with the claims in that as you get a book of claims in, the easier ones, the simpler ones will be settled quicker than more complex ones later. In the earlier that you can identify the types of claims that will become complex and really rise and be troublesome as they go through the settlement process, the earlier you can identify those claims and get the work on them early, the better off you are going to be. So that’s the point of what we are doing with the predictive modeling in the claims is to look at the characteristics of our claims history in terms of identifying those that would need more careful handling earlier on so that we can prevent adverse development in later periods. And so we do feel it will provide improvement in the loss ratio, I think it’s just a little bit too early to give how many points that would be.

Vincent D'Agostino – Keefe, Bruyette & Woods

And well, first I just want to take a second to see if there is any questions from the audience. I think we have time for maybe one or two more questions.

Unidentified Analyst

Just a quick question on one of your slides, VCR to carried reserves, just any color as to why in 2012 the carried reserves went down?

Steve Johnston

I think the carried reserves went down due to the improvements that we have been making in controlling our loss cost trends. And so everything that we showed in terms of what we are doing in terms of our predictive modeling and managing our retention to retain on those with the better loss experience give rate to those with the higher loss cost expectation, everything that we have been doing from more specialization in our claims, our underwriting, our loss control, how we manage the whole process has allowed the reserves to be – we’re just having fewer claims.

So to Mike’s point that he made in the slide, we’re very consistent in our process, have been conservative such that we’ve had, I believe, 23 years in a row of favorable development in our held reserves. So a very consistent process that hasn’t changed at all but I do think that the initiatives that we put in place have caused us to have fewer claims.

Unidentified Analyst

(Question Inaudible)

Steve Johnston

It’s going to be two, maybe little bit less, somewhere around there, I believe.

Mike Sewell

The other thing I will maybe just add to that real quickly is in 2011, we had our two largest cat losses in the company’s history. So you do from the payout of claims on those reserves that would be adjusted. So it’s a total effect.

Vincent D'Agostino – Keefe, Bruyette & Woods

Any other questions from the floor? I’ll throw one last one out before we run out of time. As far as your premium growth outlook, you have a total company wide goal, including the write business of $5 billion, and so as we think about kind of where you’re optimistic as far as pocket of strength in your book, and we think about the out-performance as far as premium growth versus peers, how should we think about the breakdown within the premium growth coming either from rate, new business and then something that I find with Cincinnati that is an interesting aspect is being able to increase the penetration within some of the agents whether it’s since the maturity but you’re not kind of in the top three spot. So just I guess [for me as] just looking for affirmation that it seems like all of these buckets are pretty sustainable aspects of premium growth and right now we see some of the headlines that we are hearing in the industry, that’s a little bit different. So I’d just be kind of curious of your thoughts about your prospects and the optimism versus kind of what we are hearing in the headlines?

Steve Johnston

The one thing I want to clarify is that $5 billion goal is on direct written premium which would be exclusive of what we [see to] reinsurers and it includes all of our segments, commercial, personal, excess and surplus lines and life insurance. In terms of relative rate versus other we are giving about half of the growth roughly in rate, we have the percentages up there by line which show where we are in terms of the goal and where we need to go, we’re largely in the P&C segments ahead of plan. So it will be in there and see how the market goes but if the real estate rate increases were tougher to come by, as we go forward we are ahead of the plan at about the halfway point.

I think what’s crucial when we talk about growth and really germane to our company is that we are going to focus on profitability. We’re only going to grow when we feel that we can be profitable. So we are going to be very much focused on managing our relative rate versus loss cost trends on a granular basis, getting rate where we need it, underwriting the way we know that we need to do, but we do feel that we can hit the goal, we’re ahead of plan and how we manage the agency, the penetration there, with new appointments, the volume of business that each new appointment brings and executing our strategy gives us confidence that we can hit both the premium growth goal and do it as the profitability levels that we need to do at that.

Vincent D'Agostino – Keefe, Bruyette & Woods

All right. I think we are out of time. So thank you very much gentlemen.

Steve Johnston

Thank you, Vincent.

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