UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
FORM 10-Q

(Mark one)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2009.

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                     to                     .

CINCINNATI FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Ohio		31-0746871
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

6200 S. Gilmore Road, Fairfield, Ohio		45014-5141
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (513) 870-2000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ            Accelerated filer o                      Non-accelerated filer o                 Smaller reporting company o

                          (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

o Yes þ No

As of April 27, 2009, there were 162,560,900 shares of common stock outstanding.

 

 

CINCINNATI FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2009

TABLE OF CONTENTS

				Page
		PART I — FINANCIAL INFORMATION
Item 1		Financial Statements (unaudited)			3
		Condensed Consolidated Balance Sheets			3
		Condensed Consolidated Statements of Income			4
		Condensed Consolidated Statements of Shareholders’ Equity			5
		Condensed Consolidated Statements of Cash Flows			6
		Notes to Condensed Consolidated Financial Statements (unaudited)			7
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3		Quantitative and Qualitative Disclosures About Market Risk			37
Item 4		Controls and Procedures			43
		PART II — OTHER INFORMATION
Item 1		Legal Proceedings			43
Item 1A		Risk Factors			43
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 3		Defaults Upon Senior Securities			44
Item 4		Submission of Matters to a Vote of Security Holders			44
Item 5		Other Information			44
Item 6		Exhibits			44
EX-11
EX-31(A)
EX-31(B)
EX-32

Cincinnati Financial Corporation
Form 10-Q for the period ended March 31, 2009

Part I — Financial Information

Item 1. Financial Statements (unaudited)

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Balance Sheets

		March 31,				December 31,
(Dollars in millions except per share data)		2009				2008
ASSETS
Investments
Fixed maturities, at fair value (amortized cost: 2009—$6,613; 2008—$6,058)		$	6,479			$	5,827
Equity securities, at fair value (cost: 2009—$1,993; 2008—$2,077)			2,302				2,896
Short-term investments, at fair value (amortized cost: 2009—$13; 2008—$84)			13				84
Other invested assets			82				83
Total investments			8,876				8,890
Cash and cash equivalents			515				1,009
Investment income receivable			98				98
Finance receivable			71				71
Premiums receivable			1,085				1,059
Reinsurance receivable			735				759
Prepaid reinsurance premiums			15				15
Deferred policy acquisition costs			510				509
Deferred income tax			275				126
Land, building and equipment, net, for company use (accumulated depreciation: 2009—$305; 2008—$297)			236				236
Other assets			138				49
Separate accounts			554				548
Total assets		$	13,108			$	13,369
LIABILITIES
Insurance reserves
Loss and loss expense reserves		$	4,093			$	4,086
Life policy reserves			1,573				1,551
Unearned premiums			1,582				1,544
Other liabilities			586				618
Note payable			49				49
6.125% senior notes due 2034			371				371
6.9% senior debentures due 2028			28				28
6.92% senior debentures due 2028			391				392
Separate accounts			554				548
Total liabilities			9,227				9,187
Commitments and contingent liabilities (Note 7)			—				—
SHAREHOLDERS’ EQUITY
Common stock, par value—$2 per share; (authorized: 2009—500 million shares, 2008—500 million shares; issued: 2009—196 million shares, 2008—196 million shares)			393				393
Paid-in capital			1,072				1,069
Retained earnings			3,551				3,579
Accumulated other comprehensive income			69				347
Treasury stock at cost (2009—34 million shares, 2008—34 million shares)			(1,204	)			(1,206	)
Total shareholders’ equity			3,881				4,182
Total liabilities and shareholders’ equity		$	13,108			$	13,369

Accompanying notes are an integral part of these statements.

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended March 31, 2009

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Statements Of Income

		Three months ended March 31,
(In millions except per share data)		2009				2008
REVENUES
Earned premiums
Property casualty		$	732			$	751
Life			33				29
Investment income, net of expenses			124				152
Realized investment gains and losses			(2	)			(232	)
Other income			3				4
Total revenues			890				704
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits			581				536
Commissions			152				150
Other operating expenses			99				91
Taxes, licenses and fees			17				21
Increase in deferred policy acquisition costs			(7	)			(6	)
Interest expense			14				12
Total benefits and expenses			856				804
INCOME (LOSS) BEFORE INCOME TAXES			34				(100	)
PROVISION (BENEFIT) FOR INCOME TAXES
Current			(2	)			22
Deferred			1				(80	)
Total benefit for income taxes			(1	)			(58	)
NET INCOME (LOSS)		$	35			$	(42	)
PER COMMON SHARE
Net income (loss)—basic		$	0.22			$	(0.26	)
Net income (loss)—diluted			0.22				(0.26	)

Accompanying notes are an integral part of these statements.

Cincinnati Financial Corporation
Form 10-Q for the period ended March 31, 2009

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Statements Of Shareholders’ Equity

		Three months ended March 31,
(In millions)		2009				2008
COMMON STOCK
Beginning of year		$	393			$	393
End of period			393				393
PAID-IN CAPITAL
Beginning of year			1,069				1,049
Stock options exercised			0				2
Stock-based compensation			3				4
End of period			1,072				1,055
RETAINED EARNINGS
Beginning of year			3,579				3,404
Net income (loss)			35				(42	)
Dividends declared			(63	)			(64	)
End of period			3,551				3,298
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of year			347				2,151
Other comprehensive income (loss), net			(278	)			(271	)
End of period			69				1,880
TREASURY STOCK
Beginning of year			(1,206	)			(1,068	)
Purchase			0				(109	)
Reissued			2				0
End of period			(1,204	)			(1,177	)
Total shareholders’ equity		$	3,881			$	5,449
COMMON STOCK — NUMBER OF SHARES OUTSTANDING
Beginning of year			162				166
Purchase of treasury shares			0				(3	)
End of period			162				163
COMPREHENSIVE INCOME
Net income (loss)		$	35			$	(42	)
Net unrealized investment gains and losses and other, net of deferred income tax			(278	)			(271	)
Total comprehensive loss		$	(243	)		$	(313	)

Accompanying notes are an integral part of these statements.

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended March 31, 2009

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Statements Of Cash Flows

		Three months ended March 31,
(In millions)		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	35			$	(42	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization and other non-cash items			8				8
Realized losses on investments			2				232
Stock-based compensation			3				4
Interest credited to contract holders			9				9
Deferred income tax			1				(80	)
Changes in:
Investment income receivable			0				6
Premiums and reinsurance receivable			(2	)			(9	)
Deferred policy acquisition costs			(7	)			(6	)
Other assets			(4	)			3
Loss and loss expense reserves			7				52
Life policy reserves			25				22
Unearned premiums			38				21
Other liabilities			(23	)			(62	)
Current income tax receivable/payable			(52	)			20
Net cash provided by operating activities			40				178
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of fixed maturities			62				18
Call or maturity of fixed maturities			215				615
Sale of equity securities			423				137
Collection of finance receivables			6				11
Purchase of fixed maturities			(873	)			(700	)
Purchase of equity securities			(345	)			(123	)
Change in short-term investments, net			71				51
Investment in buildings and equipment, net			(8	)			(11	)
Investment in finance receivables			(6	)			(3	)
Change in other invested assets, net			(3	)			0
Change in securities lending collateral invested			0				126
Net cash provided by (used in) investing activities			(458	)			121
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of cash dividends to shareholders			(63	)			(59	)
Purchase of treasury shares			0				(97	)
Proceeds from stock options exercised			0				2
Contract holder funds deposited			9				7
Contract holder funds withdrawn			(19	)			(14	)
Change in securities lending payable			0				(126	)
Other			(3	)			(1	)
Net cash provided by (used in) financing activities			(76	)			(288	)
Net (decrease) increase in cash and cash equivalents			(494	)			11
Cash and cash equivalents at beginning of year			1,009				226
Cash and cash equivalents at end of period		$	515			$	237
Supplemental disclosures of cash flow information:
Interest paid (net of capitalized interest:2009—$0; 2008—$1)		$	1			$	0
Income taxes paid			50				2
Non-cash activities:
Conversion of securities		$	0			$	2
Equipment acquired under capital lease obligations			2				1

Accompanying notes are an integral part of these statements.

Cincinnati Financial Corporation
Form 10-Q for the period ended March 31, 2009

Notes To Condensed Consolidated Financial Statements (Unaudited)

NOTE 1 — Accounting Policies

The condensed consolidated financial statements include the accounts of Cincinnati Financial Corporation and its consolidated subsidiaries, each of which is wholly owned, and are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). All significant intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates. The December 31, 2008, consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures required by GAAP.

Our March 31, 2009, condensed consolidated financial statements are unaudited. Certain financial information that is included in annual financial statements prepared in accordance with GAAP is not required for interim reporting and has been condensed or omitted. We believe that we have made all adjustments, consisting only of normal recurring accruals that are necessary for fair presentation. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements included in our 2008 Annual Report on Form 10-K. The results of operations for interim periods do not necessarily indicate results to be expected for the full year.

Adopted Accounting Standards

SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of SFAS No. 133

In March 2008, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standard (SFAS) No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of SFAS No. 133. SFAS No. 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. SFAS No. 161 also requires cross-referencing within the footnotes to assist the users of financial statements in identifying significant information about derivative instruments. We have adopted SFAS No. 161 and it is effective for all reporting periods beginning after November 15, 2008. SFAS No. 161 does not have an impact on our company’s financial position or results of operations as it focuses on additional disclosures.

SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts — an interpretation of SFAS No. 60

In May 2008, the FASB issued SFAS No. 163, Accounting for Financial Guarantee Insurance Contracts — an interpretation of SFAS No. 60. SFAS No. 163 provides guidance on the recognition and measurement of premium revenue and claim liabilities for certain financial guarantee insurance contracts issued by insurance enterprises, and require certain related disclosures. Certain disclosure requirements were effective for the third quarter 2008. The effective date of SFAS No. 163 is the company’s fiscal year beginning after December 15, 2008. The company does not have financial guarantee insurance products and adoption of this statement did not have an impact on our results of operations and financial position.

Pending Accounting Standards

FSP No. 132(R)-1, Financial Disclosures about Postretirement Benefit Plan Assets

In December 2008, the FASB issued FASB Staff Position (FSP) No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets. FSP No. 132(R)-1 is an amendment of SFAS No. 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and 106. FSP No. 132(R)-1 provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The effective date of SFAS No. 132(R)-1 is the company’s fiscal year ending after December 15, 2009. SFAS No. 132(R)-1 will not impact our company’s financial position or results of operations as it focuses on additional disclosures.

FSP No. 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments

In April 2009, the FASB issued FSP No. 107-1/Accounting Principles Board (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments. FSP No. 107-1/APB 28-1 is an amendment of SFAS No. 107, Disclosures about Fair Value of Financial Instruments and APB 28, Interim Financial Reporting. FSP No. 107-1/APB 28-1 expands the fair value disclosures for all financial instruments within the scope of SFAS No. 107 to interim reporting periods. The effective date of FSP No. 107-1/APB 28-1 is for interim reporting periods ending after June 15, 2009, with early adoption permitted. We did not adopt for the first quarter 2009 and do not

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended March 31, 2009

anticipate this FSP having a material impact on our results of operations and financial position for the second quarter of 2009.

FSP No. 115-2 and FSP No. 124-2, Recognition and Presentation of Other-Than-Temporary Impairments

In April 2009, the FASB issued FSP No. 115-2/124-2, Recognition and Presentation of Other-Than-Temporary Impairments. FSP No. 115-2/124-2 is an amendment of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities and SFAS No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. FSP No. 115-2/124-2 amends the other-than-temporary impairment guidance for debt securities and expands the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The effective date of FSP No. 115-2/124-2 is for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted. We did not adopt for the first quarter 2009 and are currently evaluating the impact that FSP No. 115-2/124-2 may have on our results of operations and financial position for the second quarter of 2009.

FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly

In April 2009, the FASB issued FSP No. 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly. FSP No. 157-4 is an amendment of SFAS No. 157, Fair Value Measurements. FSP No. 157-4 applies to all assets and liabilities and provides guidance on measuring fair value when the volume and level of activity has significantly decreased and guidance identifying transactions that are not orderly. FSP No. 157-4 requires interim and annual disclosures of the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, which occurred during the period. The effective date of FSP No. 157-4 is for interim and annual reporting periods ending after June 15, 2009, with early adoption permitted. We did not adopt for the first quarter 2009 and are currently evaluating the impact FSP No. 157-4 may have on our results of operations and financial position for the second quarter of 2009.

NOTE 2 — Investments

Fixed maturities (bonds and redeemable preferred stocks), equity securities (common and non-redeemable preferred stocks) and short-term investments have been classified as available for sale and are stated at fair values at March 31, 2009, and December 31, 2008.

Unrealized gains and losses

At March 31, 2009, unrealized investment gains before taxes totaled $792 million and unrealized investment losses in the investment portfolio amounted to $617 million. The unrealized gains were largely due to long-term gains from our common stock portfolio. Holdings that contributed 10 percent or more of the $792 million in unrealized gains were: ExxonMobil (NYSE:XOM), Wyeth (NYSE:WYE) and The Procter & Gamble Company (NYSE:PG). Equity securities unrealized gains declined for the three months ended March 31, 2009, primarily because of equity security market value fluctuations and the realization of gains through the sale of Fifth Third Bancorp (NASDAQ: FITB), ExxonMobil Corporation (NYSE: XOM) and sales of other financial and non-financial common stock holdings.

The change in unrealized gains and losses on investments, net of taxes, described in the following table, is included in other comprehensive income and shareholders’ equity. Included in Other is an interest-rate swap of less than $1 million. The agreement expires August 29, 2009. Details about the interest-rate swap are found in our 2008 Annual Report on Form 10-K, Item 8, Note 1, Summary of Significant Accounting Policies, Page 98, and Note 7, Notes Payable, Page 109.

		Three months ended March 31,
(In millions)		2009				2008
Change in unrealized investment gains and losses and other summary:
Fixed maturities		$	97			$	(25	)
Equity securities			(510	)			(393	)
Adjustment to deferred acquisition costs and life policy reserves			(4	)			1
Pension obligations			1				1
Other			(12	)			(2	)
Income taxes on above			150				147
Total		$	(278	)		$	(271	)

Cincinnati Financial Corporation
Form 10-Q for the period ended March 31, 2009

Realized gains and losses

Realized gains resulted from sales of Fifth Third and ExxonMobil common stock, along with sales of other financial and non-financial stock holdings. As a result of the sale of common stock for various banks, including the sale of the remainder of our holding in Fifth Third in the first quarter, we owned no common stock in banks as of March 31, 2009. The realized loss from the sale of our common stock holding in General Electric (NYSE:GE), which was sold because of the reduction in its dividend rate, and the sales of financial related preferred securities offset some of these realized gains from sales of equity securities.

During the three months ended March 31, 2009, we recognized $4 million in realized investment losses related to current period changes in valuation of our hybrid securities. At March 31, 2009, we had $92 million of hybrid securities included in fixed maturities that are accounted for under SFAS No. 155.

During the three months ended March 31, 2009, we recognized $50 million in non-cash other-than-temporary impairment charges for 29 securities. Impairment charges, the majority of which were in the fixed maturity portfolio, consisted primarily of $35 million in the financial related and real estate sectors and $12 million in the services cyclical sector. During the three months ended March 31, 2008, we recognized $26 million in other-than-temporary impairment charges for 21 fixed-maturity holdings. We had no other-than-temporary impairment charges for common stocks for the three months ended March 31, 2009, compared with $172 million for three months ended March 31, 2008.

Realized gains and losses on investments are recognized in net income on a specific identification basis. See our 2008 Annual Report on Form 10-K, Item 1, Investments Segment, Page 17, for additional discussion of the investment portfolio. Other-than-temporary declines in the fair value of investments are recognized in net income as realized investment losses at the time when facts and circumstances indicate such write-downs are warranted.

Collateralized Mortgage Obligations

As indicated in our 2008 Annual Report on Form 10-K, Item 8, Note 2, Investments, Page 106, the securities lending program was terminated during the third quarter of 2008. In conjunction with the program termination, we chose to retain a small portfolio of collateralized mortgage obligations rather than sell them at what we felt were distressed prices in an illiquid market. All $27 million market value of CMOs in the portfolio are collateralized by Alt-A mortgages that originated between 2004 and 2006. As of March 31, 2009, we owned investment grade CMOs with a market value and book value of $20 million and $32 million, respectively. Of this $20 million market value, $18 million is rated AAA by Standard & Poor’s. Our non-investment grade CMOs had a market value and book value of $7 million and $10 million, respectively.

NOTE 3 —Fair Value Measurements

Fair Value Hierarchy

In accordance with SFAS No. 157, we categorized our financial instruments, based on the priority of the observable and market-based data for valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3). Valuation techniques have not changed from December 31, 2008 and, ultimately, management determines fair value.

When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used.

Financial instruments are categorized based upon the following characteristics or inputs to the valuation techniques:

•		Level 1 — Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in actively traded markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.
•		Level 2 — Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets and liabilities that are actively traded. This also includes pricing models which the inputs are corroborated by market data.
•		Level 3 — Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include the following:

o    Quotes from brokers or other external sources that are not considered binding;

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended March 31, 2009

		o	Quotes from brokers or other external sources where it can not be determined that market participants would in fact transact for the asset or liability at the quoted price;
		o	Quotes from brokers or other external sources where the inputs are not deemed observable.

We conduct a thorough review of fair value hierarchy classifications on a quarterly basis. Reclassification of certain financial instruments may occur when input observability changes. As noted below in the Level 3 disclosure table, reclassifications are reported as transfers in/out of the Level 3 category as of the beginning of the quarter in which the reclassification occurred.

The following tables illustrate the fair value hierarchy for those assets measured at fair value on a recurring basis for the three months ended March 31, 2009 and December 31, 2008. We do not have any material liabilities carried at fair value.

		Asset fair value measurements at March 31, 2009 using:
		Quoted prices in								Significant
		active markets for				Significant other				unobservable
		identical assets				observable inputs				inputs
(In millions)		(Level 1)				(Level 2)				(Level 3)				Total
Available for sale securities:
Taxable fixed maturities		$	438			$	3,015			$	38			$	3,491
Taxable fixed maturities separate accounts			74				408				0				482
Tax-exempt fixed maturities			0				2,956				5				2,961
Common equities			2,169				0				64				2,233
Preferred equities			0				63				6				69
Collateralized mortgage obligations			0				27				0				27
Short-term investments			0				13				0				13
Top Hat Savings Plan			4				1				0				5
Total		$	2,685			$	6,483			$	113			$	9,281

		Asset fair value measurements at December 31, 2008 using:
		Quoted prices in								Significant
		active markets for				Significant other				unobservable
		identical assets				observable inputs				inputs
(In millions)		(Level 1)				(Level 2)				(Level 3)				Total
Available for sale securities:
Taxable fixed maturities		$	395			$	2,619			$	50			$	3,064
Taxable fixed maturities separate accounts			65				422				6				493
Tax-exempt fixed maturities			0				2,728				5				2,733
Common equities			2,657				0				64				2,721
Preferred equities			0				153				22				175
Collateralized mortgage obligations			0				30				0				30
Short-term investments			0				84				0				84
Top Hat Savings Plan			4				1				0				5
Total		$	3,121			$	6,037			$	147			$	9,305

Level 3 Assets

Each financial instrument that was deemed to have significant unobservable inputs when determining valuation is identified in the tables below by security type with a summary of changes in fair value for the three months ended March 31, 2009 and December 31, 2008. As of March 31, 2009, total Level 3 assets were 1.2 percent of financial assets measured at fair value compared with 1.6 percent at December 31, 2008.

		Asset fair value measurements using significant unobservable inputs (Level 3)
		Taxable				Taxable fixed				Tax-exempt
		fixed				maturities-separate				fixed				Common				Preferred
(In millions)		maturities				accounts				maturities				equities				equities				Total
Beginning balance, December 31, 2008		$	50			$	6			$	5			$	64			$	22			$	147
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)			0				0				0				0				(3	)			(3	)
Included in other comprehensive income			(1	)			0				0				0				2				1
Purchases, sales, issuances, and settlements			0				0				0				0				0				0
Transfers in and/or out of Level 3			(11	)			(6	)			0				0				(15	)			(32	)
Ending balance, March 31, 2009		$	38			$	0			$	5			$	64			$	6			$	113

Cincinnati Financial Corporation
Form 10-Q for the period ended March 31, 2009

		Asset fair value measurements using significant unobservable inputs (Level 3)
		Taxable				Taxable fixed				Tax-exempt
		fixed				maturities-separate				fixed				Common				Preferred
(In millions)		maturities				accounts				maturities				equities				equities				Total
Beginning balance, December 31, 2007		$	85			$	3			$	5			$	59			$	58			$	210
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)			0				0				0				0				(6	)			(6	)
Included in other comprehensive income			(2	)			0				0				0				3				1
Purchases, sales, issuances, and settlements			(15	)			0				0				0				5				(10	)
Transfers in and/or out of Level 3			(14	)			0				0				0				0				(14	)
Ending balance, March 31, 2008		$	54			$	3			$	5			$	59			$	60			$	181

Level 3 taxable fixed-maturity securities decreased $11 million because of the transfer of three securities from Level 3 hierarchy to Level 2 hierarchy. The transfer was the result of the use of unobservable inputs at December 31, 2008, compared with observable inputs at March 31, 2009. Preferred equities also transferred two securities totaling $15 million from Level 3 to Level 2 as the result of observable inputs as of March 31, 2009. At March 31, 2009, total fair value of assets priced with broker quotes and other market inputs for the SFAS No. 157 disclosure was $48 million.

Note 4 — Reinsurance

Our statements of income include earned consolidated property casualty insurance premiums on assumed and ceded business:

		Three months ended March 31,
(In millions)		2009				2008
Direct earned premiums		$	771			$	791
Assumed earned premiums			3				2
Ceded earned premiums			(42	)			(42	)
Net earned premiums		$	732			$	751

Our statements of income include incurred consolidated property casualty insurance loss and loss expenses on assumed and ceded business:

		Three months ended March 31,
(In millions)		2009				2008
Direct incurred loss and loss expenses		$	526			$	525
Assumed incurred loss and loss expenses			4				(1	)
Ceded incurred loss and loss expenses			12				(23	)
Net incurred loss and loss expenses		$	542			$	501

Our statements of income include earned life insurance premiums on assumed and ceded business:

		Three months ended March 31,
(In millions)		2009				2008
Direct earned premiums		$	45			$	42
Assumed earned premiums			0				0
Ceded earned premiums			(12	)			(13	)
Net earned premiums		$	33			$	29

Our statements of income include life insurance contract holder benefits incurred on assumed and ceded business:

		Three months ended March 31,
(In millions)		2009				2008
Direct contract holders benefits incurred		$	50			$	40
Assumed contract holders benefits incurred			0				0
Ceded contract holders benefits incurred			(11	)			(5	)
Net incurred loss and loss expenses		$	39			$	35

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended March 31, 2009

NOTE 5 — Employee Retirement Benefits

The following summarizes the components of net periodic costs for our qualified and supplemental pension plans:

		Three months ended March 31,
(In millions)		2009				2008
Service cost		$	2			$	4
Interest cost			3				4
Expected return on plan assets			(3	)			(4	)
Amortization of actuarial loss, prior service cost and transition asset			0				1
Net periodic benefit cost		$	2			$	5

During 2008, we changed the form of retirement benefit we offer associates to a company match on contribution to the 401(k) savings plan from the defined benefit pension plan. For a discussion of these benefit changes see our 2008 Annual Report on Form 10-K, Item 8, Note 13, Employee Retirement Benefits, Page 113. We made matching contributions of $2 million to our 401(k) savings plan during the first quarter of 2009.

We made no contribution to the pension plans during the first quarter of 2009. We continue to anticipate contributing $33 million during 2009 to our qualified pension plan as indicated in our 2008 Annual Report on Form 10-K.

NOTE 6 — Stock-Based Associate Compensation Plans

We currently have four equity compensation plans that together permit us to grant various types of equity awards. We currently grant incentive stock options, non-qualified stock options, service-based restricted stock units and performance-based restricted stock units under our plans. We also have a Holiday Stock Plan that permits annual awards of one share of common stock to each full time associate for each year of service up to a maximum of 10 shares. One of our equity compensation plans permits us to grant common stock to our outside directors. For additional information about our equity compensation plans, see our 2008 Annual Report on Form 10-K, Item 8, Note 17, Stock-Based Associate Compensation Plans, Page 117.

A total of 16,725,250 shares are authorized to be granted under the shareholder-approved plans. At March 31, 2009, 7,356,110 shares were available for future issuance under the plans. During the first three months of 2009, we granted 23,944 shares of common stock to our directors for 2008 service fees. There were no stock-based awards granted to associates during the period ended March 31, 2009.

Our pretax and after-tax stock-based compensation costs are summarized below:

		Three months ended March 31,
(In millions)		2009				2008
Stock-based compensation cost		$	3			$	4
Income tax benefit			1				1
Stock-based compensation cost after tax		$	2			$	3

Stock-Based Awards

Stock options are granted to associates at an exercise price that is equal to the fair market value as reported on the NASDAQ Global Select Market for the grant date and are exercisable over 10-year periods. The stock options generally vest ratably over a three-year period. In determining the stock-based compensation amounts the fair value of each option granted is estimated on the date of grant using the binomial option-pricing model. Service-based and performance-based restricted stock units are granted to associates at fair market value on the date of grant less the present value of the dividends that holders of restricted stock units will not receive on the shares underlying the restricted stock units during the vesting period. Service-based restricted stock units vest as a unit three years after the date of grant. If certain performance targets are attained, performance-based restricted stock units vest on the first day of March after a three-calendar year performance period. Quarterly, management reviews and determines the likelihood that the company will achieve the performance targets for the outstanding groups of service-based restricted stock units.

As of March 31, 2009, there was $19 million of unrecognized compensation cost related to non-vested awards that is expected to be recognized over a weighted-average period of 2.1 years.

NOTE 7 — Commitments And Contingent Liabilities

In the ordinary course of conducting business, the company and its subsidiaries are named as defendants in various legal proceedings. Most of these proceedings are claims litigation involving the company’s insurance subsidiaries in which the company is either defending or providing indemnity for third-party claims brought against insureds who are litigating first-party coverage claims. The company accounts for such activity

12		Cincinnati Financial Corporation Form 10-Q for the period ended March 31, 2009

through the establishment of unpaid loss and loss adjustment expense reserves. We believe that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, will be immaterial to our consolidated financial condition, results of operations and cash flows.

The company and its subsidiaries also are occasionally involved in other legal actions, some of which assert claims for substantial amounts. These actions include, among others, putative state class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, improper reimbursement of medical providers paid under workers’ compensation insurance policies. The company’s insurance subsidiaries also are occasionally parties to individual actions in which extra-contractual damages, punitive damage, or penalties are sought, such as claims alleging bad faith in the handling of insurance claims.

On a quarterly basis, we review the outstanding lawsuits seeking such recourse. Based on our quarterly review, we believe we have valid defenses to each. As a result, we believe the ultimate liability, if any, with respect to these lawsuits, after consideration of provisions made for estimated losses, will be immaterial to our consolidated financial position.

Nonetheless, given the potential for large awards in certain of these actions and the inherent unpredictability of litigation, an adverse outcome could have a material adverse effect on the company’s consolidated results of operations or cash flows, in particular quarterly or annual periods.

NOTE 8 — Income Taxes

As of December 31, 2008, we had a gross unrecognized tax benefit (FIN 48 liability) of $2 million. Details about our FIN 48 liability are found in our 2008 Annual Report on Form 10-K, Item 8, Note 11, Income Taxes, Page 112.

During the current quarter, our unrecognized tax benefits as a result of tax positions taken in the current year increased approximately $1 million. Our total FIN 48 liability as of March 31, 2009, was $3 million. For the three months ended March 31, 2009, there have been no changes to any assumptions regarding our FIN 48 liability that may be settled with the IRS in the next 12 months related to tax years 2007 to 2008.

NOTE 9 — Segment Information

We operate primarily in two industries, property casualty insurance and life insurance. We regularly review four different reporting segments to make decisions about allocating resources and assessing performance:

•		Commercial lines property casualty insurance
•		Personal lines property casualty insurance
•		Life insurance
•		Investments operations

We report as “Other” the non-investment operations of the parent company and its subsidiaries CFC Investment Company and CinFin Capital Management Company (excluding client investment activities), results of The Cincinnati Specialty Underwriters Insurance Company and CSU Producer Resources Inc, as well as other income of our standard market property casualty insurance operations. CinFin Capital Management terminated all operations effective February 28, 2009. See our 2008 Annual Report on Form 10-K, Item 8, Note 18, Segment Information, Page 119, for a description of revenue, income or loss before income taxes and identifiable assets for each segment.

Cincinnati Financial Corporation Form 10-Q for the quarterly period ended March 31, 2009		13

Segment information is summarized in the following table:

		Three months ended March 31,
(In millions)		2009				2008
Revenues:
Commercial lines insurance
Commercial casualty		$	187			$	190
Commercial property			121				122
Commercial auto			99				101
Workers’ compensation			83				94
Specialty packages			35				35
Surety and executive risk			25				25
Machinery and equipment			7				7
Total commercial lines insurance			557				574
Personal lines insurance
Personal auto			79				83
Homeowner			70				72
Other personal lines			22				22
Total personal lines insurance			171				177
Life insurance			34				30
Investment operations			122				(80	)
Other			6				3
Total		$	890			$	704
Income (loss) before income taxes:
Insurance underwriting results:
Commercial lines insurance		$	(12	)		$	29
Personal lines insurance			(35	)			(18	)
Life insurance			(1	)			(1	)
Investment operations			106				(96	)
Other			(24	)			(14	)
Total		$	34			$	(100	)

		March 31,				December 31,
		2009				2008
Identifiable assets:
Property casualty insurance		$	2,505			$	2,676
Life insurance			1,067				1,091
Investment operations			8,961				8,907
Other			575				695
Total		$	13,108			$	13,369

NOTE 10 — Subsequent Events

Catastrophe Losses — In April 2009, storms affecting our policyholders in Tennessee, Georgia and Alabama currently are estimated to have resulted in approximately $14 million of reported claims, which will be included in second-quarter pretax catastrophe losses. This estimate does not take into account development of these catastrophes, any further catastrophe activity that may occur in the remainder of the second quarter of 2009 or potential development from events in prior periods.

14		Cincinnati Financial Corporation Form 10-Q for the period ended March 31, 2009

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion highlights significant factors influencing the consolidated results of operations and financial position of Cincinnati Financial Corporation (CFC). It should be read in conjunction with the consolidated financial statements and related notes included in our 2008 Annual Report on Form 10-K. Unless otherwise noted, the industry data is prepared by A.M. Best Co., a leading insurance industry statistical, analytical and financial strength rating organization. Information from A.M. Best is presented on a statutory basis. When we provide our results on a comparable statutory basis, we label it as such; all other company data is presented in accordance with accounting principles generally accepted in the United States of America (GAAP).

We present per share data on a diluted basis unless otherwise noted, adjusting those amounts for all stock splits and dividends. Dollar amounts are rounded to millions; calculations of percent changes are based on whole dollar amounts or dollar amounts rounded to the nearest thousand. Certain percentage changes are identified as not meaningful (nm).

Safe Harbor Statement

This is our “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in our 2008 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 25. Although we often review or update our forward-looking statements when events warrant, we caution our readers that we undertake no obligation to do so.

Factors that could cause or contribute to such differences include, but are not limited to:

•		Further decline in overall stock market values negatively affecting the company’s equity portfolio and book value
•		Events, such as the credit crisis, followed by prolonged periods of economic instability, that lead to:

	o		Significant or prolonged decline in the value of a particular security or group of securities and impairment of the asset(s)
	o		Significant decline in investment income due to reduced or eliminated dividend payouts from a particular security or group of securities
	o		Significant rise in losses from surety and director and officer policies written for financial institutions

•		Prolonged low interest rate environment or other factors that limit the company’s ability to generate growth in investment income or interest rate fluctuations that result in declining values of fixed-maturity investments, including declines in accounts in which we hold bank-owned life insurance contract assets
•		Recession or other economic conditions resulting in lower demand for insurance products or increased payment delinquencies
•		Inadequate estimates or assumptions used for critical accounting estimates
•		Increased competition that could result in a significant reduction in the company’s premium volume
•		Delays in adoption and implementation of underwriting and pricing methods that could increase our pricing accuracy, underwriting profit and competitiveness
•		Inability to defer policy acquisition costs for our personal lines segment if pricing and loss trends would lead management to conclude this segment could not achieve sustainable profitability.
•		Changing consumer insurance-buying habits and consolidation of independent insurance agencies that could alter our competitive advantages
•		Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns, environmental events, terrorism incidents or other causes
•		Increased frequency and/or severity of claims
•		Ability to obtain adequate reinsurance on acceptable terms, amount of reinsurance purchased, financial strength of reinsurers and the potential for non-payment or delay in payment by reinsurers
•		Events or conditions that could weaken or harm the company’s relationships with its independent agencies and hamper opportunities to add new agencies, resulting in limitations on the company’s opportunities for growth, such as:

o

Multi-notch downgrades of the company’s financial strength ratings

Cincinnati Financial Corporation Form 10-Q for the quarterly period ended March 31, 2009		15

	o		Concerns that doing business with the company is too difficult
	o		Perceptions that the company’s level of service, particularly claims service, is no longer a distinguishing characteristic in the marketplace
	o		Delays or inadequacies in the development, implementation, performance and benefits of technology projects and enhancements

•

Actions of insurance departments, state attorneys general or other regulatory agencies, including a change to a federal system of regulation from a state-based system, that:

	o		Restrict our ability to exit or reduce writings of unprofitable coverages or lines of business
	o		Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules and regulations

	o		Increase our expenses
	o		Add assessments for guaranty funds, other insurance related assessments or mandatory reinsurance arrangements; or that impair our ability to recover such assessments through future surcharges or other rate changes
	o		Limit our ability to set fair, adequate and reasonable rates
	o		Place us at a disadvantage in the marketplace
	o		Restrict our ability to execute our business model, including the way we compensate agents

•		Adverse outcomes from litigation or administrative proceedings
•		Events or actions, including unauthorized intentional circumvention of controls, that reduce the company’s future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002
•		Unforeseen departure of certain executive officers or other key employees due to retirement, health or other causes that could interrupt progress toward important strategic goals or diminish the effectiveness of certain longstanding relationships with insurance agents and others
•		Events, such as an epidemic, natural catastrophe or terrorism, that could hamper our ability to assemble our workforce at our headquarters location
•		Further, the company’s insurance businesses are subject to the effects of changing social, economic and regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand overall regulation. The company also is subject to public and regulatory initiatives that can affect the market value for its common stock, such as recent measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.

Introduction

Corporate Financial Highlights

Income Statement and Per Share Data

		Three months ended March 31,
(Dollars in millions except share data)		2009				2008				Change %
Income statement data
Earned premiums		$	765			$	780				(2.0	)
Investment income, net of expenses			124				152				(18.7	)
Realized investment gains and losses (pretax)			(2	)			(232	)			99.3
Total revenues			890				704				26.5
Net income (loss)			35				(42	)		nm
Per share data (diluted)
Net income (loss)			0.22				(0.26	)		nm
Cash dividends declared			0.39				0.39				0.0
Diluted weighted average shares outstanding			162,663,625				165,105,311				(1.5	)

Revenues rose for the three months ended March 31, 2009, compared with the first quarter of 2008 due to lower level of realized investment losses. The other two primary revenue components, earned premiums and investment income, declined in the current quarter compared with the same period a year ago. Revenue trends are discussed further in the respective sections of Results of Operations.

16		Cincinnati Financial Corporation Form 10-Q for the period ended March 31, 2009

Realized investment gains and losses are recognized on the sales of investments or as otherwise required by GAAP. We have substantial discretion in the timing of investment sales, and that timing generally is independent of the insurance underwriting process. GAAP also requires us to recognize in income the gains or losses from certain changes in market (fair) values of securities even though we continue to hold the securities.

Net income improved for the first three months of 2009 compared to the same period in 2008 primarily because of the lower level of realized investment losses. The investment income and underwriting profit components of net income decreased during the current three-month period as discussed below in Results of Operations. As discussed in our 2008 Annual Report on Form 10-K, Item 7, Factors Influencing Our Future Performance, Page 38, there are several reasons that our performance during 2009 may be below our long-term targets. In that annual report, as part of Results of Operations, we also discussed the year 2009 outlook for each reporting segment.

The board of directors is committed to rewarding shareholders directly through cash dividends and through share repurchase authorizations. Through 2008, the company has increased the indicated annual cash dividend rate for 48 consecutive years, a record we believe is matched by only 11 other publicly traded companies. While seeing merit in continuing that record, with the February 2009 quarterly dividend declaration our board indicated its first priority was assuring continued financial strength for the company and that its intention was to consider the potential for a 49th year of increase over the course of 2009.

Balance Sheet Data and Performance Measures

		At March 31,				At December 31,
(Dollars in millions except share data)		2009				2008
Balance sheet data
Invested assets		$	8,876			$	8,890
Total assets			13,108				13,369
Short-term debt			49				49
Long-term debt			790				791
Shareholders’ equity			3,881				4,182
Book value per share			23.88				25.75
Debt-to-capital ratio			17.8	%			16.7	%
		Three months ended March 31,
		2009				2008
Performance measure
Value creation ratio			(5.7)	%			(5.4)	%

Invested assets, total assets, shareholders’ equity and book value per share were below year-end 2008, largely because of declines in the market value of our investment portfolio during the first quarter of 2009, reflecting adverse trends of securities markets in general. As a result, our total debt-to-capital ratio (capital is the sum of debt plus shareholders’ equity) increased 1.1 percentage points from the December 31, 2008, level. The value creation ratio also decreased because of the decline in the market value of our investment portfolio and is discussed further in the section below entitled “Progress Toward Long-Term Value Creation.”

Progress Toward Long-Term Value Creation

Through The Cincinnati Insurance Company, Cincinnati Financial Corporation is one of the 25 largest property casualty insurers in the nation, based on written premium volume for approximately 2,000 U.S. stock and mutual insurer groups. We market our insurance products through a select group of independent insurance agencies in 35 states as discussed in our 2008 Annual Report on Form 10-K, Item 1, Our Business and Our Strategy, Page 1.

Although 2009 is a difficult year for our economy, our industry and our company, our long-term perspective lets us address the immediate challenges while focusing on the major decisions that best position the company for success through all market cycles. We believe that this forward-looking view has consistently benefited our policyholders, agents, shareholders and associates.

To measure our progress, we have defined a measure of value creation that we believe captures the contribution of our insurance operations, the success of our investment strategy and the importance we place on paying cash dividends to shareholders. Between 2010 and 2014, we expect to achieve a 12 percent to 15 percent average for the total of 1) our rate of growth in book value per share plus 2) the ratio of dividends declared per share to beginning book value per share. With the current economic and market uncertainty, we believe this ratio is an appropriate way to measure our long-term progress in creating value.

Cincinnati Financial Corporation Form 10-Q for the quarterly period ended March 31, 2009		17

When looking at our longer-term objectives, we see three performance drivers:

•		Premium growth — We believe over any five-year period our agency relationships and initiatives can lead to a property casualty written premium growth rate that exceeds the industry average. The compound annual growth rate of our net written premiums was 1.3 percent over the past five years, equal to the estimated growth rate for a broad group of standard market property casualty insurance companies.
		For the first quarter of 2009, our property casualty net written premiums were essentially flat, rising 0.3 percent to $778 million. A.M. Best forecasts industry growth at 0.9 percent for full-year 2009. Our flat overall growth despite strong new business reflects the progress on the growth initiatives discussed below in Highlights of Initiatives Supporting Our Strategies, offset by continued price competition requiring us to take a disciplined approach to risk selection and pricing and by continued weakness in the broader economy. First-quarter new business written by our agents rose 28.9 percent to $97 million compared with $76 million for the 2008 first quarter.

•		Combined ratio — We believe our underwriting philosophy and initiatives can generate a GAAP combined ratio over any five-year period that is consistently below 100 percent. Our GAAP combined ratio averaged 92.8 percent over the five years ended December 31, 2008. Our combined ratio was below 100 percent in each year during the period, except 2008 when we experienced a record level of catastrophe losses as discussed in our 2008 Annual Report on Form 10-K, Item 7 Consolidated Property Casualty Insurance Results of Operations, Page 49. Our statutory combined ratio averaged 92.6 percent over the same period compared with an estimated 98.5 percent for the same industry group.
		For the first quarter of 2009, our statutory combined ratio was 105.1 percent, including 7.2 percentage points of catastrophe losses, compared with 97.3 percent, including 5.7 percentage points of catastrophe losses, for the first quarter of 2008. A.M. Best forecasts the industry’s full-year 2009 combined ratio at 101.1 percent, including 4.0 percentage points of catastrophe losses.
•		Investment contribution — We believe our investment philosophy and initiatives can drive investment income growth and lead to a total return on our equity investment portfolio over a five-year period that exceeds the five-year return of the Standard & Poor’s 500 Index (Index).

	o		Investment income grew at a compound annual rate of 2.9 percent over the five years ended December 31, 2008. It grew in each year except 2008 when we experienced a dramatic reduction in dividends from financial services companies held in our equity portfolio, a risk we addressed aggressively during 2008.
			For the first quarter of 2009, pretax investment income was $124 million, down 18.7 percent from $152 million for the first quarter of 2008. The decrease reflected reduced dividends and ongoing diversification of the equity portfolio during 2008 and the first quarter of 2009, with investment of sales proceeds and cash flow in more secure, lower yielding securities with potential for yield improvement.
	o		Over the five years ended December 31, 2008, our compound annual equity portfolio return was a negative 9.0 percent compared with a compound annual total return of a negative 2.1 percent for the Index. Our equity portfolio underperformed the market for the five-year period primarily because of the decline in the market value of Fifth Third, our largest holding for most of the period. In 2008, our compound annual equity portfolio return was a negative 31.5 percent, compared with a negative 36.9 percent for the Index.
	o		For the first quarter of 2009, our equity portfolio underperformed the market, with a negative return of 13.1 percent compared with negative 11.0 percent for the Index. At that date, the financial sector weighting was 2.9 percent in our equity portfolio compared with 10.8 percent in the Index.

Highlights of Initiatives Supporting Our Strategies

Management works with the board of directors to identify the strategies that can lead to long-term success. Our strategies are intended to position us to compete successfully in the markets we have targeted while minimizing risk. We believe successful implementation of the initiatives that support our strategies will help us better serve our agent customers, reduce volatility in our financial results and weather difficult economic, market or pricing cycles.

•		Preserve capital — Implementation of these initiatives is intended to preserve our capital and liquidity so that we can successfully grow our insurance business. A strong capital position provides the capacity to support premium growth and provides the liquidity to sustain our investment in the people and infrastructure needed to implement our other strategic initiatives.
•		Improve insurance profitability — Implementation of these operational initiatives is intended to support improved cash flow and profitable growth for the agencies that represent us and for our company. These initiatives primarily seek to strengthen our relationships with agents, allowing them to serve clients faster

18		Cincinnati Financial Corporation Form 10-Q for the period ended March 31, 2009

		and manage expenses better. Others may streamline our internal processes so we can devote more resources to agent service.
•		Drive premium growth — Implementation of these operational initiatives is intended to expand our geographic footprint and diversify our premium sources to obtain profitable growth without significant infrastructure expense. Diversified growth also may reduce our catastrophe exposure risk and temper negative changes that may occur in the economic, judicial or regulatory environments in the territories we serve.

We discuss initiatives supporting each of these strategies below, along with the metrics we use to assess their progress.

Preserve Capital

The four primary initiatives supporting our capital preservation strategy are:

•

Maintain a diversified and stabilized investment portfolio by applying parameters and tolerances — We discuss our portfolio strategies in greater depth in our Annual Report on Form 10-K, Item 1, Investments Segment, Page 17.

	o		High-quality fixed-maturity portfolio that matches or exceeds total insurance reserves — At March 31, 2009, the average rating of the $6.479 billion fixed maturity portfolio was A2/A+, and the portfolio value exceeded the total insurance reserve liability. We also have reinsurance recoverables to offset a portion of insurance reserves.
	o		Diversified equity portfolio that generally has no concentrated positions in single stocks or industries — At March 31, 2009, no single security accounted for more than 10.5 percent of our portfolio of publicly traded common stocks and no single sector accounted for more than 26 percent. Because of the strength and diversity of our fixed-maturity portfolio, we have the opportunity to invest for both income growth and potential capital appreciation by purchasing equity securities. We seek to achieve a total return on the equity portfolio over any five-year period that exceeds that of the Index while taking equal or less risk.
	o		Parent company liquidity that increases our flexibility through all periods to maintain our cash dividend and to continue to invest in and expand our insurance operations — We aim to keep approximately 90 percent of parent company investments in cash and marketable securities. At March 31, 2009, we held $1.038 billion of our cash and invested assets at the parent company level, of which $680 million, or 65.6 percent, was invested in common stocks and $217 million, or 20.9 percent, was cash or cash equivalents.

•		Minimize reliance on debt as a source of capital, maintaining the ratio of debt-to-total capital below 20 percent — This target is higher than we had identified in previous years because total capital declined in 2008 and early 2009 although debt levels were essentially unchanged. At March 31, 2009 this ratio was 17.8 percent compared with 16.7 percent at year-end 2008 and 13.6 percent at March 31, 2008. Our long-term debt consists of three non-convertible, non-callable debentures, two due in 2028 and one in 2034.
•		Purchase reinsurance from highly rated reinsurers to mitigate underwriting risk and to support our ability to hold investments until maturity. See our Annual Report on Form 10-K, Item 7, 2009 Reinsurance Programs, Page 81, for additional details on these programs.
•		Identify tolerances for other operational risks and calibrate management decisions accordingly — For example, we are developing programs to address the concentration of production operations at our headquarters location.

We measure the overall success of our strategy to preserve capital primarily by growing investment income and by achieving over any five-year period a total return on our equity investment portfolio that exceeds the Standard & Poor’s 500’s return. We also monitor other measures. One of the most significant is our ratio of property casualty net written premiums to statutory surplus, which was 0.97-to-1 for the 12 months ended March 31, 2009, compared with 0.89-to-1 at year-end 2008. This ratio is a common measure of operating leverage used in the property casualty industry; the lower the ratio the more capacity a company has for premium growth. The estimated property casualty industry net written premium to statutory surplus ratio was 0.9-to-1 at year-end 2008 and 0.8-to-1 at year-end 2007.

Our second means of verifying our capital preservation strategy is our financial strength ratings. Our parent company’s senior debt is rated by four independent ratings firms. In addition, the ratings firms award insurer financial strength ratings to our property casualty and life companies based on their quantitative and qualitative analyses. These ratings assess an insurer’s ability to meet financial obligations to policyholders and do not necessarily address all of the matters that may be important to shareholders. Ratings may be subject to

Cincinnati Financial Corporation Form 10-Q for the quarterly period ended March 31, 2009		19

revision or withdrawal at any time by the rating agency, and each rating should be evaluated independently of any other rating.

As of April 27, 2009, our credit and financial strength ratings were:

Insurance Financial Strength Ratings

Parent

Company

Standard Market Property

Rating

Senior Debt

Insurance Casualty

Life Insurance

Excess and Surplus

Agency

Rating

Subsidiary

Subsidiary

Subsidiary

Status (date)

Rating

Rating

Rating

Tier

Tier

Tier

A. M. Best Co.

a

A+

Superior

2 of 16

A

Excellent

3 of 16

A

Excellent

3 of 16

Stable outlook (12/19/08)

Fitch Ratings

A-

AA-

Very Strong

4 of 21

AA-

Very Strong

4 of 21

—

—

—

Negative outlook (2/13/09)

Moody’s Investors Service

A3

A1

Good

5 of 21

—

—

—

—

—

—

Stable outlook Service (9/25/08)

Standard & Poor’s Rating Services

BBB+

A+

Strong

5 of 21

A+

Strong

5 of 21

—

—

—

Negative outlook (06/30/08)

•

All of our insurance subsidiaries continue to be highly rated. During the first quarter of 2009, only one ratings agency action occurred. On February 13, 2009, Fitch Ratings affirmed our ratings it had assigned in July 2008, continuing its negative outlook due to the downside risk in our equity portfolio. Fitch stated that it viewed favorably the number of steps we have taken to rebalance our equity portfolio and reduce exposure to the financial sector. Fitch noted our strong capitalization at the current ratings level and low operating leverage.

Our debt ratings are discussed in our 2008 Annual Report on Form 10-K, Item 7, Additional Sources of Liquidity, Page 71.

Improve Insurance Profitability

The three primary initiatives to improve insurance profitability are:

•

Implement technology projects to improve critical efficiencies and streamline processes for our agencies, allowing us to win an increasing share of their business. By the end of this year, we expect to make significant strides with deployment of technology initiatives that enhance local decision making based on the local knowledge and risk selection expertise we derive from our agents and from having a large network of field representatives who live and work in our agents’ communities:

	o		Predictive modeling tool for our workers’ compensation business line — The tool will increase pricing precision so that our agents can better compete for the most desirable workers’ compensation business. We now are beginning to use this tool to assist underwriters with improved risk selection and pricing capabilities.
	o		Commercial lines policy administration system — we are on track to deploy a new system for commercial package and auto by year-end 2009 to all of our appointed agencies in 11 states, including several higher premium volume states, with additional states to receive the system in 2010. The new system includes direct bill capabilities, real time rating and issue and other efficiencies that will help cement our spot among the go-to carriers for our agencies. We anticipate a positive impact on future commercial lines premium growth.
	o		Personal lines policy administration system — In the first quarter, we introduced single point of entry capability, allowing our agents to rate homeowner and personal auto policies through their agency management systems in real time. In early 2010, we plan to move our personal lines policy processing system to a “next generation” platform. We expect agency efficiency to improve with newly designed, easier-to-use screens that can be delivered with greater speed. We continue to focus on making it easier for our agents to do business with us.
	o		Online technologies to serve agencies and policyholders — During 2009, we expect to introduce online services that agents have requested for policyholders. In the first quarter of 2009, we began offering personal lines policyholders whom we bill for our agents the convenience of making their premium payments online from our Web site, using credit cards or transfers from bank accounts.
	o		Improved claims processes with options such as agent access to more detailed information on the status of pending claims — These capabilities help sustain our reputation for superior claims service by helping keep the agent better informed on the details of claim status. In April 2009, we enhanced our response time for new claims, making available an online system for submission of notices of loss to agencies that use Applied agency management systems.

20		Cincinnati Financial Corporation Form 10-Q for the period ended March 31, 2009

o

Improving our business data, supporting accurate underwriting, pricing and decisions — Over the next several years, we will deploy a full data management program, including a property casualty insurance data warehouse. One of the greatest advantages will be enhanced granularity of pricing data. This is a phased, long-term project that is currently in progress.

•

Continue to staff field positions to ensure that we carefully select and evaluate new business on a case-by-case basis so we can grow profitably. At March 31, 2009, we had 112 field marketing territories, up from 111 at the end of 2008 and 106 at March 31, 2008.

	o		Personal lines field marketing representatives — In 2008, we expanded the role of our personal lines marketing representative by locating associates in states newer to our personal lines offerings. In these states, our personal lines automation has allowed us to introduce or broaden our product offerings. We now have two headquarters-based and three field-based personal lines marketing representatives and will add two more in the field in 2009. These representatives have underwriting authority and visit agencies on a regular basis to promote the advantages of Cincinnati personal lines.
	o		Other field associates help provide our agents with superior service and support — Additions are planned to the field teams that provide the local expertise, help us better understand the accounts we underwrite and provide another market advantage for our agents. In the second quarter of 2009, we are adding three new premium audit representatives and one new loss control field representative, and plan to add two more loss control representatives before year-end who will help support our expansion into western states.

•

Improve internal efficiencies to make best use of our resources — Smart spending today means we will be even better prepared with strong, local market-based relationships when external conditions improve. Projects under way include developing an energy efficiency plan for our headquarters buildings and reviewing underwriting workflow.

We measure the overall success of our strategy to improve insurance profitability primarily through our GAAP combined ratio, which we believe can be consistently below 100 percent over any five-year period.

In addition, we expect these initiatives to contribute to our rank as the No. 1 or No. 2 carrier based on premium volume in agencies that have represented us for at least five years. In 2008, we again earned that rank in more than 75 percent of the agencies that have represented Cincinnati Insurance for more than five years. We are working to improve that rank again in 2009 and in each of the years that follow.

Drive Premium Growth

The five primary initiatives to drive premium growth are:

•		New agency appointments in 2009 — We continue to appoint new agencies in our current operating territories, adding 76 in 2008. Our objective is to appoint additional points of distribution each year. In 2009, we are targeting 65 appointments of independent agencies writing an aggregate $1 billion in property casualty premiums annually with all carriers they represent. This target includes appointments in the recently opened state of Texas. As of March 31, 18 appointments have been completed in 2009, resulting in a total of 1,141 agency relationships marketing our standard market insurance products from 1,406 reporting locations.
		In measuring progress towards achieving this initiative, we include appointment of new agency relationships with Cincinnati. For those that we believe will produce a meaningful amount of new business premiums, we also include appointment of agencies that merge with a Cincinnati agency and new branch offices opened by existing Cincinnati agencies. We made 76, 66 and 55 new appointments in 2008, 2007 and 2006, respectively. Of these new appointments, 52, 50 and 42, respectively, were new relationships. These new appointments and other changes in agency structures led to a net increase in reporting agency locations of 60 in 2008, 38 in 2007 and 37 in 2006. We seek to build close, long-term relationships with each agency we appoint. We carefully evaluate the marketing reach of each new appointment to ensure the territory can support both current and new agencies.
•		New states — With our entry into Texas during the fourth quarter of 2008, Cincinnati Insurance now is actively marketing our policies in 35 states, expanding our opportunities beyond the Midwest and South. We now have a sizeable presence in the western states — opening New Mexico and eastern Washington in 2007, Utah in 2000, Idaho in 1999 and Montana in 1998. We entered Arizona in 1971. We plan to look next at taking Cincinnati Insurance to agencies in Colorado and Wyoming. While we continually study the regulatory and competitive environment in other states where we could decide to actively market our property casualty products, we have not announced the timetable for entry into additional states.
		We generally are able to earn a 10 percent share of an agency’s business after 10 years. In Delaware, New Mexico and Washington, our three newer states, we’ve appointed agencies that write about $400 million

Cincinnati Financial Corporation Form 10-Q for the quarterly period ended March 31, 2009		21

		annually with all the carriers they represent. Our writings with these new agencies were almost 2 percent of that total in 2008 and were almost 3 percent of the first-quarter 2009 total.
		We appointed our first agencies in Texas late in 2008, opening two field marketing territories. In the first quarter of 2009, we added our third Texas marketing territory. By mid 2010, we expect to appoint agencies in that state that write about $750 million in premiums annually with all carriers they represent.
•		Personal lines — We are working to position our personal lines business for profitable future growth. By late-2009, we expect to have made more advances using tiered rating, helping to further improve our rate and credit structures. Personal lines rate changes made in 2008 have started to drive additional new business, including rollovers of seasoned business our agencies previously placed with other carriers.
		Additional pricing changes that became effective in January 2009 are further driving new business. These changes build on our 2006 introduction of credits for homeowner and personal auto products that began to address rates that were too high; our 2007 introduction of discounts on homeowner policies in some states when an auto policy is also purchased; and our 2008 introduction of further credits and debits to more accurately price risks. These pricing refinements reduced premiums for many policies we write, presenting an opportunity to market the policy advantages to our agents’ more quality-conscious clientele.
		We also are more aggressively tapping our potential to market personal lines insurance through agencies that already represent us for commercial lines. In 2008, we began writing personal lines business or significantly expanded our product offerings and automation capabilities in five states. In early 2009, we began marketing personal lines in Idaho and South Carolina, bringing the total of states where we market personal lines to 29. In these seven new or expanded states, our agencies write approximately $650 million in personal lines premiums annually with all carriers they represent.
•		Surplus lines insurance — Another source of premium growth is our new surplus lines operation, which ended the year on track with products available in 33 states. We entered this business area to better serve agents of The Cincinnati Insurance Companies. Today, they write about $2.5 billion annually of surplus lines business with other carriers. We want to earn an appropriate share by bringing Cincinnati-style service to those clients. In 2008, our first year, we wrote $14 million in surplus lines premiums and met our 2008 strategic plan deployment objectives. In the fourth quarter of 2008, we expanded product offerings from general liability, adding property and professional liability lines of businesses. For the first quarter 2009, we wrote a total of $7 million compared with $1 million in the first quarter of 2008, our initial period for surplus lines operations.
•		Life insurance product development — During the first quarter of 2009, we designed a worksite return of premium 20-year term life product to be introduced during the second quarter, when we also intend to release a new secondary guarantee universal life product. In the third quarter, we expect to introduce a survivor universal life product for the estate planning market. These initiatives support opportunities to cross-sell life insurance products to clients of the independent agencies that sell Cincinnati’s property casualty insurance policies.

We also expect a positive impact on 2009 premium growth from the introduction of our commercial package and auto policy administration system, discussed above. It includes a new option, highly anticipated by our agencies, to let them select to have us bill the policyholder directly. We also will offer those directly billed policyholders more payment options, including monthly billing and electronic funds transfer. In the second quarter of 2009, we will begin offering direct billing of workers’ compensation policies.

We measure the overall success of this strategy to drive premium growth primarily through changes in net written premiums, which we believe can grow faster than the industry average over any five-year period. Notably, many of our growth initiatives have been under way for a year or more and helped us achieve 28.5 percent new business growth for the first quarter of 2009 although total written premiums were flat on weak market pricing, economic pressures and higher reinsurance premiums.

Despite near-term challenges in insurance and financial markets that are reflected in our first-quarter 2009 financial performance, we are making good progress on our initiatives and remain confident that our strategy will deliver long-term value for shareholders.

22		Cincinnati Financial Corporation Form 10-Q for the period ended March 31, 2009

Results Of Operations

The consolidated results of operations reflect the operating results of each of our four segments along with the parent company and other activities reported as “Other.” The four segments are:

•		Commercial lines property casualty insurance
•		Personal lines property casualty insurance
•		Life insurance

•

Investments operations

We report as Other the non-investment operations of the parent company and its subsidiaries CFC Investment Company and CinFin Capital Management Company (excluding client investment activities), as well as other income of our standard market property casualty insurance operations. CinFin Capital Management terminated all operations effective February 28, 2009. Beginning in the first quarter of 2008, we also included the results of The Cincinnati Specialty Underwriters Insurance Company and CSU Producer Resources Inc. in Other.

See Item 1, Note 9, Segment Information, Page 14 for discussion of the calculations of segment data. The following sections review results of operations for each of the four segments.

Consolidated Property Casualty Insurance Results of Operations

Consolidated property casualty insurance results include premiums and expenses for our standard market insurance (commercial lines and personal lines segments) as well as our surplus lines operations.

		Three months ended March 31,
(Dollars in millions)		2009				2008				Change %
Earned premiums		$	732			$	751				(2.5	)
Loss and loss expenses from:
Current accident year before catastrophe losses			482				467				3.1
Current accident year catastrophe losses			55				47				16.9
Prior accident years before catastrophe losses			9				(9	)		nm
Prior accident year catastrophe losses			(2	)			(4	)			47.5
Total loss and loss expenses			544				501				8.6
Underwriting expenses			243				240				1.5
Underwriting (loss) profit		$	(55	)		$	10			nm

										Pt. Change
Ratios as a percent of earned premiums:
Current accident year before catastrophe losses			65.8	%			62.2	%			3.6
Current accident year catastrophe losses			7.5				6.2				1.3
Prior accident years before catastrophe losses			1.2				(1.2	)			2.4
Prior accident year catastrophe losses			(0.3	)			(0.5	)			0.2
Total loss and loss expenses			74.2				66.7				7.5
Underwriting expenses			33.3				31.9				1.4
Combined ratio			107.5	%			98.6	%			8.9
Combined ratio:			107.5	%			98.6	%			8.9
Contribution from catastrophe losses and prior years reserve development			8.4				4.5				3.9
Combined ratio before catastrophe losses and prior years reserve development			99.1	%			94.1	%			5.0

Our consolidated property casualty insurance operations experienced an underwriting loss of $55 million for the three months ended March 31, 2009, compared with an underwriting profit of $10 million in 2008. The main drivers of this quarter’s underwriting loss were increased losses in our workers’ compensation and homeowner business as discussed below.

Our combined ratio reflected the factors influencing underwriting results. (The combined ratio is the percentage of incurred losses plus all expenses for each premium dollar — the lower the ratio, the better the performance. An underwriting profit results when the combined ratio is under 100 percent. A combined ratio above 100 percent indicates that a carrier’s losses and expenses are greater than premiums.)

The combined ratio can be affected by updated estimates of loss and loss expense reserves established for claims that occurred in prior periods, referred to as prior accident years. Development on prior year accident reserves unfavorably affected the combined ratio by 0.9 percentage points in the first quarter of 2009 compared with a favorable impact of 1.7 percentage points in the first quarter of 2008. These amounts include development on prior period catastrophe loss reserves. The unfavorable development recognized in

Cincinnati Financial Corporation Form 10-Q for the quarterly period ended March 31, 2009		23

the first quarter of 2009 occurred primarily in the workers’ compensation line of business as discussed in Commercial Lines Results of Operations below. The combined ratio can also be affected by catastrophe losses and other large losses as discussed in detail below.

		Three months ended March 31,
(Dollars in millions)		2009				2008				Change %
Agency renewal written premiums		$	695			$	733				(5.2	)
Agency new business written premiums			97				76				28.9
Other written premiums			(14	)			(33	)			56.6
Net written premiums			778				776				0.3
Unearned premium change			(46	)			(25	)			(85.2	)
Earned premiums		$	732			$	751				(2.5	)