United States Securities and Exchange Commission

Form 10-K

For the fiscal year ended December 31, 2004.

For the transition period from                      to                     .

Commission file number 0-4604

Cincinnati Financial Corporation

(Exact name of registrant as specified in its charter)

6200 S. Gilmore Road

Fairfield, Ohio 45014-5141

(Address of principal executive offices) (Zip Code)

(513) 870-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

$2.00 par, common

(Title of Class)

6.9% Senior Debentures due 2028

(Title of Class)

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). þ Yes    o No

The aggregate market value of voting stock held by nonaffiliates of the Registrant was $6,479,492,390 as of June 30, 2004.

As of February 25, 2005, there were 167,249,902 shares of common stock outstanding.

Document Incorporated by Reference

Portions of the definitive Proxy Statement for Cincinnati Financial Corporation’s Annual Meeting of Shareholders to be held on April 23, 2005, are incorporated by reference into Parts II and III of this Form 10-K.

Table of Contents

Part I

Item 1. Business

Introduction

Cincinnati Financial Corporation (CFC or the company) is an Ohio corporation formed in 1968. Through its subsidiaries, CFC has been conducting insurance operations since 1950, marketing commercial, personal and life insurance. The company reports results in four segments:

The commercial lines and personal lines property casualty insurance segments combined to generate 80.8 percent of the company’s revenues in 2004. Revenues, income before income taxes, and identifiable assets for these segments are included in Item 8, Note 17 to the Consolidated Financial Statements, Page 89. The company’s segments are defined based on the financial information used internally to evaluate performance and determine the allocation of assets.

CFC owns 100 percent of its three subsidiaries: The Cincinnati Insurance Company, CFC Investment Company and CinFin Capital Management Company. The Cincinnati Insurance Company owns 100 percent of its three subsidiaries: The Cincinnati Casualty Company, The Cincinnati Indemnity Company and The Cincinnati Life Insurance Company.

The Cincinnati Insurance Company, founded in 1950, leads the property casualty group known as The Cincinnati Insurance Companies. The Cincinnati Casualty Company and The Cincinnati Indemnity Company round out the property casualty insurance group, providing flexibility in pricing and underwriting while ceding substantially all of their business to The Cincinnati Insurance Company. The Cincinnati Life Insurance Company primarily markets life insurance and annuities. CFC Investment Company complements the insurance subsidiaries with leasing and financing services. CinFin Capital Management Company provides asset management services to institutions, corporations and high net worth individuals.

CFC’s headquarters is located in Fairfield, Ohio. At December 31, 2004, the company had 3,884 headquarters and field associates. The company’s filings with the Securities and Exchange Commission (SEC) are available, free of charge, on the company’s Web site, www.cinfin.com, as soon as possible after they have been filed with the SEC. Referenced Web sites, including the company’s Web site, are not incorporated by reference in this Annual Report on Form 10-K.

Unless otherwise noted, estimated industry data are referenced from materials presented on a statutory basis by A.M. Best Co., a leading insurance industry statistical, analytical and financial strength rating organization. Statutory data for the company is labeled as such; all other company data is presented on a GAAP basis.

Property Casualty Insurance Operations

Introduction

The company actively markets commercial insurance policies in 31 states through a select group of 986 independent insurance agencies as of December 31, 2004. It actively markets all of its personal lines insurance policies in 22 of those states.

In 2004, nine states with at least $100 million in commercial and personal lines agency earned premium generated approximately 69 percent of total property casualty premiums. In these states, agency earned premiums grew 9.2 percent, or $176 million. Ohio, where the company had 187 independent agencies at year-end 2004, accounted for 23.7 percent of total earned premiums. In the 22 states with less than $100 million in agency earned premium, agency earned premiums grew 15.0 percent, or $119 million, in 2004.

Competitive Environment

There are approximately 3,100 property casualty insurance companies in the United States operating independently or in groups and no single company or group is dominant. Property casualty insurers can distribute their products through independent insurance agents, who sell the products of many insurers, or captive agents, who sell the products of only one insurance company. Companies that use captive agents, as well as companies selling directly to consumers through the mail, Internet or telephone solicitations, are called direct writers.

The company is committed to the independent agent distribution system, recognizing that locally based independent agencies have relationships in their communities that lead to profitable business. The company’s field associates provide service and accountability to the agencies, living in the communities they serve and working from offices in their homes, providing 24/7 availability. The company differentiates itself by providing superior claims service and field

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underwriting, through locally based associates serving the needs of agents and policyholders; by offering competitive products, rates and compensation; and by maintaining high financial strength ratings.

In 2003, the most recent period for which data is available, Cincinnati Insurance was the No. 1 or No. 2 carrier in more than 70 percent of its agencies based on premium volume or number of policies. For commercial lines, the company views its competition as the companies that distribute through independent agents. For personal lines, policyholders are more likely to investigate insurance options both through independent agents and through personal research with captive agents or direct writers. The 986 independent agencies through which the company markets its commercial lines products normally represent four to 12 insurance carriers, including both national and regional carriers, some of which may be mutual companies. Management generally views regional carriers as more challenging competition because they often are familiar with the local market and focus on differentiating themselves through personal relationships with agencies.

Independent Agent Marketplace

Agencies chosen by the company demonstrate the same commitments that distinguish the company in the marketplace: doing business person to person; offering broad, value-added services; maintaining sound balance sheets and managing their agencies professionally. In 2003, the most recent year industry data is available, on average, Cincinnati’s agencies were larger than the industry average, with approximately 35 percent estimated to have more than $2 million in revenues. According to data from a specialized consulting service to independent agents, in 2000, approximately 22 percent of the 20,066 U.S. independent agents with more than $250,000 in revenues had more than $2 million in revenues. The consulting service projects continued consolidation in the agency marketplace, estimating that by 2010, the number of agencies with more than $250,000 in revenues will decline to approximately 11,700, of which approximately 40 percent will have more than $2 million in revenues. The company believes that its agencies will continue to be leading agencies.

In 2004, property casualty agencies representing the company averaged approximately $3.1 million in agency earned premiums for the company compared with approximately $2.9 million in 2003 and $2.6 million in 2002. Agencies that have represented the company for less than five years averaged slightly less than $1 million in agency earned premium for the company in 2004. Established agencies that have represented the company five years or more averaged approximately $3.4 million in agency earned premium for the company in 2004. No single agency accounted for more than 1.1 percent of the company’s total agency earned premiums in 2004.

Growth Strategies

In addition to growth of its agencies, the premium increases reflected efforts to improve customer service through the creation of smaller marketing territories, permitting local field marketing representatives to devote more time to each independent agency. At year-end 2004, the company had 92 property casualty field territories, up from 87 at the end of 2003 and 83 at the end of 2002. During 2005, the company plans to subdivide and staff at least eight additional territories, which would bring the total number of field territories to 100. As part of this program, the company plans to create a Delaware/Maryland territory in mid-2005. The planned Delaware/Maryland territory represents both the subdivision of the current Maryland territory and the company’s entry into Delaware, its first new state since 2000.

During 2004, the company selectively appointed 48 new agencies within existing marketing territories. The company plans to add 100 new agencies in 2005 and 2006. New appointments were made in 21 of the 31 states in which the company actively markets insurance. Care is taken when selecting and appointing new agencies to minimize market disruption for existing agencies. Of the 48 new agencies, 31 will market the company’s full complement of property casualty insurance and 17 will market commercial lines only. An additional three agencies were appointed in 2004 to market the company’s surety bond products, bringing its total of surety-only independent agencies to nine. These nine agencies are not included in the 986 property casualty agency total.

The company believes that it can continue to grow by taking actions intended to maintain or increase its penetration within its agencies and through the selective appointment of additional agencies. Other than Delaware, the company does not expect to enter any new states in the near future.

Competitive Position

The company’s competitive position reflects:

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The company seeks to be a consistent, predictable and reasonable carrier that agencies can rely on to serve their communities.

     Technology initiatives completed or ongoing include:

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Loss and Loss Expense Reserves

When claims are made by or against policyholders, any amounts that the company’s property casualty operations pay or expect to pay to the claimant are termed losses. The costs of investigating, resolving and processing these claims are termed loss expenses. The consolidated financial statements include property casualty loss and loss expense reserves that estimate the costs of paying claims incurred through December 31 of each year. The reserves include estimates for claims that have been reported and estimates for claims that have been incurred but not yet reported, along with estimates of loss expenses associated with processing and settling those claims. The various estimates are developed based on individual claim evaluations and statistical projections. Loss reserves are reduced by the estimated amount of salvage and subrogation.

While the company believes that reported reserves are sufficient for all unpaid loss and loss expense obligations, the estimation process involves uncertainty by its very nature. The estimates are continually reviewed, and as facts regarding individual claims develop and new information becomes known, the reserve is adjusted as necessary. Adjustments due to loss development for prior years are reflected in the calendar year in which they are identified. Item 7, Property Casualty Loss and Loss Expense Reserves, Page 25, includes more information about the process used to analyze potential losses and establish reserves.

The anticipated effect of inflation is implicitly considered when estimating reserves for loss and loss expenses. While anticipated cost increases due to inflation are considered in estimating the ultimate claim costs, the increase in

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average severity of claims is caused by a number of factors that vary with the individual type of policy. Average severity projections are based on historical trends adjusted for anticipated changes in underwriting standards, policy provisions and general economic trends. These trends are monitored based on actual development. The company does not discount any of its property casualty loss and loss expense reserves.

A reconciliation of the beginning and ending balances of the company’s reserve for losses and loss expenses at December 31, 2004, 2003 and 2002, is presented in Item 8, Note 4 to the Consolidated Financial Statements, Page 82. The reconciliation of the December 31, 2003, reserve balance to net incurred losses one year later recognizes approximately $196 million in redundant reserves. The redundancy was partially due to the 2004 release of $32 million in Ohio uninsured motorist/underinsured motorist reserves as discussed in Item 7, Property Casualty Reserve Levels, Page 55.

Development of Loss and Loss Expenses

Differences between the property casualty reserves reported in the accompanying consolidated balance sheets (prepared in accordance with accounting principles generally accepted in the United States of America – GAAP) and those same reserves reported in the annual statements (filed with state insurance departments in accordance with statutory accounting practices – SAP), relate principally to the reporting of reinsurance recoverables, which are recognized as receivables for GAAP and as an offset to reserves for SAP.

The table above shows the development of the estimated reserves for loss and loss expenses for the years prior to 2004:

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In evaluating this information, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, payments or reserve adjustments related to losses settled in 2004 but incurred in 1998 will be included in the cumulative deficiency or redundancy amount for 1999 and each subsequent year. In addition this table presents calendar year data, not accident or policy year development data, which readers may be more accustomed to analyzing. Conditions and trends that have affected development of the reserve in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this data.

Reinsurance

The company has property and casualty working reinsurance treaties for 2004 through reinsurance companies that have written its treaties for more than 15 years. The strong relationships the company has with these reinsurers has allowed the company to negotiate what it considers to be favorable terms and conditions during a difficult time in the market cycle. To add further diversification to the reinsurance program, Partner Reinsurance Company of the U.S. was added to the property per risk and casualty per occurrence treaties effective January 1, 2005, joining American Re-Insurance Company, GE Insurance Solutions and Swiss Reinsurance America Corporation. The property casualty working treaties align the company with what it considers to be four of the most financially sound reinsurance companies in the world. The company also secures property catastrophe coverage and catastrophic casualty protection.

The 2005 property and casualty reinsurance program encompasses five primary components:

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Individual risks with insured values in excess of $25 million as identified in the policy are handled through a different reinsurance mechanism. Property coverage for individual risks with insured values between $25 million and $50 million are reinsured under an automatic facultative treaty. For those risks with property values exceeding $50 million, the company negotiates the purchase of facultative coverage on an individual certificate basis. For casualty coverage on individual risks with limits exceeding $25 million, facultative reinsurance coverage is placed on an individual certificate basis.

Responding to the challenges presented by terrorism has become a very important issue for the insurance industry over the last three years. Terrorism coverage at various levels has been secured in all of the company’s reinsurance agreements. The broadest coverage for this peril is found in the property and casualty working treaties, which provide coverage for commercial and personal risks. The company’s property catastrophe treaty provides coverage for personal risks and the majority of its reinsurers provide limited coverage for commercial risks with total insured values of $10 million or less. For insured values between $10 million and $25 million, there also may be coverage in the property working treaty.

Reinsurance protection for the company’s surety business is covered under separate treaties with many of the same reinsurers that write the property casualty working treaties.

The estimated incremental cost increase of $13 million for the 2005 property casualty working reinsurance agreements is primarily due to the growth in the company’s premium base. The company believes it has the financial ability to absorb losses at the current retention levels, and the 2005 reinsurance agreements are a means of balancing reinsurance costs with what it considers to be an acceptable level of risk. Reinsurance does not relieve the company of its obligation to pay covered claims. The financial strength of the company’s reinsurers is important because the company’s ability to recover losses under one of the reinsurance agreements depends on the financial viability of the reinsurer.

Reinsurance protection for the company’s life insurance business is covered under separate treaties with many of the same reinsurers that write the property casualty working treaties. In 2005, the company modified its reinsurance protection for the life insurance business due to changes in the marketplace during 2004 that affected the cost and availability of reinsurance for term life insurance. Previously, the company retained 20 percent of each term policy, not to exceed $500,000, and ceded the balance of mortality risk and policy reserve. Under the new program, the company will continue to retain no more than a $500,000 exposure, ceding the balance using excess over retention mortality coverage, but will retain the policy reserve. Retaining the policy reserve has no direct impact on GAAP results. Because of the conservative nature of statutory reserving principles, retaining the policy reserve does have a negative impact on statutory income. The company currently is researching alternative reinsurance solutions to moderate the effect on statutory income of retaining the policy reserve for new term business. Management believes it will be able to structure this portion of the reinsurance program to provide the life insurance company with the ability to continue to grow in the term life insurance marketplace while appropriately managing risk, at a cost that allows the company to achieve its profit targets.

Financial Strength Ratings

Cincinnati Financial is awarded credit (debt) ratings (see Item 7, Long- and Short-term Debt, Page 60, for a discussion of the company’s credit ratings), and its insurance subsidiaries are awarded insurer financial strength ratings. The following summarizes the insurer financial strength ratings as of March 4, 2005. Insurer financial strength ratings assess an insurer’s ability to meet its financial obligations to policyholders and do not necessarily address matters that may be important to shareholders.

(See Life Insurance Segment, Page 12, for a discussion of life insurance subsidiary ratings.)

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Management believes that its superior insurer financial strength ratings are clear, competitive advantages in the segment of the insurance marketplace that the company’s agents serve. The company’s financial strength supports the consistent, predictable performance that its policyholders, agents, associates and shareholders have always expected and received, and it must be able to withstand significant challenges. The most important way management seeks to ensure that the company remains consistent and predictable is to align agents’ interests with those of the company, giving agents outstanding service and compensation to earn their best business.

While the potential for volatility exists due to the company’s catastrophe exposures, investment philosophy and bias towards incremental change, the ratings agencies consistently have asserted that the company has built appropriate financial strength and flexibility to manage that volatility and seek higher long-term returns for shareholders. Management remains committed to strategies that emphasize long-term stability instead of quickly reacting to changes in market conditions to obtain short-term benefits. For example, the company maintains strong insurance company statutory-basis surplus, a solid reinsurance program, sound reserving practices and low interest rate risk, as well as low debt and strong capital at the parent-company level.

In 2004, the board of directors and management established parameters around the property casualty company’s strong statutory surplus position that led to some short-term actions. The new parameters allow the company to remain consistent with its long-term underwriting and equity investing strategies while responding to risk factors that are studied carefully by the ratings agencies.

In the second quarter of 2004, the company:

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These property casualty actions did not signal a change in the company’s overall investment philosophy. The company remains fully committed to a long-term equity focus that management believes is the key to the company’s long-term growth and stability (see Investments Segment, Page 13, for a discussion of the company’s investment strategy). The company currently intends to continue to invest for income and growth, focusing on a total-return strategy supported by investments in dividend-paying companies. Over the longer term, the company anticipates continuing to invest in equity securities to help achieve its portfolio objectives. However, the company believes that recent short-term actions to enhance the property casualty statutory surplus quality should support the predictability viewed by rating agencies as one of the company’s primary strengths, and by agents as a competitive advantage.

Commercial Lines Property Casualty Insurance Segment

The commercial lines property casualty insurance segment contributed $2.126 billion in net earned premiums to the company’s total revenues and $338 million to income before income taxes in 2004. Commercial lines net earned premiums grew 11.4 percent in 2004, 10.8 percent in 2003 and 18.6 percent in 2002.

The company markets its full complement of commercial products in all 986 property casualty independent agencies and all 31 states in which it markets property casualty insurance. The company’s emphasis is on providing products that agents can market to small- to mid-size businesses in their communities. The company monitors agency earned premium, which is earned premium before reinsurance, on a by-state basis to evaluate its performance on a geographic basis. In 2004, Illinois, Indiana, Michigan, North Carolina, Ohio, Pennsylvania and Virginia, each with at least $100 million in commercial lines agency earned premium, generated 59.3 percent of commercial lines premiums compared with 60.4 percent in the prior year. In these states, agency earned premiums grew 10.0 percent, or $120 million, in 2004 compared with 11.9 percent, or $127 million, in 2003. Ohio, where the company has 187 independent agencies, accounted for 18.7 percent of commercial lines earned premiums, versus 19.4 percent in 2003. In the remaining 24 states, agency earned premiums grew 15.2 percent and 17.7 percent, or $119 million and $118 million, in 2004 and 2003, respectively.

Commercial Lines Agency Earned Premiums by State

From late-2003 through the end of 2004, competition has increased in the commercial lines marketplace, particularly to attract quality new business. In the company’s experience, the level of competition varies market-by-market, by line of business and by size of account. In most markets where the company competes, the company believes that disciplined underwriting generally remains the norm. In the company’s opinion, carriers are modifying prices rather than changing policy terms and conditions.

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As competition in the commercial markets has increased, the company has maintained its pricing discipline for both renewal and new business. While the company’s independent agents reported only modest pressure on renewal pricing at the end of 2004, they communicated that winning new business would require more pricing flexibility and careful risk selection. The company intends to remain a stable market for its agencies’ best business, and management believes that the company’s case-by-case approach gives it a clear advantage. The company’s field marketing associates and its independent agents work together to select risks and respond appropriately to local pricing trends. Historically, they have proven capable of balancing risk and price to achieve growth in new business over the longer term.

Looking ahead, management believes that opportunities to obtain new business and increase policy count will come from its strong relationships with independent agencies, subdivision of territories to enhance service and appointment of new agencies over the next several years. Offsetting new appointments will be continued consolidation within the independent agency marketplace and terminations of certain of its agency relationships.

Staying abreast of evolving market conditions is a critical function, accomplished in both an informal and a formal manner. Informally, the field marketing representatives are in constant receipt of market intelligence from the agencies with which they work. Formally, the commercial lines product management group completes periodic market surveys to obtain competitive intelligence. This market information helps to determine the top competitors by line of business or specialty program and also determines market strengths and weaknesses for the company. The analysis encompasses pricing, breadth of coverage and underwriting/eligibility issues. In addition to reviewing the company’s competitive position, the product management group performs underwriting audits to assess profitability initiatives. Further, the company’s research and development department analyzes opportunities and develops new products, new coverage options and improvements to existing insurance products.

The company’s standard approach is to write three-year policies, and it considers this a competitive advantage in the commercial lines market. Although the company offers three-year terms, premiums for some coverages within those policies are adjustable at anniversary for the subsequent annual period, and policies may be cancelled at any time at the discretion of the policyholder. While writing three-year policies would appear to restrict opportunities to quickly adjust pricing, contract terms provide that the rates for automobile, workers compensation, professional liability and most umbrella liability coverages within multi-year packages may be changed at each of the policy’s annual anniversaries for the next one-year period. The annual rate adjustments could incorporate rate changes approved by state insurance regulatory authorities between the date the policy was written and its annual anniversary date, as well as changes in risk exposures and premium credits or debits relating to loss experience, competition and other underwriting judgment factors. Management estimates that approximately 75 percent of 2004 commercial premium was written on a one-year policy term or was subject to annual rating adjustments.

In the company’s experience, multi-year packages can be marketed at rates that may be slightly higher than annual package rates. By reducing annual administrative efforts, multi-year policies reduce the company’s and agency’s expenses and the incentive for the policyholder to shop for a new policy every year. Management believes that the advantages of three-year policies in terms of policyholder convenience, account retention and reduced administrative costs outweigh the potential disadvantage of these policies, even in periods of rising rates.

Management believes that its three-year commercial policies are somewhat less price sensitive for quality-conscious insurance buyers who are typical customers of the company’s independent agents. For three years, or even over relationships that last decades, those policyholders have experienced the company’s personal claims service, benefited from the company’s coverage packages and relied on the company’s high financial strength ratings. Customized insurance programs on a three-year term complement the relationships these policyholders have with their agents and with the company. They may be less inclined to shop their accounts annually.

In 2003, the company resumed writing three-year policies for contractor risks in most states because of these advantages. In 2002, the company temporarily wrote one-year policies for contractor risks while awaiting state regulatory approval for two significant coverage changes in the company’s general liability and umbrella coverage forms. The changes brought the company’s policy forms in line with industry practices by capping the amount payable during a policy period (usually 12 months) for certain types of liability claims and by clarifying how a policy responds once the insured learns that injury or damage has occurred during a prior policy period. Looking ahead, the company expects that these changes will help the company better manage liability losses and remain a viable market for agents to place coverage for well-managed, reputable contractors. Underwriters carefully monitor new and renewal contractor business, continuing to write one-year policies when competitive or underwriting issues make three-year policies impractical.

Four business lines – commercial multi-peril, workers compensation, commercial automobile and other liability – account for approximately 90 percent of commercial lines earned premiums.

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The remainder of commercial lines earned premiums was derived from a variety of other types of insurance products the company offers to commercial customers, including fiduciary and surety bonds and machinery and equipment policies.

Personal Lines Property Casualty Insurance Segment

The personal lines property casualty insurance segment contributed $793 million in net earned premiums to the company’s total revenues and a $40 million loss before income taxes in 2004. Personal lines net earned premiums grew 6.4 percent in 2004, 11.2 percent in 2003 and 8.2 percent in 2002.

The company actively markets its personal lines products in 22 of the 31 states in which it markets commercial lines insurance and selected products within certain agencies in the nine remaining states. In 2004, Alabama, Georgia, Illinois, Indiana, Kentucky, Michigan and Ohio, each with $35 million or more in personal lines agency earned premium, generated 76.2 percent of personal lines premiums, compared with 76.9 percent in 2003. In these states, agency earned premiums grew 6.4 percent, or $37 million, in 2004, versus 8.6 percent, or $46 million, in the prior year. Ohio, where the company has 182 independent agencies writing personal lines products, accounted for 37.6 percent of 2004 personal lines agency earned premiums compared with 38.2 percent in 2003. In the remaining 21 states, agency earned premiums grew 10.7 percent and 16.2 percent, or $19 million and $24 million, in 2004 and 2003, respectively.

Personal Lines Agency Earned Premiums by State

Since 2000, the company has observed that the personal lines marketplace has focused on underwriting discipline rather than market share. The result has been an industry-wide improvement in profitability, augmented by favorable loss frequency and severity trends. Overall, rates for both personal auto and homeowner insurance have risen in conjunction with stricter enforcement of underwriting guidelines. Despite the record level of industry-wide catastrophe losses in 2004, competition began to increase during the year in the personal lines marketplace, with industry analysts observing a plateau in year-over-year rate filings.

The company markets homeowners and personal automobile insurance products through 706 of its 986 independent agencies. The 280 agencies that do not market the full complement of personal lines products either are located in states in which the company does not actively market these products or the company has determined, in conjunction with agency management, that the company’s personal lines products are not appropriate for their agencies at this time. Personal automobile accounted for 56.8 percent and homeowners accounted for 32.6 percent of personal lines net earned premium in 2004.

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The remainder of personal lines earned premium was derived from a variety of other types of insurance products the company offers to individuals such as dwelling fire, inland marine, personal umbrella liability and watercraft coverages.

Life Insurance Segment

The life insurance segment contributed $104 million of the company’s total revenues and a $2 million gain before income taxes in 2004. See Item 7, Life Insurance, Page 45, for additional information regarding life insurance segment profitability.

The Cincinnati Life Insurance Company’s mission complements that of the overall company: to provide products and services that attract and retain high quality independent insurance agencies. The company primarily focuses on life products that produce revenue growth through a steady stream of premiums.

Cincinnati Life seeks to round out and protect accounts in the property casualty agency and to improve account persistency. At the same time, the life operation looks to increase diversification, revenues and profitability for both the agency and the company. This strategy enhances the already strong relationship built by the combination of the property casualty and life companies.

Cincinnati Life seeks to become the life insurance carrier of choice for the independent agencies that work with the property casualty operations by providing competitive products, responsive underwriting, high quality service and reasonable commissions. At year-end 2004, approximately 89 percent of the company’s 986 property casualty agencies offered Cincinnati Life’s products to their policyholders. The life company also seeks to develop life business from other independent life insurance agencies in a manner that does not conflict or compete with the property casualty agencies.

Four lines of business – term insurance, whole life insurance, universal life insurance and worksite products – account for approximately 85 percent of the life insurance segment’s revenues:

In addition, Cincinnati Life markets:

Cincinnati Life is a financially strong and stable life insurance company. Cincinnati Life’s statutory adjusted risk-based surplus increased 10.7 percent to $491 million at December 31, 2004, from $443 million a year earlier. Statutory

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adjusted risk-based surplus as a percentage of liabilities, a key measure of life insurance company capital strength, were 38.3 percent at year-end 2004 compared with an estimated industry average ratio of 10.5 percent. The higher the ratio, the stronger an insurer’s security for policyholders and its capacity to support business growth . A.M. Best – A+ (Superior), Fitch Ratings – AA (Very Strong) and Standard & Poor’s Ratings Services – AA- (Very Strong, negative outlook) maintained their ratings for Cincinnati Life in 2004.

Investments Segment

The investment segment contributed $583 million of the company’s total revenues in 2004, primarily from net investment income and realized investment gains and losses from investment portfolios managed for the holding company and each of the operating subsidiaries. Primarily from investment income, it contributed $537 million of income before income taxes, or 67.2 percent of total income before income taxes.

While the company seeks to generate an underwriting profit in its property casualty and life segments, the investment segment historically has provided the primary source of profits and contributed to the company’s financial strength, driving long-term growth in shareholders’ equity and book value.

Under the direction of the investment committee of the board of directors, the company’s analysts and portfolio managers seek to balance current investment income opportunities and long-term appreciation so that current cash flows from both insurance and investment operations can be compounded to achieve above-average long-term total return.

While focused on long-term total return, the company maintains liquidity to meet both its immediate and long-range insurance obligations with the purchase and maintenance of medium-risk fixed-maturity and equity securities. Historically, approximately 65 percent to 70 percent of available cash has been invested in fixed-income securities with the remaining 30 percent to 35 percent invested in equity and equity-linked securities.

In preparing the Consolidated Financial Statements, convertible securities are included in fixed-maturities or equity securities, based on the characteristics of the underlying security (bond or preferred stock). When monitoring and evaluating investment operations results, the company broadly categorizes investments as fixed-income securities, which includes investment-grade corporate bonds, high-yield corporate bonds and tax-exempt municipal bonds; and equity and equity-linked securities, which includes common and preferred stocks and all convertible securities.

At year-end 2004 and 2003, these five classes of assets accounted for the following:

Fixed-income Securities

By maintaining a well diversified fixed-income portfolio, the company attempts to reduce overall credit risk. The company invests new money in the bond market on a continuous basis, targeting what management believes to be optimal risk-adjusted after-tax yields. Risk, in this context, includes both credit and interest rate risk. Management does not make concerted efforts to alter duration on a portfolio basis in response to anticipated movements in interest rates. By continually investing in the bond market, the company builds a broad, diversified portfolio that management believes mitigates the impact of adverse economic factors. In recent years, the company has taken into account the trend toward a flatter corporate yield curve and an overall decline in credit quality by purchasing higher-quality corporate bonds with shorter maturities as well as tax-exempt municipal bonds and U.S. agency paper. The company’s focus on long-term total return may result in variability in the levels of realized and unrealized investment gains or losses from one period to the next.

With the exception of U.S. agency paper, no individual fixed-income issuer’s securities accounted for more than 0.6 percent of the fixed-income portfolio at December 31, 2004. For the insurance companies’ portfolios, strong emphasis is placed on purchasing current income-producing securities.

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Equity and Equity-linked Securities

The company’s equity and equity-linked securities portfolio includes a core group of common stocks that the company can monitor closely to gain an in-depth understanding of their organization and industry. It also includes a broader group of smaller positions in common and preferred stocks and convertible securities, which can be a source of trading flexibility and other risk management advantages. The company’s portfolio of equity investments had an average dividend yield-to-cost of 11.5 percent at December 31, 2004.

Common Stock Holdings

When investing in common stock, management seeks to identify companies in which it can accumulate more than 5 percent of their outstanding shares. There also is a core group of common stocks in which the company holds a market value of at least $100 million. At year-end 2004, there were 14 holdings in that core group, including three of the four investments where the company held more than 5 percent of their outstanding shares. While this emphasis on a small group of equities and long-term investment horizon has resulted in significant concentrations within the portfolio, the company has followed this buy-and-hold strategy for many years, resulting in significant accumulated unrealized appreciation within the equity portfolio. At year-end 2004, the largest industry concentrations within these large common equity holdings were the financials sector at 65.9 percent of total market value and the healthcare sector at 5.7 percent of total market value. (See Item 7, Investment Results of Operations, Page 47, for a discussion of equity securities sold during 2004.)

Additional information regarding the composition of investments is included in Item 8, Note 2 to the Consolidated Financial Statements, Page 80.

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Regulation

State Regulation

The business of insurance primarily is regulated by state law. Although the company’s insurance subsidiaries are domiciled in Ohio and primarily subject to Ohio insurance laws and regulations, the company also is subject to state regulatory authorities of all states in which it writes insurance. The state laws and regulations that have the most significant effect on the company’s insurance operations and financial reporting are discussed below.

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Federal Regulation

Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives often have an impact. Some of the current and proposed federal measures that may significantly affect the company’s business are discussed below.

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Item 2. Properties

Cincinnati Financial Corporation owns its headquarters building located on 100 acres of land in Fairfield, Ohio. This building contains approximately 800,000 total square feet. John J. & Thomas R. Schiff & Co. Inc., a related party, occupies approximately 6,750 square feet (1 percent). The property, including land, is carried in the financial statements at $76 million as of December 31, 2004, and is classified as property and equipment, net, for company use.

CFC Investment Company owns the Fairfield Executive Center, which is located on the northwest corner of its headquarters property in Fairfield, Ohio. This is a four-story office building containing approximately 96,000 square feet. CFC and its subsidiaries occupy approximately 90 percent of the building and unaffiliated tenants occupy approximately 10 percent. The property is carried in the financial statements at $7 million as of December 31, 2004, and is classified as property and equipment, net, for company use.

The Cincinnati Life Insurance Company owns a four-story office building in the Tri-County area of Cincinnati, Ohio. It contains approximately 102,000 rentable square feet. An unaffiliated tenant currently leases 100 percent of the building through December 31, 2005. At this time, the company has not been informed that the tenant intends to vacate the property and the tenant has until August 2005 to notify the company of their intent. This property is carried in the financial statements at $3 million as of December 31, 2004, and is classified as other invested assets.

In 2004, the company decided to undertake a building expansion at its headquarters location in Fairfield, Ohio. Preparation for construction of an underground garage and third office tower began in January 2005. The new tower will contain more than 690,000 total square feet, including the garage. It will rise seven stories above three underground parking levels with 700 parking spaces. The construction has an estimated completion date of September 2008. The company believes this expansion will accommodate its business needs for the foreseeable future.

Item 3. Legal Proceedings

Neither the company nor any of its subsidiaries is involved in any material litigation other than ordinary, routine litigation incidental to the nature of its business.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders of Cincinnati Financial during the fourth quarter of 2004.

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Part II

Cincinnati Financial Corporation had approximately 11,850 shareholders of record as of December 31, 2004. Many of the company’s independent agent representatives and most of the 3,884 associates of its subsidiaries own the company’s common stock. Common shares are traded under the symbol CINF on the Nasdaq National Market. The common stock prices and dividend data below reflect the 5 percent stock dividend paid June 15, 2004; per share data has not been adjusted for the 5 percent stock dividend to be paid on April 26, 2005.

CFC’s ability to pay cash dividends may depend on the ability of its insurance subsidiary to pay dividends to the parent company. See Item 8, Note 8 to the Consolidated Financial Statements, Page 83, for discussion of dividend restrictions at the insurance company subsidiaries.

Information regarding securities authorized for issuance under equity compensation plans appears in the Proxy Statement under “Equity Compensation Plan Information.” This portion of the Proxy Statement is incorporated herein by reference. Additional information with respect to options under the company’s equity compensation plans is available in Item 8, Note 8 and Note 16 to the Consolidated Financial Statements, Pages 83 and 88.

The board of directors has authorized a share repurchase program (see Item 7, Cash Flow, Page 51, for additional information on the program). In 2004, repurchases were made as follows (amounts unadjusted for stock dividends):

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Item 6. Selected Financial Data

Per share data adjusted to reflect all stock splits and dividends prior to December 31, 2004.

One-time charges or adjustments:

2003 — As the result of a settlement negotiated with a vendor, pretax results included the recovery of $23 million of the $39 million one-time, pretax charge incurred in 2000.

2000 — The company recorded a one-time charge of $39 million, pretax, to write down previously capitalized costs related to the development of software to process property casualty policies.

2000 — The company earned $5 million in interest in the first quarter from a $303 million single-premium bank-owned life insurance (BOLI) policy booked at the end of 1999 that was segregated as a Separate Account effective April 1, 2000. Investment income and realized investment gains and losses from separate accounts generally accrue directly to the contract holder and, therefore, are not included in the company’s consolidated financials.

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Topics addressed in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 7A, Quantitative and Qualitative Disclosures About Market Risk, include:

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Introduction

The purpose of the Management’s Discussion and Analysis is to provide an understanding of Cincinnati Financial Corporation’s (CFC) consolidated results of operations and financial position. It begins with an overview of the company and its outlook, a safe harbor statement that covers factors that could cause results to differ from those anticipated by management and details on the company’s critical accounting policies and estimates. It should be read in conjunction with Item 6, Selected Financial Data, Pages 20 and 21, and the Consolidated Financial Statements and related Notes, beginning on Page 72. Per share amounts have been adjusted for the 5 percent stock dividend paid June 15, 2004; per share data has not been adjusted for the 5 percent stock dividend to be paid on April 26, 2005.

Unless otherwise noted, estimated industry data are referenced from materials presented on a statutory basis by A.M. Best, a leading insurance industry statistical, analytical and financial strength rating organization. Statutory data for the company is labeled as such; all other company data is presented on a GAAP basis.

Executive Summary

Cincinnati Financial Corporation is the parent company of the nation’s 25^th largest property casualty insurer, based on statutory net written premium volume through the first nine months of 2004. The company marketed property casualty insurance products through a select group of 986 independent insurance agencies in 31 states at year-end 2004.

The company is built on a foundation of personal relationships with these local independent insurance agents. These agents have an informed, front line perspective that benefits policyholders as well as the company, helping to create profitability and value for shareholders. Local-resident field marketing and other associates live in the communities they serve, working from offices in their homes and providing 24/7 availability. They are assigned directly to agencies, where they are able to provide prompt and personal service, gain firsthand knowledge and be effective decision makers for the company. The company differentiates itself by its commitment to: providing exceptional claims service and field underwriting through locally based associates serving the needs of agents and policyholders; offering competitive products, rates and compensation; and maintaining excellent financial strength ratings. Headquarters associates, including approximately 600 underwriters, are assigned to specific agencies and provide important support to the field staff and agencies.

In addition to property casualty insurance products, the company offers life insurance, leasing and asset management services to help attract and retain high quality independent insurance agencies. This strategy helps diversify revenues and profitability for both the agency and the company and enhances the already strong relationship built by the property casualty operations.

Among the various factors that influence the consolidated results of operations and financial position of the company, management considers its relationships with independent agencies to be the most significant. To continue to achieve its performance targets, the company must maintain its strong relationships with the select group of agencies with which it does business, write a significant portion of each agency’s business and attract new agencies. The company seeks to be an indispensable partner in each agency’s success. The company measures its accomplishment of this objective based on being the largest or second largest carrier in each agency, either by dollars of premium or number of policies written, depending on the agency’s mix of business.

The company’s strong surplus and asset positions provide security for policyholders while allowing for a successful, equity-centered investment strategy.

By consistently applying long-term strategies rather than taking short-term actions, the company seeks to build shareholder value by:

In 2004, the company reported record results, as described in detail in the results of operations. Statutory net written premium growth outpaced the estimated industry average while the combined ratio, a common measure of profitability

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for property casualty insurers, was significantly better than the estimated industry average. The growth rate of investment income reached its highest level in four years and book value reached a new record, as growth in net income more than offset market fluctuations in the equity portfolio. The company’s financial position continued to strengthen with assets at a record level.

The company currently is pursuing a number of strategies to help it achieve its performance objectives over the next several years:

In 2005, management believes the company will achieve statutory net written premium growth in the mid-single digits and a GAAP combined ratio of 91 percent (equivalent to approximately 91 percent on a statutory basis). A.M. Best estimates that 2005 net written premiums industry-wide may rise by 1 percent and that the 2005 industry statutory combined ratio may be approximately 97.3 percent.

Currently, management anticipates pretax investment income growth in 2005 in the range of 5 percent to 6 percent. The investment portfolio is positioned for long-term capital appreciation. Equity and equity-linked securities make up 34.0 percent of the portfolio based on book value and 62.7 percent based on market value at year-end 2004.

Management expects that the impact of these anticipated strong operating results will be tempered in 2005 by the adoption of option expensing and slightly higher interest expense on long-term debt, which increased modestly with the November 2004 issue of $375 million aggregate principal amount of senior notes due 2034. The company will adopt Statement of Financial Accounting Standards (SFAS) No. 123 (R), “Share-Based Payment,” which calls for stock option expense to be included as a component of net income, in the third quarter of 2005. Pro forma option expense as disclosed in Item 8, Note 1 to the Consolidated Financial Statements, Page 76, would have reduced earnings per share by 7 cents in both 2004 and 2003 and 8 cents in 2002.

Safe Harbor Statement

This is a “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995. Certain forward-looking statements contained herein involve potential risks and uncertainties. The company’s future results could differ materially from those discussed. Factors that could cause or contribute to such differences include, but are not limited to:

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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.

Readers are cautioned that the company undertakes no obligation to review or update the forward-looking statements included herein.

Critical Accounting Policies and Estimates

Cincinnati Financial Corporation’s financial statements are prepared using GAAP. These principles require management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. Actual results could differ materially from those estimates.

The significant accounting policies used in the preparation of the financial statements are discussed in Item 8, Note 1 to the Consolidated Financial Statements, Page 76. In conjunction with that discussion, material implications of uncertainties associated with the methods, assumptions and estimates underlying the company’s critical accounting policies are discussed below. The audit committee of the board of directors reviews the annual financial statements with management and the independent registered public accounting firm. These discussions cover the quality of earnings, review of reserves and accruals, reconsideration of the suitability of accounting principles, review of highly judgmental areas including critical accounting policies, audit adjustments and such other inquiries as may be appropriate.

Property Casualty Insurance Loss and Loss Expense Reserves

Overview

The most significant estimates relate to the company’s reserves for property casualty loss and loss expenses. Management believes that the stability of the company’s business makes its historical data the most important source for establishing adequate reserve levels.

Management bases reserve estimates on company experience and information from internal analyses, obtaining additional information from consulting outside actuaries. When reviewing reserves, management analyzes historical data and estimates the effect of various loss development factors. Management believes that the following represent the primary risks to its ability to estimate loss reserves accurately:

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Any of these factors can cause the company’s ultimate loss experience to be better or worse than reserves held, and the difference could be material. To the extent that reserves are inadequate and strengthened, the amount of such increase is treated as a charge in the period that the deficiency is recognized, raising the loss and loss expense ratio and reducing earnings. To the extent that reserves are redundant and released, the amount of the release is a credit in the period that the redundancy is recognized, reducing the loss and loss expense ratio and increasing earnings.

A reserve change of $29 million has a 1 percentage-point effect on the loss and loss expense ratio, based on 2004 earned premiums. Each 1 percentage point change in the loss and loss expense ratio has a $19 million effect on income and an 11 cent per share effect on net income per share, based on 2004 earned premiums.

Establishing Reserves

Reserves are established for the total of unpaid loss and loss expenses, including estimates for claims that have been reported, estimates for claims that have been incurred but not yet reported (IBNR) and estimates of loss expenses associated with processing and settling those claims. Reserves are determined for the various lines of business. Loss reserves are reduced by salvage and subrogation reserves.

Management establishes case reserves for claims that have been reported within the parameters of coverage provided in the policy. Individual case reserves greater than $35,000 established by field claims representatives are reviewed by experienced headquarters claims supervisors while case reserves greater than $100,000 are reviewed by headquarters claims managers. The estimates reflect informed judgment and experience of the company’s claims associates based on general insurance reserving practices and their experience with the company. Case reserves are reviewed on a 90-day cycle, or more frequently if specific circumstances require, based on events such as the status of ongoing negotiations.

In 2001, the company began to establish higher initial case reserves on serious liability claims to reflect recent experience indicating the likelihood that juries would ignore significant liability issues in cases involving seriously injured claimants.

To establish IBNR reserves on an annual basis, management uses a variety of tools, including actuarial and statistical methods. These may include but are not limited to:

Supplemental statistical information is compiled and reviewed to aid in the application of the actuarial methods. The supplemental data also is used to evaluate the reasonableness of estimates derived from the actuarial methods. This information includes:

Management conducts its thorough evaluation of the adequacy of reserves as of the end of the third quarter of each year. As a result, the most significant refinements in reserves historically have been implemented in the fourth quarter. Less detailed, periodic reviews of reserve adequacy are made at the other quarter ends. A loss review committee, including internal actuaries and representatives from management of multiple operating departments, is responsible for the quarterly review process.

The internal actuaries provide a point estimate to summarize their analysis. At year-end 2004 and 2003, IBNR reserves differed from the internal actuarial point estimate by less than 1 percent of the company’s loss and loss expense reserve.

Adjusting Reserves

While the company believes that reported reserves provide for all unpaid loss and loss expense obligations, the estimation processes involve a number of variables and assumptions. Management believes this uncertainty is mitigated by the historical stability of the company’s book of business and by its periodic reviews of estimates. As loss experience develops and new information becomes known, the reserve is reviewed and adjusted as appropriate. In this process, the company monitors trends in the industry, relevant court cases, legislative activity and other current events in an effort to ascertain new or additional exposures to loss. If management determines that reserves established in prior years were not sufficient or were excessive, the change is reflected in current-year results.

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Outside Actuarial Review

As part of its internal processes, management utilizes an outside actuary to provide management with an opinion regarding an acceptable range for adequate statutory reserves based on generally accepted actuarial guidelines.

Historically, the company has established adequate reserves that have fallen in the upper half of the outside actuary’s range. This approach has resulted in recognition of reserve redundancies (see Item 1, Property Casualty Loss and Loss Expense Reserves, Development of Loss and Loss Expenses, Page 5, for a 10-year history of reserve development). Modestly redundant reserves support the company’s business strategy to retain high financial strength ratings and remain a market for agencies’ business in all market conditions.

The outside actuaries conduct a thorough evaluation of the adequacy of reserves as of the end of the third quarter of each year and conduct a supplemental review of full-year data at year-end.

Highly Uncertain Exposures

In the normal course of its business, the company may provide coverage for exposures for which estimates of losses are highly uncertain. Most significant are catastrophic events. Due to the nature of these events, management is unable to predict precisely the frequency or potential cost of catastrophe occurrences. However, in an effort to control such losses, the company foregoes marketing property casualty insurance in California, reviews aggregate exposures to huge disasters and monitors its exposure in certain coastal regions. The company has catastrophe exposure to:

The company uses the Risk Management Solutions and Applied Insurance Research models to evaluate exposures to a once-in-250-year event in determining appropriate reinsurance coverage programs. Reinsurance mitigates the risk of these highly uncertain exposures and limits the maximum net loss that can arise from large risks or risks concentrated in areas of exposure. In conjunction with these activities, the company also continues to explore and analyze credible scientific evidence, including the impact of global climate change, which may affect its exposure under insurance policies. Management’s decisions regarding the appropriate level of property casualty risk retention are affected by various factors, including changes in the company’s underwriting practices, capacity to retain risks and reinsurance market conditions. See Item 1, Reinsurance, Page 6, for a discussion of the company’s 2005 reinsurance treaties.