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 September 30, 2007.

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		(I.R.S. Employer Identification No.)
incorporation or organization)
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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o

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

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

As of October 30, 2007, there were 165,998,910 shares of common stock outstanding.

 

 

CINCINNATI FINANCIAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2007

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			7
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3		Quantitative and Qualitative Disclosures About Market Risk			37
Item 4		Controls and Procedures			41
PART II – OTHER INFORMATION
Item 1		Legal Proceedings			41
Item 1A		Risk Factors			41
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3		Defaults Upon Senior Securities			42
Item 4		Submission of Matters to a Vote of Security Holders			42
Item 5		Other Information			42
Item 6		Exhibits			43
EX-10.29
EX-10.30
EX-10.31
EX-10.32
EX-10.33
EX-10.34
EX-11
EX-31.1
EX-31.2
EX-32

		Cincinnati Financial Corporation
2		Form 10-Q for the quarterly period ended September 30, 2007

Part I – Financial Information

Item 1. Financial Statements (unaudited)

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Balance Sheets

		September 30,				December 31,
(Dollars in millions except per share data)		2007				2006
ASSETS
Investments
Fixed maturities, at fair value (amortized cost: 2007—$5,905; 2006—$5,739) (includes securities pledged to creditors of $754 at September 30, 2007)		$	5,939			$	5,805
Equity securities, at fair value (cost: 2007—$3,006; 2006—$2,621)			7,225				7,799
Short-term investments, at fair value (amortized cost: 2007—$37; 2006—$95)			37				95
Other invested assets			67				60
Total investments			13,268				13,759
Cash and cash equivalents			183				202
Securities lending collateral invested			768				0
Investment income receivable			123				121
Finance receivable			97				108
Premiums receivable			1,161				1,128
Reinsurance receivable			745				683
Prepaid reinsurance premiums			12				13
Deferred policy acquisition costs			471				453
Land, building and equipment, net, for company use (accumulated depreciation: 2007—$281; 2006—$261)			227				193
Other assets			46				58
Separate accounts			521				504
Total assets		$	17,622			$	17,222
LIABILITIES
Insurance reserves
Loss and loss expense reserves		$	4,031			$	3,896
Life policy reserves			1,459				1,409
Unearned premiums			1,619				1,579
Securities lending payable			768				0
Other liabilities			539				533
Deferred income tax			1,287				1,653
Note payable			69				49
6.125% senior notes due 2034			371				371
6.9% senior debentures due 2028			28				28
6.92% senior debentures due 2028			392				392
Separate accounts			521				504
Total liabilities			11,084				10,414
Commitments and contingent liabilities (Note 6)			—				—
SHAREHOLDERS’ EQUITY
Common stock, par value—$2 per share; (authorized: 2007—500 million shares, 2006—500 million shares; issued: 2007—196 million shares, 2006—196 million shares)			392				391
Paid-in capital			1,041				1,015
Retained earnings			3,277				2,786
Accumulated other comprehensive income			2,735				3,379
Treasury stock at cost (2007—26 million shares, 2006—23 million shares)			(907	)			(763	)
Total shareholders’ equity			6,538				6,808
Total liabilities and shareholders’ equity		$	17,622			$	17,222

Accompanying notes are an integral part of these statements.

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended September 30, 2007		3

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Statements Of Income

		Three months ended September 30,								Nine months ended September 30,
(In millions except per share data)		2007				2006				2007				2006
REVENUES
Earned premiums
Property casualty		$	777			$	791			$	2,348			$	2,362
Life			34				28				99				84
Investment income, net of expenses			152				144				451				425
Realized investment gains and losses			16				0				370				671
Other income			3				4				15				14
Total revenues			982				967				3,283				3,556
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits			559				549				1,533				1,596
Commissions			136				156				466				478
Other operating expenses			90				87				266				255
Taxes, licenses and fees			18				19				57				58
Increase in deferred policy acquisition costs			6				(5	)			(17	)			(27	)
Interest expense			13				13				39				39
Total benefits and expenses			822				819				2,344				2,399
INCOME BEFORE INCOME TAXES			160				148				939				1,157
PROVISION (BENEFIT) FOR INCOME TAXES
Current			32				23				265				363
Deferred			4				10				5				(6	)
Total provision for income taxes			36				33				270				357
NET INCOME		$	124			$	115			$	669			$	800
PER COMMON SHARE
Net income—basic		$	0.72			$	0.67			$	3.89			$	4.61
Net income—diluted		$	0.72			$	0.66			$	3.86			$	4.56

Accompanying notes are an integral part of these statements.

		Cincinnati Financial Corporation
4		Form 10-Q for the quarterly period ended September 30, 2007

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Statements Of Shareholders’ Equity

		Nine months ended September 30,
(In millions)		2007				2006
COMMON STOCK
Beginning of year		$	391			$	389
Stock options exercised			1				2
End of period			392				391
PAID-IN CAPITAL
Beginning of year			1,015				969
Stock options exercised			13				22
Share-based compensation			11				14
Other			2				0
End of period			1,041				1,005
RETAINED EARNINGS
Beginning of year			2,786				2,088
Cumulative effect of change in accounting for hybrid financial securities			5				0
Cumulative effect of change in accounting for uncertain tax positions			(1	)			0
Adjusted beginning of year			2,790				2,088
Net income			669				800
Dividends declared			(182	)			(174	)
End of period			3,277				2,714
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of year			3,379				3,284
Cumulative effect of change in accounting for hybrid financial securities			(5	)			0
Adjusted beginning of year			3,374				3,284
Other comprehensive income (loss), net			(639	)			(191	)
End of period			2,735				3,093
TREASURY STOCK
Beginning of year			(763	)			(644	)
Purchase			(144	)			(95	)
End of period			(907	)			(739	)
Total shareholders’ equity		$	6,538			$	6,464
COMMON STOCK — NUMBER OF SHARES OUTSTANDING
Beginning of year			173				174
Stock options exercised			0				1
Purchase of treasury shares			(3	)			(2	)
End of period			170				173
COMPREHENSIVE INCOME
Net income		$	669			$	800
Unrealized investment gains and losses during the period			(989	)			(314	)
Other			4				5
Taxes on other comprehensive income			346				118
Total comprehensive income		$	30			$	609

Accompanying notes are an integral part of these statements.

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended September 30, 2007		5

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Statements Of Cash Flows

		Nine months ended September 30,
(In millions)		2007				2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	669			$	800
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items			26				26
Realized gains on investments			(370	)			(671	)
Share-based compensation			11				14
Interest credited to contract holders			25				22
Changes in:
Investment income receivable			(2	)			2
Premiums and reinsurance receivable			(94	)			(69	)
Deferred policy acquisition costs			(17	)			(27	)
Other assets			(6	)			3
Loss and loss expense reserves			135				217
Life policy reserves			71				53
Unearned premiums			40				64
Other liabilities			28				(12	)
Deferred income tax			5				(6	)
Current income tax			(1	)			4
Net cash provided by operating activities			520				420
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of fixed maturities			267				76
Call or maturity of fixed maturities			330				225
Sale of equity securities			602				850
Collection of finance receivables			28				26
Purchase of fixed maturities			(792	)			(611	)
Purchase of equity securities			(626	)			(644	)
Change in short-term investments, net			60				79
Investment in buildings and equipment, net			(51	)			(37	)
Investment in finance receivables			(18	)			(30	)
Change in other invested assets, net			1				(10	)
Change in securities lending collateral invested			(768	)			(1,016	)
Net cash used in investing activities			(967	)			(1,092	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of cash dividends to shareholders			(180	)			(170	)
Purchase of treasury shares			(144	)			(95	)
Increase in notes payable			20				49
Proceeds from stock options exercised			14				21
Contract holder funds deposited			12				28
Contract holder funds withdrawn			(59	)			(57	)
Change in securities lending payable			768				1,016
Excess tax benefits on share-based compensation			0				2
Other			(3	)			(2	)
Net cash provided by financing activities			428				792
Net increase (decrease) in cash and cash equivalents			(19	)			120
Cash and cash equivalents at beginning of year			202				119
Cash and cash equivalents at end of period		$	183			$	239
Supplemental disclosures of cash flow information:
Interest paid (net of capitalized interest: 2007—$2; 2006—$1)		$	26			$	26
Income taxes paid			264				360
Non-cash activities:
Conversion of securities		$	108			$	50
Equipment acquired under capital lease obligations			7				7

Accompanying notes are an integral part of these statements.

		Cincinnati Financial Corporation
6		Form 10-Q for the quarterly period ended September 30, 2007

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 accounting principles generally accepted in the United States of America 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, 2006, consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America.

Our September 30, 2007, 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 2006 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.

Recent Accounting Pronouncements

Statements of Financial Accounting Standards (SFAS) No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of SFAS Nos. 133 and 140

Hybrid securities generally combine both debt and equity characteristics. The most common example is a convertible bond that has features of an ordinary bond but is heavily influenced by the price movements of the stock into which it is convertible.

Hybrid financial instruments are hybrid securities that contain embedded derivatives as defined under Statements of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” We adopted SFAS No. 133 in 2001. Under SFAS No. 133, we bifurcated the embedded derivative and recorded it at fair value, with changes in value recognized in realized investment gains and losses. We continued to account for the remainder of the security at amortized cost, with changes in value recognized in other comprehensive income.

On January 1, 2007, we adopted SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” which allows us to account for the entire hybrid financial instrument at fair value, with changes in the fair value recognized in realized investment gains and losses rather than unrealized investment gains and losses. We elected the fair value option for hybrid financial instruments to simplify our reporting, to address cost-benefit considerations and to have a consistent and reliable fair value. Our transition adjustment increased retained earnings by $5 million, reducing accumulated other comprehensive income by the same amount. The transition adjustment was comprised of $12 million of gross realized investment gains and $4 million of gross realized investment losses before tax.

SFAS No. 157, Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. We currently are evaluating the impact of this statement on our financial position.

SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, which is effective for fiscal years beginning after November 15, 2007. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. We are currently evaluating the potential impact of this statement on our financial position.

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended September 30, 2007		7

Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109

We adopted the provisions of FIN 48 on January 1, 2007. As a result, we recorded a charge of approximately $300,000 to the January 1, 2007, retained earnings. As of the adoption date, we had a gross unrecognized tax benefit (FIN 48 liability) of $24.8 million. There was no change to the FIN 48 liability for the three and nine months ended September 30, 2007. The FIN 48 liability is carried in other liabilities in the condensed consolidated balance sheet as of September 30, 2007. Of the total $24.8 million FIN 48 liability, an immaterial amount would affect the effective tax rate, if recognized. Although no penalties currently are accrued, if incurred, they would be recognized as a component of income tax expense. Accrued interest expense recognized is classified in the condensed consolidated statements of income as an offset to investment income. The accrued interest liability was $2.5 million and $3.7 million as of January 1, 2007, and September 30, 2007, respectively.

The Internal Revenue Service has concluded the examination phase of its audit for our 2002, 2003 and 2004 tax years. Unresolved issues for these years have been referred to the Appeals Office of the Internal Revenue Service. It is reasonably possible that a change in the unrecognized tax benefits may occur once settlement of issues has occurred. At this time, we can neither estimate a date for settlement nor quantify an estimated range for the change of unrecognized tax benefits.

In addition to filings with the Internal Revenue Service, we file income tax returns in various state jurisdictions. Ohio, Illinois and Florida are states where we pay a material amount of income tax. Our income tax filings currently are not under examination by any state although tax years 2003 and later remain open for examination.

SOP 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts

SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract; or by amendment, endorsement or rider to a contract; or by the election of a feature or coverage within a contract. Internal replacement contracts are those that are substantially changed from the replaced contract and are accounted for as an extinguishment of the replaced contract. Nonintegrated contract features are accounted for as separately issued contracts. Modifications resulting from the election of a feature or coverage within a contract or from an integrated contract feature generally do not result in an internal replacement contract subject to SOP 05-1 provided certain conditions are met. The provisions of SOP 05-1 were effective January 1, 2007, and did not have a material impact on our results of operations or financial position.

Subsequent Events

Investment asset sale – On October 24, 2007, we sold 5.5 million shares, or 7.6 percent, of the company’s Fifth Third Bancorp (NASDAQ:FITB) common stock holding to largely fund an accelerated share repurchase agreement. The sale generated total proceeds of $162 million, which will be reduced by capital gains taxes of approximately $22 million. The sale was executed pursuant to Rule 144 under the Securities Act of 1933, as amended. The net after-tax gain of approximately $42 million, or about 25 cents per share, will be included in net income for the three and 12 months ending December 31, 2007.

Fifth Third remains the company’s largest equity holding and Cincinnati Financial remains Fifth Third’s largest shareholder. After the transaction, Cincinnati Financial and its subsidiaries own 67.3 million shares of Fifth Third’s common stock, or approximately 12.6 percent of the bank’s total common shares outstanding as of September 30, 2007.

Accelerated share repurchase agreement – On October 24, 2007, we entered into an accelerated share repurchase agreement with UBS AG. The 4 million accelerated share repurchase agreement is valued at $160 million (based on a reference price of $39.88). The final effective purchase price will be based on the volume weighted average price of the company’s common stock through a contractually specified period expected to conclude no later than the first quarter of 2008.

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 September 30, 2007, and December 31, 2006.

At September 30, 2007, unrealized investment gains before taxes in the investment portfolio totaled $4.357 billion and unrealized investment losses before taxes amounted to $104 million. The unrealized gains primarily were due to our long-term holdings of Fifth Third common stock, which constituted 50.1 percent of total unrealized gains, and from our other common stock holdings, including AllianceBernstein Holding L.P. (NYSE:AB), ExxonMobil (NYSE:XOM), PNC Financial Services Group, Inc. (NYSE:PNC) and

		Cincinnati Financial Corporation
8		Form 10-Q for the quarterly period ended September 30, 2007

The Procter & Gamble Company (NYSE:PG), each of which constituted at least 5 percent of total unrealized gains. As noted above, we sold 5.5 million shares of our Fifth Third common stock holding on October 24, 2007, which will reduce unrealized gains from this position at year-end 2007 and beyond.

The change in unrealized gains and losses on investments, net of taxes, described in the following table, is included in shareholders’ equity as accumulated other comprehensive income. During the three months ended September 30, 2007, we recognized $3 million in realized investment losses related to current period changes in valuation of our hybrid securities. During the nine months, we recognized $1 million in realized investment gains related to current period changes in valuation of our hybrid securities. At September 30, 2007, we had $170 million of hybrid securities included in fixed maturities that now are accounted for under SFAS No. 155.

The change in fixed maturities unrealized gains and losses for the three and nine months ended September 30, 2007 and 2006, was due primarily to interest-rate driven fair value fluctuations in the fixed maturity portfolio.

Equity securities unrealized gains decreased for the three and nine months ended September 30, 2007, because of the sale of common stock holdings and declines in the market value of equity holdings.

Equity securities unrealized gains rose for the three months ended September 30, 2006, primarily due to gains in the market value of equity holdings. Equity securities unrealized gains declined for the nine months ended September 30, 2006, primarily because of the sale of our holdings of ALLTEL Corporation (NYSE:AT) common stock, which was completed in January 2006, partially offset by gains in the market values of our other equity holdings.

		Three months ended September 30,								Nine months ended September 30,
(In millions)		2007				2006				2007				2006
Change in unrealized investment gains and losses and other summary:
Fixed maturities		$	60			$	142			$	(30	)		$	(18	)
Equity securities			(488	)			385				(959	)			(296	)
Adjustment to deferred acquisition costs and life policy reserves			(1	)			(4	)			1				2
Pension funded status			1				0				2				0
Other			0				2				1				3
Income taxes on above			150				(184	)			346				118
Total		$	(278	)		$	341			$	(639	)		$	(191	)

Realized gains and losses on investments are recognized in net income on a specific identification basis. See our 2006 Annual Report on Form 10-K, Item 1, Investments Segment, Page 14, 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.

Securities Lending Program

We participate in a securities lending program under which certain fixed maturities from our investment portfolio are loaned to other institutions for short periods of time. We require cash collateral in excess of the market value of the loaned securities. The collateral received is invested in accordance with our guidelines in high quality, short-duration instruments to generate additional investment income. The market value of the loaned securities is monitored on a daily basis and additional collateral is added or refunded as the market value of the loaned securities changes. As this program is accounted for as a secured borrowing, the invested collateral is recognized as an asset, and classified as securities lending collateral invested, with a corresponding liability for the obligation to return the collateral.

We maintain the right and ability to redeem the securities loaned on short notice and continue to earn interest on the securities. Although the securities loaned have been pledged and effectively secure the cash collateral we received, we maintain effective control over such securities, which we continue to classify as invested assets on our consolidated balance sheets. At September 30, 2007, we had fixed maturities with a market value of $754 million on loan, with collateral held of $768 million. Interest income on collateral, net of fees, was $452,000 and $995,000 in the three and nine months ended September 30, 2007, versus $252,000 and $528,000 in the comparable 2006 periods.

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended September 30, 2007		9

NOTE 3 – Reinsurance

In the accompanying condensed consolidated statements of income, property casualty earned premiums and insurance losses consisted of the following:

		Three months ended September 30,								Nine months ended September 30,
(In millions)		2007				2006				2007				2006
Direct earned premiums		$	815			$	826			$	2,462			$	2,459
Assumed earned premiums			6				6				16				17
Ceded earned premiums			(44	)			(41	)			(130	)			(114	)
Net earned premiums		$	777			$	791			$	2,348			$	2,362
Direct incurred loss and loss expenses		$	534			$	533			$	1,511			$	1,567
Assumed incurred loss and loss expenses			6				3				10				10
Ceded incurred loss and loss expenses			(16	)			(20	)			(86	)			(72	)
Net incurred loss and loss expenses		$	524			$	516			$	1,435			$	1,505

For the three and nine months ended September 30, 2007, assumed earned premiums were essentially unchanged while ceded earned premiums reflected the change in our reinsurance programs effective January 1, 2007.

For the three and nine months ended September 30, 2007, assumed incurred loss and loss expenses were essentially unchanged. Ceded incurred loss and loss expenses were essentially unchanged for the three-month period ended September 30, 2007. Ceded incurred loss and loss expenses rose in the nine month period due to a greater number and amount of losses above our per risk treaty retentions.

NOTE 4 – Pension Plan

The measurement date for the company’s pension plan is December 31. The following summarizes the components of net periodic costs for our qualified and supplemental pension plans:

		Three months ended September 30,								Nine months ended September 30,
(In millions)		2007				2006				2007				2006
Service cost		$	6			$	4			$	15			$	12
Interest cost			4				4				12				10
Expected return on plan assets			(4	)			(3	)			(11	)			(9	)
Amortization of actuarial gain, prior service cost and transition asset			1				1				2				2
Net periodic benefit cost		$	7			$	6			$	18			$	15

We contributed $10 million to the pension plan during the nine months ended September 30, 2007.

NOTE 5 – Equity Compensation Plans

We currently have six equity compensation plans that together permit us to grant incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights and other stock-based awards. The 2006 Stock Compensation Plan also gives us the flexibility to make grants to associates of any type of stock-based awards subject to performance-based criteria to directly link compensation to performance. We currently grant incentive stock options, non-qualified stock options, restricted stock units and performance-based restricted stock units under our plans. One of our equity compensation plans permits us to grant common stock to our outside directors as discussed in our 2007 Proxy Statement.

A total of 22,237,750 shares are authorized to be granted under the shareholder-approved plans. At September 30, 2007, 10,546,728 shares were available for future issuance under the plans. We currently issue new shares for option exercises.

Our pre-tax and after-tax share-based compensation costs are summarized below:

		Three months ended September 30,								Nine months ended September 30,
(In millions)		2007				2006				2007				2006
Share-based compensation cost		$	3			$	3			$	11			$	14
Income tax benefit			0				0				2				3
Share-based compensation cost after tax		$	3			$	3			$	9			$	11

		Cincinnati Financial Corporation
10		Form 10-Q for the quarterly period ended September 30, 2007

Stock Options

Stock options are granted to associates at an exercise price that is not less than fair market value on the date of grant and are exercisable over 10 year periods. The stock options generally vest ratably over a three-year period. In determining the share-based compensation amounts for 2007, the fair value of each option granted in 2007 was estimated on the date of grant using the binomial option-pricing model with the following weighted average assumptions used for grants in 2007:

		Nine months ended September 30,
		2007				2006
Weighted — average expected term		5-7 years				5-7 years
Expected volatility		18.29- 24.14%				20.25 - 27.12%
Dividend yield		3.33%				3.22%
Risk-free rates		4.8-4.81%				4.5-4.61%

As of September 30, 2007, there was $17 million of unrecognized compensation cost related to non-vested awards that is expected to be recognized over a weighted average period of 1.8 years.

Here is a summary of option information:

						Weighted-
						average				Aggregate
						exercise				intrinsic
(Dollars in millions, shares in thousands)		Shares				price				value
2007
Outstanding at beginning of year			10,667			$	36.03
Granted/reinstated			582				44.79
Exercised			(489	)			28.70
Forfeited/revoked/expired			(113	)			39.39
Outstanding at end of period			10,647				36.80			$	74
Options exercisable at end of period			8,761			$	35.20			$	73
Weighted-average fair value of options granted during the period							9.43

(Shares in thousands)		Options outstanding												Options exercisable
						Weighted-average				Weighted-								Weighted-
						remaining				average								average
Range of exercise prices		Shares				contractual life				exercise price				Shares				exercise price
$25.00 to $29.99			865			2.28 yrs				$	27.04				865			$	27.04
$30.00 to $34.99			4,387			3.47 yrs					32.68				4,387				32.68
$35.00 to $39.99			1,868			4.65 yrs					38.45				1,868				38.45
$40.00 to $44.99			2,224			6.97 yrs					42.38				1,198				41.51
$45.00 to $49.99			1,303			8.30 yrs					45.26				443				45.26
Total			10,647			4.90 yrs					36.80				8,761				35.20

Restricted Stock Units

In January 2007, the compensation committee granted service-based and performance-based restricted stock units. The service-based restricted stock units will vest at the end of the three-year vesting period. The performance based restricted stock units granted in 2007 will vest on March 1, 2010, if certain performance targets are attained. As of September 30, 2007, management assumed for accounting purposes that performance targets used for the 2007 awards would be met, which resulted in the inclusion of costs for these awards in share-based compensation for the three and nine months ended September 30, 2007.

The fair value of the restricted stock unit awards was determined based on the fair value on the date of grant less the present value of the dividends that holders of restricted stock units will not receive on the restricted stock units during the vesting period.

Restricted stock unit awards in 2007 were:

		Service -								Performance -				Weighted -
		based				Weighted -				based				average
		nonvested				average grant-				nonvested				grant-date
(Shares in thousands)		shares				date fair value				shares				fair value
Nonvested at January 1, 2007			0			$	0.00				0			$	0.00
Granted			168				40.74				35				40.74
Vested			0				0.00				0				0.00
Forfeited			(5	)			40.74				0				0.00
Nonvested at September 30, 2007			163				40.74				35				40.74

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended September 30, 2007		11

NOTE 6 – Commitments And Contingent Liabilities

Legal issues are part of the normal course of business for all companies. As such, we have various litigation and claims against us in process and pending. Having analyzed our current understanding of the facts and circumstances of those claims with our legal counsel, we believe the outcomes of normal insurance matters will not have a material effect on our consolidated financial position, results of operations or cash flows. We further believe that the outcomes of non-insurance matters will be covered by insurance coverage or will not have a material effect on our consolidated financial position, results of operations or cash flows.

NOTE 7 – 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
•		Investment 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 insurance subsidiary. See our 2006 Annual Report on Form 10-K for a description of revenue, income or loss before income taxes and identifiable assets for each segment.

Segment information is summarized in the following table:

		Three months ended September 30,								Nine months ended September 30,
(In millions)		2007				2006				2007				2006
Revenues:
Commercial lines insurance
Commercial casualty		$	205			$	207			$	623			$	613
Commercial property			125				123				373				367
Commercial auto			108				113				331				337
Workers’ compensation			94				93				280				271
Specialty packages			36				35				109				106
Surety and executive risk			25				24				73				69
Machinery and equipment			7				7				21				20
Total commercial lines insurance			600				602				1,810				1,783
Personal lines insurance
Personal auto			85				95				259				294
Homeowner			70				72				214				219
Other personal lines			22				22				65				66
Total personal lines insurance			177				189				538				579
Life insurance			35				28				103				86
Investment operations			168				144				821				1,096
Other			2				4				11				12
Total		$	982			$	967			$	3,283			$	3,556
Income (loss) before income taxes:
Insurance underwriting results:
Commercial lines insurance		$	28			$	39			$	184			$	153
Personal lines insurance			(7	)			(8	)			8				(16	)
Life insurance			(2	)			0				4				2
Investment operations			154				130				778				1,056
Other			(13	)			(13	)			(35	)			(38	)
Total		$	160			$	148			$	939			$	1,157

		September 30,				December 31,
		2007				2006
Identifiable assets:
Property casualty insurance		$	2,316			$	2,220
Life insurance			918				886
Investment operations			13,323				13,820
Other			1,065				296
Total		$	17,622			$	17,222

		Cincinnati Financial Corporation
12		Form 10-Q for the quarterly period ended September 30, 2007

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 2006 Annual Report on Form 10-K. Unless otherwise noted, A.M. Best Co., a leading insurance industry statistical, analytical and financial strength rating organization, is the source of industry data. Data 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 on a GAAP basis.

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.

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 2006 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 20. 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:

•		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
•		Inaccurate estimates or assumptions used for critical accounting estimates
•		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
•		Changing consumer buying habits and consolidation of independent insurance agencies that could alter our competitive advantages
•		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		Downgrade of the company’s financial strength ratings
	o		Concerns that doing business with the company is too difficult or
	o		Perceptions that the company’s level of service, particularly claims service, is no longer a distinguishing characteristic in the marketplace

•		Delays or inadequacies in the development, implementation, performance and benefits of technology projects and enhancements
•		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
•		Increased competition that could result in a significant reduction in the company’s premium growth rate
•		Underwriting and pricing methods adopted by competitors that could allow them to identify and flexibly price risks, which could decrease our competitive advantages
•		Personal lines pricing and loss trends that lead management to conclude that this segment could not attain sustainable profitability, which could prevent the capitalization of policy acquisition costs
•		Actions of insurance departments, state attorneys general or other regulatory agencies 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

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended September 30, 2007		13

	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 or
	o		Restrict our ability to execute our business model, including the way we compensate agents

•		Sustained decline in overall stock market values negatively affecting the company’s equity portfolio and book value; in particular a sustained decline in the market value of Fifth Third shares, a significant equity holding
•		Securities laws that could limit the manner and timing of our investment transactions
•		Recession or other economic conditions or regulatory, accounting or tax changes resulting in lower demand for insurance products
•		Events, such as the sub-prime mortgage lending crisis, that lead to a significant decline in the value of a particular security or group of securities and impairment of the asset(s)
•		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
•		Adverse outcomes from litigation or administrative proceedings
•		Investment activities or market value fluctuations that trigger restrictions applicable to the parent company under the Investment Company Act of 1940
•		Events, such as an epidemic, natural catastrophe, terrorism or construction delays, 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 September 30,												Nine months ended September 30,
(Dollars in millions except share data)		2007				2006				Change %				2007				2006				Change %
Income statement data
Earned premiums		$	811			$	819				(1.0	)		$	2,447			$	2,446				0.1
Investment income, net of expenses			152				144				5.8				451				425				6.0
Realized investment gains and losses (pretax)			16				0			nm					370				671			nm
Total revenues			982				967				1.5				3,283				3,556				(7.7	)
Net income			124				115				7.4				669				800				(16.4	)
Per share data (diluted)
Net income			0.72				0.66				9.1				3.86				4.56				(15.4	)
Cash dividends declared			0.355				0.335				6.0				1.065				1.005				6.0
Weighted average shares outstanding			172,399,539				175,260,063				(1.6	)			173,423,199				175,542,616				(1.2	)

Revenues rose modestly for the three months ended September 30, 2007, and declined for the nine months because of lower realized investment gains. For the three and nine months ended September 30, 2007, one of the primary drivers of consolidated property casualty earned premiums and total revenues – written premiums – was at a level that caused us to further lower our full-year 2007 target for this measure. We discuss that change in Measuring Our Success in 2007 and Beyond, Page 16. Below we discuss two significant components of revenues, investment income and realized investment gains and losses.

For the three and nine months ended September 30, 2007, growth in pretax investment income reflected strong cash flow for new investments and increased dividend income from the common stock portfolio. Pretax interest income trends have been affected in recent years by the higher percentage of tax-advantaged bond purchases, such as municipal bonds, which have a lower gross yield than taxable bonds.

		Cincinnati Financial Corporation
14		Form 10-Q for the quarterly period ended September 30, 2007

For the three months ended September 30, 2007, a more normalized level of gains from the disposition of certain investments led to higher realized investment gains. For the nine months ended September 30, 2007 and 2006, realized investment gains were higher than our normal level because of equity sales in the first half of each year. We discuss these sales in Investments Results of Operations, Page 31.

Realized investment gains and losses are integral to our financial results over the long term, but we have substantial discretion in the timing of investment sales and, therefore, the gains or losses that will be recognized in any period. That discretion generally is independent of the insurance underwriting process. Also, applicable accounting standards require us to recognize gains and losses from certain changes in fair values of securities without actual realization of those gains and losses.

Net income per share for the three and nine months ended September 30, 2007, benefited from declines in diluted weighted average shares outstanding from the year-earlier periods. Weighted average shares outstanding may fluctuate from period to period because we regularly repurchase shares under board authorizations and we grant associates stock options on an annual basis.

During the three months ended September 30, 2007, we repurchased 1.9 million shares of our common stock at a cost of $80 million. During the nine months ended September 30, 2007, we repurchased a total of 3.4 million shares at a cost of $144 million. The fourth-quarter accelerated share repurchase agreement more than doubled year-to-date repurchases to approximately 7.4 million shares at a cost of approximately $304 million.

The board of directors is committed to steadily increasing cash dividends and periodically authorizing stock dividends and splits. Cash dividends declared per share rose 6.0 percent in the three and nine months ended September 30, 2007.

Balance Sheet Data and Performance Measures

		At September 30,				At December 31,
(Dollars in millions except share data)		2007				2006
Balance sheet data
Invested assets		$	13,268			$	13,759
Total assets			17,622				17,222
Short-term debt			69				49
Long-term debt			791				791
Shareholders’ equity			6,538				6,808
Book value per share			38.47				39.38
Debt-to-capital ratio			11.6	%			11.0	%

		Three months ended September 30,								Nine months ended September 30,
		2007				2006				2007				2006
Performance measures
Comprehensive income		$	(149	)		$	455			$	30			$	609
Return on equity, annualized			7.4	%			7.4	%			13.4	%			17.0	%
Return on equity, annualized, based on comprehensive income			(8.9	)			29.1				0.6				12.9

Invested assets were below the level at year-end 2006 primarily because of the lower market value of our equity portfolio. Total assets rose over the year-end 2006 level primarily because of the securities lending collateral asset of $768 million.

Comprehensive income is net income plus the year-over-year change in accumulated other comprehensive income. In the three months ended September 30, 2007, comprehensive income declined because net income was more than offset by lower unrealized gains in the investment portfolio. In the three months ended September 30, 2006, comprehensive income rose because of higher unrealized gains in the investment portfolio.

In the nine months ended September 30, 2007, comprehensive income rose slightly because net income more than offset lower unrealized gains in the investment portfolio. In the nine months ended September 30, 2006, comprehensive income rose because of higher net income and unrealized gains in the investment portfolio.

Return on equity was unchanged in the three months ended September 30, 2007. Return on equity was lower for the nine-month period because realized gains on investments were lower. Return on equity based on comprehensive income showed results similar to comprehensive income, as described above.

Our ratio of total debt to capital (total debt plus shareholders’ equity) rose 0.6 percentage points from year-end 2006 due to the $20 million increase in short-term borrowings and lower shareholders’ equity, which reflected lower unrealized gains in the investment portfolio.

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended September 30, 2007		15

Property Casualty Highlights

		Three months ended September 30,												Nine months ended September 30,
(Dollars in millions)		2007				2006				Change %				2007				2006				Change %
Property casualty highlights
Written premiums		$	736			$	780				(5.6	)		$	2,392			$	2,423				(1.3	)
Earned premiums			777				791				(1.8	)			2,348				2,362				(0.6	)
Underwriting profit			21				31				(32.7	)			192				137				40.8
GAAP combined ratio			97.3	%			96.1	%							91.8	%			94.2	%
Statutory combined ratio			98.7				96.4								91.3				93.2

The trend in overall written and earned premium growth rates reflects the heightened competition as well as the competitive strategies we discussed in our 2006 Annual Report on Form 10-K, Item 1, Commercial Lines and Personal Lines Property Casualty Insurance Segments, Page 9 and Page 11.

Our consolidated property casualty insurance underwriting profit declined for the three months ended September 30, 2007. The quarter benefited from lower levels of catastrophe losses and commissions and from higher than anticipated favorable development on prior period reserves. These were offset by the effects of softer pricing, non-catastrophe weather losses and the timing differences.

Our underwriting profit rose for the nine months ended September 30, 2007, primarily because of lower catastrophe losses. Our combined ratio reflected those trends. (The combined ratio is the percentage of each premium dollar incurred for claims plus all expenses — 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 is paying out more in claims and expenses than it is collecting in premiums.)

Measuring Our Success in 2007 And Beyond

We use a variety of metrics to measure the success of our strategies:

•		Maintaining our strong relationships with our established agencies, writing a significant portion of each agency’s business and attracting new agencies – In 2007, we expect to continue to rank No. 1 or No. 2 by premium volume in approximately 75 percent or more of the locations that have marketed our products for more than five years.
		We expect to improve service to our agencies by subdividing or creating four field territories in 2007. At September 30, 2007, we had 105 field marketing territories, up from 102 at the end of 2006 and 100 at the end of 2005. We continually study the regulatory and competitive environment in states where we could decide to actively market our property casualty products. We made our first agency appointment in eastern Washington state in the second quarter and our first agency appointment in New Mexico in the third quarter.
		At September 30, 2007, our 1,084 agency relationships had 1,311 reporting agency locations marketing our insurance products, compared with 1,066 agency relationships with 1,289 reporting agency locations at year-end 2006. We also seek to increase overall premiums by expanding our agency force within our current marketing territories. We are very careful to protect the franchise for current agencies when selecting and appointing new agencies. Our objective is to appoint approximately 55 to 60 additional sales offices, or points of distribution, each year. During the first nine months of 2007, we had a net increase of 22 reporting agency locations. We made 33 new agency appointments during the period, including 16 that were new relationships. These were offset by changes in agency structures and the cancellation of nine agency relationships.
		In 2007, we are making further progress in our efforts to improve service to and communication with our agencies through our expanding portfolio of software. We discuss our technology plans for 2007 in our 2006 Annual Report on Form 10-K, Item 1, Technology Solutions, Page 4. Activities and plans include:

	•		Commercial Lines Technology – WinCPP® is our commercial lines premium quoting system. WinCPP is available in all of our agency locations in 32 of the 34 states in which we actively market insurance and provides quoting capabilities for nearly 100 percent of our new and renewal commercial lines business. We will introduce WinCPP in Washington and New Mexico as soon as possible. We have introduced real-time agency interface technology for WinCPP: CinciBridge™ allows automated movement of key underwriting data from an agent’s management system to WinCPP, reducing agents’ data entry and allowing seamless quoting and rating capabilities.
			e-CLAS® is our commercial lines Web-based policy processing system. e-CLAS now is available in 15 states representing 71 percent of our Businessowner Policy (BOP) and Dentist’s Package Policy (DBOP) premiums, which are part of the Specialty Packages commercial line of business. We continue to roll out e-CLAS to additional states for these policy types. CinciBridge real-time agency interface technology also has been rolled out in all states using e-CLAS.

		Cincinnati Financial Corporation
16		Form 10-Q for the quarterly period ended September 30, 2007

			To respond to agency needs, we have begun a project to allow agencies to select direct bill as an option for policyholders. Our first step will be to make the direct bill option available for policies issued through e-CLAS. We now anticipate rolling out a test version of this capability to selected agencies by year-end 2007 with full agency roll out in early 2008. Similar direct billing capability for policies not issued through e-CLAS is anticipated by the end of 2008.
			iView™ is our commercial lines policy imaging and workflow system. At September 30, 2007, 80 percent of non-workers’ compensation commercial lines policy files were administered and stored electronically in iView. We expect more than 90 percent of non-workers’ compensation commercial lines policy files to be stored in iView by year-end 2007.
	o		Personal Lines Technology – Diamond, our personal lines policy processing system, now is available in 17 states representing virtually all of our personal lines premium volume. Roll out to additional states is planned for next year.
			In 2006, we introduced PL-efiles, a policy imaging system, to our personal lines operations. Through September 30, 2007, we had transitioned information on current Diamond personal lines policies to PL-efiles and continue to work on imaging older policy information.
	o		Claims Technology – CMS is our claims file management system used by claims associates and associates in other headquarters and field departments. Agency access to selected CMS information will be tested in the fourth quarter of 2007, with the full roll out due to be completed in early 2008.
	o		Surety and Executive Risk Technology – CinciBond® is an automated system that processes license and permit surety bonds. It has been introduced to agencies in 10 states representing 803 agency reporting locations. We will roll out CinciBond to additional states beginning with Arizona and Michigan during the fourth quarter of 2007. We expect to add Judicial and Public Official bond processing in 2008.

		Over the years, we have been able to increase our share of our agencies’ business by making available insurance products that meet the needs of the individuals and businesses in their communities. In recent years, our agents have indicated their desire to have Cincinnati available as a market for commercial accounts that require the flexibility of excess and surplus lines coverage.
		Generally, excess and surplus lines insurance carriers provide insurance that is unavailable to businesses in the standard market due to market conditions or due to characteristics of the insured that are caused by nature, the insured’s history or the nature of the insured’s business.
		We believe excess and surplus lines will contribute to our long-term objectives. Among the potential benefits, we would gain opportunities to compete for additional accounts by having more flexibility in pricing, policy terms and conditions.
		In the first nine months of 2007, we completed the due diligence necessary to enter the excess and surplus lines market, meeting with business partners and regulators in various states. We have incorporated The Cincinnati Specialty Underwriters Insurance Company as a new subsidiary of The Cincinnati Insurance Company and we will capitalize Cincinnati Specialty Underwriters with up to $200 million by year-end 2007. We also have incorporated CSU Producer Resources as a subsidiary of Cincinnati Financial Corporation. CSU Producer Resources is a wholly owned brokerage subsidiary that will provide exclusive access for our independent agencies to our excess and surplus lines products. Our interdepartmental team continues to identify the excess and surplus lines and classes of business that we will target, develop underwriting guidelines and establish rate ranges for this business. The team also has selected a policy administration system and begun the process of hiring additional, experienced staff. We continue to target roll out to our independent agencies and the first contributions to premiums in 2008.
•		Achieving above-industry-average growth in property casualty statutory net written premiums and maintaining industry-leading profitability by leveraging our regional franchise and proven agency-centered business strategy – Considering market conditions and results for the first nine months of 2007, we are revising our full-year 2007 property casualty growth and profitability targets.
		Written premiums – We now believe we may see slightly lower full-year net written premiums, in line with the 1.3 percent decline in this measure for the nine months ended September 30, 2007. At mid-year, we had estimated full-year premiums would be in the same range as last year’s $3.178 billion.
		Our property casualty operations received administrative subpoenas from the Florida Office of Insurance Regulation on August 24, 2007. The subpoenas requested documents and testimony at a public hearing about our reinsurance programs, and our relationships with trade associations, rating agencies and risk modeling firms. Although our September 20, 2007, petition to modify the scope of the subpoenas was denied, the Office separately clarified the scope of the subpoenas and we produced responsive documents. The Office also cancelled the public hearing regarding the subpoenas originally planned for October 18, 2007. A new date for the hearing has not been set.

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended September 30, 2007		17

		We share the Office’s goal to make homeowners insurance available and affordable to the citizens of Florida, and we respect their right – their duty – to investigate activities that might be contrary to their regulations supporting that goal. The subpoenas add uncertainty to the insurance-related legislative and regulatory developments that have occurred in Florida this year. Over the past year, we have not sought new policyholder relationships from our Florida agencies. This status, which extends to most of our lines of property casualty insurance, may have slowed our growth rate in Florida this year. By excluding wind coverage from policies located within the Florida wind pool area, we have been able to reduce our exposure to hurricane catastrophe losses for those risks located closest to the coast, in accordance with Florida rules and regulations. We hope the Florida insurance environment will improve so that we may resume writing all lines of new business through our Florida agencies.
		In early 2007, A.M. Best projected that overall industry net written premiums would be flat in 2007. Premiums for the commercial lines sector were expected to decline 1.0 percent in 2007; the personal lines sector was expected to grow 1.2 percent and the reinsurance sector was expected to grow 18.6 percent. They later estimated that overall industry premiums declined an estimated 0.7 percent in the first six months of 2007. For that period, they estimated that premiums for the commercial lines sector declined an estimated 1.8 percent and that premiums for the personal lines sector rose an estimated 0.7 percent.
		Combined ratio – We now believe that the full-year 2007 combined ratio could be at or below 94 percent on either a GAAP or statutory basis, improved from our previous estimate of a combined ratio at or below 95 percent. This is the second time we have improved our view for this measure this year. The GAAP combined ratio was 91.8 percent in the first nine months of 2007 and 94.3 percent for full-year 2006. Our revised target reflects several assumptions:

	o		Catastrophe loss contribution lower than previously anticipated. This should help offset the expected deterioration in the underlying loss ratio due to softer pricing and loss cost inflation. We previously had anticipated catastrophe losses would contribute up to 4.5 percentage points to the combined ratio.
	o		Savings from favorable reserve development contributing more than 2 percentage points to the full-year combined ratio. Savings from favorable development on prior period reserves averaged about 2 percentage points between 2000 and 2003. Between 2004 and 2006, the average rose to approximately 5 percentage points.
	o		Underwriting expense contribution as we continue to invest in people and technology. We now believe the consolidated property casualty 2007 underwriting expense ratio could be approximately 31 percent, slightly below our previous estimate.

		In early 2007, A.M. Best projected the industry average 2007 combined ratio would be 96.8 percent. They later estimated that for the second-quarter, the commercial lines sector combined ratio was 91.9 percent, the personal lines sector ratio was 94.6 percent and the reinsurance sector ratio was 89.5 percent.
•		Pursuing a total return investment strategy that generates both strong investment income growth and capital appreciation – We continue to estimate that 2007 pretax investment income growth will be approximately 6 percent.
		We do not establish annual capital appreciation targets. Over the long term, our target is to have the equity portfolio outperform the Standard & Poor’s 500 Index, a common benchmark of market performance. In the first nine months of 2007, our equity portfolio’s total return was a negative 5.0 percent compared with a 9.1 percent return for the Index. Over the five years ended September 30, 2007, our compound annual equity portfolio return was 2.7 percent compared with 15.5 percent for the Index. Our equity portfolio performance reflected the decline in the market value of our holdings of Fifth Third common stock, which generated a negative annualized return of 8.3 percent for the five-year period ended September 30, 2007.
•		Increasing the total return to shareholders through a combination of higher earnings per share, growth in book value and increasing dividends – We do not announce annual targets for earnings per share or book value. Over the long term, we look for our earnings per share growth to outpace that of a peer group of national and regional property casualty insurance companies. Long-term book value growth should exceed that of our equity portfolio.
		The board of directors is committed to steadily increasing cash dividends, periodically authorizing stock dividends and splits and authorizing share repurchases. In February 2007, the board increased the indicated annual cash dividend rate 6.0 percent, marking the 47th consecutive year of increases in our indicated dividend rate. We believe our record of dividend increases is matched by only 11 other publicly traded corporations.
		Over the long term, we seek to increase earnings per share, book value and dividends at a rate that would allow total return to our shareholders to exceed that of the Standard & Poor’s Composite 1500 Property

		Cincinnati Financial Corporation
18		Form 10-Q for the quarterly period ended September 30, 2007

		Casualty Insurance Index. Over the 2002 to 2006 period, our total return to shareholders of 49.4 percent was below the 71.4 percent return for that Index.
•		Maintaining financial strength by keeping the ratio of debt to capital below 15 percent and purchasing reinsurance to provide investment flexibility - A $20 million increase in our short-term borrowings and the decline in shareholders’ equity resulted in an increase in our debt-to-capital ratio to 11.6 percent at September 30, 2007. Based on our present capital requirements, we do not anticipate a material increase in debt levels during 2007. As a result, we believe our debt-to-capital ratio will remain approximately 12 percent through the remainder of the year. We discuss our outstanding debt in Capital Resources, Page 34.
		We expect our 2007 reinsurance premiums to be approximately $22 million higher than in 2006. We provide more detail on our reinsurance programs in our 2006 Annual Report on Form 10-K, Item 7, 2007 Reinsurance Programs, Page 69. For the first nine months of 2007, the increase in premiums we are paying for reinsurance lowered the consolidated property casualty written premium growth rate by approximately 0.5 percentage points.
		Our property casualty and life operations are awarded insurer financial strength ratings. These 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.
		As of November 1, 2007, our financial strength ratings were unchanged from those reported in our 2006 Annual Report on Form 10-K.

Parent

Company

Property Casualty Insurance

Life Insurance

Senior Debt

Subsidiaries Financial

Subsidiary Financial

Rating

Strength Ratings

Strength Ratings

Outlook

Rating Tier

Rating Tier

A. M. Best Co.

aa-

A++

Superior

1 of 16

A+

Superior

2 of 16

Stable

Fitch Ratings

A+

AA

Very Strong

4 of 21

AA

Very Strong

4 of 21

Stable

Moody’s Investors Services

A2

Aa3

Excellent

4 of 12

na

na

na

Stable

Standard & Poor’s Ratings Services

A

AA-

Very Strong

4 of 21

AA-

Very Strong

4 of 21

Stable