UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2007.

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

For the transition period from                                          to                                         .

Commission file number 0-4604

CINCINNATI FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Ohio		31-0746871
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
6200 S. Gilmore Road, Fairfield, Ohio		45014-5141
(Address of principal executive offices)		(Zip code)

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

Indicate by check mark whether the registrant 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 April 25, 2007, there were 171,681,890 shares of common stock outstanding.

 

 

CINCINNATI FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2007

TABLE OF CONTENTS

		Page
PART I – FINANCIAL INFORMATION
Item 1 Financial Statements
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			14
Item 3 Quantitative and Qualitative Disclosures About Market Risk			37
Item 4 Controls and Procedures			42
PART II – OTHER INFORMATION
Item 1 Legal Proceedings			42
Item 1A Risk Factors			42
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3 Defaults Upon Senior Securities			43
Item 4 Submission of Matters to a Vote of Security Holders			43
Item 5 Other Information			43
Item 6 Exhibits			44
EX-11
EX-31A
EX-31B
EX-32

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

Part I – Financial Information

Item 1. Financial Statements

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Balance Sheets

		March 31,				December 31,
(Dollars in millions except per share data)		2007				2006
		(unaudited)
ASSETS
Investments
Fixed maturities, at fair value (amortized cost: 2007—$5,785; 2006—$5,739)		$	5,864			$	5,805
Equity securities, at fair value (cost: 2007—$2,802; 2006—$2,621)			7,687				7,799
Short-term investments, at fair value (amortized cost: 2007—$19; 2006—$95)			19				95
Other invested assets			71				60
Total investments			13,641				13,759
Cash and cash equivalents			197				202
Securities lending collateral			984				0
Investment income receivable			117				121
Finance receivable			103				108
Premiums receivable			1,173				1,128
Reinsurance receivable			727				683
Prepaid reinsurance premiums			12				13
Deferred policy acquisition costs			467				453
Land, building and equipment, net, for company use (accumulated depreciation:
2007—$268; 2006—$261)			204				193
Other assets			85				58
Separate accounts			511				504
Total assets		$	18,221			$	17,222
LIABILITIES
Insurance reserves
Loss and loss expense reserves		$	3,928			$	3,896
Life policy reserves			1,427				1,409
Unearned premiums			1,640				1,579
Securities lending payable			984				0
Other liabilities			652				533
Deferred income tax			1,531				1,653
Note payable			49				49
6.125% senior notes due 2034			371				371
6.9% senior debentures due 2028			28				28
6.92% senior debentures due 2028			392				392
Separate accounts			511				504
Total liabilities			11,513				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			1,027				1,015
Retained earnings			2,923				2,786
Accumulated other comprehensive income			3,193				3,379
Treasury stock at cost (2007—24 million shares, 2006—23 million shares)			(827	)			(763	)
Total shareholders’ equity			6,708				6,808
Total liabilities and shareholders’ equity		$	18,221			$	17,222

Accompanying notes are an integral part of this statement.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Statements Of Income

		Three months ended March 31,
(In millions except per share data)		2007				2006
		(unaudited)
REVENUES
Earned premiums
Property casualty		$	785			$	778
Life			30				26
Investment income, net of expenses			148				139
Realized investment gains and losses			62				660
Other income			6				4
Total revenues			1,031				1,607
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits			484				501
Commissions			170				166
Other operating expenses			88				83
Taxes, licenses and fees			20				24
Increase in deferred policy acquisition costs			(15	)			(14	)
Interest expense			13				13
Total benefits and expenses			760				773
INCOME BEFORE INCOME TAXES			271				834
PROVISION (BENEFIT) FOR INCOME TAXES
Current			77				292
Deferred			0				(10	)
Total provision for income taxes			77				282
NET INCOME		$	194			$	552
PER COMMON SHARE
Net income—basic		$	1.12			$	3.17
Net income—diluted		$	1.11			$	3.13

Accompanying notes are an integral part of this statement.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Statements Of Shareholders’ Equity

		Three months ended March 31,
(In millions)		2007				2006
		(unaudited)
COMMON STOCK
Beginning of year		$	391			$	389
Stock options exercised			1				1
End of period			392				390
PAID-IN CAPITAL
Beginning of year			1,015				969
Stock options exercised			7				10
Share-based compensation			5				7
End of period			1,027				986
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			194				552
Dividends declared			(61	)			(59	)
End of period			2,923				2,581
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			(181	)			(312	)
End of period			3,193				2,972
TREASURY STOCK
Beginning of year			(763	)			(644	)
Purchase			(64	)			(81	)
End of period			(827	)			(725	)
Total shareholders’ equity		$	6,708			$	6,204
COMMON STOCK — NUMBER OF SHARES OUTSTANDING
Beginning of year			173				174
Purchase of treasury shares			(1	)			(1	)
End of period			172				173
COMPREHENSIVE INCOME
Net income		$	194			$	552
Other comprehensive income (loss), net			(181	)			(312	)
Total comprehensive income		$	13			$	240

Accompanying notes are an integral part of this statement.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Statements Of Cash Flows

(In millions)		Three months ended March 31,
		2007				2006
		(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	194			$	552
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items			7				8
Realized gains on investments			(62	)			(660	)
Share-based compensation			5				7
Interest credited to contract holders			6				7
Changes in:
Investment income receivable			4				7
Premiums and reinsurance receivable			(88	)			(36	)
Deferred policy acquisition costs			(16	)			(15	)
Other assets			(5	)			(2	)
Loss and loss expense reserves			32				67
Life policy reserves			21				4
Unearned premiums			61				51
Other liabilities			(12	)			81
Deferred income tax			0				(10	)
Current income tax			71				286
Net cash provided by operating activities			218				347
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of fixed maturities			51				54
Call or maturity of fixed maturities			127				65
Sale of equity securities			93				827
Collection of finance receivables			12				10
Purchase of fixed maturities			(228	)			(350	)
Purchase of equity securities			(220	)			(491	)
Change in short-term investments, net			77				(211	)
Investment in buildings and equipment, net			(17	)			(18	)
Investment in finance receivables			(6	)			(12	)
Change in other invested assets, net			(4	)			(5	)
Change in securities lending collateral			(984	)			(330	)
Net cash used in investing activities			(1,099	)			(461	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of cash dividends to shareholders			(58	)			(53	)
Purchase of treasury shares			(47	)			(81	)
Proceeds from stock options exercised			7				10
Contract holder funds deposited			8				13
Contract holder funds withdrawn			(17	)			(17	)
Change in securities lending payable			984				330
Other			(1	)			(1	)
Net cash provided by financing activities			876				201
Net increase (decrease) in cash and cash equivalents			(5	)			87
Cash and cash equivalents at beginning of year			202				119
Cash and cash equivalents at end of period		$	197			$	206
Supplemental disclosures of cash flow information:
Interest paid (net of capitalized interest: 2007—$1; 2006—$0)		$	—			$	—
Income taxes paid			5				7
Non-cash activities:
Conversion of securities		$	17			$	—
Purchase of treasury shares not yet settled			17				—
Equipment acquired under capital lease obligations			—				7

Accompanying notes are an integral part of this statement.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 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 March 31, 2007 and 2006, 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 all adjustments, consisting only of normal recurring accruals, have been made that are necessary for fair presentation. The results of operations for interim periods are not necessarily an indication of 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 for simplification, cost-benefit considerations and to have a consistent and reliable fair value.

Our transition adjustment related to the adoption of SFAS No. 155 increased retained earnings at January 1, 2007, 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. During the first quarter of 2007, we recognized $1 million in realized investment gains and losses related to current period changes in valuation of our hybrid securities. At March 31, 2007, we had $175 million of hybrid securities included in fixed maturities that now are accounted for under SFAS No. 155.

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 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.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

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

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109. It prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

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 during the quarter ended March 31, 2007. The FIN 48 liability is carried in other liabilities in the condensed consolidated balance sheet as of March 31, 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. Any interest recognized is classified in the condensed consolidated statements of income as an offset to investment income. Accrued interest was $2.5 million and $3.5 million as of January 1, 2007, and March 31, 2007, respectively.

The Internal Revenue Service has concluded the examination phase of its audit for our 2002, 2003 and 2004 tax years. 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

In October 2005, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 05-1, which provides accounting guidance for deferred policy acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. 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 are effective January 1, 2007, and did not have a material impact on our results of operations or financial position.

Subsequent Events

Catastrophe losses – In addition to catastrophe losses reported for the first three months of 2007, a storm in mid-April across a number of states on the East Coast is believed to have caused our policyholders to sustain losses under their policies. Based on initial claim reports, we estimate that less than $5 million pretax of catastrophe losses from this storm would be included in second-quarter results. This estimate does not take into account any catastrophe activity that may occur in the remainder of the second quarter of 2007 or potential development from events in prior periods.

Investment asset sale – In the first three months of 2007 we sold 725,000 shares of our holdings of ExxonMobil Corporation (NYSE:XOM) common stock. In April 2007, we sold an additional 3,072,206 shares, reducing our holdings to 5,164,860 shares with a market value of $415 million at the close of business on April 27, 2007. After-tax proceeds from the sale have been reinvested in equity securities.

The sale contributed $30 million to our pretax realized gains for the first three months of 2007. The $175 million gain from the sale in April 2007 will be recognized in pretax realized investment gains and losses in the second quarter of 2007. After-tax proceeds from the shares sold in April totaled approximately $114 million.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

NOTE 2 – Investments

Fixed maturities (bonds and redeemable preferred stocks) and equity securities (common and non-redeemable preferred stocks) have been classified as available for sale and are stated at fair values at March 31, 2007, and December 31, 2006. Short-term investments (commercial paper, demand notes or bonds purchased within one year of maturity) are classified as available for sale and recorded at amortized cost, which approximates fair value, at March 31, 2007 and December 31, 2006.

At March 31, 2007, unrealized investment gains before taxes in the investment portfolio totaled $5.014 billion and unrealized investment losses before taxes amounted to $50 million. The unrealized gains primarily were due to our long-term holdings of Fifth Third Bancorp (NASDAQ:FITB) common stock, which constituted 51.0 percent of total unrealized gains, and from our other common stock holdings, including ExxonMobil, The Procter & Gamble Company (NYSE:PG) and PNC Financial Services Group (NYSE:PNC), each of which constituted at least 5 percent of total unrealized gains.

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.

Fixed maturities unrealized gains and losses were essentially unchanged in the three months ended March 31, 2007. The change for the three months ended March 31, 2006, was due primarily to interest-rate driven fair value fluctuations in the fixed maturity portfolio.

Equity securities unrealized gains declined for the three months ended March 31, 2007, primarily because of the decline in the market value of Fifth Third since December 31, 2006, and realized gains from equity sales. Equity securities unrealized gains declined for the three months ended March 31, 2006, primarily because of the sale of our holdings of Alltel Corporation (NYSE:AT) common stock, which was completed in January 2006.

		Three months ended March 31,
(In millions)		2007				2006
Change in unrealized investment gains and losses and other summary:
Fixed maturities		$	10			$	(78	)
Equity securities			(293	)			(423	)
Adjustment to deferred acquisition costs and life policy reserves			(1	)			3
Other			5				1
Income taxes on above			98				185
Total		$	(181	)		$	(312	)

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. We recorded no other-than-temporary impairment charges in the three months ended March 31, 2007, and $1 million in the three months ended March 31, 2006.

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 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. The securities lending collateral is recognized as an asset, and classified as securities lending collateral, 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. We maintain effective control over the securities loaned, which are classified as invested assets on our consolidated balance sheets. At March 31, 2007, we had fixed maturities with a market value of $964 million on loan, with collateral held of $984 million. Interest income on collateral, net of fees, was $242,000 in the three months ended March 31, 2007, compared with $123,000 in the three months ended March 31, 2006.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

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 March 31,
(In millions)		2007				2006
Direct earned premiums		$	821			$	810
Assumed earned premiums			7				6
Ceded earned premiums			(43	)			(38	)
Net earned premiums		$	785			$	778
Direct incurred loss and loss expenses		$	477			$	491
Assumed incurred loss and loss expenses			1				3
Ceded incurred loss and loss expenses			(20	)			(23	)
Net incurred loss and loss expenses		$	458			$	471

For the three months ended March 31, 2007, direct earned premiums rose more rapidly than net earned premiums because the change in our reinsurance programs caused ceded earned premiums to increase. Direct losses and policyholder benefits declined because of the lower level of catastrophe losses. Assumed and ceded incurred loss and loss expenses were essentially unchanged from the comparable 2006 period.

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 March 31,
(In millions)		2007				2006
Service cost		$	4			$	4
Interest cost			4				3
Expected return on plan assets			(4	)			(4	)
Amortization of actuarial gain, prior service cost and transition asset			1				1
Net periodic benefit cost		$	5			$	4

We made no contribution to the pension plan in the first quarter of 2007. We continue to anticipate contributing $10 million during 2007 as indicated in the 2006 Annual Report on Form 10-K.

NOTE 5 – Equity Compensation Plans

We currently have four 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 to our associates. 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. We also have one equity compensation plan that permits us to grant common stock to our outside directors as discussed in our 2007 Proxy Statement.

A total of 22,237,750 shares is authorized to be granted under the plans. At March 31, 2007, 10,441,773 shares were available for future issuance under the plans. We currently issue new shares for option exercises. The total share-based compensation cost with respect to these plans was $5 million and $7 million for the three months ended March 31, 2007 and 2006. The total income tax benefit with respect to these plans was $1 million and $2 million for the three months ended March 31, 2007 and 2006.

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:

		Three months ended March 31,
		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	%

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

The total cash received from the exercise of options was $7 million and $10 million for the three months ended March 31, 2007 and 2006. The total tax benefit realized on options exercised was $1 million for the three months ended March 31, 2007. There was no material tax benefit for the three months ended March 31, 2006.

As of March 31, 2007, there was $23 million of unrecognized compensation cost related to non-vested awards, which is expected to be recognized over a weighted average period of 2.2 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			(274	)			25.48
Forfeited/revoked			(17	)			38.80
Outstanding at end of period			10,958				36.75			$	67
Options exercisable at end of period			9,040			$	35.16			$	67
Weighted-average fair value of options granted during the period							9.43

(Shares in thousands)
		Options outstanding																Options exercisable
						Weighted-								Weighted-								Weighted-
						average								average								average
						remaining								exercise								exercise
Range of exercise prices		Shares				contractual life								price				Shares				price
$20.00 to $24.99			15				0.16		yrs					$	22.02				15			$	22.02
$25.00 to $29.99			898				2.77		yrs						27.07				898				27.07
$30.00 to $34.99			4,513				3.96		yrs						32.67				4,513				32.67
$35.00 to $39.99			1,948				5.08		yrs						38.44				1,948				38.44
$40.00 to $44.99			2,257				7.50		yrs						42.38				1,214				41.52
$45.00 to $49.99			1,327				8.84		yrs						45.26				452				45.26
Total			10,958				5.38		yrs						36.75				9,040				35.16

Restricted Stock Units

In 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 March 31, 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 months ended March 31, 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 will not be received on the restricted stock units during the vesting period.

Restricted stock unit awards in 2007 were:

		Service-				Weighted-				Performance-				Weighted-
		based				average				based				average
		nonvested				grant-date				nonvested				grant-date
(Shares in thousands)		shares				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			(1	)			40.74				0				0.00
Nonvested at March 31, 2007			167				40.74				35				40.74

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 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

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

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, CFC Investment Company and CinFin Capital Management Company (excluding client investment activities), as well as other income of our insurance subsidiary.

Revenues come primarily from unaffiliated customers:

•

All three insurance segments record revenues from insurance premiums earned. Life insurance segment revenues also include separate account investment management fees.

•

Our investment operations’ revenues are pretax net investment income plus realized investment gains and losses.

•

Other revenues are primarily finance/lease income.

Income or loss before income taxes for each segment is reported based on the nature of that business area’s operations:

•

Income before income taxes for the insurance segments is defined as underwriting income or loss.

	o		For commercial lines and personal lines insurance segments, we calculate underwriting income or loss by recording premiums earned minus loss and loss expenses and underwriting expenses incurred.
	o		For the life insurance segment, we calculate underwriting income or loss by recording premiums earned and separate account investment management fees, minus contract holder benefits and expenses incurred, plus investment interest credited to contract holders.

•

Income before income taxes for the investment operations segment is net investment income plus realized investment gains and losses for all fixed-maturity and equity security investments of the entire company, minus investment interest credited to contract holders of the life insurance segment.

•

Loss before income taxes for the Other category is primarily due to interest expense from debt of the parent company and operating expenses of our headquarters.

Identifiable assets are used by each segment in its operations. We do not separately report the identifiable assets for the commercial or personal lines segments because we do not use that measure to analyze the segments. We include all fixed-maturity and equity security investment assets, regardless of ownership, in the investment operations segment. We include securities lending collateral in the Other category.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

Segment information is summarized in the following table:

		Three months ended March 31,
(In millions)		2007				2006
Revenues:
Commercial lines insurance
Commercial casualty		$	209			$	197
Commercial property			123				121
Commercial auto			113				112
Workers’ compensation			92				88
Specialty packages			36				36
Surety and executive risk			24				21
Machinery and equipment			7				7
Total commercial lines insurance			604				582
Personal lines insurance
Personal auto			88				101
Homeowner			71				73
Other personal lines			22				22
Total personal lines insurance			181				196
Life insurance			31				27
Investment operations			210				799
Other			5				3
Total		$	1,031			$	1,607
Income (loss) before income taxes:
Insurance underwriting results:
Commercial lines insurance		$	67			$	55
Personal lines insurance			14				7
Life insurance			5				0
Investment operations			196				785
Other			(11	)			(13	)
Total		$	271			$	834
Identifiable assets:
Property casualty insurance		$	2,269			$	2,260
Life insurance			944				850
Investment operations			13,688				13,035
Other			1,320				618
Total		$	18,221			$	16,763

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 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
•		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

•

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
	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

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

•

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

•

Recession or other economic conditions or regulatory, accounting or tax changes resulting in lower demand for insurance products

•

Events that lead to a significant decline in the value of a particular security and impairment of the asset

•

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 March 31,
(Dollars in millions except share data)		2007				2006				Change %
Income statement data
Earned premiums		$	815			$	804				1.3
Investment income, net of expenses			148				139				7.1
Realized investment gains and losses (pretax)			62				660				(90.6	)
Total revenues			1,031				1,607				(35.9	)
Net income			194				552				(64.8	)
Per share data (diluted)
Net income			1.11				3.13				(64.5	)
Cash dividends declared			0.355				0.335				6.0
Weighted average shares outstanding			174,274,157				176,127,404				(1.1	)

For the three months ended March 31, 2007, the growth rates for consolidated property casualty earned premiums and pretax investment income were in line with our full-year 2007 targets.

The decline in realized investment gains, revenues, net income and net income per share primarily reflected the inclusion of the proceeds from the sale of our holdings of Alltel Corporation (NYSE:AT) common stock in the first three months of 2006. That sale raised first quarter 2006 realized investment gains and revenues by $647 million and net income and net income per share by $412 million, or $2.34 per share.

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 months ended March 31, 2007, benefited from a decline in diluted weighted average shares outstanding from the year-earlier period. Weighted average shares outstanding may fluctuate from period to period because we regularly repurchase shares under board authorizations, and we issue shares when associates exercise stock options.

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 months ended March 31, 2007. The board also is committed to share repurchase. We purchased 1.49 million shares at a total cost of $64 million in the three months ended March 31, 2007.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

Balance Sheet Data and Performance Measures

		At March 31,				At December 31,
(Dollars in millions except share data)		2007				2006
Balance sheet data
Invested assets		$	13,641			$	13,759
Total assets			18,221				17,222
Short-term debt			49				49
Long-term debt			791				791
Shareholders’ equity			6,708				6,808
Book value per share			39.08				39.38
Debt-to-capital ratio			11.1	%			11.0	%

		Three months ended March 31,
		2007				2006
Performance measures
Comprehensive income		$	13			$	240
Return on equity, annualized			11.5	%			35.9	%
Return on equity, annualized, based on comprehensive income			0.8				15.7

Invested assets were slightly below the level at year-end 2006 because of a decline in the market value of our equity portfolio. Total assets rose over the year-end 2006 level because of the securities lending collateral asset of $984 million. Shareholders’ equity was $6.708 billion, or $39.08 per share, at March 31, 2007, compared with $6.808 billion, or $39.38, at year-end 2006.

Comprehensive income is net income plus the year-over-year change in accumulated other comprehensive income. In the first three months of 2007, comprehensive income declined because of lower unrealized gains in the investment portfolio and gains realized in the period.

Return on equity was lower in the first three months of 2007 because of the lower level of realized gains on investments. Return on equity based on comprehensive income was lower in the first three months of 2007 because of lower net income and reduced unrealized gains in the investment portfolio.

Our ratio of long-term debt to capital (long-term debt plus shareholders’ equity) was essentially unchanged at March 31, 2007.

Property Casualty Highlights

		Three months ended March 31,
(Dollars in millions)		2007				2006				Change %
Property casualty highlights
Written premiums		$	846			$	829				2.1
Earned premiums			785				778				0.8
Underwriting profit			81				62				30.8
GAAP combined ratio			89.6	%			92.0	%			(2.6	)
Statutory combined ratio			87.7				89.6				(2.2	)

The trend in overall written and earned premium growth rates continued to reflect the market factors and competitive strategies 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. The higher premiums we are paying for reinsurance in 2007 lowered the written premium growth rate by approximately 0.5 percentage points.

Our consolidated property casualty insurance underwriting profit rose for the three months ended March 31, 2007, primarily due to 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 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 year-end 2006, we had 102 field marketing territories, up from 100 at the end of 2005 and 92 at the

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

end of 2004. We continually study the regulatory and competitive environment in states where we could decide to actively market our property casualty products. In January 2007, we announced we were working on plans to enter New Mexico and eastern Washington within the next year. We have begun the process of preparing policy forms and rates to submit to the departments of insurance in those states. Marketing efforts in New Mexico and Washington will begin following our initial agency appointments.

At March 31, 2007, our 1,065 agency relationships had 1,291 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 plant within our current marketing territories. Our objective is to appoint approximately 55 to 60 additional sales offices, or points of distribution, each year. During the first three months of 2007, we had a net increase of two reporting agency locations. We made 12 new agency appointments during the quarter, including nine that were new relationships. These were offset by changes in agency structures. We are very careful to protect the franchise for current agencies when selecting and appointing new agencies.

In 2007, we expect to make further progress in our efforts to improve service to and communication with our agencies through our expanding portfolio of software. We seek to employ technology solutions and business process improvements that complement our core values of local underwriting decisions, strong relationships with our independent agencies and superior claims service. In recent years, we have made significant investments in state-of-the-art information technology platforms, systems and Internet-based applications. We discuss our technology plans for 2007 in our 2006 Annual Report on Form 10-K, Item 1, Technology Solutions, Page 4. Recent activities include:

	o		Commercial Lines Technology – WinCPP® is our commercial lines premium quoting system. WinCPP is used by all of our agency locations in the 32 states in which we actively market insurance and provides quoting capabilities for nearly 100 percent of our new and renewal commercial lines business. We have introduced agency integration 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 Web-based policy processing system. e-CLAS now is available in 10 states representing 56 percent of our BOP and DBOP premiums, which are part of our Specialty Package, one of our commercial lines of business. During 2007, we expect to roll out e-CLAS to an additional nine states for these policy types. We also intend to introduce the CinciBridge agency integration technology with e-CLAS this year.
			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 by year-end 2007.
			iView™ is our commercial lines policy imaging and workflow system. At March 31, 2007, 73 percent of non-workers’ compensation commercial lines policy files are administered and stored electronically in i-View. We expect more than 90 percent of non-workers’ compensation commercial lines policy files will be stored in iView by year-end 2007.
	o		Personal Lines Technology – Diamond is our personal lines policy processing system. At March 31, 2007, Diamond was in use in 15 states representing approximately 95 percent of our personal lines premium volume. Rollout to two additional states is planned for 2007.
			In 2006, we introduced PL-efiles, a policy imaging system, to our personal lines operations. Through March 31, 2007, we had transitioned more than one-third of our Diamond personal lines files to PL-efiles.
	o		Claims Technology – CMS™ is our claims file management system used by all of our claims associates. Agency access to selected CMS information is planned for 2007.
	o		Surety and Executive Risk Technology – CinciBond® is an automated system to process license and permit surety bonds. It has been introduced to agents in 11 states representing 803 agency reporting locations. During 2007, we expect to complete the rollout to 10 of the remaining states and add other popular surety bond types.

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.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

We have studied the option of providing excess and surplus lines coverage for several years and believe it could contribute to our long-term objectives. Among the potential benefits, we could gain opportunities to compete for additional accounts by having more flexibility in pricing and policy terms and conditions.

In 2007, we will take the initial steps necessary to incorporate a new excess and surplus subsidiary and determine its structure. In March, we began appointing the team that will research and develop the appropriate terms and conditions, rates and underwriting guidelines. Additionally, the team is reviewing alternatives for the state of domicile for the new subsidiary and the most effective means for distribution of these products to our independent agencies. We anticipate little, if any, premium contribution from excess and surplus lines in 2007.

•

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 – We believe growth in our consolidated property casualty written premiums may be in the low single digits in 2007. Net written premiums rose 2.1 percent in the first three months of 2007 and 3.3 percent for full-year 2006.

Legislative and regulatory developments continue in 2007 to add to the uncertainty that already exists for the insurance industry in Florida. We are not seeking new policyholder relationships from our Florida agencies. This status, which extends to all lines of insurance and other business areas, may result in lower 2007 growth. We have resumed excluding wind coverage from policies located within the Florida wind pool area. This permits us 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 new business from our Florida agencies. We will continue to monitor Florida’s insurance environment for signs of improvement.

Overall industry premiums are projected to be flat in 2007. Net written premiums for the commercial lines industry are expected to decline 1.0 percent in 2007, the personal lines sector is expected to grow 1.2 percent and the reinsurance sector is expected to grow 18.6 percent.

Taking results for the first three months of 2007 into consideration, we revised our 2007 property casualty combined ratio target in mid-April. We now believe that the full-year combined ratio could be at or below 97 percent on either a GAAP or statutory basis. The GAAP combined ratio was 89.6 percent in the first three months of 2007 and 94.3 percent for full-year 2006. The year-over-year increase reflects four assumptions:

	o		Catastrophe losses contributing approximately 5.0 percentage points to the combined ratio, down from our original assumption of 5.5 percent. We think this is an appropriate estimate based on our reinsurance treaty retention and catastrophe loss experience in recent years.
	o		Savings from favorable reserve development in line with our historical norms. 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 an unusually high level of approximately 5 percentage points.
	o		Loss ratio deterioration as pricing becomes even more competitive and loss severity increases.
	o		Higher other underwriting expenses as we continue to invest in people and technology. We believe the consolidated property casualty 2007 underwriting expense ratio could be approximately 31.5 percent.

For these reasons, we may not achieve our objective of an industry-leading combined ratio in 2007. The projected industry average 2007 combined ratio is 96.8 percent.

•		Pursuing a total return investment strategy that generates both strong investment income growth and capital appreciation – In 2007, we are estimating pretax investment income growth to be in the range of 6.5 percent to 7.0 percent. This outlook is based on the higher anticipated level of dividend income from equity holdings, the investment of insurance operations cash flow and the current portfolio attributes.
		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 three months of 2007, our equity portfolio’s total return was a negative 2.1 percent compared with a 0.6 percent return for the Index. Over the five years ended March 31, 2007, our compound annual equity portfolio return was 0.2 percent compared with a compound annual total return of 6.6 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 7.9 percent for the five-year period ended March 31, 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

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

		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 and periodically authorizing stock dividends and splits. In February 2007, the board increased the indicated annual 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 Casualty Insurance Index. Over the past five years, 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 - 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 11 percent.
		In December 2006, we finalized our property casualty reinsurance program for 2007, updating it to maintain the balance between the cost of the program and the level of risk we retain. Under the new program, our 2007 reinsurance premiums are expected 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.
		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 May 2, 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

—

—

—

Stable

Standard & Poor’s Ratings Services

A

AA-

Very Strong

4 of 21

AA-

Very Strong

4 of 21

Stable

We believe that our property catastrophe reinsurance program provides adequate protection for large loss events. Our strong capital position would allow the payment of claims if an event exceeded our reinsurance program. Currently participating on our property per risk and casualty per-occurrence programs are Hannover Reinsurance Company, Munich Reinsurance America, Partner Reinsurance Company of the U.S. and Swiss Reinsurance America Corporation and its subsidiaries, all of which have A.M. Best insurer financial strength ratings of A (Excellent) or A+ (Superior).

Statutory surplus for our property casualty insurance subsidiary was $4.741 billion at March 31, 2007, compared with $4.723 billion at December 31, 2006. The ratio of the property casualty subsidiary’s common stock to statutory surplus was 96.0 percent at March 31, 2007, compared with 97.3 percent at year-end. Life statutory surplus was $483 million at March 31, 2007, compared with $479 million at December 31, 2006. The ratio of the life insurance subsidiary’s common stock to statutory adjusted capital and surplus was 88.4 percent at March 31, 2007, compared with 88.8 percent at year-end.

Cincinnati Life’s statutory adjusted risk-based surplus increased 1.4 percent to $563 million at March 31, 2007, from $556 million at December 31, 2006. Statutory adjusted risk-based surplus as a percentage of liabilities, a key measure of life insurance company capital strength, was 30.7 percent at March 31, 2007, compared with 37.8 percent at year-end 2006. A higher ratio indicates an insurer’s stronger security for policyholders and capacity to support business growth.

Factors supporting our outlook for 2007 are discussed below in the Results of Operations for each of the four business segments.

Results of Operations

The consolidated results of operations reflect the operating results of each of our four segments along with the parent company and other non-insurance activities. The four segments are:

•

Commercial lines property casualty insurance

•

Personal lines property casualty insurance

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

•

Life insurance

•

Investments operations

We measure profit or loss for our property casualty and life segments based upon underwriting results (profit or loss), which represent net earned premium less loss and loss expenses and underwriting expenses on a pretax basis. We also measure aspects of the performance of our commercial lines and personal lines segments on a combined property casualty insurance operations basis. Underwriting results and segment pretax operating income are not a substitute for net income determined in accordance with GAAP.

For the combined property casualty insurance operations as well as the commercial lines and personal lines segments, statutory accounting data and ratios are key performance indicators that we use to assess business trends and to make comparisons to industry results, since GAAP-based industry data generally is not readily available. We also use statutory accounting data and ratios as key performance indicators for our life insurance operations. We do not believe that inflation has had a material effect on consolidated results of operations, except to the extent that inflation may affect interest rates. We continue to monitor market trends to identify segments where cost increases are exceeding general inflation rates for their potential effect on claim payments and headquarters construction costs.

Investments held by the parent company and the investment portfolios for the property casualty and life insurance subsidiaries are managed and reported as the investments segment, separate from the underwriting businesses. Net investment income and net realized investment gains and losses for our investment portfolios are discussed in Investments Results of Operations.

The calculations of segment data are described in more detail in Item 1, Note 7 of the Condensed Consolidated Financial Statements, Page 12. The following sections review results of operations for each of the four segments. Commercial Lines Insurance Results of Operations begins on Page 21, Personal Lines Insurance Results of Operations begins on Page 26, Life Insurance Results of Operations begins on Page 30, and Investments Results of Operations begins on Page 32. We begin with an overview of our consolidated property casualty operations, which is the total of our commercial lines and personal lines segments.

Consolidated Property Casualty Insurance Results of Operations

		Three months ended March 31,
(Dollars in millions)		2007				2006				Change %
Written premiums		$	846			$	829				2.1
Earned premiums		$	785			$	778				0.8
Loss and loss expenses excluding catastrophes			455				432				5.1
Catastrophe loss and loss expenses			3				39				(91.8	)
Commission expenses			161				157				2.5
Underwriting expenses			82				84				(2.8	)
Policyholder dividends			3				4				(2.1	)
Underwriting profit		$	81			$	62				30.9
Ratios as a percent of earned premiums:
Loss and loss expenses excluding catastrophes			57.9	%			55.6	%
Catastrophe loss and loss expenses			0.4				5.0
Loss and loss expenses			58.3				60.6
Commission expenses			20.5				20.2
Underwriting expenses			10.4				10.8
Policyholder dividends			0.4				0.4
Combined ratio			89.6	%			92.0	%

In addition to the factors discussed in our 2006 Annual Report on Form 10-K, Item 7, Commercial Lines and Personal Lines Insurance Results of Operations, Page 42 and Page 49, growth and profitability for the property casualty insurance operations were affected by:

•

New business written directly by agencies was $80 million in the three months ended March 31, 2007, compared with $77 million in the year earlier period. New business levels reflected market conditions for commercial and personal lines as well as the advantages of our agency relationship strategy and changes made to our personal lines pricing in mid-2006.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

•

Catastrophe losses contributed 0.4 percentage points to the combined ratio in the first three months of 2007 compared with 5.0 percentage points in the comparable 2006 period. In the first quarter of 2007, we incurred $16 million in pretax catastrophe losses caused by four weather events during the period, mitigated by $13 million in reduced estimates of losses from catastrophes in earlier years, in particular an October 2006 hail storm. The following table shows catastrophe losses incurred, net of reinsurance, for these periods as well as the effect of loss development on prior period catastrophes.

(In millions, net of reinsurance)						Three months ended March 31,
						Commercial				Personal
Dates		Cause of loss		Region		lines				lines				Total
2007
Jan. 12-15		Wind, hail, ice, snow		Midwest		$	2			$	1			$	3
Feb. 14-15		Wind, hail, ice, snow		Mid-Atlantic			1				1				2
Feb. 23-25		Wind, hail, ice, snow		Midwest			3				0				3
Mar. 1-2		Wind, hail, flood		South			6				2				8
Development on 2006 and prior catastrophes							(2	)			(11	)			(13	)
Calendar year incurred total						$	10			$	(7	)		$	3
2006
Mar. 11-13		Wind, hail		Midwest, Mid-Atlantic		$	28			$	10			$	38
Development on 2005 and prior catastrophes							1				0				1
Calendar year incurred total						$	29			$	10			$	39

•

Savings from favorable development on prior period reserves reduced the combined ratio by a total of 4.0 percentage points in the first three months of 2007, including 1.7 percentage points from the $13 million in savings from favorable development on prior period catastrophe loss reserves noted above. In the first three months of 2006, reserve strengthening added 2.5 percentage points to the combined ratio.

The discussions of property casualty insurance segments provide additional detail regarding these factors.

Commercial Lines Insurance Results of Operations

Overview

Performance highlights for the commercial lines segment include:

•		Premiums –Our commercial lines written premiums rose 3.8 percent in the first quarter of 2007 as competition in our markets continued to increase. This growth reflects the value of our agency relationships, new business growth, healthy policy retention rates, more accurate risk classification and insurance-to-value initiatives. These helped offset our deliberate decisions not to write or renew certain business, the loss of some accounts due to price competition and slightly higher reinsurance premiums.
		In the more competitive pricing environment, we have been careful to maintain our underwriting discipline for both renewal and new business. We believe that our written premium growth rate continues to exceed the average for the overall commercial lines industry, which A.M. Best estimates may decline approximately 1 percent in 2007 after rising approximately 1 percent in 2006.
		Our earned premiums rose 3.7 percent for the quarter.
		We continue to see a shift in our customer base to slightly larger accounts as our policy count remains relatively stable. From 2004 through 2006, growth in accounts with premiums above $10,000 offset a decline in the number of smaller accounts. Agency emphasis and technology considerations were the primary reasons for the shift.
		New commercial lines business written directly by agencies in the first three months of 2007 grew 2.8 percent to $72 million from $70 million in the comparable 2006 period.
•		Combined ratio – Our commercial lines combined ratio improved 1.6 percentage points to 88.9 percent in the first quarter of 2007, primarily due to a significantly lower level of catastrophe losses. Savings from favorable development on prior period reserves improved the ratio by 2.5 percentage points in the first three months of 2007 while reserve strengthening raised the ratio by 2.7 percentage points in the first three months of 2006. In the first three months of 2007, higher large losses and modestly higher commissions and other underwriting expenses offset the savings.
		We continue to focus on sound underwriting fundamentals and seek to obtain adequate premiums per policy. On an ongoing basis, we monitor loss patterns and structure our products and our pricing accordingly. We discuss large losses and other factors affecting the combined ratio beginning on Page 22. We discuss reserve development for commercial lines of business on Page 36.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

Our commercial lines statutory combined ratio was 86.5 percent in the first three months of 2007 compared with 87.5 percent in the comparable 2006 period. By comparison, A.M. Best estimates the industry commercial lines combined ratio will be approximately 98 percent in 2007, rising from approximately 94.3 percent in 2006. Beginning in 2007, we are including stock option expense in the calculation of statutory income.

Commercial Lines Results

		Three months ended March 31,
(Dollars in millions)		2007				2006				Change %
Written premiums		$	693			$	668				3.8
Earned premiums		$	604			$	582				3.7
Loss and loss expenses excluding catastrophes			344				324				5.8
Catastrophe loss and loss expenses			10				29				(63.9	)
Commission expenses			123				117				5.6
Underwriting expenses			57				53				5.9
Policyholder dividends			3				4				(2.1	)
Underwriting profit		$	67			$	55				21.3
Ratios as a percent of earned premiums:
Loss and loss expenses excluding catastrophes			56.9	%			55.7	%
Catastrophe loss and loss expenses			1.8				5.1
Loss and loss expenses			58.7				60.8
Commission expenses			20.4				20.0
Underwriting expenses			9.3				9.1
Policyholder dividends			0.5				0.6
Combined ratio			88.9	%			90.5	%

Loss and Loss Expenses

Loss and loss expenses include both net paid losses and reserve changes for unpaid losses as well as the associated loss expenses. The change in the loss and loss expense ratio in the first three months of 2007 was due to:

•		Catastrophe losses – Catastrophe losses contributed 1.8 percentage points to the commercial lines loss and loss expense ratio in the first three months of 2007 compared with 5.1 percentage points in the first three months of 2006. In the first three months of 2007, we incurred $12 million in pretax catastrophe losses caused by four weather events during the period. These losses were mitigated by a net $2 million of favorable loss development on prior period catastrophe reserves.
•		Loss reserve changes – Savings from favorable development on prior period reserves reduced the ratio by a total of 2.5 percentage points in the first three months of 2007, including 0.4 percentage points from the $2 million of favorable loss development on prior period catastrophe loss reserves noted above. In the first three months of 2006, reserve strengthening added 2.7 percentage points to the ratio.
•		Market conditions – During the first three months of 2007, agents continued to report that renewal pricing pressure had risen and new business pricing was requiring even more flexibility and more careful risk selection. We are using credits more frequently to retain renewals of quality business – the larger the account, the higher the credits, with variations by geographic region and class of business. Our field marketing representatives continue to report pricing down about 10 percent to 15 percent on average to write the same piece of new business we would have quoted a year ago. By comparison, 5 percent to 10 percent rate declines seem to be typical for renewal business.
•		Loss severity – We believe loss severity continues to be of concern. Various factors, such as higher initial reserve levels, normal loss cost inflation and higher settlement expenses are contributing to an increase in new losses and case reserve increases greater than $250,000. In the first three months of 2007, these were above the year-ago level, but below the level of the third and fourth quarters of 2006. In total, commercial lines new losses and reserve increases greater than $250,000 rose to 21.8 percent of earned premiums in the first three months of 2007, up from 17.6 percent in the comparable 2006 period.
		New losses greater than $1 million frequently are the result of severe injuries to individuals covered by our policies. We continue to analyze factors that could be contributing to a rise in severe injuries. Overall, our analysis continues to indicate no unexpected concentration of these losses and reserve increases by risk category, geographic region, policy inception, agency or field marketing territory.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended March 31, 2007

Commercial Lines Losses by Size

		Three months ended March 31,
(Dollars in millions)		2007				2006				Change %
Losses $1 million or more		$	45			$	30				49.2
Losses $250 thousand to $1 million			38				28				33.9
Development and case reserve increases of $250 thousand or more			49				44				10.7
Other losses excluding catastrophes			141				155				(9.3	)
Total losses incurred excluding catastrophe losses			273				257				5.7
Catastrophe losses			10				29				(63.9	)
Total losses incurred		$	283			$	286				(1.5	)
Ratios as a percent of earned premiums:
Losses $1 million or more			7.4	%			5.2	%
Losses $250 thousand to $1 million			6.2				4.8
Development and case reserve increases of $250 thousand or more			8.2				7.6
Other losses excluding catastrophes			23.2				26.5
Loss ratio excluding catastrophe losses			45.0				44.1
Catastrophe losses			1.8				5.1
Total loss ratio			46.8	%			49.2	%