CINCINNATI FINANCIAL CORP - 10-Q Quarterly Report

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, 2003.

p		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		(I.R.S. Employer
incorporation or organization)		Identification No.)

6200 S. Gilmore Road, Fairfield, Ohio		45014-5141

(Address of principal executive offices)		(Zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. þ Yes p No

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

As of October 31, 2003, there were 160,427,727 shares of common stock outstanding.

TABLE OF CONTENTS


Part I – Financial Information
	Item 1. Financial Statements
		Cincinnati Financial Corporation and Subsidiaries Condensed Consolidated Balance Sheets
		Cincinnati Financial Corporation and Subsidiaries Condensed Consolidated Statements of Income
		Cincinnati Financial Corporation and Subsidiaries Condensed Consolidated Statements of Shareholders’ Equity
		Cincinnati Financial Corporation and Subsidiaries Condensed Consolidated Statements of Cash Flows
		Notes to Condensed Consolidated Financial Statements (unaudited)
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
Part II – Other Information
	Item 1. Legal Proceedings
	Item 2. Changes in Securities
	Item 3. Defaults upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
Exhibit 11 STMT Recomp of Per Share Earnings
Exhibit 31 Cert
Exhibit 32 Cert

CINCINNATI FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2003

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	10
Item 3	Quantitative and Qualitative Disclosures about Market Risk	21
Item 4	Controls and Procedures	24
	PART II – OTHER INFORMATION
Item 1	Legal Proceedings	24
Item 2	Changes in Securities	24
Item 3	Defaults Upon Senior Securities	24
Item 4	Submission of Matters to a Vote of Security Holders	24
Item 5	Other Information	25
Item 6	Exhibits and Reports in Form 8-K	25


Cincinnati Financial Corporation			2
Form 10-Q for the Quarter Ended September 30, 2003

Part I – Financial Information

Item 1. Financial Statements

Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Balance Sheets



(Dollars in millions except share data)				September 30,			December 31,
				2003			2002

				(unaudited)
ASSETS
	Investments
		Fixed maturities, at fair value (amortized cost: 2003—$3,521; 2002—$3,220)		$	3,762		$	3,305
		Equity securities, at fair value (cost: 2003—$2,445; 2002—$2,375)			7,941			7,884
		Other invested assets			71			68
	Cash				220			112
	Investment income receivable				92			98
	Finance receivable				37			33
	Premiums receivable				1,081			956
	Reinsurance receivable				612			590
	Prepaid reinsurance premiums				16			47
	Deferred policy acquisition costs				386			343
	Property and equipment, net, for company use (accumulated depreciation:
			2003—$172; 2002—$155)		121			128
	Other assets				153			131
	Separate accounts				466			427

		Total assets		$	14,958		$	14,122

LIABILITIES
	Insurance reserves
		Losses and loss expense		$	3,416		$	3,176
		Life policy reserves			1,005			917
	Unearned premiums				1,459			1,319
	Other liabilities				470			345
	Deferred income tax				1,773			1,737
	Notes payable				183			183
	6.9% senior debenture due 2028				420			420
	Separate accounts				466			427

		Total liabilities			9,192			8,524

SHAREHOLDERS’ EQUITY
	Common stock, par value—$2 per share; authorized 200 million shares; issued: 2003—176 million shares, 2002—176 million shares				352			352
	Paid-in capital				304			300
	Retained earnings				1,897			1,772
	Accumulated other comprehensive income—unrealized gains on investments and derivatives				3,731			3,643
	Treasury stock at cost (2003—15 million shares, 2002—14 million shares)				(518	)		(469	)

		Total shareholders’ equity			5,766			5,598

		Total liabilities and shareholders’ equity		$	14,958		$	14,122

Accompanying notes are an integral part of these condensed financial statements.


Cincinnati Financial Corporation			3
Form 10-Q for the Quarter Ended September 30, 2003

Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Income



(In millions except per share data)			Nine months ended September 30,						Three months ended September 30,
			2003			2002			2003			2002

			(unaudited)						(unaudited)
REVENUES
	Earned premiums
		Property casualty	$	1,963		$	1,749		$	678		$	610
		Life		68			63			23			22
	Investment income, net of expenses			347			331			117			113
	Realized investments gains and losses			(44	)		(34	)		15			(16	)
	Other income			8			12			3			2

		Total revenues		2,342			2,121			836			731

BENEFITS AND EXPENSES
	Insurance losses and policyholder benefits			1,447			1,360			505			448
	Commissions			402			345			143			120
	Other operating expenses			142			150			32			53
	Taxes, licenses and fees			48			51			19			19
	Increase in deferred policy acquisition costs			(42	)		(32	)		(11	)		(9	)
	Interest expense			25			26			8			9
	Other expenses			10			6			3			1

		Total benefits and expenses		2,032			1,906			699			641

INCOME BEFORE INCOME TAXES				310			215			137			90

PROVISION (BENEFIT) FOR INCOME TAXES
	Current			75			44			30			15
	Deferred			(10	)		(11	)		3			3

		Total provision (benefit) for income taxes		65			33			33			18

NET INCOME			$	245		$	182		$	104		$	72

PER COMMON SHARE Net income—basic			$	1.52		$	1.12		$	0.65		$	0.44
	Net income—diluted		$	1.51		$	1.11		$	0.64		$	0.44

Accompanying notes are an integral part of these condensed financial statements.


Cincinnati Financial Corporation			4
Form 10-Q for the Quarter Ended September 30, 2003

Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity



(In millions)			Nine months ended September 30,
			2003			2002

			(unaudited)
COMMON STOCK – NUMBER OF SHARES
	Beginning of year			162			162
		Stock options exercised		0			0
		Conversion of debentures		0			0
		Purchase of treasury shares		(1	)		0

	End of period			161			162

COMMON STOCK
	Beginning of year		$	352		$	350
		Stock options exercised		0			1
		Conversion of debentures		0			1

	End of period		$	352		$	352

TREASURY STOCK
	Beginning of year		$	(469	)	$	(427	)
		Purchases		(49	)		(36	)

	End of period		$	(518	)	$	(463	)

PAID-IN CAPITAL
	Beginning of year		$	300		$	284
		Stock options exercised		4			6
		Conversion of debentures		0			6

	End of period		$	304		$	296

RETAINED EARNINGS
	Beginning of year		$	1,772		$	1,678
		Net income		245			182
		Dividends declared		(120	)		(109	)

	End of period		$	1,897		$	1,751

ACCUMULATED OTHER COMPREHENSIVE INCOME
	Beginning of year		$	3,643		$	4,113
		Change in other accumulated comprehensive income, net		88			(532	)

	End of period			3,731			3,581

Total shareholders’ equity			$	5,766		$	5,517

COMPREHENSIVE INCOME
	Net income		$	245		$	182
	Change in other accumulated comprehensive income, net			88			(532	)

		Total comprehensive income	$	333		$	(350	)

Accompanying notes are an integral part of these condensed financial statements.


Cincinnati Financial Corporation			5
Form 10-Q for the Quarter Ended September 30, 2003

Cincinnati Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows



(In millions)					Nine months ended September 30,
					2003			2002

					(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
	Net income				$	245		$	182
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				20			14
		Realized losses on investments				44			34
		Interest credited to contract holders				18			15
		Deferred income tax				(10	)		(12	)
		Changes in:
			Investment income receivable			6			1
			Premiums and reinsurance receivable			(116	)		(96	)
			Deferred policy acquisition costs			(43	)		(32	)
			Other assets			(45	)		(15	)
			Losses and loss expense reserves			240			136
			Life policy reserves			54			35
			Unearned premiums			140			168
			Other liabilities			95			63
			Current income tax			48			(3	)

				Net cash provided by operating activities		696			490

CASH FLOWS FROM INVESTING ACTIVITIES
	Sale of fixed maturities investments					121			64
	Call or maturity of fixed maturities investments					364			222
	Sale of equity securities investments					132			29
	Collection of finance receivables					11			11
	Purchase of fixed maturities investments					(836	)		(429	)
	Purchase of equity securities investments					(205	)		(204	)
	Investment in property and equipment					(14	)		(20	)
	Investment in finance receivables					(15	)		(17	)
	Investment in other invested assets					(1	)		(4	)

			Net cash used in investing activities			(443	)		(348	)

CASH FLOWS FROM FINANCING ACTIVITIES
	Payment of cash dividends to shareholders					(116	)		(107	)
	Purchase of treasury shares					(49	)		(36	)
	Proceeds from stock options exercised					4			7
	Contract holder funds deposited					31			86
	Contract holder funds withdrawn					(15	)		(14	)

			Net cash used in financing activities			(145	)		(64	)

Net increase in cash						108			78
Cash at beginning of year						112			93

Cash at end of period					$	220		$	171

Supplemental disclosures of cash flow information:
	Interest paid				$	18		$	18
	Income taxes paid					14			47
	Conversion of 5.5% senior debentures to common stock					0			6
	Conversion of fixed maturity to equity security investments					30			38

Accompanying notes are an integral part of these condensed financial statements.


Cincinnati Financial Corporation			6
Form 10-Q for the Quarter Ended September 30, 2003

Notes to Condensed Consolidated Financial Statements (unaudited)

NOTE 1 — ACCOUNTING POLICIES
The condensed consolidated financial statements present the accounts of Cincinnati Financial Corporation and all of its subsidiaries, each of which is wholly owned, in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. All significant inter-company investments and transactions have been eliminated in consolidation. The December 31, 2002, consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures herein required by accounting principles generally accepted in the United States of America.

The condensed consolidated financial statements of Cincinnati Financial Corporation and its consolidated subsidiaries are unaudited. The company believes that all adjustments (consisting only of normal recurring accruals) necessary for fair presentation have been made. The results of operations for this interim period are not necessarily an indication of results to be expected for the remainder of the year. The sum of the quarterly reported amounts may not equal year-to-date amounts as each is computed independently.

Investments
Fixed maturities and equity securities have been classified as available for sale and are carried at fair values at September 30, 2003, and December 31, 2002.

Unrealized Gains and Losses
The increases (decreases) in unrealized gains for fixed maturities and equity securities, net of income tax effects, that are included as additions to (deductions from) shareholders’ equity, are as follows:



(In millions)		Nine months ended September 30,						Three months ended September 30,
		2003			2002			2003			2002

Fixed maturities		$	104		$	25		$	(30	)	$	(5	)
Equity securities			(16	)		(557	)		(136	)		(659	)

	Total	$	88		$	(532	)	$	(166	)	$	(664	)

Other-Than-Temporary Impairments
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. In the nine-month and three-month periods ended September 30, 2003, the company recorded $77 million and $8 million, respectively, in other-than-temporary impairment charges compared with $38 million and $8 million in the comparable prior-year periods (see Management’s Discussion and Analysis, Page 10, for discussion of the impairment charges).

Reinsurance
In the accompanying statements of income, premiums earned are net of ceded premiums, and insurance losses and policyholder benefits are net of reinsurance recoveries, as follows:



(In millions)	Nine months ended September 30,				Three months ended September 30,
	2003		2002		2003		2002

Ceded premiums	$	186	$	251	$	58	$	95
Reinsurance recoveries	$	109	$	80	$	16	$	38

Effective April 1, 2003, the company expanded its property catastrophe reinsurance program, adding another $100 million layer in excess of $300 million, and retaining 5 percent of the losses in this layer.

Stock Options
The company has qualified and non-qualified stock option plans under which options are granted to employees at prices that are not less than market price at the date of grant and that are exercisable over 10-year periods. The company applies Accounting Principles Board (APB) Opinion 25 and related interpretations in accounting for these plans. Accordingly, no compensation cost has been recognized for the stock option plans.


Cincinnati Financial Corporation			7
Form 10-Q for the Quarter Ended September 30, 2003

Had compensation cost for the company’s stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Statement of Financial Accounting Standards (SFAS) No. 123 “Accounting for Stock-Based Compensation,” the company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below:



(In millions except per share data)		Nine months				Three months
		ended September 30,				ended September 30,
		2003		2002		2003		2002

Net income	As reported	$	245	$	182	$	104	$	72
Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			7		7		2		3

	Pro forma	$	238	$	175	$	102	$	69

Net income per common share—basic	As reported	$	1.52	$	1.12	$	0.65	$	0.44
	Pro forma	$	1.48	$	1.08	$	0.62	$	0.43
Net income per common share—diluted	As reported	$	1.51	$	1.11	$	0.64	$	0.44
	Pro forma	$	1.47	$	1.07	$	0.62	$	0.43

In determining the pro forma amounts above, the fair value of each option was estimated on the date of grant using the binomial option-pricing model with the following weighted-average assumptions used for grants in the nine months ended September 30, 2003 and 2002, respectively: dividend yield of 2.52 percent and 2.20 percent; expected volatility of 25.90 percent and 25.54 percent; risk-free interest rates of 4.26 percent and 5.54 percent; and expected lives of 10 years for all periods. Compensation expense in the pro forma disclosures is not indicative of future amounts as options vest over several years and additional grants generally are made each year. The company has adopted the disclosure provisions of SFAS No. 148 “Accounting for Stock-based Compensation — Transition and Disclosure” (issued in December 2002). The company will adopt a transition method when a consistent fair value recognition and measurement provisions are determined by The Public Company Accounting Oversight Board and is required to be adopted.

New Accounting Standards
The Financial Accounting Standards Board (FASB) issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” in April 2003 to amend and clarify financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. This statement did not have any effect on the company’s consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer of financial instruments classifies and measures in its statement of financial position certain instruments with characteristics of both liabilities and equity. SFAS No. 150 affects an issuer’s accounting for various types of financial instruments that are required to be accounted for as liabilities.

SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003. For all financial instruments entered into prior to May 31, 2003, SFAS 150 is effective at the beginning of the first interim period beginning after June 15, 2003, which for the company begins July 1, 2003. The company does not have any financial instruments outstanding to which the provisions of SFAS No. 150 apply; therefore, the adoption of FASB No. 150 did not have any impact on the company’s consolidated financial statements.

FASB Interpretation 46 “Consolidation of Variable Interest Entities” was issued in January 2003 and is effective at various dates for various requirements. This interpretation addresses consolidation of variable interest entities (formerly known as special purpose entities). Management believes that this interpretation will have no significant effect on the company’s consolidation financial statements.


Cincinnati Financial Corporation			8
Form 10-Q for the Quarter Ended September 30, 2003

Reclassifications
Certain prior-period amounts have been reclassified to conform with the current-period classifications.

NOTE 2 — SEGMENT INFORMATION
The company is organized and operates primarily in two industries, property casualty insurance and life insurance, and has four reportable segments - commercial lines property casualty insurance, personal lines property casualty insurance, life insurance and investment operations. Company management regularly reviews these four segments to make decisions about allocating resources and to assess their performance. Included in the Other category are the parent company; non-investment operations of CFC Investment Company and CinFin Capital Management Company; and non-premium income of the insurance subsidiaries.

Revenues are primarily from unaffiliated customers. Insurance segments’ revenue is insurance premiums earned; investment operations’ revenue represents net investment income and realized investment gains and losses; and other revenues are primarily finance/lease income, asset management fees and other income of the insurance subsidiaries.

Income before income taxes for the insurance segments represents underwriting profit (loss), which is premiums earned minus loss and loss expenses incurred or policyholder benefits and other expenses. Income before income taxes for the investment operations represents net investment income plus realized investment gains and losses, less interest credited to contract holders. The nine- and three-month periods of 2003 and 2002 included other-than-temporary impairment charges (see Management’s Discussion and Analysis, Page 10, for discussion of the charges). Losses before income taxes in the Other category in the nine- and three-month periods of 2003 and 2002, respectively, were primarily due to interest expense from debt of the parent company and operating expenses of the company’s headquarters.

Identifiable assets by segment are those assets used in the respective segment’s operations. Information regarding identifiable assets is not reported separately for two reportable segments — commercial lines and personal lines of property casualty insurance — because these amounts are not used by company management for analysis of those segments. All fixed-maturity and equity security investments, regardless of ownership, are included in the investment operations segment.

Segment information is summarized in the following table.



(In millions)			Nine months ended September 30,						Three months ended September 30,
			2003			2002			2003			2002

Revenues:
	Commercial lines insurance		$	1,410		$	1,253		$	488		$	440
	Personal lines insurance			553			496			190			170
	Life insurance			68			63			23			22
	Investment operations			303			297			132			97
	Other			8			12			3			2

		Total	$	2,342		$	2,121		$	836		$	731

Income (loss) before income taxes:
	Insurance underwriting results:
		Commercial lines insurance	$	110		$	25		$	45		$	28
		Personal lines insurance		(45	)		(50	)		(16	)		(6	)
		Life insurance		0			(9	)		1			(5	)
	Investment operations			270			277			114			91
	Other			(25	)		(28	)		(7	)		(18	)

		Total	$	310		$	215		$	137		$	90



(In millions)			September 30,		December 31,
			2003		2002

Identifiable assets:
	Property casualty insurance		$	1,666	$	1,450
	Life insurance			737		676
	Investment operations			12,361		11,824
	Other			194		172

		Total	$	14,958	$	14,122


Cincinnati Financial Corporation			9
Form 10-Q for the Quarter Ended September 30, 2003

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

INTRODUCTION

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 the company’s 2002 Annual Report on Form 10-K. Dollar amounts are rounded to millions; calculations of percent changes are based on whole dollar amounts.

SAFE HARBOR STATEMENT
The following discussion contains certain forward-looking statements that involve potential risks and uncertainties. The company’s future results could differ materially from those discussed. Factors that could cause or contribute to such differences include, but are not limited to: unusually high levels of catastrophe losses due to changes in weather patterns or other natural or man-made causes; increased frequency and/or severity of claims; environmental events or changes; insurance regulatory actions, legislation or court decisions that increase expenses or place the company at a disadvantage in the marketplace; adverse outcomes from litigation or administrative proceedings; recession or other economic conditions resulting in lower demand for insurance products; sustained decline in overall stock market values negatively affecting the company’s equity portfolio, in particular a sustained decline in market value of Fifth Third Bancorp shares; political, regulatory, economic, re-valuation or interest-rate events that lead to a significant decline in the market value of a particular security or sector and impairment of assets; delays in the development, implementation and benefits of technology enhancements; and decreased ability to generate growth in investment income.

Further, the company’s insurance businesses are subject to the effects of changing social, economic and regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand overall regulation. The company also is subject to public and regulatory initiatives that can affect the market value for its common stock, such as recent measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.

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


Cincinnati Financial Corporation			10
Form 10-Q for the Quarter Ended September 30, 2003

RESULTS OF OPERATIONS

Overview — Financial Highlights



(Dollars in millions except	Nine months ended September 30,									Three months ended September 30,
per share data)	2003			2002			Change %			2003			2002			Change %

Revenue	$	2,342		$	2,121			10.4		$	836		$	731			14.4

Net income before net realized investment gains and losses	$	274		$	204			33.8		$	94		$	83			13.7
Net realized investment gains and losses		(29	)		(22	)		(29.6	)		10			(11	)		190.5

Net income	$	245		$	182			34.3		$	104		$	72			43.9


Per share data (diluted):
Net income before net realized investment gains and losses	$	1.69		$	1.25			35.2		$	0.58		$	0.51			13.7
Net realized investment gains and losses		(.18	)		(.14	)		(28.6	)		.06			(.07	)		185.7

Net income	$	1.51		$	1.11			36.0		$	0.64		$	0.44			45.5

Book value per share	$	35.94		$	34.14						—			—
Return on equity		5.7	%		4.2	%					7.1	%		4.9	%
Return on equity based on comprehensive income		7.8	%		(8.1	%)					(4.2	%)		(40.6	%)

Management utilizes net income before realized investment gains and losses to evaluate underlying performance for a number of reasons. First, quarterly fluctuations in net realized investment gains and losses are unrelated to trends in the company’s insurance business. Second, net realized investment gains and losses can include gains related to the sale of investments made at management’s discretion. Third, net income before realized investment gains and losses is a measure commonly used by investors to evaluate insurance companies.

The 10.4 percent growth in revenues for the nine months ended September 30, 2003, reflected:

• 12.1 percent increase in property casualty earned premiums – Premiums rose on continued strong renewal pricing while new business written by agents increased 1.0 percent to $243 million compared with the record $240 million in the first nine months of 2002. The company continued to take a selective, case-by-case approach to competing for new property casualty business, maintaining an appropriate balance between growth and profitability. Premium growth also has reflected the focus on improving customer service through the creation of smaller marketing territories, permitting local field marketing representatives to devote more time to each independent agency. During the first nine months of 2003, the company split and staffed three additional territories, bringing the total number of property casualty field territories to 86. The company anticipates subdividing one additional territory in 2003 and four to five additional territories in 2004.

• 4.8 percent rise in investment income – The company has achieved stable investment income growth with low prevailing interest rates limiting investing opportunities. Strong cash flow and an emphasis on equity holdings with a steady flow of increasing dividend payments have added stability to investment income.

• $44 million in net realized investment losses (pretax) – Offsetting the 2003 rise in earned premiums and investment income was a $10 million increase in net realized investment losses over the first nine months of 2002, due to higher other-than-temporary impairment charges in 2003. In the third-quarter, the company recorded realized investment gains of $15 million as the bond and equity markets sustained their overall recovery. As a result, the company recorded realized gains on security sales and a positive shift in the valuation of embedded derivatives that offset a modest level of other-than-temporary impairments.


Cincinnati Financial Corporation			11
Form 10-Q for the Quarter Ended September 30, 2003

In addition to the higher revenues, the 34.3 percent increase in net income for the nine months ended September 30, 2003, reflected recovery of $23 million pretax in the third quarter of 2003 resulting from a settlement negotiated with a vendor. The recovery added $15 million, or 9 cents per share, to after tax net income. The negotiated settlement related to the $39 million one-time, pretax charge incurred in the third quarter of 2000 to write off previously capitalized software development costs.

In addition, improved non-catastrophe underwriting led to slower growth of benefits and expenses and a decline in the consolidated property casualty combined ratio. The quarterly combined ratio has remained at or below 100 percent for five consecutive quarters, reflecting the support and cooperation of agents, firm prices and careful attention to underwriting. For the nine-month period, the ratio was 96.7 percent compared with 101.4 percent for the comparable 2002 nine-month period. Included in the 2003 nine-month combined ratio were:

• 1.2 percentage point benefit from the recovery

• 4.6 percentage points due to catastrophe losses versus 3.8 percentage points in the first nine months of 2002

• 1.1 percentage point increase in commission expense as total contingent (profit-based) commissions for 2003 now are expected to be approximately two times the level of 2002 because of strong recent results. The company relies on its independent agencies as frontline underwriters who know the businesses and individuals in their communities; many agencies are expected to benefit from the hard work they have put into this effort over the past several years.

As a result of the factors stated above, the company reported a property casualty underwriting profit of $65 million in the first nine months of 2003 compared with an underwriting loss of $25 million in the year-earlier period.

Book value improved $1.29, or 3.7 percent, from year-end 2002. The continued bond market recovery during 2003 increased the unrealized gains in the company’s investment portfolio.

PROPERTY CASUALTY INSURANCE OPERATIONS

Within the property casualty insurance market, the company offers both commercial and personal policies through a network of independent agencies.

Commercial Lines



(Dollars in millions, prior to		Nine months ended September 30,								Three months ended September 30,
intercompany eliminations)		2003			2002			Change %		2003			2002			Change %

Earned premiums		$	1,410		$	1,255			12.4	$	488		$	440			10.8
Losses incurred			750			746			0.6		259			248			4.4
Loss expenses incurred			173			143			20.7		61			48			27.1
Underwriting expenses incurred			368			336			9.9		126			122			3.3
Policyholder dividends incurred			9			5			74.2		3			0			491.4

Underwriting profit (loss)		$	110		$	25			330.4	$	39		$	22			66.1


Combined ratio:
Loss ratio			51.2	%		56.8	%				51.1	%		54.8	%
Loss expenses ratio			12.2			11.4					12.3			10.7

	Loss and loss expenses ratio excluding catastrophes		63.4	%		68.2	%				63.4	%		65.5	%
Catastrophe loss and loss expenses ratio			2.0			2.7					2.0			1.3

	Loss and loss expenses ratio		65.4	%		70.9	%				65.4	%		67.1	%
Underwriting expense ratio			26.2			26.7					26.2			27.7
Policyholder dividend ratio			0.6			0.4					0.5			0.1

	Combined ratio		92.2	%		98.0	%				92.1	%		94.9	%


Cincinnati Financial Corporation			12
Form 10-Q for the Quarter Ended September 30, 2003

Commercial lines earned premiums rose 12.4 percent for the nine months. The primary source of growth continued to be firm pricing on new and renewal commercial business, more than offsetting deliberate decisions not to write or renew certain policies. Beginning in the first quarter of 2003, the company resumed writing three-year commercial package policies at its normal pace because of their competitive advantages.

The company’s standard approach is to write three-year policies, a competitive advantage in the commercial lines market. Though the company issues policies for a three-year term, policies are renewable annually at the discretion of the policyholder and are cancelable by the policyholder at any time. While writing three-year policies would appear to restrict opportunities to quickly adjust pricing, annual adjustments are in fact made within multi-year packages to automobile, workers compensation, professional liability and most umbrella liability coverages. Within a multi-year term package, these coverages are adjusted or repriced at the policy’s annual anniversary. The repricing affects the next policy year going forward, not the past policy year. These annual pricing changes could incorporate rate changes approved by state insurance regulatory authorities between the date the policy was written and its annual anniversary, as well as changes in risk exposures and premium credits or debits relating to loss experience, competition and other underwriting judgment factors. Management estimates that 75 percent of 2002 commercial premium was subject to annual adjustment or repricing.

Based on annualized premiums written directly by agencies, commercial new business premiums for the first nine months were $197 million, compared with a record $189 million in the first nine months of 2002, as 9.0 percent second quarter growth and 6.2 percent third quarter growth in new business offset a modest decline in the first quarter.

For the first nine months of 2003, the commercial lines combined ratio improved by 5.8 percentage points, reflecting rate increases as well as longer-term efforts to ensure adequate premium for the company’s exposure to each risk. The combined ratio in the first nine months of 2003 included 2.0 percentage points due to catastrophe losses compared with 2.7 percentage points in the first nine months of 2002. The expense ratio for the first nine months of 2003 reflected a 1.0 percentage point benefit from the recovery offset by an increase in the contribution of contingent commissions to 2.5 percentage points from 0.9 percentage points in 2002.


Cincinnati Financial Corporation			13
Form 10-Q for the Quarter Ended September 30, 2003

Line of Business Analysis
Commercial multi-peril, workers compensation, commercial auto and other liability account for more than 90 percent of total commercial lines earned premium. The following analyzes growth and profitability for these lines separately:



(Dollars in millions)		Nine months ended September 30,									Three months ended September 30,
		2003			2002			Change %			2003			2002			Change %

Commercial multi-peril:
	Earned premium	$	498		$	443			12.3		$	172		$	152			13.0
	Loss and loss expenses incurred		335			319			4.8			113			109			3.0
	Loss and loss expenses ratio		67.2	%		72.0	%					65.4	%		71.8	%
	Loss and loss expenses ratio excluding catastrophes		62.2			64.9						60.1			68.0
Workers compensation:
	Earned premium	$	217		$	215			1.2		$	73		$	78			(6.6	)
	Loss and loss expenses incurred		172			170			1.1			57			58			(1.8	)
	Loss and loss expenses ratio		79.0	%		79.1	%					78.3	%		74.5	%
	Loss and loss expenses ratio excluding catastrophes		79.0			79.1						78.3			74.5
Commercial auto:
	Earned premium	$	310		$	278			11.5		$	106		$	97			9.1
	Loss and loss expenses incurred		193			186			3.3			69			65			6.9
	Loss and loss expenses ratio		62.2	%		67.1	%					65.4	%		66.7	%
	Loss and loss expenses ratio excluding catastrophes		61.1			66.2						64.8			66.5
Other liability:
	Earned premium	$	251		$	199			26.1		$	89		$	71			25.4
	Loss and loss expenses incurred		145			145			(0.2	)		54			39			38.8
	Loss and loss expenses ratio		57.7	%		72.9	%					60.6	%		54.7	%
	Loss and loss expenses ratio excluding catastrophes		57.7			72.9						60.6			54.7

• Commercial multi-peril – Earned premiums grew 12.3 percent for the nine months. This growth reflected continued, though moderating, premium increases on renewed policies, selective non-renewing of underperforming business and a solid contribution from new business. The improvement in the nine-month loss and loss expenses ratio for commercial multi-peril was due to a 2.1 percentage-point decline in the catastrophe loss ratio. In addition, higher casualty base rates have taken effect in most states during the first nine months of 2003. These are expected to contribute to improvement in the full-year loss and loss expenses ratio.

• Workers compensation – Earned premiums grew 1.2 percent for the nine-month period in part due to the company’s decision not to renew some larger workers compensation policies this year. Average policy premium increases have been in the 12 percent to 15 percent range for new and renewal business, with total new business relatively unchanged from a year earlier. Improving profitability trends have led to inclusion of workers compensation with a larger percentage of commercial packages. The higher rates on new and renewal business and other underwriting actions helped maintain the nine-month loss and loss expenses ratio at 79.0 percent versus 79.1 percent a year ago.

• Commercial auto – Earned premiums grew 11.5 percent for the nine months, primarily due to price increases and inclusion of commercial auto coverages in business packages. The loss and loss expenses ratio for commercial auto reflected a continuation of the positive trends of the past two years, improving 4.9 percentage points due to pricing changes and underwriting actions. For 2003, approval for auto rate changes in the 10 percent to 14 percent range


Cincinnati Financial Corporation			14
Form 10-Q for the Quarter Ended September 30, 2003

have been requested from various state insurance departments, which should help the company keep the loss and loss expenses ratio in its current range.

• Other liability (commercial umbrella, commercial general liability and directors and officers) – Earned premiums grew 26.1 percent for the nine-month period, in line with growth in 2002, as a higher number of policies are being written in non-discounted programs. The nine-month loss and loss expenses ratio improved to 57.7 percent from 72.9 percent a year ago, mostly due to pricing increases taken in 2002 as well as unusually good loss experience in the commercial umbrella line. The company monitors commercial umbrella results and anticipates quarter-to-quarter fluctuations due to high volatility in this line.

Management monitors claim activity and appropriately modifies amounts added to loss and loss expenses reserves via incurred but not yet reported (IBNR) additions on an ongoing basis.

Commercial Lines Losses Incurred Analysis



(Dollars in millions)		Nine months ended September 30,						Three months ended September 30,
		2003			2002				2003			2002

Losses $1 million or more		$	72		$	69			$	30		$	22
Losses $250 thousand to $1 million			82			86				31			31
Development and reserve increases of $250 thousand or more			84			90				31			26
Other losses			484			467				157			163

	Total losses incurred excluding catastrophes		722			712				249			242
Catastrophe losses			28			34				10			6

	Total losses	$	750		$	746			$	259		$	248


As a percent of earned premiums:
Losses $1 million or more			5.1	%		5.5	%			6.2	%		5.1	%
Losses $250 thousand to $1 million			5.9			6.9				6.5			7.0
Development and reserve increases of $250 thousand or more			5.9			7.1				6.4			5.9
Other losses			34.3			37.3				32.0			37.1

	Loss ratio excluding catastrophes		51.2	%		56.8	%			51.1	%		55.1	%
Catastrophe loss ratio			2.0			2.7				2.0			1.3

	Total loss ratio		53.2	%		59.5	%			53.1	%		56.4	%

The company evaluates the trends in losses and case reserve increases greater than $250,000 to track frequency and severity of larger losses. In the first nine months of 2003, the total ratio of large losses and case reserve increases greater than $250,000 declined to 16.9 percent of earned premium from 19.5 percent a year earlier, as the amount of losses in these categories remained relatively stable and earned premium grew.


Cincinnati Financial Corporation			15
Form 10-Q for the Quarter Ended September 30, 2003

Personal Lines



(Dollars in millions)		Nine months ended September 30,								Three months ended September 30,
		2003			2002			Change %		2003			2002			Change %

Earned premiums		$	553		$	496			11.5	$	190		$	170			11.6
Losses incurred			412			374			10.2		148			118			24.4
Loss expenses incurred			48			38			24.1		16			13			28.8
Underwriting expenses incurred			138			134			3.3		42			45			(8.5	)

Underwriting loss		$	(45	)	$	(50	)		10.2	$	(16	)	$	(6	)		(135.4	)


Combined ratio:
Loss ratio			63.2	%		68.7	%				61.4	%		70.6	%
Loss expenses ratio			8.7			7.8					8.6			7.5

	Loss and loss expenses ratio excluding catastrophes		71.9	%		76.5	%				70.0	%		78.1	%
Catastrophe loss and loss expenses ratio			11.2			6.6					16.6			(0.6	)

	Loss and loss expenses ratio		83.1	%		83.1	%				86.6	%		77.5	%
Underwriting expense ratio			25.1			27.0					21.8			26.5

	Combined ratio		108.2	%		110.1	%				108.4	%		104.0	%

Personal lines earned premiums rose 11.5 percent in the first nine months of 2003. The sources of growth in the first nine months of 2003 were rate increases on renewal personal lines business and additional homeowner premium derived from insurance-to-value initiatives and specific charges for certain coverage extensions such as water damage. New business written directly by agents in the first nine months of 2003 was $16 million versus $19 million for the same period in 2002. The personal lines combined ratio improved 1.9 percentage points over the year-earlier period. Catastrophe losses contributed 11.2 percentage points to the combined ratio compared with 6.6 percentage points in the first nine months of 2003. The combined ratio for the third quarters of 2003 and 2002 reflected the seasonal variation in the loss ratio due to weather-related losses.

Line of Business Analysis
The personal auto and homeowner business lines together accounted for approximately 90 percent of total personal lines earned premiums. The following analyzes growth and profitability for these lines separately:



(Dollars in millions)		Nine months ended September 30,								Three months ended September 30,
		2003			2002			Change %		2003			2002			Change %

Personal auto:
	Earned premium	$	317		$	288			10.0	$	109		$	98			10.4
	Loss and loss expenses incurred		219			211			3.8		68			72			(5.0	)
	Loss and loss expenses ratio		69.0	%		73.1	%				62.4	%		72.5	%
	Loss and loss expenses ratio excluding catastrophes		67.7			72.3					61.5			72.0
Homeowner:
	Earned premium	$	177		$	155			14.6	$	60		$	53			13.4
	Loss and loss expenses incurred		196			159			22.7		80			47			69.9
	Loss and loss expenses ratio		110.4	%		103.0	%				132.5	%		88.5	%
	Loss and loss expenses ratio excluding catastrophes		78.8			84.3					83.2			92.0


Cincinnati Financial Corporation			16
Form 10-Q for the Quarter Ended September 30, 2003

• Personal auto – Earned premiums for the personal auto line grew 10.0 percent for the first nine months of 2003. Personal auto new business premiums were $8 million compared with last year’s $9 million. The earned premium growth in 2003 reflects rate increases, generally in the mid single digits, that have taken effect in the past 12 months in 23 of the states in which the company writes personal auto coverage. Additional rate increases are scheduled for 15 states in the next six months. The loss and loss expenses ratio improved 4.1 percentage points in the first nine months of 2003 with the impact of catastrophe losses rising by 0.5 percent. The improvement resulted from the re-underwriting program that was initiated in this line several years ago, combined with the benefit of rate increases in the 5 percent to 8 percent range this year. Further rate increases should lead to additional improvement in the loss and loss expenses ratio as the company renews one-year personal auto coverages.

• Homeowner – Earned premiums for homeowners grew 14.6 percent in the first nine months of 2003 mostly due to rate increases on renewal business. New business premiums were $5 million compared with last year’s $7 million. In the past 12 months, rate increases have taken effect in 19 of the states in which the company writes homeowner coverage. Due to the cumulative impact of rate increases, average renewal rate increases for three-year homeowner policies are in the range of 25 percent, with additional double-digit rate increases approved in the company’s larger states, including Illinois, Indiana, Ohio and Pennsylvania, that will become effective over the next six months.

In addition to raising rates, the company has taken other actions to reduce homeowner losses and improve profitability. The company has modified policy terms and conditions that take effect as policies renew or new business is written. It also is working very closely with agencies on a re-underwriting program similar to a successful program used to improve results for the personal auto line over the past several years. Because the company’s current homeowner book is made up primarily of three-year policies, only one-third of renewed policies have been affected by recent actions. Nonetheless, underlying profitability for the homeowner line improved in the first nine months of 2003. The 7.4 percentage-point increase in the loss and loss expenses ratio for the first nine months of 2003 was due entirely to the rise in catastrophe losses, which contributed 31.6 percentage points to the ratio in 2003 compared with 18.7 in 2002. The company anticipates improvement in the loss and loss expenses ratio in 2004 as its actions affect a higher percentage of the company’s homeowner book. That effort may be accelerated by plans to transition the homeowner book to one-year policies as new personal lines technology is rolled out to additional states in 2004.

Management monitors claim activity and appropriately modifies amounts added to loss and loss expenses reserves via incurred but not yet reported (IBNR) additions on an ongoing basis.

Personal Lines Losses Incurred Analysis



(Dollars in millions)		Nine months ended September 30,						Three months ended September 30,
		2003			2002			2003			2002

Losses $1 million or more		$	13		$	9		$	6		$	5
Losses $250 thousand to $1 million			27			28			9			12
Development and reserve increases of $250 thousand or more			8			16			3			4
Other losses			302			288			98			98

	Total losses incurred excluding catastrophes		350			341			116			119
Catastrophe losses			62			33			32			(1	)

	Total losses	$	412		$	374		$	148		$	118


As a percent of earned premiums:
Losses $1 million or more			2.3	%		1.8	%		3.3	%		2.7	%
Losses $250 thousand to $1 million			4.9			5.6			4.7			6.8
Development and reserve increases of $250 thousand or more			1.5			3.3			1.5			2.6
Other losses			54.5			58.0			51.9			58.5

	Loss ratio excluding catastrophes		63.2	%		68.7	%		61.4	%		70.6	%
Catastrophe loss ratio			11.2			6.6			16.6			(0.6	)

	Total loss ratio		74.4	%		75.3	%		78.0	%		70.0	%


Cincinnati Financial Corporation			17
Form 10-Q for the Quarter Ended September 30, 2003

For the first nine months of 2003, personal lines losses and case reserve increases greater than $250,000 were 8.7 percent of earned premium compared with 10.7 percent a year earlier due to earned premium growth.

LIFE INSURANCE OPERATIONS



(Dollars in millions)		Nine months ended September 30,								Three months ended September 30,
		2003		2002			Change %			2003		2002			Change %

Earned premiums		$	68	$	63			7.1		$	23	$	22			8.4
Other income			2		0		nm				1		0		nm

	Total revenues		70		63			8.8			24		22			11.7

Policyholder benefits			33		34			(2.5	)		10		13			(21.2	)
Expenses			36		38			(8	)		13		14			(8.6	)

	Total benefits and expenses		69		72			(5.6	)		23		27			(14.5	)

	Income before income tax and realized investment losses	$	1	$	(9	)		101.9		$	1	$	(5	)		119.0

Results for the life insurance segment exclude the impact of investment income on assets under the management of the life insurance company reported in the investment operations segment. Income before income taxes and realized investment gains and losses in the nine month period ended September 30, 2003, rose to $1 million compared with a loss of $9 million in the comparable 2002 period. At September 30, 2003, invested assets under management of the life insurance company were 18.4 percent above the year earlier level.

For the nine months, net earned premiums rose 8.4 percent and new submitted ordinary life applications rose 6.2 percent. That increase reflects a positive response to the company’s products and services. In 2004, the company will expand its portfolio with a new long-term guaranteed universal life insurance product and an improvement to its existing term life insurance product.

INVESTMENT OPERATIONS

Investment Income
Consolidated pretax investment income rose 4.8 percent for the nine months and 3.3 percent for the third quarter, benefiting from dividend increases announced over the last year by companies in the equity portfolio. As of September 30, 2003, 22 of the 48 equity holdings in the portfolio have announced dividend increases that would add $13 million on an annualized basis to investment income including $9 million from Fifth Third Bancorp.

Realized Investment Gains and Losses
Realized investment losses, before federal taxes, for the first nine months of 2003 were $44 million, or 0.4 percent of total invested assets at September 30, 2003, compared with last year’s $34 million, or 0.3 percent of total invested assets at September 30, 2002. In the third quarter, the company recorded realized investment gains of $15 million compared with realized investment losses of $16 million in last year’s third quarter.



				Nine months ended						Three months ended
(In millions)				September 30,						September 30,
				2003			2002			2003			2002

Other-than-temporary impairments:
	Utility/merchant energy/trading			$	(30	)	$	(5	)	$	0		$	(4	)
	Airline				(18	)		0			(4	)		0
	Healthcare				(10	)		0			0			0
	Automotive				(1	)		(10	)		0			(1	)
	Retail				0			(1	)		0			(1	)
	Telecommunication				0			(10	)		0			0
	Other				(18	)		(12	)		(4	)		(2	)

			Total other-than-temporary impairments		(77	)		(38	)		(8	)		(8	)
Realized investment gains and losses					24			12			14			2
Valuation of embedded derivatives					9			(8	)		9			(10	)

		Total realized losses		$	(44	)	$	(34	)	$	15		$	(16	)


Cincinnati Financial Corporation			18
Form 10-Q for the Quarter Ended September 30, 2003

Continuing weakness in the economy during the first half of 2003 led to a higher level of realized investment losses in that period due to the increase in write-downs of securities that management deemed had experienced other-than-temporary declines in market value. Also included in other-than-temporary impairments are unrealized losses of holdings that the company has identified for sale but not yet completed a transaction. Of the $77 million in other-than-temporary write-downs in the first nine months of 2003, $69 million occurred in the first six months of 2003. For the nine-month period, the majority of the write-downs related to 29 high-yield corporate bonds written down $36 million and 10 convertible securities written down $26 million. Third-quarter 2003 write downs primarily were due to five high-yield corporate airline bonds written down by $4 million and one equity security identified for sale written down by $3 million.

Federal Income Taxes
The effective rate for income taxes increased to 20.9 percent in the first nine months of 2003 from 15.2 percent in the comparable prior period primarily due to the $65 million property casualty underwriting profit in 2003 compared with a $25 million underwriting loss in 2002.

Liquidity and Capital Resources
Cash Flow



(In millions)		Nine months ended September 30,
		2003			2002

Net cash provided by operating activities		$	696		$	490
Net cash used in investing activities			(443	)		(348	)
Net cash used in financing activities			(145	)		(64	)

	Net increase (decrease) in cash	$	108		$	78
Cash at beginning of period			112			93

	Cash at end of period	$	220		$	171

Compared with last year, the $206 million increase in net cash flow from operations for the first nine months of 2003 was due to the strong performance of the company’s property casualty insurance operations. The strong operating cash flow permitted the company to invest a net $443 million in invested assets in the first nine months of 2003. More than 78 percent of the new investments were made in fixed-income investments, focusing on high quality with intermediate maturities. Net cash used in financing activities rose due to $49 million in stock repurchases during the first nine months of 2003 compared with $36 million last year as well as a $9 million rise in cash dividends to shareholders offset by a reduction in annuity sales.

Assets
The market value of the company’s invested assets was $11.774 billion at September 30, 2003, compared with $11.257 billion at year-end 2002. Invested assets made up 78.7 percent of the company’s $14.958 billion in assets at September 30, 2003, compared with 79.7 percent of the company’s $14.122 billion in assets at year-end 2002. Information regarding the company’s investment strategy and portfolio composition is available in the 2002 Annual Report on Form 10-K.

Debt
The company has two lines of credit totaling $250 million, with the outstanding balances on the lines totaling $183 million at September 30, 2003, unchanged from year-end 2002.

Dividends
In February 2003, the board of directors authorized a 12.4 percent increase in the regular quarterly cash dividend to an indicated annual payout of $1.00. On May 23 and August 15, the board of directors declared 25-cent per share regular quarterly dividends payable July 15, 2003 and October 15, 2003, to shareholders of record on June 25, 2003 and September 24, 2003, respectively.


Cincinnati Financial Corporation			19
Form 10-Q for the Quarter Ended September 30, 2003

Common Stock Repurchase
The Cincinnati Financial board believes that stock repurchases can help fulfill the company’s commitment to enhancing shareholder value. Consequently, the company’s board has authorized the repurchase of outstanding shares.

At September 30, 2003, 5.4 million shares remained authorized for repurchase at any time in the future. The company repurchased approximately 1.4 million shares of common stock during the first nine months of 2003 at a cost of $49 million. Shares repurchases totaled approximately 15.7 million, at a total cost to the company of $518 million since the inception of share repurchases in 1996.


Cincinnati Financial Corporation			20
Form 10-Q for the Quarter Ended September 30, 2003

Outlook
Management believes the outlook for the company’s results of operations, liquidity and capital resources is positive in 2003 and beyond for a number of reasons:

• Property casualty insurance operations – The company believes that its strategies provide important competitive advantages within the overall insurance marketplace. In the past, those advantages have led to above-average growth rates and produced profitability well ahead of industry measures, despite the industry-wide challenges of rising losses. Based on the strong overall performance of the property casualty insurance operations in the first nine months of 2003, management believes its strategies are proving successful. As a result, management continues to anticipate steady growth overall for 2003 with commercial lines premium growth in the 10 percent to 15 percent range. This would reflect renewal price increases for good- to high-quality accounts in the high single digits and the contribution of new business.

Management is maintaining reasonable growth projections for the personal lines area as the company prepares for the rollout of its new personal lines processing system in the key states of Michigan, Indiana and Ohio in the first half of 2004. The new system will make it easier for agents to place business with the company while increasing policy issuance efficiency. It currently is in use in the company’s Kansas agencies and is undergoing a series of upgrades and modifications for other states.

Management continues to believe that its target for a full-year 2003 GAAP combined ratio of 96.8 percent remains within reach, assuming catastrophe losses contribute less than 1 percentage point to the fourth quarter combined ratio, a level at the low-end of the normal range for fourth-quarter catastrophe losses. Through the first nine months of 2003, catastrophe losses were $90 million, or 4.6 percentage points on the combined ratio.

Following two Ohio Supreme Court decisions, in 2000, the company established a $110 million IBNR reserve, net of reinsurance, for past uninsured motorist/underinsured motorist losses (UM/UIM) incurred but not yet reported. The court rulings affected all auto insurers in the state. The company monitors cases pending before the Supreme Court in Ohio that could alter the outlook for future UM/UIM developments either positively or negatively. In November 2003, the Ohio Supreme Court issued a ruling that could eliminate or greatly reduce the company’s exposure to additional losses related to past UM/UIM claims. It is not known if this ruling will withstand possible motions to reconsider or if plaintiffs will voluntarily dismiss their cases. At this time, management believes it would be premature to estimate any potential future benefit from release of case reserves set aside to pay claims reported but not yet paid and the $17 million IBNR balance.

Based on the trends of the past four quarters, management believes that it can sustain its steady growth into 2004. Further improvement in profitability can be achieved by sustaining or modestly improving commercial lines profitability while benefiting from the anticipated improvement in homeowner profitability due to the actions the company has taken over the past 12 to 18 months. Management has targeted a quarterly loss and loss expenses ratio for its homeowners business in the range of 72 percent to 74 percent by the end of 2005 compared with 110.4 percent in the first nine months of 2003.

• Investment operations – To address current market conditions, the company continues to invest in taxable and tax-exempt fixed-income securities with intermediate maturities in the eight- to 12-year range and to emphasize higher credit quality investments. Management also will continue to emphasize long-term equity investments in companies with increasing sales, earnings and dividends, strong management teams and favorable outlooks. Absent a significant shift in market conditions, management remains confident in its target for full-year investment income growth at the high end of its 3.5 percent to 4.5 percent target range for 2003.

• Liquidity and capital resources – During the nine months ended September 30, 2003 and 2002, the company realized investment losses of $105 million and $58 million, offset by realized investment gains of $61 million and $24 million, respectively. At September 30, 2003, unrealized investment gains in the investment portfolio were $5.783 billion and unrealized investment losses were $47 million. Based on current information, in the fourth quarter the company anticipates other-than-temporary impairments will be under $5 million, absent new developments affecting individual companies or industries in the portfolio.


Cincinnati Financial Corporation			21
Form 10-Q for the Quarter Ended September 30, 2003

Other Matters

Significant Accounting Policies
The company does not utilize any special-purpose financing vehicles or have any undisclosed off-balance sheet arrangements. Similarly, the company holds no fair-value contracts for which a lack of marketplace quotations would necessitate the use of fair-value techniques.

During the nine months ended September 30, 2003, the company did not change any significant accounting policies from those utilized in the preparation of the consolidated financial statements as of and for the year ended December 31, 2002, which are discussed in Note 1 to the Consolidated Financial Statements in the company’s 2002 Annual Report on Form 10-K and updated in Note 1 to the Condensed Consolidated Financial Statements beginning on Page 7.

In conjunction with those discussions, in the Management’s Discussion and Analysis contained in the 2002 Annual Report on Form 10-K, management reviews the estimates and assumptions used to develop reported amounts related to the most significant policies. Management discusses the development and selection of those accounting estimates with the audit committee of the board of directors.

New Accounting Standards
See Notes to Condensed Consolidated Financial Statements for a discussion of new accounting standards.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the potential for a decrease in value resulting from broad yet uncontrollable forces such as inflation, economic growth, interest rates, world political conditions or other widespread unpredictable events. It is comprised of many individual risks that, when combined, create a macroeconomic impact. The company’s view of potential risks and its sensitivity to such risks is discussed in the 2002 Annual Report on Form 10-K.

Fixed-Income Securities
The company is using financial planning models developed during 2002 to further incorporate analytical tools in assessing market risks. Management believes the models are improving the company’s ability to measure the impact on bond values resulting from changes in interest rates. Improved measurement of the impact of interest-rate changes should allow for improved matching of the company’s assets and liabilities.

Hypothetically, an increase in interest rates (market yields to maturity) of 100 basis points at September 30, 2003, would decrease the fair value of the fixed-income portfolio by $187 million to $3.575 billion from $3.762 billion. The interest-rate change selected represents management’s views of a shift in rates that is quite possible over a one-year period. The rates selected should not be considered a prediction of future events, as interest rates may be much more volatile in the future. The analysis is not intended to provide a precise forecast of the effect of rate changes on the company’s results or financial condition, nor does it take into account any actions that might be taken to reduce exposure to such risks.

Equity and Convertible Securities
In the first nine months of 2003, the company’s equity portfolio underperformed the Standard & Poor’s 500 Index, a common benchmark of market performance, generating a total return of 1.5 percent versus 14.7 percent for the Index. The primary reasons for difference were the 5.1 percent decline in the market value of Fifth Third Bancorp (Nasdaq: FITB), the company’s largest equity holding, and a decline in the market value of the company’s healthcare-related holdings, which make up 8.3 percent of the equity portfolio market value.

Fifth Third’s value in early 2003 was affected by uncertainty surrounding a regulatory review announced in late 2002. Some of the uncertainty was removed when Fifth Third entered into an agreement with the Federal Reserve Bank and the Ohio Department of Commerce in late March 2003. In the agreement, Fifth Third outlined the series of steps its management has been taking to strengthen identified areas. At that time, Fifth Third noted that management is extremely serious about risk management and internal controls and that the company is taking the necessary steps to strengthen procedures to fully cooperate with the regulatory agencies. Fifth Third said that these efforts, many of which have already


Cincinnati Financial Corporation			22
Form 10-Q for the Quarter Ended September 30, 2003

begun, will result in Fifth Third emerging from this process as an even stronger company. Fifth Third continues to report results that meet Cincinnati Financial’s investing criteria of increasing sales, earnings and dividends. In addition, Cincinnati Financial management believes Fifth Third has proven management and a favorable outlook.

At September 30, 2003, the company held 48 individual equity investments, 14 of which each approach at least $100 million in market value. This group accounted for approximately 94 percent of the after-tax net unrealized appreciation of the investment portfolio. The company held 72.8 million shares of Fifth Third at a cost of $283 million at September 30, 2003. The market value of that position was $4.042 billion, or 53.5 percent of Cincinnati Financial’s total equity portfolio, with the after-tax unrealized gain represented by the position at $2.443 billion, or 65.6 percent of the company’s total after-tax unrealized gains. The Fifth Third holding represented $15.23 of the company’s total book value of $35.94 per share at September 30, 2003. Every $1.00 change in the market price of Fifth Third’s common stock has approximately a 29-cent impact on Cincinnati Financial’s book value per share. A 20 percent change in the market price of Fifth Third’s common stock, which was $55.54 at September 30, 2003, would result in a $809 million change in assets and a $526 million change in after-tax unrealized gains. This would affect shareholders’ equity by 9.1 percent and book value by $3.22 per share.

Management believes the company’s investment style – focused on companies that pay and increase dividends to shareholders – offers some protection in down markets. While past performance cannot guarantee future returns, in 2002, the company’s equity portfolio lost 7.3 percent versus a decline of 22.1 percent for the Standard & Poor’s 500 Index.

Potential Impairments
The following table summarizes the portfolio at September 30, 2003, and December 31, 2002:



(Dollars in millions)		Number						Gross unrealized			Year-to-date
		of issues		Book value		Market value		gain/loss			investment income

At September 30, 2003
Portfolio summary:
	Trading below 70% of book value		3	$	7	$	5	$	(2	)	$	0
	Trading at 70% to less than 100% of book value		155		768		721		(47	)		28
	Trading at 100% and above of book value		1,249		5,191		10,977		5,785			300
	Securities sold in current year		—		—		—		—			19

Total			1,407	$	5,966	$	11,703	$	5,736		$	347

At December 31, 2002
Portfolio summary:
	Trading below 70% of book value		59	$	231	$	139	$	(92	)	$	15
	Trading at 70% to less than 100% of book value		183		852		772		(80	)		57
	Trading at 100% and above of book value		1,118		4,512		10,278		5,766			352
	Securities sold in current year		—		—		—		—			18

Total			1,360	$	5,595	$	11,189	$	5,594		$	442

The reduction in the number of securities trading below 100 percent of book value reflects the recent emphasis on increasing the credit quality of the bond portfolio, as rated by Standard & Poor’s and Moody’s, as well as impairment charges made over the past nine months. During the first nine months of 2003, 47 securities were written down as other-than-temporarily impaired.

Management monitors securities trading below 70 percent of book value for potential other-than-temporary impairment. At September 30, 2003, three securities were trading below 70 percent of book value compared with 59 at December 31, 2002.

Management deems the risk related to securities trading at 70 percent to less than 100 percent of book value to be relatively minor and at least partially offset by the earned income potential of these investments. Other-than-temporary impairment of all securities trading in this range would have resulted in $47 million in additional realized investment losses, before taxes, at September 30, 2003. At year-end 2002, the securities trading in this range represented the potential


Cincinnati Financial Corporation			23
Form 10-Q for the Quarter Ended September 30, 2003

for $80 million in additional realized investment losses, before tax. In the first nine months of 2003, securities trading at 70 percent to less than 100 percent of book value, which represented 6.1 percent of invested assets, generated $28 million, or 8.1 percent, of gross investment income.


Cincinnati Financial Corporation			24
Form 10-Q for the Quarter Ended September 30, 2003

The following table details the portfolio’s gross unrealized gains and losses as of September 30, 2003:



(Dollars in millions)		6 Months					> 6 -					> 12 -					> 24 -
		or less					12 Months					24 Months					36 Months					Totals
				Gross					Gross					Gross					Gross					Gross
		Number		unrealized			Number		unrealized			Number		unrealized			Number		unrealized			Number		unrealized
		of issues		gain/loss			of issues		gain/loss			of issues		gain/loss			of issues		gain/loss			of issues		gain/loss

Investment-grade corporate bonds:
	Trading below 70% of book value		0	$	0			0	$	0			0	$	0			0	$	0			0	$	0
	Trading at 70% to less than 100% of book value		28		(2	)		0		0			1		0			0		0			29		(2	)
	Trading at 100% and above of book value		56		6			90		26			125		56			151		68			422		156

Total			84	$	4			90	$	26			126	$	56			151	$	68			451	$	154

High-yield corporate bonds:
	Trading below 70% of book value		3	$	(2	)		0	$	0			0	$	0			0	$	0			3	$	(2	)
	Trading at 70% to less than 100% of book value		34		(8	)		12		(3	)		15		(7	)		9		(2	)		70		(20	)
	Trading at 100% and above of book value		43		4			46		16			38		7			20		4			147		31

Total			80	$	(6	)		58	$	13			53	$	0			29	$	2			220	$	9

Tax-exempt municipal bonds:
	Trading below 70% of book value		0	$	0			0	$	0			0	$	0			0	$	0			0	$	0
	Trading at 70% to less than 100% of book value		20		(4	)		0		0			2		1			4		(1	)		26		(4	)
	Trading at 100% and above of book value		49		3			65		7			87		9			370		59			571		78

Total			69	$	(1	)		65	$	7			89	$	10			374	$	58			597	$	74

Convertible securities:
	Trading below 70% of book value		0	$	0			0	$	0			0	$	0			0	$	0			0	$	0
	Trading at 70% to less than 100% of book value		10		(2	)		3		(1	)		5		(1	)		4		(2	)		22		(6	)
	Trading at 100% and above of book value		22		8			21		15			15		14			11		13			69		50

Total			32	$	6			24	$	14			20	$	13			15	$	11			91	$	44

Equity securities:
	Trading below 70% of book value		0	$	0			0	$	0			0	$	0			0	$	0			0	$	0
	Trading at 70% to less than 100% of book value		4		(8	)		2		(2	)		2		(2	)		0		0			8		(12	)
	Trading at 100% and above of book value		11		10			3		11			2		1			24		5,445			40		5,467

Total			15	$	2			5	$	9			4	$	(1	)		24	$	5,445			48	$	5,455

Summary:
	Trading below 70% of book value		3	$	(2	)		0	$	0			0	$	0			0	$	0			3	$	(2	)
	Trading at 70% to less than 100% of book value		96		(24	)		17		(6	)		25		(9	)		17		(5	)		155		(44	)
	Trading at 100% and above of book value		181		31			225		75			267		87			576		5,589			1,249		5,782

Total			280	$	5			242	$	69			292	$	78			593	$	5,584			1,407	$	5,736

At September 30, 2003, three of the company’s 220 high-yield corporate bonds were trading below 70 percent of book value and had a market value of $5 million, or less than 0.1 percent of total invested assets, and a book value of $7 million. The three issues have traded below 70 percent of book value for six months or less. At September 30, 2003, no securities in the company’s portfolio had traded below 70 percent of book value for more than six months.

For the 155 securities trading at 70 percent to less than 100 percent of book value, only 42 securities representing $14 million in unrealized losses had been trading in that range for more than 12 months, 17 securities representing $6 million in unrealized losses had been trading in that range for more than six to 12 months and 96 securities representing $24 million in unrealized losses had been trading in that range for six months or less.

Of the total 158 holdings trading below book value at September 30, 2003, eight were common stocks and 22 were convertible securities representing total unrealized losses of $19 million. Financial services-related securities accounted for $6 million, or 34.3 percent, of the unrealized losses. At September 30, 2003, financial services-related securities in the equity portfolio had a market value of $5.278 billion. The other $13 million in unrealized losses primarily were diversified among industrial, healthcare, energy, consumer staple, consumer discretionary and telecommunication securities.

Reflecting the company’s long-term investment philosophy, of the 1,249 securities trading at or above book value, 576, or 46.1 percent, have shown unrealized gains for more than 24 months.


Cincinnati Financial Corporation			25
Form 10-Q for the Quarter Ended September 30, 2003

Potential Impairment Outlook
In management’s judgment, the three securities trading below 70 percent of book value at September 30, 2003, that were not written down, do have the potential to recover based on analysis of economic-, industry- or company-specific factors. When applied to the evaluation of holdings trading at 70 percent to less than 100 percent of book value, the company’s investment philosophy considers the corporation’s strong capitalization, which allows it to retain equity securities that have the potential to recover value and to hold bonds until their scheduled redemption. Details of the company’s asset impairment policy are available in the 2002 Annual Report on Form 10-K.

Based on current information, in the fourth quarter the company anticipates other-than-temporary impairments will be under $5 million, absent new developments affecting individual companies or industries in the portfolio.

Item 4. Controls and Procedures

The company carried out an evaluation, under the supervision and with the participation of management, including the chief executive officer and chief financial officer, of the effectiveness of the design and operation of disclosure controls and procedures. Based on that evaluation of these disclosure controls and procedures, the chief executive officer and chief financial officer concluded that Cincinnati Financial Corporation’s disclosure controls and procedures were effective as of the end of the third quarter.

The chief executive officer and chief financial officer also have concluded that there were no significant changes in the third quarter of 2003 to the company’s internal controls or in other factors that have materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

Part II – Other Information

Item 1. Legal Proceedings

The Cincinnati Insurance Company is a defendant in Rochlin et al v. The Cincinnati Insurance Company, a purported class action lawsuit filed in December 2000 in the U.S. District Court for Southern Indiana on behalf of certain female employees in three departments of the company alleging employment-related gender discrimination in promotions and pay. The complaint seeks unspecified monetary damages and injunctive relief. In July 2003 the court decertified the Title VII class, but left in place conditional certification of the collective action filed under the Equal Pay Act. The company denies the allegations of the suit and is vigorously defending this action.

The company is involved in no other material litigation other than routine litigation incident to the nature of its insurance business.

Item 2. Changes in Securities

There have been no material changes in securities during the third quarter.

Item 3. Defaults upon Senior Securities

The company has not defaulted on any interest or principal payment, and no arrearage in the payment of dividends has occurred.

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

No matters were submitted to a vote of security holders in the third quarter ended September 30, 2003.


Cincinnati Financial Corporation			26
Form 10-Q for the Quarter Ended September 30, 2003

Item 5. Other Information

The company’s chief executive officer and chief financial officer have furnished to the SEC the certification with respect to this Form 10-Q that is required by Section 906 of the Sarbanes-Oxley Act of 2002.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:
Exhibit 11—Statement Recomputation of Per Share Earnings.
Item 31—302 Certifications
Item 32—906 Certification

(b) The company furnished the following Reports on Form 8-K during the quarter ended September 30, 2003:
July 14, 2003—Item 9. Regulation FD Disclosure (Disclosure of Results of Operations and Financial Condition). On July 14, 2003, Cincinnati Financial Corporation announced preliminary results for its second quarter ended June 30, 2003. The news release was furnished as an exhibit.
July 29, 2003—Item 9. Regulation FD Disclosure (Disclosure of Results of Operations and Financial Condition). On July 29, 2003, Cincinnati Financial Corporation announced its financial results for its second quarter ended June 30, 2003. The news release was furnished as an exhibit.
September 25, 2003—Item 9. Regulation FD Disclosure. On September 25, 2003, Cincinnati Financial Corporation commented on its long-term outlook, recent storm activity and preliminary results for its third quarter ended September 30, 2003. The news release was furnished as an exhibit.
September 29, 2003—Item 9. Regulation FD Disclosure. On September 25, 2003, Cincinnati Financial Corporation held an investor headquarters visit. Presentations used at the visit are furnished as exhibits to the filing.


Cincinnati Financial Corporation			27
Form 10-Q for the Quarter Ended September 30, 2003

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The company furnished a news release announcing the third-quarter 2003 financial results on Form 8-K on October 28, 2003.

CINCINNATI FINANCIAL CORPORATION

Date: November 13, 2003

/S/ Kenneth W. Stecher

Kenneth W. Stecher

Chief Financial Officer and Senior Vice President, Secretary, Treasurer

(Principal Accounting Officer)


Cincinnati Financial Corporation			28
Form 10-Q for the Quarter Ended September 30, 2003

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	•		12.1 percent increase in property casualty earned premiums – Premiums rose on continued strong renewal pricing while new business written by agents increased 1.0 percent to $243 million compared with the record $240 million in the first nine months of 2002. The company continued to take a selective, case-by-case approach to competing for new property casualty business, maintaining an appropriate balance between growth and profitability. Premium growth also has reflected the focus on improving customer service through the creation of smaller marketing territories, permitting local field marketing representatives to devote more time to each independent agency. During the first nine months of 2003, the company split and staffed three additional territories, bringing the total number of property casualty field territories to 86. The company anticipates subdividing one additional territory in 2003 and four to five additional territories in 2004.

	•		4.8 percent rise in investment income – The company has achieved stable investment income growth with low prevailing interest rates limiting investing opportunities. Strong cash flow and an emphasis on equity holdings with a steady flow of increasing dividend payments have added stability to investment income.

	•		$44 million in net realized investment losses (pretax) – Offsetting the 2003 rise in earned premiums and investment income was a $10 million increase in net realized investment losses over the first nine months of 2002, due to higher other-than-temporary impairment charges in 2003. In the third-quarter, the company recorded realized investment gains of $15 million as the bond and equity markets sustained their overall recovery. As a result, the company recorded realized gains on security sales and a positive shift in the valuation of embedded derivatives that offset a modest level of other-than-temporary impairments.

	•		1.2 percentage point benefit from the recovery

	•		4.6 percentage points due to catastrophe losses versus 3.8 percentage points in the first nine months of 2002

	•		1.1 percentage point increase in commission expense as total contingent (profit-based) commissions for 2003 now are expected to be approximately two times the level of 2002 because of strong recent results. The company relies on its independent agencies as frontline underwriters who know the businesses and individuals in their communities; many agencies are expected to benefit from the hard work they have put into this effort over the past several years.

	•		Commercial multi-peril – Earned premiums grew 12.3 percent for the nine months. This growth reflected continued, though moderating, premium increases on renewed policies, selective non-renewing of underperforming business and a solid contribution from new business. The improvement in the nine-month loss and loss expenses ratio for commercial multi-peril was due to a 2.1 percentage-point decline in the catastrophe loss ratio. In addition, higher casualty base rates have taken effect in most states during the first nine months of 2003. These are expected to contribute to improvement in the full-year loss and loss expenses ratio.

	•		Workers compensation – Earned premiums grew 1.2 percent for the nine-month period in part due to the company’s decision not to renew some larger workers compensation policies this year. Average policy premium increases have been in the 12 percent to 15 percent range for new and renewal business, with total new business relatively unchanged from a year earlier. Improving profitability trends have led to inclusion of workers compensation with a larger percentage of commercial packages. The higher rates on new and renewal business and other underwriting actions helped maintain the nine-month loss and loss expenses ratio at 79.0 percent versus 79.1 percent a year ago.

	•		Commercial auto – Earned premiums grew 11.5 percent for the nine months, primarily due to price increases and inclusion of commercial auto coverages in business packages. The loss and loss expenses ratio for commercial auto reflected a continuation of the positive trends of the past two years, improving 4.9 percentage points due to pricing changes and underwriting actions. For 2003, approval for auto rate changes in the 10 percent to 14 percent range

			have been requested from various state insurance departments, which should help the company keep the loss and loss expenses ratio in its current range.

	•		Other liability (commercial umbrella, commercial general liability and directors and officers) – Earned premiums grew 26.1 percent for the nine-month period, in line with growth in 2002, as a higher number of policies are being written in non-discounted programs. The nine-month loss and loss expenses ratio improved to 57.7 percent from 72.9 percent a year ago, mostly due to pricing increases taken in 2002 as well as unusually good loss experience in the commercial umbrella line. The company monitors commercial umbrella results and anticipates quarter-to-quarter fluctuations due to high volatility in this line.

	•		Personal auto – Earned premiums for the personal auto line grew 10.0 percent for the first nine months of 2003. Personal auto new business premiums were $8 million compared with last year’s $9 million. The earned premium growth in 2003 reflects rate increases, generally in the mid single digits, that have taken effect in the past 12 months in 23 of the states in which the company writes personal auto coverage. Additional rate increases are scheduled for 15 states in the next six months. The loss and loss expenses ratio improved 4.1 percentage points in the first nine months of 2003 with the impact of catastrophe losses rising by 0.5 percent. The improvement resulted from the re-underwriting program that was initiated in this line several years ago, combined with the benefit of rate increases in the 5 percent to 8 percent range this year. Further rate increases should lead to additional improvement in the loss and loss expenses ratio as the company renews one-year personal auto coverages.

	•		Homeowner – Earned premiums for homeowners grew 14.6 percent in the first nine months of 2003 mostly due to rate increases on renewal business. New business premiums were $5 million compared with last year’s $7 million. In the past 12 months, rate increases have taken effect in 19 of the states in which the company writes homeowner coverage. Due to the cumulative impact of rate increases, average renewal rate increases for three-year homeowner policies are in the range of 25 percent, with additional double-digit rate increases approved in the company’s larger states, including Illinois, Indiana, Ohio and Pennsylvania, that will become effective over the next six months.

			In addition to raising rates, the company has taken other actions to reduce homeowner losses and improve profitability. The company has modified policy terms and conditions that take effect as policies renew or new business is written. It also is working very closely with agencies on a re-underwriting program similar to a successful program used to improve results for the personal auto line over the past several years. Because the company’s current homeowner book is made up primarily of three-year policies, only one-third of renewed policies have been affected by recent actions. Nonetheless, underlying profitability for the homeowner line improved in the first nine months of 2003. The 7.4 percentage-point increase in the loss and loss expenses ratio for the first nine months of 2003 was due entirely to the rise in catastrophe losses, which contributed 31.6 percentage points to the ratio in 2003 compared with 18.7 in 2002. The company anticipates improvement in the loss and loss expenses ratio in 2004 as its actions affect a higher percentage of the company’s homeowner book. That effort may be accelerated by plans to transition the homeowner book to one-year policies as new personal lines technology is rolled out to additional states in 2004.

	•		Property casualty insurance operations – The company believes that its strategies provide important competitive advantages within the overall insurance marketplace. In the past, those advantages have led to above-average growth rates and produced profitability well ahead of industry measures, despite the industry-wide challenges of rising losses. Based on the strong overall performance of the property casualty insurance operations in the first nine months of 2003, management believes its strategies are proving successful. As a result, management continues to anticipate steady growth overall for 2003 with commercial lines premium growth in the 10 percent to 15 percent range. This would reflect renewal price increases for good- to high-quality accounts in the high single digits and the contribution of new business.

			Management is maintaining reasonable growth projections for the personal lines area as the company prepares for the rollout of its new personal lines processing system in the key states of Michigan, Indiana and Ohio in the first half of 2004. The new system will make it easier for agents to place business with the company while increasing policy issuance efficiency. It currently is in use in the company’s Kansas agencies and is undergoing a series of upgrades and modifications for other states.

			Management continues to believe that its target for a full-year 2003 GAAP combined ratio of 96.8 percent remains within reach, assuming catastrophe losses contribute less than 1 percentage point to the fourth quarter combined ratio, a level at the low-end of the normal range for fourth-quarter catastrophe losses. Through the first nine months of 2003, catastrophe losses were $90 million, or 4.6 percentage points on the combined ratio.

			Following two Ohio Supreme Court decisions, in 2000, the company established a $110 million IBNR reserve, net of reinsurance, for past uninsured motorist/underinsured motorist losses (UM/UIM) incurred but not yet reported. The court rulings affected all auto insurers in the state. The company monitors cases pending before the Supreme Court in Ohio that could alter the outlook for future UM/UIM developments either positively or negatively. In November 2003, the Ohio Supreme Court issued a ruling that could eliminate or greatly reduce the company’s exposure to additional losses related to past UM/UIM claims. It is not known if this ruling will withstand possible motions to reconsider or if plaintiffs will voluntarily dismiss their cases. At this time, management believes it would be premature to estimate any potential future benefit from release of case reserves set aside to pay claims reported but not yet paid and the $17 million IBNR balance.

			Based on the trends of the past four quarters, management believes that it can sustain its steady growth into 2004. Further improvement in profitability can be achieved by sustaining or modestly improving commercial lines profitability while benefiting from the anticipated improvement in homeowner profitability due to the actions the company has taken over the past 12 to 18 months. Management has targeted a quarterly loss and loss expenses ratio for its homeowners business in the range of 72 percent to 74 percent by the end of 2005 compared with 110.4 percent in the first nine months of 2003.

	•		Investment operations – To address current market conditions, the company continues to invest in taxable and tax-exempt fixed-income securities with intermediate maturities in the eight- to 12-year range and to emphasize higher credit quality investments. Management also will continue to emphasize long-term equity investments in companies with increasing sales, earnings and dividends, strong management teams and favorable outlooks. Absent a significant shift in market conditions, management remains confident in its target for full-year investment income growth at the high end of its 3.5 percent to 4.5 percent target range for 2003.

	•		Liquidity and capital resources – During the nine months ended September 30, 2003 and 2002, the company realized investment losses of $105 million and $58 million, offset by realized investment gains of $61 million and $24 million, respectively. At September 30, 2003, unrealized investment gains in the investment portfolio were $5.783 billion and unrealized investment losses were $47 million. Based on current information, in the fourth quarter the company anticipates other-than-temporary impairments will be under $5 million, absent new developments affecting individual companies or industries in the portfolio.