UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark one)

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

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

Commission file number 0-4604

CINCINNATI FINANCIAL CORPORATION

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 ¨ No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

þ Yes ¨ No

As of April 29, 2005, there were 175,433,843 shares of common stock outstanding.

CINCINNATI FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2005

TABLE OF CONTENTS

Part I – Financial Information

Item 1. Financial Statements

Cincinnati Financial Corporation and Subsidiaries

Cincinnati Financial Corporation and Subsidiaries

Cincinnati Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

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 management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The December 31, 2004, 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 March 31, 2005, condensed consolidated financial statements of the company 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 interim periods are not necessarily an indication of results to be expected for the remainder of the year. Per share amounts have been adjusted for the 5 percent stock dividends paid April 26, 2005, and June 15, 2004.

Investments

Fixed maturities (bonds, redeemable preferred stocks and notes) 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, 2005, and December 31, 2004.

At March 31, 2005, unrealized investment gains before taxes totaled $5,385 billion and unrealized investment losses in the investment portfolio amounted to $68 million. The unrealized gains were primarily due to the company’s holdings in Fifth Third Bancorp (Nasdaq: FITB) and Alltel Corporation (NYSE:AT) common stock. 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. The change in fixed maturities unrealized gains and losses for the first quarter ended March 31, 2005, was due primarily to interest-rate driven fair value fluctuations in the fixed maturity portfolio. The change in equity securities unrealized gains and losses for the first quarter ended March 31, 2005, was due primarily to the decline in Fifth Third’s market value.

Realized gains and losses on investments are recognized in net income on a specific identification basis. See Investment Portfolio, Page 27, 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. In the three-month period ended March 31, 2005, the company recorded no other-than-temporary impairment charges, compared with $3 million in other-than-temporary impairment charges in the comparable prior-year period (see Investments Results of Operations, Page 24, for discussion of the impairment charges).

Reinsurance

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

Stock Options

The company has qualified and non-qualified stock option plans under which options are granted to associates at prices which 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.

The company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below 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.”

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 three months ended March 31, 2005 and 2004, respectively: dividend yield of 2.70 and 2.54 percent; expected volatility of 25.61 percent and 25.91 percent; risk-free interest rates of 4.62 percent and 4.30 percent; and expected lives of 10 years for all periods. Compensation expense in the pro forma disclosures is not indicative of future amounts as additional grants generally are made each year and options granted under the company’s options plans vest over three years.

Pension Plan

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

Reclassifications

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

Recent Accounting Pronouncements

Statement of Financial Accounting Standards No. 123(R)

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123(R), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25. Among other items, SFAS No. 123(R) eliminates the use of APB Opinion No. 25 and the intrinsic value method of accounting and requires companies to recognize the cost of associate services received in exchange for awards of equity instruments, based on the grant date fair value of those awards, in the financial statements. The effective date of SFAS No. 123(R) was the first reporting period beginning after June 15, 2005, which is the third quarter of 2005 for calendar year companies, although early adoption is allowed. On April 21, 2005, the Securities and Exchange Commission amended the effective date, stating that companies can choose implementation in either the reporting period beginning after June 15, 2005, or December 15, 2005. SFAS No. 123(R) permits companies to adopt its requirements using either a modified prospective or a modified retrospective method. The company currently utilizes a standard option-pricing model (binomial option-pricing model) to measure the fair value of stock options granted to associates. While SFAS No. 123(R) permits companies to continue to use such a model, the standard also permits the use of a lattice model. The company has not yet determined which model it will use to measure the fair value of associate stock options upon the adoption of SFAS No. 123(R).

Management continues to evaluate the choice of dates for adoption of SFAS 123(R) and the adoption method to be used. Subject to a complete review of the requirements of SFAS No. 123(R), based on stock options granted to associates through March 2005, the company estimates that the adoption of SFAS No. 123(R) would reduce 2005 net income per share by approximately 8 cents per share.

Emerging Issues Task Force in Issue 03-1

In March 2004, the Financial Accounting Standards Board ratified the consensus reached by the Emerging Issues Task Force in Issue 03-1, “The Meaning of Other-Than-Temporary Impairments and Its Applications to Certain Investments” (EITF 03-1). The EITF reached a consensus on an other-than-temporary impairment model for debt and equity securities accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and cost method investments. The basic model developed to evaluate whether an investment within the scope of Issue 03-1 is other-than-temporarily impaired involves a three-step process including: 1) determining whether an investment is impaired (fair value less amortized cost); 2) evaluating whether the impairment is other-than-temporary and 3) requiring recognition of an impairment equal to the difference between the investment’s cost and fair value. In September 2004, the FASB issued Staff Position (FSP) No. EITF Issue 03-1-1, “Effective Date of Paragraphs 10-20 of EITF Issue No. 03-01.” This FSP delays the effective date of the measurement and recognition guidance contained in paragraphs 10-20 of EITF 03-1 and, as of the date of this filing, the FASB had not yet issued guidance on the adoption or effective date of FSP No. EITF Issue 03-1-1. The amount of any other-than-temporary impairment that may need to be recognized in the future will depend on market conditions and management’s intent and ability to hold any such impaired securities.

Subsequent Events

On April 22, 2005, the company completed its exchange of outstanding 6.125% senior notes due 2034 for up to $375 million aggregate principal amount of newly issued 6.125% series B senior notes due 2034, which are

substantially identical to the old 6.125% senior notes except that they have been registered under the Securities Act of 1933, as amended. As of the expiration of the exchange offer, $364.5 million aggregate principal amount of the outstanding notes had been tendered and accepted for exchange. That transaction had no effect on the company’s financial statements.

On May 9, 2005, we completed our offer to exchange outstanding 6.90% senior debentures due 2028 for up to $420 million aggregate principal amount of newly issued 6.92% senior debentures due 2028. Alternatively, we had offered to repurchase up to $420 million aggregate principal amount of our outstanding 6.90% senior debentures due 2028. In the transaction, holders of $392.3 million aggregate principal amount of the 6.90% senior debentures opted to exchange their bonds for newly issued 6.92% senior debentures. The issuance of $392.3 million aggregate principal amount of 6.92% senior debentures will increase interest expense by approximately $78,000 annually.

In addition, holders of $68,000 aggregate principal amount of the 6.90% senior debentures opted for repurchase. Pursuant to the rescission offer, holders received $1,032 per $1,000 principal amount of bonds tendered for repurchase (representing the original price paid for the bond plus accrued interest from the last interest payment date), or a total of $70,202 for all of the bonds tendered for repurchase.

As a result, management believes the company’s balance sheets as of June 30, 2005, will reflect three senior debt issues. The total of the aggregate principal amounts of the three debt issues would be unchanged from the total at March 31, 2005:

•	$392 million aggregate principal amount of 6.92% senior debentures due 2028
•	$28 million aggregate principal amount of 6.90% senior debentures due 2028
•	$375 million aggregate principal amount of 6.125% senior notes due 2034

None of the notes are encumbered by rating triggers.

NOTE 2 — SEGMENT INFORMATION

The company operates primarily in two industries, property casualty insurance and life insurance. Company management regularly reviews four reportable segments to make decisions about allocating resources and to assess performance:

•	commercial lines property casualty insurance
•	personal lines property casualty insurance
•	life insurance
•	investment operations

Operations of the parent company, CFC Investment Company and CinFin Capital Management Company (excluding investment activities) and other income of the insurance subsidiaries are reported as Other.

Revenues are primarily from unaffiliated customers.

•	Revenue for all three insurance segments consists of insurance premiums earned. Life insurance segment revenue also includes fees from separate account investment management fees
•	Investment operations segment revenue consists of pretax net investment income plus realized investment gains and losses
•	Other revenue is primarily finance/lease income

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

•	Income before income taxes for the insurance segments is defined as underwriting income (loss)

	o	Commercial lines and personal lines insurance segments — underwriting income (loss) is premiums earned minus loss and loss expenses incurred or policyholder benefits and underwriting expenses
	o	Life insurance segment — underwriting income (loss) is premiums earned and separate account investment management fees, less contract holder benefits incurred 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, less 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 the company’s headquarters

Identifiable assets by segment are those assets used in the respective segment’s operations. Identifiable assets are not separately reported for two reportable segments – commercial lines and personal lines of property casualty

insurance – because company management does not use this measure to analyze those segments. All fixed maturity and equity security investment assets, regardless of ownership, are included in the investment operations segment.

Segment information is summarized in the following table:

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 2004 Annual Report on Form 10-K. Unless otherwise noted, estimated industry data are referenced from materials presented on a statutory basis by A.M. Best Co., a leading insurance industry statistical, analytical and financial strength rating organization. Statutory data for the company is labeled as such; all other company data is presented on a GAAP basis.

Dollar amounts are rounded to millions; calculations of percent changes are based on whole dollar amounts. Per share amounts have been adjusted for the 5 percent stock dividends paid April 26, 2005, and June 15, 2004.

SAFE HARBOR STATEMENT

This is a “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995. Certain forward-looking statements contained herein involve potential risks and uncertainties. We believe 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, environmental events, terrorism incidents or other causes
	•	Ability to obtain adequate reinsurance on acceptable terms, amount of reinsurance purchased and financial strength of reinsurers
	•	Increased frequency and/or severity of claims
	•	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

	•	Insurance regulatory actions, legislation or court decisions or legal actions that increase expenses or place us at a disadvantage in the marketplace
	•	Delays in the development, implementation, performance and benefits of technology projects and enhancements
	•	Inaccurate estimates or assumptions used for critical accounting estimates, including loss reserves
	•	Events that reduce the company’s ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002 in the future
	•	Recession or other economic conditions or regulatory, accounting or tax changes 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 the market value of Fifth Third Bancorp shares, a significant equity holding
	•	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
	•	Adverse outcomes from litigation or administrative proceedings
	•	Effect on the insurance industry as a whole, and thus on the company’s business, of the actions undertaken by the Attorney General of the State of New York and other regulators against participants in the insurance industry, as well as any increased regulatory oversight that might result from the suit
	•	Limited flexibility in conducting investment activities if the restrictions imposed by the Investment Company Act of 1940 were to become applicable to the parent company or the application for exemptive relief is not approved

Further, the company’s insurance businesses are subject to the effects of changing social, economic and regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand overall regulation. The company also is subject to public and regulatory initiatives that can affect the market value for its common stock,

such as recent measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.

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

Results of Operations

Overview — Cincinnati Financial Corporation Consolidated First-quarter Highlights

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

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

Highlights of the consolidated results include:

Revenues – Total revenues advanced $46 million, or 5.3 percent, to $916 million, primarily reflecting 5.0 percent growth of consolidated earned premium. Revenues from pretax investment income rose 5.6 percent to $127 million.

Net income – Net income was $144 million, or 81 cents per share, for the first quarter of 2005 compared with $146 million, or 82 cents, in the comparable 2004 quarter. Net income in the first quarter of 2004 included a benefit of $32 million pretax ($21 million, or 11 cents per share, after tax) from the release of reserves for uninsured/underinsured motorist (UM/UIM) losses following a 2003 Ohio Supreme Court decision.

Book value – Book value was $34.21 at March 31, 2005, compared with $35.60 at year-end 2004, as higher retained earnings were more than offset by lower unrealized investment gains.

Comprehensive income – Comprehensive income, which includes the change in unrealized gains and losses on investments, was a negative $190 million in the first quarter of 2005 compared with a positive $47 million in the first quarter of 2004. Annualized return on equity was unchanged over last year’s first quarter. Annualized return on equity based on comprehensive income was a negative 12.3 percent due to the decline in accumulated unrealized gains compared with a positive 3.0 percent in the comparable prior period.

Other considerations – When evaluating ongoing business operations, we take the following into consideration:

	•	Realized investment gains and losses – A significant factor in the growth rate of net income in any year can be realized investment gains and losses. We believe it is important to carefully consider the impact of these gains and losses on net income when evaluating the company’s primary business areas: property casualty insurance and life insurance. We believe the level of realized investment gains and losses for any particular period, while it may be material, may obscure the performance of ongoing underlying business operations in that period. While realized investment gains and losses are integral to the company’s insurance operations over the long term, the determination to recognize gains or losses in any period may be subject to our discretion and is independent of the insurance underwriting process. Moreover, under applicable accounting requirements, gains and losses may be recognized from certain changes in fair values of securities without actual realization.
		In the first quarter of 2005, the after-tax impact of realized investment gains and losses was to raise net income by $6 million, or 3 cents per share, compared with $4 million, or 3 cents, in last year’s first quarter.

Cincinnati Financial Corporation 10-Q for the Quarter Ended March 31, 2005		13

	•	Uninsured motorist/underinsured motorist (UM/UIM) reserve release– Following the Ohio Supreme Court’s late 2003 decision to limit its 1999 Scott-Pontzer v. Liberty Mutual decision, we released $38 million pretax of previously established UM/UIM reserves, adding $25 million, or 15 cents per share, to net income in 2003.
		In 2004, we reviewed outstanding UM/UIM claims for which litigation was pending. Those claims represented approximately $37 million in previously established case reserves. During the first quarter of 2004, the company filed motions for dismissal in various jurisdictions for specific claims and we released an additional $32 million in related case reserves. The reserve releases in the first quarter of 2004 added $21 million, or 12 cents per share, to net income. Following the release of those reserves, we stopped separately reporting on UM/UIM-related reserve actions.
	•	Option expense – The company estimates that the adoption of SFAS No. 123(R); would reduce 2005 net income per share by approximately 8 cents per share, as disclosed in Note 1 to the Consolidated Financial Statements, Page 9.
	•	Effects of inflation – 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 and claim costs.

Outlook

Over the long term, our objective is to achieve steady growth while performing as an industry profitability leader. Based on our outlook for the insurance and investment markets and our progress in implementing operating strategies, we had established certain performance targets for 2005. In light of the performance of our personal lines segment in the first quarter of 2005 and heightened competition in the commercial lines market, we have moderated our expectations for 2005 performance:

	•	Property casualty written premium growth in the low-single digits. Overall, we now anticipate growth for the property casualty operations in the low single digits. Commercial lines should continue to achieve outstanding results, with written premium growth of approximately 3 percent to 5 percent. We now anticipate a mid-single digit decline in personal lines written premiums in 2005. Our outlook is based on feedback from insurance agents, production results for agencies, market intelligence from our field marketing representatives and account retention trends. We previously had anticipated mid-single digit written premium growth for both the commercial lines and personal lines segments.
	•	Combined ratio for the property casualty insurance operations in the range of 93 percent, assuming catastrophe losses contribute approximately 3.5 percentage points to the combined ratio. We continue to anticipate that the commercial lines combined ratio will be in the range of 90 percent. We now believe the personal lines combined ratio will be approximately 100 percent. The consolidated target also assumes that favorable loss reserve development will be in line with historical levels. We previously had anticipated the property casualty combined ratio would be approximately 91 percent.
	•	Our investment income growth target of 5 percent to 6 percent pretax remains unchanged. We are comfortable with this growth in part because of the investment of a greater percentage of available cash flow in fixed-income securities during most of 2004 and the first half of 2005.

These anticipated strong operating results should be tempered in 2005 by a $15 million, net of tax, annual increase in interest expense on long-term debt, which rose modestly with the November 2004 issue of $375 million aggregate principal amount of senior notes due 2034. We also had anticipated adopting SFAS No. 123(R), “Share-Based Payment,” which calls for stock option expense to be included as a component of net income, in the third quarter of 2005. As discussed in the Note 1 to the Financial Statements, we are reviewing the timeline for adopting this accounting treatment because the SEC deferred the effective date.

Factors supporting management’s outlook for 2005 are discussed in the Results of Operations for each of the four business segments.

Segment Results of Operations

As described in Note 2, Page 10, we measure profit or loss for our property casualty and life segments based upon underwriting results. Insurance underwriting results (profit or loss) represent net earned premium less loss and loss expenses and underwriting expenses on a pretax basis. We also measure aspects of the performance of the 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.

Statutory accounting data and ratios also are key performance indicators for The Cincinnati Life Insurance Company, the life insurance subsidiary.

Investments held by the parent company and non-insurance subsidiaries 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 the company’s investment portfolios are discussed in the investments segment discussion.

The following sections review results of operations for the combined property casualty insurance operations and, separately, for each of the company’s four reportable segments (see Commercial Lines Results of Operations, Page 17, Personal Lines Results of Operations, Page 20, Life Insurance Results of Operations, Page 23, and Investments Results of Operations, Page 24).

Property Casualty Insurance Operations

Overview — First-quarter Highlights

Within the property casualty insurance market, the company offers both commercial and personal policies through a network of independent agencies. Highlights of the performance for the combined property casualty insurance operations included:

	•	Premiums and growth — First-quarter 2005 growth in earned premium continued to reflect the competitive characteristics we discussed in the Annual Report on Form 10-K, Property Casualty Insurance Operations, Page 1, as well as the slowing of net written premium growth over the past year. First-quarter new business written directly by agencies was $71 million compared with $80 million in last year’s first quarter.
		We consider statutory net written premium growth to be a key performance indicator, since it can be used to compare the company’s growth to industry performance, allowing the company to evaluate the success of its strategies. Statutory net written premiums on an adjusted basis rose 2.6 percent in the first quarter of 2005. Statutory net written premiums were adjusted for an actuarial estimate of premiums for policies that were in process but not yet booked at quarter end.
		The discussion of the commercial lines and personal lines segments provides additional detail regarding premiums and growth trends.

•

Underwriting results and combined ratio — The first-quarter 2005 combined ratio was 88.9 percent compared with 87.1 percent reported for the first quarter of 2004, which benefited by 4.4 percentage points from the release of UM/UIM reserves. The 1.8 percentage-point increase in the ratio reflected:

	o	Increase in the loss and loss expense ratio excluding catastrophes. First-quarter 2005 results included a previously announced single large loss in January that was insufficiently covered through our facultative reinsurance programs. That loss reduced the underwriting profit by $24 million, net of reinsurance and raised the loss and loss expense ratio by 3.2 percentage points.

	o	Slightly higher catastrophe loss ratio. Total catastrophe losses, net of reinsurance, were $2 million in the first quarter of 2005 compared with $1 million in the first quarter of 2004. Catastrophe losses contributed 0.3 percentage points to the property casualty combined ratio compared with 0.1 percentage points a year ago.
	o	Lower commission expense ratio. Commission expense declined from last year’s level primarily because of the release of $8 million of 2004 accruals. The release reflected the use of actual 2004 financial data to calculate the contingent commissions paid in 2005. Our 2005 contingent commission accrual reflects the decline in the first-quarter 2005 underwriting profit, our outlook for full-year results and other factors that could impact the contingent commission liability for the year.
	o	Increase in the underwriting expense ratio. Underwriting expenses rose over last year’s level due to higher salary expense, largely due to increases in staffing in underwriting and other areas that directly serve agencies, and higher technology-related costs.

On a statutory basis, the first-quarter 2005 property casualty combined ratio was 87.4 percent, compared with the first-quarter 2004 property casualty statutory combined ratio of 85.1 percent, which also included the 4.4 percentage-point benefit from the UM/UIM reserve release. The discussion of the commercial lines and personal lines segments provides additional detail regarding underwriting results and combined ratio trends.

As described in the 2004 Annual Report on Form 10-K, we expect to continue to strengthen our relationships with agencies through the introduction and use of technology that is designed to bring agencies greater efficiencies and to permit associates to spend more time with people and less with paper. During the first quarter of 2005, we made additional progress on our technology initiatives. Those activities and plans for the remainder of the year include:

	•	CMS™, a new claims file management system, initially was deployed in late 2003. Field claims associates in all states are using CMS to process all newly reported claims. Planned upgrades for 2005 include agency access to enter information on agency-issued claims checks and agency claims reporting via CMS.
	•	WinCPP™, an online rate quoting system for commercial package, commercial auto and workers compensation policies, now is available for agencies in 27 states that account for approximately 97 percent of the company’s total 2004 property casualty premiums. We expect it will be available in all states in which we operate by year-end 2005. Businessowner policy quoting capabilities now have been extended to 10 states, bringing the total to 12.
	•	Training for Diamond, our personal lines processing system, was completed for agents in Florida in April 2005. It now is in use in six states representing approximately 62 percent of total 2004 personal lines earned premium volume. System enhancements and training for agents in Georgia, Illinois, Kentucky, Minnesota, Missouri, Tennessee and Wisconsin, representing another 29 percent of personal lines earned premium, are scheduled for the remainder of 2005.
	•	I-View, a commercial lines policy imaging and workflow system, was introduced in areas of the commercial lines underwriting department in mid-2004. Approximately 30 percent of commercial lines underwriting teams now are using the system. I-View is expected to be available to all commercial lines underwriters by year-end 2005.
	•	For 2005, development and delivery of a full-featured commercial lines policy processing system is the company’s primary business-technology objective. We remain on track to achieve our goal of delivering a full version of the system for businessowners policies to one or more of the company’s high volume states by the end of 2005.
	•	CinciBond™, a new automated system to process license and permit surety bonds, was delivered to a small group of Ohio agencies for testing in late 2004. CinciBond enables agents to issue and print bonds at their offices. Responses were positive and delivery to the remaining Ohio agencies and those in several additional states is anticipated during late 2005.

In all cases, the objective is to enhance the level of personal service that the company delivers by automating office functions.

Cincinnati Financial is awarded credit (debt) ratings (see Long- and Short-term Debt, Page 29, for a discussion of the company’s credit ratings), and its insurance subsidiaries are awarded insurer financial strength ratings. The following summarizes our insurer financial strength ratings as of May 9, 2005, which are unchanged from those reported in the 2004 Annual Report on Form 10-K, Financial Strength Ratings, Page 7. Insurer financial strength ratings assess an insurer’s ability to meet its financial obligations to policyholders and do not necessarily address matters that may be important to shareholders.

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

In addition to reducing property casualty portfolio common stock holdings, adding a $100 million layer to our reinsurance program and beginning to adjust homeowner earthquake deductibles, in the second quarter of 2004, we changed the allocation of new property casualty portfolio investments to reduce the ratio of common stock to statutory surplus (see Investment Portfolio, Page 27, for a discussion of portfolio allocation). The ratio was 101.9 percent at March 31, 2005, compared with 103.5 percent at year-end 2004.

These property casualty actions did not signal a change in our overall investment philosophy. We remain committed to a long-term equity focus that we believe is the key to the company’s long-term growth and stability (see 2004 Annual Report on Form 10-K, Investments Segment, Page 13).

Commercial Lines Results of Operations

Overview — First-quarter Highlights

Performance highlights for the commercial lines segment include:

•	Premiums and growth — Commercial lines earned premiums rose 6.4 percent in the first quarter of 2005. New commercial lines business was $63 million for the first quarter compared with $67 million last year. On an adjusted basis in both periods, statutory net written premiums rose 5.1 percent to $617 million compared with $587 million in last year’s first quarter. Statutory net written premiums were adjusted for an actuarial estimate of premiums for policies that were in process but not yet booked at quarter end.
	As competition in our commercial markets continues to increase, our growth rate has slowed to reflect the pricing discipline we have been maintaining for both renewal and new business. Agents report that while renewal pricing pressure has risen since the end of 2004, new business pricing is requiring even more flexibility and more careful risk selection. Our field marketing associates and agents are working together to select risks and respond appropriately to local pricing trends. Our case-by-case approach has generated 11.7 percent compound annual growth in commercial lines new business over the past five years and yielded $63 million in new commercial lines business in the first quarter.
	While the commercial lines pricing environment is clearly in flux, we continue to rely on factors other than price to drive sales. Our agents look for the best insurance program for their clients, not just the best price. They serve policyholders well by presenting our value proposition — customized coverage packages, personal claims service and high financial strength ratings — all wrapped up in a convenient three-year commercial policy.
•	Underwriting results and combined ratio — The first-quarter 2005 combined ratio was 87.5 percent, including 4.3 percentage points due to the single large loss in January. The ratio was 82.6 percent in the first quarter of 2004, which benefited by 6.0 percentage points from the release of UM/UIM reserves.
	Commercial lines profitability remained strong in the first quarter of 2005 as we benefited from the front-line underwriting efforts of our independent agents and our pricing discipline. The significant components of expenses for the commercial lines segment are described below.

Commercial Lines Results

Loss and Loss Expenses (excluding catastrophe losses)

Loss and loss expenses include both net paid losses and reserve additions for unpaid losses as well as the associated loss expenses. Loss and loss expenses excluding catastrophes rose in the first quarter of 2005 primarily because of the single large loss discussed above (see Property Casualty Reserve Levels, Commercial Lines Segment Reserves, Page 28, for information regarding first-quarter 2005 loss reserves for the commercial lines segment).

Management monitors incurred losses by size of loss, business line, risk category, geographic region, agency, field marketing territory and duration of policyholder relationship, addressing concentrations or trends as needed. The total of new losses greater than $1 million, new losses between $250,000 and $1 million and case reserve increases greater than $250,000, as a percentage of earned premium, was below the level of last year’s first quarter despite the single large loss noted above.

Commercial Lines Losses by Size

Catastrophe Loss and Loss Expenses

For the first quarter of 2005, commercial lines catastrophe losses were $6 million, which contributed 1.1 percentage points to the combined ratio, compared with $1 million, or 0.2 percentage points, in last year’s first quarter. The $6 million in first-quarter 2005 catastrophes were due to a series of winter storms in the Midwest and Northeast during January that caused approximately $1 million of losses, plus an additional $5 million of development from 2004 catastrophes.

Commission Expenses

Commission expense as a percent of earned premium declined by 2.9 percentage points, primarily because of the release of an over accrual from 2004. The release reflected the use of actual 2004 financial data to calculate the contingent commissions paid in 2005. Our 2005 contingent commission accrual reflects the decline in the first-quarter 2005 underwriting profit, our outlook for full-year results and other factors that could impact the contingent commission liability for the year.

Underwriting Expenses

Non-commission expenses rose to 7.2 percent of earned premium in the first quarter of 2005 from 6.8 percent in the first quarter of 2004. The increase reflected higher salary expense and technology-related costs.

Policyholder Dividends

Policyholder dividend expense was 0.6 percent of earned premium in the first quarter of 2005 compared with 0.5 percent in the first quarter of 2004.

Line of Business Analysis

In total the commercial multi-peril, workers compensation, commercial auto and other liability lines of business accounted for almost 90 percent of total commercial lines earned premium in the first quarter of 2005. Approximately 95 percent of the company’s commercial lines premiums are written as packages providing accounts with coverages from more than one business line. The company believes that its commercial lines area is best measured and evaluated on a segment basis. For reference, however, the table above and discussion below summarizes first-quarter results for each of the four primary business lines.

•	Commercial multi-peril — Commercial multi-peril earned premiums rose 5.6 percent, in line with overall commercial lines growth. The loss and loss expense ratio increased by 14.5 percentage points as the large loss noted above added 12.2 percentage-points to the ratio.

•	Workers compensation — Workers compensation earned premiums rose 4.9 percent, in line with overall commercial lines growth. The loss and loss expense ratio declined by 14.1 percentage points. The loss and loss expense ratio in last year’s first quarter was unusually high due to higher claims activity in that period.
•	Commercial auto — Commercial auto earned premiums increased 2.7 percent, less rapidly than overall commercial lines growth. Commercial auto frequently is one of the first lines to experience pricing pressure because it often represents the largest portion of insurance costs for commercial policyholders. The loss and loss expense ratio increased by 13.2 percentage points. In last year’s first quarter, the ratio included an 18.7 percentage-point benefit ($21 million) from the release of UM/UIM reserves.
•	Other liability — Other liability earned premiums rose 12.1 percent, continuing to outpace overall commercial lines growth because of the number of policies written in non-discounted programs and the relative strength of pricing for liability coverages. The loss and loss expense ratio increased by 4.7 percentage points. In last year’s first quarter, the ratio included an 8.4 percentage-point benefit ($8 million) from the release of UM/UIM reserves. The company monitors results for the other liability business line closely, anticipating quarter-to-quarter fluctuations due to the nature and size of commercial umbrella policies and limits.

Commercial Lines Outlook

As a result of market conditions, we have slightly moderated our expectations for 2005 commercial lines written premium growth to the low-single digits compared with 7.6 percent in 2004. Industry experts currently anticipate industrywide commercial lines written premiums will decline approximately 1 percent in 2005. We anticipate commercial lines insurance market trends will reflect accelerated competition in 2005 with pressure on pricing from the industry’s increasing surplus and improving profitability. During the first quarter of 2005, agents reported that renewal pricing pressure had risen since the end of 2004 and new business pricing was requiring even more flexibility and more careful risk selection. We now need to use more credits to retain renewals; the larger the account, the higher the credits. On smaller accounts, we are seeing some opportunities to get small increases, with variations by geographic region and class of business. Careful underwriting appears to remain the norm.

We intend to continue to market our products to a broad range of business classes, price our products adequately and take a package approach. We intend to maintain our underwriting selectivity and carefully manage our rate levels, as well as our programs that seek to accurately match exposures with appropriate premium. The creation of new marketing territories and appointment of new agencies over the next several years also could contribute to commercial lines growth.

We believe the company can continue to be a preferred market for its agencies and the types of local businesses they serve. We will do so by evaluating each risk individually and making decisions regarding rates, the use of three-year policies and other policy terms on a case-by-case basis, even in lines and classes of business that are under competitive pressure. We believe this should allow us to maintain the positive underlying improvements in profitability that have occurred over the past several years, but we do not believe favorable reserve development will contribute as much in 2005 as it did in 2004. As a result, we continue to estimate a 2005 commercial lines combined ratio of approximately 90 percent compared with 84.1 percent in 2004.

Personal Lines Results of Operations

Overview - First-quarter Highlights

Performance highlights for the personal lines segment include:

•	Premiums and growth — Personal lines earned premiums rose 2.3 percent in the first quarter of 2005. New personal lines business was $8 million for the first quarter compared with $13 million last year. Statutory net written premiums were $168 million compared with $180 million in last year’s first quarter.
•	Underwriting results and combined ratio — The first-quarter 2005 combined ratio was 92.7 percent. The ratio was 98.8 percent in the first quarter of 2004, which benefited by 0.3 percentage points from the release of UM/UIM reserves.

As the $15 million first-quarter 2005 personal lines underwriting profit indicated, we are making some progress toward returning personal lines to full-year profitability. We also are moving steadily to complete deployment of Diamond, our personal lines policy processing system, to all states where we market personal lines.

We addressed profitability by substantially increasing rates in 2003 and 2004. Despite the progress, we are concerned about the declines in written premiums and new business activity. We are looking closely at our rate structure to ensure our products are competitively priced going forward. In late summer 2004, we chose to postpone all rate changes until May 2005 so that our information technology staff could complete steps in the Sarbanes-Oxley internal control review and could prepare for rollout of Diamond into additional states.

During that period, it became clear that our rates were high in many of our markets, including Ohio, making our homeowner and personal auto coverages less price competitive. During the fourth quarter of 2004, our retention

rates for renewal business remained relatively stable although new business declined. During the first quarter of 2005, retention rates declined and we experienced additional weakness in new business, contributing to our decision to lower our expectations for personal lines performance in 2005 and 2006.

On a territory-by-territory basis, we now are moving ahead with modifications to selected rates and credits. We believe that changes scheduled for mid- to late-2005 effective dates should begin positioning our auto and homeowner products appropriately in the local markets. We believe this should further open the door for our agents to sell the value of our homeowner-auto package, superior claims service and financial strength.

A portion of the slowdown in premium growth may have been due to the introduction of Diamond in our larger states. Diamond gives agents new options that increase their choice and control but has a steep learning curve and requires substantial effort on the part of the agencies to transfer business to the system.

Excluding catastrophe results, the personal lines GAAP combined ratio improved 4.3 percentage points over last year’s first quarter. That progress reflected the 6.1 percentage point improvement in the personal auto line’s loss and loss expense ratio excluding catastrophe losses, offsetting a 2.3 percentage point increase in the homeowner line’s loss and loss expense ratio excluding catastrophes, as discussed in the line of business analysis. The significant components of expenses for the personal lines segment are described below.

Personal Lines Results

Loss and Loss Expenses (excluding catastrophe losses)

Loss and loss expenses include both net paid losses and reserve additions for unpaid losses as well as the associated loss expenses. The decline in loss and loss expenses excluding catastrophes in the first quarter of 2005 reflected further improvement in personal auto results (see Property Casualty Reserve Levels, Personal Lines Segment Reserves, Page 28, for information regarding first-quarter loss reserves for the personal lines segment).

Management monitors incurred losses by size of loss, business line, risk category, geographic region, agency, field marketing territory and duration of policyholder relationship, addressing concentrations or trends as needed. The total of new losses greater than $1 million, new losses between $250,000 and $1 million and case reserve increases greater than $250,000, was below the total in last year’s first quarter, primarily because there were no personal lines losses greater than $1 million in the first quarter of 2005.

Personal Lines Losses by Size

Catastrophe Loss and Loss Expenses

For the first quarter of 2005, a series of winter storms in the Midwest and Northeast during January caused approximately $1 million of catastrophe losses, which was more than offset by $5 million of favorable development from losses from prior period storms. As a result, the personal lines combined ratio benefited by 2.0 percentage points. In last year’s first quarter, favorable development from prior-period catastrophe losses took 0.2 percentage points off the combined ratio.

Commission Expenses

Commission expense as a percent of earned premium declined by 1.8 percentage points primarily because of the release of an over accrual from 2004. The release reflected the use of actual 2004 financial data to calculate the contingent commissions paid in 2005. Our 2005 contingent commission accrual reflects the increase in the first-quarter 2005 underwriting profit, our outlook for full-year results and other factors that could impact the contingent commission liability for the year.

Underwriting Expenses

Non-commission expenses rose to 13.0 percent of earned premium in the first quarter of 2005 from 9.8 percent in the first quarter of 2004. The increase was due to higher salary expense and higher technology-related costs.

Line of Business Analysis

The personal auto and homeowner business lines together accounted for almost 90 percent of total personal lines earned premiums in the first quarter of 2005. The company’s intent is to write personal auto and homeowners coverages in personal lines packages. As a result, we believe that personal lines is best measured and evaluated on a

segment basis. For reference, however, the table above and discussion below summarizes growth and profitability trends for the personal auto and homeowner business lines.

	•	Personal auto – Earned premiums for personal auto declined 1.7 percent in the first quarter of 2005. As noted above, the decline primarily was due to the change in our competitive posture, which resulted in lower new business production in recent quarters. We are planning to modify selected rates and credits on a territory-by-territory basis during the remainder of 2005.
		Over the last three years, the benefits of personal auto re-underwriting programs and higher pricing have generally served to offset rising loss severity. For selected agencies, the programs reviewed and strengthened underwriting standards, required motor vehicle reports for many insured drivers and developed strategies to increase the company’s penetration of the agency’s personal lines business. The loss and loss expense ratio for personal auto continued this trend, improving to 60.6 percent in the first quarter of 2005 from 66.3 percent a year ago.
	•	Homeowner – Earned premiums for homeowners grew 9.0 percent in the first quarter of 2005. Rate changes enacted over the past several years more than offset lower first-quarter written premium volume due to the slight decline in policy renewals and lower new business. The loss and loss expense ratio excluding catastrophe losses for the homeowner line rose to 71.2 percent in the first quarter of 2005 from 68.9 percent a year ago.
		As noted above, we are concerned about both profitability and recent retention and new business trends for this business line. In addition to the actions described in our 2004 Annual Report on Form 10-K, Personal Lines Results of Operations, Page 40, to address profitability, we are planning to modify selected rates and credits on a territory-by-territory basis during the remainder of 2005 to address our competitive posture.

Personal Lines Outlook

In the personal lines marketplace, we believe agents select Cincinnati for their value-oriented clients who seek to balance value and price and are attracted by Cincinnati’s superior claims service and the benefits of the company’s package approach. In light of first-quarter trends, we now anticipate a mid-single digit decline in written premiums in 2005. Industry experts currently anticipate industry-wide personal lines written premiums will rise approximately 4.5 percent in 2005.

We now believe the personal lines combined ratio will be approximately 100 percent for full-year 2005 for the reasons noted above. In addition, industrywide loss trends for personal auto liability and homeowner are deteriorating. Further, expenses have been trending higher for personal lines due to higher contingent commissions, salary expense and technology-related costs. In the 2004 Annual Report on Form 10-K, Personal Lines Outlook, Page 44, we described a number of factors affecting our outlook for personal lines profitability. We believe these factors continue to be important to our ability to improve the performance of the homeowner line of business while maintaining personal auto profitability. As a result of the premium and expense trends, we no longer believe the homeowner business line will be profitable by year-end 2006.

Life Insurance Results of Operations

Overview – First-quarter Highlights

Performance highlights for the life insurance segment include:

	•	Revenues – Earned premiums for the life insurance segment were $23 million compared with $24 million in last year’s first quarter. The company’s life insurance subsidiary reported first quarter 2005 statutory written life premium of $26 million compared with $26 million in the first quarter of 2004. Statutory written premiums have been reclassified to exclude annuity deposits not involving life contingencies, which are not recognized as written premium under statutory rules. Annuity sales were $26 million in the first quarter of 2005 compared with $8 million in the first quarter of 2004.
		In the first quarter of 2005, face amount of life policies in force rose 3.4 percent to $46.462 billion at March 31, 2005, from $44.921 billion at year-end 2004. During the quarter, applications submitted rose 8.4 percent, with a 16.4 percent gain in worksite applications. Worksite marketing efforts have included a focus on increasing participation and cross serving. We are expanding our product portfolio by developing a new term life insurance series with an optional return-of-premium feature and two new universal life products, one of which will insure the lives of children. To support our enhanced product portfolio, we are providing product and sales concept marketing materials to help property casualty agents sell our life portfolio more easily.
	•	Profitability – The life insurance segment’s GAAP-based segment profit was small because investment income is included in investment segment results, except investment income credited to contract holders (interest assumed in life insurance policy reserve calculations). Results improved in 2005 because operating expenses remained level and mortality experience remained within pricing guidelines.

At the same time, we recognize that assets under management, capital appreciation and investment income are integral to evaluation of the success of the life insurance segment because of the long duration of life products. For that reason, we also evaluate GAAP data including results for investment activities on life insurance-related assets for The Cincinnati Life Insurance Company subsidiary, which comprises the life insurance segment. Looking at a key performance indicator for Cincinnati Life, GAAP net income grew 23.4 percent in the first quarter of 2005 to $10 million compared with $8 million in the first quarter of 2004. The life insurance portfolio had pretax realized investment gains of $2 million in the first quarter of 2005 compared with no realized investment gains in the first quarter of 2004.

Life Insurance Results

Life Insurance Outlook

As the life insurance company seeks to increase penetration of the property casualty agencies, our objective is to increase premiums and contain expenses. We continue to emphasize the cross-serving opportunities afforded by worksite marketing of life insurance products. In 2005, we are exploring additional programs to simplify the worksite marketing sales process for independent property casualty agencies, including enrollment software. Term insurance is our largest life insurance product line. Changes in the marketplace during 2004 have affected the cost and availability of reinsurance for term life insurance for 2005. We currently are researching alternative reinsurance solutions to help fund the statutory reserve strain on new term business. We believe we will be able to structure a reinsurance program that provides the life insurance company with the ability to continue to grow in the term life insurance marketplace while appropriately managing risk, at a cost that allows the life insurance company to achieve its profit targets.

Investments Results of Operations

Overview – First-quarter Highlights

The investment segment contributes investment income and realized gains and losses to results of operations. Investments provide our primary source of pretax and after-tax profits.

	•	Investment income – Consolidated pretax investment income rose 5.6 percent for the first quarter of 2005, with the increase coming from higher interest income from cash flow invested in fixed-income securities. Dividend increases by Fifth Third Bancorp and another 40 of the 51 common stock holdings in the equity portfolio during the 12 months ended March 31, 2005, should add $19 million to annualized investment income. Fifth Third, the company’s largest equity holding, contributed 46.3 percent of the increase and 43.8 percent of total dividend income in the first quarter of 2005.
	•	Realized gains and losses – Realized investment gains were $9 million pretax in this year’s first quarter. There were no other-than-temporary impairment charges in this year’s first quarter. Fluctuation of market values of options embedded in convertible securities resulted in $7 million in fair value declines in this year’s first quarter, due to the application of SFAS No. 133, partially offsetting $16 million in net gains from the disposition of securities. In last year’s first quarter, net realized investment gains totaled $7 million, including $3 million in other than-temporary impairment charges.

Investment Results