The following discussion highlights significant factors influencing the consolidated results of operations and financial position of Cincinnati Financial Corporation (CFC). It should be read in conjunction with the consolidated financial statements and related notes included in our 2007 Annual Report on Form 10-K. Unless otherwise noted, the industry data is prepared by
A.M. Best Co., a leading insurance industry statistical, analytical and financial strength rating organization. Information from A.M. Best is presented on a statutory basis. When we provide our results on a comparable statutory basis, we label it as such; all other company data is presented in accordance with accounting principles generally accepted in the United States of America (GAAP).
We present per share data on a diluted basis unless otherwise noted, adjusting those amounts for all stock splits and dividends. Dollar amounts are rounded to millions; calculations of percent changes are based on whole dollar amounts or dollar amounts rounded to the nearest thousand. Certain percentage changes are identified as not meaningful (nm).
Safe Harbor Statement
This is our "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in our 2007 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 21. Although we often review and update our forward-looking statements when events warrant, we caution our readers that we undertake no obligation to do so. Factors that could cause or contribute to such differences include, but are not limited to:
• Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns, environmental events, terrorism incidents or other causes

• 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 Multi-notch downgrades 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

• Further decline in overall stock market values negatively affecting the company's equity portfolio and book value; in particular further declines in the market value of financial sector stocks

• Securities laws that could limit the manner, timing and volume of our investment transactions

• Events, such as the credit crisis triggered by subprime mortgage lending practices, that lead to:

o Significant decline in the value of a particular security or group of securities, such as our financial sector holdings, and impairment of the asset(s)

o Significant decline in investment income due to reduced or eliminated dividend payouts from a particular security or group of securities

o Significant rise in losses from surety and director and officer policies written for financial institutions

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

• Prolonged low interest rate environment or other factors that limit the company's ability to generate growth in investment income or interest rate fluctuations that result in declining values of fixed-maturity investments

• Inaccurate estimates or assumptions used for critical accounting estimates

• Events or actions, including unauthorized intentional circumvention of controls, that reduce the company's future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002

• Changing consumer buying habits and consolidation of independent insurance agencies that could alter our competitive advantages

• Increased frequency and/or severity of claims

Cincinnati Financial Corporation Form 10-Q for the quarterly period ended September 30, 2008 15

• Delays or inadequacies in the development, implementation, performance and benefits of technology projects and enhancements

• Ability to obtain adequate reinsurance on acceptable terms, amount of reinsurance purchased, financial strength of reinsurers and the potential for non-payment or delay in payment by reinsurers

• Increased competition that could result in a significant reduction in the company's premium growth rate

• Underwriting and pricing methods adopted by competitors that could allow them to identify and flexibly price risks, which could decrease our competitive advantages

• Personal lines pricing and loss trends that lead management to conclude that this segment could not attain sustainable profitability, which could prevent the capitalization of policy acquisition costs

• Actions of insurance departments, state attorneys general or other regulatory agencies that:

o Restrict our ability to exit or reduce writings of unprofitable coverages or lines of business

o Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules and regulations

o Increase our expenses

o Add assessments for guaranty funds, other insurance related assessments or mandatory reinsurance arrangements; or that impair our ability to recover such assessments through future surcharges or other rate changes

o Limit our ability to set fair, adequate and reasonable rates

o Place us at a disadvantage in the marketplace

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

• Adverse outcomes from litigation or administrative proceedings

• Unforeseen departure of certain executive officers or other key employees due to retirement, health or other causes that could interrupt progress toward important strategic goals or diminish the effectiveness of certain longstanding relationships with insurance agents and others

• Events, such as an epidemic, natural catastrophe, terrorism or construction delays, that could hamper our ability to assemble our workforce at our headquarters location

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

Introduction
Corporate Financial Highlights
Income Statement and Per Share Data

                                                              Three months ended September 30,                                         Nine months ended September 30,
(Dollars in millions except share data)              2008                      2007                 Change %                 2008                      2007                 Change %

Income statement data
Earned premiums                                 $         781             $         811                (3.7 )           $       2,355             $       2,447                (3.8 )
Investment income, net of expenses                        130                       152               (14.5 )                     412                       451                (8.5 )
Realized investment gains and losses
(pretax)                                                  272                        16                  nm                        28                       370               (92.2 )
Total revenues                                          1,186                       982                20.8                     2,806                     3,283               (14.5 )
Net income                                                247                       124                99.5                       268                       669               (59.9 )
Per share data (diluted)
Net income                                               1.50                      0.72               108.3                      1.64                      3.86               (57.5 )
Cash dividends declared                                  0.39                     0.355                 9.9                      1.17                     1.065                 9.9

Weighted average shares outstanding               164,242,185               172,399,539                (4.7 )             163,834,163               173,423,199                (5.5 )

Revenues rose for the three months ended September 30, 2008, largely because of higher realized investment gains in 2008. Those gains were offset by lower earned premiums and investment income. Revenues declined for the nine months ended September 30, 2008, largely because of substantially lower realized investment gains in 2008, exacerbated by the effect of lower earned premiums and investment income.
Earned premiums for the three and nine months generally were in line with expectations described in our 2007 Annual Report on Form 10-K. Investment income for the three and nine months largely reflected our

Cincinnati Financial Corporation
16 Form 10-Q for the quarterly period ended September 30, 2008

recent expectations for lower dividend income, as described in our Quarterly Report on Form 10-Q for the three months ended June 30, 2008. The higher realized gains drove an increase in net income for the three months ended September 30, 2008, despite higher catastrophe losses, as discussed below. For the nine months, net income declined significantly due to the lower revenues and significantly higher catastrophe losses.
Realized investment gains and losses are recognized on the sales of investments or as otherwise required by GAAP. We have substantial discretion in the timing of investment sales, and that timing generally is independent of the insurance underwriting process. GAAP also requires us to recognize in income the gains or losses from certain changes in market (fair) values of securities even though we continue to hold the securities.
During the three months ended September 30, 2008, we did not repurchase any shares of our common stock. Reflecting purchases in the first half of the year, for the nine months ended September 30, 2008, repurchases totaled 3.8 million shares at a cost of $139 million. Largely as a result of repurchases in prior periods, average weighted shares outstanding for the nine months declined 5.5 percent compared with a year ago.
The board of directors is committed to steadily increasing cash dividends and periodically authorizing stock dividends and splits. Cash dividends declared per share rose 9.9 percent for both the three months and nine months ended September 30, 2008.

Balance Sheet Data and Performance Measures

                                               At September 30,     At December 31,
    (Dollars in millions except share data)          2008                2007

    Balance sheet data
    Invested assets                            $       10,160       $       12,261
    Total assets                                       14,303               16,637
    Short-term debt                                        69                   69
    Long-term debt                                        791                  791
    Shareholders' equity                                4,687                5,929
    Book value per share                                28.87                35.70

    Debt-to-capital ratio                                15.5 %               12.7 %



                                                    Three months ended September 30,                Nine months ended September 30,
                                                       2008                   2007                     2008                    2007

Performance measures
Comprehensive income (loss)                       $         41            $       (149 )         $         (927 )          $        30
Return on equity, annualized                              21.0 %                   7.4 %                    6.7 %                 13.4 %
Return on equity, annualized, based on
comprehensive income (loss)                                3.5                    (8.9 )                  (23.3 )                  0.6

Invested assets, total assets and shareholders' equity were down slightly from June 30, 2008, and well below year-end 2007, because of declines in the market value of our investment portfolio during the first half of 2008. As a result, our total debt-to-capital ratio (total debt plus shareholders' equity) rose from year-end but was relatively unchanged from June 30, 2008. Comprehensive income is net income plus the year-over-year change in accumulated other comprehensive income.
Consolidated Property Casualty Insurance Highlights

                                      Three months ended September 30,                        Nine months ended September 30,
(Dollars in millions)             2008               2007            Change %            2008               2007             Change %

Consolidated property
casualty highlights
Written premiums               $     727          $    736              (1.3 )        $   2,292          $   2,392              (4.2 )
Earned premiums                      751               777              (3.3 )            2,262              2,348              (3.6 )
Underwriting profit                   (9 )              21            (144.8 )              (26 )              192            (113.3 )
GAAP combined ratio                101.3 %            97.3 %                              101.1 %             91.8 %
Statutory combined ratio           102.8              98.7                                100.5               91.3

Consolidated property casualty insurance results include premiums and expenses for our standard market insurance (commercial lines and personal lines) as well as our excess and surplus lines operations.
The trends in written and earned premiums reflected the heightened competition in our markets and current economic trends as well as the competitive strategies we discussed in our 2007 Annual Report on Form 10-K, Item 1, Commercial Lines and Personal Lines Property Casualty Insurance Segments, Page 10 and Page 12. Written and earned premiums for the three months ended September 30, 2008, were reduced by $11 million of ceded premiums to reinstate coverage layers of our catastrophe reinsurance treaty.
New business written directly by our local independent agencies grew in the three and nine months ended September 30, 2008. New business reached $267 million in the first nine months of 2008 compared with $244 million in the first nine months of 2007. New business levels reflected market conditions for commercial and personal lines as well as the advantages of our agency relationship strategy. Our new excess and surplus

Cincinnati Financial Corporation Form 10-Q for the quarterly period ended September 30, 2008 17

lines operations added $8 million to new business in the first nine months of 2008, but did not materially influence consolidated results, contributing $2 million in net earned premiums.
We reported modest consolidated property casualty insurance underwriting losses for the three and nine months ended September 30, 2008, compared with underwriting profits in 2007. While premium levels, competitive market conditions, commission expenses and other underwriting expenses influenced results, the most significant factor in this year's underwriting losses was an atypically high level of catastrophe losses as discussed below. Unusually high savings from favorable development on prior year reserves provided an offset to the catastrophe losses.
Our combined ratio reflected the factors influencing underwriting results. (The combined ratio is the percentage of each premium dollar incurred for losses plus all expenses - the lower the ratio, the better the performance. An underwriting profit results when the combined ratio is under 100 percent. A combined ratio above 100 percent indicates that a carrier's losses and expenses are greater than premiums.)
Savings from favorable development on prior year reserves improved the combined ratio by 13.7 and 8.9 percentage points in the three and nine months ended September 30, 2008, compared with 6.5 and 5.4 percentage points in the same three and nine months of 2007. Savings from favorable development on prior year reserves was $102 million and $202 million in the three and nine months ended September 30, 2008, compared with $50 million and $126 million in the comparable 2007 periods. These amounts include development on prior period catastrophe loss reserves as discussed below.
The contribution rose primarily because of savings in the commercial casualty line of business, which is benefiting from an initiative to use a claims mediation process that promotes earlier liability settlement resolution and from revised expectations for related loss expense inflation.
Catastrophe losses contributed 8.4 and 9.7 percentage points to the combined ratio in the three and nine months ended September 30, 2008, compared with an unusually low 1.7 and 1.2 percentage points in the same three and nine months of 2007. Catastrophe losses in the first nine months of 2008 included $2 million of savings from favorable development on 2007 and prior catastrophe loss reserves compared with $20 million of savings in the first nine months of 2007 from favorable development on 2006 and prior catastrophe loss reserves. The following table shows catastrophe losses incurred, net of reinsurance, as well as the effect of loss development on prior period catastrophe events. We individually list catastrophe events for which our incurred losses exceed $5 million.

(In millions, net of reinsurance)                                                   Three months ended September 30,                  Nine months ended September 30,
                                                                               Commercial          Personal                      Commercial        Personal
Dates                       Cause of loss                     Region             lines               lines           Total         lines             lines           Total

2008
Jan. 4-9        Wind, hail, flood, freezing             South, Midwest        $          1         $      (1 )       $    0     $          4       $       2       $       6
Jan. 29-30      Wind, hail                              Midwest                         (1 )               0             (1 )              5               4               9
Feb. 5-6        Wind, hail, flood                       Midwest                          0                (1 )           (1 )              6               7              13
Mar. 14         Tornadoes, wind, hail, flood            South                           (1 )               0             (1 )              4               1               5
Mar. 15-16      Wind, hail                              South                            0                 2              2                2               7               9
Apr. 9-11       Wind, hail, flood                       South                           (3 )               0             (3 )             16               2              18
May 1           Wind, hail                              South                            3                 0              3                5               1               6
May 10-12       Wind, hail, flood                       South, Mid-Atlantic             (1 )               0             (1 )              3               3               6
May 22-26       Wind, hail                              Midwest                          0                 1              1                7               3              10
May 29- Jun 1   Wind, hail, flood, water, hydrostatic   Midwest                          0                (1 )           (1 )              6               5              11
Jun. 2-4        Wind, hail, flood, water, hydrostatic   Midwest                          0                (2 )           (2 )              6               5              11
Jun. 5-8        Wind, hail, flood, water, hydrostatic   Midwest                         (4 )              (4 )           (8 )              9               7              16
Jun. 11-12      Wind, hail, flood, water, hydrostatic   Midwest                          0                (6 )           (6 )             11               6              17
Jun. 25         Wind, hail, flood, water, hydrostatic   Midwest                          3                 2              5                3               2               5
Jul. 19         Wind, hail, flood, water, hydrostatic   Midwest                          3                 3              6                3               3               6
Jul. 26         Wind, hail, flood, water, hydrostatic   Midwest                          1                 8              9                1               8               9
Sep. 12-14      Hurricane Ike                           South, Midwest                  20                37             57               20              37              57
All other                                                                                1                 0              1                3               3               6
Development on 2007 and prior catastrophes                                               1                 2              3               (2 )             1              (1 )

Calendar year incurred total                                                  $         23         $      40         $   63     $        112       $     107       $     219


2007
Mar. 1-2        Wind, hail, flood                       South                 $         (1 )       $       1         $    0     $          5       $       2       $       7
Jun. 7-9        Wind, hail, flood                       Midwest                          2                 1              3                4               4               8
Sep. 20-21      Wind, hail, flood                       Midwest                          1                 6              7                1               6               7
All Other                                                                                4                 2              6               18               8              26
Development on 2006 and prior catastrophes                                              (5 )               2             (3 )            (11 )            (9 )           (20 )

Calendar year incurred total                                                  $          1         $      12         $   13     $         17       $      11       $      28

Hurricane Ike, which reached the Gulf Coast on September 12, 2008, moved into the Midwest on September 14, causing unusually high winds in Ohio, Indiana and Kentucky. At September 30, 2008, our gross

Cincinnati Financial Corporation
18 Form 10-Q for the quarterly period ended September 30, 2008

losses from Hurricane Ike were estimated at $105 million, making it the single largest catastrophe in the company's history. Net of reinsurance, the loss is estimated at $57 million. Virtually all of the losses reported by our policyholders occurred in the Midwest. Through October 24, we had received approximately 18,000 claims, of which more than 80 percent have been closed. To restore the affected layers of our catastrophe reinsurance treaty, we incurred a reinstatement premium of $11 million, which was included in written and earned premiums for the three- and nine-month periods. Measuring Our Success In 2008 And Beyond We use a variety of metrics to measure the success of our strategies:
• Maintaining our strong relationships with our established independent agencies, writing a significant portion of each agency's business and attracting new agencies - In 2008, we expect to continue to rank No. 1 or No. 2 by premium volume in approximately 75 percent of the agency locations that have marketed our standard market products for more than five years, not taking into account any contribution from our excess and surplus lines business. During 2008, we subdivided two of our operating territories to improve service to our agencies. We now also believe we will appoint a total of 75 new agencies throughout the markets we serve for the full-year.

We appointed 56 new agencies in the first nine months of the year, of which 39 were new relationships. As a result, at September 30, 2008, our 1,118 agency relationships had 1,369 reporting agency locations marketing our standard market insurance products. At year-end 2007, our 1,092 agency relationships had 1,327 reporting agency locations.

In 2007, we appointed our first agencies in eastern Washington and New Mexico, our 33rd and 34th states of operation. In July 2008, we announced our plans to launch commercial lines operations in selected Texas markets, which will become our 35th state of operation. Since the end of the third quarter, the first member of our local team has begun meeting with agencies in the Austin market. Our second team member is scheduled to relocate to the Dallas market in November. We expect to appoint our first agency in the state and receive approval for regulatory filings in December. New field territories and agency appointments in Texas were not counted in our targets for 2008. We have not announced plans to enter any additional states but continue to study other potential markets for future expansion.

In 2008, we are making further progress in our efforts to improve service to and communication with our agencies through our expanding software capabilities. We discuss our technology plans for 2008 in our 2007 Annual Report on Form 10-K, Item 1, Technology Solutions, Page 4.

Key technology accomplishments of 2008 included:

o Introduced WinCPP, our commercial lines policy rating system, in our newest states - Washington and New Mexico.

o Made a direct bill option available for e-CLAS, our commercial lines policy processing system, which currently processes Businessowners Policies and Dentist's Package Policies in 30 states. We continue to work to make direct bill an option for all commercial policies as soon as practical.

o Deployed Diamond, our personal lines policy processing system, to agencies in seven additional states. One additional state is scheduled for the remainder of 2008 and three are scheduled for early 2009. Following those deployments, Diamond will be available in 28 states.

o Gave agencies online access to selected policyholder claims information.

o Added excess and surplus lines policy administration system that delivers policies to agencies within 24 hours.

Over the years, we have been able to increase our share of our agencies' business by making available insurance products that meet the needs of the individuals and businesses in their communities. In recent years, our agents had indicated their interest in having Cincinnati available as a market for commercial accounts that require the flexibility of excess and surplus lines coverage.

Our 2008 objective was to introduce our excess and surplus lines products and services to agencies in all of our active states except Delaware, Cincinnati Specialty Underwriters Insurance Company's state of incorporation. During the first nine months of the year, our new excess and surplus lines company has . . .