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, 2008.

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

For the transition period from                      to                     .

CINCINNATI FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Ohio		31-0746871
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

6200 S. Gilmore Road, Fairfield, Ohio		45014-5141
(Address of principal executive offices)		(Zip code)

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

o Yes þ No

As of October 24, 2008, there were 162,382,939 shares of common stock outstanding.

 

 

CINCINNATI FINANCIAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2008

TABLE OF CONTENTS

				Page
		PART I — FINANCIAL INFORMATION
Item 1		Financial Statements (unaudited)
		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			15
Item 3		Quantitative and Qualitative Disclosures About Market Risk			39
Item 4		Controls and Procedures			46
		PART II — OTHER INFORMATION
Item 1		Legal Proceedings			46
Item 1A		Risk Factors			46
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds			46
Item 3		Defaults Upon Senior Securities			47
Item 4		Submission of Matters to a Vote of Security Holders			47
Item 5		Other Information			47
Item 6		Exhibits			47

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

Part I — Financial Information

Item 1. Financial Statements (unaudited)

		September 30,				December 31,
(Dollars in millions except per share data)		2008				2007
ASSETS
Investments
Fixed maturities, at fair value (amortized cost: 2008—$5,943; 2007—$5,783) (includes securities pledged to creditors: 2008—$0; 2007—$745)		$	5,729			$	5,848
Equity securities, at fair value (cost: 2008—$2,400; 2007—$2,975)			4,137				6,249
Short-term investments, at fair value (amortized cost: 2008—$212; 2007—$101)			212				101
Other invested assets			82				63
Total investments			10,160				12,261
Cash and cash equivalents			347				226
Securities lending collateral invested			0				760
Investment income receivable			96				124
Finance receivable			74				92
Premiums receivable			1,103				1,107
Reinsurance receivable			846				754
Prepaid reinsurance premiums			13				13
Deferred policy acquisition costs			501				461
Land, building and equipment, net, for company use (accumulated depreciation: 2008—$290; 2007—$276)			235				239
Other assets			381				72
Separate accounts			547				528
Total assets		$	14,303			$	16,637
LIABILITIES
Insurance reserves
Loss and loss expense reserves		$	4,166			$	3,967
Life policy reserves			1,553				1,478
Unearned premiums			1,583				1,564
Securities lending payable			0				760
Other liabilities			671				574
Deferred income tax			236				977
Note payable			69				69
6.125% senior notes due 2034			371				371
6.9% senior debentures due 2028			28				28
6.92% senior debentures due 2028			392				392
Separate accounts			547				528
Total liabilities			9,616				10,708
Commitments and contingent liabilities (Note 6)			—				—
SHAREHOLDERS’ EQUITY
Common stock, par value—$2 per share; (authorized: 2008—500 million shares, 2007—500 million shares; issued: 2008—196 million shares, 2007—196 million shares)			393				393
Paid-in capital			1,063				1,049
Retained earnings			3,482				3,404
Accumulated other comprehensive income			956				2,151
Treasury stock at cost (2008—34 million shares, 2007—30 million shares)			(1,207	)			(1,068	)
Total shareholders’ equity			4,687				5,929
Total liabilities and shareholders’ equity		$	14,303			$	16,637

Accompanying notes are an integral part of these statements.

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended September 30, 2008		3

Cincinnati Financial Corporation And Subsidiaries

		Three months ended September 30,								Nine months ended September 30,
(In millions except per share data)		2008				2007				2008				2007
REVENUES
Earned premiums
Property casualty		$	751			$	777			$	2,262			$	2,348
Life			30				34				93				99
Investment income, net of expenses			130				152				412				451
Realized investment gains and losses			272				16				28				370
Other income			3				3				11				15
Total revenues			1,186				982				2,806				3,283
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits			563				559				1,693				1,533
Commissions			130				136				428				466
Other operating expenses			108				90				292				266
Taxes, licenses and fees			16				18				52				57
Increase in deferred policy acquisition costs			(1	)			6				(18	)			(17	)
Interest expense			14				13				39				39
Total benefits and expenses			830				822				2,486				2,344
INCOME BEFORE INCOME TAXES			356				160				320				939
PROVISION (benefit) FOR INCOME TAXES
Current			140				32				146				265
Deferred			(31	)			4				(94	)			5
Total provision for income taxes			109				36				52				270
NET INCOME		$	247			$	124			$	268			$	669
PER COMMON SHARE
Net income—basic		$	1.51			$	0.72			$	1.64			$	3.89
Net income—diluted			1.50				0.72				1.64				3.86

Accompanying notes are an integral part of this statement.

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

Cincinnati Financial Corporation And Subsidiaries

		Nine months ended September 30,
(In millions)		2008				2007
COMMON STOCK
Beginning of year		$	393			$	391
Stock options exercised			0				1
End of period			393				392
PAID-IN CAPITAL
Beginning of year			1,049				1,015
Stock options exercised			4				13
Share-based compensation			9				11
Other			1				2
End of period			1,063				1,041
RETAINED EARNINGS
Beginning of year			3,404				2,786
Cumulative effect of change in accounting for hybrid financial securities			0				5
Cumulative effect of change in accounting for uncertain tax positions			0				(1	)
Adjusted beginning of year			3,404				2,790
Net income			268				669
Dividends declared			(190	)			(182	)
End of period			3,482				3,277
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of year			2,151				3,379
Cumulative effect of change in accounting for hybrid financial securities			0				(5	)
Adjusted beginning of year			2,151				3,374
Other comprehensive income (loss), net			(1,195	)			(639	)
End of period			956				2,735
TREASURY STOCK
Beginning of year			(1,068	)			(763	)
Purchases			(139	)			(144	)
End of period			(1,207	)			(907	)
Total shareholders’ equity		$	4,687			$	6,538
COMMON STOCK — NUMBER OF SHARES OUTSTANDING
Beginning of year			166				173
Purchase of treasury shares			(4	)			(3	)
End of period			162				170
COMPREHENSIVE INCOME (LOSS)
Net income		$	268			$	669
Unrealized investment gains and losses during the period			(1,842	)			(989	)
Other			0				4
Taxes on other comprehensive income			647				346
Total comprehensive income (loss)		$	(927	)		$	30

Accompanying notes are an integral part of this statement.

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended September 30, 2008		5

Cincinnati Financial Corporation And Subsidiaries

		Nine months ended September 30,
(In millions)		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	268			$	669
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items			27				26
Realized gains on investments			(28	)			(370	)
Share-based compensation			9				11
Interest credited to contract holders			28				25
Changes in:
Investment income receivable			28				(2	)
Premiums and reinsurance receivable			(88	)			(94	)
Deferred policy acquisition costs			(18	)			(17	)
Other assets			4				(6	)
Loss and loss expense reserves			199				135
Life policy reserves			71				71
Unearned premiums			19				40
Other liabilities			(30	)			28
Deferred income tax			(94	)			5
Current income tax			87				(1	)
Net cash provided by operating activities			482				520
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of fixed maturities			119				267
Call or maturity of fixed maturities			933				330
Sale of equity securities			1,036				602
Collection of finance receivables			29				28
Purchase of fixed maturities			(1,346	)			(792	)
Purchase of equity securities			(591	)			(626	)
Change in short-term investments, net			(110	)			60
Investment in buildings and equipment, net			(28	)			(51	)
Investment in finance receivables			(12	)			(18	)
Change in other invested assets, net			(14	)			1
Change in securities lending collateral invested			741				(768	)
Net cash provided by (used in) investing activities			757				(967	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of cash dividends to shareholders			(186	)			(180	)
Purchase of treasury shares			(139	)			(144	)
Increase in notes payable			0				20
Proceeds from stock options exercised			4				14
Contract holder funds deposited			13				12
Contract holder funds withdrawn			(46	)			(59	)
Change in securities lending payable			(760	)			768
Other			(4	)			(3	)
Net cash provided by (used in) financing activities			(1,118	)			428
Net increase (decrease) in cash and cash equivalents			121				(19	)
Cash and cash equivalents at beginning of year			226				202
Cash and cash equivalents at end of period		$	347			$	183
Supplemental disclosures of cash flow information:
Interest paid (net of capitalized interest: 2008—$3; 2007—$2)		$	26			$	26
Income taxes paid			58				264
Non-cash activities:
Conversion of securities		$	3			$	108
Equipment acquired under capital lease obligations			0				7

Accompanying notes are an integral part of these statements.

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

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. The statements are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). All significant intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates. The December 31, 2007, consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements included in our 2007 Annual Report on Form 10-K.

Our September 30, 2008, condensed consolidated financial statements are unaudited. Certain financial information that is included in annual financial statements prepared in accordance with GAAP is not required for interim reporting and has been condensed or omitted. We believe that we have made all adjustments, consisting only of normal recurring accruals that are necessary for fair presentation. The results of operations for interim periods do not necessarily indicate results to be expected for the full year.

Recent Accounting Pronouncements

SFAS No. 157, Fair Value Measurements

In October 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. FSP No. 157-3 provides key considerations when determining fair value for financial assets that are not active. In February 2008, the FASB issued FSP No. 157-2, Fair Value Measurement. FSP No. 157-2 and FSP No. 157-3 are amendments of Statement of Financial Accounting Standards (SFAS) No. 157, issued in September 2006. SFAS No. 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure about fair value measurements.

SFAS No. 157 was effective for fiscal years beginning after November 15, 2007. We partially adopted SFAS No. 157 in the first quarter of 2008. We elected to defer SFAS No. 157, Fair Value Measurements, for nonfinancial assets and nonfinancial liabilities until January 1, 2009, as permitted under FSP No. 157-2. We did not have a cumulative-effect adjustment to beginning retained earnings as a result of the adoption of SFAS No. 157.

SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of SFAS No. 115

In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of SFAS No. 115. SFAS No. 159 permits an entity to choose to measure many financial instruments and certain other items at fair value (on an instrument-by-instrument basis) at specified election dates. The objective is to improve financial reporting by providing an entity with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. We have not elected to value any assets or liabilities (not otherwise measured at fair value) under SFAS No. 159. We continue to evaluate the impact of adopting SFAS No. 159 in the future.

SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities - an amendment of SFAS No. 133

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of SFAS No. 133. SFAS No. 161 requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. SFAS No. 161 also requires cross-referencing within the footnotes to assist the users of financial statements in identifying significant information about derivative instruments. The effective date of SFAS No. 161 is the company’s fiscal year beginning January 1, 2009.

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended September 30, 2008		7

NOTE 2 — Investments

Fixed maturities (bonds and redeemable preferred stocks), equity securities (common and non-redeemable preferred stocks) and short-term investments have been classified as available for sale and are stated at fair values at September 30, 2008, and December 31, 2007.

At September 30, 2008, unrealized investment gains before taxes totaled $1.861 billion and unrealized investment losses in the investment portfolio amounted to $338 million. The unrealized gains were largely due to long-term gains from our common stock portfolio. Holdings that contributed 10 percent or more of the $1.861 billion in gains were: Exxon Mobil Corporation (NYSE:XOM), Fifth Third Bancorp (NASDAQ:FITB), PNC Financial Services Group, Inc. (NYSE:PNC) and The Procter & Gamble Company (NYSE:PG).

The change in unrealized gains and losses on investments, net of taxes, described in the following table, is included in other comprehensive income and shareholders’ equity. During the three and nine months ended September 30, 2008, we recognized $8 million and $13 million in realized investment losses related to current period changes in valuation of our hybrid securities. At September 30, 2008, we had $118 million of hybrid securities included in fixed maturities that now are accounted for under SFAS No. 155.

The change in fixed maturities unrealized gains and losses for the three and nine months ended September 30, 2008 and 2007, was largely due to fair value fluctuations in the fixed maturity portfolio, which were driven primarily by widening credit spreads. At September 30, 2008, 1,438 of the 2,156 securities we owned were trading below book value compared with 373 of the 2,053 securities we owned at year-end 2007. The 1,438 holdings trading below book value at September 30, 2008, represented 46.9 percent of fair value of invested assets and $338 million in unrealized losses. The increase largely was due to a greater number of fixed-maturity investments trading below book value. We deem the risk related to these securities to be relatively minor and at least partially offset by the earned income potential of these investments.

Equity securities unrealized gains declined for the three and nine months ended September 30, 2008, primarily because of equity security market value fluctuations and the realization of gains through the sale of 38 million shares of our holdings of Fifth Third common stock along with sales of other financial and non-financial common stock holdings. During the three and nine months ended September 30, 2008, we recognized $121 million and $400 million in other-than-temporary impairment charges.

Third-quarter impairment charges represented 1.2 percent of invested assets and included $47 million to write down preferred shares of Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Impairments of equity securities accounted for more than 80 percent of total nine-month other-than-temporary impairment charges, reflecting the portfolio mix, the historic weighting in financial sector securities and the unprecedented decline in overall stock market values during 2008. Equity securities unrealized gains declined for the three and nine months ended September 30, 2007, primarily because of the sale of common stock holdings and declines in the market value of equity holdings. During the three and nine months ended September 30, 2007, we recognized $1 million and $2 million in other-than-temporary impairment charges.

		Three months ended September 30,								Nine months ended September 30,
(In millions)		2008				2007				2008				2007
Change in unrealized investment gains and losses and other summary:
Fixed maturities		$	(147	)		$	60			$	(280	)		$	(30	)
Equity securities			(150	)			(488	)			(1,536	)			(959	)
Adjustment to deferred acquisition costs and life policy reserves			8				(1	)			13				1
Pension obligations			0				1				1				2
Other			(30	)			0				(40	)			1
Income taxes on above			112				150				647				346
Total		$	(207	)		$	(278	)		$	(1,195	)		$	(639	)

Realized gains and losses on investments are recognized in net income on a specific identification basis. See our 2007 Annual Report on Form 10-K, Item 1, Investments Segment, Page 15, for additional discussion of the investment portfolio. Other-than-temporary declines in the fair value of investments are recognized in net income as realized investment losses at the time when facts and circumstances indicate such write-downs are warranted.

Securities Lending Program

In 2006, we began actively participating in a securities lending program under which certain fixed-maturity securities from our investment portfolio were loaned to other institutions for short periods of time. We required cash collateral in excess of the market value of the loaned securities. The collateral received was invested in accordance with our guidelines in high-quality, short-duration funds to generate additional investment income. The market value of the loaned securities was monitored on a daily basis and additional collateral was added or refunded as the market value of the loaned securities changed. The program was accounted for as a

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

secured borrowing; therefore, the collateral was recognized as an asset and was classified as securities lending collateral invested, with a corresponding liability for the obligation to return the collateral.

During the third quarter of 2008, we terminated the program. At September 30, 2008, we had no fixed maturities on loan compared with $760 million on loan at year-end 2007.

In conjunction with the termination of the program, we returned the offsetting collateral. We returned $64 million of cash in lieu of $45 million book value of Alt-A, residential collateralized mortgage obligations (CMOs), which were included in fixed maturities as of September 30, 2008. In the first nine months of 2008, these CMOs had fair value adjustments of $19 million. The CMOs were an investment made by one of the short-duration funds, which subsequently dissolved and distributed the assets to its investors. When we terminated the securities lending program, we chose to retain the CMOs rather than sell them at what we felt were distressed prices in an illiquid market.

NOTE 3 — Reinsurance

Our statements of income include earned consolidated property casualty insurance premiums on assumed and ceded business:

		Three months ended September 30,								Nine months ended September 30,
(In millions)		2008				2007				2008				2007
Direct earned premiums		$	799			$	815			$	2,389			$	2,462
Assumed earned premiums			3				6				8				16
Ceded earned premiums			(51	)			(44	)			(135	)			(130	)
Net earned premiums		$	751			$	777			$	2,262			$	2,348

Our statements of income include incurred consolidated property casualty insurance loss and loss expenses on assumed and ceded business:

		Three months ended September 30,								Nine months ended September 30,
(In millions)		2008				2007				2008				2007
Direct incurred loss and loss expenses		$	598			$	534			$	1,715			$	1,511
Assumed incurred loss and loss expenses			2				6				2				10
Ceded incurred loss and loss expenses			(78	)			(17	)			(138	)			(86	)
Net incurred loss and loss expenses		$	522			$	523			$	1,579			$	1,435

Our statements of income include earned life insurance premiums on assumed and ceded business:

		Three months ended September 30,								Nine months ended September 30,
(In millions)		2008				2007				2008				2007
Direct earned premiums		$	43			$	44			$	131			$	129
Assumed earned premiums			0				0				0				0
Ceded earned premiums			(13	)			(10	)			(38	)			(30	)
Net earned premiums		$	30			$	34			$	93			$	99

Our statements of income include life insurance contract holder benefits incurred on assumed and ceded business:

		Three months ended September 30,								Nine months ended September 30,
(In millions)		2008				2007				2008				2007
Direct contract holders benefits incurred		$	54			$	46			$	148			$	128
Assumed contract holders benefits incurred			0				0				0				0
Ceded contract holders benefits incurred			(13	)			(10	)			(34	)			(30	)
Net contract holders benefits incurred		$	41			$	36			$	114			$	98

NOTE 4 — Employee Benefits

The following summarizes the components of net periodic costs for our qualified and supplemental pension plans:

		Three months ended September 30,								Nine months ended September 30,
(In millions)		2008				2007				2008				2007
Service cost		$	4			$	6			$	12			$	15
Interest cost			4				4				13				12
Expected return on plan assets			(4	)			(4	)			(12	)			(11	)
Amortization of actuarial loss (gain), prior service cost and transition asset			0				1				1				2
Curtailment			3				0				3				0
Net periodic benefit cost		$	7			$	7			$	17			$	18

In the third quarter, we changed the form of retirement benefit we offer associates to a 401(k) plan with company match from a qualified defined benefit pension plan. Effective June 30, 2008, we froze entry into the pension plan, and only participants 40 years of age or older on August 31, 2008, could elect to continue to participate. For participants remaining in the pension plan, the company will continue to contribute to fund

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended September 30, 2008		9

future benefit obligations. We contributed $10 million to the pension plan during the nine months ended September 30, 2008, and we currently anticipate contributing an additional $1 million during the fourth quarter. The fourth-quarter contribution amount may vary due to fluctuations in the capital markets.

For participants leaving the pension plan, benefit accruals were frozen effective August 31, 2008. The company plans to transfer $60 million of the pension plan’s accumulated benefit obligation to an intermediary spin-off plan to facilitate the partial curtailment and settlement for these participants. A curtailment charge of $3.0 million was included in results of operations for the third quarter of 2008.

During the fourth quarter of 2008, pursuant to SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, we anticipate an expense of approximately $26 million in the consolidated statement of income to recognize a settlement loss associated with the partial termination of the qualified pension plan. Included in the charge is the anticipated contribution of approximately $24 million to complete funding of benefits that will be distributed in the fourth quarter to participants leaving the qualified pension plan.

The company began making matching contributions to our sponsored 401(k) plan during September 2008. The company contributed less then $1 million during the third quarter of 2008 to the 401(k) plan. Associates who are not accruing benefits under the pension plan are eligible to receive the company match of up to 6 percent of cash compensation.

NOTE 5 — Equity Compensation Plans

We currently have four equity compensation plans that together permit us to grant incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights and other stock-based awards. The Cincinnati Financial Corporation 2006 Stock Compensation Plan also gives us the flexibility to make grants to associates of any type of stock-based awards, subject to performance-based criteria, to directly link compensation to performance. We currently grant incentive stock options, non-qualified stock options, service-based restricted stock units and performance-based restricted stock units under our plans. One of our equity compensation plans permits us to grant common stock to our outside directors as discussed in our 2008 Proxy Statement.

A total of 16,725,250 shares are authorized to be granted under the shareholder-approved plans. At September 30, 2008, 8,974,266 shares were available for future issuance under the plans. We currently issue new shares for option exercises.

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

		Three months ended September 30,								Nine months ended September 30,
(In millions)		2008				2007				2008				2007
Share-based compensation cost		$	3			$	3			$	9			$	11
Income tax benefit			1				0				3				2
Share-based compensation cost after tax		$	2			$	3			$	6			$	9

Stock Options

Stock options are granted to associates at an exercise price that is not less than fair market value on the date of grant and are exercisable over 10 year periods. The stock options generally vest ratably over a three-year period. In determining the share-based compensation amounts for 2008, the fair value of each option granted in 2008 was estimated on the date of grant using the binomial option-pricing model with the following weighted average assumptions used for grants in 2008:

		Nine months ended September 30,
		2008				2007
Weighted — average expected term		7-8 years				5-7 years
Expected volatility			20.58- 24.67%				18.29 - 24.14%
Dividend yield			3.99-6.22%				3.33%
Risk-free rates			3.29-3.84%				4.8-4.81%

As of September 30, 2008, there was $15 million of unrecognized compensation cost related to non-vested awards that we expect to recognize over a weighted-average period of two years.

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

Here is a summary of option information:

						Weighted-
						average				Aggregate
						exercise				intrinsic
(Shares in thousands)		Shares				price				value
2008
Outstanding at beginning of year			10,480			$	36.86
Granted			775				38.64
Exercised			(119	)			31.40
Forfeited			(1,069	)			36.59
Outstanding at end of period			10,067				37.09			$	1
Options exercisable at end of period			8,521				36.22			$	1
Weighted-average fair value of options granted during the period							7.41

(Shares in thousands)		Options outstanding												Options exercisable
						Weighted-average				Weighted-								Weighted-
						remaining				average								average
Range of exercise prices		Shares				contractual life				exercise price				Shares				exercise price
$25.00 to $29.99			824			1.41 yrs				$	26.95				816			$	26.97
$30.00 to $34.99			3,787			2.78 yrs					32.92				3,787				32.92
$35.00 to $39.99			2,254			6.16 yrs					38.53				1,503				38.40
$40.00 to $44.99			1,924			6.83 yrs					42.55				1,555				42.01
$45.00 to $49.99			1,278			7.26 yrs					45.26				860				45.26
Total			10,067			4.77 yrs					37.09				8,521				36.22

Restricted Stock Units

Service-based and performance-based restricted stock units are granted to associates at fair market value on the date of grant. Service-based restricted stock units vest as a unit three years after the date of grant, while performance-based restricted stock units vest on the first day of March after a three-calendar year performance period, if certain performance targets are attained. As of September 30, 2008, management assumed for accounting purposes that performance targets used for the restricted stock unit awards would not be met.

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

Here is a summary of restricted stock unit information:

		Service -				Weighted -				Performance -				Weighted -
		based				average grant-				based				average grant-
		nonvested				date fair				nonvested				date fair
(Shares in thousands)		shares				value				shares				value
Nonvested at January 1, 2008			162			$	40.74				35			$	40.74
Granted			227				34.70				47				32.61
Vested			(2	)			37.65				(1	)			36.47
Forfeited			(7	)			37.61				0				0.00
Nonvested at September 30, 2008			380				37.20				81				36.04

NOTE 6 — Commitments And Contingent Liabilities

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

NOTE 7 — Income Taxes

On January 1, 2007, we adopted the provisions of FIN 48. As of December 31, 2007, we had gross unrecognized tax benefits (FIN 48 liability) of $14.2 million. Details about our FIN 48 liability are found in our 2007 Annual Report on Form 10-K, Item 8, Note 10 of the Consolidated Financial Statements, Page 98.

During 2008, our unrecognized tax benefits as a result of tax positions taken during prior years increased $2.8 million, our unrecognized tax benefits as a result of tax positions taken in the current year increased $1.6

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended September 30, 2008		11

million and our unrecognized tax benefits for settlements with taxing authorities decreased $2.8 million. Our total FIN 48 liability as of September 30, 2008, was $15.8 million. In May 2008, the IRS presented us with preliminary adjustments related to the valuation of our loss reserves for tax years 2005 and 2006. Upon evaluation of the IRS preliminary adjustments, management refined certain assumptions used to calculate the unrecognized tax benefits associated with this issue, resulting in a revised measurement of the unrecognized tax benefits for both current and prior years. During the three and nine months ended September 30, 2008, there have been no changes to any assumptions about the amount of our FIN 48 liability that may be settled with the IRS in the next 12 months related to tax years 2005 to 2006.

NOTE 8 — SFAS No. 157, Fair Value Measurements

We adopted SFAS No. 157 in the first quarter of 2008. Our investment portfolio is subject to SFAS No. 157 disclosure requirements for interim reporting. Our year-end 2008 reporting will include disclosure for the investment portfolio as well as the fair value measurement framework for all SFAS No. 107 disclosures.

Fair Value Hierarchy

In accordance with SFAS No. 157, we categorized our financial instruments, based on the priority of the observable and market-based data for each valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices with readily available independent data in active markets for identical asses or liabilities (Level 1) and the lowest priority to unobservable market inputs (Level 3).

When various inputs for measurement fall within different levels of the fair value hierarchy, the lowest observable input that has a significant impact on fair value measurement is used.

Financial instruments are categorized based upon the following characteristics or inputs to the valuation techniques:

•

Level 1 — Financial assets and liabilities for which inputs are observable and are obtained from reliable quoted prices for identical assets or liabilities in actively traded markets. This is the most reliable fair value measurement and includes, for example, active exchange-traded equity securities.

•

Level 2 — Financial assets and liabilities for which values are based on quoted prices in markets that are not active or for which values are based on similar assets and liabilities that are actively traded. Also includes pricing models for which the inputs are corroborated by market data.

•

Level 3 — Financial assets and liabilities for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Level 3 inputs include the following:

	o		Quotes from brokers or other external sources that are not considered binding;
	o		Quotes from brokers or other external sources where it cannot be determined that market participants would in fact transact for the asset or liability at the quoted price;
	o		Quotes from brokers or other external sources where the inputs are not deemed observable.

We conduct a thorough review of fair value hierarchy classifications on a quarterly basis. Reclassification of certain financial instruments may occur when input observability changes. As noted below in the Level 3 disclosure table, reclassifications are reported as transfers in/out of the Level 3 category as of the beginning of the quarter in which the reclassification occurred.

The following table illustrates the fair value hierarchy for those assets measured at fair value on a recurring basis as of September 30, 2008. We do not have any material liabilities carried at fair value.

		Asset fair value measurements at reporting date using
						Significant
		Quoted prices in				other				Significant
		active markets for				observable				unobservable
		identical assets				inputs				inputs
(In millions)		(Level 1)				(Level 2)				(Level 3)				Total
Available for sale securities:
Taxable fixed maturities		$	426			$	2,672			$	49			$	3,147
Taxable fixed maturities separate accounts			56				419				2				477
Tax-exempt fixed maturities			0				2,533				5				2,538
Common equities			3,874				0				63				3,937
Preferred equities			0				162				38				200
Collateralized mortgage obligations			0				44				0				44
Short-term investments			0				212				0				212
Top Hat Savings Plan			5				1				0				6
Total		$	4,361			$	6,043			$	157			$	10,561

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

Level 3 Assets

Each financial instrument deemed to have significant unobservable inputs when determining valuation is identified in the table below by security type with a summary of changes in fair value for the three months ended September 30, 2008.

		Asset fair value measurements using significant unobservable inputs (Level 3)
						Taxable
						fixed
		Taxable				maturities-				Tax-exempt
		fixed				separate				fixed				Common				Preferred
(In millions)		maturities				accounts				maturities				equities				equities				Total
Beginning balance, June 30, 2008		$	57			$	3			$	5			$	63			$	47			$	175
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)			(4	)			(1	)			0				0				(10	)			(15	)
Included in other comprehensive income			(1	)			0				0				0				2				1
Purchases, sales, issuances, and settlements			(4	)			0				0				0				0				(4	)
Transfers in and/or out of Level 3			1				0				0				0				(1	)			0
Ending balance, September 30, 2008		$	49			$	2			$	5			$	63			$	38			$	157

Level 3 taxable fixed-maturity securities decreased primarily because of sales and impairments. Preferred stocks also decreased primarily due to impairment charges of $10 million. In addition, we may transfer securities in and out of levels following quarterly reviews that determine the appropriate current use of observable or unobservable inputs.

Below is a summary of changes in fair value for the nine months ended September 30, 2008.

		Asset fair value measurements using significant unobservable inputs (Level 3)
						Taxable
						fixed
		Taxable				maturities-				Tax-exempt
		fixed				separate				fixed				Common				Preferred
(In millions)		maturities				accounts				maturities				equities				equities				Total
Beginning balance, January 1, 2008		$	85			$	3			$	5			$	59			$	58			$	210
Total gains or losses (realized/unrealized):
Included in earnings (or changes in net assets)			(3	)			(1	)			0				0				(16	)			(20	)
Included in other comprehensive income			(5	)			0				0				4				1				0
Purchases, sales, issuances, and settlements			(15	)			0				0				0				5				(10	)
Transfers in and/or out of Level 3			(13	)			0				0				0				(10	)			(23	)
Ending balance, September 30, 2008		$	49			$	2			$	5			$	63			$	38			$	157

Unrealized gains or losses on Level 3 securities were included in accumulated other comprehensive income and were not included in net realized investment gains or losses for the three and nine months ended September 30, 2008.

NOTE 9 — Segment Information

We operate primarily in two industries, property casualty insurance and life insurance. We regularly review four different reporting segments to make decisions about allocating resources and assessing performance:

•

Commercial lines property casualty insurance

•

Personal lines property casualty insurance

•

Life insurance

•

Investment operations

We report as “Other” the non-investment operations of the parent company and its subsidiaries CFC Investment Company and CinFin Capital Management Company (excluding client investment activities), as well as other income of our insurance subsidiary. Beginning in the first quarter of 2008, we also are including results of The Cincinnati Specialty Underwriters and CSU Producer Resources Inc. in Other. See our 2007 Annual Report on Form 10-K, Item 8, Note 17, Segment Information, Insurance Company Page 105, for a description of revenue, income or loss before income taxes and identifiable assets for each segment.

Cincinnati Financial Corporation
Form 10-Q for the quarterly period ended September 30, 2008		13

Segment information is summarized in the following table:

		Three months ended September 30,								Nine months ended September 30,
(In millions)		2008				2007				2008				2007
Revenues:
Commercial lines insurance
Commercial casualty		$	197			$	205			$	580			$	623
Commercial property			120				125				364				373
Commercial auto			103				108				308				331
Workers’ compensation			93				94				282				280
Specialty packages			35				36				107				109
Surety and executive risk			27				25				80				73
Machinery and equipment			7				7				22				21
Total commercial lines insurance			582				600				1,743				1,810
Personal lines insurance
Personal auto			81				85				245				259
Homeowner			64				70				208				214
Other personal lines			22				22				65				65
Total personal lines insurance			167				177				518				538
Life insurance			30				35				94				103
Investment operations			402				168				440				821
Other			5				2				11				11
Total		$	1,186			$	982			$	2,806			$	3,283
Income (loss) before income taxes:
Insurance underwriting results:
Commercial lines insurance		$	30			$	28			$	59			$	184
Personal lines insurance			(38	)			(7	)			(82	)			8
Life insurance			(6	)			(2	)			(6	)			4
Investment operations			386				154				393				778
Other			(16	)			(13	)			(44	)			(35	)
Total		$	356			$	160			$	320			$	939

Identifiable assets:

		September 30,				December 31,
		2008				2007
Property casualty insurance		$	2,385			$	2,281
Life insurance			1,024				938
Investment operations			10,506				12,322
Other			388				1,096
Total		$	14,303			$	16,637

Note 10 — Subsequent Events

Investment asset sale — In early October 2008, we sold 9 million shares, or 31.7 percent, of the company’s Fifth Third common stock holding as of September 30, 2008. The October sales generated total proceeds of $120 million, which will be reduced by capital gains taxes of approximately $40 million. The sale was executed pursuant to Rule 144 under the Securities Act of 1933, as amended. The net after-tax gain of approximately $75 million, or about 46 cents per share, will be included in net income for the three-months and full-year ending December 31, 2008. After the transaction, Cincinnati Financial and its subsidiaries own 20 million shares of Fifth Third’s common stock, or approximately 3.5 percent of the bank’s total common shares outstanding as of October 21, 2008.

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

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

The following discussion highlights significant factors influencing the consolidated results of operations and financial position of Cincinnati Financial Corporation (CFC). It should be read in conjunction with the consolidated financial statements and related notes included in our 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