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 June 30, 2006.

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

For the transition period from                      to                     .

Commission file number 0-4604

CINCINNATI FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

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

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

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

Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨

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

¨ Yes þ No

As of July 25, 2006, there were 173,224,905 shares of common stock outstanding.

 

 

CINCINNATI FINANCIAL CORPORATION
FORM 10-Q FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2006

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1 Financial Statements
Condensed Consolidated Balance Sheets			3
Condensed Consolidated Statements of Income			4
Condensed Consolidated Statements of Shareholders’ Equity			5
Condensed Consolidated Statements of Cash Flows			6
Notes to Condensed Consolidated Financial Statements			7
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3 Quantitative and Qualitative Disclosures About Market Risk			36
Item 4 Controls and Procedures			40
PART II — OTHER INFORMATION
Item 1 Legal Proceedings			41
Item 1A Risk Factors			41
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds			41
Item 3 Defaults Upon Senior Securities			41
Item 4 Submission of Matters to a Vote of Security Holders			41
Item 5 Other Information			42
Item 6 Exhibits			43
EX-11
EX-31A
EX-31B
EX-32

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

Part I — Financial Information

Item 1. Financial Statements

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Balance Sheets

(Dollars in millions except per share data)		June 30,				December 31,
		2006				2005
		(unaudited)
ASSETS
Investments
Fixed maturities, at fair value (amortized cost: 2006—$5,700; 2005—$5,387)		$	5,629			$	5,476
Equity securities, at fair value (cost: 2006—$2,533; 2005—$2,128)			6,830				7,106
Short-term investments, at fair value (cost: 2005—$75)			0				75
Other invested assets			55				45
Cash and cash equivalents			203				119
Securities lending collateral			898				0
Investment income receivable			118				117
Finance receivable			106				105
Premiums receivable			1,192				1,116
Reinsurance receivable			691				681
Prepaid reinsurance premiums			13				14
Deferred policy acquisition costs			460				429
Land, building and equipment, net, for company use (accumulated depreciation:
2006—$246; 2005—$232)			184				168
Other assets			76				66
Separate accounts			481				486
Total assets		$	16,936			$	16,003
LIABILITIES
Insurance reserves
Loss and loss expense reserves		$	3,796			$	3,661
Life policy reserves			1,372				1,343
Unearned premiums			1,634				1,559
Securities lending payable			898				0
Other liabilities			547				455
Deferred income tax			1,303				1,622
Notes payable			49				0
6.125% senior notes due 2034			371				371
6.9% senior debentures due 2028			28				28
6.92% senior debenture due 2028			392				392
Separate accounts			481				486
Total liabilities			10,871				9,917
SHAREHOLDERS’ EQUITY
Common stock, par value-$2 per share; authorized: 2006-500 million shares, 2005- 500 million shares; issued: 2006-195 million shares, 2005-194 million shares			391				389
Paid-in capital			997				969
Retained earnings			2,656				2,088
Accumulated other comprehensive income—unrealized gains on investments			2,753				3,284
Treasury stock at cost (2006—22 million shares, 2005—20 million shares)			(732	)			(644	)
Total shareholders’ equity			6,065				6,086
Total liabilities and shareholders’ equity		$	16,936			$	16,003

Accompanying notes are an integral part of this statement.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Statements Of Income

(In millions except per share data)		Three months ended June 30,								Six months ended June 30,
		2006				2005				2006				2005
		(unaudited)								(unaudited)
REVENUES
Earned premiums
Property casualty		$	793			$	765			$	1,571			$	1,518
Life			29				29				56				53
Investment income, net of expenses			143				129				281				256
Realized investment gains and losses			11				13				671				22
Other income			5				4				9				7
Total revenues			981				940				2,588				1,856
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits			546				461				1,047				942
Commissions			156				166				322				316
Other operating expenses			79				72				159				139
Taxes, licenses and fees			14				18				39				35
Increase in deferred policy acquisition costs			(7	)			(7	)			(22	)			(18	)
Interest expense			13				13				26				26
Other expenses			5				2				8				6
Total benefits and expenses			806				725				1,579				1,446
INCOME BEFORE INCOME TAXES			175				215				1,009				410
PROVISION (BENEFIT) FOR INCOME TAXES
Current			48				57				340				107
Deferred			(5	)			0				(15	)			1
Total provision for income taxes			43				57				325				108
NET INCOME		$	132			$	158			$	684			$	302
PER COMMON SHARE
Net income—basic		$	0.77			$	0.90			$	3.94			$	1.72
Net income—diluted		$	0.76			$	0.89			$	3.90			$	1.70

Accompanying notes are an integral part of this statement.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Statements Of Shareholders’ Equity

(In millions)		Six months ended June 30,
		2006				2005
		(unaudited)
COMMON STOCK — NUMBER OF SHARES
Beginning of year			174				167
5% stock dividend			0				9
Stock options exercised			1				0
Purchase of treasury shares			(2	)			(1	)
End of period			173				175
COMMON STOCK
Beginning of year		$	389			$	370
5% stock dividend			0				19
Stock options exercised			2				0
End of period			391				389
PAID-IN CAPITAL
Beginning of year			969				618
5% stock dividend			0				341
Stock options exercised			17				5
Share-based compensation			11				0
End of period			997				964
RETAINED EARNINGS
Beginning of year			2,088				2,057
Net income			684				302
5% stock dividend			0				(360	)
Dividends declared			(116	)			(105	)
End of period			2,656				1,894
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of year			3,284				3,787
Change in accumulated other comprehensive income, net			(531	)			(282	)
End of period			2,753				3,505
TREASURY STOCK
Beginning of year			(644	)			(583	)
Purchase			(88	)			(39	)
Reissued for stock options			0				2
End of period			(732	)			(620	)
Total shareholders’ equity		$	6,065			$	6,132
COMPREHENSIVE INCOME
Net income		$	684			$	302
Change in accumulated other comprehensive income, net			(531	)			(282	)
Total comprehensive income		$	153			$	20

Accompanying notes are an integral part of this statement.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Statements Of Cash Flows

(In millions)		Six months ended June 30,
		2006				2005
		(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	684			$	302
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items			16				14
Share-based compensation expense			11				0
Realized (gains) on investments			(671	)			(22	)
Interest credited to contract holders			14				14
Changes in:
Investment income receivable			1				(6	)
Premiums and reinsurance receivable			(85	)			(75	)
Deferred policy acquisition costs			(22	)			(19	)
Other assets			(11	)			(4	)
Loss and loss expense reserves			135				59
Life policy reserves			28				53
Unearned premiums			75				71
Other liabilities			(15	)			(43	)
Deferred income tax			(15	)			1
Current income tax			94				(13	)
Net cash provided by operating activities			239				332
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of fixed maturities investments			68				123
Call or maturity of fixed maturities investments			148				321
Sale of equity securities investments			835				45
Collection of finance receivables			18				17
Purchase of fixed maturities investments			(510	)			(828	)
Purchase of equity securities investments			(585	)			(56	)
Change in short-term investments, net			79				63
Investment in buildings and equipment, net			(28	)			(23	)
Investment in finance receivables			(21	)			(18	)
Change in other invested assets, net			(10	)			(4	)
Change in securities lending collateral			(898	)			0
Net cash used in investing activities			(904	)			(360	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of cash dividends to shareholders			(112	)			(98	)
Purchase/issuance of treasury shares			(88	)			(37	)
Increase (decrease) in notes payable			49				0
Proceeds from stock options exercised			17				5
Contract holder funds deposited			19				47
Contract holder funds withdrawn			(35	)			(23	)
Change in securities lending payable			898				0
Other			1				0
Net cash provided by (used in) financing activities			749				(106	)
Net increase (decrease) in cash and cash equivalents			84				(134	)
Cash and cash equivalents at beginning of period			119				306
Cash and cash equivalents at end of period		$	203			$	172
Supplemental disclosures of cash flow information:
Interest paid		$	26			$	26
Income taxes paid			248				120
Non-Cash activities
Conversion of fixed maturity to equity security and fixed maturity investments		$	0			$	25
Equipment acquired with capital lease obligations			7				0

Accompanying notes are an integral part of this statement.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

Notes To Condensed Consolidated Financial Statements (unaudited)

NOTE 1 — ACCOUNTING POLICIES

The condensed consolidated financial statements include the accounts of Cincinnati Financial Corporation and its consolidated subsidiaries, each of which is wholly owned, and are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). All significant intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates. The December 31, 2005, consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America.

Our June 30, 2006, condensed consolidated financial statements are unaudited. We believe 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 full year.

Investments

Fixed maturities (bonds and redeemable preferred stocks) and equity securities (common and non-redeemable preferred stocks) have been classified as available for sale and are stated at fair values at June 30, 2006, and December 31, 2005. Short-term investments (primarily commercial paper and notes) are classified as available for sale and recorded at amortized cost, which approximates fair value, at December 31, 2005. We had no short-term investments at June 30, 2006.

At June 30, 2006, unrealized investment gains before taxes totaled $4.413 billion and unrealized investment losses in the investment portfolio amounted to $187 million. The unrealized gains at June 30, 2006, primarily were due to long-term gains from our holdings of Fifth Third Bancorp (Nasdaq:FITB) common stock, which contributed 56.8 percent of the gain, and from our other common stock holdings, including ExxonMobil Corporation (NYSE:XOM), The Procter & Gamble Company (NYSE:PG) and PNC Financial Services Group (NYSE:PNC), which each contributed at least 5 percent of the gain. 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 three and six months ended June 30, 2006 and 2005, was due primarily to interest-rate driven fair value fluctuations in the fixed-maturity portfolio.

The change in equity securities unrealized gains for the three months ended June 30, 2006, was primarily due the decline in Fifth Third’s market value since March 31, 2006. The change in equity securities unrealized gains for the six months ended June 30, 2006, was primarily due to the sale of our holdings of ALLTEL Corporation (NYSE:AT) common stock, which was completed in January 2006. The change in equity securities unrealized gains and losses for the three months ended June 30, 2005, was due to increases in the market value of other equity holdings offsetting the decline in Fifth Third’s market value since March 31, 2005. The change for the six months ended June 30, 2005, was due primarily to the decline in Fifth Third’s market value.

(In millions)		Three months ended June 30,								Six months ended June 30,
		2006				2005				2006				2005
Change in unrealized investment gains and losses summarized by investment category:
Fixed maturities		$	(82	)		$	70			$	(160	)		$	(53	)
Equity securities			(258	)			13				(681	)			(387	)
Adjustment to deferred acquisition costs and life policy reserves			3				(3	)			6				1
Other			0				(1	)			1				5
Income taxes on above			118				(28	)			303				152
Total		$	(219	)		$	51			$	(531	)		$	(282	)

Realized gains and losses on investments are recognized in net income on a specific identification basis. See our 2005 Annual Report on Form 10-K, 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. In the three months ended June 30, 2006, we recorded no other-than-temporarily impairment charges and in the six months ended June 30, 2006, we recorded $1 million in other-than-temporary impairment charges. In the comparable 2005 periods, we recorded no other-than-temporary impairment charges.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

Reinsurance

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

(In millions)		Three months ended June 30,								Six months ended June 30,
		2006				2005				2006				2005
Direct earned premiums		$	824			$	801			$	1,634			$	1,588
Assumed earned premiums			4				7				10				14
Ceded earned premiums			(35	)			(43	)			(73	)			(84	)
Net earned premiums		$	793			$	765			$	1,571			$	1,518
Direct incurred loss and loss expenses		$	544			$	449			$	1,034			$	947
Assumed incurred loss and loss expenses			3				6				7				12
Ceded incurred loss and loss expenses			(28	)			(19	)			(51	)			(65	)
Net incurred loss and loss expenses		$	519			$	436			$	990			$	894

Ceded earned premiums declined in the three and six months ended June 30, 2006, because of the change in our reinsurance programs. Direct losses and policyholder benefits rose primarily because of a higher level of catastrophe losses in the three and six months ended June 30, 2006. Ceded incurred loss and loss expenses increased for the three months ended June 30, 2006, because of an increase in losses that exceeded the higher retention on our working treaties as well as the higher retention on our property catastrophe treaty. For the six months, ceded incurred loss and loss expenses declined because we had fewer losses that exceeded the higher retention on our working treaties as well as the higher retention on our property catastrophe treaty.

Securities Lending Program

During the first quarter of 2006, we began actively participating in a securities lending program under which certain fixed maturities from our investment portfolio are loaned to other institutions for short periods of time. We require collateral in excess of the market value of the loaned securities. The collateral is invested in accordance with our guidelines in high-quality, short-duration instruments to generate additional investment income. The market value of the loaned securities is monitored on a daily basis and additional collateral is added or refunded as the market value of the loaned securities changes. The securities lending collateral is recognized as an asset with a corresponding liability for the obligation to return the collateral.

We maintain the right and ability to redeem the securities loaned on short notice and continue to earn interest on the securities. We maintain effective control over the securities that we have loaned. The securities we have loaned are classified as invested assets in our consolidated balance sheet and the collateral is classified as securities lending collateral. At June 30, 2006, we had fixed maturities with a market value of $880 million on loan, with collateral held of $898 million. Interest income on collateral, net of fees, was $152,000 and $275,000 in the three and six months ended June 30, 2006.

Share-based Compensation

We grant qualified and non-qualified stock options (share-based compensation) under our plans. These stock options are granted to associates at prices that are not less than market price at the date of grant and that are exercisable over 10-year periods. Prior to January 1, 2006, we accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by the Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. No stock-based employee compensation cost was recognized in the Statement of Income for the year ended December 31, 2005, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment, using the modified-prospective-transition method.

As a result of adopting SFAS No. 123(R) on January 1, 2006, our income before income taxes for the three and six months ended June 30, 2006, was reduced by $4 million and $11 million, respectively. Our net income (after tax) for the three and six months ended June 30, 2006, was reduced by $3 million and $8 million, respectively. Diluted earnings per share for the three and six months ended June 30, 2006, were reduced by 2 cents and 5 cents, respectively. If we had continued to account for stock-based compensation under APB Opinion No. 25, there would have been no effect. The weighted-average grant-date fair value of options granted during the years 2006 and 2005 was $10.09 and $12.49, respectively. The total intrinsic value of options exercised during the periods ended June 30, 2006 and 2005, was $16 million and $5 million, respectively.

Under the modified-prospective-transition method, in the first six months of 2006, we recognized:

•

compensation cost for all stock options granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R)

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

•		compensation cost for all non-vested stock options granted prior to January 1, 2006, that vested during the first six months of 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and
•		compensation cost for all non-vested stock options that have nonsubstantive vesting requirements, such as those to associates who are eligible for retirement.

Results for prior periods have not been retrospectively adjusted for SFAS No. 123(R). As of June 30, 2006, we had $21 million of unrecognized total compensation cost related to non-vested stock options. That cost will be recognized over a weighted-average period of 2.0 years, based on the estimated grant date fair value. SFAS No. 123(R) also requires us to classify certain tax benefits related to share-based compensation deductions as cash from financing activities. As of June 30, 2006, these tax benefits totaled $2 million.

In determining the share-based compensation amounts for 2006, the fair value of each option granted in 2006 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 and six months ended June 30, 2006: dividend yield of 3.22 percent; expected volatility ranging from 20.25 to 27.12 percent; risk-free interest rates ranging from 4.50 to 4.61 percent; and expected lives of five to seven years.

The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 to options granted under our stock option plans prior to our adoption of SFAS No. 123(R) on January 1, 2006. For purposes of this pro forma disclosure, the value of the options is estimated using a binomial option-pricing model and amortized to expense over the options’ vesting periods.

(In millions except per share data)				Three months ended June 30,				Six months ended June 30,
				2005				2005
Net income		As reported		$	158			$	302
Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects					3				7
		Pro forma		$	155			$	295
Net income per common share—basic		As reported		$	0.90			$	1.72
		Pro forma			0.88				1.68
Net income per common share—diluted		As reported		$	0.89			$	1.70
		Pro forma			0.87				1.66

In determining the share-based compensation pro forma amounts, 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 and six months ended June 30, 2005: dividend yield of 2.70 percent; expected volatility of 25.61 percent; risk-free interest rates 4.62 percent; and expected lives of 10 years.

Here is a summary of our share-based compensation information as of June 30, 2006:

(Dollars in millions, shares in thousands)										Aggregate
						Weighted-average				intrinsic
		Shares				exercise price				value
2006
Outstanding at beginning of year			10,589			$	33.70
Granted/reinstated			1,372				45.26
Exercised			(736	)			22.47
Forfeited/revoked			(125	)			34.77
Outstanding at end of period			11,100				35.86			$	119
Options exercisable at end of period			8,371			$	33.55			$	109
Weighted-average fair value of options granted during the period							10.09

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

Options outstanding and exerciseable consisted of the following at June 30, 2006:

(Shares in thousands)
		Options outstanding												Options exercisable
						Weighted-average
						remaining				Weighted-average								Weighted-average
Range of excercise prices		Shares				contractual life				exercise price				Shares				exercise price
$17.07 to 19.34			9			0.28yrs				$	17.97				9			$	17.97
$20.37 to 24.14			201			0.78yrs					20.61				201				20.61
$26.63 to 29.92			1,045			3.52yrs					27.06				1,045				27.06
$30.60 to 35.00			4,771			4.69yrs					32.66				4,770				32.66
$36.17 to 38.87			2,009			5.82yrs					38.47				1,570				38.37
$41.14 to 45.62			3,065			8.41yrs					43.19				776				41.50
Total			11,100			5.74yrs					35.86				8,371				33.55

Pension Plan

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

(In millions)		Three months ended June 30,								Six months ended June 30,
		2006				2005				2006				2005
Service cost		$	4			$	4			$	8			$	7
Interest cost			3				3				6				6
Expected return on plan assets			(3	)			(3	)			(6	)			(6	)
Amortization			1				0				1				0
Net pension expense		$	5			$	4			$	9			$	7

We made no contribution to the pension plan in the first six months of 2006. We plan to contribute $10 million during the third quarter of 2006, as indicated in the 2005 Annual Report on Form 10-K.

Reclassifications

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

Recent Accounting Pronouncements

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

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. We currently are assessing the impact of Interpretation No. 48 on our results of operations and financial position.

SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment of SFAS No. 140

In March 2006, the FASB issued SFAS No. 156, which addresses the accounting for servicing assets and liabilities. SFAS No. 156 is effective at the beginning of an entity’s first fiscal year beginning after September 15, 2006. We do not expect SFAS No. 156 to have a material effect on our results of operations or financial position.

SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of SFAS No. 133 and SFAS No. 140

In February 2006, FASB issued SFAS No. 155. This accounting standard permits fair value re-measurement for any hybrid financial instrument containing an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate interests in securitized financial assets to identify them as freestanding derivatives or as hybrid financial instruments containing an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument pertaining to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

beginning of an entity’s first fiscal year beginning after September 15, 2006. We currently are assessing the impact of SFAS No. 155 on our results of operations and financial position.

SOP 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts

In October 2005, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 05-1, which provides accounting guidance for deferred policy acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage within a contract. Internal replacement contracts are those that are substantially changed from the replaced contract and are accounted for as an extinguishment of the replaced contract. Nonintegrated contract features are accounted for as separately issued contracts. Modifications resulting from the election of a feature or coverage within a contract or from an integrated contract feature generally do not result in an internal replacement contract subject to SOP 05-1 provided certain conditions are met. The provisions of SOP 05-1 are effective for internal replacements occurring in fiscal years beginning after December 15, 2006. We currently are assessing the impact of SOP 05-1 on our results of operations and financial position.

Subsequent Events

In addition to catastrophe losses reported for the first six months of 2006, two Midwestern storms in July are estimated to have caused approximately $7 million in pretax catastrophe losses, which will be included in third-quarter results. This estimate does not take into account any catastrophe activity that may occur in the remainder of the third quarter of 2006 or potential development from events in prior periods.

In late July 2006, Scottish Re Group Limited, one of the company’s life reinsurers, announced the resignation of its president and chief executive officer, that it expected to report a net operating loss for the second quarter and that its third- and fourth-quarter earnings will likely be below previous expectations. Following that announcement, Scottish Re’s financial strength ratings were downgraded by A.M. Best Co., Fitch Ratings, Moody’s Investors Services and Standard & Poor’s Ratings Service. At June 30, 2006, The Cincinnati Life Insurance Company had approximately $28 million in reinsurance receivables with Scottish Re, the majority of which is through Scottish Re’s purchase of assets from Security Life of Denver.

NOTE 2 — 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 operations of the parent company, CFC Investment Company and CinFin Capital Management Company (excluding client investment activities), as well as other income of our insurance subsidiary.

Revenues come primarily from unaffiliated customers:

•		All three insurance segments record revenues from insurance premiums earned. Life insurance segment revenues also include separate account investment management fees.
•		Our investment operations’ revenues are pretax net investment income plus realized investment gains and losses.
•		Other revenues are primarily finance/lease income.

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

•

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

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

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

•		Income before income taxes for the investment operations segment is net investment income plus realized investment gains and losses for all fixed-maturity and equity security investments of the entire company, minus investment interest credited to contract holders of the life insurance segment.
•		Loss before income taxes for the Other category is primarily due to interest expense from debt of the parent company and operating expenses of our headquarters.

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

Segment information is summarized in the following table:

(In millions)		Three months ended June 30,								Six months ended June 30,
		2006				2005				2006				2005
Revenues:
Commercial lines insurance
Commercial property		$	123			$	118			$	244			$	234
Commercial casualty			208				192				405				375
Specialty packages			35				34				71				68
Commercial auto			112				112				224				225
Workers’ compensation			90				82				178				161
Surety and executive risk			24				19				45				38
Machinery and equipment			7				6				14				13
Total commercial lines insurance			599				563				1,181				1,114
Personal lines insurance
Homeowner			74				70				146				139
Personal auto			98				110				199				221
Other personal lines			22				22				45				44
Total personal lines insurance			194				202				390				404
Life insurance			30				30				58				55
Investment operations			154				142				952				278
Other			4				3				7				5
Total		$	981			$	940			$	2,588			$	1,856
Income (loss) before income taxes:
Insurance underwriting results:
Commercial lines insurance		$	58			$	86			$	114			$	154
Personal lines insurance			(15	)			9				(8	)			25
Life insurance			2				3				2				5
Investment operations			141				129				925				253
Other			(11	)			(12	)			(24	)			(27	)
Total		$	175			$	215			$	1,009			$	410

		June 30,				December 31,
		2006				2005
Identifiable assets:
Property casualty insurance		$	2,863			$	2,167
Life insurance			1,162				845
Investment operations			12,577				12,774
Other			334				217
Total		$	16,936			$	16,003

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

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 2005 Annual Report on Form 10-K. Unless otherwise noted, 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 on a GAAP basis.

We present per share data on a diluted basis unless otherwise noted, adjusting those amounts for all stock splits and dividends. Dollar amounts are rounded to millions; calculations of percent changes are based on whole dollar amounts.

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 2005 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 21. Although we often review or update our forward-looking statements when events warrant, we caution our readers that we undertake no obligation to do so.

Factors that could cause or contribute to such differences include, but are not limited to:

•		Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns, environmental events, terrorism incidents or other causes
•		Ability to obtain adequate reinsurance on acceptable terms, amount of reinsurance purchased and financial strength of reinsurers and the potential for non-payment or delay in payment by 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:

	•		Downgrade of the company’s financial strength ratings,
	•		Concerns that doing business with the company is too difficult
	•		Perceptions that the company’s level of service, particularly claims service, is no longer a distinguishing characteristic in the marketplace or
	•		Regulations or laws that change industry or company practices for our agents.

•		Increased competition that could result in a significant reduction in the company’s premium growth rate
•		Underwriting and pricing methods adopted by competitors that could allow them to identify and flexibly price risks, which could decrease our competitive advantages
•		Actions of insurance departments, state attorneys general or other regulatory agencies that:

	•		place the insurance industry under greater regulatory scrutiny or result in new statutes, rules and regulations
	•		increase our expenses
	•		place us at a disadvantage in the marketplace or
	•		restrict our ability to execute our business model, including the way we compensate agents

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

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

•		Sustained decline in overall stock market values negatively affecting the company’s equity portfolio and book value; in particular a sustained decline in the market value of Fifth Third Bancorp (Nasdaq:FITB) 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 medium- and long-term 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
•		Investment activities or market value fluctuations that trigger restrictions applicable to the parent company under the Investment Company Act of 1940
•		Events, such as an avian flu epidemic, natural catastrophe 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

(Dollars in millions except share data)		Three months ended June 30,												Six months ended June 30,
		2006				2005				Change %				2006				2005				Change %
Income statement data
Earned premiums		$	822			$	794				3.6			$	1,627			$	1,571				3.6
Investment income, net of expenses			143				129				10.4				281				256				9.7
Net realized gains and losses (pretax)			11				13				(12.3	)			671				22				2,996.8
Total revenues			981				940				4.4				2,588				1,856				39.5
Net income			132				158				(16.0	)			684				302				126.5
Per share data (diluted)
Net income			0.76				0.89				(14.6	)			3.90				1.70				129.4
Cash dividends declared			0.335				0.305				9.8				0.670				0.595				12.6
Weighted average shares outstanding			175,022,367				177,097,493				(1.2	)			175,615,017				177,451,366				(1.0	)

In the three and six months ended June 30, 2006, we reported record results, as described in detail in the Results of Operations.

For the three and six months ended June 30, 2006, consolidated property casualty earned premium growth was in line with our expectations. Pretax investment income growth accelerated over the 2005 level. The increase in revenue in the six months ended June 30, 2006, largely was due to $647 million in the realized investment gain from the previously announced sale of our holdings of ALLTEL Corporation (NYSE:AT) common stock.

Net income and net income per share for the three and six months ended June 30, 2006, reflected the higher catastrophe losses this year. Due to the gain from the sale of our ALLTEL holding, net income and net income per share for the six months ended June 30, 2006, were at a level that we do not anticipate achieving in future quarters. Realized investment gains and losses are integral to our financial results over the long term, but we have substantial discretion in the timing of investment sales and, therefore, the gains or losses that will be recognized in any period. That discretion generally is independent of the insurance underwriting process. Also, applicable accounting standards require us to recognize gains and losses from certain changes in fair values of securities and embedded derivatives without actual realization of those gains and losses.

•		2006 — Realized investment gains in the three months ended June 30, 2006, raised net income by $6 million, or 4 cents per share, after applicable income taxes. Realized investment gains in the six months ended June 30, 2006, raised net income by $426 million, or $2.43 per share, after applicable income taxes. The sale of our ALLTEL holding contributed $412 million, or $2.34 per share, of the gain in the six-month period.
•		2005 — Realized investment gains in the three months ended June 30, 2005, raised net income by $8 million, or 5 cents per share, after applicable income taxes. Realized investment gains in the six months ended June 30, 2005, raised net income by $14 million, or 8 cents per share, after applicable income taxes.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

The quarter and six-month decline in consolidated property casualty underwriting profits also contributed to the change in net income and net income per share. Underwriting profits declined primarily due to higher catastrophe losses and underwriting expenses.

One of the factors in the rise in expenses was the adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R) “Share-Based Payments,” which requires expensing the cost of associate options on our income statement. On an after-tax basis, stock option expense was $3 million, or 2 cents per share, in the three months ended June 30, 2006, and $8 million, or 5 cents per share, in the six months ended June 30, 2006. Prior to January 1, 2006, we were not required to include stock option expense on our income statement and disclosed the estimated impact of stock options on net income and earnings per share in Note 1 to the Financial Statements. For three and six months ended June 30, 2005, net income per share would have been reduced by approximately 2 cents and 4 cents, if option expense, calculated using the binomial option-pricing model, had been included as an expense.

Net income per share for the three and six months ended June 30, 2006, benefited from a decline in diluted weighted average shares outstanding from year-end 2005. Weighted average shares outstanding may fluctuate from period to period because we regularly repurchase shares under board authorizations, and we issue shares when associates exercise stock options.

The board of directors is committed to steadily increasing cash dividends and periodically authorizing stock dividends and splits. Cash dividends declared per share rose 9.8 percent and 12.6 percent in three and six months ended June 30, 2006, including an adjustment for the 5 percent stock dividend paid in 2005. The board also is committed to share repurchase. We purchased 150,000 shares at a total cost of $7 million in the three months ended June 30, 2006, and 2.0 million shares at a total cost of $88 million in the six months ended June 30, 2006.

Balance Sheet Data and Performance Measures

(Dollars in millions except share data)		At June 30,				At December 31,
		2006				2005
Balance sheet data
Invested assets		$	12,514			$	12,702
Total assets			16,936				16,003
Short-term debt			49				0
Long-term debt			791				791
Shareholders’ equity			6,065				6,086
Book value per share			35.02				34.88
Debt-to-capital ratio			12.2	%			11.5	%

		Three months ended June 30,								Six months ended June 30,
		2006				2005				2006				2005
Performance measures
Comprehensive income (loss)		$	(86	)		$	209			$	153			$	20
Return on equity, annualized			8.6	%			10.4	%			22.5	%			9.8	%
Return on equity, annualized, based on comprehensive income			(5.6	)			13.8				5.1				0.6

Invested assets declined primarily because of the sale of our ALLTEL holding and the tax obligation associated with the significant capital gain that was realized on that sale. Total assets rose over the year-end 2005 levels primarily because of the new securities lending collateral asset of $898 million. Shareholders’ equity was essentially unchanged at June 30, 2006, and book value rose slightly due to the lower number of shares outstanding.

Comprehensive income is net income plus the change in net other accumulated comprehensive income. The change in net other accumulated comprehensive income is the difference in unrealized gains on investments between the end of a quarter and the prior period-end. In the three months ended June 30, 2006, comprehensive income declined because of the decline in unrealized gains on investments. In the six months ended June 30, 2006, comprehensive income rose because of the increase in net income.

Our ratio of debt to capital (total debt plus shareholders’ equity) rose in the second quarter of 2006 because we borrowed $49 million from one of our short-term lines of credit.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

Property Casualty Highlights

(Dollars in millions except share data)		Three months ended June 30,												Six months ended June 30,
		2006				2005				Change %				2006				2005				Change %
Property casualty highlights
Written premiums		$	814			$	791				3.0			$	1,643			$	1,588				3.5
Earned premiums			793				765				3.7				1,571				1,518				3.5
Underwriting profit			43				95				(54.5	)			106				179				(41.1	)
GAAP combined ratio			94.5	%			87.5	%							93.3	%			88.2	%
Statutory combined ratio			93.7				86.6								91.7				86.9

The trend in overall written and earned premium growth rates continued to reflect the market factors and competitive strategies discussed in our 2005 Annual Report on Form 10-K, Item 1, Commercial Lines and Personal Lines Property Casualty Insurance Segments, Page 10 and Page 11.

Our consolidated property casualty insurance underwriting profit declined in the three and six months ended June 30, 2006, and our combined ratio rose. (The combined ratio is the percentage of each premium dollar incurred for claims plus all expenses — the lower the ratio, the better the performance.) The underwriting profit declined and the ratio rose in both periods primarily because of higher catastrophe losses.

Measuring Our Success in 2006 And Beyond

We use a variety of metrics to measure the success of our strategies:

•		Maintaining our strong relationships with our established agencies, writing a significant portion of each agency’s business and attracting new agencies — In 2006, we expect to continue to rank No. 1 or No. 2 by premium volume in at least 74 percent or more of the agency locations that have marketed our products for more than five years. We are targeting 55 to 60 new agency appointments. In the first six months of 2006, we appointed 44 new agency locations. These new appointments and other changes in agency structures brought total reporting agency locations to 1,283, a net increase of 31 since year-end 2005.
		In 2006, we expect to make further progress in our efforts to improve service to and communication with our agencies. Among other actions, we subdivided three field marketing territories in the first six months of the year, giving our field marketing representatives more time to spend in each agency. We also continued to enhance our expanding portfolio of software. We discussed our technology plans for 2006 in our 2005 Annual Report on Form 10-K, Item 1, Technology Solutions, Page 4. In the six months ended June 30, 2006, we made progress toward the technology objectives we established for the year:
		Three commercial lines and one personal lines system form the core of our quoting and policy processing systems. Agencies access our quoting and policy processing systems via CinciLink®, our secure agency-only Web site.

	•		WinCPP® is an online commercial lines rating and quoting system for businessowner, commercial package, commercial auto and workers’ compensation policies. We are on track to achieve our 2006 objective of rolling out quoting for specialty programs for metalworkers and garage owners. We now expect to add data sharing capabilities with agency systems in early 2007. Quoting capability for the artisan contractor package policy has been postponed pending planned changes to the underlying policy forms.
	•		e-CLAS™ is a commercial lines policy processing system. Businessowner Policy processing now is available through e-CLAS in Arkansas, Indiana, Michigan, Ohio and Pennsylvania. Dentist’s Package Policy processing now is available in Indiana and Ohio, and we are on track to achieve our objectives of providing it in Arkansas, Michigan and Pennsylvania by year-end. We also plan to begin developing commercial auto and commercial package policy processing capabilities in 2006.
	•		CinciBond™ is an automated system to process license and permit surety bonds. CinciBond now is deployed in Indiana, Illinois, North Carolina, Ohio and Tennessee, with Georgia, Missouri and Utah scheduled for later in 2006.
	•		Diamond is our personal lines policy processing system. In the first six months of 2006, $257 million of our $372 million of personal lines written premium was issued through Diamond. Agents in Georgia, Kentucky, Tennessee and Wisconsin began using Diamond in the first half of 2006 with Minnesota and Missouri rollouts planned for later this year. When the 2006 roll-out schedule is complete, Diamond will be in use in states that represent approximately 90 percent of our personal lines premium volume.

Many systems automate our internal processes so our associates can spend more time serving agents and policyholders. These systems are accessed through CFCNet^®, our secure intranet. Enhancement activities for two newer systems continue:

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

	•		CMS™ is a claims file management system. We continue to refine the system to add capabilities to make our associates more effective. During the second quarter, we began issuing tablet computers to our field claims representatives. These units allow our claims representatives to view and enter information into CMS from any location, including an insured’s home or agent’s office, and to print claims checks using wireless printers. Agent access to selected CMS information is planned for 2007.
	•		i-View™ is a commercial lines policy imaging and workflow system now in use by all of our commercial lines underwriting teams. During the remainder of the year, we expect to begin providing field and other headquarters associates with access to these electronic files.

		We also continue to work to give independent agents enhanced access to Cincinnati’s systems and client data quickly and easily through their agency systems. In 2006 and 2007, we plan to advance our use of industry integration products, TransactNOW® and Transformation Station®.
•		Achieving above-industry-average growth in property casualty statutory net written premiums and maintaining industry-leading profitability by leveraging our regional franchise and proven agency-centered business strategy — We now believe our consolidated property casualty written premium growth will be at least 2 percent in 2006 compared with the 2.6 percent increase in 2005. We previously had anticipated full-year property casualty written premiums would be flat to up slightly. We anticipate continued above-average growth in commercial lines written premiums. We may not achieve our objective of above-industry-average growth in total in 2006 because of the rate-driven declines we anticipate in personal lines written premiums.
		Despite the level of catastrophe losses through the first six months of 2006, our combined ratio estimate for 2006 remains 92 percent to 94 percent on a GAAP basis compared with 89.2 percent on a GAAP basis in 2005 (combined ratio estimate for 2006 would be 91 percent to 93 percent on a statutory basis). Considerations include:

	•		Healthy loss and loss expense ratio excluding catastrophe losses for the first six months of 2006.
	•		Catastrophe losses could exceed 4.5 percentage points on combined ratio — We originally allowed for full year catastrophe losses, net of reinsurance, of approximately $125 million to $145 million, contributing in the range of 4.0 to 4.5 percentage points to the full-year 2006 combined ratio. That level would have been above our historical range of 3.0 to 3.5 percentage points.
			Catastrophe losses in the second quarter of 2006 totaled $64 million, reflecting $67 million from events during the period and $3 million in net favorable development from prior period catastrophes, compared with $15 million in the second quarter of 2005. Catastrophe losses for the first six months of 2006 totaled $103 million, contributing 6.5 percentage points to the six-month combined ratio, compared with $17 million, contributing 1.1 percentage points, in the first six months of 2005.
			In addition to catastrophe losses reported for the first six months of 2006, two Midwestern storms in July are estimated to have caused approximately $7 million in pretax catastrophe losses, which will be included in third-quarter results. That estimate does not take into account any catastrophe activity that may occur in the remainder of the third quarter of 2006 or potential development from events in prior periods.
	•		Lower level of savings from loss reserve development — We continue to believe that savings from favorable loss reserve development from prior accident years is likely to reduce the combined ratio in the range of 2 to 3 percentage points in 2006. Higher-than-normal savings, particularly for liability coverages, reduced the 2005 combined ratio by 5.2 percentage points and the 2004 combined ratio by 6.7 percentage points. Net development for the six months ended June 30, 2006, was insignificant. In the first six months of 2005, savings lowered the loss and loss expense ratio by 2.0 percentage points.

Trends in both the loss and loss expense ratio and underwriting expense ratio also could affect the full-year 2006 combined ratios for our commercial lines and personal lines segments:

	•		The degree of price softening in the commercial lines marketplace will affect the 2006 loss and loss expense ratio for that business segment. That ratio may move up slightly as pricing becomes more competitive.
	•		The personal lines 2006 loss and loss expense ratio primarily will reflect our ability to offer competitive prices for our personal lines products in that changing marketplace. We believe we have taken the appropriate actions to improve competitiveness and to maintain the full-year loss and loss expense ratio near the improved level we achieved in 2005. The ratio may increase if premiums continue to decline.
	•		For both commercial lines and personal lines, lower growth rates could lead to further unfavorable year-over-year comparisons in the ratios of deferred acquisition costs and other underwriting

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

expenses to earned premiums. Continued investment in technology also may contribute to an increase in other underwriting expenses.

•		Pursuing a total return investment strategy that generates both strong investment income growth and capital appreciation — For full-year 2006, we now are estimating that pretax investment income growth could be in the range of 8.0 percent to 8.5 percent, up from our previous estimate of 6.5 percent to 7.0 percent. This outlook is based on strong cash flows from insurance operations, a higher-than-historical allocation of new cash flow to fixed-maturity securities over the last two years and an increase in the general level of interest rates.
		We do not establish annual capital appreciation targets. Over the long term, our target is to have the equity portfolio outperform the Standard & Poor’s 500 Index, a common benchmark of market performance. In the first six months of 2006, our equity portfolio’s total return of 1.4 percent was below the 2.7 percent return for the Index. Over the five years ended June 30, 2006, our compound annual equity portfolio return was a negative 0.5 percent compared with a compound annual total return of 2.5 percent for the Index. Our equity portfolio underperformed our benchmark primarily because of the decline in the market value of our holdings of Fifth Third common stock, which generated a negative annualized return of 6.9 percent for the five-year period ended June 30, 2006.
•		Increasing the total return to shareholders through a combination of higher earnings per share, growth in book value and increasing dividends — We do not announce annual targets for earnings per share or book value. Earnings results in 2006 are being tempered by the adoption of SFAS No. 123(R), which requires expensing the cost of associate stock options on our income statement. We continue to anticipate that stock option expense will reduce full-year earnings per share by approximately 8 cents.
		Over the long term, we look for our earnings per share growth to outpace that of a peer group of national and regional property casualty insurance companies. Long-term book value growth should approximate that of our equity portfolio. The board of directors is committed to steadily increasing cash dividends and periodically authorizing stock dividends and splits. In February 2006, the board increased the indicated annual dividend rate for the 46th consecutive year, a record we believe is matched by only 11 other U.S. publicly traded corporations.
		Over the long-term, we also seek to increase earnings per share, book value and dividends at a rate that would allow long-term total return to our shareholders to exceed that of the Standard & Poor’s Composite 1500 Property Casualty Insurance Index. As provided in our 2006 Proxy Statement, over the five years ended December 31, 2005, our total return to shareholders of 40.9 percent matched the return on that Index.
•		Maintaining financial strength by keeping the ratio of debt to capital below 15 percent and purchasing reinsurance to provide investment flexibility — Based on our present capital requirements, we do not anticipate a material increase in debt levels during 2006. CFC Investment Company, our commercial leasing and financing subsidiary, replaced $49 million of intercompany debt in May 2006 with borrowings against one of our short-term lines of credit. The additional borrowing raised our consolidated debt-to-capital ratio to 12.2 percent at June 30, 2006, from 11.3 percent at March 31, 2006.
		In December 2005, we finalized our property casualty reinsurance program for 2006, updating it to maintain the balance between the cost of the program and the level of risk we retain. We now anticipate that under the new program, our 2006 reinsurance premiums are expected to be in the range of $9 million to $11 million lower than 2005, without taking into account the reinstatement premium we incurred in 2005. For more details on our reinsurance programs, please see our 2005 Annual Report on Form 10-K, Item 7, 2006 Reinsurance Programs, Page 68.
		Our property casualty and life operations are awarded insurer financial strength ratings. These ratings assess an insurer’s ability to meet its financial obligations to policyholders and do not necessarily address matters that may be important to shareholders.
		On July 25, 2006, Standard & Poor’s Ratings Services affirmed its AA- (Very Strong) financial strength and counterparty credit ratings on the property casualty group and The Cincinnati Life Insurance Company and its A (Strong) counterparty credit rating on Cincinnati Financial Corporation. At the same time, Standard & Poor’s revised its outlook on the company, our property casualty operating companies and Cincinnati Life to stable from negative. Standard & Poor’s said the revised outlook reflected the improved results on our homeowner book of business, as well as its view of our ability to benefit from corrective actions we have effected over recent years. Standard & Poor’s believes our unique approach to agency relationships should drive profitable growth even in a softer pricing environment.
		As reported in our 10-Q for the quarter ended March 31, 2006, on April 28, 2006, A.M. Best affirmed the financial strength rating (FSR) of A++ (Superior) for our property casualty group. A.M. Best also affirmed the senior debt ratings and issuer credit rating (ICR) of “aa-” of Cincinnati Financial Corporation. Additionally, A.M. Best affirmed the FSR of A+ (Superior) and the ICR of “aa-” of The Cincinnati Life

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

Insurance Company. Concurrently, A.M. Best downgraded the ICRs to “aa+” from “aaa” for our property casualty insurance companies, reflecting the company’s investment and geographic risk concentrations at current rating levels. The outlook for all ratings is stable.

As of August 2, 2006, our financial strength ratings were unchanged from those we reported in our 2005 Annual Report on Form 10-K.

		Parent Company			Property Casualty
		Senior Debt			Insurance		Life Insurance
		Rating			Subsidiaries		Subsidiary
					Financial Strength Ratings:
A. M. Best Co.		aa-			A++		A+
Fitch Ratings		A+			AA		AA
Moody’s Investors Services		A2			Aa3		—
Standard & Poor’s Ratings Services		A			AA-		AA-

Property casualty statutory surplus rose to $4.342 billion at June 30, 2006, with the ratio of property casualty common stock to statutory surplus at 92.4 percent. At year-end 2005, property casualty statutory surplus was $4.194 billion, with the ratio of common stock to surplus at 97.0 percent. Life statutory surplus was $459 million at June 30, 2006, up from $451 million at year-end 2005.

We believe that our strong surplus position and superior insurer financial strength ratings are clear, competitive advantages in the segment of the insurance marketplace that our agents serve. Our financial strength supports the consistent, predictable performance that our policyholders, agents, associates and shareholders have always expected and received, and it must be able to withstand significant challenges. The most important way we seek to ensure that our performance remains consistent and predictable is to align agents’ interests with those of the company, giving agents outstanding service and compensation to earn their best business and enhance their ability to serve the businesses and individuals in their communities.

We continue to review the risk management and capital requirement changes that have been proposed by the rating agencies. Additionally, we began a formal implementation of enterprise risk management. Detailed and summary assessments, operational audits, strategic plans and departmental business plans are reported as appropriate to executives, directors and board committees.

We believe that our property catastrophe reinsurance program provides adequate protection for large loss events. Our strong capital position would allow the payment of claims if an event exceeded our reinsurance program. Swiss Reinsurance America Corporation and GE Insurance Solutions, two of the four participants in our 2006 property and casualty per-occurrence reinsurance programs, recently merged. All four of the participants (including American Reinsurance Company and Partner Reinsurance Company of the U.S.) currently have A.M. Best insurer financial strength ratings of A (Excellent) or A+ (Superior). In 2007 and beyond, we anticipate reallocating participation on our reinsurance treaties.

Factors supporting our outlook for 2006 are discussed below in the Results of Operations for each of the four business segments.

Results of Operations

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

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

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 premiums less loss and loss expenses and underwriting expenses on a pretax basis. We also measure aspects of the performance of our commercial lines and personal lines segments on a combined property casualty insurance operations basis. Underwriting results and segment pretax operating income are not a substitute for net income determined in accordance with GAAP. Life insurance segment revenues also include separate account investment management fees, and life insurance segment expenses include separate account investment management fees, minus contract holder benefits and expenses incurred, plus investment interest credited to contract holders.

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

Cincinnati Financial Corporation
Form 10-Q for the quarter ended June 30, 2006

not readily available. We also use statutory accounting data and ratios as key performance indicators for our life insurance operations. We do not believe that inflation has had a material effect on consolidated results of operations, except to the extent that inflation may affect interest rates. We continue to monitor market trends in construction costs that could affect claim payments and headquarters construction costs.

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

The calculations of segment data are described in more detail in Item 1, Note 2 of the Consolidated Financial Statements, Page 11. The following sections review results of operations for each of the four segments. Commercial Lines Insurance Results of Operations begins on Page 21, Personal Lines Insurance Results of Operations begins on Page 27, Life Insurance Results of Operations begins on Page 30, and Investments Results of Operations begins on Page 32. We begin with an overview of our consolidated property casualty operations, which is the total of our commercial lines and personal lines segments.

Consolidated Property Casualty Insurance Results of Operations

(Dollars in millions)		Three months ended June 30,												Six months ended June 30,
		2006				2005				Change %				2006				2005				Change %
Written premiums		$	814			$	791				3.0			$	1,643			$	1,588				3.5
Earned premiums		$	793			$	765				3.7			$	1,571			$	1,518				3.5
Loss and loss expenses excluding catastrophes			455				421				8.1				887				877				1.2
Catastrophe loss and loss expenses			64				15				326.6				103				17				505.8
Commission expenses			147				157				(6.2	)			305				299				1.8
Underwriting expenses			79				75				4.8				162				141				15.0
Policyholder dividends			5				2				193.7				8				5				64.3
Underwriting profit		$	43			$	95				(54.5	)		$	106			$	179				(41.1	)
Ratios as a percent of earned premiums:
Loss and loss expenses excluding catastrophes			57.3	%			55.0	%							56.5	%			57.8	%
Catastrophe loss and loss expenses			8.0				2.0								6.5				1.1
Loss and loss expenses			65.3	%			57.0	%							63.0	%			58.9	%
Commission expenses			18.6				20.5								19.4				19.7
Underwriting expenses			9.9				9.8								10.4				9.3
Policyholder dividends			0.7				0.2								0.5				0.3
Combined ratio			94.5	%			87.5	%							93.3	%			88.2	%