Cincinnati Financial Corporation

2008 First-quarter Letter to Shareholders

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Cincinnati Financial Reports First-quarter 2008 Results

• First-quarter net loss of $42 million, or 26 cents per share, compared with net income of $194 million, or $1.11 per share, in the first quarter of 2007. The realized investment loss in the first quarter of 2008 included other-than-temporary impairment charges of $214 million largely due to recognition on the income statement of significant declines in market values of four equity investments. These non-cash charges lower the carrying value of these investments.
• Operating income* of $109 million, or 66 cents per share, compared with $153 million, or 88 cents per share. Catastrophe losses reduced first-quarter operating income by 17 cents compared with 1 cent in last year's first quarter.
• Total property casualty underwriting profit of $10 million compared with strong $81 million for the first quarter of 2007.

*	Our Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures appears on our Web site, www.cinfin.com/investors, and defines and reconciles measures presented in this release that are not based on Generally Accepted Accounting Principles or Statutory Accounting Principles.

(Dollars in millions except share data)		Three months ended March 31,
		2008				2007				Change %
Revenue Highlights
Earned premiums		$	780			$	815				(4.2)
Investment income			152				148				2.6
Total revenues			704				1,031				(31.7)
Income Statement Data
Net income (loss)		$	(42)			$	194			nm
Net realized investment gains and losses			(151)				41			nm
Operating income*		$	109			$	153				(29.0)
Per Share Data (diluted)
Net income (loss)		$	(0.26)			$	1.11			nm
Net realized investment gains and losses			(0.92)				0.23			nm
Operating income*		$	0.66			$	0.88				(25.0)
Book value		$	33.40			$	39.08				(14.5)
Cash dividend declared		$	0.39			$	0.355				9.9
Weighted average shares outstanding			165,105,311				174,274,157				(5.3)

• 98.6 percent first-quarter 2008 property casualty combined ratio, compared with 89.6 percent for the 2007 first-quarter.
• Catastrophe losses added 5.7 percentage points to the property casualty combined ratio for the 2008 first quarter, compared with an unusually low 0.4 percentage points for the same quarter one year ago.
• Commercial and personal lines marketplace competition continues to intensify. First-quarter 2008 property casualty net written premiums decreased 8.3 percent, reflecting softer pricing, disciplined underwriting and timing differences.
• 5 cents per share contribution from life insurance operations to first-quarter operating income, down from 7 cents.

• 2.6 percent growth in pretax investment income.
• Book value of $33.40 per share compared with $35.70 at year-end 2007. Invested assets and book value declined primarily on lower market values of financial sector equity holdings.
• 2.93 million shares of common stock repurchased at a cost of $109 million.

• Property casualty net written premiums could decline as much as 5 percent for the full year due to competitive pricing.
• Combined ratio could be in the 96 percent to 98 percent range for the full year.
• Investment income growth is expected to be below last year's 6.6 percent increase as financial sector holdings evaluate dividend levels. Portfolio strategies continue to focus on balancing near-term income generation with long-term book value growth.

Chairman and Chief Executive Officer John J. Schiff, Jr., CPCU, commented, "This was a tough quarter for Cincinnati Financial as both the insurance and investment markets presented unusual challenges. Soft pricing in the property casualty insurance market pressured our growth and profitability while pressure on financial stocks in our portfolio reduced our net income and book value.

"We firmly believe – and our 55 plus year history supports our confidence – that Cincinnati's strategies will work as designed, helping us rise above these challenges. After carefully reviewing our position, we are confirming our previously announced outlook, including all of our estimates for full-year performance. We will continue to support agents by providing local service and local decision making authority. We will continue to invest, looking for opportunities that will let us ride out this market cycle with the high level of financial strength and stability that our agents and policyholders rely on."

James E. Benoski, vice chairman, president and chief insurance officer, said, "Our new excess and surplus lines operation is off to a good start. It increases our underwriting capabilities, adding a new layer of flexibility to write the whole account, even when part of it isn't a good fit for a standard market business policy. We began quoting and issuing excess and surplus business during the first quarter, adding almost $1 million to net written premiums and putting much more in the pipeline."

"We initiated our excess and surplus business with the ability to underwrite general liability in five states. We plan to expand both coverage offerings and operating territory. By year-end, we plan to offer commercial property insurance, along with miscellaneous professional liability and excess casualty. Cincinnati agents benefit not only from prompt and efficient policy processing, but also from the ease of accessing services such as loss control and personal attention from knowledgeable underwriters. Our reputation for superb claims handling and other value-added services also is encouraging agencies to select Cincinnati's excess and surplus lines carrier as their preferred market to serve this segment of their clients. We're very satisfied with progress to date."

Benoski added, "This year began with severe weather in the South and Midwest. We incurred $43 million of catastrophe losses during the quarter, quite a contrast to $3 million for last year's first quarter. Of almost 2,500 catastrophe claims our commercial and personal policyholders reported in the five events during the quarter, approximately 85 percent are already closed. Our claims representatives' prompt responses and personal service are creating tremendous policyholder loyalty that will help agents market Cincinnati policies in the current competitive marketplace."

Kenneth W. Stecher, chief financial officer and executive vice president, commented, "We continue to expect our full-year 2008 results will reflect current commercial lines pricing trends, leading to as much as a 5 percent decline in net written premiums and a combined ratio in the range of 96 percent to 98 percent. Softer pricing is likely to continue to challenge us as we hold steady to our core business values of strong agency relationships, policyholder retention and accurate risk classification.

"We also continue to make deliberate decisions not to write or renew certain business. In this environment, we have been careful to maintain our underwriting discipline. Across our industry, the expectation is for full-year 2008 net written premiums to decline 0.5 percent with the combined ratio at 98.6 percent."

Stecher noted that the combined ratio target relies on three assumptions:

• Current accident year loss and loss expense ratio excluding catastrophe losses – Will reflect the same market trends that contributed to an increase in this ratio in 2007 and are further pressuring the 2008 ratio.
• Catastrophe loss ratio – May contribute approximately 4.5 percentage points to the full-year 2008 combined ratio. Catastrophes are unpredictable for any given year. These losses have contributed on average 3.7 percentage points to the company's combined ratio in the past 10 years, ranging from 2007's low of 0.8 points to 1998's high of 6.1 points.
• Savings from favorable development on prior period reserves – May benefit the full-year 2008 combined ratio by approximately 4 percentage points based on current trends. Even as market conditions soften, management continues to rely on sound actuarial analysis in determining loss and loss expense reserves.

Stecher added, "We believe this level of full-year performance will allow us to sustain our industry leading position in the commercial lines insurance marketplace. We are taking steps in our personal lines insurance operations to enhance our opportunities in the changing marketplace. We also expect our life insurance business to continue its contribution to our earnings.

"As the preferred market for our agents' best business, we are well positioned to carry out our commitments, supporting market stability and contributing to their success. While we believe we may see a positive contribution from our new excess and surplus lines operations, our 2008 targets do not take into account any contribution. It will take some time before that operation is of sufficient size to materially influence our overall corporate results."

Schiff commented, "Our equity investing strategy has been key to the long-term growth of our assets and shareholders' equity. We identify companies with the potential for sales, earnings and dividend growth, a strong management team and favorable outlook. Over the years, these equities have generally offered a steady flow of dividend income along with the potential for capital appreciation.

"Broad concerns about credit quality, liquidity and the general health of the economy have disrupted the financial markets, causing unusual volatility in our equity portfolio. Valuations of a number of our holdings have been significantly influenced and, in some cases, dividend payouts have been reduced. As a result, our book value declined further in the first quarter. We are making some changes in our portfolio and we took a non-cash charge to earnings to reduce our carrying cost for some holdings, including four equity investments. We adjusted our carrying value to quarter-end market value because we concluded that the decline in the value of these holdings to below our cost was 'other than temporary.' Other-than-temporary impairment losses represent a non-cash charge to income.

"Our bond portfolio, however, continued to hold steady, with a total value of $5.965 billion at quarter-end, up 2.0 percent from the year-end level. The flight to quality and the resulting lower interest rates for risk-free securities continued to support bond valuations, helping offset the effects of increasing risk premiums and credit spreads in the first quarter of 2008. Our focus remains on portfolio strategies to balance near-term income generation and long-term book value growth. While decisions to sell investments that no longer meet our investment criteria could have a negative impact on income in the short-term, reinvestment in securities with lower, but more secure, yields should help us weather the present storm.

"We are committed to sustaining the strong capitalization that supports our high insurer financial strength ratings, giving our agents a distinct marketing advantage for their value-oriented clients. On March 26, A.M. Best Co. affirmed our issuer credit and financial strength ratings. Best said its stable outlook on our ratings reflects our group's 'superior risk-adjusted capitalization and its historical ability to generate solid operating results through underwriting cycles, which will enable the group to absorb any near-term increases in volatility as a result of its investment philosophy or weather-related events.'

"Our ratio of property casualty written premiums to statutory surplus, an important measure of that financial strength, rose slightly at March 31, 2008, to 0.75 from 0.72 at year-end 2007, but remains more than 10 percent stronger than the industry average," Schiff noted. "Cincinnati Financial has the resources and tenacity to get through times such as these in good shape.

"We returned $168 million to shareholders in the first three months of 2008 through cash dividends and repurchase activity," Schiff concluded.

Combined Property Casualty Insurance Operations

(Dollars in millions)		Three months ended March 31,
		2008				2007				Change %
Written premiums		$	776			$	846				(8.3)
Earned premiums		$	751			$	785				(4.3)
Loss and loss expenses excluding catastrophes			458				455				0.8
Catastrophe loss and loss expenses			43				3				1,230.8
Commission expenses			144				161				(10.9)
Underwriting expenses			93				82				14.5
Policyholder dividends			3				3				(1.7)
Underwriting profit		$	10			$	81				(87.1)
Ratios as a percent of earned premiums:
Loss and loss expenses excluding catastrophes			61.0%				57.9%
Catastrophe loss and loss expenses			5.7				0.4
Loss and loss expenses			66.7				58.3
Commission expenses			19.1				20.5
Underwriting expenses			12.4				10.4
Policyholder dividends			0.4				0.4
Combined ratio			98.6%				89.6%

• 8.3 percent decline in first-quarter property-casualty net written premiums reflecting softer pricing, disciplined underwriting and timing differences.
• $74 million in first-quarter 2008 new business written directly by agencies compared with $80 million in last year's first quarter, down 7.5 percent.
• Excess and surplus lines contributed almost $1 million in net written premiums in its first quarter of operations.
• Lower level of commission expense, largely due to softer pricing, offset higher other underwriting expenses.
• 1,098 agency relationships with 1,337 reporting locations marketed our insurance products at March 31, 2008, up from 1,092 agency relationships with 1,327 reporting locations at year-end 2007.
• $13 million of net savings from favorable development on prior period reserves improved the first-quarter 2008 combined ratio by 1.8 percentage points, compared with $30 million and 4.0 points for the same period in 2007.
• $43 million in first-quarter 2008 catastrophe losses, due primarily to wind and hail damage from storms in the South and Midwest.

Insurance Segment Highlights

(Dollars in millions)		Three months ended March 31,
		2008				2007				Change %
Written premiums		$	625			$	693				(9.8)
Earned premiums		$	574			$	604				(4.9)
Loss and loss expenses excluding catastrophes			343				344				(0.2)
Catastrophe loss and loss expenses			22				10				110.4
Commission expenses			109				123				(12.0)
Underwriting expenses			68				57				21.9
Policyholder dividends			3				3				(1.7)
Underwriting profit		$	29			$	67				(56.8)
Ratios as a percent of earned premiums:
Loss and loss expenses excluding catastrophes			59.7%				56.9%
Catastrophe loss and loss expenses			3.9				1.8
Loss and loss expenses			63.6				58.7
Commission expenses			18.9				20.4
Underwriting expenses			11.9				9.3
Policyholder dividends			0.6				0.5
Combined ratio			95.0%				88.9%

• 9.8 percent lower first-quarter 2008 commercial lines net written premiums, primarily a result of intensifying market competition.
• $66 million in first-quarter 2008 commercial lines new business written directly by agencies compared with $72 million in last year's first quarter, down 8.3 percent.
• 95.0 percent first-quarter 2008 commercial lines combined ratio, an increase of 6.1 percentage points over first-quarter 2007 due mostly to higher catastrophe losses, lower pricing, normal loss cost inflation and higher underwriting expenses. Lower commission expenses partially offset these increases.
• 3.9 percentage points of first-quarter 2008 catastrophe losses, more than double last year's unusually low level.
• 2.5 percentage point improvement in combined ratio due to savings from favorable development on prior period reserves for the first three months of both 2008 and 2007.
• Commercial lines insurance industry combined ratio for full-year 2008 estimated at 97.5 percent with decline in net written premiums estimated at 2.3 percent.

(Dollars in millions)		Three months ended March 31,
		2008				2007				Change %
Written premiums		$	150			$	153				(2.0)
Earned premiums		$	177			$	181				(2.2)
Loss and loss expenses excluding catastrophes			115				111				3.7
Catastrophe loss and loss expenses			21				(7)				nm
Commission expenses			35				38				(7.7)
Underwriting expenses			24				25				(3.6)
Underwriting profit (loss)		$	(18)			$	14				nm
Ratios as a percent of earned premiums:
Loss and loss expenses excluding catastrophes			65.1%				61.4%
Catastrophe loss and loss expenses			11.6				(4.1)
Loss and loss expenses			76.7				57.3
Commission expenses			19.8				20.9
Underwriting expenses			13.6				13.8
Combined ratio			110.1%				92.0%

• 2.0 percent lower first-quarter 2008 personal lines net written premiums on lower policy counts, steady new business levels and pricing changes that reduced premiums per policy.
• $8 million in first-quarter 2008 personal lines new business written directly by agencies, down 0.5 percent.
• 110.1 percent first-quarter 2008 personal lines combined ratio. The ratio reflects significantly higher catastrophe losses and a modest increase in the loss and loss expense ratio excluding catastrophe losses due to lower pricing and normal loss cost inflation.
• 11.6 percentage-point contribution from first quarter 2008 catastrophe losses, compared with a benefit of 4.1 points in the first quarter of 2007 due to savings primarily from fourth-quarter 2006 events.
• $1 million of reserve strengthening added 0.7 percentage points to the combined ratio in the first three months of 2008, compared with 9.0 percentage points of savings from favorable development on prior period reserves for the same period last year. 2007 savings included 6.1 points in savings on prior period catastrophe loss reserves.
• Personal lines insurance industry combined ratio for full-year 2008 estimated at 99.5 percent with net written premiums rising approximately 1.4 percent.

(In millions)		Three months ended March 31,
		2008				2007				Change %
Written premiums		$	44			$	42				3.8
Earned premiums		$	29			$	30				(3.2)
Investment income, net of expenses			29				28				2.7
Other income			1				1				(45.7)
Total revenues, excluding realized investment gains and losses			59				59				(1.4)
Contract holders benefits			35				27				30.4
Expenses			12				13				(14.1)
Total benefits and expenses			47				40				15.7
Net income before income tax and realized investment gains and losses			12				19				(37.2)
Income tax			4				6				(39.5)
Net income before realized investment gains and losses		$	8			$	13				(36.0)

• $44 million in first-quarter 2008 life insurance segment net written premiums. Written premiums include life insurance, annuity and accident and health premiums.
• 3.2 percent increase to $35 million in written premiums for life insurance products in total.
• 9.0 percent rise to $18 million in term life insurance written premiums, reflecting marketing advantages of competitive, up to date products, providing close personal attention and offering policies backed by financial strength and stability.
• 1.5 percent rise in face amount of life policies in force to $62.803 billion at March 31, 2008, from $61.875 billion at year end 2007.
• $5 million decrease in first-quarter 2008 operating profit, primarily due to less favorable mortality experience.
• 2008 plans include redesign of all life term insurance products. In addition to the worksite term product, updates are planned for the full worksite life portfolio. These improvements support opportunities to cross-sell life insurance products to clients of the independent agencies that sell Cincinnati's property casualty insurance policies.

Investment and Balance Sheet Highlights

(In millions)		Three months ended March 31,
		2008				2007				Change %
Investment income:
Interest		$	76			$	76				0.5
Dividends			73				72				1.6
Other			5				3				35.7
Investment expenses			(2)				(3)				40.0
Total investment income, net of expenses			152				148				2.6
Investment interest credited to contract holders			(16)				(14)				6.0
Realized investment gains and losses summary:
Realized investment gains and losses			(16)				61			nm
Change in fair value of securities with embedded derivatives			(2)				1			nm
Other-than-temporary impairment charges			(214)				0			nm
Total realized investment gains and losses			(232)				62			nm
Investment operations income (loss)		$	(96)			$	196			nm

• 2.6 percent growth in first-quarter 2008 net investment income due to cash flow for new investments that produced higher interest and dividend income.
• $232 realized investment loss in first-quarter 2008 compared with realized investment gain of $62 million in first quarter 2007.
• First-quarter pretax realized investment loss included $214 million non-cash charge for other-than-temporary impairments that recognize significant market value declines, largely for four equity holdings.

(Dollars in millions except share data)		At March 31,				At December 31,
		2008				2007
Balance sheet data
Invested assets		$	11,704			$	12,261
Total assets			15,945				16,637
Short-term debt			69				69
Long-term debt			791				791
Shareholders’ equity			5,449				5,929
Book value per share			33.40				35.70
Debt-to-capital ratio			13.6%				12.7%
		Three months ended March 31,
		2008				2007
Performance measures
Comprehensive income (loss)		$	(313)			$	13
Return on equity, annualized			(3.0)%				11.5%
Return on equity, annualized, based on comprehensive income (loss)			(22.1)				0.8

• $11.704 billion in investment assets at March 31, 2008, compared with $12.261 billion at year-end 2007. The decrease in investment assets was largely due to lower market valuations of equity holdings, primarily in the financial sector, reflecting broad concerns across the marketplace about credit quality, liquidity and the general health of the economy.
• Shareholders' equity declined to $5.449 billion, or $33.40 per share, at March 31, 2008, down from $5.929 billion, or $35.70, at year end 2007, largely due to lower market values for investment assets.
• Lower market values were the primary reason for the comprehensive loss for the first three months of 2008. Net and comprehensive loss resulted in negative returns on equity for the 2008 first quarter.
• $4.027 billion in statutory surplus for the property casualty insurance group at March 31, 2008, compared with $4.307 billion at year-end 2007. The ratio of common stock to statutory surplus for the property casualty insurance group portfolio was 82.3 percent at March 31, 2008, compared with 86.0 percent at year-end 2007.
• 27.4 percent ratio of investment securities held at the holding-company level to total holding-company-only assets at March 31, 2008, comfortably within management's below-40 percent target.
• Repurchases of the company's common stock totaled 2.93 million shares at a cost of $109 million in the first quarter. Approximately 9 million shares remain authorized for repurchase.

Additional information is available on our Web site, www.cinfin.com/investors, including an audio replay of the April 30th conference call webcast.

(Dollars in millions)		March 31,				December 31,
		2008				2007
Assets
Investments		$	11,704			$	12,261
Cash and cash equivalents			237				226
Premiums receivable			1,113				1,107
Reinsurance receivable			757				754
Other assets			2,134				2,289
Total assets		$	15,945			$	16,637
Liabilities
Insurance reserves		$	5,524			$	5,445
Unearned premiums			1,585				1,564
Deferred income tax			750				977
6.125% senior notes due 2034			371				371
6.9% senior debentures due 2028			28				28
6.92% senior debentures due 2028			392				392
Other liabilities			1,846				1,931
Total liabilities			10,496				10,708
Shareholders’ Equity
Common stock and paid-in capital			1,448				1,442
Retained earnings			3,298				3,404
Accumulated other comprehensive income			1,880				2,151
Treasury stock			(1,177)				(1,068)
Total shareholders’ equity			5,449				5,929
Total liabilities and shareholders’ equity		$	15,945			$	16,637

(Dollars in millions except per share data)		Three months ended March 31,
		2008				2007
Revenues
Earned premiums		$	780			$	815
Investment income, net of expenses			152				148
Realized investment gains and losses			(232)				62
Other income			4				6
Total revenues			704				1,031
Benefits and Expenses
Insurance losses and policyholder benefits			536				484
Commissions			150				170
Other operating expenses			118				106
Total benefits and expenses			804				760
Income Before Income Taxes			(100)				271
Provision for Income Taxes			(58)				77
Net Income (Loss)		$	(42)			$	194
Per Common Share
Net income (loss)—basic		$	(0.26)			$	1.12
Net income (loss)—diluted		$	(0.26)			$	1.11

This report contains forward-looking statements that involve potential risks and uncertainties. For factors that could cause results to differ materially from those discussed, please see the most recent edition of our safe harbor statement under the Private Securities Litigation Reform Act of 1995. To view or print the edition in effect as of this report's initial publication date, please view this document as a printable PDF.

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