Cincinnati Financial Corporation

2008 Third-quarter Letter to Shareholders

Cincinnati Financial Reports Profitable 2008 Third Quarter

• Positive net and operating income for three- and nine-month periods
• Book value holds steady for the quarter at $28.87 on September 30

• Net income of $247 million, or $1.50 per share, in the 2008 third quarter, compared with $124 million, or 72 cents, in the 2007 third quarter. Third-quarter 2008 realized investment gains were significantly higher. Common stocks sales to lock in gains and diversify the portfolio more than offset previously announced non-cash impairment charges.
• Operating income* of $74 million, or 45 cents per share, in the 2008 third quarter, compared with $114 million, or 66 cents, in the 2007 third quarter. Previously announced catastrophe losses reduced 2008 third-quarter operating income by 25 cents per share compared with 5 cents last year. Nine-month operating income of $1.54 per share included an 87-cent catastrophe loss impact compared with a 10-cent impact on last year's nine-month operating income of $2.49 per share.

• $727 million in third-quarter 2008 consolidated property casualty net written premiums compared with $736 million in the 2007 third quarter. Strong contribution of new business written by agencies partially offset the effects of competition in the commercial markets and current economic trends. Excess and surplus lines operations launched in January 2008 added $4 million to new business in the third quarter and $8 million year-to-date.
• Property casualty underwriting loss of $9 million in 2008 third quarter compared with underwriting profit of $21 million in the 2007 third quarter. 2008 property casualty results were reduced by catastrophe losses
• Three- and nine-month property casualty combined ratio near breakeven despite catastrophe losses from Hurricane Ike.
• 3 cents per share contribution from life insurance operations to third-quarter operating income, down from 5 cents.

• Book value of $28.87 at September 30, 2008, almost flat from $28.99 at June 30, 2008, but down from year-end 2007 on valuation changes in first half of year. Property casualty statutory surplus rose slightly from its midyear level.
• Pretax investment income of $130 million in 2008 third quarter compared with $152 million in 2007 third quarter. Dividend income from the equity portfolio declined due to dividend cuts, some from positions that the company has since sold or reduced.
• Equity sales of portions of selected positions locked in gains or reduced concentrations. Proceeds to be reinvested in sectors with better total return prospects. Sales helped reduce financial sector concentration by 25 percent since midyear.

• Outlook for specific full-year 2008 metrics unchanged from September update. Management anticipates full year profitability and continued capital strength, which supports our cash dividend and continued investment in insurance operations, even in a difficult economic and industry environment.

Kenneth W. Stecher, president and chief executive officer, commented, “The current instability of financial markets highlights the value of operating in a transparent and conservative way, building a cushion of financial strength over a period of years. A long-term perspective governs all of our major decisions – to the consistent benefit of our policyholders, agents, shareholders and associates. We continue to focus on our risk management program, with the goal of more specifically defining our risk limits, aligning our operating plan accordingly and improving management’s ability to identify and respond to changing conditions.

“Exceptional liquidity arises from our strong cash flows and prudent cash balances. All of our insurance subsidiaries continue to be highly rated, operating with a level of capital far exceeding regulatory requirements. Statutory surplus of our property casualty insurance companies increased slightly during the third quarter of 2008. Plus, unlike many insurers, we hold significant additional assets at the parent company level, increasing our flexibility through all periods to maintain our cash dividend and to continue to invest in and expand our insurance operations.

“New internal parameters for our investment portfolio, including more conservative limits on sector and issuer concentrations, are helping us prepare to withstand future challenges. Recent sales of selected common stock holdings are part of a strategic rebalancing, providing cash for reinvestment into sectors that we believe have better prospects for both current income and long-term appreciation. In early October we sold approximately 9 million additional shares of Fifth Third Bancorp (NASDAQ: FITB), reducing our position to 20 million shares. In total, we have reduced our financial sector holdings 25 percent since midyear, moving this sector more in line with our longer-term targets. In large part, common stock sales occurred when we exercised appropriate sell discipline to lock in gains.

“At quarter-end, fixed-maturity investments represented almost 60 percent of the portfolio, a level management believes is appropriate. We view our diversification to be consistent with our view of prudent risk management. Going forward, we will evaluate all of our fixed-maturity and equity investments using our investment parameters and risk limits and adding to both the fixed maturity and equity portfolios, as appropriate. We believe our current capital position can withstand short term pressures, such as the market volatility that we have experienced in October,” Stecher noted.

Steven J. Johnston, FCAS, MAAA, CFA, chief financial officer, said, "As we work to write profitable insurance business, we continue to face unfavorable pricing and economic trends. At this time, we continue to believe that 2008 full year written premiums could decline by 5 percent, or slightly more, if pessimistic views of these trends prove accurate and commercial insurance pricing continues to be very competitive.

"A more optimistic view could result in a rate of decline for full-year 2008 premiums closer to the 4.2 percent we experienced so far in 2008. This pace is appropriate and consistent with our agents' practice of selecting and retaining accounts with manageable risk characteristics that support the lower prevailing prices. It reflects the advantages of our three year policies. We believe this pace also reflects the advantages we achieve by maintaining an experienced field force. Our representatives live in our agents' communities and serve their clients, providing us with quality intelligence on local market conditions. Since the end of the third quarter, our first Texas representative has begun to explore relationships with agencies in the Austin market, and our second team member is scheduled to relocate to the Dallas market in November.

"We continue to pioneer this and other new paths to future growth. During the third quarter, we introduced our excess and surplus lines capabilities to additional agencies in more states, staying on track with our plans to have these products available in 33 states by year end. We continued appointing new agencies and working to position our personal lines for profitable future growth, including introducing personal lines capabilities in new geographies. We look to 2009 for momentum in all of these initiatives, as well as advances in our technology that will make it easier for agents and their policyholders to do business with our company."

Johnston continued, "High catastrophe losses continued to temper property casualty profitability despite satisfactory underlying trends. Our commercial lines combined ratio was 96.6 percent for the nine-month period, despite a 5.5 percentage-point rise in commercial catastrophe losses. We continue to see the potential for the full-year 2008 combined ratio for our overall property casualty operations to remain slightly above 100 percent.

"We're taking that conservative view of the combined ratio because of the record catastrophe losses this year. Hurricane Ike moved into the Midwest on September 14, causing unusually high winds in Ohio, Indiana and Kentucky. Our third-quarter estimate of gross losses from that storm was $105 million, making it the single largest gross catastrophe event in the company's history. Net of reinsurance, the loss is estimated at $57 million. Our reinsurance program, an important part of our risk management efforts, protected our surplus from outsized losses as intended. Virtually all of the losses reported by our policyholders occurred in the Midwest.

"Through October 24, we had received approximately 18,000 claims from Hurricane Ike, of which more than 80 percent have been closed. To restore the affected layers of our catastrophe reinsurance treaty, we incurred a reinstatement premium of $11 million, which reduced written and earned premiums for the three- and nine-month periods."

Johnston noted, "In mid-2008, we modified our defined benefit pension plan and began transitioning to a sponsored 401(k) with company matching of associate contributions. This action reduces the company's future risk while offering associates an up to-date, more flexible benefits program. The pension plan now includes only associates 40 years of age or older on August 31, 2008, who elected to remain in the plan. We now expect fourth-quarter 2008 results to reflect a settlement cost of approximately $26 million, largely related to benefit distributions to those who left the qualified pension plan. Going forward, we expect potential savings from lower funding requirements for the pension plan to be offset by company matching contributions to 401(k) accounts for associates who do not accrue pension plan benefits."

Stecher added, "Our rebalancing actions, together with market and economic forces, have significantly changed our investment portfolio over the past 12 months. The decision to rebalance our portfolio grew out of our implementation of an enhanced risk management process, which involves modeling outcomes, setting tolerances and acting to optimize use of our capital. We considered opportunities to reduce volatility risk while retaining upside potential. After common stock sales made since midyear, our financial sector holdings now account for approximately 30 percent of the market value of our equity portfolio, down 25 percent.

"While our equity portfolio now is better positioned for total return, it is producing lower dividend income. We expect full-year 2008 pretax investment income to be less than 90 percent of the 2007 level, with no resumption of earned dividend growth in 2009. We also expect our highly rated and diversified $5.941 billion bond and short-term investment portfolio to continue providing steady interest income. We generally hold bonds to maturity, redeeming them at full value of the principal."

Stecher concluded, "We believe that our strong surplus position and superior insurer financial strength ratings are competitive advantages that help our agents market our policies. In this market, consistency and predictability are our most valuable differentiators. Our financial strength supports the consistent, predictable performance that our policyholders, agents, associates and shareholders have always expected and received. We will continue to manage our capital to withstand significant challenges. We believe our capital position and cash flow continues to support our cash dividend, which the board sees as a priority over repurchase in this market."

Consolidated Property Casualty Insurance Operations

• 1.3 percent and 4.2 percent declines in third-quarter and nine-month 2008 property-casualty net written premiums, reflecting weakening economy, soft pricing and disciplined underwriting.
• $92 million in third-quarter 2008 new business written directly by agencies, up 12.1 percent from $82 million in last year’s third quarter.
• Positive benefits from growth initiatives seen in third quarter including $8 million in nine-month net written premiums from excess and surplus lines operations launched in January 2008.
• New state, new agency and other initiatives also contributed. Agency relationships rise to 1,118 with 1,369 reporting locations marketed property casualty insurance products at quarter end, up from 1,092 agency relationships with 1,327 reporting locations at year-end 2007.
• 101.3 percent third-quarter and 101.1 percent nine-month 2008 GAAP combined ratios. Near breakeven performance achieved in both periods despite significantly higher catastrophe losses. The effects of soft pricing and loss cost inflation were offset by higher savings from favorable development on prior year reserves.
• $63 million in third-quarter 2008 catastrophe losses, due primarily to Hurricane Ike.

Insurance Segment Highlights

• 1.2 percent and 4.9 percent declines in third-quarter and nine-month 2008 commercial lines net written premiums, primarily a result of weakening economy, soft pricing and disciplined underwriting.
• $77 million in third-quarter 2008 new commercial lines business written directly by agencies, up 6.0 percent from $72 million in last year’s third quarter. Nine-month new business rose 6.3 percent to $229 million from $216 million.
• Improved third-quarter 2008 combined ratio despite 3.8 percentage-point rise in the contribution of catastrophe losses. Savings from favorable development on prior year reserves rose substantially.
• Higher nine-month 2008 combined ratio primarily due to 5.5 percentage-point rise in the contribution of catastrophe losses. Other factors contributing to the change in the ratio were higher savings from favorable development on prior year reserves, lower pricing, normal loss cost inflation and higher underwriting expenses. Lower commission expenses partially offset these increases.
• Higher savings from favorable development on prior year reserves continued to reflect fluctuations in savings for the commercial casualty line of business.

• 4.0 percent and 3.1 percent declines in third-quarter and nine-month 2008 personal lines net written premiums due to lower policy counts and pricing changes that reduced premiums per policy. Higher new personal lines business partially offset those factors.
• $11 million in third-quarter 2008 personal lines new business written directly by agencies, up 11.8 percent from $10 million in last year’s third quarter. Nine-month new business rose 6.7 percent to $30 million from $28 million.
• 18.7 percentage-point rise in third-quarter 2008 combined ratio largely due to higher catastrophe losses. In addition to catastrophes, lower pricing and normal loss cost inflation continued to weigh on homeowner results. However, the loss and loss expense ratio for the largest line of business in this segment, personal auto, remained very healthy.
• Higher savings from favorable development on prior year reserves continue to reflect normal fluctuations in savings for the other personal line of business, which includes personal umbrella liability coverages.