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Fourth-quarter and Full-year 2008 Results

(Dollars in millions except share data)		Three months ended December 31,													Twelve months ended December 31,
		2008				2007					Change %				2008				2007				Change %
Revenue Highlights
Earned premiums		$	780			$	802				(2.7)				$	3,136			$	3,250				(3.5)
Investment income			125				157				(20.5)					537				608				(11.6)
Total revenues			1,018				977				4.2					3,824				4,259				(10.2)
Income Statement Data
Net income		$	161			$	187				(13.9)				$	429			$	855				(49.9)
Net realized investment gains and losses			69				8				801.9					85				245				(65.4)
Operating income*		$	92			$	179				(48.6)				$	344			$	610				(43.7)
Per Share Data (diluted)
Net income		$	0.99			$	1.11				(10.8)				$	2.62			$	4.97				(47.3)
Net realized investment gains and losses			0.42				0.04				950.0					0.52				1.43				(63.6)
Operating income*		$	0.57			$	1.07				(46.7)				$	2.10			$	3.54				(40.7)
Book value															$	25.75			$	35.70				(27.9)
Cash dividend declared		$	0.39			$	0.355				9.9				$	1.56			$	1.42				9.9
Weighted average shares outstanding			162,485,576				168,163,752				(3.4)					163,362,409				172,167,452				(5.1)

• 98.9 percent fourth-quarter 2008 property casualty combined ratio as net written premiums declined 1.0 percent. Full-year 2008 property casualty combined ratio at 100.6 percent, with 3.4 percent decline in net written premiums.
• 23.6 percent and 13.1 percent increase in new business written by agencies in the 2008 fourth quarter and full year, partially offsetting the effects of the very competitive insurance market and slowing economy.
• $14 million in net written premiums from excess and surplus lines operation launched in 2008.
• 24 cents per share contribution from life insurance operating income to full-year results, up 2 cents from 2007.

• $1.009 billion in cash and cash equivalents at year-end 2008, providing exceptional liquidity and capital flexibility.
• $25.75 book value, down from $28.87 at September 30 and $35.70 at year-end 2007 on lower investment values.
• Investment portfolio at year-end reflected application of investment guidelines revised in 2008 that increased diversification and reduced concentrations. Investment income declined in the fourth-quarter and full-year because of portfolio changes and lower dividends from holdings in the equity portfolio.

• Management sees strategies leading to rate of book value growth plus rate of dividend contribution, a measure of value creation, averaging 12 percent to 15 percent between 2010 and 2014. Dividend contribution rate defined as annual dividends declared as a percent of beginning shareholders’ equity.

Kenneth W. Stecher, president and chief executive officer, said, “2008 was a tough year for our economy, our industry and our company. Our long-term perspective lets us address the immediate challenges while focusing on the major decisions that best position the company for success through all market cycles. We believe that this forward-looking view has consistently benefited our policyholders, agents, shareholders and associates.

“To measure our progress, we’re defining a value creation ratio that we believe captures the contribution of our insurance operations, the success of our investment strategy and the importance we place on paying cash dividends to shareholders. Between 2010 and 2014, we expect the total of our rate of growth in book value plus the rate of dividend contribution to average 12 percent to 15 percent. With the current economic and market uncertainty, we believe this ratio is an appropriate way to measure our long-term progress in creating value.”

Stecher added, “We were founded more than 50 years ago by independent agents who established the mission that continues to guide us — To grow profitably and enhance the ability of local independent insurance agents to deliver quality financial protection to the people and businesses they serve. To continue to achieve that objective, we have worked with our board of directors to identify actions that will position us for long-term success in three broad areas of strategic focus — preservation of capital, profitability and growth.

Stecher said, “First, we are addressing preservation of capital to sustain our capacity for growth of our insurance business. We ended 2008 with a healthy property casualty premium to surplus ratio of 0.9-to-1. All of our insurance subsidiaries continue to be highly rated, operating with a level of capital far exceeding regulatory requirements. We also can sustain our investment in the people and infrastructure needed to succeed in the future. Smart spending today means we’ll be even better prepared with strong, local market-based relationships when external conditions improve.

“As we stated on Monday, we’re working on a variety of initiatives, including the repositioning of our investment portfolio, to preserve our capital strength and liquidity. Additionally, we hold more than $1 billion of our 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.”

Stecher said, “Second, we are emphasizing business initiatives that support improved cash flow and profitability for the agencies that represent us and for our company.

“Several technology initiatives are well under way to improve critical efficiencies and streamline processes for our appointed agencies, allowing us to win an increasing share of their business. By the end of this year, we expect to make significant strides with deployment of a new commercial lines policy administration system; the groundwork for a major upgrade of our personal lines policy administration system; and a variety of online initiatives to serve agencies and policyholders. We’ll also sustain our reputation for superior claims service, improving processes with options such as allowing agents access to more detailed information on the status of pending claims.

“Other technology projects in process will improve our business data, supporting accurate underwriting, pricing and decisions. These will enhance our hallmark — local decision making based on the local knowledge and risk selection expertise we derive from our agents and from having a large network of field representatives who live and work in our agents’ communities.

“All of our initiatives seek to strengthen our relationships with agents, allowing them to serve clients faster and manage expenses better. We expect these efforts to contribute to our rank as the No. 1 or No. 2 carrier in agencies that have represented us for at least five years. In 2008, we again earned that rank in more than 75 percent of the agencies that have represented Cincinnati Insurance for more than five years. We are working to improve that rank again in 2009 and in each of the years that follow.”

Stecher added, “The third area of focus is adding to our property casualty premiums without significant concentration of risk or infrastructure expense. Expanding our geographic footprint and diversifying our premium sources should give us profitable growth while also reducing catastrophe exposure risk. With our entry into Texas during the fourth quarter of 2008, Cincinnati Insurance now is actively marketing our policies in 35 states, expanding our opportunities beyond the Midwest and South. We now have a sizeable presence in the western states — opening New Mexico and Washington in 2007, Utah in 2000, Idaho in 1999 and Montana in 1998. We plan to look next at taking the Cincinnati Insurance franchise to agencies in Colorado and Wyoming.

“To diversify the sources of our premiums, we also continue to appoint new agencies in our current operating territories, adding 76 in 2008 and targeting at least 65 additional appointments in 2009. We are working to position our personal lines business for profitable future growth with rate and credit modifications and making personal lines policies available in new geographies to spread risk. Another source of premiums is our new excess and surplus lines operation, which ended the year on track with $14 million of written premiums and products available in 33 states.”

Steven J. Johnston, FCAS, MAAA, CFA, chief financial officer, said, “When looking at our longer-term objectives, we believe over any five-year period our agency relationships and growth strategies can lead to a property casualty written premium growth rate that exceeds the industry average. We also believe our underwriting philosophy can generate a GAAP combined ratio over any five-year period that is consistently below 100 percent. Finally, we believe our investment philosophy can drive investment income growth and lead to a total return on our equity investment portfolio that exceeds the Standard & Poor’s 500’s five-year return.”

Johnston added, “Our view of the value we can create over the next five years relies on two assumptions about the external environment. First, we’re anticipating some firming of commercial insurance pricing during 2009. Second, we believe that the economy and financial markets can resume a growth track by the end of 2010.”

On 2008 results and the outlook for 2009, Johnston said, “In 2009, we believe our value creation ratio may be below our long-term target for several reasons. First, the weak economy is expected to continue to affect policyholders by deflating their business and personal insurable assets. Until the economy begins to recover, we also do not expect to see significant appreciation of our investments. Second, the lingering effects of soft insurance market pricing are expected to affect growth rates and earned premium levels into 2010, continuing to weaken loss ratios and hamper near-term profitability. Third, our property casualty written premium growth may lag as our growth initiatives need more time to reach their full contribution. Fourth, we continue to invest in our business, including technology, new states and process initiatives to create long-term value.

Johnston noted, “The diversification of the investment portfolio over the past year included sales of selected positions to lock in gains, reduce concentrations and increase liquidity. We expect to continue to make changes to the portfolio, as appropriate. Proceeds of sales are being reinvested in both fixed income and equity securities with yields that we believe are likely to be more secure. This may slow the return to growth in investment income although we believe year-over-year comparisons may turn positive in the second half of the year.”

(Dollars in millions; percent change given for dollar amounts		Three months ended December 31,													Twelve months ended December 31,
and point change given for ratios)		2008				2007				Change %					2008				2007				Change %
Earned premiums		$	747			$	777				(3.8)				$	3,010			$	3,125				(3.7)
Loss and loss expenses before catastrophe losses			490				397				23.5					1,853				1,806				2.6
Loss and loss expenses from catastrophe losses			(16)				(2)				(800.3)					203				26				681.1
Total loss and loss expenses			474				395				20.1					2,056				1,832				12.2
Underwriting expenses			264				270				(2.1)					971				989				(1.8)
Underwriting profit (loss)		$	9			$	112				(92.3)				$	(17)			$	304			nm
Other business metrics:
Agency renewal written premiums		$	669			$	705				(5.0)				$	2,828			$	2,960				(4.4)
Agency new business written premiums			100				81				23.6					368				325				13.1
Net written premiums			717				724				(1.0)					3,010				3,117				(3.4)
										Points													Points
Ratios as a percent of earned premiums:
Loss and loss expenses			63.6%				50.9%				12.7					68.3%				58.6%				9.7
Underwriting expenses			35.3				34.7				0.6					32.3				31.7				0.6
Combined ratio			98.9%				85.6%				13.3					100.6%				90.3%				10.3
Other business metrics:
Contribution from catastrophe losses			(2.1)				(0.2)				(1.9)					6.8				0.8				6.0
Contribution from prior period reserve development			(16.1)				(15.3)				(0.8)					(10.7)				(7.7)				(3.0)

(In millions, net of reinsurance)		Three months ended December 31,												Twelve months ended December 31,
		Commercial				Personal								Commercial				Personal
Dates		lines				lines				Total				lines				lines				Total
2008
First quarter catastrophes		$	(1)			$	1			$	0			$	20			$	22			$	42
Second quarter catastrophes			(7)				(4)				(11)				59				30				89
Third quarter catastrophes			1				(3)				(2)				25				45				70
Fourth quarter catastrophes			0				0				0				0				0				0
All other			(1)				(1)				(2)				2				2				4
Development on 2007 and prior catastrophes			(1)				0				(1)				(3)				1				(2)
Calendar year incurred total		$	(9)			$	(7)			$	(16)			$	103			$	100			$	203
2007
First quarter catastrophes		$	1			$	0			$	1			$	6			$	2			$	8
Second quarter catastrophes			0				1				1				4				5				9
Third quarter catastrophes			1				(2)				(1)				2				4				6
Fourth quarter catastrophes			0				0				0				0				0				0
All other			(4)				1				(3)				14				9				23
Development on 2006 and prior catastrophes			1				(1)				0				(10)				(10)				(20)
Calendar year incurred total		$	(1)			$	(1)			$	(2)			$	16			$	10			$	26

Treaties	Retention Summary	Comments
Property catastrophe	For any one event, retain losses of: 100% of first $45 million 33% between $45 million and $70 million 19% between $70 million and $105 million 7% to 20% for layers between $105 million and $500 million	After reinsurance, our maximum exposure to a catastrophic event that caused $500 million in covered losses would be $118 million compared with $105 million in 2008. The largest catastrophe loss in our history was Hurricane Ike, estimated at $129 million before reinsurance at December 31, 2008.
Casualty per risk	For a single loss, retain: 100% of first $6 million 0% between $6 million and $25 million Obtain facultative reinsurance above $25 million	Increased casualty treaty retention to $6 million from $5 million
Property per risk	For a single loss, retain: 100% of first $5 million 0% between $5 million and $25 million Obtain facultative reinsurance above $25 million	Increased property treaty retention to $5 million from $4 million
Casualty third excess	Coverage of: $25 million excess of $25 million	No changes in 2009
Casualty fourth excess	Coverage of: $20 million excess of $50 million	No changes in 2009

(Dollars in millions; percent change given for dollar amounts and point change given for ratios)		Three months ended December 31,													Twelve months ended December 31,
		2008				2007				Change %					2008				2007				Change %
Earned premiums		$	573			$	601				(4.5)				$	2,316			$	2,411				(3.9)
Loss and loss expenses before catastrophe losses			367				310				18.4					1,401				1,378				1.6
Loss and loss expenses from catastrophe losses			(9)				0			nm						103				16				522.5
Total loss and loss expenses			358				310				15.6					1,504				1,394				7.8
Underwriting expenses			204				215				(5.0)					742				756				(1.8)
Underwriting profit		$	11			$	76				(84.8)				$	70			$	261				(73.0)
Other business metrics:
Agency renewal written premiums		$	514			$	546				(5.9)				$	2,156			$	2,271				(5.1)
Agency new business written premiums			83				71				16.4					312				287				8.8
Net written premiums			552				562				(1.9)					2,311				2,413				(4.2)
										Points													Points
Ratios as a percent of earned premiums:
Loss and loss expenses			62.5%				51.5%				11.0					64.9%				57.9%				7.0
Underwriting expenses			35.6				35.8				(0.2)					32.1				31.3				0.8
Combined ratio			98.1%				87.3%				10.8					97.0%				89.2%				7.8
Other business metrics:
Contribution from catastrophe losses			(1.5)				0.0				(1.5)					4.5				0.7				3.8
Contribution from prior period reserve development			(17.0)				(17.0)				0.0					(11.8)				(8.4)				(3.4)

(Dollars in millions; percent change given for dollar amounts		Three months ended December 31,													Twelve months ended December 31,
and point change given for ratios)		2008				2007				Change %					2008				2007				Change %
Earned premiums		$	171			$	176				(2.9)				$	689			$	714				(3.4)
Loss and loss expenses before catastrophe losses			120				87				37.1					447				428				4.6
Loss and loss expenses from catastrophe losses			(7)				(2)				(308.2)					100				10				958.8
Total loss and loss expenses			113				85				31.6					547				438				25.2
Underwriting expenses			58				55				6.6					224				233				(3.9)
Underwriting profit (loss)		$	0			$	36			nm					$	(82)			$	43			nm
Other business metrics:
Agency renewal direct written premiums		$	156			$	159				(2.3)				$	672			$	690				(2.5)
Agency new business direct written premiums			11				10				17.9					42				38				9.5
Net written premiums			159				162				(1.4)					685				704				(2.7)
										Points													Points
Ratios as a percent of earned premiums:
Loss and loss expenses			65.9%				48.6%				17.3					79.4%				61.3%				18.1
Underwriting expenses			34.1				31.1				3.0					32.5				32.6				(0.1)
Combined ratio			100.0%				79.7%				20.3					111.9%				93.9%				18.0
Other business metrics:
Contribution from catastrophe losses			(4.1)				(1.0)				(3.1)					14.5				1.3				13.2
Contribution from prior period reserve development			(13.2)				(9.2)				(4.0)					(7.2)				(5.7)				(1.5)

(In millions)		Three months ended December 31,													Twelve months ended December 31,
		2008				2007				Change %					2008				2007				Change %
Written premiums		$	50			$	41				24.2				$	185			$	167				11.0
Earned premiums		$	33			$	25				30.6				$	126			$	125				0.8
Investment income, net of expenses			31				30				4.9					120				115				4.5
Other income			1				1				(35.6)					2				4				(56.0)
Total revenues, excluding realized investment gains and losses			65				56				15.8					248				244				1.5
Contract holders benefits			27				35				(23.3)					142				133				6.2
Expenses			12				8				54.6					45				52				(12.8)
Total benefits and expenses			39				43				(8.6)					187				185				0.8
Net income before income tax and realized investment gains and losses			26				13				96.9					61				59				3.6
Income tax			9				4				110.3					21				20				6.5
Net income before realized investment gains and losses		$	17			$	9				90.4				$	40			$	39				2.1

(In millions)		Three months ended December 31,													Twelve months ended December 31,
		2008				2007				Change %					2008				2007				Change %
Investment income:
Interest		$	88			$	79				12.6				$	326			$	308				6.0
Dividends			35				75				(53.0)					204				294				(30.5)
Other			4				4				(6.1)					14				15				(4.5)
Investment expenses			(2)				(1)			nm						(7)				(9)				12.6
Total investment income, net of expenses			125				157				(20.5)					537				608				(11.6)
Investment interest credited to contract holders			(16)				(17)				7.9					(63)				(59)				(5.2)
Realized investment gains and losses summary:
Realized investment gains and losses			245				38				535.9					686				409				67.6
Change in fair value of securities with embedded derivatives			(25)				(12)				(108.1)					(38)				(11)				(243.8)
Other-than-temporary impairment charges			(110)				(14)				(672.7)					(510)				(16)			nm
Total realized investment gains and losses			110				12				804.7					138				382				(64.0)
Investment operations income		$	219			$	152				43.5				$	612			$	931				(34.2)

(Dollars in millions except share data)		At December 31,				At December 31,
		2008				2007
Balance sheet data
Invested assets		$	8,890			$	12,261
Total assets			13,369				16,637
Short-term debt			49				69
Long-term debt			791				791
Shareholders’ equity			4,182				5,929
Book value per share			25.75				35.70
Debt-to-capital ratio			16.7%				12.7%

		Three months ended December 31,								Twelve months ended December 31,
		2008				2007				2008				2007
Performance measures
Comprehensive loss		$	(449)			$	(397)			$	(1,375)			$	(368)
Return on equity, annualized			14.5%				12.0%				8.5%				13.4%
Return on equity, annualized, based on comprehensive loss			(40.5)				(25.4)				(27.2)				(5.8)

(Dollars in millions except per share data)		December 31,				December 31,
		2008				2007
ASSETS
Investments
Fixed maturities, at fair value (amortized cost: 2008—$6,058; 2007—$5,783)		$	5,827			$	5,848
(includes securities pledged to creditors: 2008—$0; 2007—$745)
Equity securities, at fair value (cost: 2008—$2,077; 2007—$2,975)			2,896				6,249
Short-term investments, at fair value (amortized cost: 2008—$84; 2007—$101)			84				101
Other invested assets			83				63
Total investments			8,890				12,261
Cash and cash equivalents			1,009				226
Securities lending collateral invested			0				760
Investment income receivable			98				124
Finance receivable			71				92
Premiums receivable			1,059				1,107
Reinsurance receivable			759				754
Prepaid reinsurance premiums			15				13
Deferred policy acquisition costs			509				461
Deferred income tax			126				0
Land, building and equipment, net, for company use (accumulated depreciation:
2008—$297; 2007—$276)			236				239
Other assets			49				72
Separate accounts			548				528
Total assets		$	13,369			$	16,637
LIABILITIES
Insurance reserves
Loss and loss expense reserves		$	4,086			$	3,967
Life policy reserves			1,551				1,478
Unearned premiums			1,544				1,564
Securities lending payable			0				760
Other liabilities			618				574
Deferred income tax			0				977
Note payable			49				69
6.125% senior notes due 2034			371				371
6.9% senior debentures due 2028			28				28
6.92% senior debentures due 2028			392				392
Separate accounts			548				528
Total liabilities			9,187				10,708
SHAREHOLDERS’ EQUITY
Common stock, par value—$2 per share; (authorized: 2008—500 million shares, 2007—500 million shares; issued: 2008—196 million shares, 2007—196 million shares)			393				393
Paid-in capital			1,069				1,049
Retained earnings			3,579				3,404
Accumulated other comprehensive income			347				2,151
Treasury stock at cost (2008—34 million shares, 2007—30 million shares)			(1,206)				(1,068)
Total shareholders’ equity			4,182				5,929
Total liabilities and shareholders’ equity		$	13,369			$	16,637

(In millions except per share data)		Three months ended December 31,								Twelve months ended December 31,
		2008				2007				2008				2007
REVENUES
Earned premiums
Property casualty		$	747			$	777			$	3,010			$	3,125
Life			33				25				126				125
Investment income, net of expenses			125				157				537				608
Realized investment gains and losses			110				12				138				382
Other income			3				6				13				19
Total revenues			1,018				977				3,824				4,259
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits			500				430				2,193				1,963
Commissions			149				158				576				624
Other operating expenses			118				96				411				362
Taxes, licenses and fees			15				18				68				75
Increase in deferred policy acquisition costs			1				8				(17)				(9)
Interest expense			14				13				53				52
Total benefits and expenses			797				723				3,284				3,067
INCOME BEFORE INCOME TAXES			221				254				540				1,192
PROVISION (BENEFIT) FOR INCOME TAXES
Current			93				60				238				325
Deferred			(33)				7				(127)				12
Total provision for income taxes			60				67				111				337
NET INCOME		$	161			$	187			$	429			$	855
PER COMMON SHARE
Net income—basic		$	0.99			$	1.12			$	2.63			$	5.01
Net income—diluted		$	0.99			$	1.11			$	2.62			$	4.97

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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