2010 Annual Letter From the Chairman and the Chief Executive Officer

March 18, 2011

Your company's operating income* rose 27 percent in 2010, covering shareholder dividends that have increased each and every one of the past 50 years. Only 10 other publicly traded U.S. companies can claim this long record of cash dividend growth; its preservation reflects the board's recognition of our progress, its confidence in our plans and its vision of the opportunities before us.

While 2010 pretax investment income rose 3 percent and underwriting results improved, the contribution to net income from net realized investment gains fell $114 million. This resulted in net income of $377 million, $55 million lower than the $432 million we earned in 2009. We chose to retain $755 million of pretax unrealized investment gains in our $3 billion equity portfolio at year-end.

The equity portfolio accounted for just over a fourth of our year-end invested assets. While that level is roughly half of the pre-2008 level, it is higher than industry norms. Equity investing remains a key strategy for your company. Income from our dividend-paying stocks helps offset low bond yields. The long-term growth potential of stocks also serves as a hedge against rising interest rates and inflation.

Appreciation of common stocks contributes to your shareholders' equity. Fair value of the equity portfolio rose 13 percent in 2010 on appreciation and higher invested assets. Book value per share rose 6 percent over 2009, an increase of $1.66 after dividends to shareholders of $1.59 per share.

Our value creation ratio shows how we are doing for shareholders, summing the growth rate of book value per share and the ratio of dividends declared per share to beginning book value per share. Our long-term target is an annual average of 12 percent to 15 percent for the period 2010 through 2014, and our 11.1 percent ratio for 2010 came within a percentage point of that range. We expect several initiatives to further improve our insurance underwriting profitability and premium growth, creating stronger value.

Having reached major milestones for several initiatives over the past two years, we stand ready and eager to continue executing our plans. In January, we marked the 60^th anniversary of the first policy issued by The Cincinnati Insurance Company, a residential fire policy with total premium of $17.50 for three years. From that beginning, four independent agents with a good idea and a lot of determination started a company that now writes almost $3 billion of annual premium and has more than $15 billion of consolidated assets.

While commercial lines continues to be our largest operating segment based on revenues, each of our other insurance operating segments grew nicely in 2010, demonstrating the success of strategic initiatives for profitable growth. Invested assets continued a steady upward trend since the 2008 U.S. financial market decline, due to disciplined investing and a two-year rally in financial markets. Income contributed by our operations grew stronger in 2010, primarily from improved property casualty underwriting results, plus after-tax investment income growth of 2 percent despite declining investment yields.

Book value per share grew in 2010, reflecting better operating results in addition to higher valuation for our investment portfolio. We increased our shareholder dividend in 2010, marking the 50th consecutive year of increases. The value creation ratio, our primary long-term performance measure, averaged just over 15 percent for 2009 and 2010, in line with our target range of 12 percent to 15 percent on average annually for 2010 through 2014. To calculate the value creation ratio, we add the percentage of year-over-year growth in book value per share to the annual contribution of dividends (the percentage of declared dividends per share to beginning book value per share).

Sixty years later, we are stepping up to be a stronger competitor than ever, just as determined as our founders to be the best insurance company serving independent agents in the United States. The business model and marketplace advantages they nurtured remain strong, and our efforts are adding new advantages as we take our position on the starting line ready to take that model into a new era. Our initiatives are already having an impact - regardless of economic uncertainty and the stubborn commercial insurance market - and any positive change in these respects would be wind at our backs.

We see opportunity ahead. Over the past three years, we have taken decisive actions that stabilized our investment portfolio and our coastal catastrophe exposures; brought our technology systems up to date; improved our data management and embraced predictive modeling and analytics; developed robust enterprise risk management and business planning frameworks; expanded our operations and agency force; and invested in training and expertise of our associates.

These ongoing efforts are making us nimble and fit to provide our agents with more ease and efficiency in doing business with us. That ease has historically risen from the availability of our field representatives in their offices and communities, our respect for local knowledge and efforts to push decision making to the local level, and our commitments to provide outstanding claims service and a stable market for their business while controlling expenses. We continue this agency-centered approach, bringing new tools, capabilities and services to bear as we seek profitable growth for our agencies and your company.

Our 2 percent growth of written premiums in 2010 exceeded industry average growth estimated at 0.5 percent by A.M. Best, primarily due to our expansion activities. Our combined ratio improved almost 3 percentage points to 101.7 percent while the estimated industry average ratio deteriorated to 103.0 percent. We see limited prospects in the coming year for increased investment income; rather, we expect to achieve our performance objectives for earnings and book value growth primarily by continuing to execute on strategic initiatives to improve property casualty underwriting results.

Each percentage point improvement on our overall property casualty combined ratio can add approximately $29 million to underwriting gains. This is where we will apply our main efforts to improve performance in 2011.

In 2010, we maintained a healthy level of profitability in most lines of business. For all lines except workers' compensation, homeowners, and excess and surplus lines, the combined ratio averaged 95 percent. That profitable core of business represented almost 80 percent of our property casualty premium volume. We will keep those lines healthy by staying disciplined and avoiding underpriced business. Broader use of predictive analytics will help us price all risks with sufficient profit margin. Most importantly, we will continue supporting our strong agency relationships with knowledgeable, local field staff, profit sharing and superior claims service.

For each of the three challenging lines, specific plans and initiatives already under way make us confident we can achieve profitability as those initiatives mature:

The 2010 loss and loss expense ratio improved 29.6 percentage points, reflecting favorable development this year after a reserve charge for this line in 2009. We expect that use of predictive modeling will be the primary driver of further improvement, as analytics assist our decisions both on individual risks and on the overall book.

A multidisciplinary task force of claims, underwriting, loss control and sales associates has implemented additional initiatives such as our program to systematically act on policies with the highest loss ratios, increasing rates or nonrenewing this business as indicated by a detailed, case-by-case review. Use of a new supplemental application informs underwriters about aspects of the applicant's risk management including return-to-work programs, safety practices, pre-employment physicals and drug screenings. Claims initiatives involve medical repricing; increased use of workers' compensation claims specialists; and use of new claims kits to educate employers about safety, claims reporting and cost control. Our new workers' compensation claims reporting center, launched in January 2010, has significantly decreased the lag between an injury and its first report to us, leading to a faster response that benefits the employee, the employer and your company.

We are expanding our loss control staff to allow for more onsite inspections, both to gather underwriting information and to assist employers with loss prevention. Our representatives now provide detailed quantitative and qualitative assessments of employers' workers' compensation practices to accounts with workers' compensation premiums over $50,000.

The 2010 homeowner loss and loss expense ratio improved 18.8 percentage points, benefiting from lower catastrophe losses and improved pricing. We expect incremental benefits from use of our tiered rating structure and annual rate changes. Increases averaged 5 percent for policies renewing beginning October 2009, with a slightly higher average increase effective for renewals beginning in late 2010. These changes target rates more precisely to correspond to the quality of each risk and improve the quality of our homeowner book as confirmed by insurance scores.

Catastrophe risk management actions also have improved our book. Over the past three years, we reduced our homeowner coastal exposures in Alabama, Florida, Georgia and North Carolina while introducing hurricane deductibles, tighter underwriting guidelines and rate increases.

We targeted states with less volatility for personal lines growth in order to diversify our book. We made progress toward achieving scale, increasing personal lines new business 20 percent in 2010. Technology upgrades are now available in all 29 states where we market personal lines products, increasing our overall ease of doing business through improved workflows. These changes are a competitive advantage, fully supporting our desire to grow the business and improve profitability.

In its third year of operations, start-up expenses have leveled off. The combined ratio improved nearly 40 percentage points to 115.4 percent, meeting our expectations for 2010. Our initiatives to move the ratio under 100 percent include claims reviews that add to our ability to react quickly to adjust coverages in response to observed trends and to amend our training, pricing or terms and conditions.

Additionally, we conduct reinsurer reviews of this book, confirming that our underwriting appetite, risk profile and reserving are conservative, our use of deductibles is aggressive and our pricing is adequate. We are shortening our exposure on risks with traditionally long liability tails by actively managing prior acts coverage and retroactive dates on claims-made policies. And we are staffing to enhance new business as agents become more familiar with our new products and expansion of eligible classes. Excess and surplus lines contributed $49 million of our nearly $3 billion of property casualty premium revenues. Growth in 2011 will be disciplined, as pricing remains soft.

These challenging lines of business give us plenty of room to improve our results. As we aggressively pursue improvements, we will also work to amplify some proven advantages:

• Almost 90 percent of our commercial policies have premiums of $10,000 or less. Together with our independent agents, we have served the small business segment very well. In 2011, we will develop a 360-degree plan to optimize our small business product, technology, marketing, pricing and services.
• Our success depends on the success of our independent agents. We are working in 2011 to support their businesses by providing more planning support, more access to capital and an updated contingent commission agreement designed to help stabilize their agency revenues and reward longer-term profitability.

• Our associates know and support our mission. We can direct their talent and energy in the most productive directions, advancing company and personal goals, by creating performance metrics that show how components of our value creation ratio cascade to the team and individual level.

• Our independent agents and field representatives excel in their consumer interactions, establishing our reputation as a preferred carrier. As technology makes it practical and desirable for us to provide more direct services online and from our headquarters, we are studying ways to best align these interactions with consumer and agent expectations.

We pay close attention to insurance basics and work to get them right, year after year.

Industry observers are voicing concerns that carriers have cut corners by releasing prior year reserves too soon, in effect subsidizing current earnings with amounts that may be needed to fund future liabilities. Our reserving philosophy and practices remain unchanged. Our consistent approach has resulted in 22 consecutive years of favorable development on prior accident years' reserves. We continue to target total reserves in the upper half of the actuarial range, and we believe our carried reserves are in the same solid position at the end of 2010 as they were a year ago.

Our practice is to cover insurance reserve liabilities by investing in a diversified, high-quality bond portfolio that far exceeds those liabilities. These fixed income securities assure our ability to fulfill our obligations to policyholders, while we set the stage for long-term growth by holding stocks that steadily increase their dividends.

Catastrophe reinsurance is a particularly important tool to control the variability inherent in our business. After reinsurance, our maximum exposure to a 2011 catastrophic event that caused $500 million in covered losses would be $88 million. $500 million is more than three times the amount of damage caused to our policyholders by any single event in our history. In negotiating agreements with our highly rated reinsurers, we applied savings to the catastrophe program, prudently reducing our maximum retention.

These practices protect your company's high-quality balance sheet, positioning us with formidable financial strength. As 2010 came to a close in December, A.M. Best affirmed our ratings, including the A+ Superior awarded to our standard market property casualty companies. Over the past two years, we have stepped up our initiatives to build capital, improve profitability and drive premium growth. We believe these efforts position us to create long-term value for you, our shareholders, and for agents, policyholders and associates. Thank you for your support.

Respectfully,

/S/ John J. Schiff, Jr. John J. Schiff, Jr., CPCU Chairman of the Board

/S/ Kenneth W. Stecher Kenneth W. Stecher President and Chief Executive Officer

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