TO OUR SHAREHOLDERS, FRIENDS AND ASSOCIATES:

Financial Highlights

As our industry looks back on 2011, the headline story is the unrelenting onslaught of catastrophes – tornadoes, hurricanes, hail and wildfires in the U.S., an earthquake in New Zealand, an earthquake with a tsunami in Japan, floods in Australia and Thailand – and the list goes on.

Your company shared in the losses from several of these events. We experienced the two worst catastrophe events in our 60-year history as tornadoes and hail struck our policyholders from Alabama to North Carolina in late April and from Missouri to Ohio in late May. Those two multi-day, multi-state events caused $169 million of our 2011 estimated, pretax $402 million of catastrophe losses, net of reinsurance. In total, our 2011 catastrophe loss ratio was three times higher than the annual average for the prior 10 years.

The first large storms hit just a few days before we began our new jobs as your company's chairman and chief executive officer. While the loss of lives and devastation were unprecedented, we knew we could count on our claims representatives to respond promptly, compassionately and decisively. We believe the real story for Cincinnati Financial – the one that speaks volumes about our future and your potential investment returns – is about how we came through 2011 with satisfied agents and policyholders, positive full-year operating income, higher year-end book value and unabashed optimism about our ability to create shareholder value in 2012 and well into the future. Strong fourth-quarter operating income* more than offset our nine-month operating loss, taking full-year net income to $166 million and operating income to $121 million. Fourth-quarter underwriting profits from property casualty insurance operations rose to $98 million before taxes, our first underwriting profit for any 2011 quarter and our best result for any quarter since 2007.

* The Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures are in our quarterly news releases, which are available on the Investors page of our website, www.cinfin.com.

Investment income rose slightly for the fourth quarter and the year, trending counter to the industry as our equity investing strategy brought us 5 percent higher dividend income for full-year 2011. Invested assets reached $11.8 billion, with total pretax unrealized gains in the portfolio up 19 percent. Year-end book value per share rose to $31.16, up 1 percent for the year after returning to shareholders $293 million, or 6 percent of shareholders' equity. The total value returned included share repurchases and increased dividends declared to shareholders in 2011, our 51st straight year of dividend increase.

Steven J. Johnston and Kenneth W. Stecher

Steven J. Johnston (left), president and chief executive officer, with Kenneth W. Stecher, chairman of the board.

While our fourth-quarter performance was impressive, full-year results were not, and we plan to do better. As the severe storms abated in the fourth quarter, it became clear that we are effectively executing on our plans to drive growth and improve profitability. Indicators of longer-term performance are moving in the right direction.

Property casualty new business written premiums rose to a healthy $437 million in 2011, a record owing to $41 million of standard market new business produced by agencies appointed since the beginning of 2010. In total, net written property casualty premiums rose 5 percent for the year, with growth in each of our property casualty business segments: commercial, personal and excess and surplus lines insurance.

During the fourth quarter, long-awaited pricing improvement in commercial lines contributed to growth. We also continued to pursue rate adequacy in personal lines, rolling out our fourth year of homeowner increases. While these increases average 8 percent, lower increases apply for accounts with better risk characteristics. We believe these improvements reflect the cumulative effects of tools we have introduced to assist pricing precision, as well as positive changes in the broader marketplace where our agents compete.

The 2011 combined ratio was unprofitable at 109.2 percent, including 13.3 percentage points of catastrophe loss. To evaluate core underwriting progress, we also look at the ratio without catastrophe and reinsurance reinstatement effects; on that basis, the ratio improved by 2 percentage points in 2011 compared with 2010. We continued to benefit in 2011 from favorable development of prior accident year reserves, which improved our ratio by 9.4 percentage points. Because we establish and manage reserves carefully and consistently, we expect favorable development in future years. Further, the impacts of our initiatives to improve underwriting, pricing and expense control should create momentum, driving progress in 2012.

Executing on Our Plans

Through the tumult of 2011, we worked steadfastly to fulfill two commitments: First, we are determined to be unmatched in areas that differentiate Cincinnati. Our hallmarks include our agency relationships and field focus, our financial strength and our service-oriented associates who set high standards of excellence. These fundamental, unchanging tenets of the Cincinnati business model provide for continuity, resilience and competitive advantage.

Secondly, we are determined to continue executing on initiatives that improve our support of agency relationships; here are some examples of how we are building out these initiatives to widen our margin of opportunity:

Automation Efficiency Initiatives

  • e-CLAS®CPP: In 2009, we first deployed this policy administration system that lets agents quote and print commercial package and auto policies in their offices. Agencies in 34 states now use this system, which has processed more than 60 percent of our non-workers' compensation commercial lines policies. Since the end of 2010, we have built the system out by automating additional forms that provide coverage for professional liability, employment practices and uninsured motorists. We incorporated pricing tools and a sales proposal system, which also are available in pilot beginning March 2012 for business written in our new small business program, CinciPak™.

  • Online Policyholder Services: Our online services bring self-service to policyholders, reducing the number of information and service requests our agents receive. In 2011 we extended online payment services already available at www.cinfin.com for directly billed personal lines policyholders to commercial lines and life insurance policyholders. We added new services to view or print personal lines policy documents, automobile insurance identification cards and billing statements. Company-billed personal lines policyholders now have the option to accept electronic notification of billing in lieu of paper mailings.

Product Portfolio Initiatives

  • Target Markets: Our Target Markets department, formed in 2010, is a product innovation center focusing on commercial product development and extra promotional support for promising niches of business. Each program has a manager who has expertise with the specific class of business and who engages with related trade and professional associations. Target Markets also identifies and develops new coverage options and improvements to existing insurance products. We introduced four new target markets programs to our agents in 2011, including coverage products for hospitality, golf and country clubs, fitness and recreation, and medical facilities. Plans for 2012 include four programs related to health services and social services. In 2011, Target Markets premiums reached $100 million.

  • Excess and Surplus Lines: At the end of 2011, we marketed excess and surplus lines insurance products in each of the 39 states where we offer standard market commercial insurance. Offering excess and surplus lines helps agencies meet the needs of their clients when coverage is unavailable in the standard market. Excess and surplus lines insurers have more flexibility in coverage terms and rates than standard lines companies do. Policies generally have higher rates, with terms and conditions customized for specific risks, including restricted coverage where appropriate. Agents appreciate the unique advantages of placing this business with us, including rapid policy quotes and issuance, use of our in-house brokerage without fees and prompt support from Cincinnati's local claims and loss control field representatives. Our excess and surplus lines grew profitably in 2011, with net written premiums up 36 percent.

Consumer Care

  • Claims Reporting Center: In early 2010, we implemented direct reporting via toll-free telephone calls for workers' compensation claims. This change has allowed us to quickly obtain detailed information to assign the appropriate level of claims handling expertise to each case. Workers benefit from prompt attention, their employers benefit from faster return to work, and we benefit from early management of pharmacy and medical costs. In 2011, we officially opened the center for additional types of claims, at the option of the agent and the policyholder. With this expansion, we are accepting claims around the clock and efficiently escalating those that need emergency attention.

  • CinciSafe™ Loss Control Program: We introduced our comprehensive workers' compensation loss control program in 2010 for accounts with $50,000 or higher premiums. The program provides safety assessments and educates the employer on the financial benefits of implementing best practices to control the experience modification factor, a key rating component. During 2011, our loss control representatives completed assessments for all eligible policyholders. We also increased our loss control staff, including more specialists who inspect property to be covered by new or renewal policies. We believe these initiatives will improve profitability over time.

Continuous Improvement

At the time we moved to our new leadership roles in May 2011, we announced two significant organizational changes. To facilitate integrated decisions and actions, we united all of our commercial lines areas under the umbrella of a new Business Insurance department, headed by Executive Vice President J. F. Scherer; and brought together several areas under Planning, Analytics & Risk Management, led by Senior Vice President and Chief Risk Officer Teresa Cracas.

Our strategic planning activities, along with our risk management program formalized several years ago, have encouraged us to be more openly communicative and more fully collaborative across department walls in pursuit of shared goals; more skilled at collecting, managing and applying data to business decisions; and more tightly aligned in setting goals from the corporate level to departments, territories, teams and individual associates, and even to the agency level. We are beginning to see successes fueled by this cultural evolution, and our confidence has never been higher.

We are working across the company to measure performance and to align compensation of every associate accordingly. Our formulae for various components of compensation consider factors such as progress toward measurable individual goals, the associate's level of responsibility and control, and the company's value creation ratio relative to peers. That ratio was 6 percent for 2011 – better than some peers but less than our target of a 12 percent average annual ratio over the five-year period through 2014.

To consistently get to 12 percent or above, your company needs to attract and retain bright, curious associates who bring or acquire strong industry knowledge and sharp technical skills. We have launched a talent management initiative to assure that happens, and associates who want to learn will have many opportunities. This is an exciting time for those associates, and for all who share our positive outlook on what we can accomplish by executing on initiatives that take our business model into the next generation.

Respectfully,

/s/ Kenneth W. Stecher

Kenneth W. Stecher
Chairman of the Board

/s/ Steven J. Johnston

Steven J. Johnston, FCAS, MAAA, CFA
President and Chief Executive Officer

March 9, 2012

Fast Fact: Your company is one of only 10 U.S. companies that have increased cash dividends paid to shareholders for more than 50 consecutive years.

Cincinnati Hallmark:A long-term perspective leads us to amass financial strength that withstands significant challenges and supports the consistent, predictable performance expected by our shareholders, policyholders, agents and associates.

Building on Our Strengths:Exceptionally strong capital gives us the ability to steadily increase dividends and be a consistent market for our agents' business, supporting stability and confidence. Corporate debt is a low 15 percent of total capital. Financial flexibility is high, with parent-company holdings of more than $1 billion of cash and marketable securities.

Our property casualty risk-based capital has remained approximately eight times higher than the minimum level required by regulators in recent years despite the faltering economy. Consistent loss reserving practices and carefully structured reinsurance programs contributed to that stability. In each of the past 23 years, our property casualty loss and loss expense reserves for prior accident years have developed favorably, contributing to earnings and book value. Whether insurance markets are soft or hard, we establish and update our reserve estimates using the same protocols and targeting total reserves within the upper half of the actuarially estimated range. In 2011, favorable development totaled $285 million, improving the combined ratio by 9.4 percentage points. We also purchase coverage from quality reinsurers for large individual losses and for catastrophe losses above the level we choose to retain. Record catastrophe losses in 2011 affected our income but minimally affected our balance sheets, as reinsurance covered $256 million of our policyholders' losses and shareholders' equity rose in 2011.

Outlook on Shareholder Value Creation:12 percent or better average annual value creation ratio for the 2010-2014 period, indicating higher net worth of your company.

Fast Fact:Each percentage point of improvement on our combined ratio can increase our 2012 underwriting income by about $31 million.

Cincinnati Hallmark:We balance growth with underwriting discipline, applying a case-by-case approach while aiming to be a market for about 75 percent of the business that local independent agencies typically handle.

Building on Our Strengths:By diligently executing initiatives already under way, we are confident we can improve insurance results and increase earnings. For commercial lines of business, which account for 73 percent of our 2011 property casualty premium revenues, underwriters successfully negotiated average renewal price increases in the fourth quarter at low- to mid-single-digit rates.

Improvement is partly due to our development of analytics models for most lines of business, not to replace but rather to complement frontline underwriting and relationship-based decisions. Underwriters consider precise tool outputs along with information and judgments that come from having eyes on the risk–the agent's frontline evaluation of risk exposures, our field representative's onsite property inspection, the underwriter's experience with the specific agent or account, and the claims representative's report on observed changes in the nature of the risk since policy issuance. Analytics tools have contributed to progress in the two challenging lines where we first implemented them. While industry loss ratios are deteriorating for workers' compensation, our loss ratio improved by 16 percentage points in 2011. Analytics also have helped improve pricing precision and rate adequacy in our homeowner line, where we have targeted higher rate increases for less desirable accounts, improving our retention of better accounts and our mix of business.

Outlook on Profitability:A property casualty combined ratio at 95 percent or better, indicating underwriting gains.

Fast Fact:The number of field associates directly serving our independent agencies grew 4 percent since the end of 2009, while increased productivity at headquarters allowed for decreased staffing.

Cincinnati Hallmark:We select the most professional independent agencies in each community, building mutually beneficial relationships and working to be their carrier of choice.

Building on Our Strengths:Agents affirm that the strong presence of our field representatives makes it easier for them to place and keep business with us. These representatives call frequently on agencies and collaborate to serve their clients, setting us apart. Field staff additions in 2011 increased local access to field marketing and loss control services, workers' compensation claims specialists and property claims specialists.

Our growth strategy emphasizes earning a larger share of business from each appointed agency. We continue to add services, expand our product portfolio and marketing support and develop technology that increases agency efficiency. Field marketing representatives also identify opportunities to appoint new agencies in underserved areas, taking care to preserve franchise value for all agencies. Nearly one-quarter of the 133 agencies appointed during 2011 were in the states we entered since late 2008: Texas, Colorado, Wyoming, Connecticut and Oregon. We generally earn a 10 percent share of an agency's business within 10 years of its commercial lines appointment. In 2012, we expect to appoint approximately 130 new agencies. We also plan to appoint our first personal lines agencies in New York and Oregon, followed by Connecticut in 2013, supporting continued growth and geographic diversification.

Outlook on Growth:An increasing rate of premium growth in 2012, building toward $5 billion in property casualty and life direct written premiums for full-year 2015.

Fast Fact:Cincinnati responded to 31,270 catastrophe claims in 2011, delivering superior service through our own experienced field claims representatives.

Cincinnati Hallmark:Our operating structure and strong field presence support local decision making and showcase our claims excellence.

Building on Our Strengths:More than 400 of our 763 claims representatives volunteered to leave their home communities for temporary storm duty in 2011. Our catastrophe response featured easy claim reporting to local agencies or our 24-hour claim reporting center, followed by prompt initial contact and assessment. Storm team volunteers are authorized and equipped to immediately write the checks that put policyholders on the road to recovery. At year-end, more than 90 percent of 2011 catastrophe claims were closed. Our teams move quickly, compassionately and decisively, drawing on advantages including knowledge of Cincinnati coverage products and the local representative’s relationships with area repair and rebuild vendors.

Cincinnati has no branch office bureaucracy. Field representatives empowered to make decisions work out of their homes within our agents’ communities, a model that increases their availability and local knowledge while decreasing expenses. By controlling administrative costs, we afford a larger field force to better meet our customers’ needs for customized, personal service. Other claims expense reduction measures in 2011 included a new audit system for litigation expense and consolidation of medical pricing vendors for workers’ compensation claims.

Outlook on the Cincinnati Brand:A reputation among independent agents and their clients as a trustworthy insurer that conducts business to high customer service, legal, regulatory and ethical standards.

Fast Fact:2011 dividend income from our equity investments increased 5 percent, more than offsetting flat interest income from bond investments.

Cincinnati Hallmark:Total-return equity investing helps achieve a balance between the need for short-term income and the opportunity for long-term appreciation.

Building on Our Strengths:The primary driver for the 2011 increase in dividend income was a higher average dividend payment rate for the common stocks in our $3 billion equity portfolio. At year-end 2011, common stock holdings made up 24.3 percent of our investment portfolio, a higher proportion than in many insurer portfolios. The equity portfolio held $794 million of pretax net unrealized gains.

We favor large cap, high quality, dividend-increasing companies that offer the potential for both current income and longer-term asset growth. We buy common stocks only after fully covering our insurance reserves with fixed-maturity investments. We believe that our diversified selection of large cap, high quality, dividend-increasing companies generally results in reduced volatility relative to the broader equity markets. At year-end 2011, no holding had a fair value equal to or greater than 5 percent of our common stock portfolio. Pepsico Inc. (NYSE:PEP) was our largest single common stock investment, comprising 4.7 percent of the publicly traded common stock portfolio and 1.1 percent of the investment portfolio. To assure such diversity, our investment guidelines set risk tolerances for allocations and for concentrations within any security or sector. These parameters are part of an integrated corporate risk management program.

Outlook on Investment Operations: Investment income growth plus a level of total shareholder return on our equity portfolio that outperforms the S&P 500 Index.

About The Company

Cincinnati Financial Corporation stands among the 25 largest property casualty insurers in the nation, based on 2010 net written premiums. A select group of independent agencies actively markets our business, home and auto insurance within their communities.

These agents offer our standard market and excess and surplus commercial lines policies in 39 states and our personal lines policies in 30 states. Within this select group, we seek to become the life insurance carrier of choice and to help agents and their clients – our policyholders – by offering leasing and financing services.

Three competitive advantages distinguish our company, positioning us to build value and long-term success:

  • Commitment to our network of professional independent insurance agencies and to their continued success
  • Financial strength that lets us be a consistent market for our agents' business, supporting stability and confidence
  • Operating structure that supports local decision making, showcasing the strength of our claims service, field underwriting and field support services

These advantages help us to balance growth with underwriting discipline in a competitive environment. Learn more about where we are today and how we plan to create value for shareholders, agents, policyholders and associates by reviewing publications that we promptly post on www.cinfin.com/investors as they are completed.

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