UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2006.

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                      to                     .

Commission file number 0-4604

CINCINNATI FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Ohio		31-0746871
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)
6200 S. Gilmore Road, Fairfield, Ohio		45014-5141
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (513) 870-2000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

þ Yes       o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ       Accelerated filer o       Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

o Yes       þ No

As of October 25, 2006, there were 173,247,863 shares of common stock outstanding.

 

 

CINCINNATI FINANCIAL CORPORATION

FORM 10-Q FOR THE THREE MONTHS AND NINE MONTHS ENDED

TABLE OF CONTENTS

				Page
PART I – FINANCIAL INFORMATION
Item 1		Financial Statements			3
		Condensed Consolidated Balance Sheets			3
		Condensed Consolidated Statements of Income			4
		Condensed Consolidated Statements of Shareholders’ Equity			5
		Condensed Consolidated Statements of Cash Flows			6
		Notes to Condensed Consolidated Financial Statements			7
Item 2		Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3		Quantitative and Qualitative Disclosures About Market Risk			40
Item 4		Controls and Procedures			44
PART II – OTHER INFORMATION
Item 1		Legal Proceedings			44
Item 1A		Risk Factors			44
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 3		Defaults Upon Senior Securities			45
Item 4		Submission of Matters to a Vote of Security Holders			45
Item 5		Other Information			45
Item 6		Exhibits			46
EX-10.17
EX-11
EX-31.1
EX-31.2
EX-32

		Cincinnati Financial Corporation
2		Form 10-Q for the quarter ended September 30, 2006

Part I – Financial Information

Item 1. Financial Statements

		September 30,				December 31,
(Dollars in millions except per share data)		2006				2005
		(unaudited)
ASSETS
Investments
Fixed maturities, at fair value (amortized cost: 2006—$5,719; 2005—$5,387)		$	5,790			$	5,476
Equity securities, at fair value (cost: 2006—$2,574; 2005—$2,128)			7,256				7,106
Short-term investments, at fair value (amortized cost: 2005—$75)			0				75
Other invested assets			58				45
Cash and cash equivalents			239				119
Securities lending collateral			1,016				0
Investment income receivable			115				117
Finance receivable			106				105
Premiums receivable			1,166				1,116
Reinsurance receivable			701				681
Prepaid reinsurance premiums			13				14
Deferred policy acquisition costs			458				429
Land, building and equipment, net, for company use (accumulated depreciation: 2006—$253; 2005—$232)			185				168
Other assets			63				66
Separate accounts			505				486
Total assets		$	17,671			$	16,003
LIABILITIES
Insurance reserves
Loss and loss expense reserves		$	3,878			$	3,661
Life policy reserves			1,389				1,343
Unearned premiums			1,623				1,559
Securities lending payable			1,016				0
Other liabilities			459				455
Deferred income tax			1,497				1,622
Notes payable			49				0
6.125% senior notes due 2034			371				371
6.9% senior debentures due 2028			28				28
6.92% senior debenture due 2028			392				392
Separate accounts			505				486
Total liabilities			11,207				9,917
SHAREHOLDERS’ EQUITY
Common stock, par value-$2 per share; authorized: 2006-500 million shares, 2005- 500 million shares; issued: 2006-195 million shares, 2005-194 million shares			391				389
Paid-in capital			1,005				969
Retained earnings			2,714				2,088
Accumulated other comprehensive income			3,093				3,284
Treasury stock at cost (2006—22 million shares, 2005—20 million shares)			(739	)			(644	)
Total shareholders’ equity			6,464				6,086
Total liabilities and shareholders’ equity		$	17,671			$	16,003

Accompanying notes are an integral part of this statement.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended September 30, 2006		3

Cincinnati Financial Corporation And Subsidiaries

		Three months ended Sept. 30,								Nine months ended Sept. 30,
(In millions except per share data)		2006				2005				2006				2005
		(unaudited)								(unaudited)
REVENUES
Earned premiums
Property casualty		$	791			$	765			$	2,362			$	2,283
Life			28				25				84				78
Investment income, net of expenses			144				134				425				390
Realized investment gains and losses			0				16				671				38
Other income			4				4				14				12
Total revenues			967				944				3,556				2,801
BENEFITS AND EXPENSES
Insurance losses and policyholder benefits			549				528				1,596				1,470
Commissions			156				160				478				476
Other operating expenses			83				74				243				213
Taxes, licenses and fees			19				17				58				52
Increase in deferred policy acquisition costs			(5	)			(5	)			(27	)			(23	)
Interest expense			13				13				39				39
Other expenses			4				6				12				12
Total benefits and expenses			819				793				2,399				2,239
INCOME BEFORE INCOME TAXES			148				151				1,157				562
PROVISION (BENEFIT) FOR INCOME TAXES
Current			23				19				363				126
Deferred			10				15				(6	)			17
Total provision for income taxes			33				34				357				143
NET INCOME		$	115			$	117			$	800			$	419
PER COMMON SHARE
Net income—basic		$	0.67			$	0.67			$	4.61			$	2.39
Net income—diluted		$	0.66			$	0.66			$	4.56			$	2.37

Accompanying notes are an integral part of this statement.

		Cincinnati Financial Corporation
4		Form 10-Q for the quarter ended September 30, 2006

Cincinnati Financial Corporation And Subsidiaries

		Nine months ended Sept. 30,
(In millions)		2006				2005
		(unaudited)
COMMON STOCK — NUMBER OF SHARES
Beginning of year			174				167
5% stock dividend			0				9
Stock options exercised			1				0
Purchase of treasury shares			(2	)			(1	)
End of period			173				175
COMMON STOCK
Beginning of year		$	389			$	370
5% stock dividend			0				19
Stock options exercised			2				0
End of period			391				389
PAID-IN CAPITAL
Beginning of year			969				618
5% stock dividend			0				341
Stock options exercised			22				6
Share-based compensation			14				0
End of period			1,005				965
RETAINED EARNINGS
Beginning of year			2,088				2,057
Net income			800				419
5% stock dividend			0				(360	)
Dividends declared			(174	)			(158	)
End of period			2,714				1,958
ACCUMULATED OTHER COMPREHENSIVE INCOME
Beginning of year			3,284				3,787
Change in accumulated other comprehensive income, net			(191	)			(458	)
End of period			3,093				3,329
TREASURY STOCK
Beginning of year			(644	)			(583	)
Purchase			(95	)			(45	)
Reissued for stock options			0				2
End of period			(739	)			(626	)
Total shareholders’ equity		$	6,464			$	6,015
COMPREHENSIVE INCOME
Net income		$	800			$	419
Change in accumulated other comprehensive income, net			(191	)			(458	)
Total comprehensive income		$	609			$	(39	)

Accompanying notes are an integral part of this statement.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended September 30, 2006		5

Cincinnati Financial Corporation And Subsidiaries

Condensed Consolidated Statements Of Cash Flows

		Nine months ended Sept. 30,
(In millions)		2006				2005
		(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	800			$	419
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and other non-cash items			26				22
Share-based compensation expense			14				0
Realized (gains) on investments			(671	)			(38	)
Interest credited to contract holders			22				21
Changes in:
Investment income receivable			2				(7	)
Premiums and reinsurance receivable			(69	)			(75	)
Deferred policy acquisition costs			(27	)			(24	)
Other assets			3				(11	)
Loss and loss expense reserves			217				157
Life policy reserves			53				83
Unearned premiums			64				67
Other liabilities			(12	)			(20	)
Deferred income tax			(6	)			17
Current income tax			4				(46	)
Net cash provided by operating activities			420				565
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of fixed maturities investments			76				156
Call or maturity of fixed maturities investments			225				400
Sale of equity securities investments			850				70
Collection of finance receivables			26				24
Purchase of fixed maturities investments			(611	)			(1,085	)
Purchase of equity securities investments			(644	)			(136	)
Change in short-term investments, net			79				19
Investment in buildings and equipment, net			(37	)			(34	)
Investment in finance receivables			(30	)			(29	)
Change in other invested assets, net			(10	)			(7	)
Change in securities lending collateral			(1,016	)			0
Net cash used in investing activities			(1,092	)			(622	)
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of cash dividends to shareholders			(170	)			(151	)
Purchase/issuance of treasury shares			(95	)			(43	)
Increase in notes payable			49				0
Proceeds from stock options exercised			21				7
Contract holder funds deposited			28				77
Contract holder funds withdrawn			(57	)			(41	)
Change in securities lending payable			1,016				0
Excess tax benefits on share-based compensation			2				0
Other			(2	)			0
Net cash provided by (used in) financing activities			792				(151	)
Net increase (decrease) in cash and cash equivalents			120				(208	)
Cash and cash equivalents at beginning of period			119				306
Cash and cash equivalents at end of period		$	239			$	98
Supplemental disclosures of cash flow information:
Interest paid		$	26			$	26
Income taxes paid			360				172
Non-cash activities
Conversion and exchanges of investment securities		$	50			$	34
Equipment acquired with capital lease obligations			7				0

Accompanying notes are an integral part of this statement.

		Cincinnati Financial Corporation
6		Form 10-Q for the quarter ended September 30, 2006

Notes To Condensed Consolidated Financial Statements (unaudited)

NOTE 1 — ACCOUNTING POLICIES

The condensed consolidated financial statements include the accounts of Cincinnati Financial Corporation and its consolidated subsidiaries, each of which is wholly owned, and are presented in conformity with accounting principles generally accepted in the United States of America (GAAP). All significant intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Our actual results could differ from those estimates. The December 31, 2005, consolidated balance sheet amounts are derived from the audited financial statements but do not include all disclosures required by accounting principles generally accepted in the United States of America.

Our September 30, 2006, condensed consolidated financial statements are unaudited. We believe that all adjustments, consisting only of normal recurring accruals, have been made that are necessary for fair presentation. The results of operations for interim periods are not necessarily an indication of results to be expected for the full year.

Investments

Fixed maturities (bonds and redeemable preferred stocks) and equity securities (common and non-redeemable preferred stocks) have been classified as available for sale and are stated at fair values at September 30, 2006, and December 31, 2005. Short-term investments (primarily commercial paper and demand notes) are classified as available for sale and recorded at amortized cost, which approximates fair value, at December 31, 2005. We had no short-term investments at September 30, 2006.

At September 30, 2006, unrealized investment gains before taxes totaled $4.824 billion and unrealized investment losses in the investment portfolio amounted to $71 million. The unrealized gains at September 30, 2006, primarily were due to long-term gains from our holdings of Fifth Third Bancorp (NASDAQ:FITB) common stock, which contributed 52.3 percent of the gain, and from our other common stock holdings, including ExxonMobil Corporation (NYSE:XOM), The Procter & Gamble Company (NYSE:PG) and PNC Financial Services Group (NYSE:PNC), each of which contributed at least 5 percent of the gain. The change in unrealized gains and losses on investments, net of taxes, described in the following table, is included in shareholders’ equity as accumulated other comprehensive income.

The change in fixed maturities unrealized gains and losses for the three and nine months ended September 30, 2006 and 2005, was due primarily to interest-rate driven fair value fluctuations in the fixed-maturity portfolio.

The net change in equity securities unrealized gains for the three months ended September 30, 2006, was primarily due to gains in the market value of equity holdings since June 30, 2006. The net change in equity securities unrealized gains for the nine months ended September 30, 2006, was primarily due to the sale of our holdings of ALLTEL Corporation (NYSE:AT) common stock, which was completed in January 2006, partially offset by gains in the market values of our other equity holdings. The net change in equity securities unrealized gains and losses for the three months and nine months ended September 30, 2005, was due primarily to the decline in Fifth Third’s market value.

		Three months ended Sept. 30,								Nine months ended Sept. 30,
(In millions)		2006				2005				2006				2005
Change in other comprehensive income:
Fixed maturities		$	142			$	(93	)		$	(18	)		$	(146	)
Equity securities			385				(178	)			(296	)			(565	)
Adjustment to deferred acquisition costs and life policy reserves			(4	)			3				2				4
Other			2				(3	)			3				2
Income taxes on above			(184	)			95				118				247
Total		$	341			$	(176	)		$	(191	)		$	(458	)

Realized gains and losses on investments are recognized in net income on a specific identification basis. See our 2005 Annual Report on Form 10-K, Investments Segment, Page 15, for additional discussion of the investment portfolio. Other-than-temporary declines in the fair value of investments are recognized in net income as realized investment losses at the time when facts and circumstances indicate such write-downs are warranted. We recorded no other-than-temporary impairment charges in the three months ended September 30, 2006, and we recorded $1 million in other-than-temporary impairment charges in the nine months ended September 30, 2006. We recorded $1 million in other-than-temporary impairment charges in the three months and nine months ended September 30, 2005.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended September 30, 2006		7

Reinsurance

In the accompanying condensed consolidated statements of income, property casualty earned premiums and insurance losses consisted of the following:

		Three months ended Sept. 30,								Nine months ended Sept. 30,
(In millions)		2006				2005				2006				2005
Direct earned premiums		$	826			$	810			$	2,459			$	2,398
Assumed earned premiums			6				6				17				21
Ceded earned premiums			(41	)			(51	)			(114	)			(136	)
Net earned premiums		$	791			$	765			$	2,362			$	2,283
Direct incurred loss and loss expenses		$	533			$	522			$	1,567			$	1,469
Assumed incurred loss and loss expenses			3				21				10				33
Ceded incurred loss and loss expenses			(20	)			(42	)			(72	)			(107	)
Net incurred loss and loss expenses		$	516			$	501			$	1,505			$	1,395

Ceded earned premiums declined in the three and nine months ended September 30, 2006, because of the change in our reinsurance programs. Direct losses and policyholder benefits rose primarily because of an increase in new losses and case reserve increases greater than $250,000 and rising loss severity in selected commercial and personal business lines in the three and nine months ended September 30, 2006. Higher catastrophe losses also contributed in the nine months ended September 30, 2006. Ceded incurred loss and loss expenses decreased for the three and nine months ended September 30, 2006, as fewer losses exceeded the higher retention on our reinsurance treaties.

Securities Lending Program

During the first quarter of 2006, we began actively participating in a securities lending program under which certain fixed maturities from our investment portfolio are loaned to other institutions for short periods of time. We require collateral in excess of the market value of the loaned securities. The collateral is invested in accordance with our guidelines in high-quality, short-duration instruments to generate additional investment income. The market value of the loaned securities is monitored on a daily basis and additional collateral is added or refunded as the market value of the loaned securities changes. The securities lending collateral is recognized as an asset, and classified as securities lending collateral, with a corresponding liability for the obligation to return the collateral.

We maintain the right and ability to redeem the securities loaned on short notice and continue to earn interest on the securities. We maintain effective control over the securities that we have loaned, which are classified as invested assets on our consolidated balance sheets. At September 30, 2006, we had fixed maturities with a market value of $996 million on loan, with collateral held of $1.016 billion. Interest income on collateral, net of fees, was $252,000 and $528,000 in the three and nine months ended September 30, 2006.

Share-based Compensation

We grant qualified and non-qualified stock options (share-based compensation) under our plans. These stock options are granted to associates at an exercise price that is not less than market price at the date of grant and are exercisable over 10-year periods. Prior to January 1, 2006, we accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, as permitted by the Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. No stock-based employee compensation cost was recognized in the Statement of Income for the year ended December 31, 2005, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), Share-Based Payment, using the modified-prospective-transition method.

As a result of adopting SFAS No. 123(R) on January 1, 2006, our income before income taxes for the three and nine months ended September 30, 2006, was reduced by $3 million and $14 million, respectively. Our net income (after tax) for the three and nine months ended September 30, 2006, was reduced by $3 million and $11 million, respectively. Diluted earnings per share for the three and nine months ended September 30, 2006, were reduced by 2 cents and 6 cents, respectively. If we had continued to account for stock-based compensation under APB Opinion No. 25, there would have been no effect on net income. The weighted-average grant-date fair value of options granted during 2006 and 2005 was $10.09 and $12.49, respectively. The total intrinsic value of options exercised during the periods ended September 30, 2006 and 2005, was $18 million and $6 million, respectively. (Intrinsic value is the market price less the exercise price.)

Under the modified-prospective-transition method, in the first nine months of 2006, we recognized:

•

compensation cost for all stock options granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R)

		Cincinnati Financial Corporation
8		Form 10-Q for the quarter ended September 30, 2006

•

compensation cost for all non-vested stock options granted prior to January 1, 2006, that vested during the first nine months of 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and

•

compensation cost for all non-vested stock options that have nonsubstantive vesting requirements, such as those to associates who are eligible for retirement.

Results for prior periods have not been retrospectively adjusted for SFAS No. 123(R). As of September 30, 2006, we had $18 million of unrecognized total compensation cost related to non-vested stock options. That cost will be recognized over a weighted-average period of 1.8 years. SFAS No. 123(R) also requires us to classify certain tax benefits related to share-based compensation deductions as cash from financing activities. As of September 30, 2006, these tax benefits totaled $2 million.

In determining the share-based compensation amounts for 2006, the fair value of each option granted in 2006 was estimated on the date of grant using the binomial option-pricing model with the following weighted-average assumptions used for grants in the three and nine months ended September 30, 2006: dividend yield of 3.22 percent; expected volatility ranging from 20.25 to 27.12 percent; risk-free interest rates ranging from 4.5 to 4.61 percent; and expected lives of five to seven years.

Here is a summary of our share-based compensation information as of September 30, 2006:

						Weighted-				Aggregate
						average exercise				intrinsic
(Dollars in millions, shares in thousands)		Shares				price				value
2006
Outstanding at beginning of year			10,589			$	33.70
Granted/reinstated			1,372				45.26
Exercised			(877	)			23.88
Forfeited/revoked			(167	)			35.72
Outstanding at end of period			10,917				35.91			$	133
Options exercisable at end of period			8,220			$	33.60			$	119
Weighted-average fair value of options granted during the period							10.09

The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS No. 123 to options granted under our stock option plans prior to our adoption of SFAS No. 123(R) on January 1, 2006. For purposes of this pro forma disclosure, the fair value of each option was estimated on the date of grant using the binomial option-pricing model with the following weighted-average assumptions used for grants in the three and nine months ended September 30, 2005: dividend yield of 2.70 percent; expected volatility of 25.61 percent; risk-free interest rates 4.62 percent; and expected lives of 10 years.

				Three months ended Sept. 30,				Nine months ended Sept. 30,
(In millions except per share data)				2005				2005
Net income		As reported		$	117			$	419
Stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects					3				10
		Pro forma		$	114			$	409
Net income per common share—basic		As reported		$	0.67			$	2.39
		Pro forma			0.65				2.34
Net income per common share—diluted		As reported		$	0.66			$	2.37
		Pro forma			0.64				2.31

Cincinnati Financial Corporation
Form 10-Q for the quarter ended September 30, 2006		9

Options outstanding and exerciseable consisted of the following at September 30, 2006:

		Options outstanding												Options exercisable
						Weighted-
						average				Weighted-								Weighted-
(Shares in thousands)						remaining				average exercise								average exercise
Range of excercise prices		Shares				contractual life				price				Shares				price
$17.07 to 19.34			5				0.27	yrs		$	18.78				5			$	18.78
$20.37 to 24.14			188				0.53	yrs			20.58				188				20.58
$26.63 to 29.92			1,019				3.27	yrs			27.06				1,019				27.06
$30.60 to 35.00			4,687				4.44	yrs			32.66				4,687				32.66
$36.17 to 38.87			1,976				5.57	yrs			38.47				1,541				38.37
$41.14 to 45.62			3,042				8.15	yrs			43.19				780				41.53
Total			10,917				5.50	yrs			35.91				8,220				33.60

Pension Plan

The measurement date for the company’s pension plan is December 31. The following summarizes the components of net periodic pension costs:

		Three months ended Sept. 30,								Nine months ended Sept. 30,
(In millions)		2006				2005				2006				2005
Service cost		$	4			$	3			$	12			$	10
Interest cost			4				3				10				9
Expected return on plan assets			(3	)			(3	)			(9	)			(9	)
Amortization			1				0				2				0
Net pension expense		$	6			$	3			$	15			$	10

We made a $10 million contribution to the pension plan in the third quarter of 2006, as indicated in the 2005 Annual Report on Form 10-K.

Derivative Financial Instruments

In the second quarter of 2006, CFC Investment Company, our commercial leasing and financing subsidiary, replaced $49 million of intercompany debt with borrowings against one of our short-term lines of credit to improve cash flow for the parent company. During the third quarter, we entered into an interest-rate swap to manage the variability of interest payments for certain variable-rate debt obligations ($49 million notional amount). Under this interest-rate swap contract, we have agreed to pay a fixed rate of interest for a three-year period. The contract is intended to be a hedge against changes in the amount of future cash flows associated with the related interest payments. The interest-rate swap contract is reflected at fair value in our balance sheet.

SFAS No. 133 “Accounting for Derivative Financial Instruments and Hedging Activities,” as amended, requires changes in the fair value of the company’s derivative financial instruments to be recognized periodically as realized gains or losses on the consolidated statement of income or as a component of accumulated other comprehensive income in shareholders’ equity, respectively. In the three months ended September 30, 2006, we recognized a $542,000 pretax realized investment loss due to the decline in the fair value of the interest-rate swap.

In October, we completed the necessary requirements for the interest-rate swap to qualify for hedge accounting treatment under SFAS No. 133. We expect that the interest-rate swap will be a highly effective hedge and that future changes in the fair value of the interest-rate swap will be recorded as a component of accumulated other comprehensive income. As a result, we do not expect any significant amounts to be reclassified into earnings in the next 12 months.

Reclassifications

Certain prior-period amounts have been reclassified to conform with the current-period classifications.

Recent Accounting Pronouncements

SFAS No. 157, Fair Value Measurements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We currently are evaluating the timing and impact of adopting SFAS No. 157 on our financial position.

		Cincinnati Financial Corporation
10		Form 10-Q for the quarter ended September 30, 2006

SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of SFAS Nos. 87, 88, 106, and 132(R)

In September 2006, FASB issued SFAS No. 158, which requires that we recognize the over-funded or under-funded status of our defined benefit plans as an asset or liability. SFAS No. 158 is effective as of the fiscal year ending after December 15, 2006, with changes in the funded status recognized through comprehensive income in the year in which they occur.

Using December 31, 2005, data to estimate the funding status of our defined benefit plans, adoption of SFAS No. 158 would result in an increase in liabilities of approximately $38 million on an after-tax basis with a corresponding reduction in accumulated other comprehensive income and shareholders’ equity. The actual impact on 2006 results of adopting SFAS No. 158 will depend on the fair value of plan assets at the selected fourth-quarter 2006 measurement date.

SFAS No. 158 will not change the amount of net periodic benefit expense recognized in an entity’s results of operations. As such, the adoption is not expected to have an impact to our results of operations in 2006.

No later than 2008, SFAS No. 158 also requires the measurement date of the funded status of our defined benefit plans to be based on our year-end balance sheet date. The effect of the change in measurement date will not have a material impact on our financial position.

SAB No. 108, Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108 to address diversity in practice in quantifying financial statement misstatements. SAB 108 requires that we quantify misstatements based on their impact on each of our financial statements and related disclosures. SAB 108 is effective as of the first fiscal year ending after November 15, 2006, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 1, 2006, for errors that were not previously deemed material, but are material under the guidance in SAB No. 108. We currently are evaluating the impact of adopting SAB No. 108 on our results of operations and financial position.

Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109

In July 2006, FASB issued Interpretation No. 48. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. We currently are assessing the impact of Interpretation No. 48 on our results of operations and financial position.

SFAS No. 156, Accounting for Servicing of Financial Assets, an amendment of SFAS No. 140

In March 2006, FASB issued SFAS No. 156, which addresses the accounting for servicing assets and liabilities. SFAS No. 156 is effective at the beginning of an entity’s first fiscal year beginning after September 15, 2006. We do not expect SFAS No. 156 to have a material effect on our results of operations or financial position.

SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of SFAS Nos. 133 and 140

In February 2006, FASB issued SFAS No. 155. This accounting standard permits fair value re-measurement for any hybrid financial instrument containing an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133; establishes a requirement to evaluate interests in securitized financial assets to identify them as freestanding derivatives or as hybrid financial instruments containing an embedded derivative requiring bifurcation; clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives; and amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument pertaining to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year beginning after September 15, 2006.

We are planning to adopt SFAS No. 155 on January 1, 2007, to permit fair value re-measurement for our hybrid financial instruments that contain embedded derivatives that required bifurcation under the original provisions of SFAS No. 133. We do not expect this to have a material impact on our results of operations or financial position.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended September 30, 2006		11

SOP 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts

In October 2005, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 05-1, which provides accounting guidance for deferred policy acquisition costs on internal replacements of insurance and investment contracts other than those specifically described in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments. SOP 05-1 defines an internal replacement as a modification in product benefits, features, rights or coverages that occurs by the exchange of a contract for a new contract, or by amendment, endorsement or rider to a contract, or by the election of a feature or coverage within a contract. Internal replacement contracts are those that are substantially changed from the replaced contract and are accounted for as an extinguishment of the replaced contract. Nonintegrated contract features are accounted for as separately issued contracts. Modifications resulting from the election of a feature or coverage within a contract or from an integrated contract feature generally do not result in an internal replacement contract subject to SOP 05-1 provided certain conditions are met. The provisions of SOP 05-1 are effective for internal replacements occurring in fiscal years beginning after December 15, 2006. We do not expect this statement to have a material impact on our results of operations or financial position.

Subsequent Events

In addition to catastrophe losses reported for the first nine months of 2006, a Midwest storm in early October caused heavy hail damage in central Ohio, resulting in at least $35 million pretax of catastrophe losses for our policyholders, which will be included in fourth-quarter results. This estimate does not take into account any catastrophe activity that may occur in the remainder of the fourth quarter of 2006 or potential development from events in prior periods.

NOTE 2 – SEGMENT INFORMATION

We operate primarily in two industries, property casualty insurance and life insurance. We regularly review four different reporting segments to make decisions about allocating resources and assessing performance:

•

Commercial lines property casualty insurance

•

Personal lines property casualty insurance

•

Life insurance

•

Investment operations

We report as “Other” the non-investment operations of the parent company, CFC Investment Company and CinFin Capital Management Company (excluding client investment activities), as well as other income of our insurance subsidiary.

Revenues come primarily from unaffiliated customers:

•

All three insurance segments record revenues from insurance premiums earned. Life insurance segment revenues also include separate account investment management fees.

•

Our investment operations’ revenues are pretax net investment income plus realized investment gains and losses.

•

Other revenues are primarily finance/lease income.

Income or loss before income taxes for each segment is reported based on the nature of that business area’s operations:

•

Income before income taxes for the insurance segments is defined as underwriting income or loss.

	o		For commercial lines and personal lines insurance segments, we calculate underwriting income or loss by recording premiums earned minus loss and loss expenses and underwriting expenses incurred.
	o		For the life insurance segment, we calculate underwriting income or loss by recording premiums earned and separate account investment management fees, minus contract holder benefits and expenses incurred, plus investment interest credited to contract holders.

•

Income before income taxes for the investment operations segment is net investment income plus realized investment gains and losses for all fixed-maturity and equity security investments of the entire company, minus investment interest credited to contract holders of the life insurance segment.

•

Loss before income taxes for the Other category is primarily due to interest expense from debt of the parent company and operating expenses of our headquarters.

Identifiable assets are used by each segment in its operations. We do not separately report the identifiable assets for the commercial or personal lines segments because we do not use that measure to analyze the segments. We include

		Cincinnati Financial Corporation
12		Form 10-Q for the quarter ended September 30, 2006

all fixed-maturity and equity security investment assets, regardless of ownership, in the investment operations segment. We include securities lending collateral in the Other category.

Segment information is summarized in the following table:

		Three months ended Sept. 30,								Nine months ended Sept. 30,
(In millions)		2006				2005				2006				2005
Revenues:
Commercial lines insurance
Commercial casualty		$	207			$	193			$	613			$	566
Commercial property			123				113				367				347
Commercial auto			113				115				337				340
Workers’ compensation			93				82				271				244
Specialty packages			35				34				106				103
Surety and executive risk			24				21				69				59
Machinery and equipment			7				6				20				19
Total commercial lines insurance			602				564				1,783				1,678
Personal lines insurance
Personal auto			95				107				294				329
Homeowner			72				72				219				209
Other personal lines			22				22				66				67
Total personal lines insurance			189				201				579				605
Life insurance			28				26				86				81
Investment operations			144				150				1,096				428
Other			4				3				12				9
Total		$	967			$	944			$	3,556			$	2,801
Income (loss) before income taxes:
Insurance underwriting results:
Commercial lines insurance		$	39			$	27			$	153			$	182
Personal lines insurance			(8	)			(1	)			(16	)			23
Life insurance			0				0				2				5
Investment operations			130				137				1,056				390
Other			(13	)			(12	)			(38	)			(38	)
Total		$	148			$	151			$	1,157			$	562

		September 30,				December 31,
		2006				2005
Identifiable assets:
Property casualty insurance		$	2,309			$	2,167
Life insurance			856				845
Investment operations			13,161				12,774
Other			1,345				217
Total		$	17,671			$	16,003

Cincinnati Financial Corporation
Form 10-Q for the quarter ended September 30, 2006		13

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion highlights significant factors influencing the consolidated results of operations and financial position of Cincinnati Financial Corporation (CFC). It should be read in conjunction with the consolidated financial statements and related notes included in our 2005 Annual Report on Form 10-K. Unless otherwise noted, A.M. Best Co., a leading insurance industry statistical, analytical and financial strength rating organization, is the source of industry data. Data from A.M. Best is presented on a statutory basis. When we provide our results on a comparable statutory basis, we label it as such; all other company data is presented on a GAAP basis.

We present per share data on a diluted basis unless otherwise noted, adjusting those amounts for all stock splits and dividends. Dollar amounts are rounded to millions; calculations of percent changes are based on whole dollar amounts or dollar amounts rounded to the nearest thousand.

Safe Harbor Statement

This is our “Safe Harbor” statement under the Private Securities Litigation Reform Act of 1995. Our business is subject to certain risks and uncertainties that may cause actual results to differ materially from those suggested by the forward-looking statements in this report. Some of those risks and uncertainties are discussed in our 2005 Annual Report on Form 10-K, Item 1A, Risk Factors, Page 21. Although we often review or update our forward-looking statements when events warrant, we caution our readers that we undertake no obligation to do so.

Factors that could cause or contribute to such differences include, but are not limited to:

•

Unusually high levels of catastrophe losses due to risk concentrations, changes in weather patterns, environmental events, terrorism incidents or other causes

•

Increased frequency and/or severity of claims

•

Inaccurate estimates or assumptions used for critical accounting estimates

•

Events or actions, including unauthorized intentional circumvention of controls, that reduce the company’s future ability to maintain effective internal control over financial reporting under the Sarbanes-Oxley Act of 2002

•

Events or conditions that could weaken or harm the company’s relationships with its independent agencies and hamper opportunities to add new agencies, resulting in limitations on the company’s opportunities for growth, such as:

	o		Downgrade of the company’s financial strength ratings,
	o		Concerns that doing business with the company is too difficult
	o		Perceptions that the company’s level of service, particularly claims service, is no longer a distinguishing characteristic in the marketplace or
	o		Regulations or laws that change industry or company practices for our agents.

•

Delays or inadequacies in the development, implementation, performance and benefits of technology projects and enhancements

•

Ability to obtain adequate reinsurance on acceptable terms, amount of reinsurance purchased, financial strength of reinsurers and the potential for non-payment or delay in payment by reinsurers

•

Increased competition that could result in a significant reduction in the company’s premium growth rate

•

Underwriting and pricing methods adopted by competitors that could allow them to identify and flexibly price risks, which could decrease our competitive advantages

•

Actions of insurance departments, state attorneys general or other regulatory agencies that:

	o		Place the insurance industry under greater regulatory scrutiny or result in new statutes, rules and regulations
	o		Increase our expenses
	o		Add assessments for guaranty funds, other insurance related assessments or mandatory reinsurance arrangements; or that impair our ability to recover such assessments through future surcharges or other rate changes
	o		Limit our ability to set fair, adequate and reasonable rates
	o		Place us at a disadvantage in the marketplace or
	o		Restrict our ability to execute our business model, including the way we compensate agents

		Cincinnati Financial Corporation
14		Form 10-Q for the quarter ended September 30, 2006

•

Sustained decline in overall stock market values negatively affecting the company’s equity portfolio and book value; in particular a sustained decline in the market value of Fifth Third Bancorp (NASDAQ:FITB) shares, a significant equity holding

•

Recession or other economic conditions or regulatory, accounting or tax changes resulting in lower demand for insurance products

•

Events that lead to a significant decline in the value of a particular security and impairment of the asset

•

Prolonged medium- and long-term low interest rate environment or other factors that limit the company’s ability to generate growth in investment income

•

Adverse outcomes from litigation or administrative proceedings

•

Investment activities or market value fluctuations that trigger restrictions applicable to the parent company under the Investment Company Act of 1940

•

Events, such as an avian flu epidemic, natural catastrophe or construction delays, that could hamper our ability to assemble our workforce at our headquarters location

Further, the company’s insurance businesses are subject to the effects of changing social, economic and regulatory environments. Public and regulatory initiatives have included efforts to adversely influence and restrict premium rates, restrict the ability to cancel policies, impose underwriting standards and expand overall regulation. The company also is subject to public and regulatory initiatives that can affect the market value for its common stock, such as recent measures affecting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.

Introduction

Corporate Financial Highlights

Income Statement and Per Share Data

		Three months ended September 30,												Nine months ended September 30,
(Dollars in millions except share data)		2006				2005				Change %				2006				2005				Change %
Income statement data
Earned premiums		$	819			$	790				3.6			$	2,446			$	2,361				3.6
Investment income, net of expenses			144				134				7.5				425				390				9.0
Net realized gains and losses (pretax)			0				16			nm					671				38			nm
Total revenues			967				944				2.4				3,556				2,801				27.0
Net income			115				117				(1.6	)			800				419				90.7
Per share data (diluted)
Net income			0.66				0.66				0.0				4.56				2.37				92.4
Cash dividends declared			0.335				0.305				9.8				1.005				0.90				11.7
Weighted average shares outstanding			175,260,063				176,806,267				(0.9	)			175,542,616				177,212,677				(0.9	)

For the three and nine months ended September 30, 2006, consolidated property casualty earned premium growth was in line with our expectations. Pretax investment income growth accelerated over the 2005 level. The increase in revenue in the nine months ended September 30, 2006, largely was due to $647 million of realized investment gains from the previously announced sale of our holdings of ALLTEL Corporation (NYSE:AT) common stock.

Net income and net income per share for the three months ended September 30, 2006, reflected rising loss severity, particularly an increase in the number of losses greater than $1 million. Net income and net income per share for the nine months ended September 30, 2006, reflected rising severity and higher catastrophe losses this year.

Due to the gain from the sale of our ALLTEL holding, net income and net income per share for the nine months ended September 30, 2006, were at a level that we do not anticipate achieving in future quarters. Realized investment gains and losses are integral to our financial results over the long term, but we have substantial discretion in the timing of investment sales and, therefore, the gains or losses that will be recognized in any period. That discretion generally is independent of the insurance underwriting process. Also, applicable accounting standards require us to recognize gains and losses from certain changes in fair values of securities and embedded derivatives without actual realization of those gains and losses.

•

2006 – Realized investment gains were immaterial in the three months ended September 30, 2006. Realized investment gains in the nine months ended September 30, 2006, raised net income by $426 million, or $2.43 per share, after applicable income taxes. The sale of our ALLTEL holding contributed $412 million, or $2.34 per share, of the gain in the nine-month period.

•

2005 – Realized investment gains in the three months ended September 30, 2005, raised net income by $10 million, or 5 cents per share, after applicable income taxes. Realized investment gains in the nine months

Cincinnati Financial Corporation
Form 10-Q for the quarter ended September 30, 2006		15

ended September 30, 2005, raised net income by $24 million, or 14 cents per share, after applicable income taxes.

The quarter and nine-month change in consolidated property casualty underwriting profits also contributed to the change in net income and net income per share. Underwriting profits for the three months ended September 30, 2006, rose as lower catastrophe losses offset an increase in loss severity. Underwriting profits for the nine months ended September 30, 2006, declined primarily due to rising loss severity, increased catastrophe losses and higher underwriting expenses.

One of the factors in the rise in expenses was the adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R) “Share-Based Payments,” which requires expensing the cost of associate options on our income statement. On an after-tax basis, stock option expense was $3 million, or 2 cents per share, in the three months ended September 30, 2006, and $11 million, or 6 cents per share, in the nine months ended September 30, 2006. Prior to January 1, 2006, we were not required to include stock option expense on our income statement and disclosed the estimated impact of stock options on net income and earnings per share in Note 1 to the Financial Statements. For the three and nine months ended September 30, 2005, net income per share would have been reduced by approximately 2 cents and 6 cents, if option expense had been included as an expense.

Net income per share for the three and nine months ended September 30, 2006, benefited from a decline in diluted weighted average shares outstanding from year-end 2005. Weighted average shares outstanding may fluctuate from period to period because we regularly repurchase shares under board authorizations, and we issue shares when associates exercise stock options.

The board of directors is committed to steadily increasing cash dividends and periodically authorizing stock dividends and splits. Cash dividends declared per share rose 9.8 percent and 11.7 percent in the three and nine months ended September 30, 2006, including an adjustment for the 5 percent stock dividend paid in 2005. The board also is committed to share repurchase. We purchased 142,566 shares at a total cost of $7 million in the three months ended September 30, 2006, and 2,142,566 shares at a total cost of $95 million in the nine months ended September 30, 2006.

Balance Sheet Data and Performance Measures

		At September 30,				At December 31,
(Dollars in millions except share data)		2006				2005
Balance sheet data
Invested assets		$	13,104			$	12,702
Total assets			17,671				16,003
Short-term debt			49				0
Long-term debt			791				791
Shareholders’ equity			6,464				6,086
Book value per share			37.32				34.88
Debt-to-capital ratio			11.5	%			11.5	%

		Three months ended Sept. 30,								Nine months ended Sept. 30,
		2006				2005				2006				2005
Performance measures
Comprehensive income (loss)		$	455			$	(59	)		$	609			$	(39	)
Return on equity, annualized			7.4	%			7.7	%			17.0	%			9.1	%
Return on equity, annualized, based on comprehensive income			29.1				(3.9	)			12.9				(0.8	)

Invested assets rose because of new investments, interest-rate driven improvement in bond values and appreciation of our equity portfolio. Total assets rose over the year-end 2005 levels in part because of the new securities lending collateral asset of $1.016 billion. Shareholders’ equity was up 6.2 percent at September 30, 2006, reflecting the appreciation of invested assets. Book value rose by $2.44 to $37.32.

Comprehensive income is net income plus the change in net other accumulated comprehensive income. The change in net other accumulated comprehensive income is the difference in unrealized gains on investments between the end of a quarter and the prior period-end. In the three months ended September 30, 2006, comprehensive income rose because of the increase in unrealized gains on investments. In the nine months ended September 30, 2006, comprehensive income rose because of the increase in net income and the increase in unrealized gains on investments.

		Cincinnati Financial Corporation
16		Form 10-Q for the quarter ended September 30, 2006

Property Casualty Highlights

		Three months ended September 30,												Nine months ended September 30,
(Dollars in millions except share data)		2006				2005				Change %				2006				2005				Change %
Property casualty highlights
Written premiums		$	780			$	761				2.4			$	2,423			$	2,349				3.2
Earned premiums			791				765				3.4				2,362				2,283				3.5
Underwriting profit			31				26				19.0				137				205				(33.4	)
GAAP combined ratio			96.1				96.6								94.2				91.0
Statutory combined ratio			96.4				96.6								93.2				90.1

The trend in overall written and earned premium growth rates continued to reflect the market factors and competitive strategies discussed in our 2005 Annual Report on Form 10-K, Item 1, Commercial Lines and Personal Lines Property Casualty Insurance Segments, Page 10 and Page 11.

Our consolidated property casualty insurance underwriting profit rose slightly for the three months ended September 30, 2006, while declining for the nine months ended September 30, 2006, as discussed above. Our combined ratio reflected these changes. (The combined ratio is the percentage of each premium dollar incurred for claims plus all expenses — the lower the ratio, the better the performance.)

Measuring Our Success in 2006 And Beyond

We use a variety of metrics to measure the success of our strategies:

•		Maintaining our strong relationships with our established agencies, writing a significant portion of each agency’s business and attracting new agencies – In 2006, we expect to continue to rank No. 1 or No. 2 by premium volume in at least 74 percent or more of the agency locations that have marketed our products for more than five years. We are targeting 55 to 60 new agency appointments. In the first nine months of 2006, we made 49 agency appointments. These new appointments and other changes in agency structures brought total reporting agency locations to 1,286, a net increase of 34 since year-end 2005.
		In 2006, we expect to make further progress in our efforts to improve service to and communication with our agencies. Among other actions, we subdivided two field marketing territories in the first nine months of the year and staffed a third territory in October, giving our field marketing representatives more time to spend in each agency. We also continued to enhance our expanding portfolio of software. We discussed our technology plans for 2006 in our 2005 Annual Report on Form 10-K, Item 1, Technology Solutions, Page 4. In the nine months ended September 30, 2006, we made progress toward the technology objectives we established for the year:
		Three commercial lines and one personal lines system form the core of our quoting and policy processing systems. Agencies access our quoting and policy processing systems via CinciLink®, our secure agency-only Web site.

	o		WinCPP® is an online commercial lines rating and quoting system for businessowner, commercial package, commercial auto and workers’ compensation policies. We are on track to achieve our 2006 objective of rolling out quoting for specialty programs for metalworkers and garage owners. We now expect to add data sharing capabilities with agency systems in early 2007.
	o		e-CLAS™ is a commercial lines policy processing system. Businessowner Policy (BOP) and Dentist’s Package Policy (DBOP) processing now is available through e-CLAS in Arkansas, Indiana, Michigan, Ohio and Pennsylvania. We are moving forward with development of commercial auto and commercial package policy processing capabilities.
	o		CinciBond™ is an automated system to process license and permit surety bonds. CinciBond now is deployed in Indiana, Illinois, North Carolina, Ohio and Tennessee, with Georgia, Minnesota, Missouri, Utah and Vermont scheduled for later in 2006.
	o		Diamond is our personal lines policy processing system. In the first nine months of 2006, $424 million of our $570 million of personal lines written premium was issued through Diamond. In 2006, agents in Georgia, Kentucky, Minnesota, Missouri, Tennessee and Wisconsin have begun using Diamond. As a result, Diamond is in use in states that represent approximately 90 percent of our personal lines premium volume. Our plans for 2007 include the introduction of Diamond in Pennsylvania and Virginia and other low personal lines volume states.

Many systems automate our internal processes so our associates can spend more time serving agents and policyholders. These systems are accessed through CFCNet^®, our secure intranet. Enhancement activities for two newer systems continue:

o

CMS™ is a claims file management system. We continue to refine the system to add capabilities to make our associates more effective. During the first nine months of 2006, we issued tablet computers to our field claims representatives. These units allow our claims representatives to view and enter information into

Cincinnati Financial Corporation
Form 10-Q for the quarter ended September 30, 2006		17

			CMS from any location, including an insured’s home or agent’s office, and to print claims checks using wireless printers. Agent access to selected CMS information is planned for 2007.
	o		i-View™ is a commercial lines policy imaging and workflow system now in use by all of our commercial lines underwriting teams. During the remainder of the year, we expect to begin providing field and other headquarters associates with access to these electronic files.

		We also continue to work to give independent agents enhanced access to Cincinnati’s systems and client data quickly and easily through their agency systems. In 2006 and 2007, we plan to advance our use of industry integration products, TransactNOW® and Transformation Station®.
•		Achieving above-industry-average growth in property casualty statutory net written premiums and maintaining industry-leading profitability by leveraging our regional franchise and proven agency-centered business strategy – We now expect consolidated property casualty written premium growth of at least 2 percent in 2006 compared with the 2.6 percent increase in 2005. We anticipate continued above-average growth in commercial lines written premiums. We may not achieve our objective of above-industry-average growth in total in 2006 because of the rate-driven declines we anticipate in personal lines written premiums.
		We now anticipate a combined ratio for 2006 in the range of 94 percent to 95 percent (93 percent to 94 percent on a statutory basis), primarily due to the level of catastrophe losses through the first nine months of 2006 and preliminary estimates of catastrophe losses in October 2006. Previously, our combined ratio estimate for 2006 was 92 percent to 94 percent on a GAAP basis compared with 89.2 percent on a GAAP basis in 2005. Considerations include:

	o		Catastrophe losses of at least 5.0 percentage points on combined ratio – We originally allowed for full year catastrophe losses, net of reinsurance, of approximately $125 million to $145 million, contributing in the range of 4.0 to 4.5 percentage points to the full-year 2006 combined ratio. We had raised our estimate from the historical range of 3.0 to 3.5 percentage points to account for the potential of severe weather, such as we’ve seen in the past two years and for the higher retention on our 2006 catastrophe reinsurance treaty.
			Catastrophe losses in the third quarter of 2006 totaled $27 million, reflecting $19 million from events during the period and $8 million of net unfavorable development from prior period catastrophes, compared with $66 million in the third quarter of 2005. The development of prior period catastrophe losses primarily relates to the April 13-15 wind and hailstorm in the Midwest. Policyholders in the Indianapolis market continue to report hail damage that has caused our estimate of total losses from this event to rise by approximately $10 million from the second-quarter 2006 level.
			Catastrophe losses for the first nine months of 2006 totaled $130 million, contributing 5.5 percentage points to the nine-month combined ratio, compared with $83 million, contributing 3.6 percentage points, in the first nine months of 2005.
			In addition to catastrophe losses reported for the first nine months of 2006, a Midwest storm in early October caused heavy hail damage in central Ohio, resulting in at least $35 million of losses for our policyholders, which will be included in fourth-quarter results. That estimate does not take into account any catastrophe activity that may occur in the remainder of the fourth quarter of 2006 or potential development from events in prior periods.
	o		Rising loss severity, including an increase in the number of losses greater than $1 million, resulted in higher loss and loss expense ratios excluding catastrophe losses for the first nine months of 2006. Our initial analysis has turned up no new trend in the sources of these losses – no geographic concentration, no policy age concentration, no cause of loss concentration – and different influences on each of the three most affected business lines – commercial auto, workers’ compensation and homeowners.
			We believe commercial auto results reflected the increasing competition in the commercial lines marketplace. Workers’ compensation reflected a review we made of established case reserves. Homeowner results appeared to reflect industrywide trends of higher material costs and insured property values as well as rising deductibles. Underwriting results remained healthy for our other business areas, including our two largest commercial business lines – commercial property and commercial casualty – and our largest personal business line – personal auto.
	o		Lower level of savings from loss reserve development – We continue to believe that savings from favorable loss reserve development from prior accident years is likely to reduce the 2006 combined ratio in line with historical levels of 2 to 3 percentage points. Higher-than-normal savings, particularly for liability coverages, reduced the 2005 combined ratio by 5.2 percentage points and the 2004 combined ratio by 6.7 percentage points. Net savings for the nine months ended September 30, 2006, was 1.5 percent points. In the first nine months of 2005, savings lowered the loss and loss expense ratio by 3.5 percentage points.

		Cincinnati Financial Corporation
18		Form 10-Q for the quarter ended September 30, 2006

Trends in both the loss and loss expense ratio and underwriting expense ratio also could affect the full-year 2006 combined ratios for our commercial lines and personal lines segments:

	o		The degree of price softening in the commercial lines marketplace will affect the 2006 loss and loss expense ratio for that business segment. That ratio may move up slightly as pricing becomes more competitive.
	o		We believe we have taken actions to improve competitiveness for personal lines by adjusting pricing. These changes could lead to a full year loss and loss expense ratio above the improved level we had achieved in 2005. The ratio may increase further, if premiums continue to decline.
	o		For both commercial lines and personal lines, lower growth rates could lead to further unfavorable year-over-year comparisons in the ratios of deferred acquisition costs and other underwriting expenses to earned premiums. Continued investment in technology also may contribute to an increase in other underwriting expenses.

•		Pursuing a total return investment strategy that generates both strong investment income growth and capital appreciation – For full-year 2006, we now are estimating that pretax investment income growth could be in the range of 8.0 percent to 8.5 percent. This outlook is based on strong cash flows from insurance operations, a higher-than-historical allocation of new cash flow to fixed-maturity securities over the last two years and an increase in the general level of interest rates.
		We do not establish annual capital appreciation targets. Over the long term, our target is to have the equity portfolio outperform the Standard & Poor’s 500 Index, a common benchmark of market performance. In the first nine months of 2006, our equity portfolio’s total return of 7.9 percent was below the 8.5 percent return for the Index. Over the five years ended September 30, 2006, our compound annual equity portfolio return was 0.9 percent compared with a compound annual total return of 7.0 percent for the Index. Our equity portfolio performance reflected the decline in the market value of our holdings of Fifth Third common stock, which generated a negative annualized return of 6.7 percent for the five-year period ended September 30, 2006.
•		Increasing the total return to shareholders through a combination of higher earnings per share, growth in book value and increasing dividends – We do not announce annual targets for earnings per share or book value. Earnings results in 2006 are being tempered by the adoption of SFAS No. 123(R), which requires expensing the cost of associate stock options on our income statement. We continue to anticipate that stock option expense will reduce full-year earnings per share by approximately 8 cents.
		Over the long term, we look for our earnings per share growth to outpace that of a peer group of national and regional property casualty insurance companies. Long-term book value growth should approximate that of our equity portfolio. The board of directors is committed to steadily increasing cash dividends and periodically authorizing stock dividends and splits. In February 2006, the board increased the indicated annual dividend rate for the 46th consecutive year, a record we believe is matched by only 11 other U.S. publicly traded corporations.
		Over the long-term, we also seek to increase earnings per share, book value and dividends at a rate that would allow long-term total return to our shareholders to exceed that of the Standard & Poor’s Composite 1500 Property Casualty Insurance Index. As provided in our 2006 Proxy Statement, over the five years ended December 31, 2005, our total return to shareholders of 40.9 percent matched the return on that Index.
•		Maintaining financial strength by keeping the ratio of debt to capital below 15 percent and purchasing reinsurance to provide investment flexibility - Based on our present capital requirements, we do not anticipate a material increase in debt levels during the remainder of 2006. Our consolidated debt-to-capital ratio was 11.5 percent at September 30, 2006 and December 31, 2005.
		Our property casualty reinsurance program for 2006 maintains the balance between the cost of the program and the level of risk we retain. We now anticipate that under the new program, our 2006 reinsurance premiums should be $11 million to $12 million lower than 2005, without taking into account the reinstatement premium we incurred in 2005. For more details on our reinsurance programs, please see our 2005 Annual Report on Form 10-K, Item 7, 2006 Reinsurance Programs, Page 68.
		Our property casualty and life operations are awarded insurer financial strength ratings. These ratings assess an insurer’s ability to meet its financial obligations to policyholders and do not necessarily address matters that may be important to shareholders.
		On September 15, 2006, Fitch Ratings affirmed the AA- issuer default rating and A+ senior debt ratings of Cincinnati Financial Corporation. Further, it affirmed the AA insurer financial strength ratings of our three property casualty companies and The Cincinnati Life Insurance Company. The AA rating is at the fourth highest level of Fitch’s 21 rating levels. Fitch said the ratings are based on the strong financial condition of our operating subsidiaries, excellent financial flexibility and successful total return investment strategy. The ratings

Cincinnati Financial Corporation
Form 10-Q for the quarter ended September 30, 2006		19

consider the property casualty group’s investment concentration in a small number of common stocks and geographic concentration in Ohio and Midwestern states.

As reported in our 10-Q for the quarter ended June 30, 2006, on July 25, 2006, Standard & Poor’s Ratings Services affirmed its A (Strong) counterparty credit rating on Cincinnati Financial Corporation and its AA- (Very Strong) financial strength and counterparty credit ratings on the property casualty group and The Cincinnati Life Insurance Company. The AA- is at the fourth highest level of Standard & Poor’s 21 rating levels.

At the same time, Standard & Poor’s revised its outlook on the company, our property casualty operating companies and Cincinnati Life to stable from negative. Standard & Poor’s said the revised outlook reflected the improved results on our homeowner book of business, as well as its view of our ability to benefit from corrective actions we have effected over recent years. Standard & Poor’s said they believe our unique approach to agency relationships should drive profitable growth even in a softer pricing environment.

As reported in our 10-Q for the quarter ended March 31, 2006, on April 28, 2006, A.M. Best affirmed the financial strength rating (FSR) of A++ (Superior) for our property casualty group. The A++ FSR is the highest possible rating of Best’s 16 rating levels.

A.M. Best also affirmed the senior debt ratings and issuer credit rating (ICR) of aa- of Cincinnati Financial Corporation. Additionally, A.M. Best affirmed the FSR of A+ (Superior) and the ICR of aa- of The Cincinnati Life Insurance Company. The A+ FSR is the second highest of Best’s 16 rating levels. Concurrently, A.M. Best downgraded the ICRs to aa+ from aaa for our property casualty insurance companies, reflecting the company’s investment and geographic risk concentrations at current rating levels. The outlook for all ratings is stable.

As of November 1, 2006, our financial strength ratings were unchanged from those we reported in our 2005 Annual Report on Form 10-K. The outlook from Standard & Poor’s has changed to stable from negative.

Parent Company

Property Casualty

Senior Debt

Insurance

Life Insurance

Rating

Subsidiaries

Subsidiary

Outlook

Financial Strength Ratings:

A. M. Best Co.

aa-

A++

Superior

A+

Superior

Stable

Fitch Ratings

A+

AA

Very Strong

AA

Very Strong

Stable

Moody’s Investors Services

A2

Aa3

Excellent

-

-

Stable

Standard & Poor’s Ratings Services

A

AA-

Very Strong

AA-

Very Strong

Stable

Property casualty statutory surplus was $4.616 billion at September 30, 2006, with the ratio of property casualty common stock to statutory surplus at 92.6 percent. At year-end 2005, property casualty statutory surplus was $4.194 billion, with the ratio of common stock to surplus at 97.0 percent. Life statutory surplus was $461 million at September 30, 2006, with the ratio of life common stock to statutory adjusted capital and surplus at 85.8 percent. At year-end 2005, life statutory surplus was $451 million, with the ratio of common stock to statutory adjusted capital and surplus at 83.5 percent.

We believe that our strong surplus position and superior insurer financial strength ratings are clear, competitive advantages in the segment of the insurance marketplace that our agents serve. Our financial strength supports the consistent, predictable performance that our policyholders, agents, associates and shareholders have always expected and received, and it must be able to withstand significant challenges. The most important way we seek to ensure that our performance remains consistent and predictable is to align agents’ interests with those of the company, giving agents outstanding service and compensation to earn their best business and enhance their ability to serve the businesses and individuals in their communities.

We continue to review the risk management and capital requirement changes that have been proposed by the rating agencies. Additionally, we began a formal implementation of enterprise risk management in 2005. Detailed and summary risk assessments, operational audits, strategic plans and departmental business plans are reported as appropriate to executives, directors and board committees.

We believe that our property catastrophe reinsurance program provides adequate protection for large loss events. Our strong capital position would allow the payment of claims if an event exceeded our reinsurance program. Swiss Reinsurance America Corporation and GE Insurance Solutions, two of the four participants in our 2006 property and casualty per-occurrence reinsurance programs, recently merged. All four of the participants (including Munich Reinsurance America Inc. and Partner Reinsurance Company

		Cincinnati Financial Corporation
20		Form 10-Q for the quarter ended September 30, 2006

of the U.S.) currently have A.M. Best insurer financial strength ratings of A (Excellent) or A+ (Superior). In 2007 and beyond, we anticipate reallocating participation on our reinsurance treaties.

Factors supporting our outlook for 2006 are discussed below in the Results of Operations for each of the four business segments.

Results of Operations

The consolidated results of operations reflect the operating results of each of our four segments along with the parent company and other non-insurance activities. The four segments are:

•

Commercial lines property casualty insurance

•

Personal lines property casualty insurance

•

Life insurance

•

Investments operations

We measure profit or loss for our property casualty and life segments based upon underwriting results. Insurance underwriting results (profit or loss) represent net earned premiums less loss and loss expenses and underwriting expenses on a pretax basis. We also measure aspects of the performance of our commercial lines and personal lines segments on a combined property casualty insurance operations basis. Underwriting results and segment pretax operating income are not a substitute for net income determined in accordance with GAAP. Life insurance segment revenues also include separate account investment management fees, and life insurance segment expenses include contract holder benefits and expenses incurred, less investment interest credited to contract holders.

For the combined property casualty insurance operations as well as the commercial lines and personal lines segments, statutory accounting data and ratios are key performance indicators that we use to assess business trends and to make comparisons to industry results, since GAAP-based industry data generally is not readily available. We also use statutory accounting data and ratios as key performance indicators for our life insurance operations. We do not believe that inflation has had a material effect on consolidated results of operations, except to the extent that inflation may affect interest rates. We continue to monitor market trends in construction costs that could affect claim payments and headquarters construction costs.

Investments held by the parent company and the investment portfolios for the property casualty and life insurance subsidiaries are managed and reported as the investments segment, separate from the underwriting businesses. Net investment income and net realized investment gains and losses for our investment portfolios are discussed in the Investments Results of Operations.

The calculations of segment data are described in more detail in Item 1, Note 2 of the Consolidated Financial Statements, Page 12. The following sections review results of operations for each of the four segments. Commercial Lines Insurance Results of Operations begins on Page 23, Personal Lines Insurance Results of Operations begins on Page 29, Life Insurance Results of Operations begins on Page 33, and Investments Results of Operations begins on Page 34. We begin with an overview of our consolidated property casualty operations, which is the total of our commercial lines and personal lines segments.

Cincinnati Financial Corporation
Form 10-Q for the quarter ended September 30, 2006		21

Consolidated Property Casualty Insurance Results of Operations

		Three months ended September 30,												Nine months ended September 30,
(Dollars in millions)		2006				2005				Change %				2006				2005				Change %
Written premiums		$	780			$	761				2.4			$	2,423			$	2,349				3.2
Earned premiums		$	791			$	765				3.4			$	2,362			$	2,283				3.5
Loss and loss expenses excluding catastrophes			489				435				12.2				1,375				1,312				4.8
Catastrophe loss and loss expenses			27				66				(58.2	)			130				83				57.2
Commission expenses			147				151				(2.6	)			452				451				0.4
Underwriting expenses			94				84				11.4				256				225				13.7
Policyholder dividends			3				3				39.4				12				7				56.5
Underwriting profit		$	31			$	26				19.0			$	137			$	205				(33.4	)
Ratios as a percent of earned premiums:
Loss and loss expenses excluding catastrophes			61.7	%			56.9	%							58.3	%			57.5	%
Catastrophe loss and loss expenses			3.5				8.6								5.5				3.6
Loss and loss expenses			65.2				65.5								63.8				61.1
Commission expenses			18.7				19.8								19.1				19.7
Underwriting expenses			11.8				11.0								10.8				9.9
Policyholder dividends			0.4				0.3								0.5				0.3
Combined ratio			96.1	%			96.6	%							94.2	%			91.0	%