Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)

x		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 2002.
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

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

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:
$2.00 par, common
6.9% Senior Debentures due 2028

     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.      Yes x     No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.           o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).     Yes x     No o

     The aggregate market value of voting stock held by nonaffiliates of Cincinnati Financial Corporation was $4,836,296,722 as of February 20, 2003.

     As of February 20, 2003, there were 161,075,902 shares of common stock outstanding.

Document Incorporated by Reference

Portions of the definitive Proxy Statement for Cincinnati Financial Corporation’s Annual Meeting of Shareholders to be
held on April 19, 2003 are incorporated by reference into Part III of this Form 10-K.

Table of Contents

CINCINNATI FINANCIAL CORPORATION
2002 ANNUAL REPORT ON FORM 10-K

TABLE OF CONTENTS

Table of Contents

PART I

ITEM 1. BUSINESS

INTRODUCTION

Cincinnati Financial Corporation (CFC), through its subsidiaries, operates in the property casualty and life insurance businesses. Its property casualty operations rank the company as one of the nation’s 20 largest property casualty insurers, based on revenues. Over the past five years, the company’s growth has outpaced that of the industry, with written premiums rising at an average annual rate of 12.2 percent versus the estimated industry average of 6.0 percent. At the same time, the company has sustained its position as one of the most profitable property casualty insurers, with a five-year average statutory combined ratio of 103.0 percent, excluding a one-time charge of $33 million (statutory, before tax) recorded in 2000, compared with the estimated industry average of 109.0 percent. Investment income growth has averaged 5.0 percent over the same period and investment income provides the primary source of profits.

The company’s track record reflects a strong competitive position; an effective and efficient local independent agent distribution system; continued expansion and market penetration in operating territories; and a successful, equity-centered investment strategy.

SEGMENT INFORMATION

The company is organized and operates principally in two industries – property casualty insurance and life insurance.

The company’s four reportable segments are:

•		commercial lines property casualty insurance
•		personal lines property casualty insurance
•		life insurance, and
•		investment operations

Segment information for revenues, income before income taxes, and identifiable assets is included in Note 17 to the Consolidated Financial Statements, Page 71. The company’s segments are defined based upon the components of the company for which financial information is used internally to evaluate performance and determine the allocation of resources.

SUBSIDIARY OVERVIEW

Cincinnati Financial had three subsidiaries at year-end 2002. The lead property casualty insurance subsidiary, The Cincinnati Insurance Company, markets a broad range of commercial and personal insurance policies in 31 states through a select group of 950 independent insurance agencies. Subsidiaries of The Cincinnati Insurance Company are The Cincinnati Casualty Company and The Cincinnati Indemnity Company, which provide the company with flexibility in underwriting, pricing and billing for property casualty insurance; as well as The Cincinnati Life Insurance Company, which markets life, long-term care and disability income policies and annuities through property casualty agencies and independent life agencies. The Cincinnati Insurance Company and its subsidiaries are collectively referred to as The Cincinnati Insurance Companies.

Cincinnati Financial’s other two subsidiaries are CFC Investment Company, which complements the insurance subsidiaries with commercial leasing, financing and real estate services; and, CinFin Capital Management Company, which provides asset management services to institutions, corporations and individuals with $500,000 minimum asset accounts.

1

Table of Contents

PROPERTY CASUALTY INSURANCE OPERATIONS

STRATEGY

The core strengths of the company’s property casualty insurance operations are its commitment to the independent agent distribution system and the care with which it selects the agencies that represent The Cincinnati Insurance Companies. Its mission places agents at the center of its identity, recognizing that locally based independent agencies have the relationships that lead to profitable business. The company also differentiates itself by providing exceptional claims service, through locally based field claims staff serving the needs of agents and policyholders.

The Cincinnati Insurance Companies, which offer both commercial and personal lines of insurance, continuously strengthen service by providing agents and their clients a strong local presence, unparalleled claim service and competitive products, rates and compensation.

MARKETS AND COMPETITIVE POSITION

The Cincinnati Insurance Companies market property casualty insurance policies in 31 states. In 2002, 98.6 percent of the company’s agencies direct written premium volume was in the 27 states in which the company has had a presence for more than five years. Further, agencies in Ohio contributed 24 percent and Georgia, Illinois, Indiana, Michigan and Pennsylvania each contributed between 5 percent and 10 percent of premium volume in 2002.

The company selects agencies based on their commitment to the same philosophies that distinguish the company in the marketplace: a commitment to doing business person to person; a focus on broad, value-added services; sound balance sheets; and, professional management. The independent agencies representing the company are among the most successful in the country. The agencies with which the company does business averaged approximately $12 million in total annual premium volume for all carriers in 2000, more than two times the approximately $5.5 million national average for 41,000 agencies, based on a Future One 2000 Agency Universe study.

In 2002, each agency representing the company averaged approximately $2.6 million in agency direct written premiums for the company, or 18 percent of the agency’s total volume, up from $2.3 million in 2001 and $2.0 million in 2000. No single agency accounted for more than 1.1 percent of the company’s total agency direct written premiums. The company believes that it can continue to increase its penetration within these agencies that share the company’s philosophy and underwriting approach. Even if the company’s share of these agencies’ business remains unchanged, it expects to be able to continue to grow as the agencies expand.

Factors that distinguish the company in the insurance marketplace include:

•		Field marketing staff that enhances service and accountability. The company’s field staff live in the communities they serve and work from offices in their homes, providing 24/7 availability to a small group of independent agencies that they visit frequently, for many agencies as often as once a week for a full day. They also provide local decision-making authority. The field marketing staff is responsible for the selection of new independent agencies as well as underwriting and pricing of new commercial business. Because of their local presence, they are making these decisions for risks with which they are familiar. They round out their efforts by coordinating teams of specialized company representatives and promoting all of the company’s products within the agencies they serve.
•		Widely recognized, high-quality claims service via locally based field claims staff in conjunction with independent agencies. To help ensure prompt claims service, the company provides most agencies with authority to pay first-party claims immediately up to $2,500 and assigns claims representatives to specific agencies, allowing them to become familiar with the agency and its customers. The company believes the higher level of service provided by claims representatives familiar with an agency and its policyholders provides it with a competitive advantage. The company paid an average of $6 million in claims per business day in 2002.
•		Emphasis on improving customer service through the creation of smaller marketing territories, permitting local field marketing representatives to devote more time to each independent agent. At year-end 2002, the company had 83 property casualty field territories, up from 74 at the end of 2000. During 2003, the company plans to split and staff another six territories. Smaller territories allow marketing representatives to increase the level of field underwriting and service as well as expand the opportunities to ask for and earn new business.
•		Commitment to the agents. The company seeks to provide the products and services needed to serve agency clients – the policyholders – including the availability of three-year policy terms for many types of insurance coverage. Though the company commits to a three-year policy term, policies are annually renewable at the discretion of the policyholder and

2

Table of Contents

		are cancelable at any time. To serve the needs of agents and policyholders effectively, decisions are made about both new business and renewals that are risk-specific. Rather than stereotyping entire business lines, the company, on a case-by-case basis, looks for equitable solutions that allow it to select the risks it can cover on reasonable terms and at an adequate price. This case-by-case underwriting is coordinated by the local field marketing representatives and relies on their knowledge of the communities in which they live and work. The company seeks to be a consistent, predictable and reasonable carrier that agencies can rely on to serve their communities.
•		Programs to support agency growth, including education programs for agents and staff and financing for buildings and equipment. In 2002, the insurance subsidiaries augmented ongoing training programs with a number of special events, including seminars held around the country to encourage cross-selling by expanding awareness of the company’s products among producing agents. CFC Investment Company offers convenient equipment and vehicle leases and loans for independent insurance agencies, their commercial clients and other businesses and also provides commercial real estate loans to agencies to help them operate and expand their businesses.

The success of the company’s efforts to distinguish itself in the insurance marketplace is demonstrated by the company’s consistently high rankings in agent and consumer satisfaction surveys. Most recently, the Florida Association of Independent Agents reported that the company had received high marks for its loyalty to agents and claims service. In past years, the company has obtained similar rankings from consumer organizations and Crittenden’s Property/Casualty Ratings. These surveys assess insurers’ accessibility and timely response, premium pricing, efficiency and fairness of claims payments. The National Association of Insurance Commissioners’ (NAIC) Online Consumer Information Source measures the company’s low complaint ratio (www.naic.org) at 0.16 versus the national median of 1.00. NAIC members head state departments of insurance.

TECHNOLOGY-BASED TOOLS

To help solidify relationships with agencies, the company continues to invest in and roll out technology-based tools.

•		CinciLink – In 2002, the company completed the deployment of CinciLink, an agent-only Web site, to all of the independent agencies with which it works. CinciLink enables agencies and field and headquarters associates to share information. The Web site includes a number of features to make it easier for agencies to place business with the company, such as online policy loss information, software updates and a property casualty electronic coverage forms library. Additionally, initial rollout of commercial lines and personal lines rating software was achieved through CinciLink.
•		Personal lines automation – In August 2002, the company introduced a Web-based policy processing system for personal lines products to agencies in Kansas. The single-entry data processing system streamlines policy issue, reduces processing time to improve cash flow and offers direct billing. Longer-term, management believes this program could have a substantial positive benefit on premium growth as the technology presents solutions sought by independent agencies. State-by-state development and rollout will take place over the coming years with agencies in three of the company’s most significant personal lines states – Michigan, Indiana and Ohio – targeted for deployment within 15 months. Through December 31, 2002, capitalized development expense related to the project had totaled $15 million. Over the next three to four years, management anticipates investing another $14 million to complete the rollout to all personal lines states.
•		Commercial lines automation – The company is in the preliminary stages of development of a single-entry data processing system for its commercial lines of insurance. The budget of $9 million approved for 2003 will be used to finalize system requirements and prepare automation for the businessowners policy (BOP). At this time, management cannot predict the timetable for this project.
•		Claims management system – In late 2002, the company successfully completed a proof-of-concept for claims processing software intended to streamline claims administration through elimination of duplicate entry, replacement of paper claims files and improved accuracy of data coding. While development now is at a very early stage, when completed management anticipates that the system will provide additional information and capabilities, improving the company’s ability to monitor loss trends and offering additional information for use in establishing loss expense and salvage and subrogation levels. The total amount invested in the development of the new software through December 31, 2002, was approximately $4 million. Continued development of the software is expected to result in an additional investment of $13 million in 2003.

•

Disaster recovery – In June 2002, the company began initial operation of an off-site data center for company disaster recovery needs. This facility provides an alternate location in the event that the headquarters data center becomes inoperable, permitting the company to continue to serve agents. The data center complements the company’s ongoing efforts to establish offsite locations where associates can continue to perform key functions in the event the company’s headquarters is not accessible.

3

Table of Contents

COMMERCIAL LINES PROPERTY CASUALTY INSURANCE

The commercial lines property casualty insurance segment contributed $1,721 million of Cincinnati Financial’s total revenues and $59 million of income before income taxes in 2002. The company’s commercial lines property casualty companies are licensed in all 50 states, the District of Columbia and Puerto Rico, to serve the needs of policyholders who operate businesses in multiple locations. Substantially all of commercial lines written premiums, however, are for risks located within the 31 states in which the company has agent relationships.

The company’s commercial lines products are marketed through the 950 independent agencies that represent The Cincinnati Insurance Companies. The company’s emphasis is on providing products that agents can market to small- to mid-size businesses in their communities. Approximately 57.5 percent of total premiums are derived from six states: Indiana, Illinois, Michigan, Ohio, Pennsylvania and Virginia. The premium growth rate in these six states over the past three years has exceeded that of overall premiums as the company continues to increase its market penetration in these areas.

Facing rising losses after years of intense price competition, the commercial lines insurance marketplace began to experience a firming of rates in mid-1999. Growing concerns about the economy and rising loss severity, exacerbated by the events of September 11, 2001, led to continued rate increases through year-end 2002. Also in response to the rising loss severity, during this period, some competitors have announced decisions to exit geographic markets or specific lines of business; others have instituted across-the-board price increases. Industry analysts believe the market has experienced a renewed sense of underwriting discipline.

The company responded to these market conditions by continuing to pursue its case-by-case approach to new business and account renewals, seeking to further solidify its relationships with the independent agencies and establish a basis for continued growth. While insisting on adequate premiums for covered exposures, the company has continued to do business the way it always has; on the local level, focusing on each relationship separately. Commercial lines pricing has remained flexible to respond to each risk in partnership with local agencies, who knows their market and their business. The company believes that this approach results in more, high-quality accounts over the long term.

For small- to mid-size commercial customers, the company offers a variety of insurance products. Four business lines – commercial multi-peril, workers compensation, commercial automobile and other liability – account for 90.5 percent of commercial lines earned premiums.

•		Commercial multi-peril – Commercial multi-peril is the standard of commercial package insurance coverages for small- to medium-sized risks. The company continues to market its products to a broad range of business classes. Within each local market, each risk is evaluated individually and decisions are made regarding rates, the use of three-year policies and other policy terms. Even in classes of business that are under pressure, such as contractors and professional liability, the company has sought to develop underwriting guidelines that allow it to continue to be a market for its agents and their better clients in these classes of business. In 2002, the company made carefully positioned changes to its general liability coverage, including the application of aggregate limits, which allow it to remain a market for agents. By year-end, these changes were in effect in 20 states and will be implemented in additional states during 2003. Further, the company developed a contractor’s questionnaire and accelerated the use of insurance risk reviews by field claims staff to help manage the loss ratio in this class of business. For professional liability, the company has narrowed the underwriting criteria and significantly increased rates.
•		Workers compensation – Conditions within the workers compensation market have improved somewhat in the past two years as market pricing has risen in most states, albeit offset by continued rising trends in loss severity. As indicated by rapid rise in premium volume of state pools for workers compensation, many carriers are choosing to exit significant portions of this line of business. The company has continued to write workers compensation, but remains highly selective about the risks it chooses to cover. In addition, the company has chosen not to renew selected policies where the aggregate risk, related to terrorism exposure, is excessive.
•		Commercial auto – The Cincinnati Insurance Companies are one of the leading writers of commercial automobile coverage, ranking 16th in the country based on written premiums in 2001. The highly competitive market over the second half of the 1990s caused results for this line of business to deteriorate. Following the Ohio Supreme Court’s decisions regarding uninsured and underinsured motorist (UM/UIM) coverage in late 2000, the company accelerated its efforts to improve commercial automobile underwriting and rate levels, particularly for trucking firms. As a result of those efforts, in 2002, the company reported a statutory losses and loss expenses ratio of 67.5 percent, putting its commercial auto profitability ahead of the estimated industry averages.

4

Table of Contents

•

Other liability – The company’s other liability business line includes commercial umbrella, commercial general liability and director and officer policies. In response to rising loss severity, however, the company’s underwriting efforts have led to lower policy count and significantly higher premiums for this product area. Directors and officers coverage accounted for 11 percent of other liability premium in 2002. Director and officer policies are offered primarily to non-profit organizations, reducing the risk associated with this line of business; only 32 in-force director and officer policies as of December 31, 2002, are for publicly traded companies and only 10 are for Fortune 1000 companies.

The remaining 9.5 percent of commercial lines earned premiums in 2002 were derived from a variety of other types of insurance products the company offers to commercial customers.

PERSONAL LINES PROPERTY CASUALTY INSURANCE

The personal lines property casualty insurance segment contributed $670 million of Cincinnati Financial’s total revenues and a $51 million loss before income taxes in 2002. The company markets its full complement of personal lines products in 25 of the 31 states in which it markets commercial lines insurance. Six states – Alabama, Georgia, Illinois, Indiana, Michigan and Ohio – accounted for 72.8 percent of personal lines premiums in 2002.

The company predominantly markets homeowners and personal automobile insurance products through 663 of the 950 independent agencies that represent The Cincinnati Insurance Companies. The 287 agencies that do not market the personal lines products either are located in the six states in which the company does not actively market personal lines insurance or they have decided, in conjunction with company management, that the company’s personal lines products are not appropriate for their agencies at this time.

Already unprofitable due to years of inadequate pricing, industry-wide personal lines insurance saw a dramatic rise in loss ratios in 2001, primarily because the homeowners area experienced an upswing in water damage and mold claims. In response, insurance companies have sought rate increases and added coverage exclusions. A number of carriers have taken dramatic steps such as restricting new business and exiting certain territories. While the personal automobile area has been less volatile in recent years, companies continue to seek rate increases to keep up with increasing claim costs.

Personal automobile accounted for 58 percent of personal lines earned premium in 2002. The company continues to seek and receive approval for appropriate rate increases. The homeowners line accounted for 31 percent of personal lines earned premium in 2002. To return this business line to profitability, the company has focused on pricing and changes in policy terms and conditions. The remaining 11 percent of personal lines earned premium in 2002 was derived from a variety of other types of insurance products the company offers to individuals such as inland marine, watercraft and umbrella. The company offers its personal umbrella product, which accounted for 4 percent of total premiums in 2002, primarily in a package with auto or homeowner coverage. Due to the volatility of the personal umbrella product, the company has experienced rising losses in this area, which it is addressing with rate increases and careful underwriting.

PROPERTY CASUALTY LOSSES AND LOSS EXPENSE RESERVES

The consolidated financial statements include the estimated liability for unpaid losses and loss expenses of the company’s property casualty insurance subsidiaries. The liabilities for losses and loss expenses are determined using case-basis evaluations and statistical projections for estimates of unreported claims and represent estimates of the ultimate net cost of all unpaid losses and loss expenses incurred through December 31 of each year. These estimates are subject to the effect of trends in future claim severity and frequency. These estimates are continually reviewed, and as experience develops and new information becomes known, the liability is adjusted as necessary. Adjustments due to prior year development are reflected in underwriting results in the year in which they are identified.

The company does not discount any of its property casualty liabilities for unpaid losses and loss expenses. A reconciliation of the beginning and ending balances of the company’s liability for losses and loss expenses for 2002, 2001 and 2000 is presented in Note 4 to the Consolidated Financial Statements, see Page 64 The reconciliation of beginning and ending liability balances shows recognition of approximately $45 million in redundant reserves during 2002 related to amounts held in the reserve as of December 31, 2001, for losses and loss expenses in 2001 and prior accident years. This redundancy was due to subsequent reserve estimates that confirm the conservative approach the company uses when establishing adequate reserves. Changes in calendar year 2002 to the 1992 through 1997 accident year reserves were due to adverse developments on umbrella, commercial multi-peril, product liability and workers compensation claims.

5

Table of Contents

The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and loss expenses. While anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severity of claims is caused by a number of factors that vary with the individual type of policy written. Average severity is based on historical trends adjusted for anticipated changes in underwriting standards, policy provisions and general economic trends. These trends are monitored based on actual development and are modified, if necessary.

The principal reason for differences between the property casualty liabilities reported in the accompanying consolidated financial statements (prepared in accordance with accounting principles generally accepted in the United States of America – GAAP) and those same liabilities reported in the annual statements (filed with state insurance departments in accordance with statutory accounting practices – SAP or statutory), relates to the reporting of reinsurance recoverables, which are recognized as receivables for GAAP and as an offset to reserves for SAP.

The table below shows the development of the estimated liability for losses and loss expenses for the years prior to 2002:

The table above presents the development of balance sheet liabilities for 1992 through 2002. The first line of data shows the estimated net liability for unpaid losses and loss expenses recorded at the balance sheet date for each of the indicated years. That liability represents the estimated amount of losses and loss expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the company. The upper portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims.

Net cumulative redundancy represents the aggregate change in the estimates over all prior years. For example, the 1992 liability has developed a $225 million redundancy over 10 years, which has been reflected in income over the 10 years. The effects on income in 2002, 2001 and 2000 of changes in estimates of the liabilities for losses and loss expenses for all accident years are shown in the reconciliation table above.

6

Table of Contents

The lower portion of the development table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. For example, as of December 31, 2002, the company had paid $794 million of the currently estimated $913 million of losses and loss expenses that have been incurred as of the end of 1992; thus an estimated $119 million of losses incurred as of the end of 1992 remain unpaid as of year-end 2002.

In evaluating this information, it should be noted that each amount includes the effects of all changes in amounts for prior periods. For example, the amount of deficiency or redundancy related to losses settled in 1997 but incurred in 1992 will be included in the cumulative deficiency or redundancy amount for 1992 and each subsequent year. This table does not present accident or policy year development data, which readers may be more accustomed to analyzing. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table.

LIFE INSURANCE OPERATIONS

STRATEGY

The life insurance segment contributed $87 million of Cincinnati Financial’s total revenues and a $12 million loss before income taxes in 2002.

Cincinnati Life’s strategic mission complements that of the overall company: to provide products and services that attract and retain high-quality independent agencies. The company primarily focuses on life products that will produce revenue growth through a steady stream of premiums rather than seeking to accumulate assets through the sale of single-premium-type policies.

Cincinnati Life seeks to round and protect accounts in the property casualty agency. At the same time, the life operation looks to increase diversification, revenues and profitability for both the agency and the company. This strategy enhances the already strong relationship built by the combination of the property casualty and life companies.

Cincinnati Life seeks to become the life insurance carrier of choice for the independent agencies that work with the property casualty operations by providing competitive products, underwriting, service and commissions. At year-end 2002, 90 percent of the company’s 950 independent agencies offered Cincinnati Life’s products to their policyholders. Term and worksite insurance products are well suited to cross serving by the company’s property casualty agency force. Agents find that offering worksite marketing to employees of their small commercial accounts provides a benefit to the employees at low cost to the employer. The life company also seeks to develop life business from other independent agencies in a manner that does not conflict with or compete with the property casualty agencies.

The life company offers a full line of whole, term and universal life products, fixed annuities, disability income and long-term care products. Over the past several years, it has worked to introduce a portfolio of new and enhanced products, primarily under the LifeHorizons name. For example, in 2002, the life company revised the rates for the LifeHorizons term series and introduced a new risk classification system that better matches risk profile and rate. Other recent launches in the LifeHorizons product series included a simplified term policy specifically for clients of the company’s property casualty agencies. Looking ahead, the life company plans to introduce two new, competitive LifeHorizons guaranteed products – whole life with a single-premium paid-up life rider and long-term guaranteed universal life – and roll out a non-cancelable rider for its disability income insurance product. In 2003, the life operation also will be devoting more internal resources to promotion of its new long-term care insurance product, with a structure targeted at the corporate market.

To augment the enhanced product line, the life operation has staffed a new field marketing position in the western United States to complement the efforts of the 25 life field marketing representatives in other regions of the country.

MARKETS AND COMPETITIVE POSITION

The life insurance industry was challenged in 2002 by a number of factors, including the higher-than-historic level of bond defaults, stock market declines that impacted variable annuities and competitive pressures that affected rates for term products. As a result, the industry saw an overall decline in statutory surplus, accelerated write-downs of deferred acquisition costs and lower income. In combination, these factors resulted in ratings downgrades for many life insurance companies during 2002.

7

Table of Contents

During the same period, many large, widely known life insurance companies have transitioned to investor-owned companies from mutual companies. Industry analysts believe these transitions could result in accelerated consolidation in the life insurance industry. The future presence of larger competitors could have a negative impact on smaller, stand-alone life insurance companies because of their potentially greater efficiency and their ability to be more aggressive in setting prices.

Cincinnati Life believes such pressures are mitigated for the company because of its association with the property casualty operations, its focus on the property casualty distribution system and its careful selection of independent agencies. Within this marketplace, Cincinnati Life is able to be competitive and attract its share of business from the company’s agencies, especially as other property casualty companies continue to exit the life business.

During the past three years, the company has invested in imaging and workflow technology. As a result, the efficiency of application processing has improved significantly. During this period, submitted applications have increased at an annualized rate of approximately 6 percent, while staff involved with the underwriting and policy-issue functions has declined 5 percent. This has been accomplished while maintaining the company’s service standards.

Cincinnati Life is a financially strong and stable life insurance company. During 2002, Cincinnati Life’s statutory surplus increased 7 percent to $408 million from $380 million at year-end 2001. Statutory surplus is one of the key measures of an insurance company’s financial stability. A.M. Best Co. and Standard & Poor’s Ratings Services maintained their ratings for Cincinnati Life in 2002 while Fitch Ratings initiated coverage with an AA (very strong) rating.

INVESTMENT OPERATIONS

STRATEGY

By applying a strategy that focuses on the compounding of cash flows over the long term, Cincinnati Financial’s investment operations have contributed to the company’s success in several ways:

•		Provided the primary source of profits. In 2002, the investment segment contributed $351 million of Cincinnati Financial’s total revenues and $315 million of income before income taxes.
•		Contributed to the company’s industry-leading financial strength and stability. At year-end 2002, the ratio of property casualty written premiums to statutory surplus was 1.12-to-1 compared with an estimated industry average of 1.30-to-1. In addition, the company has $2.9 billion in capital at the holding company level, primarily due to unrealized gains in the investment portfolio. This provides management with flexibility in capitalization policies for the subsidiaries, consequently improving the ability of the insurance companies to write additional premiums.
•		Driven long-term growth in book value. While market conditions resulted in a 7 percent decline in book value in 2002, over the past five years, book value has compounded at an average rate of 4.1 percent primarily due to lower unrealized gains in the equity portfolio.

While focused on long-term total return, the company maintains liquidity to meet both its immediate and long-range insurance obligations with the purchase and maintenance of medium-risk fixed-maturity and equity securities. The emphasis is on income-producing fixed-maturity and equity securities with the potential for long-term price appreciation. In recent years, the company’s investment strategy has taken into account the trend toward a flatter corporate yield curve and an overall decline in credit quality by purchasing higher-quality corporate bonds with shorter maturities as well as tax-exempt municipal bonds.

REGULATIONS

INSURANCE REGULATORY OVERSIGHT

The company’s subsidiaries primarily are engaged in the property casualty insurance business, and secondarily in the life insurance business, and it is therefore subject to regulation by the State of Ohio, the domiciliary state, as an insurance holding company. All states have enacted legislation that regulates insurance holding company systems such as the company and its insurance subsidiaries. This legislation generally provides that each insurance company in the system is required to register with the department of insurance of its state of domicile and furnish information concerning the operations of companies within the company which may materially affect the operations, management or financial condition of the insurers within the company. All transactions within a holding company affecting insurers must be fair and equitable. Notice to the insurance commissioner is required prior to the consummation of transactions affecting the ownership or control of an insurer and of

8

Table of Contents

certain material transactions between an insurer and any person or entity in its holding company and, in addition, certain of such transactions cannot be consummated without the commissioner’s prior approval.

The company’s insurance subsidiaries are subject to regulation and supervision in the states in which they do business. In general, such regulation is for the protection of policyholders rather than shareholders. The extent of such regulation varies, but generally has its source in statutes that delegate regulatory, supervisory and administrative powers to a department of insurance. For example, these statutes cover: the standards of solvency which must be met and maintained; the licensing of insurers and their agents; restrictions on insurance policy terminations; unfair trade practices; the nature of and limitations on investments; premium rates; deposits of securities for the benefit of policyholders; approval of policy forms; periodic examinations of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of companies or for other purposes; limitations on dividends to policyholders and shareholders; and, adequacy of provisions for unearned premiums, unpaid losses and loss expenses (both reported and unreported) and other liabilities, among other matters.

Most states have insurance laws requiring insurers to file rates, policy or coverage forms and other information with the state’s regulatory authority. Some states require such rates and/or forms to be approved prior to use while others permit an insurer to begin using rates and/or forms prior to approval by the insurance regulator. Several states exempt such filings and approvals for commercial risks of a certain size. In all states, the insurance regulator has the authority to disapprove a rate after it is filed. Rates proposed for life insurance generally become effective immediately upon filing with a state, even though the same state may require prior rate approval for other types of insurance. Generally, the objectives of the laws governing rate filings are that a rate must be adequate, not excessive and not unfairly discriminatory.

In all states, insurers licensed to transact certain classes of property casualty insurance are required to become members of a guaranty fund. In the event of the insolvency of a licensed insurer writing a class of insurance covered by the fund in the state, members are assessed to pay certain claims against the insolvent insurer. Generally, fund assessments are proportionately based on the members’ market share for the classes of insurance written by the insolvent insurer. In certain states, a portion of these assessments is recovered through premium tax offsets and policyholder surcharges. In 2002, assessments to the company’s insurance subsidiaries amounted to approximately $9 million.

State insurance regulation requires insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms that generally provide applicants with various basic insurance coverages when they are not available in voluntary markets. Such mechanisms are most commonly instituted for automobile and workers compensation insurance, but many states also mandate participation in FAIR Plans or Windstorm Plans, which provide basic property coverages. Participation is based upon the amount of a company’s voluntary market share in a particular state for the classes of insurance involved. Underwriting results related to these organizations, which tend to be adverse to the company, have been immaterial to the company or its results of operations.

For public reporting, insurance companies prepare financial statements in accordance with GAAP. However, certain data also must be calculated according to statutory accounting rules as defined in the National Association of Insurance Commissioners’ (NAIC) Accounting Practices and Procedures Manual, which may be, and has been, modified by various state insurance departments.

While not a substitute for any GAAP measure of performance, statutory data frequently is used by industry analysts and other recognized reporting sources to facilitate comparisons of the performance of insurance companies. When appropriate, the company makes use of statutory data to analyze trends or make comparisons to industry performance. Estimated industry data is taken from materials published by A.M. Best, a leading insurance industry analytical and rating organization, and presented on a statutory basis. Statutory data for the company is labeled as such; all other data is prepared based on GAAP.

NAIC adopted the Codification of Statutory Accounting Principles (Codification) in March 1998. Codification, which is intended to standardize regulatory accounting and reporting to state insurance regulators, became effective January 1, 2001. However, statutory accounting principles will continue to be established by individual state laws and permitted practices. Ohio required adoption of Codification, with certain modifications, for the preparation of statutory-basis financial statements effective January 1, 2001. Codification is now incorporated into the NAIC Accounting Practices and Procedures Manual. The effects of the company’s adoption of Codification effective January 1, 2001, are discussed below.

NAIC has risk-based capital (RBC) requirements for property casualty and life insurers which serve as an early warning tool for the NAIC and the state regulators to identify companies that may be undercapitalized and may merit further regulatory action.

9

Table of Contents

The formula prescribes a series of risk measurements to determine a minimum capital amount for an insurance company, based on the profile of the individual company. The ratio of a company’s actual policyholders’ surplus to its minimum capital requirement will determine whether any state regulatory action is required. At December 31, 2002, the company’s insurance subsidiary and each of its subsidiaries had more than sufficient capital to meet the RBC minimum requirements and had excess capacity to write additional premiums in relation to these requirements.

EFFECTS OF CODIFICATION OF STATUTORY ACCOUNTING PRACTICES

The effect of adopting Codification is reported as a cumulative-effect type change in accounting principle for the company’s insurance subsidiaries’ statutory financial statements as of January 1, 2001. This means that the January 1, 2001, balances of the company’s insurance subsidiaries’ statements of admitted assets, liabilities and capital and surplus have been adjusted to the amounts that would have been reported had Codification been in effect since the subsidiaries began operations. Accordingly, there were significant changes to the statutory surplus. For the property casualty companies, the changes were deferred tax assets of $314 million, consisting primarily of taxes on the timing of loss reserves and unearned premiums; deferred tax liabilities of $701 million, comprised mainly of taxes on net unrealized gains; guaranty fund assessments and premium tax liabilities of $11 million; and earned-but-unbilled premium receivables of $6 million, with a resulting decrease in surplus of $392 million. For the life company, the changes were deferred tax liabilities of $62 million, comprised mainly of taxes on net unrealized gains, and a corresponding decrease in surplus.

Additionally, prior to 2001, the company’s property casualty insurance subsidiaries recognized written premiums as they were billed throughout the policy period, which was a previously acceptable method. Beginning on January 1, 2001, these companies began recognizing written premiums on an annualized basis at the effective date of the policy as required by Codification. This method of recognizing written premiums had no effect on statutory income or surplus because earned premiums were unaffected. To account for unbooked premium related to policies with effective dates prior to January 1, 2001, the company recorded a written premium adjustment on January 1, 2001, of $402 million that appeared in the 2001 statutory financial reports submitted to insurance regulatory authorities. Since this adjustment affected written premiums only and was one-time in nature, it has been excluded from comparisons of written premiums between 2002, 2001 and 2000 in this report. Written premiums presented throughout this report for 2000 have been reclassified to conform with the 2001 presentation based on contractual period; information was not readily available to reclassify earlier years’ statutory data.

FEDERAL LEGISLATIVE AND REGULATORY INITIATIVES

Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Some of the current and proposed federal measures that may significantly affect the company’s business are discussed below.

The Terrorism Risk Insurance Act of 2002 (TRIA), signed into law on November 26, 2002, provides a federal backstop for losses related to the writing of the terrorism peril in property casualty insurance policies. Under the TRIA, the company had until February 24, 2003, to notify commercial policyholders about requirements of the law, let them know that the company was required to offer terrorism coverage and let them know how the coverage would be priced.

During December 2002 and January and February 2003, the company distributed more than 400,000 disclosure notices to in-force commercial policyholders. The notices explained the Act and notified them of their coverage. Except for a few select cases, full policy limit coverage has been provided for terrorism for policyholders. The terrorism rating plan, with rates that vary based on geographical and risk-type factors, will go into effect in the near future. The plan will charge all commercial policies a nominal terrorism premium to encourage them to accept coverage while minimizing the company’s administrative costs.

The Gramm-Leach-Bliley Act of 1999 (GLB) permits mergers that combine commercial banks, insurers and securities firms within one holding company group. The impact on the company of the ability of banks to affiliate with insurers is uncertain. Additionally, GLB imposed privacy protections of consumer financial information. GLB requires financial institutions, including the company, to protect the financial information of their policyholders and applicants by requiring them to develop and send a notice of the institution’s privacy practices at the inception of the relationship and annually thereafter. The institutions must also give customers the opportunity to opt out of some information disclosures. Most states have passed similar statutes or regulations, many of which include health as well as financial information in the protections. The company believes it has complied with all relevant statutes of GLB. Further protection of consumer health information is required by regulations promulgated under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). These regulations become effective April 2003 and require health care

10

Table of Contents

providers such as doctors and hospitals, as well as health and long-term care insurers and health care clearinghouses, to institute physical and procedural safeguards to protect the health records of patients and insureds. Examples of mandated safeguards include requirements that notices of the entity’s privacy practices be sent and that patients and insureds be given the right to access and request amendments to their records. Authorizations are required before a provider, insurer or clearinghouse can use health information for marketing and certain other purposes. Additionally, health plans are required to electronically transmit and receive standardized healthcare information.

While not directly affecting the company’s insurance business, the Sarbanes-Oxley Act of 2002 and regulations promulgated thereunder by the Security and Exchange Commission, apply to the company. Sarbanes-Oxley requires the Securities and Exchange Commission (SEC) to prescribe rules to enhance the accountability of public companies to investors and to enhance its own enforcement powers. Rules promulgated or proposed by the SEC to date relate to: independence of issuers’ audit committees; independence of outside audit firms; requirements of financial experts on audit committees; certification of certain financial reports by the chief executive officer and chief accounting officer of the issuer; requirement of a code of ethics; design and implementation by audit committees of a confidential and anonymous system to receive and handle reports of complaints regarding accounting and internal controls; additional disclosure requirements; and, enhanced civil and criminal penalties, among many others. Additionally, an issuer’s listing exchange may prescribe additional rules to apply to issuers listed on that exchange. The company is monitoring the developments of these rules and is making any necessary adjustments to ensure full compliance.

HISTORY OF CINCINNATI FINANCIAL CORPORATION

INCORPORATION

Cincinnati Financial was incorporated on September 20, 1968, under the laws of the State of Delaware. On April 4, 1992, the shareholders voted to adopt an Agreement of Merger by means of which the reincorporation of the corporation from the State of Delaware to the State of Ohio was accomplished.

SUBSIDIARY DESCRIPTIONS

The Cincinnati Insurance Company (CIC), incorporated in August 1950, is an insurance carrier presently licensed to conduct multiple line underwriting in accordance with Section 3941.02 of the Revised Code of Ohio. This includes the sale of fire, automobile, casualty, bonds and all related forms of property casualty insurance in 50 states, the District of Columbia, and Puerto Rico. CIC is not authorized to write any other forms of insurance. CIC is in a highly competitive industry and competes in varying degrees with a large number of stock and mutual companies.

The Cincinnati Casualty Company (CCC), (formerly the Queen City Indemnity Company), incorporated in 1972 under the laws of Ohio, is engaged in writing workers compensation as well as a limited personal lines book of business on a direct basis. The business of CIC and CCC is conducted separately and there are no plans for combining the business of these companies. CCC reinsures substantially all of its business to CIC.

The Cincinnati Indemnity Company (CID), incorporated in 1988 under the laws of Ohio, is engaged in writing workers compensation, some casualty lines and a small amount of non-standard personal auto coverage. The business of CIC and CID is conducted separately and there are no plans for combining the business of these companies. CID reinsures substantially all of its business to CIC.

The Cincinnati Life Insurance Company (CLIC) was incorporated in 1987 under the laws of Ohio for the purpose of acquiring the business of Inter-Ocean Insurance Company and The Life Insurance Company of Cincinnati. CLIC acquired The Life Insurance Company of Cincinnati and Inter-Ocean Insurance Company on February 1, 1988. CLIC is licensed for the sale of life insurance and accident and health insurance in 49 states and the District of Columbia.

CFC Investment Company (CFC-I), in the business of leasing or financing various items, principally automobiles, trucks, computer equipment, machine tools, construction equipment and office equipment, was incorporated in 1970.

CinFin Capital Management Company (CCM), which offers asset management services to corporations, insurance agencies and companies, institutions, pension plans and high net worth individuals, was incorporated in 1998.

11

Table of Contents

Cincinnati Financial is the parent and owns 100 percent of The Cincinnati Insurance Company, CFC Investment Company and CinFin Capital Management Company. CIC owns 100 percent of The Cincinnati Casualty Company, The Cincinnati Indemnity Company and The Cincinnati Life Insurance Company.

EMPLOYEES

As of December 31, 2002, Cincinnati Financial employed 3,511 associates.

AVAILABLE INFORMATION

The company’s principal executive offices are located at 6200 S. Gilmore Rd., Fairfield, Ohio 45014-5141, telephone (513) 870-2000. Its Web site address is www.cinfin.com. All of the company’s filings with the SEC are available free of charge through the Investors/Financial Reports page on this Web site, immediately upon filing.

ITEM 2. PROPERTIES

CFC owns its headquarters building located on 75 acres of land in Fairfield, Ohio. This building contains approximately 615,000 square feet. John J. & Thomas R. Schiff & Co. Inc., a related party, occupies approximately 6,750 square feet, and the balance of the building is occupied by CFC and its subsidiaries. The property, including land, is carried in the financial statements at $82 million as of December 31, 2002, and is classified as Property and equipment, net, for company use.

CFC-I owns the Fairfield Executive Center, which is located on the northwest corner of its headquarters property in Fairfield, Ohio. This is a four-story office building containing approximately 96,000 rentable square feet. CFC and its subsidiaries occupy approximately 45 percent of the building; unaffiliated tenants occupy approximately 15 percent of the building; approximately 28 percent of the building is available for future CFC usage; and, approximately 12 percent is available for rent. The property is carried in the financial statements at $8 million as of December 31, 2002, and is classified as Property and equipment, net, for company use.

CLIC owns a four-story office building in the Tri-County area of Cincinnati, Ohio containing approximately 102,000 rentable square feet. At the present time, 100 percent of the building is currently being leased by an unaffiliated tenant. This property is carried in the financial statements at $3 million as of December 31, 2002, and is classified as Other invested assets.

ITEM 3. LEGAL PROCEEDINGS

The Cincinnati Insurance Company is a defendant in Rochlin et al v. The Cincinnati Insurance Company, a purported class action lawsuit filed in December 2000 in the U.S. District Court for Southern Indiana on behalf of certain female employees in three departments of the company alleging employment-related gender discrimination in promotions and pay. The complaint seeks unspecified monetary damages and injunctive relief. In March 2002, the District Court certified a class but in May 2002 agreed to reconsider its class certification decision. The company denies the allegations of the suit and is vigorously defending this action.

The company is involved in no material litigation other than routine litigation incident to the nature of its insurance business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to security holders during the fourth quarter of 2002.

12

Table of Contents

PART II

ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Cincinnati Financial Corporation had 11,486 direct shareholders of record as of December 31, 2002. Registered owners hold 30 percent of Cincinnati Financial Corporation’s outstanding shares. Many of the company’s independent agent representatives and most of the 3,511 associates of its subsidiaries own the company’s common stock. Common shares are traded under the symbol CINF on the Nasdaq National Market List.

The company’s ability to pay cash dividends may depend on the ability of its subsidiaries to pay dividends to CFC. See Note 8 to the Consolidated Financial Statement for discussion of dividend restrictions at the insurance company subsidiaries.

13

Table of Contents

ITEM 6. SELECTED FINANCIAL DATA

The selected financial information above allows for a more complete analysis of results of operations and should not be considered a substitute for any GAAP measure of performance.

As more fully discussed in the company’s Form 10-K for 2002, 2001 statutory data for the property casualty subsidiaries reflects the company’s adoption of Codification effective January 1, 2001. Codification of Statutory Accounting Principles required recognition of net written premiums on the basis of the policy contract term rather than the policy billing period. For comparison purposes, a $402 million one-time net written premium adjustment required to conform with Codification was excluded from 2001 data, and 2000 statutory data was reclassified; information was not readily available to reclassify earlier years’ statutory data presented above.

14

Table of Contents