CINCINNATI FINANCIAL CORPORATION

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 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). þ Yes o No

The aggregate market value of voting stock held by nonaffiliates of the Registrant was $5,031,030,747 as of June 30, 2003.

As of February 20, 2004, there were 160,269,974 shares of common stock outstanding.

Portions of the definitive Proxy Statement for Cincinnati Financial Corporation’s Annual Meeting of Shareholders to be held on

Cincinnati Financial Corporation (CFC or the company) is an Ohio corporation. Through its subsidiaries, Cincinnati Financial has been conducting insurance operations since 1950, marketing commercial, personal and life insurance. The company reports results in four segments:

•		commercial lines property casualty insurance

•		personal lines property casualty insurance

•		life insurance

•		investments

The commercial lines and personal lines property casualty insurance segments combined to generate more than 83 percent of the company’s revenue in 2003. Segment information for revenues, income before income taxes, and identifiable assets is included in Note 17 to the Consolidated Financial Statements, Page 72. The company’s segments are defined based on the financial information used internally to evaluate performance and determine the allocation of resources.

CFC owns 100 percent of its three subsidiaries: The Cincinnati Insurance Company, CFC Investment Company and CinFin Capital Management Company. The Cincinnati Insurance Company owns 100 percent of its three subsidiaries: The Cincinnati Casualty Company, The Cincinnati Indemnity Company and The Cincinnati Life Insurance Company.

The Cincinnati Insurance Company, founded in 1950, leads the property casualty group. The Cincinnati Casualty Company and The Cincinnati Indemnity Company round out the property casualty insurance group, providing flexibility in pricing and underwriting while ceding substantially all of their business to The Cincinnati Insurance Company. The Cincinnati Life Insurance Company primarily markets life insurance and annuities. CFC Investment Company complements the insurance subsidiaries with leasing and financing services. CinFin Capital Management Company provides asset management services to institutions, corporations and high net worth individuals.

CFC’s Headquarters is located in Fairfield, Ohio. At December 31, 2003, the company had 3,720 associates. The company’s filings with the Securities and Exchange Commission are available, free of charge, on the company’s Web site, www.cinfin.com, as soon as possible after they have been filed with the SEC.

The company markets its commercial and personal insurance policies in 31 states through a select group of 963 independent insurance agencies. The company is committed to the independent agent distribution system, recognizing that locally based independent agencies have relationships in their communities that lead to profitable business. Field marketing and other associates provide service and accountability to the agencies, living in the communities they serve and working from offices in their homes, providing 24/7 availability. The company differentiates itself by providing exceptional claims service, through locally based field claims associates serving the needs of agents and policyholders, and by offering competitive products, rates and compensation.

Agencies chosen by the company demonstrate the same commitments that distinguish the company in the marketplace: doing business person to person; offering broad, value-added services; maintaining sound balance sheets and managing their agencies professionally. A Best Practices Study by Reagan & Associates reported that in 2002 just 16 percent of the 39,200 agencies industrywide generated more than $1.25 million in total revenues compared with 40 percent of the agencies representing the company.

In 2003, agencies representing the company averaged approximately $2.9 million in agency written premiums for the company. In 2002, the average was approximately $2.6 million, or 18 percent of agency total volume, up from $2.3 million in 2001. No single agency accounted for more than 1.2 percent of the company’s total agency written premiums.

In 2003, nine states with at least $100 million in agency earned premium generated approximately 70 percent of total property casualty premiums. In these states, agency earned premiums grew 11.1 percent, or $191 million. Ohio, where the company has 187 independent agencies, accounted for 24.6 percent of total earned premiums. In the remaining 22 states, agency earned premiums grew 17.8 percent, or $125 million, in 2003.

Over the past several years, the company has created smaller marketing territories to lower the number of independent agencies for which each local field marketing representative is responsible. Smaller territories allow marketing representatives to devote more time to field underwriting and service as well as to ask for and earn new business. The smaller territories also give marketing representatives more time to research and appoint new agencies. At year-end 2003, the company had 87 property casualty field territories, up from 74 at the end of 2000. During 2004, the company plans to split and staff another five to six territories. The company believes that it can continue to grow by taking actions intended to maintain or increase its penetration within its agencies and through the appointment of additional agencies. The company does not expect to enter any new states in the foreseeable future.

•		Field marketing staff who provide local decision-making authority. They are responsible for selecting new independent agencies as well as underwriting and pricing new commercial business. Because of their local presence, they are aware of local market conditions and are familiar with the risks for which they make these decisions. They round out their efforts by coordinating field teams of specialized company representatives and promoting all of the company’s products within the agencies they serve.

•		Risk-specific decisions made about both new business and renewals. On a case-by-case basis, the company selects risks it can cover on reasonable terms and at adequate prices rather than underwriting solely by geographic location or business class. For new commercial lines business, this case-by-case underwriting is coordinated by the local field marketing representatives and relies on their knowledge and agents’ knowledge of the people and businesses in their communities. Policy renewals are coordinated by headquarters underwriters who are assigned to specific agencies and consult with local field staff, as needed. The company seeks to be a consistent, predictable and reasonable carrier that agencies can rely on to serve their communities.

•		Commitment to products and services needed to serve agency clients — the policyholders. For example, the company’s commercial lines business offers three-year policy terms for some insurance coverages, a key competitive strategy. Although the company offers three-year terms, many policies are adjustable at anniversary for the subsequent annual period, and may be cancelled at any time at the discretion of the policyholder. Additionally, the company’s products are structured to allow many coverages to be combined in a single package with a single expiration date. The package approach brings policyholders convenience, discounts and a reduced risk of coverage gaps or disputes. At the same time, it increases account retention and saves time and expense, eliminating the need to enter duplicate information and process multiple documents.

•		Superior claims service. Agencies generally have authority to pay first-party claims immediately up to $2,500. Locally based claims representatives are assigned to specific agencies. 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.

•		Improved service to and communication with agencies through an expanding portfolio of software. In 2003, WinCPP™, an online system for commercial policy rating, expanded to 10 states; CMS™, a new claims management system, rolled out to all headquarters and field claims staff; Diamond, an online personal lines processing system already implemented in Kansas, moved closer to deployment in larger states; and development is underway for a new Web-based commercial lines processing system. In all cases, the objective is to enhance the level of personal service that the company delivers by automating office functions.

•		Programs to support agency growth. These include education programs for agents and staff and financing for buildings and equipment. In 2003, the insurance subsidiaries augmented ongoing training programs with a number of special events, including seminars held around the country to encourage cross-serving our policyholders by expanding awareness of the company’s broad portfolio of 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.

Insurance companies are rated on their financial strength and claims-paying ability, providing consumers with comparative information. Among other factors, independent ratings organizations focus on items such as results of operations, capital resources and minimum policyholders’ surplus requirements as well as qualitative analysis. While management believes its financial position will continue to be strong, the independent rating agencies could change their criteria or the company’s ratings based on their ongoing reviews.

•		In November 2002, A.M. Best Co. affirmed its top A++ (superior) financial strength ratings and stable outlook for the company’s property casualty group and subsidiaries. A.M. Best cited the company’s superior capitalization, sustained profitability and benefits from its long-standing independent agency strategy. A.M. Best said these strengths are somewhat offset by the company’s common stock leverage, continued stockholder dividends and robust reserves with redundancies below historic levels. The Cincinnati Insurance Companies are one of only 21 insurance groups, out of 1,087 groups reviewed by the agency and given a rating, to receive an A++ (superior) rating from Best. Each of the company’s property casualty subsidiaries also is separately rated A++ (superior).

•		In May 2002, Fitch Ratings announced an initial rating of AA (very strong) with a stable outlook based on the company’s strong financial condition and excellent financial flexibility. Fitch commented that the property casualty operation is defined by strong profitability, which is derived in part by above-average premium growth relative to its peers and strong capitalization at the operating level. The rating also considers the company’s significant investment concentration in common stocks.

•		In November 2002, Moody’s Investors Service reaffirmed its Aa3 ratings of the property casualty subsidiaries, noting key factors including the company’s sound balance sheet, conservative leverage profile and sizable capital base. Moody’s noted that the company’s pricing and underwriting initiatives should continue to offset large loss severity trends, which are closely monitored by the company. Other challenges include the risks inherent in the company’s investment strategy, which is concentrated in a limited number of equities, and continued development to replace technology systems that lag companies of comparable size. Following the company’s announcement of year-end 2003 results, Moody’s noted that the company’s sound capitalization and earnings improvements continue to support their ratings and stable outlook.

•		In November 2003, Standard & Poor’s Ratings Services re-affirmed its AA- (very strong) ratings and changed its outlook to negative. The AA- rating applies to each insurance subsidiary based on the company’s strong, competitive business position, high business persistency, strong capitalization and extremely strong financial flexibility. Standard & Poor’s noted these factors are countered by the company’s aggressive investment strategies and relatively slow response to significant market changes. In changing its outlook, Standard & Poor’s expressed concerns about the slow recovery of the company’s homeowner business line and the company’s approach to equity investing.

While the potential for volatility exists due to the company’s catastrophe exposures, investment philosophy and bias towards incremental change, the ratings agencies consistently have asserted that the company has built appropriate financial strength and flexibility to manage that volatility and seek higher long-term returns for shareholders. Management remains committed to strategies that emphasize long-term stability instead of quickly reacting to changes in market conditions to obtain short-term benefits.

Consistently high rankings in agent and consumer satisfaction surveys also demonstrate the company’s market position. Most recently, in a November 2003 survey of the Professional Insurance Agents of Ohio, the company ranked among the highest in contact time and fairness of claims handling, in approachability and confidence of company management and in field marketing support. Cincinnati was named the agents’ top-choice carrier for commercial auto business in a June 2003 survey by Crittenden’s Property/Casualty Ratings™, which asked insurance agents to compare insurers’ accessibility and timely response, premium pricing, efficiency and fairness of claims payments.

In a 2003 study, Ward Group again named Cincinnati Insurance to its annual lists of the top 50 property casualty and life/health insurers in America. The Ward’s 50 names companies that over the past five years have excelled in balancing performance with policyholder safety. Cincinnati is one of only eight property casualty insurers that have qualified for the list in each of its 13 years.

When claims are made by or against policyholders, any amounts that the company’s property casualty operations pay or expect to pay to the claimant are termed losses. The costs of investigating, resolving and processing these claims are termed loss expenses. The consolidated financial statements include property casualty loss and loss expense reserves that estimate the costs of paying claims incurred through December 31 of each year. The reserves include estimates for claims that have been reported and estimates for claims that have been incurred but not yet reported, along with estimates of loss expenses associated with processing and settling those claims. The various estimates are developed based on individual claim evaluations and statistical projections. Loss reserves are reduced by the estimated amount of salvage and subrogation.

While the company believes that reported reserves are sufficient for all unpaid loss and loss expense obligations, the estimation process involves uncertainty by its very nature. The estimates are continually reviewed, and as facts regarding individual claims develop and new information becomes known, the reserve is adjusted as necessary. Adjustments due to loss development for prior years are reflected in the calendar year in which they are identified. Item 7, Property Casualty Loss and Loss Expense Reserves, Page 18, includes more information about the process used to analyze potential losses and establish reserves.

The anticipated effect of inflation is implicitly considered when estimating reserves for loss 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. The company does not discount any of its property casualty loss and loss expense reserves.

A reconciliation of the beginning and ending balances of the company’s reserve for losses and loss expenses at December 31, 2003, 2002 and 2001 is presented in Note 4 to the Consolidated Financial Statements, Page 64. The reconciliation of the December 31, 2002 beginning reserve balance and net incurred losses one year later recognizes approximately $80 million in redundant reserves. The redundancy was partially due to the recovery of $38 million Ohio uninsured motorist/underinsured motorist reserves as discussed in Item 7, Property Casualty Loss and Loss Expense Reserves, Page 25.

Differences between the property casualty reserves reported in the accompanying consolidated balance sheets (prepared in accordance with accounting principles generally accepted in the United States of America — GAAP) and those same reserves reported in the annual statements (filed with state insurance departments in accordance with statutory accounting practices — SAP), relate principally to the reporting of reinsurance recoverables, which are recognized as receivables for GAAP and as an offset to reserves for SAP.

The table above shows the development of the estimated reserves for loss and loss expenses for the years prior to 2003:

•		Section A shows the total property casualty loss and loss expense reserves recorded at the balance sheet date for each of the indicated calendar years on a gross and net basis. Those reserves represent the estimated amount of loss and loss expenses for claims arising in all prior years that are unpaid at the balance sheet date, including losses that have been incurred but not yet reported to the company.

•		Section B shows the cumulative net amount paid with respect to the previously recorded reserve as of the end of each succeeding year. For example, as of December 31, 2003, the company had paid $880 million of loss and loss expenses that have been incurred after 1993; thus an estimated $135 million of losses incurred as of the end of 1993 remain unpaid as of year-end 2003.

•		Section C shows the re-estimated amount of the previously reported reserve 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.

•		Section D, cumulative net redundancy, represents the aggregate change in the estimates for all years subsequent to the year the reserves were initially established. For example, reserves established at December 31, 1993 had developed a $278 million redundancy over 10 years, net of reinsurance, which has been reflected in income over the 10 years. The effects on income in 2003, 2002 and 2001 of changes in estimates of the reserves for loss and loss expenses for all accident years are shown in the reconciliation above.

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 2003 but incurred in 1997 will be included in the cumulative deficiency or redundancy amount for 1998 and each subsequent year. In addition this table presents calendar year data, not accident or policy year development data, which readers may be more accustomed to analyzing. Conditions and trends that have affected development of the reserve 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 data.

The commercial lines property casualty insurance segment contributed $1.908 billion in net earned premiums to the company’s total revenues and $167 million of income before income taxes in 2003. The company markets its full complement of commercial products in all 963 independent agencies and all 31 states in which it markets property casualty insurance. The company’s emphasis is on providing products that agents can market to small- to mid-size businesses in their communities.

Commercial lines net earned premiums grew 10.8 percent in 2003 and 18.6 percent in 2002. In 2003, Illinois, Indiana, Michigan, Ohio and Pennsylvania, each with at least $100 million in agency earned premium, generated 50.8 percent of commercial lines premiums compared with 51.7 percent in the prior year. In these states, agency earned premiums grew 12.0 percent, or $108 million, in 2003 compared with 16.1 percent, or $125 million, in 2002. Ohio, where the company has 187 independent agencies, accounted for 19.4 percent of commercial lines earned premiums, versus 19.8 percent in 2002. In the remaining 26 states, agency earned premiums grew 16.3 percent and 9.0 percent, or $137 million and $133 million, in 2003 and 2002, respectively.

Four business lines — commercial multi-peril, workers compensation, commercial automobile and other liability — account for approximately 90 percent of commercial lines earned premiums.

•		Commercial multi-peril provides a combination of property and liability coverage, typically for small- to mid-size businesses. Property insurance covers damages such as those caused by fire, wind, hail, water, theft, vandalism and business interruption resulting from a covered loss. Liability coverage insures businesses against third-party liability from accidents occurring on their premises or arising out of their operations, such as injuries sustained from products sold.

•		Workers compensation covers employers for specified benefits payable under state or federal law for workplace injuries to employees.

•		Commercial auto covers businesses against losses incurred from personal medical payments, uninsured motorists, bodily injury to third parties, property damage to an insured’s vehicle and property damage to other vehicles and property resulting from the ownership, maintenance or use of automobiles and trucks in a business.

•		Other liability includes commercial umbrella, commercial general liability and most executive risk policies, which cover liability exposures including bodily injury, directors and officers and employment practices, property damage arising from products sold and general business operations.

The remainder of commercial lines earned premiums was derived from a variety of other types of insurance products the company offers to commercial customers, including fiduciary and surety bonds and machinery and equipment policies.

The personal lines property casualty insurance segment contributed $745 million in net earned premiums to the company’s total revenues and a $27 million loss before income taxes in 2003. The company markets its full complement of personal lines products in 22 of the 31 states in which it markets commercial lines insurance and selected products within certain agencies in the nine remaining states.

Personal lines net earned premiums grew 11.2 percent in 2003 and 8.2 percent in 2002. In 2003, Alabama, Georgia, Illinois, Indiana, Michigan and Ohio, each with $35 million or more in agency earned premium, generated 72.8 percent of personal lines premiums, compared with 74.1 percent in 2002. In these states, agency earned premiums grew 8.3 percent, or $42 million, in 2003, versus 7.0 percent, or $33 million, in the prior year. Ohio, where the company has 182 independent agencies writing personal lines products, accounted for 38.2 percent of 2003 personal lines agency earned premiums compared with 39.5 percent in 2002. In the remaining 25 states, agency earned premiums grew 15.9 percent and 12.0 percent, or $28 million and $19 million, in 2003 and 2002, respectively.

The company markets homeowners and personal automobile insurance products through 639 of the 963 independent agencies that represent The Cincinnati Insurance Companies. The 324 agencies that do not sell these personal lines products either are located in states in which the company does not actively market these products or the company has determined, in conjunction with agency management, that the company’s personal lines products are not appropriate for their agencies at this time. Personal automobile accounted for 57 percent and homeowners accounted for 32 percent of personal lines earned premium in 2003.

•		Personal automobile covers liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicle, physical damage to an insured’s own vehicle from collision and various other perils, and uninsured motorists. In addition, many states require policies to provide first-party personal injury protection, frequently referred to as no-fault coverage.

•		Homeowners covers losses to dwellings and contents from a wide variety of perils, as well as liability arising out of personal activities both on and off the covered premises. The company also offers coverage for condominium unit owners and renters.

The remainder of personal lines earned premium was derived from a variety of other types of insurance products the company offers to individuals such as dwelling fire, inland marine, umbrella liability and watercraft coverages.

The life insurance segment contributed $97 million of the company’s total revenues and a $3 million loss before income taxes in 2003. The life insurance segment reported a loss because its investment income is included in investment segment results. See Item 7, Life Insurance, Page 36, for additional information regarding life insurance segment profitability.

The Cincinnati Life Insurance Company’s 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 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 and to improve account persistency. 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, responsive underwriting, high quality service and reasonable commissions. At year-end 2003, approximately 86 percent of the company’s 963 property casualty agencies offered Cincinnati Life’s products to their policyholders. The life company also seeks to develop life business from other independent life insurance agencies in a manner that does not conflict with or compete with the property casualty agencies.

Four lines of business -term insurance, whole life insurance, universal life insurance and worksite products — account for approximately 85 percent of the life insurance segment’s revenues:

•		Term insurance — policies under which the benefit is payable only if the insured dies during a specified period of time or term; no benefit is payable if the insured survives to the end of the term. While premiums are fixed, they must be paid as scheduled. The proposed insured is evaluated using normal underwriting standards.

•		Whole life insurance — policies that provide life insurance for the entire lifetime of the insured; the death benefit is guaranteed never to decrease and premiums are guaranteed never to increase. While premiums are fixed, they must be paid as scheduled. The proposed insured is evaluated using normal underwriting standards.

•		Universal life insurance — long-duration life insurance policies. Contract assessments are neither fixed nor guaranteed; however, the contract does specify a minimum interest crediting rate and a maximum cost of insurance charge and expense charge. Premiums are not fixed and may be varied by the contract owner. The proposed insured is evaluated using normal underwriting standards.

•		Worksite products — term insurance, whole life insurance and universal life insurance offered to employees through their employer. Premiums are collected by the employer using payroll deduction. Polices are issued using a simplified underwriting approach and for smaller face amounts than similar regularly underwritten policies. Term and worksite insurance products provide the company’s property casualty agency force with excellent cross serving opportunities for both commercial and personal accounts. 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.

•		Disability income insurance — provides monthly benefits to offset the insured’s loss of income when he or she is unable to work due to accident or illness.

•		Deferred annuities — provides regular income payments that commence after the end of a specified period or when the annuitant attains a specified age. During the deferral period, any payments made under the contract accumulate at an annually determined crediting rate declared by the company but not less than a contract-specified guaranteed minimum rate of interest of 3 percent to 5 percent. A deferred annuity may be surrendered during the deferral period for a cash value equal to the accumulated payments plus interest less a surrender charge.

•		Immediate annuities — provides some combination of regular income and lump sum payments in exchange for a single premium. Most of the immediate annuities written by the life insurance segment are purchased by the company’s property casualty companies to settle a casualty claim.

In 2003, the life insurance segment stopped offering long-term care insurance to concentrate on its traditional life insurance products.

Cincinnati Life is a financially strong and stable life insurance company. Cincinnati Life’s statutory adjusted risk-based surplus increased 5.5 percent to $443 million at December 31, 2003, from $420 million a year earlier. Liabilities as a percentage of adjusted statutory surplus, a key measure of life insurance company capital strength, was 39.2 percent at year-end 2003 compared with an estimated industry average of 10.2 percent. A.M. Best — A+ (Superior), Fitch — AA (Very Strong) and Standard & Poor’s - AA- (Very Strong, negative outlook) maintained their ratings for Cincinnati Life in 2003.

The investment segment contributed $424 million of the company’s total revenues in 2003, primarily from net investment income and realized investment gains and losses from investment portfolios managed for the holding company and each of the operating subsidiaries. It contributed $381 million of income before income taxes, or 88.5 percent of total income before income taxes, primarily investment segment revenues less interest credited to contract holders (interest assumed in life insurance policy reserve calculations).

While the company seeks to generate an underwriting profit in its property casualty and life segments, it is the investment segment that historically has provided the primary source of profits and contributed to the company’s financial strength, driving long-term growth in shareholders’ equity and book value.

Under the direction of the investment committee of the board of directors, the company’s analysts and portfolio managers seek to balance current investment income opportunities and long-term appreciation so that current cash flows can be compounded to achieve above-average long-term total return.

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. In recent years, the company 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 and U.S. agency paper. The company’s focus on long-term total return may result in variability in the level of realized and unrealized investment gains or losses from one period to the next.

Over the long term, unrealized gains in the investment portfolio (accumulated other comprehensive income) from appreciation and investment of cash flows, has led to year-end 2003 shareholders’ equity of $2.917 billion at the holding company level. This gives management flexibility to support the capitalization policies for the subsidiaries, improving the ability of the insurance companies to write additional premiums. For the property casualty operations, the long-term appreciation has contributed to shareholders’ equity of $2.360 billion at year-end 2003 and a ratio of property casualty written premiums to statutory surplus of 1.0-to-1 compared with an estimated industry average of 1.3-to-1.

In preparing the Consolidated Financial Statements, convertible securities are included in Fixed-maturities or Equity Securities, based on the characteristics of the underlying security (bond or preferred stock). When monitoring and evaluating investment operations results, the company broadly categorizes investments as Fixed-income Securities, which includes investment-grade corporate bonds, high-yield corporate bonds and tax-exempt municipal bonds, and Equity and Equity-linked Securities, which includes common stocks and all convertible securities.

At year-end 2003 and 2002, these five classes of assets accounted for the following:

By maintaining a well diversified, fixed-income portfolio, the company attempts to reduce overall credit risk. With the exception of U.S. agency paper, no individual fixed-income issuer’s securities account for more than 2 percent of the fixed-income portfolio. For the insurance companies’ portfolios, strong emphasis is placed on purchasing current income-producing securities.

•		Investment-grade corporate bonds have a Moody’s rating at or above Baa 3 or a Standard & Poor’s rating at or above BBB-. The company seeks to balance current income with potential changes in market value as well as changes in credit risk when determining whether or not to hold these securities to maturity.

•		High-yield corporate bonds have a Moody’s rating below Baa 3 or a Standard & Poor’s rating below BBB- or are non-rated. The company’s strong capital position provides the flexibility to invest in these securities in addition to investment-grade corporate bonds. While such investments tend to have higher yields, they are inherently more risky, as their ratings indicate with a higher potential for default by the issuer. Historically, they have contributed positively to investment income and, in general, are less sensitive to interest rate fluctuations. Similar to investment-grade bonds, the company seeks to balance current income with potential changes in market value as well as changes in credit risk when determining whether or not to hold these securities to maturity. This security class is closely monitored for selective buying opportunities, but more importantly for changes in the market that may negatively impact existing holdings. See Item 7(a), Potential Impairments, Page 49, for further discussion.

•		Tax-exempt municipal bonds are exempt from federal taxes, a feature the company continues to find attractive. The company invests in a blend of tax-exempt and taxable fixed-maturity securities, however, because of alternative minimum tax effects. The company traditionally has purchased municipal bonds focusing on essential services, such as schools, sewer, water or others. While no single municipal issuer accounts for more than 2 percent of the tax-exempt municipal bond portfolio, concentrations within individual states can be high. Holdings in five states — Indiana, Illinois, Missouri, Ohio and Texas — account for approximately 67 percent of the municipal bond portfolio.

The company’s equity and equity-linked portfolio includes a core group of common stocks that the company can monitor closely to gain an in-depth understanding of their organization and industry. It also includes a broader group of smaller positions in common stocks and convertible securities, creating trading flexibility and other risk management advantages. The company’s portfolio of equity investments had an average dividend yield-to-cost of 9.1 percent at December 31, 2003.

•		Common stocks — Approximately 56 percent of the common stock (measured by market value) is held at the parent company level. Common stock investments generally are securities with annual dividend yields of 1.5 percent to 3.0 percent and histories of dividend increases. Other criteria include increasing sales and earnings, proven management and a favorable outlook.

		When investing in common stock management seeks to identify companies in which it can accumulate more than 5 percent of their common stock. There also is a core group of 15 common stocks in which the company holds a market value of at least $100 million, including five of the six investments where the company holds more than 5 percent of the common stock. While this emphasis on a small group of equities and long-term investment horizon has resulted in significant concentrations within the portfolio, the company has followed this buy-and-hold strategy for many years, resulting in significant accumulated unrealized appreciation within the equity portfolio. At year-end 2003, the largest industry concentrations within these large common equity holdings were the financials sector at 71.7 percent of total market value and the healthcare sector at 7.8 percent of total market value.

•

Convertible securities — For more than 30 years, the company has invested in convertible bonds and convertible preferred stocks. These securities are the primary trading vehicle in the portfolio. Management believes the conversion features enhance the overall value of the security and does not believe that investments in convertible securities pose any significant risk to the company or its portfolio due to their characteristics. As a class, convertible securities tend to be less sensitive to interest rate changes than fixed-rate securities and less sensitive to market conditions than common stocks.

Additional information regarding the composition of investments is included in Note 2 to the Consolidated Financial Statements, Page 62.

The company’s subsidiaries primarily engage in the property casualty insurance business, and secondarily in the life insurance business, both subject to regulation as an insurance holding company system by the State of Ohio, the domiciliary state of the company and its insurance subsidiaries. Such regulation requires that each insurance company in the system register with the department of insurance of its state of domicile and annually furnish financial and other information about the operations of the individual companies within the holding company system. 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 prior to certain material transactions between an insurer and any person or entity in its holding company. In addition, some of those transactions cannot be consummated without the commissioner’s prior approval.

The dividend-paying capacity of the company’s insurance subsidiary is regulated by the laws of Ohio, the domiciliary state. The insurance subsidiary must provide a 10-day advance informational notice to the Ohio insurance department prior to payment of any dividend or distribution to its shareholders. Ordinary dividends must be paid from earned surplus, which is the amount of unassigned funds set forth in the insurance subsidiary’s most recent statutory financial statement.

Prior approval by the Ohio Department of Insurance is required before the payment of an extraordinary dividend to shareholders. Declaration of any extraordinary dividend or distribution is conditional, conferring no rights upon shareholders until 30 days after the superintendent of insurance receives notice of the declaration and either has not disapproved it or has affirmatively approved it. Extraordinary dividends or distributions include cash or other property whose fair market value, together with that of other dividends or distributions made within the preceding 12 months, exceeds the greater of the net income for the preceding calendar year or 10 percent of the policyholders’ surplus as of the last day of the preceding calendar year. Any dividend or distribution paid from other than earned surplus also is considered an extraordinary dividend or extraordinary distribution.

See Note 8 to the Consolidated Financial Statements, Page 65, for information concerning dividends paid by its insurance subsidiary in the year 2003.

The company’s insurance subsidiaries are subject to licensing and supervision by departments of insurance in the states in which they do business. The nature and extent of such regulations vary, but generally have their source in statutes that delegate regulatory, supervisory and administrative powers to state insurance departments. Such regulations, supervision and administration of the insurance subsidiaries include, among others, the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature and limitations on investments; deposits of securities for the benefit of policyholders; regulation of policy forms and premium rates; periodic examination of the affairs of insurance companies; annual and other reports required to be filed on the financial condition of insurers or for other purposes; requirements regarding reserves for unearned premiums, losses and other matters; the nature of and limitations on dividends to policyholders and shareholders; the nature and extent of required participation in insurance guaranty funds; and the involuntary assumption of hard-to-place or high-risk insurance business, primarily workers compensation insurance.

Loss ratio trends in property casualty insurance operations may be improved by actions such as changing the amounts or kinds of coverages provided by policies, providing loss prevention and risk management services, increasing premium rates, purchasing reinsurance or combining these and other actions. The ability of the insurance subsidiaries to respond to emerging adverse underwriting trends may be delayed, from time to time, by the effects of laws that require prior approval by insurance regulatory authorities of changes in policy forms and premium rates or that restrict the ability to cancel or non-renew insurance policies.

Each state has insurance guaranty association laws under which the associations may assess life and property casualty insurers doing business in the state for certain obligations of insolvent insurance companies to policyholders and claimants. Typically, states assess each member insurer in an amount related to the insurer’s proportionate share of business written by all member insurers in the state. Assessments to the company’s insurance subsidiaries were $2 million and $9 million, net of refunds, in 2003 and 2002, respectively. The company cannot predict the amount and timing of any future assessments on its insurance subsidiaries under these laws.

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.

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 uses statutory data to analyze trends or make comparisons to industry performance. Estimated industry data is referenced from materials presented on a statutory basis by A.M. Best, a leading insurance industry analytical and financial strength rating organization. Statutory data for the company is labeled as such; all other company data is presented on a GAAP basis.

The NAIC adopted the Codification of Statutory Accounting Principles (Codification) in March 1998. Codification, which standardizes regulatory accounting and reporting to state insurance regulators, became effective January 1, 2001. Codification now is 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.

The effect of adopting Codification is reported as a cumulative-effect type change in accounting principles for the company’s insurance subsidiaries’ statutory financial statements as of January 1, 2001. This means that the January 1, 2001, balances of the insurance subsidiaries’ statements of admitted assets, liabilities, capital and surplus were 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 on January 1, 2001. For the property casualty companies, a net decrease in surplus of $392 million resulted from: 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. For the life company, deferred tax liabilities of $62 million, comprised mainly of taxes on net unrealized gains, resulted in a corresponding decrease in surplus on January 1, 2001.

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, the subsidiaries 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 earned premiums. To account for unbooked premiums 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 statutory written premiums between 2003, 2002 and 2001 in this report. Written premiums for 2000 presented in this report have been reclassified to conform with the 2001 presentation based on policy contract periods; information was not readily available to reclassify earlier years’ statutory data.

State insurance laws require that insurance subsidiaries analyze the adequacy of reserves annually. The company’s outside actuaries must submit an opinion that reserves are adequate for policy claims-paying obligations and related expenses.

The NAIC’s risk-based capital (RBC) requirements for property casualty and life insurers 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. The ratio of a company’s actual policyholders’ surplus to its minimum capital requirement determines whether any state regulatory action is required. At December 31, 2003, the company’s lead insurance subsidiary and each of its subsidiaries had more than sufficient capital to meet the RBC minimum requirements and had excess capacity beyond these requirements to write additional premiums.

Although the federal government and its regulatory agencies generally do not directly regulate the business of insurance, federal initiatives often have an impact. 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 temporary federal backstop for losses related to the writing of the terrorism peril in property casualty insurance policies. TRIA currently is scheduled to expire December 31, 2005. Under regulations promulgated under this statute, insurers are required to offer terrorism coverage for certain lines of property casualty insurance, including property, commercial multi-peril, fire, ocean marine, inland marine, liability, commercial auto, aircraft, surety and workers compensation. In the event of a terrorism event defined by TRIA, the federal government will reimburse terrorism claim payments subject to the insurer’s deductible. The deductible is calculated as a percentage of premiums written for the preceding calendar year. For 2003, the company’s deductible was $136 million. For 2004, the company’s deductible will be $199 million (10 percent of 2003 subject premiums); and for 2005, the deductible will be 15 percent of 2004 subject premiums.

The company’s life insurance subsidiary protects consumer health information pursuant to regulations promulgated under the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Regulations effective April 14, 2003, require health care 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 to send notices of the entity’s privacy practices to patients and insureds and to give patients and insureds the right to access and

request amendments to their records. The insured’s authorization is required before a provider, insurer or clearinghouse can use health information for marketing and certain other purposes. Effective October 16, 2003, additional regulations require health plans to electronically transmit and receive standardized healthcare information. These rules and regulations minimally impact the company as its health insurance writings are limited to its self-funded health plan for company associates and a small number of run-off medical and hospital expense insurance policies. The company does not actively market medical and hospital expense insurance policies.

Cincinnati Financial Corporation owns its headquarters building located on 75 acres of land in Fairfield, Ohio. This building contains approximately 615,000 square feet, of which approximately 5 percent is available for future CFC usage. John J. & Thomas R. Schiff & Co. Inc., a related party, occupies approximately 6,750 square feet (1 percent). The property, including land, is carried in the financial statements at $79 million as of December 31, 2003, and is classified as Property and equipment, net, for company use.

CFC Investment Company 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 square feet. CFC and its subsidiaries occupy approximately 85 percent of the building; unaffiliated tenants occupy approximately 10 percent; and approximately 5 percent is available for future CFC usage. The property is carried in the financial statements at $8 million as of December 31, 2003, and is classified as Property and equipment, net, for company use.

The Cincinnati Life Insurance Company owns a four-story office building in the Tri-County area of Cincinnati, Ohio. It contains approximately 102,000 rentable square feet. An unaffiliated tenant currently leases 100 percent of the building through January 31, 2005. This property is carried in the financial statements at $3 million as of December 31, 2003, and is classified as Other invested assets.

The company’s headquarters property is adequate and suitable for its business needs for at least the next two years. The company will determine the timeline for developing additional space at its headquarters location in 2004.

The Cincinnati Insurance Company is a defendant in Rochlin et al v. The Cincinnati Insurance Company, a conditionally certified Equal Pay Act collective action 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. In July 2003, the court decertified their Title VII class claim, permitting only the individual claims of named plaintiffs to proceed. The company denies the allegations of the suit and is vigorously defending this action.

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

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters

Cincinnati Financial Corporation had 11,616 direct shareholders of record as of December 31, 2003. Registered owners hold 29 percent of Cincinnati Financial Corporation’s outstanding shares. Many of the company’s independent agent representatives and most of the 3,720 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 common stock prices and dividend data below do not reflect the 5 percent stock dividend declared January 31, 2004, and payable June 15, 2004, to shareholders of record April 30, 2004.

CFC’s ability to pay cash dividends may depend on the ability of its subsidiary to pay dividends to the parent company. See Note 8 to the Consolidated Financial Statements, Page 65, for discussion of dividend restrictions at the insurance company subsidiaries.

Information regarding securities authorized for issuance under equity compensation plans appears in the Proxy Statement under “Equity Compensation Plan Information.” This portion of the Proxy Statement is incorporated herein by reference. Additional information with respect to options under the company’s equity compensation plans is available in Note 8 and Note 16 to the Consolidated Financial Statements, Pages 65 and 71.

In 2003, as the result of a settlement negotiated with a vendor, pretax results included the recovery of $23 million of the $39 million one-time, pretax charge incurred in 2000.

In 2000, the company recorded a one-time charge of $39 million, pre-tax, to write down previously capitalized costs related to the development of software to process property casualty policies.

In 2000, the company earned $5 million in interest in the first quarter from a $303 million single-premium bank-owned life insurance (BOLI) policy booked at the end of 1999 that was segregated as a Separate Account effective April 1, 2000. Investment income and realized investment gains and losses from separate accounts generally accrue directly to the contract holder and, therefore, are not included in the company’s consolidated financials.

In 1993, results included a credit related to the method of accounting for income taxes to conform with Statement of Accounting Financial Standards No. 109 and a charge related to the effect of 1993 increases in income tax rates on deferred taxes recorded for various prior-year items.


			Years ended December 31,
(In millions except per share data)			1999			1998			1997			1996			1995			1994			1993

Income Statement Data
	Earned premiums		$	1,732		$	1,613		$	1,516		$	1,423		$	1,314		$	1,219		$	1,141
	Investment income, net of expenses			387			368			349			327			300			263			239
	Gross realized investment gains and losses			0			65			69			48			31			20			52
	Total revenues			2,128			2,054			1,942			1,809			1,656			1,513			1,442
	Net income			255			242			299			224			227			201			216

	Net income per common share:
		Basic		1.55			1.45			1.81			1.34			1.36			1.21			1.30
		Diluted		1.52			1.41			1.77			1.31			1.33			1.18			1.27
	Cash dividends per common share:
		Declared		0.68			0.61	1/3		0.54	2/3		0.48	2/3		0.42	2/3		0.38	2/3		0.34
		Paid		0.66	1/3		0.59	2/3		0.53	1/3		0.47	2/3		0.42			0.37	1/3		0.33	1/3

	Shares outstanding Weighted average diluted			169			172			171			173			173			173			172

Balance Sheet Data
	Invested assets		$	10,194		$	10,325		$	8,797		$	6,355		$	5,536		$	4,212		$	4,117
	Deferred policy acquisition costs			226			143			135			128			120			110			104
	Total assets			11,795			11,484			9,867			7,397			6,439			5,037			4,888
	Loss and loss expense reserves			2,154			2,055			1,937			1,881			1,744			1,552			1,403
	Life policy reserves			885			536			482			440			403			370			346
	Long-term debt			456			472			58			80			80			80			80
	Shareholders’ equity			5,421			5,621			4,717			3,163			2,658			1,940			1,947
	Book value per share			33.46			33.72			28.35			18.95			15.80			11.63			11.70

Property Casualty Insurance Operations
	Earned premiums		$	1,658		$	1,543		$	1,454		$	1,367		$	1,263		$	1,170		$	1,092
	Investment income, net of expenses			208			204			199			190			180			162			153
	Loss ratio			61.6	%		65.4	%		58.3	%		61.6	%		57.6	%		63.3	%		63.5	%
	Loss expense ratio			10.0			9.3			10.1			13.8			14.7			9.8			8.7
	Expense ratio			28.6			29.6			30.0			28.2			27.8			27.8			28.5
		Combined ratio		100.2	%		104.3	%		98.4	%		103.6	%		100.1	%		100.9	%		100.7	%

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

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 Item 6, Selected Financial Data, Pages 14 and 15 and Item 8, Consolidated Financial Statements and related Notes, beginning on Page 58.

Among the various factors that influence the consolidated results of operations and financial position of the company, management considers its relationships with independent agencies to be the most significant. To continue to achieve its performance targets, the company must maintain its strong relationships with the select group of agencies with which it does business, write a significant portion of each agency’s business and attract new agencies. The company seeks to be an indispensable partner in each agency’s success. The company measures its accomplishment of this objective based on being the largest or second largest carrier in each agency, either by dollars of premium or number of policies written, depending on the agency’s mix of business.

As described in the safe harbor statement below, some factors could affect relationships with its independent agencies and limit opportunities for growth. Management is responsible for monitoring and managing those risk factors. In Item 1, Business, Page 1, and the Results of Operations, Page 22, management covers factors that it believes ensure it can sustain its relationships with independent agencies. In addition, the Management’s Discussion and Analysis reviews other important factors relating to the outlook, including its investing and reserving philosophy.

Topics addressed in the Management’s Discussion and Analysis include:


	10-K
	Page
Critical Accounting Policies and Estimates		18
Results of Operations
Consolidated		22
Property Casualty Operations		24
Commercial Lines		27
Personal Lines		32
Life Insurance		36
Investments		38
Liquidity and Capital Resources
Cash Flow		42
Assets		43
Liabilities		45
Shareholders’ Equity		46

Item 7(a). Quantitative and Qualitative Disclosures About Market Risk begins on 47.

Safe Harbor Statement

The following discussion contains certain forward-looking statements that involve potential risks and uncertainties. The company’s future results could differ materially from those discussed. Factors that could cause or contribute to such differences include, but are not limited to:

• recession or other economic conditions resulting in lower demand for insurance products

• unusually high levels of catastrophe losses due to changes in weather patterns, environmental events or other causes

• increased frequency and/or severity of claims

• events or conditions that could weaken or harm the company’s relationships with its independent agencies and limit opportunities for growth, including a downgrade of the company’s financial strength ratings, concerns that doing business with the company is too difficult or perceptions that the company’s level of service is no longer a distinguishing characteristic in the marketplace

• delays in the development, implementation and benefits of technology enhancements

• amount of reinsurance purchased and financial strength of reinsurers

• inaccurate estimates or assumptions used for critical accounting estimates

• sustained decline in overall stock market values negatively affecting the company’s equity portfolio, in particular a sustained decline in market value of Fifth Third Bancorp shares

• events that lead to a significant decline in the market value of a particular security and impairment of the asset

• decreased ability to generate growth in investment income

• insurance regulatory actions, legislation or court decisions that increase expenses or place the company at a disadvantage in the marketplace

• adverse outcomes from litigation or administrative proceedings

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 impacting corporate financial reporting and governance. The ultimate changes and eventual effects, if any, of these initiatives are uncertain.

Readers are cautioned that the company undertakes no obligation to review or update the forward-looking statements included in this material.

Critical Accounting Policies and Estimates

Cincinnati Financial Corporation’s financial statements are prepared using GAAP. These principles require management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. Actual results could differ from those estimates.

The significant accounting policies used in the preparation of the financial statements are discussed in Note 1 to the Consolidated Financial Statements, Page 58. In conjunction with that discussion, material implications of uncertainties associated with the methods, assumptions and estimates underlying the company’s critical accounting policies are discussed below. The audit committee of the board of directors reviews the annual financial statements with management and the independent auditor. These discussions cover the quality of earnings, review of reserves and accruals, reconsideration of the suitability of accounting principles, review of highly judgmental areas including critical accounting policies, audit adjustments and such other inquiries as may be appropriate.

Property Casualty Insurance Loss Reserves

The most significant estimates relate to the company’s reserves for property casualty loss and loss expenses. Insurance loss reserves are affected directly by management’s reserving philosophy. Management bases the estimates on company experience and information from internal analysis, and obtains additional information from consulting outside actuaries.

Reserve estimates are established for the total of unpaid loss and loss expenses, including estimates for claims that have been reported, estimates for claims that have been incurred but not yet reported and estimates of loss expenses associated with processing and settling those claims. Reserves are allocated to various lines of business. For reported claims, management establishes case reserves within the parameters of coverage provided in the policy. For claims incurred but not yet reported, management uses a variety of tools, including actuarial and statistical analysis, to estimate reserves. Loss reserves are reduced by the estimated amount of salvage and subrogation.

At year-end 2003, the total reserve balance, net of reinsurance, was $2.845 billion compared with $2.608 billion at year-end 2002 and $2.352 billion at year-end 2001. See Note 4 to the Consolidated Financial Statements, Page 64, for a reconciliation of property casualty reserve balances with the loss and loss expenses liability on the balance sheet. The increase in reserves in each year reflected the increases in policies and coverage in force, loss development reflecting the trend toward larger average losses and management’s conclusions regarding adequate reserve levels. Management believes that the stability of the company’s business makes its historic data the most important source for establishing adequate reserve levels. Traditionally, management and the outside actuaries have conducted a thorough evaluation in the calendar fourth quarter of the adequacy of reserves as of the end of the third quarter of each year. As a result, the most significant variation in reserves traditionally has been implemented in the fourth quarter. In the quarters following, less detailed but continuous reviews of reserve adequacy are made and any resulting adjustments are reflected in that quarter’s results. In 2004 and beyond, management plans to conduct more extensive analysis of reserve adequacy each quarter.

While the company believes that reported reserves make a reasonable provision for all unpaid loss and loss expense obligations, the estimation process involves a number of variables and assumptions. Management believes this uncertainty is mitigated by the historic stability of the company’s book of business and by its continuous review of estimates. As experience develops and new information becomes known, the reserve is adjusted as appropriate. In this process, the company monitors trends in the industry, relevant court cases, legislative activity and other current events in an effort to ascertain new or additional exposures to loss. If management determines that reserves established in prior years were not sufficient or were excessive, the change is reflected in current year results.

The company’s outside actuary provides management with an opinion regarding the acceptable range for adequate statutory reserves based on generally accepted actuarial guidelines. Historically, the company has established adequate reserves in the upper half of the actuary’s range. This approach has resulted in recognition of reserve redundancies in each of the past 10 years, which moderated beginning in 2000. Modestly redundant reserves support the company’s business strategy to retain high financial strength ratings and remain a market for agencies’ business in all market conditions.

The outside actuary’s range for adequate statutory reserves, net of reinsurance, was $2.696 billion to $2.906 billion for 2003; $2.492 billion to $2.674 billion for 2002; and $2.267 billion to $2.429 billion for 2001. The assumptions used to establish the recommended ranges were consistent with prior year practices as described above and in Item 1, Property Casualty Loss and Loss Expense Reserves, Page 3.

Slowness to recognize or respond to new or unexpected loss patterns, such as those caused by the risk factors cited in the company’s safe harbor statement, could lead to a rise in reserves, which would lead to a higher loss and loss expense ratio; each percentage point increase in the loss and loss expenses ratio would reduce pre-tax income by $27 million based on 2003 earned premiums.

Highly Uncertain Exposures

In the normal course of its business, the company may provide coverage for exposures for which estimates of losses are highly uncertain. Most significant are catastrophic events. Due to the nature of these events, management is unable to predict precisely the frequency or potential cost of catastrophe occurrences. However, in an effort to control such losses, the company does not market property casualty insurance in California, reviews aggregate exposures to huge disasters and monitors its exposure in certain coastal regions. Analysis of a once-in-250-year event affirms the company has catastrophe exposure to:

• hurricanes in the gulf and southeastern coastal regions

• earthquakes in the New Madrid fault zone, which lies within the central Mississippi valley, extending from northeast Arkansas through southeast Missouri, western Tennessee and western Kentucky to southern Illinois

• tornado, wind and hail in the Midwest, Southeast and mid-Atlantic regions

The company uses the Risk Management Solutions and Applied Insurance Research models to evaluate exposures and aid in determining appropriate reinsurance coverage programs. Reinsurance mitigates the risk of these highly uncertain exposures and limits the maximum net loss that can arise from large risks or risks concentrated in areas of exposure. In conjunction with these activities, the company also continues to explore and analyze credible scientific evidence, including the impact of global climate change, that may affect its exposure under insurance policies. Management’s decisions regarding the appropriate level of property casualty risk retention are affected by various factors, including changes in the company’s underwriting practices, capacity to retain risks and reinsurance market conditions. See Reinsurance, Page 26, for a discussion of the company’s 2004 reinsurance treaties.

Asset Impairment

Fixed-income and equity investments are the company’s largest assets. Certain estimates and assumptions made by management relative to investment portfolio assets are critical. The company’s asset impairment committee continually monitors investments and all other assets for signs of other-than-temporary and/or permanent impairment. Among other signs, the committee monitors significant decreases in the market value of the assets, changes in legal factors or in the business climate, an accumulation of costs in excess of the amount originally expected to acquire or construct an asset, uncollectability of all other assets, or other factors such as bankruptcy, deterioration of creditworthiness, failure to pay interest or dividends or signs indicating that the carrying amount may not be recoverable.

The application of the company’s impairment policy resulted in other-than-temporary impairment charges and write-offs of investments that reduced the company’s income before income taxes by $80 million, $98 million and $45 million in 2003, 2002 and 2001, respectively.

Other-than-temporary impairment in the value of securities is defined by the company as declines in valuation that meet specific criteria established in the asset impairment policy. Such declines often occur in conjunction with events taking place in the overall economy and market, combined with events specific to the industry or operations of the issuing corporation. These specific criteria include a declining trend in market value, the extent of the market value decline and the length of time the value of the security has been depressed, as well as subjective measures such as pending events and issuer liquidity. Generally, these declines in valuation are greater than might be anticipated when viewed in the context of overall economic and market conditions. See Investment Portfolio, Page 44, for information regarding valuation of the invested assets.

Impairment charges are recorded for other-than-temporary declines in value, if, in the asset impairment committee’s judgment, there is little expectation that the value will be recouped in the foreseeable future. The impairment policy defines a security as distressed when it is trading below 70 percent of book value or has a Moody’s or Standard & Poor’s credit rating below B3/B-. Distressed securities are monitored as potentially impaired. The security may be written down in the event of a declining market value for four consecutive quarters with quarter-end market value below 50 percent of book value, or when a security’s market value is 50 percent below book value for three consecutive quarters. A sudden and severe drop in market value that does not otherwise meet the above criteria is reviewed for possible immediate impairment. Not withstanding the above, the company’s portfolio managers constantly monitor the status of their assigned portfolios for indications of potential problems or issues that may be possible impairment issues. If a significant impairment indicator is noted, the portfolio managers even more closely scrutinize the security.

When evaluating other-than-temporary impairments, the committee considers the company’s ability to retain a security for a period adequate to recover a significant percentage of cost. Because of the company’s investment philosophy and strong capitalization, it can hold securities that have the potential to recover value until their scheduled redemption, when they might otherwise be deemed impaired. Investment assets that have already been impaired are evaluated based on their adjusted book value and further written down, if deemed appropriate. The decision to sell or write down an asset with impairment indications reflects, at least in part, management’s opinion that the security no longer meets the company’s investment expectations. See Item 7(a), Quantitative and Qualitative Disclosures About Market Risk, Page 47, for detailed information regarding securities trading in a continuous loss position at December 31, 2003. Other-than-temporary declines in the fair value of investments are recognized in net income as realized losses at the time when facts and circumstances indicate such write-downs are warranted.

Permanent impairment charges (write-offs) are defined as those for which management believes there is little potential for future recovery, for example, following the bankruptcy of the issuing corporation. These permanent declines in the fair value of investments are written off at the time when facts and circumstances indicate such write-downs are warranted, and they are reflected in realized losses.

Other-than-temporary and permanent impairments are distinct from the ordinary fluctuations seen in the value of a security when considered in the context of overall economic and market conditions. Securities considered to have a temporary decline would be expected to recover their market value or are fixed-income securities that the company intends to hold until maturity. Under the same accounting treatment as market value gains, temporary declines (changes in the fair value of these securities) are reflected on the company’s balance sheet in other comprehensive income, net of tax, and have no impact on reported net income.

Life Insurance Policy Reserves

Reserves for traditional life insurance policies are based on expected expenses, mortality, withdrawal rates and investment yields, including a provision for adverse deviation. Once these assumptions are established, they generally are maintained throughout the lives of the contracts. Expected mortality is derived primarily from industry experience. Withdrawal rates are based on company and industry experience, while investment yield is based on company experience and the economic conditions then in effect.

Reserves for the company’s universal life, deferred annuity and investment contracts are equal to the cumulative account balances, which include premium deposits plus credited interest less charges and withdrawals.

Employee Benefit Plan

The company has a defined benefit pension plan covering substantially all employees. Contributions and pension costs are developed from annual actuarial valuations. These valuations involve key assumptions including discount rates and expected return on plan assets, which are updated each year. Any adjustments to these assumptions are based on considerations of current market conditions. Therefore, changes in the related pension costs or credits may occur in the future due to changes in assumptions.

The key assumptions used in developing the 2003 net pension expense were a 6.5 percent discount rate, an 8.0 percent expected return on plan assets and rates of compensation increases ranging from 5 percent to 7 percent, depending on the age of the employee. The 8 percent return on assets assumption is based on the fact that substantially all of the investments held by the pension plan are common stocks that pay annual dividends. Management believes this rate is representative of the expected long-term rate of return on these assets. These assumptions were consistent with the prior year except that the discount rate was reduced by one half of one percent due to current market conditions. Compared with the prior year, the net pension expense was increased by $4 million. For 2004, the company expects a net pension expense of $8 million, primarily as a result of lower plan assets, lower expected returns and one half of one percent reduction in the interest rate used in converting the lump-sum cash-out form of payment at retirement.

Holding all other assumptions constant, a one half of one percent increase or decrease in the discount rate would have increased or decreased the company’s 2003 net income before income taxes by $1 million. Likewise, a one half of one percent increase or decrease in the expected return on plan assets would have increased or decreased 2003 income before income taxes by $1 million.

In addition, the fair value of the plan assets exceeded the accumulated benefit obligation by $21 million at December 31, 2003, and by $31 million at December 31, 2002. The fair value of the plan assets was less than the projected plan benefit obligation by $29 million at December 31, 2003, and by $9 million at December 31, 2002. Market conditions and interest rates significantly affect future assets and liabilities of the pension plan. An additional liability may be required in the future, with the potential for a charge to equity to the extent the minimum liability exceeds unrecognized prior service cost upon measurement of plan obligations, which is usually completed by the company at the end of each year.

Deferred Acquisition Costs

The company establishes a deferred asset for costs that vary with and are primarily related to acquiring property casualty and life business. These costs are principally agent commissions, premium taxes and certain underwriting costs, which are deferred and amortized into income as premiums are earned. Deferred acquisition costs have grown in line with the growth in premiums. Underlying assumptions are updated periodically to reflect actual experience. Changes in the amounts of timing or estimated future profits could result in adjustments to the accumulated amortization of these costs.

For property casualty policies, deferred costs are amortized over the terms of the policies. For life policies, acquisition costs are deferred and amortized over the premium-paying period of the policies.

Separate Accounts

The company issues life contracts with guaranteed minimum returns, referred to as bank-owned life insurance policies (BOLI), the assets and liabilities of which are legally segregated and recorded as assets and liabilities of the separate accounts. Minimum investment returns and account values are guaranteed by the company and also include death benefits to beneficiaries of the contract holders.

The assets of the separate accounts are carried at fair value. Separate account liabilities primarily represent the contract holders’ claims to the related assets and are carried at the fair value of the assets. Generally, investment income and realized investment gains and losses of the separate accounts accrue directly to the contract holders and, therefore, are not included in the company’s Consolidated Statements of Income, however, each separate account contract includes a negotiated realized gain and loss sharing arrangement with the company. This share is transferred from the separate account to the company’s general account and is recognized as revenue or expense. In the event that the asset value of contract holders’ accounts is projected below the value guaranteed by the company, a liability is established through a charge to the company’s earnings.

In the company’s most significant separate account written in 1999, realized gains and losses are retained in the separate account and are deferred and amortized to the contract holder over a five-year period, subject to certain limitations. Upon termination or maturity of this separate account contract, any unamortized deferred gains and/or losses will revert to the general account. In the event this separate account holder were to surrender the contract, there would be a surrender charge equal to 10 percent of the contract’s account value during the first five years. Beginning in year 6, the surrender charge decreases 2 percent a year to 0 percent in year 11. At December 31, 2003, net unamortized losses amounted to $2 million. In accordance with this separate account agreement, the investment assets must meet certain criteria established by the regulatory authorities to whose jurisdiction the group contract holder is subject. Therefore, sales of investments may be mandated to maintain compliance with these regulations, possibly requiring gains or losses to be recorded, and charged to the general account. Potentially, losses could be material; however, unrealized losses at December 31, 2003, in the separate account portfolio were less than $1 million.

Recent Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements, Page 61, for information regarding recent accounting pronouncements. Management has determined that recent accounting pronouncements have not had nor are they expected to have any material impact on the company’s consolidated financial statements.

Results of Operations

Cincinnati Financial Corporation Consolidated Three-Year Highlights

(Dollars in millions except per share data)


	2003			Change %		2002			Change %			2001			Change %
Revenues	$	3,181			11.9	$	2,843			11.0		$	2,561			9.9
Net income		374			57.0		238			23.3			192			63.3
Per share data (diluted):
Net income	$	2.31			58.2	$	1.46			22.7		$	1.19			63.0
Book value	$	38.69			11.7	$	34.65			(6.5	)	$	37.07			(0.5	)
Return on equity		6.3	%				4.1	%					3.2	%
Return on equity based on comprehensive income		13.8	%				(4.0	%)					2.5	%

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

• commercial lines property casualty insurance

• personal lines property casualty insurance

• life insurance

• investments

Highlights of the consolidated results for the past three years include:

Revenues – Revenue growth accelerated over the three-year period on strong property casualty performance. Earned premium growth slowed in 2003 as commercial pricing increases continued, but at a lower rate. In addition, realized investment losses were substantially lower in 2003 than 2002 and investment income continued to rise. The company’s emphasis on common stock holdings with an increasing flow of dividend payments has led to continued growth of investment income even though low prevailing interest rates have limited opportunities to expand income from fixed-income investments.

Net income – Net income rose 57.0 percent in 2003 and 23.3 percent in 2002. In each of the past three years, the company’s total benefits and expenses have grown less rapidly than revenues, as management’s strategies to improve profitability have taken effect. Strong property casualty underwriting profit in 2003 led to a higher effective tax rate.

Realized investment gains and losses – A significant factor in the growth rate for net income in any year can be realized investment gains and losses. Management believes it is important to carefully consider the impact of realized investment gains and losses on net income when evaluating the company’s primary business areas: property casualty insurance and life insurance. Management believes the level of realized investment gains and losses for any particular period, while it may be material, may obscure the performance of ongoing underlying business operations in that period. While realized investment gains and losses are integral to the company’s insurance operations over the long term, the determination to recognize gains or losses in any period may be subject to management’s discretion and is independent of the insurance underwriting process. Moreover, under applicable accounting requirements, gains and losses can be recognized from certain changes in market values of securities without actual realization.

In the three-year period, the after tax impact of realized investment losses was to reduce net income by $27 million, or 17 cents per share, in 2003, by $62 million, or 38 cents, in 2002 and by $17 million, or 10 cents, in 2001. Net realized investment losses were lower in 2003 than 2002 as other-than-temporary impairment charges declined due to the economic and market recovery and as net gains on the sale of securities rose to a higher level. See Investments Results of Operations, Page 38, for additional information on net realized investment gains and losses.

Other considerations – In addition, two items in 2003 that the company considered to be unusual should be taken into consideration when evaluating ongoing business operations:

• Software recovery – In the third quarter of 2003, the company recovered $23 million pretax in a settlement negotiated with a vendor. The recovery added $15 million, or 9 cents per share, to after tax net income. The negotiated settlement related to the $39 million one-time, pretax charge incurred in the third quarter of 2000 to write off previously capitalized software development costs.

• Uninsured motorist/underinsured motorist reserve release – In the fourth quarter of 2003, the company released $38 million pretax of previously established UM/UIM reserves following the Ohio Supreme Court’s decision to limit its 1999 Scott-Pontzer v. Liberty Mutual decision. That action added $25 million, or 15 cents per share to after tax net income. See Property Casualty Loss and Loss Expense Reserves, Page 25, for additional information regarding UM/UIM reserves.

Option expense – In each of the past three years, net income would have been reduced by approximately 6 cents if option expense, calculated using the binomial option-pricing model, was included in operating expenses.

Book value – Book value reached a record high of $38.69 at year-end 2003 because of the recovery in the financial markets that led to higher market values for equity investments. Year-end 2002 and 2001 book value declined primarily because of fluctuations in market values for the equity investment portfolio.

Comprehensive income – Accumulated other comprehensive income, which includes the accumulated unrealized gains on investments and derivatives, grew by $441 million in 2003 after declining $470 million and $43 million in 2002 and 2001. See Item 1, Investments Segment, Page 7, for additional information on the investment portfolio and see Shareholders’ Equity, Page 46, for information on unrealized gains and losses. Return on equity improved for the third consecutive year while return on equity based on comprehensive income rose to 13.8 percent from a negative 4.0 percent in 2002 and 2.5 percent in 2001.

Outlook

Based on its outlook for the insurance and investment markets, its progress in implementing operating strategies and its results for 2003, management has established certain performance targets for 2004 including:

• Property casualty written and earned premium growth in the high single digits.

• Combined ratio for the property casualty operations in the range of 95 percent compared with 94.7 percent in 2003, which included a benefit of 0.8 percentage points from the software recovery and 1.4 percentage points from the UM/UIM reserve release. The 2004 target does not include benefits anticipated from additional UM/UIM reserve releases and assumes the combined ratio will include approximately 3.0 to 3.5 percentage points for catastrophe losses.

• Investment income growth of 3.5 percent to 4.5 percent compared with 4.7 percent in 2003.

Factors supporting management’s outlook for 2004 and beyond are discussed in the results of operations for each of the four business segments.

Segment Results of Operations

As described in Note 17 of the Consolidated Financial Statements, Page 72, management measures segment profit or loss for its property casualty and life businesses based upon underwriting results. Insurance underwriting results (profit or loss) represent net earned premium less loss and loss expenses and underwriting expenses on a pretax basis. Management also measures aspects of the performance of its commercial lines and personal lines segments on a combined property casualty insurance operations basis. For the combined property casualty insurance operations as well as the commercial lines and personal lines segment, statutory accounting data and ratios are key performance indicators that are used for comparison to industry results since GAAP-based industry data is not readily available. Statutory accounting data and ratios also are key performance indicators for The Cincinnati Life Insurance Company, the life insurance subsidiary.

The related investment portfolios for the property casualty and life insurance segments are managed separately from the underwriting businesses, along with investments held by the parent company. Net investment income and net realized investment gains and losses are discussed in the investments segment discussion. Underwriting results and segment pretax operating income are not a substitute for net income determined in accordance with GAAP.

The following sections review results of operations for the combined property casualty insurance operations and, separately, for each of the company’s four reportable segments (see Commercial Lines Results of Operations, Page 27, Personal Lines Results of Operations, Page 32, Life Insurance Results of Operations, Page 36, and Investments Results of Operations, Page 38).

Property Casualty Insurance Operations

Three-year Highlights

(Dollars in millions)


	2003			Change %		2002			Change %			2001			Change %
Earned premiums	$	2,653			10.9	$	2,393			15.4		$	2,073			13.4
Losses incurred		1,490			1.2		1,472			6.6			1,381			6.2
Loss expenses incurred		307			12.9		273			30.2			209			1.2
Underwriting expenses incurred		701			10.5		635			11.7			569			5.8
Policyholder dividends incurred		15			164.0		6			(65.4	)		16			(11.6	)

Underwriting profit (loss)	$	140			1,816.7	$	7			107.1		$	(102	)		56.3

Combined ratio:
Loss ratio		52.5	%				57.9	%					63.5	%
Loss expense ratio		11.6					11.4						10.1

Loss and loss expenses ratio excluding catastrophe losses		64.1	%				69.3	%					73.6	%
Catastrophe loss and loss expenses ratio		3.6					3.6						3.1

Loss and loss expenses ratio		67.7	%				72.9	%					76.7	%
Underwriting expense ratio		26.4					26.6						27.4
Policyholder dividend ratio		0.6					0.2						0.8

Combined ratio		94.7	%				99.7	%					104.9	%

Within the property casualty insurance market, the company offers both commercial and personal policies through a network of independent agencies. Highlights of the performance for the combined property casualty insurance operations included:

• Earned premiums – Over the past three years, the company has taken advantage of strong insurance industry pricing and leveraged its relationships with independent agencies to obtain higher premiums on new and renewal business. The rate of increase for commercial lines earned premiums slowed in 2003, reflecting changing market conditions, while the rate of increase for personal lines earned premium rose due to higher rates. Total policy count was down 2.2 percent in 2003 after rising 1.7 percent in 2002.

Management considers statutory net written premium growth to be a key performance indicator, since it can be used to compare the company’s growth to industry performance and allows it to evaluate the success of its strategies. The estimated industry growth rate was 10.2 percent, 14.9 percent and 8.5 percent in 2003, 2002 and 2001, respectively. The company’s statutory net written premiums on an adjusted basis rose 11.7 percent in 2003, 14.0 percent in 2002 and 13.0 percent in 2001. The company’s 2003 and 2002 statutory net written premiums were adjusted for the effect of a refinement adopted in 2002 of the company’s estimation process for matching written premiums to policy effective dates. The company’s 2001 statutory net written premiums were adjusted for the adoption of Codification.

• Underwriting results and combined ratio – For the third consecutive year, combined property casualty underwriting performance improved on a year-over-year basis as the result of growth in premiums, in particular more adequate premium per policy, and as a result of benefits from underwriting efforts. The statutory industry averages are estimated 101.1 percent, 107.4 percent and 115.9 percent for 2003, 2002 and 2001, respectively. On a statutory adjusted basis, the 2003 property casualty combined ratio of 95.0 percent before the software recovery, included a 1.4 percentage-point benefit from the UM/UIM reserve release, and compared with 99.6 percent and 103.6 percent in 2002 and 2001. The company’s 2002 ratio reflects the written premium adjustment and the 2001 ratio reflects the adoption of Codification. The favorable comparison of this key performance indicator to industry trends highlights the success of the company’s strategies.

The company achieved strong growth by leveraging the competitive characteristics discussed in Item 1, Property Casualty Insurance Operations, Page 1. It continues to apply its relationship-based strategies, including a case-by-case approach to new business and account renewals. While insisting on adequate premiums for covered exposures, the company continues to do business the way it always has; on the local level, focusing on each relationship separately. Commercial lines pricing remained flexible to respond to each risk in cooperation with local agencies, which are in a position to know their market and their business. The company believes that this approach results in more high-quality accounts over the long term, further solidifies its relationships with independent agencies and establishes a basis for continued growth.

The company has been more aggressively identifying and measuring exposures to match coverage amounts and premiums to the risk. Where this matching is not possible, accounts are not being renewed unless there are mitigating factors. Agents agree on the need to carefully select risks and assure pricing adequacy. They appreciate the time the company’s associates invest in creating solutions for their clients while protecting profitability, whether that means working on an individual case or developing modified policy terms and conditions that preserve flexibility, choice and other sales advantages.

Growth also has reflected the efforts to improve customer service through the creation of smaller marketing territories, permitting local field marketing representatives to devote more time to each independent agency. At year-end 2003, the company had 87 property casualty field territories, up from 76 at the end of 2001. During 2004, the company plans to split and staff another five to six territories. Smaller territories allow marketing representatives to increase the level of service as well as expand the opportunities to ask for and earn new business. The average net earned premium per territory rose 7.8 percent in 2003 to $32 million following a 5.0 percent increase in 2002.

The company’s success has been built on frontline decision-making. The company expects to continue to strengthen its relationships with agencies with technology that brings agencies greater efficiencies while permitting associates to spend more time with people and less with paper. CinciLink, the company’s Web site for agencies, enables agencies to obtain information and access the company’s new Web-based systems. The Web site includes content 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. The initial rollout of commercial lines and personal lines rating software was achieved through CinciLink.

In 2003, WinCPP, an online system for commercial lines processing, was expanded to 10 states and now is available for agencies writing more than 70 percent of the company’s total premiums. CMS, a new claims file management system, was deployed in late 2003 to field claims associates in all states. CMS supports the company’s continued comitment to providing exemplary claims service with a personal touch by lifting the administrative burden from the field claims representatives. Through December 31, 2003, capitalized development costs related to CMS totaled $14 million. In 2004, management anticipates investing another $10 million to enhance CMS, providing capabilities for agencies and more comprehensive financial reporting.

The discussion of the commercial lines and personal lines segments provides additional detail regarding these strategies and trends.

Property Casualty Loss and Loss Expense Reserves

The largest component of the property casualty segments’ expenses is loss and loss expenses incurred, which includes both paid losses and net reserve additions for unpaid losses as well as expenses related to each. Paid losses and related loss expense accounted for 86.9 percent, 85.3 percent and 89.3 percent of property casualty insurance losses and policyholder benefits incurred in 2003, 2002 and 2001, respectively.

The remaining 13.1 percent, 14.7 percent and 10.7 percent in 2003, 2002 and 2001, respectively, reflected additions to reserves for all unpaid loss and loss expense obligations, including case reserves for reported losses and reserves for incurred but not yet reported losses, offset by released reserves. The reserve estimation policies for the property casualty segments are described in Property Casualty Insurance Loss Reserves, Page 18. The majority of IBNR increases over the past three years have been due to growth in premiums and loss cost inflation as well as management’s continuous efforts to achieve its best estimates of ultimate incurred losses. The assessment is made for each business line within the commercial lines and personal lines segments.

Reserve levels in 2003 also reflected management’s assessment that mold-related reserves should be strengthened and the need to establish higher loss expense reserves because of the rise in litigation costs due to larger and more complex claims. These two 2003 increases were offset by the release of $38 million in UM/UIM reserves following the November 2003 Ohio Supreme Court’s limiting of its 1999 Scott-Pontzer v. Liberty Mutual decision. As the company reviews pending claims in light of the recent court decision, up to an additional $37 million in UM/UIM case reserves may be released in coming quarters.

In the November 2003 decision to limit the Scott-Pontzer decision, the court ruled that an employer’s commercial automobile insurance policy only covers injured employees and only when the accident happens in the course and scope of their employment. Since 1999, the company had established case reserves and IBNR for past UM/UIM losses incurred but not yet reported related to these decisions.

As background, the Ohio Supreme Court’s 1999 decision in Scott-Pontzer greatly increased the exposure on commercial auto insurance policies. That ruling extended Ohio businesses’ UM/UIM coverage in force over the past 15 years to their employees when they were not at work and to the employees’ resident family members. It contributed to changes in policy wording for UM/UIM coverage. Additionally, the same court’s 2000 decision in Linko v. Indemnity effectively caused insurers to extend UM/UIM coverage, at the newly increased level of exposure, to every auto insurance policy in Ohio at no additional premium. The two court rulings affected all auto insurers in the state.

Management’s conclusions regarding reserve levels in 2002 reflected refinement of the manner in which the value of future salvage and subrogation for claims already incurred is estimated. Also, management increased reserves for incurred but not yet reported losses because of higher than expected paid and/or reported development in workers compensation, commercial casualty, commercial and other umbrella lines for accident years 1999 through 2001.

Asbestos and Environmental Reserves

Management has reviewed its exposure to asbestos and environmental risk, including mold risk. Management believes that reserves are adequate at this time and that these coverage areas are immaterial to the company’s financial position due to the types of accounts the company has insured in the past. Factors evaluated to reach those conclusions include:

• Open claim counts for the long-tail asbestos and environmental losses annually ranged from 400 to 600, or less than 1 percent of the total open claim count, in each of the three years.

• Loss and loss expenses incurred for all asbestos and environmental claims were $13 million, or 0.7 percent of total loss and loss expense in 2003, compared with $20 million, or 1.2 percent, in 2002 and $7 million, or 0.4 percent, in 2001.

• Reserves for all asbestos and environmental claims were constant at $71 million in 2003 and 2002, up from $63 million in 2001. Reserves for all asbestos and environmental claims were 2.5 percent, 2.7 percent and 2.7 percent of total reserves, in 2003, 2002 and 2001, respectively.

Commercial accounts were written by the company after the development of coverage forms that exclude cleanup costs. The company’s exposure to risks associated with past production and/or installation of asbestos materials is minimal because the company was primarily a personal lines company when most of the asbestos exposure occurred. The commercial coverage the company did offer was predominantly related to local-market construction activity rather than asbestos manufacturing. Further, over the past two years, to limit its exposure to mold and other environmental risks going forward, the company has revised policy terms where permitted by state regulation.

Reinsurance

The company has property casualty working reinsurance treaties for 2004 through reinsurance companies that have written its treaties for more than 15 years. The strong relationships the company has with these reinsurers has allowed the company to negotiate favorable terms and conditions during a difficult time in the market cycle. The property casualty working treaties align the company with three of the most financially sound reinsurance companies in the world. The company also secures property catastrophe coverage and catastrophic casualty protection.

The 2004 property and casualty reinsurance program encompasses four primary components:

• Property per risk treaty – The primary purpose of the property treaty is to provide excess limits capacity up to $25 million, supplying adequate capacity for the majority of the risks the company writes. The ceded premium is estimated to be $27 million for 2004, compared with $25 million in 2003 and 2002. In 2004, the company is retaining the first $2 million of each loss, and 40 percent of the next $3 million of loss. The $2 million base retention has been in place for many years, and the co-participation is the same percentage as 2003, up from 20 percent in 2002. Losses in excess of $5 million are reinsured at 100 percent up to $25 million.

• Casualty per occurrence treaty – The casualty treaty provides the company with excess capacity up to $25 million. Similar to the property treaty, this provides sufficient capacity to write the vast majority of casualty accounts the company insures. The ceded premium is estimated to be $60 million in 2004, compared with $55 million in 2003 and $52 million in 2002. In 2004, the company is retaining the first $2 million of each casualty loss, and 60 percent of the next $2 million of loss. This structure is identical to 2003. In 2003, the co-participation rose 40 percent from the 2002 level. Losses in excess of $4 million are reinsured at 100 percent up to $25 million.

• Casualty fourth excess treaty – The company also purchases a casualty reinsurance treaty that provides an additional $25 million in casualty loss protection. This treaty, along with the casualty per occurrence treaty, provides $50 million of protection for workers compensation losses, bad faith losses and “clash coverage” when there is a single occurrence involving multiple Cincinnati Insurance Company policyholders or multiple policies for one insured. The ceded premium is estimated to be $2 million in 2004 compared with $2 million in both 2003 and 2002.

• Property catastrophe treaty – To protect against catastrophic events such as wind and hail, hurricanes or earthquakes, the company purchases property catastrophe reinsurance, with a limit up to $400 million. For the 2004 treaty, ceded premiums are estimated to be $25 million, up from $21 million in 2003 and 2002. Part of the increase for 2004 is due to the increase in the limit to $400 million from $300 million effective April 1, 2003 to keep limits in line with increases in exposures due to company growth. The company will retain the first $25 million of losses arising out of a single event and will retain 43 percent of losses from $25 million to $45 million as it did in 2003. The company retains 5 percent of all losses in excess of $45 million, up to $400 million.

Individual risks with limits in excess of $25 million must be handled by a different reinsurance mechanism. Property coverage for individual risks with insured values between $25 million and $50 million are reinsured under an automatic facultative treaty. For those risks with property values exceeding $50 million, the company negotiates the purchase of facultative coverage on an individual certificate basis. For casualty coverage on individual risks with limits exceeding $25 million, facultative reinsurance coverage is placed on an individual certificate basis.

Dealing with the challenges presented by terrorism has become a very important issue for the insurance industry over the last two years. Terrorism coverage at various levels has been secured in all of the company’s reinsurance agreements. The broadest coverage for this peril is found in the property and casualty working treaties, which provides coverage for commercial and personal risks. Our property catastrophe treaty provides coverage for personal risks and the majority of our reinsurers provide limited coverage for commercial risks with total insured values of $10 million or less. For insured values between $10 million and $25 million, there also may be coverage in the property working treaty.

Reinsurance protection for the company’s surety and life insurance businesses are covered under separate treaties with many of the same reinsurers that write the property casualty working treaties.

All reinsurance agreements in place for 2004 are similar to those for 2003 and 2002. The 2004 estimated incremental cost increase of $7 million, net of tax, is primarily due to the growth in the company’s premium base. The company has the financial ability to absorb losses at the current retention levels, and the 2004 reinsurance agreements are a means of balancing reinsurance costs with an acceptable level of risk.

Commercial Lines Results of Operations

Three-year Highlights

(Dollars in millions)


	2003			Change %			2002			Change %			2001			Change %
Earned premiums	$	1,908			10.8		$	1,723			18.6		$	1,453			17.9
Losses incurred		977			(1.9	)		996			10.0			905			3.2
Loss expenses incurred		241			12.9			214			25.3			171			7.7
Underwriting expenses incurred		508			13.3			448			16.3			386			5.4
Policyholder dividends incurred		15			164.0			6			(65.4	)		16			(11.6	)

Underwriting profit (loss)	$	167			184.5		$	59			330.5		$	(25	)		86.4

Combined ratio:
Loss ratio		49.0	%					55.5	%					60.4	%
Loss expense ratio		12.6						12.5						11.8

Loss and loss expenses ratio excluding catastrophe losses		61.6	%					68.0	%					72.2	%
Catastrophe loss and loss expenses ratio		2.2						2.3						1.9

Loss and loss expenses ratio		63.8	%					70.3	%					74.1	%
Underwriting expense ratio		26.6						26.0						26.5
Policyholder dividend ratio		0.8						0.3						1.1

Combined ratio		91.2	%					96.6	%					101.7	%

Performance highlights for the commercial lines segment include:

• Earned premiums – The primary source of growth in the past three years has been higher pricing on new and renewal commercial business and insurance-to-value initiatives, more then offsetting the company’s deliberate decisions not to write or renew certain business. The growth rate in 2003 slowed as the rate of premium increases moderated industrywide.

• Profitability – Since 2001, improvement in commercial lines profitability has primarily been driven by more adequate premiums per policy, with policy count relatively stable over the three-year period. In addition, careful attention to underwriting has slowed the rate of growth in loss and loss expenses. The 2003 combined ratio included the benefit of the software recovery and UM/UIM reserve release, which reduced the ratio by 0.8 percentage points and 2.0 percentage points, respectively.

Growth

From mid-1999 into 2003, the commercial lines marketplace implemented continued rate increases in reaction to concerns about the economy and rising loss severity, exacerbated by the events of September 11, 2001. Also in response to rising loss severity, during that period, some competitors announced decisions to exit geographic markets or specific lines of business; others instituted across-the-board price increases. Industry analysts believed the market was experiencing a renewed awareness of underwriting discipline.

Late in 2003, competition increased for high-quality accounts, particularly from other regional carriers that may have been less affected by market events in 2001 and 2002. Market conditions now vary substantially between geographic markets, possibly due to differing economic conditions and the presence of different groups of competitors. Rate increases for high-quality accounts are in the low- to mid-single digits. In most markets where the company competes disciplined underwriting generally remains the norm. In certain markets the company has seen some indication of carriers seeking to aggressively price average or below-average accounts. In the company’s opinion, carriers are modifying pricing rather than changing policy terms and conditions. Regional and national carriers continue to target the small accounts market, defined by the company as accounts with premiums under $10,000 annually.

The company has faced and will continue to address these more competitive conditions by seeking to remain a stable market for its agencies’ best business although during this three year period, the company has experienced little or no growth in commercial lines policy count. The slow growth in policy count reflected the company’s re-underwriting of the existing book of business and its insistence on obtaining adequate premium for the covered risks, the combination into a single commercial package unit of coverages formerly provided by stand-alone umbrella policies and increased competition for smaller accounts. Looking ahead, management believes that opportunities to obtain new business and increase policy count will come from its strong relationships with independent agencies, subdivision of territories to enhance service and appointment of up to 150 new agencies over the next several years. Offsetting new appointments will be continued consolidation within the independent agency marketplace and terminations of agency relationships.

Staying abreast of evolving market conditions is a critical function, accomplished in both an informal and a formal manner. Informally, the field marketing representatives are in constant receipt of market intelligence from the agencies they work with on a daily basis. Formally, the commercial lines product management group completes periodic market surveys to obtain competitive intelligence. This market information helps to determine the top competitors by line of business or specialty program and also determines market

strengths and weaknesses for the company. The analysis encompasses pricing, breadth of coverage and underwriting/eligibility issues. In addition to reviewing the company’s competitive position, the product management group performs underwriting audits to assess profitability initiatives. Further, the company’s research and development department analyzes opportunities and develops new products, new coverage options and improvements to existing insurance products.

Management considers new business measures to be a key indicator of the success of its competitive strategies. Locally based field marketing representatives lead the new business effort, working with agencies to underwrite and price business using personal and direct knowledge of the risk and competitive environment. In 2003, commercial new business premiums written directly by agencies rose 6.8 percent to a record $268 million. In 2002, new business premiums rose 14.4 percent to $251 million from $220 million in 2001. The lower 2003 growth rate reflected the slowing of premium increases industrywide.

In the five states in which the company had at least $100 million in agency direct earned premiums in 2003, premiums grew 12.0 percent in 2003 and 16.1 percent in 2002. In the remaining 26 states, agency direct earned premiums grew more rapidly, rising 16.3 percent in 2003 and 9.0 percent in 2002. The stronger growth in the smaller states reflected the opportunities available to the company in less penetrated markets.

The company’s standard approach is to write three-year policies, a competitive advantage in the commercial line market. Although the company offers three-year terms, many policies are adjustable at each annual anniversary for the subsequent one-year period, and may be cancelled at any time at the discretion of the policyholder. While writing three-year policies would appear to restrict opportunities to quickly adjust pricing, contract terms provide that the rates for automobile, workers compensation, professional liability and most umbrella liability coverages within multi-year packages may be changed at each of the policy’s annual anniversaries for the next one-year period. The annual rate adjustments could incorporate rate changes approved by state insurance regulatory authorities between the date the policy was written and its annual anniversary date, as well as changes in risk exposures and premium credits or debits relating to loss experience, competition and other underwriting judgment factors. Management estimates that approximately 75 percent of 2003 commercial premium was written on a one-year policy term or was subject to annual rating adjustments.

Multi-year packages are offered at rates that may be slightly higher than annual rates. By reducing annual administrative efforts, multi-year policies reduce the company’s and agency’s expenses and the incentive for the policyholder to shop for a new policy every year. Management believes that the advantages of three-year policies in terms of policyholder convenience, account retention and reduced administrative costs outweigh the potential disadvantage of these policies in periods of rising rates.

In 2003, the company resumed writing three-year policies for contractor risks in most states because of these advantages. In 2002, the company temporarily had ceased writing three-year policies for contractors in favor of one-year policies while awaiting state regulatory approval for two significant coverage changes in the company’s general liability and umbrella coverage forms. The changes brought the company’s policy forms in line with industry practices by capping the amount payable during a policy period (usually 12 months) for certain types of liability claims and by clarifying how a policy responds once the insured learns that injury or damage has occurred during a prior policy period. Looking ahead, these changes will help the company better manage liability losses and remain a viable market for agents to place coverage for well managed, reputable contractors. Underwriters carefully monitor new and renewal contractor business, continuing to write one-year policies when competitive or underwriting issues make three-year policies impractical.

Commercial lines software, which is intended to reduce the administrative burden on the company’s associates and bring the agencies greater efficiencies, made further progress in 2003. WinCPP, an online system for commercial lines rating and price quoting was expanded to 10 states from three and was available for agencies writing more than 70 percent of the company’s total premiums. Development of e-CLAS™, a commercial lines policy processing system advanced to the initial field testing stage for the Businessowners Policy, and this product is expected to go to the pilot stage with selected Ohio agencies in late 2004. Through December 31, 2003, capitalized development costs related to e-CLAS totaled $8 million and management anticipates investing another $11 million in 2004.

Profitability

In addition to seeking more adequate premium per exposure over the past three years, the company has focused on longer-term efforts to enhance profitability. These have included confirming what exposures the company has for each risk and making sure it offers appropriate coverages, terms and conditions and limits of insurance. The company continues to develop new underwriting guidelines, to re-underwrite books of business with selected agencies and to update policy terms and conditions where necessary. In addition, the company continues to leverage its strong local presence. Over the past three years, field marketing representatives met with every agency to reaffirm agreements on the extent of frontline renewal underwriting to be performed by local agencies. Loss control, machinery and equipment and field claims representatives have been conducting on-site inspections. Field claims representatives prepare full risk reports on every account reporting a loss above $100,000 or on any risk of concern.

Specific actions over the three years that have helped the company achieve these favorable results included:

• Contractor task force – Initiatives resulting from this review included developing a supplemental application to better identify exposures; renewing emphasis on agent and underwriter education in the area of effective risk transfer techniques, particularly for general contractors; better managing exposures to apartment or tract housing development; making residential contractors ineligible for monoline umbrella liability policies; and excluding mold and external insulating finishing system (EIFS) exposures, where allowed by state regulations. Accelerated use of insurance risk reviews by field claims staff helped manage the loss ratio for contractors and similar types of businesses, contributing to the loss ratio improvement for commercial lines.

• Risk-category reviews – These studies emphasized underwriting guidelines, such as property age, capacity and loss experience. While the company continues to evaluate each risk on its own merits, these risk category reviews have helped underwriters develop guidelines such as caps on umbrella limits for certain severity-prone risk categories.

• Commercial auto task force – This review identified or fine-tuned underwriting guidelines and procedures, with careful attention to trucking businesses that specialize in transporting goods for others, in some cases on a long-haul basis.

• General liability task force –This study focused on loss trends by classes of business, severity versus frequency and other metrics for casualty coverages. The objective was to determine why results had not responded to the company’s other actions to improve profitability. The task force completed its analysis in mid-2003. Based on the findings, the company implemented increased underwriting and pricing attention for certain states and territories as well as for general liability classifications that have historically generated unprofitable results.

These actions have helped to address rising loss severity. The significant components of expenses for the commercial lines segment were:

• Losses incurred – Losses incurred includes both net paid losses and reserve additions for unpaid losses. As a result of the underwriting actions noted above, which have led to higher premiums on a relatively stable level of exposure, incurred losses declined to 51.2 percent of earned premiums in 2003, including a 2.0 percentage-point benefit from the UM/UIM reserve release, from 57.8 percent in 2002 and 62.3 percent in 2001. Management monitors incurred losses by size of loss, business line, risk category, geographic region, agency, field marketing territory and duration of policyholder relationship, addressing concentrations or trends as needed. Analysis indicated no significant concentrations beyond that seen in higher loss ratios for certain business lines, which management has addressed.

Commercial Lines Losses by Size

(Dollars in millions)


	Years ended December 31,
	2003			2002			2001
Losses $1 million or more	$	89		$	90		$	61
Losses $250 thousand to $1 million		117			123			112
Development and case reserve increases of $250 thousand or more		121			121			111
Other losses		608			622			593

Total losses incurred excluding catastrophe losses		935			956			877
Catastrophe losses		42			40			28

Total losses	$	977		$	996		$	905

As a percent of earned premiums:
Losses $1 million or more		4.6	%		5.2	%		4.2	%
Losses $250 thousand to $1 million		6.2			7.2			7.7
Development and case reserve increases of $250 thousand or more		6.3			7.0			7.7
Other losses		31.9			36.1			40.8

Loss ratio excluding catastrophe losses		49.0	%		55.5	%		60.4	%
Catastrophe loss ratio		2.2			2.3			1.9

Total loss ratio		51.2	%		57.8	%		62.3	%

Looking at commercial lines loss data by size, management evaluates new losses and case reserve adjustments greater than $250,000 to track frequency and severity. Analysis of loss data by average size of loss supports management’s belief that the increase in loss severity is not a temporary phenomenon. However, new losses between $250,000 and $1 million and case reserve increases greater than $250,000, declined as a percentage of earned premiums in each of the past two years. New losses greater than $1 million declined as a percentage of earned premium in 2003 after rising 1.0 percentage point in 2002.

• Loss expenses incurred – Loss expenses incurred were stable as a percent of earned premium in 2003 and 2002 after rising in 2001 because of higher loss expense reserves.

• Catastrophe losses – Commercial lines catastrophe losses, net of reinsurance and before taxes, were $42 million in 2003, compared with $40 million in 2002 and $28 million in 2001, which included $9 million for losses related to events of September 11, 2001.

• Underwriting expenses incurred — In 2003 the ratio was reduced by 0.8 percentage points due to the software recovery. In 2003, commission expense rose by 1.3 percentage points as total contingent (profit-based) commissions were two times the level of the prior year because of strong recent results. The company relies on its independent agencies as frontline underwriters who know the businesses and individuals in their communities; many agencies are benefiting from their hard work over the past several years. Depreciation of capitalized costs in 2003 was 0.2 percentage points higher than the prior year as significant technological initiatives moved into service. Over the three-year period, non-commission expenses remained steady as a percent of earned premiums.

• Policyholder dividends incurred – Policyholder dividend expense as a percent of earned premiums was 0.8 percent in 2003 compared with 0.3 percent in 2002 and 1.1 percentage points in 2001. The rise between 2003 and 2002 reflected increased estimates of workers compensation dividends. The decline between 2002 and 2001 was due to the company’s emphasis on pricing for workers compensation as well as its decision not to write or renew many of these policies.

Line of Business Analysis

(Dollars in millions)


	Years ended December 31,
Calendar year	2003			Change %			2002			Change %			2001			Change %
Commercial multi-peril:
Earned premium	$	673			10.9		$	607			13.2		$	536			15.8
Loss and loss expenses incurred		442			4.7			422			2.1			413			18.5
Loss and loss expenses ratio		65.6	%					69.5	%					77.1	%
Loss and loss expenses ratio excluding catastrophes		59.9						63.5						73.6
Workers compensation:
Earned premium	$	293			(0.5	)	$	294			16.7		$	252			21.3
Loss and loss expenses incurred		235			0.1			235			15.7			203			32.6
Loss and loss expenses ratio		80.5	%					80.0	%					80.7	%
Loss and loss expenses ratio excluding catastrophes		80.5						80.0						80.7
Commercial auto:
Earned premium	$	419			9.3		$	383			19.8		$	320			20.9
Loss and loss expenses incurred		240			(7.2	)		259			(5.7	)		274			(13.9	)
Loss and loss expenses ratio		57.3	%					67.5	%					85.7	%
Loss and loss expenses ratio excluding catastrophes		56.5						66.7						85.1
Other liability:
Earned premium	$	342			24.1		$	276			27.5		$	216			4.9
Loss and loss expenses incurred		183			(14.5	)		214			68.3			127			(24.4	)
Loss and loss expenses ratio		53.6	%					77.8	%					58.9	%
Loss and loss expenses ratio excluding catastrophes		53.6						77.8						58.9


Accident year	2003			2002			2001			2000			1999
Loss and loss expenses incurred:
Commercial multi-peril	$	429		$	419		$	417		$	401		$	315
Workers compensation		223			227			221			199			162
Commercial auto		277			263			247			245			221
Other liability		262			203			151			144			100
Loss and loss expenses incurred ratio:
Commercial multi-peril		63.7	%		69.0	%		77.7	%		86.8	%		77.2	%
Workers compensation		76.1			77.1			87.7			95.9			87.4
Commercial auto		66.0			68.5			77.3			92.5			96.7
Other liability		76.6			73.5			69.8			69.8			54.6

In total, commercial multi-peril, workers compensation, commercial auto and other liability accounted for 90.5 percent of total commercial lines earned premium in 2003 compared with 90.5 percent in 2002 and 91.5 percent in 2001. Approximately 95 percent of the company’s commercial lines premiums are written for accounts with coverages from more than one business lines. The company believes that its commercial lines area is best measured and evaluated on a segment basis. For reference, however, the table above and discussion below summarizes growth and profitability trends separately for each of the four primary business lines.

The accident year loss data provides current estimates of accident year incurred loss and loss expenses for the past five years. Accident year data shows the year in which loss events occurred, regardless of when the losses are actually reported, booked or paid.

Over the past three years, results for the business lines within the commercial lines segment have reflected the company’s emphasis on underwriting and obtaining adequate pricing for the covered risk, as discussed above. Other factors that have affected results for these lines included:

• Commercial multi-peril – As noted above, the company wrote a higher than normal number of one-year policies in 2002 pending regulatory approval for changes in policy terms and conditions. In addition to industrywide slowing in premium growth, this decision affected the 2003 and 2002 growth rates for the company’s commercial multi-peril business line as some liability coverages previously written in premium discounted packages were moved to non-discounted policies, which are included in the other liability line of business.

The loss and loss expenses ratio declined steadily over the three-year period. This is the company’s single largest business line and the loss data are the best indicators of the success of the growth and underwriting actions that have been implemented in the past three years. Higher general liability base rates were effective in most states during 2003. This contributed to further improvement in the loss and loss expenses ratio in 2003. In 2002, underwriting and pricing initiatives also contributed, including package discount eligibility reviews, elimination or reduction of discounts, promotion of insurance-to-value levels and the salvage and subrogation reserve. The overall effect of these actions improved the loss and loss expenses ratio by 3.9 percentage points in 2003 and 7.6 percentage points in 2002. Additions of $27 million to reserves for older accident years offset the improvement by 4.4 percentage points in 2002.

• Workers compensation – Conditions within the workers compensation market improved between 1999 and 2003 as market pricing rose in most states, albeit offset by continued rising trends in loss severity. As indicated by the rapid rise in premium volume of state pools for workers compensation, many carriers chose to exit significant portions of this line of business. While the company remains highly selective about the risks covered, workers compensation is available in packages for commercial lines policyholders, maintaining the company’s competitive position in selected states. Workers compensation has a lower commission ratio than the other commercial business lines.

In 2003 and 2002 the company chose not to renew selected policies where the aggregate terrorism exposure risk was excessive. Any new or renewal policy covering 200 or more employees at any one location received added scrutiny as the company sought to manage risk aggregation. On the basis of new business premiums written directly by agents, new workers compensation premiums rose 5.9 percent in 2003 after declining 17.4 percent in 2002 and 18.4 percent in 2001. Total workers compensation earned premiums were unchanged between 2003 and 2002 because of rate increases offset by a decline in policy count due to the re-underwriting effort.

The workers compensation loss and loss expense ratio has been steady for three years. Overall pricing increases for new and renewed risks and underwriting actions have helped to bring about declining accident year loss ratios over the three-year period. The loss and loss expenses ratio in 2002 reflected the addition of $23 million to IBNR for older accident years, offset by the salvage and subrogation reserve. Higher than expected paid and reported loss development, primarily in accident years 2001 and 2000, accounted for $21 million of the 2002 IBNR change.

• Commercial auto – Commercial auto premium growth trends reflected the factors influencing overall commercial lines performance with the primary driver being price increases.

In the past several years, the company accelerated efforts to improve commercial automobile underwriting and rate levels, making certain that vehicle use was properly classified. As a result, the loss and loss expenses ratio for commercial auto improved in each of the past three years. Further, a task force studied loss patterns in this business line and recommended new or revised underwriting guidelines to assure accurate classification and pricing. As part of the company’s overall emphasis on underwriting, risk information is being more closely scrutinized, generally resulting in higher pricing for renewal policyholders. The 2003 UM/UIM reserve release had its most substantial impact on the commercial auto line, lowering the full-year loss and loss expense ratio by 6.9 percentage points. The 2002 ratio benefited by 7.5 percentage points from the salvage and subrogation reserve.

• Other liability (commercial umbrella, commercial general liability and most executive risk policies) – Earned premium growth for the other liability line continued at a higher pace in 2003 because of the number of policies written in non-discounted programs and the continuing rise in liability pricing. Other liability policy count has been stable as growth in the number of non-discounted policies has offset declines in other areas, in part due to a change that allowed umbrella coverages to be endorsed to a primary policy rather than be written separately.

For professional liability coverages, particularly nursing home professional liability, the company narrowed the underwriting criteria and significantly increased rates. Directors and officers coverage accounted for 12 percent of other liability premium in 2003. Director and officer policies are offered primarily to non-profit organizations, reducing the risk associated with this line of business; only 35 in-force director and officer policies as of December 31, 2003, are for publicly traded companies and only nine are for Fortune 1000 companies.


Ohio		31-0746871

(State of incorporation)		(I.R.S. Employer Identification No.)


Part I
	Item 1. Business
	Item 2. Properties
	Item 3. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
Part II
	Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters
	Item 6. Selected Financial Data
	Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Items 7(a). Quantitative and Qualitative Disclosures About Market Risk
	Item 8. Financial Statements and Supplementary Data
Independent Auditors’ Report
	Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	Item 9(a). Controls and Procedures
Part III
	Item 10. Directors and Executive Officers of the Registrant
	Item 11. Executive Compensation
	Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
	Item 13. Certain Relationships and Related Transactions
	Item 14. Principal Accountant Fees and Services
Part IV
	Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
Index of Exhibits
EX-23
EX-31(A)
EX-31(B)
EX-32


		Years ended December 31,
				Percent				Percent
(In millions)		2003		of total		2002		of total

Commercial multi-peril		$	705		20.8	$	624		19.8
Workers compensation			563		16.6		523		16.6
Commercial auto			385		11.4		386		12.3
Other liability			774		22.9		734		23.3
Personal auto			224		6.6		202		6.4
Homeowners			94		2.8		99		3.2
All other lines of business			641		18.9		582		18.4

	Total	$	3,386		100.0	$	3,150		100.0


		Calendar year ended December 31,

(In millions)		1993		1994		1995		1996		1997		1998		1999		2000		2001		2002		2003

A. Originally reported reserves for unpaid loss and loss expenses:
	Gross of reinsurance	$	1,365	$	1,510	$	1,690	$	1,824	$	1,889	$	1,978	$	2,093	$	2,401	$	2,865	$	3,150	$	3,386
	Reinsurance recoverable		72		78		109		122		112		138		161		219		513		542		541

	Net of reinsurance	$	1,293	$	1,432	$	1,581	$	1,702	$	1,777	$	1,840	$	1,932	$	2,182	$	2,352	$	2,608	$	2,845

B. Cumulative net paid as of:
	One year later	$	343	$	368	$	395	$	453	$	499	$	522	$	591	$	697	$	758	$	799
	Two years later		538		578		630		732		761		853		943		1,116		1,194
	Three years later		663		709		801		884		965		1,067		1,195		1,378
	Four years later		734		802		881		992		1,075		1,207		1,327
	Five years later		788		847		946		1,049		1,152		1,283
	Six years later		814		885		977		1,093		1,205
	Seven years later		838		902		1,009		1,123
	Eight years later		848		926		1,031
	Nine years later		866		943
	Ten years later		880
C. Net reserves re-estimated as of:
	One year later	$	1,200	$	1,306	$	1,429	$	1,582	$	1,623	$	1,724	$	1,912	$	2,120	$	2,307	$	2,528
	Two years later		1,116		1,220		1,380		1,470		1,551		1,728		1,833		2,083		2,263
	Three years later		1,067		1,214		1,279		1,405		1,520		1,636		1,802		2,052
	Four years later		1,067		1,131		1,236		1,380		1,465		1,615		1,771
	Five years later		1,103		1,106		1,227		1,326		1,466		1,608
	Six years later		1,005		1,091		1,189		1,333		1,463
	Seven years later		997		1,060		1,205		1,333
	Eight years later		978		1,091		1,210
	Nine years later		1,010		1,095
	Ten years later		1,015
D. Cumulative net redundancy as of:
	One year later	$	93	$	126	$	152	$	120	$	154	$	116	$	20	$	62	$	45	$	80
	Two years later		177		212		201		232		226		112		99		99	$	89
	Three years later		226		218		302		297		257		204		130		130
	Four years later		226		301		345		322		312		225		161
	Five years later		190		326		354		376		311		232
	Six years later		288		341		392		369		314
	Seven years later		296		372		376		369
	Eight years later		315		341		371
	Nine years later		283		337
	Ten years later		278
Net liability re-estimated-latest		$	1,015	$	1,095	$	1,210	$	1,333	$	1,463	$	1,608	$	1,770	$	2,052	$	2,263	$	2,528
Re-estimated recoverable-latest			162		165		167		159		166		193		202		233		524		568

Gross liability re-estimated-latest		$	1,177	$	1,260	$	1,377	$	1,492	$	1,629	$	1,801	$	1,972	$	2,285	$	2,787	$	3,096

Cummulative gross redundancy		$	188	$	250	$	313	$	332	$	260	$	177	$	121	$	116	$	78	$	54


		Years ended December 31,
		2003				2002

(Dollars in millions)		Book value		Market value		Book value		Market value

Investment-grade corporate bonds		$	1,873	$	2,011	$	1,398	$	1,492
High-yield corporate bonds			505		537		693		629
Tax-exempt municipal bonds			1,181		1,258		1,055		1,112
Common stocks			2,174		8,160		1,958		7,464
Convertible securities			423		483		491		492

	Total	$	6,156	$	12,449	$	5,595	$	11,189

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


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


		As of and for the year ended December 31, 2003
									Earned		Earned
		Actual		Fair		Percent of			dividend		dividend to
(Dollars in millions)		cost		value		fair value			income		fair value

Fifth Third Bancorp		$	283	$	4,301		52.7	%	$	82		1.9	%
ALLTEL Corporation			119		614		7.5			19		3.2
National City Corporation			255		418		5.1			15		3.8
ExxonMobil Corporation			133		367		4.5			9		2.4
The Procter & Gamble Company			94		279		3.4			5		1.8
Wyeth			115		265		3.3			6		2.2
The PNC Financial Services Group			62		258		3.2			9		3.7
FirstMerit Corporation			95		201		2.5			8		3.8
Merck and Co., Inc.			144		158		1.9			5		3.2
U.S. Bancorp			91		149		1.8			4		2.4
Sky Financial Group, Inc.			91		121		1.5			4		3.2
Piedmont Natural Gas Company			51		110		1.3			4		3.8
Wells Fargo and Company			44		108		1.3			2		3.1
Johnson & Johnson			101		107		1.3			1		1.9
Alliance Capital Management Holding L.L.P.			53		107		1.3			6		6.8
All other common stock holdings			443		597		7.4			18		3.6

	Total	$	2,174	$	8,160		100.0	%	$	197		2.3


(Source:Nasdaq National Market)	2003								2002
Quarter	1^st		2^nd		3^rd		4^th		1^st			2^nd			3^rd			4^th

High	$	39.45	$	39.36	$	41.72	$	41.91	$	43.85		$	47.30		$	46.84		$	40.24
Low		33.07		35.10		36.60		39.66		36.55			42.69			34.22			32.43
Period-end close		35.07		37.04		40.00		41.75		43.66			46.53			35.58			37.55
Cash dividends declared		0.25		0.25		0.25		0.25		0.22	¼		0.22	¼		0.22	¼		0.22	¼

•		recession or other economic conditions resulting in lower demand for insurance products
•		unusually high levels of catastrophe losses due to changes in weather patterns, environmental events or other causes
•		increased frequency and/or severity of claims
•		events or conditions that could weaken or harm the company’s relationships with its independent agencies and limit opportunities for growth, including a downgrade of the company’s financial strength ratings, concerns that doing business with the company is too difficult or perceptions that the company’s level of service is no longer a distinguishing characteristic in the marketplace
•		delays in the development, implementation and benefits of technology enhancements
•		amount of reinsurance purchased and financial strength of reinsurers
•		inaccurate estimates or assumptions used for critical accounting estimates
•		sustained decline in overall stock market values negatively affecting the company’s equity portfolio, in particular a sustained decline in market value of Fifth Third Bancorp shares
•		events that lead to a significant decline in the market value of a particular security and impairment of the asset
•		decreased ability to generate growth in investment income
•		insurance regulatory actions, legislation or court decisions that increase expenses or place the company at a disadvantage in the marketplace
•		adverse outcomes from litigation or administrative proceedings

•		Earned premiums – Over the past three years, the company has taken advantage of strong insurance industry pricing and leveraged its relationships with independent agencies to obtain higher premiums on new and renewal business. The rate of increase for commercial lines earned premiums slowed in 2003, reflecting changing market conditions, while the rate of increase for personal lines earned premium rose due to higher rates. Total policy count was down 2.2 percent in 2003 after rising 1.7 percent in 2002.

		Management considers statutory net written premium growth to be a key performance indicator, since it can be used to compare the company’s growth to industry performance and allows it to evaluate the success of its strategies. The estimated industry growth rate was 10.2 percent, 14.9 percent and 8.5 percent in 2003, 2002 and 2001, respectively. The company’s statutory net written premiums on an adjusted basis rose 11.7 percent in 2003, 14.0 percent in 2002 and 13.0 percent in 2001. The company’s 2003 and 2002 statutory net written premiums were adjusted for the effect of a refinement adopted in 2002 of the company’s estimation process for matching written premiums to policy effective dates. The company’s 2001 statutory net written premiums were adjusted for the adoption of Codification.

•		Commercial multi-peril – As noted above, the company wrote a higher than normal number of one-year policies in 2002 pending regulatory approval for changes in policy terms and conditions. In addition to industrywide slowing in premium growth, this decision affected the 2003 and 2002 growth rates for the company’s commercial multi-peril business line as some liability coverages previously written in premium discounted packages were moved to non-discounted policies, which are included in the other liability line of business.

		The loss and loss expenses ratio declined steadily over the three-year period. This is the company’s single largest business line and the loss data are the best indicators of the success of the growth and underwriting actions that have been implemented in the past three years. Higher general liability base rates were effective in most states during 2003. This contributed to further improvement in the loss and loss expenses ratio in 2003. In 2002, underwriting and pricing initiatives also contributed, including package discount eligibility reviews, elimination or reduction of discounts, promotion of insurance-to-value levels and the salvage and subrogation reserve. The overall effect of these actions improved the loss and loss expenses ratio by 3.9 percentage points in 2003 and 7.6 percentage points in 2002. Additions of $27 million to reserves for older accident years offset the improvement by 4.4 percentage points in 2002.

•		Workers compensation – Conditions within the workers compensation market improved between 1999 and 2003 as market pricing rose in most states, albeit offset by continued rising trends in loss severity. As indicated by the rapid rise in premium volume of state pools for workers compensation, many carriers chose to exit significant portions of this line of business. While the company remains highly selective about the risks covered, workers compensation is available in packages for commercial lines policyholders, maintaining the company’s competitive position in selected states. Workers compensation has a lower commission ratio than the other commercial business lines.

		In 2003 and 2002 the company chose not to renew selected policies where the aggregate terrorism exposure risk was excessive. Any new or renewal policy covering 200 or more employees at any one location received added scrutiny as the company sought to manage risk aggregation. On the basis of new business premiums written directly by agents, new workers compensation premiums rose 5.9 percent in 2003 after declining 17.4 percent in 2002 and 18.4 percent in 2001. Total workers compensation earned premiums were unchanged between 2003 and 2002 because of rate increases offset by a decline in policy count due to the re-underwriting effort.

		The workers compensation loss and loss expense ratio has been steady for three years. Overall pricing increases for new and renewed risks and underwriting actions have helped to bring about declining accident year loss ratios over the three-year period. The loss and loss expenses ratio in 2002 reflected the addition of $23 million to IBNR for older accident years, offset by the salvage and subrogation reserve. Higher than expected paid and reported loss development, primarily in accident years 2001 and 2000, accounted for $21 million of the 2002 IBNR change.

•		Commercial auto – Commercial auto premium growth trends reflected the factors influencing overall commercial lines performance with the primary driver being price increases.

		In the past several years, the company accelerated efforts to improve commercial automobile underwriting and rate levels, making certain that vehicle use was properly classified. As a result, the loss and loss expenses ratio for commercial auto improved in each of the past three years. Further, a task force studied loss patterns in this business line and recommended new or revised underwriting guidelines to assure accurate classification and pricing. As part of the company’s overall emphasis on underwriting, risk information is being more closely scrutinized, generally resulting in higher pricing for renewal policyholders. The 2003 UM/UIM reserve release had its most substantial impact on the commercial auto line, lowering the full-year loss and loss expense ratio by 6.9 percentage points. The 2002 ratio benefited by 7.5 percentage points from the salvage and subrogation reserve.

•		Other liability (commercial umbrella, commercial general liability and most executive risk policies) – Earned premium growth for the other liability line continued at a higher pace in 2003 because of the number of policies written in non-discounted programs and the continuing rise in liability pricing. Other liability policy count has been stable as growth in the number of non-discounted policies has offset declines in other areas, in part due to a change that allowed umbrella coverages to be endorsed to a primary policy rather than be written separately.

		For professional liability coverages, particularly nursing home professional liability, the company narrowed the underwriting criteria and significantly increased rates. Directors and officers coverage accounted for 12 percent of other liability premium in 2003. Director and officer policies are offered primarily to non-profit organizations, reducing the risk associated with this line of business; only 35 in-force director and officer policies as of December 31, 2003, are for publicly traded companies and only nine are for Fortune 1000 companies.