United States Securities and Exchange Commission

Washington, D.C. 20549

Form 10-K

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

For the fiscal year ended December 31, 2005.

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

For the transition period from                                         to                                         .

Cincinnati Financial Corporation

(Exact name of registrant as specified in its charter)

Ohio (State of incorporation)		31-0746871 (I.R.S. Employer Identification No.)

6200 S. Gilmore Road
Fairfield, Ohio 45014-5141
(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
$2.00 par, common stock
(Title of Class)
6.125% Senior Notes due 2034
(Title of Class)
6.9% Senior Debentures due 2028
(Title of Class)
6.92% Senior Debentures due 2028
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ      No o

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

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

(Check one): Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No þ

The aggregate market value of voting stock held by nonaffiliates of the Registrant was $6,181,583,530 as of June 30, 2005. As of February 28, 2006, there were 174,106,280 shares of common stock outstanding.

Portions of the definitive Proxy Statement for Cincinnati Financial Corporation’s Annual Meeting of Shareholders to be held on May 6, 2006, are incorporated by reference into Parts II and III of this Form 10-K.

 

 

Part I

Item 1. Business

Cincinnati Financial Corporation – Introduction

We are an Ohio corporation formed in 1968. Through our subsidiaries, we have been in business since 1950, marketing commercial, personal and life insurance through independent insurance agencies to businesses and individuals. Our headquarters is in Fairfield, Ohio. At year-end 2005, we had 3,983 associates, with approximately 2,800 headquarters associates providing support to approximately 1,150 field associates.

Cincinnati Financial Corporation (CFC) owns 100 percent of three subsidiaries: The Cincinnati Insurance Company, CFC Investment Company and CinFin Capital Management Company. The Cincinnati Insurance Company owns 100 percent of our three smaller insurance 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 known as The Cincinnati Insurance Companies. 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.

Our filings with the Securities and Exchange Commission (SEC) are available, free of charge, on our Web site, www.cinfin.com, as soon as possible after they have been filed with the SEC. These filings include our annual reports on Form 10-K, our quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. In the following pages we reference various Web sites. These Web sites, including our own, are not incorporated by reference in this Annual Report on Form 10-K.

Periodically, we refer to estimated industry data so that we can give information about our performance versus the overall insurance industry. Unless otherwise noted, the industry data is prepared by A.M. Best Co., a leading insurance industry statistical, analytical and financial strength rating organization. Information from A.M. Best is presented on a statutory basis. When we provide our results on a comparable statutory basis, we label it as such; all other company data is presented in accordance with accounting principles generally accepted in the United States of America (GAAP) .

Our Business and Our Strategy

Introduction

Our company was founded more than 50 years ago by independent agents to support the ability of local independent property casualty insurance agents to deliver quality financial protection to people and businesses in their communities. Today, we operate much the same way, actively marketing commercial insurance policies in 32 states through a select group of independent insurance agencies. We actively market all of our personal lines insurance policies in 22 of those states. We seek to become the life insurance carrier of choice for the agencies that market our property casualty insurance products and offer other financial services to help agents and their clients – the policyholders.

Our company distinguishes itself in three ways:

•

We cultivate relationships with the independent insurance agents who market our policies and we make our decisions at the local level

•

We achieve claims excellence, covering the spectrum from our response to reported claims to our approach to establishing reserves for not-yet-paid claims

•

We invest for long-term total return, using available cash flow to purchase equity securities after covering insurance liabilities by purchasing fixed-maturity securities

Cultivating Relationships with Independent Insurance Agents

The U.S. property casualty insurance industry is a highly competitive marketplace with approximately 3,100 stock and mutual companies operating independently or in groups. No single company or group dominates across all product lines and states. Insurance companies (carriers) can market a broad array of products nationally or:

•

choose to sell a limited product line or only one type of insurance (monoline carrier)

•

target a certain segment of the market (for example, personal insurance)

•

focus on one or more states or regions (regional carrier)

Property casualty insurers generally market their products through one or more distribution channels:

•

independent agents, who represent multiple carriers,

•

captive agents, who represent one carrier exclusively, or

•

direct marketing through the mail or Internet

Some carriers use more than one channel. For the most part, we compete with insurance companies that market through independent insurance agents.

Independent Agency Distribution System

We are committed to the independent agency distribution system, offering a broad array of commercial, personal and life insurance products through this channel. We recognize that locally based independent agencies have relationships in their communities that can lead to policyholder satisfaction, loyalty and profitable business. Our field 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 to our agents.

At year-end 2005, our 1,024 agency relationships had 1,253 reporting agency locations marketing our insurance products. An increasing number of agencies have multiple, separately identifiable locations, reflecting their growth and consolidation of ownership within the independent agency marketplace. We believe “reporting agency locations,” a new measure for our company, accurately describes our agents’ scope of business and our presence within our 32 active states. At year-end 2004, we had 986 agency relationships with 1,213 reporting agency locations. At year-end 2003, we had 957 agency relationships with 1,185 reporting agency locations. In addition to providing data on reporting agency locations, we continue to give agency relationships metrics, such as our penetration within each agency relationship.

Property Casualty Agency Earned Premiums by State

In our 10 highest volume states, 853 reporting agency locations wrote 71.1 percent of our 2005 total property casualty agency earned premium volume. Agency earned premiums are premiums before reinsurance.

(Dollars in millions)		Earned				Percent								Reporting				Avg premium
		premium				of total				Change %				agency locations				per location
Year ended December 31, 2005
Ohio		$	737				23.1	%			2.2				224			$	3.3
Illinois			299				9.4				1.7				112				2.7
Indiana			238				7.4				0.9				99				2.4
Pennsylvania			192				6.0				8.0				63				3.0
Michigan			173				5.4				(1.2	)			88				2.0
Georgia			141				4.4				9.5				59				2.4
Virginia			134				4.2				4.8				53				2.5
North Carolina			130				4.1				10.7				68				1.9
Wisconsin			125				3.9				6.4				49				2.6
Kentucky			102				3.2				5.0				38				2.7
All other states			923				28.9				8.9				400				2.3
Total		$	3,194				100.0	%			5.1				1,253				2.5
Year ended December 31, 2004
Ohio		$	722				23.7	%			7.1				224			$	3.2
Illinois			294				9.7				7.7				113				2.6
Indiana			235				7.7				5.5				96				2.5
Pennsylvania			177				5.8				14.8				63				2.8
Michigan			175				5.8				12.2				83				2.1
Georgia			129				4.2				10.1				56				2.3
Virginia			127				4.2				12.8				51				2.5
Wisconsin			118				3.9				10.4				49				2.4
North Carolina			117				3.9				15.8				66				1.8
Kentucky			97				3.2				10.3				35				2.8
All other states			849				27.9				14.9				377				2.2
Total		$	3,040				100.0	%			10.8				1,213				2.5

In 2004, the most recent period for which data is available, Cincinnati Insurance was the No. 1 or No. 2 carrier in 74 percent of the reporting agency locations that have represented us for more than five years. The independent agencies that we choose to market our products share our philosophies. They do business person to person; offer broad, value-added services; maintain sound balance sheets and manage their agencies professionally. On average, we have a 17.3 percent share of the property casualty insurance in our

reporting agency locations. Our share is 24.3 percent in reporting agency locations that have represented us for more than 10 years; 11.5 percent in agencies that have represented us for five to 10 years; 5.1 percent in agencies that have represented us for one to five years; and less than 1 percent in agencies that have represented us for less than one year.

Over the next decade, industry analysts predict successful agencies will have opportunities to increase their size on average almost three-fold. Agencies are expected to continue to pursue consolidation opportunities, buying or merging with other agencies to create stronger organizations and expand service. In addition to the growing networks of agency locations owned by banks and brokers, other agencies are addressing the consolidation by forming voluntary associations. These associations, or “clusters,” share back office and other functions to enhance economies, while maintaining their individual ownership structures.

No single agency relationship accounted for more than 1.1 percent of our total agency earned premiums in 2005. Some of our agency relationships are with individual offices of bank- or broker-owned organizations. Our relationships are with each office separately, however, no bank- or broker-owned organization, in aggregate, accounted for more than 2.0 percent of our total agency earned premiums in 2005.

Strengthening Our Agency Relationships

We follow a number of strategies to strengthen our relationships with the independent property casualty insurance agencies that represent us:

Risk-specific Underwriting

We seek to be a consistent, predictable and reasonable carrier that agencies can rely on to serve their clients. Our field and headquarters underwriters make risk-specific decisions about both new business and renewals. On a case-by-case basis, we select risks we can cover on acceptable 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 and pricing is coordinated by the local field marketing representatives. Our agents and our field marketing, loss control, bond and machinery and equipment representatives know the people and businesses in their communities and can make informed decisions about each risk. These field marketing representatives also are responsible for selecting new independent agencies, coordinating field teams of specialized company representatives and promoting all of the company’s products within the agencies they serve. Commercial lines policy renewals are managed by headquarters underwriters who are assigned to specific agencies and consult with local field staff, as needed.

We apply our risk-specific underwriting philosophy to personal lines new and renewal business in a different process. Each agency brings us personal lines business from within the geographic territory that it serves using its knowledge of the risks in those communities. New and renewal business activities are supported by headquarters associates assigned to individual agencies.

Competitive Insurance Products

We are committed to offering the products and services local agents need to serve their clients – the policyholders. Our commercial lines products are structured to allow flexible combinations of coverages in a single package with a single expiration date. Our intent is to write personal auto and homeowners coverages in personal lines packages that may also include personal umbrella and other coverages. 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 for the agency and our company.

Our commercial lines packages are typically offered on a three-year policy term for most insurance coverages, a key competitive advantage. Although we offer three-year policy terms, premiums for some coverages within those policies are adjustable at anniversary for the subsequent annual period, and policies may be cancelled at any time at the discretion of the policyholder. Contract terms often provide that rates for property, general liability, inland marine and crime coverages, as well as policy terms and conditions, are fixed for the term of the policy. The general liability exposure basis may be audited annually. Commercial auto, workers compensation, professional liability and most umbrella liability coverages within multi-year packages are rated at each of the policy’s annual anniversaries for the next one-year period. The annual pricing 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. We estimate that approximately 75 percent of 2005 commercial premiums were subject to annual rating or were written on a one-year policy term.

In our experience, multi-year packages are somewhat less price sensitive for the quality-conscious insurance buyers who we believe are typical clients of our independent agents. Customized insurance programs on a three-year term complement the long-term relationships these policyholders typically have with their agents and with the company. By reducing annual administrative efforts, multi-year policies lower expenses for our company and for our agents. The commitment we make to policyholders encourages long-term relationships and reduces their need to annually re-evaluate their insurance carrier or agency. We believe 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, even in periods of rising rates.

Technology Solutions

We seek to continuously improve service to and communication with our agencies through an expanding portfolio of software:

•

Web-based quoting and policy processing systems that allow our agencies and our field and headquarters associates to collaborate more efficiently on new and renewal business and that give our agencies choice and control

•

Systems that automate our internal processes so our associates can spend more time serving agents and policyholders

Agencies access our quoting and policy processing systems via CinciLink^®, our secure agency-only Web site. CinciLink also provides other content that makes it easier to do business with us, such as online policy loss information, software updates, online courses on the company’s products and services and electronic coverage forms libraries.

We also are giving independent agents enhanced access to Cincinnati’s systems and client data quickly and easily through their agency systems. We recognize the investment agencies have made in agency management systems. In 2005, we gave agents access to CinciLink directly from their agency systems by leveraging industry leading integration products, TransactNOW^® and Transformation Station^®. In 2006, we plan to advance our usage of these products. For commercial lines, we will enable upload of select client data from the leading agency systems to our new commercial lines pricing and policy systems. For personal lines, agencies will be able to access Diamond billing information and policy detail directly from their agency systems.

Three commercial lines and one personal lines system form the core of our quoting and policy processing systems:

•

WinCPP® is an online commercial lines rate quoting system for businessowners, commercial package, commercial auto and workers compensation policies. WinCPP is available in all 32 states and used by all of our reporting agency locations. During 2006, we will add data sharing capabilities with agency systems and roll out quoting for small specialty programs for metalworkers, professional artisan contractors and garage owners. (A businessowners policy combines property, liability and business interruption coverages for small businesses.)

•

e-CLAS™ is a commercial lines policy processing system. e-CLAS will make it easier and more efficient for our agencies to issue and administer our commercial lines policies. In 2005, we introduced e-CLAS to all of our agencies in Ohio to process new and renewal businessowners policies.

Our primary long-term technology objectives are to:

	o		complete development of e-CLAS for all of our commercial lines of business and
	o		roll out the system to agencies in all of the states in which we do business

During 2006, we expect to roll out businessowners policy processing to four additional states and provide dentists package policy processing in all five e-CLAS states. We also will begin developing commercial auto and commercial package policy processing capabilities.

•

CinciBond™ is an automated system to process license and permit surety bonds. CinciBond enables agents to issue and print bonds at their offices. CinciBond was delivered to all Ohio agencies and initial groups of Indiana and Illinois agencies in 2005. During 2006, we will continue to deploy CinciBond in Indiana and Illinois.

•

Diamond is a real-time personal lines policy processing system, supporting all six of our personal lines of business and allowing once and done processing. After its introduction in Kansas in 2002, we began full deployment of Diamond in 2004. At year-end, Diamond was in use in agencies representing approximately 70 percent of our 2005 personal lines premium volume, including those in Alabama, Florida, Kansas, Illinois, Indiana, Michigan and Ohio. In 2005, $417 million of our $786 million of personal lines written premium was issued through Diamond. During 2005, we improved the system’s stability and speed and made additional enhancements requested by our agencies. Training for agents in six states that represent another 21.5 percent of our premium volume is scheduled for 2006. Agents in Georgia, Kentucky and Wisconsin began using Diamond in early 2006 with Minnesota, Missouri and Tennessee roll-outs planned for later in the year.

Two systems that automate our internal processes so our associates can spend more time serving agents and policyholders are accessed through CFCNet^®, our secure intranet:

•

CMS™ is a claims file management system. CMS, initially deployed in late 2003, allows simultaneous access to claim files by headquarters and field claims associates. Field and headquarters claims associates use CMS to process all reported claims in a virtual claim file. We continue to refine the system

to add capabilities to make our associates more effective. Agent access to selected information is planned for 2006.

•

i-View™ is a commercial lines policy imaging and workflow system. This system’s online policy viewing capability should speed the delivery and booking of policies as well as help expedite the claims process. We began rolling out i-View in 2004 and it was in use by approximately 50 percent of commercial lines underwriting teams at year-end 2005. Enhancements and infrastructure updates were completed in late 2005. Roll-out to the remaining teams began in January 2006 and we expect it will be completed during 2006.

Life Insurance Offerings Diversify Revenues and Earnings

We support the independent agencies affiliated with our property casualty operations in their programs to sell life insurance. The products offered by our life insurance subsidiary round out and protect accounts and improve account persistency. At the same time, the life operation looks to increase diversification of revenue and profitability sources for both the agency and our company.

Our property casualty agencies make up the main distribution system for our life insurance products. We also develop life business from other independent life insurance agencies. We are careful to solicit business from these other agencies in a manner that does not conflict with or compete with the marketing and sales efforts of our property casualty agencies. We emphasize up-to-date products, responsive underwriting and high quality service as well as competitive commissions.

Superior Financial Strength Ratings

In addition to the ratings of our parent company senior debt, our property casualty and life operations are awarded insurer financial strength ratings. Insurer financial strength ratings assess an insurer’s ability to meet its financial obligations to policyholders and do not necessarily address matters that may be important to shareholders. As of March 3, 2006, our financial strength ratings were:

Property Casualty

Parent Company

Insurance

Life Insurance

Senior Debt

Subsidiaries

Subsidiary

Financial Strength Ratings:

A. M. Best Co.

aa-

A++

A+

Fitch Ratings

A+

AA

AA

Moody’s Investors Services

A2

Aa3

—

Standard & Poor’s Ratings Services

A

AA-

AA-

Property Casualty Statutory Ratings:

Risk-Based Capital (RBC)

$

4,254

Authorized control level risk-based capital

635

Property casualty statutory surplus

4,194

Property casualty written premium-surplus ratio

0.7

x

Life Statutory Ratings:

Risk-Based Capital (RBC)

$

511

Authorized control level risk-based capital

52

Life statutory surplus

451

Life statutory risk-based adjusted surplus-liabilities ratio

37.3

%

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

•

A.M. Best – In June 2005, A.M. Best affirmed its top A++ (Superior) financial strength ratings and stable outlook for our property casualty subsidiaries. Less than 2 percent of the 1,064 insurer groups A.M. Best reviews annually qualify for the A++ rating.

A.M. Best cited our superior risk-based capitalization, successful business position developed through building a network of independent agents, very strong financial flexibility and liquidity, excellent interest coverage measures and modest financial leverage. A.M. Best said its ratings take into account our high common stock leverage, elevated investment concentration and somewhat geographically concentrated market profile. A.M. Best stated that it expects the property casualty group’s overall operating results and

capitalization will remain strong in the near term due to our focused underwriting strategy, strong agency relations and consistently sound loss reserving practices.

Also in June 2005, A.M. Best affirmed its A+ (Superior) rating for The Cincinnati Life Insurance Company. A.M. Best cited our life insurance subsidiary’s strategic position within Cincinnati Financial Corporation, our continuing focus on growth with a broad portfolio of life insurance products, expanding geographical presence, emphasis on full-time life insurance specialists, consistently positive statutory operating performance and adequate level of capitalization to manage our risks. A.M. Best said its rating considered the life subsidiary’s significant exposure to common stocks, lower operating profitability due to losses from accident and health business and the effect on surplus of acquisition costs related to writing increased amounts of new business.

•

Fitch Ratings – In August 2005, Fitch affirmed its AA (Very Strong) insurer financial strength ratings and stable outlook for our property casualty subsidiaries and life insurance subsidiary. Fitch cited the strong financial condition of our operating subsidiaries, excellent financial flexibility, successful total return investment strategy and competitive advantage derived from long-term relationships with independent agents who distribute our products.

Fitch said its ratings consider the property casualty group’s significant investment concentration in a small number of common stocks, geographic concentration that contributes to sizable catastrophe exposure and regulatory concentration and underperforming homeowner line of business. Fitch stated that it expects that financial leverage will remain at or near its current level over the intermediate term.

•

Moody’s Investors Service – Following our announcement of third-quarter 2005 results, Moody’s commented that the company’s strong balance sheet and conservative financial and operating leverage metrics continue to support the property casualty subsidiaries’ Aa3 ratings. Moody’s said that its ratings took into account the increased volatility risk to capital and surplus presented by our equity exposure, along with its potential liabilities.

Moody’s noted that the company was on track to achieve growth and profitability targets in line with Moody’s expectations for the current ratings. Moody’s said it expects the company will maintain our commercial pricing discipline along with our commitment to agency relationships, an integral filter in the underwriting process. Further, Moody’s expects full deployment of our policy processing system will simplify the process to introduce rate and product changes within our personal lines market.

•

Standard & Poor’s Ratings Services – In October 2005, Standard & Poor’s issued a corporate ratings report with the rationale for its AA- (Very Strong) ratings of the property casualty subsidiaries and its negative outlook. Standard & Poor’s based the ratings, affirmed in September 2004, on the group’s strong competitive position afforded by its extremely loyal and productive independent agency force, high business persistency, extremely strong capitalization and high degree of financial flexibility. Standard & Poor’s said its outlook took into account the company’s underperformance in our homeowner business; very aggressive investment strategies; slow, deliberate response to changing markets, and volatility related to geographic concentration.

Standard & Poor’s stated that it expects that the company should continue to perform well in its largest business segment, commercial lines, while lagging peers in personal lines profitability over the near term. Although progress could be tempered by slower growth, the sizeable equity position, adverse regulatory or judicial decisions or catastrophes, Standard & Poor’s said, it expects capitalization and growth will remain extremely strong and growth will be solid as new agency appointments and territory subdivisions partially offset possible weakening in industry pricing.

A December 2005 corporate ratings report gave the rationale for Standard & Poor’s AA- (Very Strong) rating of The Cincinnati Life Insurance Company. Standard & Poor’s based the rating, affirmed in September 2004, on the life subsidiary’s strategic position within our group of companies, an extraordinarily superior capital position, extremely strong liquidity and the strength of its marketing position among independent agents. Standard & Poor’s said its rating considered the modest but growing penetration of our property casualty customer base, a narrow but growing product line and asset/liability management in the early stage of development. Standard & Poor’s outlook included expectations for premium growth of 9 percent, continued broadening of our product portfolio, improved asset/liability management, continued extremely strong capital and liquidity, as well as improved benchmarks for tracking penetration of the property casualty customer base.

While the potential for volatility exists due to our catastrophe exposures, investment philosophy and bias toward incremental change, the ratings agencies consistently have asserted that we have built appropriate financial strength and flexibility to manage that volatility. We remain committed to strategies that emphasize long-term stability over short-term benefits that might accrue by quick reaction to changes in market conditions.

For example, through all market and economic cycles we maintain strong insurance company statutory surplus, a solid reinsurance program, sound reserving practices and low interest rate risk, as well as low debt and

strong capital at the parent-company level. Investments at the parent company give us flexibility to support our capitalization policies for the subsidiaries, improve the ability of the insurance companies to write additional premiums and maintain high insurer financial strength ratings.

In 2004, we transferred approximately 32 million shares of our Fifth Third Bancorp (Nasdaq: FITB) common stock holding to the insurance subsidiary from the parent company to reduce parent company investment assets. The transfer raised our property casualty statutory surplus and reduced our ratio of net written premiums to statutory surplus. This ratio is a common measure of operating leverage used in the property casualty industry. It serves as an indicator of the company’s premium growth capacity. The estimated property casualty industry net written premium to statutory surplus ratio was 1.0 percent, 1.1 percent and 1.2 percent in 2005, 2004 and 2003, respectively. We do not intend to leverage our lower ratio following the asset transfer by accelerating growth or strengthening loss reserves. Rather, the transfer allowed us to retain the financial flexibility that continues to support our high insurer financial strength ratings.

Cincinnati Life’s statutory adjusted risk-based surplus increased 4.1 percent to $511 million at December 31, 2005, from $491 million a year earlier. Statutory adjusted risk-based surplus as a percentage of liabilities, a key measure of life insurance company capital strength, was 37.3 percent at year-end 2005 compared with an estimated industry average ratio of 10.4 percent. The higher the ratio, the stronger an insurer’s security for policyholders and its capacity to support business growth.

At year-end 2005 and 2004, the risk-based capital (RBC) for our property casualty and life operations was exceptionally strong and well above levels that would have required regulatory action.

Programs, Products and Services to Support Agency Growth

We continue to expand the services we provide that support agency opportunities. Accessible field representatives are the first layer of support. Headquarters associates also provide agencies with underwriting, accounting and technology assistance and training. Company executives, headquarters underwriters and special teams regularly travel to visit agencies. Agents have opportunities for direct, personal conversations with our senior management team, and headquarters associates have opportunities to refresh their knowledge of marketplace conditions and field activities.

The field marketing representatives are joined by field claims, loss control, machinery and equipment, bond, premium audit, life insurance and leasing specialists. For example, our field engineering and loss control representatives perform inspections and recommend specific actions to improve the safety of the policyholder’s operations and the quality of the agent’s insurance account.

We complement the property casualty operations by providing products and services that help attract and retain high-quality independent insurance agencies. CFC Investment Company offers equipment and vehicle leases and loans for independent insurance agencies, their commercial clients and other businesses. It also provides commercial real estate loans to help agencies operate and expand their businesses. CinFin Capital Management markets asset management services to agencies and their clients, as well as other institutions, corporations and high net worth individuals.

When we appoint agencies, we look for organizations with knowledgeable, professional staffs. In turn, we make an exceptionally strong commitment to assist them in keeping their knowledge up to date and educating new people they bring on board as they grow. Numerous activities at our headquarters, in regional and agency locations and online fulfill this commitment:

•

At our headquarters, we conduct roundtables for agency principals, as well as our regular schedule of commercial lines, personal lines and life insurance agent schools and seminars. These generally focus on Cincinnati product and underwriting information and sales tips. In addition to schools for agents, we have opened seats for agents in our structured classroom training for new underwriting associates. Agency staff may return to their agencies after the class or stay and become fully grounded in Cincinnati philosophy by serving as an associate for a few years before returning to the agency.

•

Associates travel to regional and agency locations to instruct classes and provide a variety of educational support services. Teams conduct personal lines customer service representative training and marketing seminars to promote cross-serving and sales of bonds, leasing services, life worksite marketing, inland marine coverages and our program for dentists. Other teams help agencies learn to use our new systems or get the most from their own agency management systems. Cincinnati associates even co-host client seminars with our agencies on the benefits of worksite marketing or risk management and risk transfer techniques, with customized programs that address liability issues specific to contractor or dentist audiences.

•

We now bring courses to agency desktops, where at any time agency staff can access the Agency Learning Center through CinciLink, our secure agency-only Web site. The Learning Center offers convenient, online courses and Web conferences, including Cincinnati product information, Microsoft® Office topics and general business subjects. Our new producer and customer service representative curricula guide students through a progression of online courses and classroom instruction.

Except travel-related expenses for courses held at our headquarters, most programs are offered at no cost to our agencies. While that approach may be extraordinary in our industry today, the result is quality service for our policyholders and increased success for our independent agencies.

Third-party Measures of Satisfaction and Performance

The National Association of Insurance Commissioners’ Online Consumer Information Source (www.naic.org) measured our complaint ratio at a very low 0.25 versus the national median score of 1.00 for all property coverages in 2004, the most recent year for which data is available. NAIC members head the state departments of insurance that regulate insurance.

The Professional Insurance Agents Association of Ohio surveyed its members in 2005 on satisfaction with their insurance companies. We scored higher than any other insurer in the categories of claims handling, commercial lines competitiveness and agency compensation. Offsetting these top scores and other strong scores in personal lines policy service, company management and field marketing support, were scores lower than all other insurers in both the homeowner competitiveness and the personal auto competitiveness categories. As discussed in Item 7, Personal Lines Insurance Results of Operations, Page 47, we are taking steps to restore a competitive position in personal lines.

In a 2005 study, Ward Group named Cincinnati Insurance to its annual top 50 lists of property casualty and life/health insurers in America. Insurers and groups qualify based on financial safety, consistency and performance over a five-year period. Cincinnati is one of only eight property casualty insurers that have qualified for the list in each of its 15 years and one of only 10 property casualty insurers whose life insurance affiliates also qualified.

Growing with Our Agencies

One of our primary objectives is to increase our written premiums more rapidly than the industry. We believe our agencies are growing more rapidly than the industry, and we seek to maintain or increase our penetration within each agency as it grows.

Further improving service through the creation of smaller marketing territories that permit our local field marketing representatives to devote more time to each agency relationship should help us maintain or increase our penetration within each agency. At year-end 2005, we had 100 field marketing territories, up from 92 at the end of 2004 and 87 at the end of 2003. A new Delaware/Maryland territory represented both the subdivision of our existing Maryland territory and our entry into Delaware, our first new state since 2000. While we continually study the regulatory and competitive environment in states where we could decide to actively market our property casualty products, we have not announced plans to enter any of those states in the near future.

Another way we seek to increase overall premiums is to selectively appoint new agency relationships within our current marketing territories. In 2004, we set an objective to establish approximately 50 new agency relationships each year. In 2005, we established 41 new agency relationships, and in 2004, we established 50 new relationships. These new appointments and other changes in agency structures led to a net increase in reporting agency locations of 40 in 2005 and 22 in 2004. We are very careful to protect the franchise for current agencies when selecting and appointing new agencies.

Achieving Claims Excellence

Our claims philosophy reflects our belief that we will prosper as a company by responding to claims person to person, paying covered claims promptly, preventing false claims from unfairly adding to overall premiums and building financial strength to meet future obligations. We also believe that our company should have the financial strength to pay claims while also creating value for shareholders, leading to our emphasis on the establishment of adequate claims reserves.

Superior Claims Service

Our 751 locally based field claims representatives work from their homes, assigned to specific agencies. They respond personally to policyholders and claimants, typically within 24 hours of receiving an agency’s claim report. We believe the person-to-person approach, together with the resulting high level of service that field claims representatives, familiar with an agency and its policyholders, can provide, gives us a competitive advantage. We also help our agencies provide prompt service to policyholders by giving agencies authority to immediately pay most first-party claims up to $2,500.

Catastrophe Response Teams are comprised of volunteers from our experienced field claims staff. As hurricanes threaten, these associates travel to strategic locations near the expected impact area. This puts them in position to quickly get to the affected area, set up temporary offices and start calling on policyholders. Cincinnati takes pride in giving our field personnel the tools and authority they need to do their jobs. In times of widespread loss, our field claims representatives confidently and quickly resolve claims, often writing checks for damages on the same day they inspect the loss. Our Claims Management System introduced new efficiencies that are especially evident during catastrophes. Electronic claim files allow for fast initial contact of

policyholders and easy sharing of information between rotating storm teams, headquarters and local field claims representatives.

Cincinnati’s claims associates work hard to control costs where appropriate. We have several relationships with vendors that offer our insureds and claimants preferred rates. However, our biggest cost control program is our field claims representatives. Field claims representatives are educated continuously on new techniques and repair trends. These representatives have experience with area body shops, which helps them negotiate the right price with any facility the policyholder chooses.

We staff a Special Investigations Unit (SIU) with former law enforcement and claims professionals who are available to gather facts to help determine the fair amount to pay under a claim. While we believe it’s our job to pay all that is due under each policy, we also want to prevent false claims from unfairly increasing overall premiums. Our SIU also operates a computer forensic lab, using sophisticated software to recover data and mitigating the cost of computer-related claims for business interruption and loss of records.

Loss and Loss Expense Reserves

When claims are made by or against policyholders, any amounts that our property casualty operations pay or expect to pay for covered claims are termed losses. The costs we incur in investigating, resolving and processing these claims are termed loss expenses. Our consolidated financial statements include property casualty loss and loss expense reserves that estimate the costs of not-yet-paid claims incurred through December 31 of each year. The reserves include estimates for claims that have been reported to us plus our estimates for claims that have been incurred but not yet reported, along with our estimate for loss expenses associated with processing and settling those claims. We develop the various estimates based on individual claim evaluations and statistical projections. We reduce the loss reserves by an estimate for the amount of salvage and subrogation we expect to recover. For at least the past 10 years, our annual review of our estimates has led to savings from favorable development of loss reserves from prior accident years.

We encourage you to review several sections of the Management’s Discussion and Analysis where we discuss our loss reserves in greater depth. In Item 7, Critical Accounting Estimates, Property Casualty Loss and Loss Expense Reserves, Page 35, we discuss our process for analyzing potential losses and establishing reserves. In Item 7, Property Casualty Insurance Reserves, Page 61, we review reserve levels, including 10-year development of our property casualty loss reserves.

Investing for Long-term Total-return

While we seek to generate an underwriting profit in our insurance operations, our investments historically have provided our primary source of net income and contributed to our financial strength, driving long-term growth in shareholders’ equity and book value.

Under the direction of the investment committee of the board of directors, our 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. We invest some portion of cash flow in tax-advantaged fixed-maturity and equity securities to maximize after-tax earnings. With premiums generally received before claims are made under the policies purchased with those premiums, particularly for business lines such as workers compensation, we have substantial cash flow available for investment.

Insurance regulatory and statutory requirements established to protect policyholders from investment risk have always influenced our investment decisions on an individual insurance company basis. After covering both our intermediate and long-range insurance obligations with fixed-maturity investments, we historically used available cash flow to invest in equity securities. Investment in equity securities has played an important role in achieving our portfolio objectives and has contributed to net unrealized investment gains of $5.067 billion at year-end 2005. We remain committed to our long-term equity focus, which we believe is key to our company’s long-term growth and stability.

Our segments

Consolidated financial results primarily reflect the results of our four reporting segments. These segments are defined based on financial information we use to evaluate performance and to determine the allocation of assets.

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Commercial lines property casualty insurance

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Personal lines property casualty insurance

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Life insurance

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Investments

We also frequently evaluate results for our consolidated property casualty operations, which is the total of our commercial lines and personal lines segments. Our consolidated property casualty operations generated 80.8 percent of our revenues in 2005. Revenues, income before income taxes, and identifiable assets for each

segment are shown in a table in Item 8, Note 17 to the Consolidated Financial Statements, Page 98. Some of that information also is discussed in this section of this report, where we explain the business operations of each segment. The financial performance of each segment is discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations, which begins on Page 31.

Commercial Lines Property Casualty Insurance Segment

The commercial lines property casualty insurance segment contributed $2.254 billion in net earned premiums to total revenues and $285 million to income before income taxes in 2005. Commercial lines net earned premiums grew 6.0 percent in 2005, 11.4 percent in 2004 and 10.8 percent in 2003.

Four business lines – commercial multi-peril, workers compensation, commercial auto and other liability – accounted for 89.7 percent of our commercial lines earned premiums.

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Commercial multi-peril coverage is a combination of property and liability coverages. 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.

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Workers compensation coverages protect employers against specified benefits payable under state or federal law for workplace injuries to employees. In some of our active states, including Ohio, workers compensation coverage is a state monopoly, provided solely by the state instead of by private insurers.

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Commercial auto coverages protect businesses against liability to others for both bodily injury and property damage, medical payments to insureds and occupants of their vehicles, physical damage to an insured’s own vehicle from collision and various other perils, and damages caused by uninsured motorists.

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Other liability coverages include 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 our commercial lines earned premiums derives from a variety of other types of insurance products that we offer to businesses, including fire and allied lines commercial property policies, inland marine policies, fiduciary and surety bonds and machinery and equipment policies.

We market our full portfolio of commercial insurance products in 1,245 of our reporting agency locations and all 32 states where we actively market property casualty insurance. There are eight reporting agency locations that market only our surety bond products. Our emphasis is on products that agents can market to small- to mid-size businesses in their communities.

In 2005, our 10 highest volume commercial lines states generated 68.8 percent of our agency earned premium compared with 70.0 percent in the prior year. Agency earned premiums in the 10 highest volume states rose 5.2 percent in 2005 and 10.4 percent in 2004. Agency earned premiums in the remaining 22 states rose 10.5 percent in 2005 and 16.2 percent in 2004. Agency earned premiums are premiums before reinsurance.

Commercial Lines Agency Earned Premiums by State

(Dollars in millions)		Earned				Percent								Reporting				Avg premium
		premium				of total				Change %				agency locations				per location
Year ended December 31, 2005
Ohio		$	432				18.2	%			4.0				224			$	1.9
Illinois			241				10.1				2.8				112				2.1
Pennsylvania			174				7.3				7.9				63				2.8
Indiana			164				6.9				2.9				99				1.7
Michigan			130				5.5				0.2				88				1.5
North Carolina			125				5.3				11.1				68				1.8
Virginia			112				4.7				4.6				53				2.1
Wisconsin			98				4.1				8.7				49				2.0
Iowa			82				3.4				6.6				45				1.8
Georgia			79				3.3				13.6				59				1.3
All other states			739				31.2				10.5				393				1.9
Total		$	2,376				100.0	%			6.8				1,253				1.9
Year ended December 31, 2004
Ohio		$	415				18.7	%			8.1				224			$	1.9
Illinois			234				10.5				7.7				113				2.1
Pennsylvania			162				7.3				14.4				63				2.6
Indiana			160				7.2				6.8				96				1.7
Michigan			130				5.8				11.3				83				1.6
North Carolina			112				5.0				15.9				66				1.7
Virginia			107				4.8				13.5				51				2.1
Wisconsin			90				4.1				11.1				49				1.8
Iowa			77				3.4				12.4				44				1.7
Tennessee			72				3.2				14.4				30				2.4
All other states			666				30.0				16.2				393				1.7
Total		$	2,225				100.0	%			12.0				1,212				1.8

Commercial Lines Insurance Marketplace

For commercial lines, our competition predominately consists of those companies that also distribute through independent agents. The independent agencies that market our commercial lines products typically represent four to 12 standard market insurance carriers, including both national and regional carriers, some of which may be mutual companies. Generally, we believe regional carriers offer us the greatest competition on small- and mid-size commercial accounts because they often are familiar with the local market and focus on differentiating themselves through personal relationships with agencies. Carriers with a national presence provide formidable competition on large commercial accounts and have increasingly targeted smaller commercial accounts, marketing a service-center approach that some agencies find efficient. In our experience, the level of competition varies state by state and region by region, regardless of the carriers represented within a specific agency.

Since late 2003, the softening commercial lines marketplace has been characterized by increased competition, particularly for quality new business. Generally, the level of competition has varied by market, by line of business and by size of account. In most markets where we compete, disciplined underwriting generally has remained the norm. We believe carriers are modifying prices rather than changing policy terms and conditions. Prior to Hurricanes Katrina, Rita and Wilma, we anticipated commercial lines insurance market trends in 2006 would reflect accelerated competition with pressure on pricing from the industry’s increasing surplus and improving profitability. We are uncertain what effect the hurricanes, and the related rise in the cost of reinsurance, may have on commercial lines pricing throughout 2006.

Personal Lines Property Casualty Insurance Segment

The personal lines property casualty insurance segment contributed $804 million in net earned premiums to total revenues and $45 million to income before income taxes in 2005. Personal lines net earned premiums grew 1.4 percent in 2005, 6.4 percent in 2004 and 11.2 percent in 2003.

The personal auto line of business accounted for 53.8 percent and the homeowner line of business accounted for 35.5 percent of personal lines net earned premium in 2005.

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Personal auto coverages protect against 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 damages caused by uninsured motorists. In addition, many

states require policies to provide first-party personal injury protection, frequently referred to as no-fault coverage.

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Homeowner coverages protect against 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 our personal lines earned premium was derived from a variety of other types of insurance products we offer to individuals such as dwelling fire, inland marine, personal umbrella liability and watercraft coverages.

We market both homeowner and personal auto insurance products through 773 of our 1,253 reporting agency locations in 22 of the 32 states in which we market commercial lines insurance. We market homeowner products through 22 locations in three additional states (Maryland, North Carolina and West Virginia.) The remaining 458 locations are in states where we either do not actively market these products or where we have determined, in conjunction with agency management, that our personal lines products are not appropriate for their agencies at this time.

In 2005, our 10 highest volume personal lines states generated 85.0 percent of our agency earned premium compared with 85.1 percent in the prior year. Agency earned premiums in the 10 highest volume states rose 0.3 percent in 2005 and 6.5 percent in 2004. Agency earned premiums in the remaining states rose 1.1 percent in 2005 and 12.9 percent in 2004. Agency earned premiums are premiums before reinsurance.

Personal Lines Agency Earned Premiums by State

(Dollars in millions)		Earned				Percent								Reporting				Avg premium
		premium				of total				Change %				agency locations				per location
Year ended December 31, 2005
Ohio		$	305				37.4	%			(0.3	)			211			$	1.4
Indiana			74				9.0				(3.1	)			65				1.1
Illinois			59				7.2				(2.5	)			78				0.8
Georgia			62				7.6				4.8				46				1.4
Michigan			43				5.2				(5.3	)			66				0.6
Alabama			40				4.9				4.3				24				1.7
Kentucky			37				4.6				5.3				33				1.1
Wisconsin			27				3.3				(1.2	)			30				0.9
Florida			26				3.2				6.9				10				2.6
Virginia			21				2.6				5.8				23				0.9
All other states			123				15.0				1.1				209				0.6
Total		$	818				100.0	%			0.4				795				1.0
Year ended December 31, 2004
Ohio		$	306				37.6	%			5.7				202			$	1.5
Indiana			76				9.3				2.7				67				1.1
Illinois			61				7.4				7.7				80				0.8
Georgia			60				7.3				5.9				44				1.3
Michigan			45				5.5				14.9				60				0.8
Alabama			38				4.7				2.9				25				1.5
Kentucky			36				4.4				13.3				31				1.1
Wisconsin			28				3.4				8.2				30				0.9
Florida			25				3.0				4.7				10				2.5
Virginia			20				2.5				9.1				22				0.9
All other states			120				14.9				12.9				207				0.6
Total		$	815				100.0	%			7.4				778				1.0

Personal Lines Insurance Marketplace

In addition to carriers that market through independent agents, our personal lines competition also includes carriers that market through captive agents and direct writers, which our agencies’ clients may investigate independently. The independent agencies that market our personal lines products typically represent five to eight standard personal lines carriers.

In 2003, competition increased in the personal lines marketplace, driven by industrywide improvement in results and favorable frequency and severity trends. This followed several years of rising personal auto and homeowner rates and stricter enforcement of underwriting standards across the industry. The increased competition in the past several years also reflected implementation of tiered rating systems by a growing number of carriers. Carriers that have adopted these systems use multiple variables to segment the market, relying in part on credit-based information and offering a greater number of rate levels.

We expect that competition in the personal auto and homeowners markets will continue to increase over the next 12 to 24 months. Despite the record level of industrywide catastrophe losses in 2005 and 2004, many personal lines carriers have reported strong operating results in the past two years and continue to have healthy capital to support business growth. We believe these carriers are focused on gaining market share through the introduction of new products and services, increased advertising expenditures and the use of tiered rating systems that may allow them to target higher quality risks with lower prices.

Life Insurance Segment

The life insurance segment contributed $106 million of net earned premiums and $7 million in income before income taxes in 2005. Life insurance segment profitability is discussed in detail in Item 7, Life Insurance Results of Operations, Page 52.

The overall mission of our company is supported by The Cincinnati Life Insurance Company. Cincinnati Life helps meet the needs of our agencies, including increasing and diversifying agency revenues. We primarily focus on life products that produce revenue growth through a steady stream of premium payments. By diversifying revenue and profitability for both the agency and our 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 our property casualty operations. We emphasize up-to-date products, responsive underwriting and high quality service as well as competitive commissions. At year-end 2005, approximately 80 percent of our 1,253 property casualty reporting agency locations offered Cincinnati Life’s products to their clients. We also develop life business from other independent life insurance agencies. We are careful to solicit business from these other agencies in a manner that does not conflict with or compete with the marketing and sales efforts of our property casualty agencies.

Business Lines

Four lines of business – term insurance, whole life insurance, universal life insurance and worksite products – account for approximately 86 percent of the life insurance segment’s revenues:

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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.

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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. These policies provide guaranteed cash values that are available to withdrawing policyholders. The proposed insured is evaluated using normal underwriting standards.

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Universal life insurance – long-duration life insurance policies. Contract premiums 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 cash values available to withdrawing policyholders are not guaranteed and depend on the amount and timing of actual premium payments and the amount of actual contract assessments. The proposed insured is evaluated using normal underwriting standards.

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Worksite products – term insurance, whole life insurance, universal life and disability 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. Worksite insurance products provide our property casualty agency force with excellent cross-serving opportunities for both commercial and personal accounts. Agents report that offering worksite marketing to employees of their commercial accounts provides a benefit to the employees at low cost to the employer. Worksite marketing also connects agents with new customers who may not have previously benefited from receiving the services of a professional independent insurance agent.

In addition, Cincinnati Life markets:

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Disability income insurance — provides monthly benefits to offset the loss of income when the insured person is unable to work due to accident or illness.

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Deferred annuities — provide 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 the crediting rate declared by the company but not less than a contract-specified guaranteed minimum interest rate. A deferred annuity may be surrendered during the deferral period for a cash value equal to the accumulated payments plus interest less the surrender charge, if any.

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Immediate annuities — provide some combination of regular income and lump sum payments in exchange for a single premium. Most of the immediate annuities written by our life insurance segment are purchased by our property casualty companies to settle casualty claims.

Life Insurance Marketplace

Our life insurance company markets its products through approximately 1,000 of our reporting agency locations in all but one of the 32 states where we actively market property casualty insurance and through 453 additional independent life agencies in a total of 48 states. We do not market life insurance products in Alaska and New York.

We market our life insurance products either through independent agencies affiliated with our property casualty operations or through independent life agencies. Our property casualty agencies comprise the main distribution system for our life insurance products. Other life insurance carriers continue to expand the use of nontraditional distribution channels such as banks and financial planners as alternatives to the agency channel. We intend to market solely through independent agencies, with an emphasis on enhancing our relationships with the agencies affiliated with our property casualty insurance operations.

When marketing through our property casualty agencies we have several specific competitive advantages. Because our property casualty operations are held in high regard, the property casualty agency’s management is predisposed to consider carefully our proposals to sell our life products. All of our marketing efforts, property casualty and life, are directed by our field marketing department, which assures consistency of message. Our life field marketing representatives regularly meet face-to-face with the agency personnel responsible for life insurance production. The resources of our life headquarters underwriters and other associates are available to the field team to assist in the placement of agency business. We find fewer and fewer of our competitors provide direct, personal contact between the agent and the insurance carrier.

Also, we continue to emphasize the cross-serving opportunities between worksite marketing of life insurance products and the property casualty agency’s commercial accounts. For example, in 2006, we are exploring additional programs to simplify the worksite sales process, including electronic enrollment software. We also intend to enhance our worksite product portfolio to make it more attractive to agents.

In both the property casualty and independent life agency distribution systems we enjoy the competitive advantages of offering competitive, up-to-date products, providing close personal attention and exhibiting financial strength and stability.

We primarily offer products targeted at addressing the needs of small businesses that require key person coverage and individuals who require mortality coverage. Term insurance is our largest life insurance product line. We continue to introduce new term products with features our agents indicate are important. A new term series, which included a return-of-premium feature, replaced the existing term portfolio during 2005. Reaction to the new portfolio has been favorable with approximately 25 percent of applications requesting the return-of-premium feature. In 2006 we are introducing a new universal life product that offers a secondary guarantee that keeps the death benefit in force provided a competitive minimum premium requirement is met.

Because of our strong capital position, we can offer a competitive product portfolio including guaranteed products, giving our agents a marketing edge. Our life insurance company maintained strong insurer financial strength ratings in 2005: A.M. Best – A+ (Superior), Fitch — AA (Very Strong) and Standard & Poor’s – AA- (Very Strong, negative outlook).

Offsetting our competitive advantages we continue to see consolidation within the life insurance industry and an increased presence of large, well-capitalized carriers. The larger carriers can offer a broader product line, including variable and equity-indexed products. Our competitive advantage can be diminished because we do not have these types of products, particularly during a time when the stock market is performing well.

Current statutory laws and regulations require redundant reserves, particularly for preferred risk underwriting classes. These redundant reserves, in turn, depress statutory earnings and require a large commitment of capital. Redundant reserves are a significant issue, not just for our life insurance operations, but for all writers of term insurance and universal life with secondary guarantees. However, larger carriers may be able to better absorb or may be able to securitize the statutory reserve strain associated with competitively priced term insurance and universal life with secondary guarantees.

The NAIC recognizes the problems caused by redundant reserves and is following a two-step approach to provide relief. First, the NAIC has asked for comments on an amendment to the mortality table mandated for statutory reserves to incorporate preferred underwriting classifications. The amended table would lower reserve requirements for term insurance products. It may be available for use in statutory statements by December 31, 2006. Second, the NAIC proposes amending the actuarial guidelines for reserve requirements for universal life policies with secondary guarantees. The amendment would allow the use of low-level lapse rates in calculating reserves for these types of universal life plans and also would result in lower reserves. It may be available for use in statutory statements by December 31, 2007.

For the longer term, the NAIC has asked for comment proposals on implementing a principles-based reserving system rather than the current formulaic system. While still capturing all material risks, a principles-based system would allow a company to use its own experience, subject to credibility standards and appropriate margins for uncertainty. Also, under the proposed principles-based system, the insurer would fully document and disclose all its assumptions and methods to regulatory officials.

Investments Segment

The investment segment contributed $587 million of our total revenues in 2005, 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. After deducting interest credited to contract holders of the life insurance segment, the investments segment contributed $536 million of income before income taxes, or 65.1 percent of our total income before income taxes.

The fair value (market value) of our investment portfolio was $12.657 billion and $12.639 billion at year-end 2005 and 2004, respectively. The cash we generate from insurance operations historically has been invested in three broad categories of investments:

•		Fixed-maturity investments – Includes taxable and tax-exempt bonds and redeemable preferred stocks
•		Equity investments – Includes common and nonreedemable preferred stocks
•		Short-term investments – Primarily commercial paper

(In millions)						At December 31,
		2005								2004
		Book value				Fair value				Book value				Fair value
Taxable fixed maturities		$	3,304			$	3,359			$	3,161			$	3,376
Tax-exempt fixed maturities			2,083				2,117				1,622				1,694
Common equities			1,961				6,936				1,918				7,466
Preferred equities			167				170				27				32
Short-term investments			75				75				71				71
Total		$	7,590			$	12,657			$	6,799			$	12,639

Primarily as part of our program to support our high financial strength ratings almost all of our insurance subsidiary’s available cash flow since the second quarter of 2004 has been used to purchase fixed-maturity investments. Our objective was to bring the property casualty subsidiary’s ratio of common stock to statutory surplus in line with our historic sub-100 percent level. The ratio of common stock to statutory surplus for the property casualty insurance group portfolio was 97.0 percent at year-end 2005 compared with 103.5 percent at year-end 2004 and 114.7 percent at year-end 2003.

During the same period, we took actions to reduce the parent company’s ratio of investment assets to total assets for the parent company below 40 percent, for the reasons we discuss in Item 1A, Risk Factors, Page 21. The ratio of investment assets to total assets for the parent company was 33.9 percent at year-end 2005, compared with 36.3 percent at year-end 2004 and 58.6 percent at year-end 2003.

Going forward, we will take into consideration insurance department regulations and ratings agency comments, as well as the trend in these ratios, to determine what portion of new cash flow should be invested in equity securities at the parent and insurance subsidiary levels.

In the past, we also have separately reported convertible security investments, which make up approximately 2.4 percent of the total fair value of the investment portfolio. Beginning this year, we are reporting and analyzing convertible securities as either fixed-maturity or equity investments, based on the characteristics of the underlying security (bond or preferred stock).

Fixed-maturity and Short-term Investments

By maintaining a well diversified fixed-maturity portfolio, we attempt to reduce overall risk. We invest new money in the bond market on a continuous basis, targeting what we believe to be optimal risk-adjusted after-tax yields. Risk, in this context, includes interest rate, call, reinvestment rate, credit and liquidity risks. We do not make a concerted effort to alter duration on a portfolio basis in response to anticipated movements in interest rates. By continuously investing in the bond market, we build a broad, diversified portfolio that we believe mitigates the impact of adverse economic factors. In recent years, we have taken into account the trend toward a flatter corporate yield curve by purchasing higher-quality corporate bonds with intermediate maturities as well as tax-exempt municipal bonds and U.S. agency paper. Our focus on long-term total return may result in variability in the levels of realized and unrealized investment gains or losses from one period to the next.

We place a strong emphasis on purchasing current income-producing securities for the insurance companies’ portfolios. Within the fixed-maturity portfolio, we invest in a blend of taxable and tax-exempt securities to

minimize our corporate taxes. With the exception of U.S. agency paper, no individual issuer’s securities accounted for more than 1.0 percent of the fixed-maturity portfolio at December 31, 2005.

Taxable Fixed-maturities

Taxable fixed-maturity bonds include:

•		$973 million in U.S. agency paper, which is rated AAA by both Moody’s and Standard & Poor’s.
•		$1.750 billion in investment-grade corporate bonds that have a Moody’s rating at or above Baa 3 or a Standard & Poor’s rating at or above BBB-.
•		$358 million in high-yield corporate bonds that have a Moody’s rating below Baa 3 or a Standard & Poor’s rating below BBB-.
•		$278 million in convertible bonds and redeemable preferred stocks.

We seek 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.

Similar to the equity portfolio, the taxable fixed-maturity portfolio is most heavily concentrated in the financials sector, including banks, brokerage, finance and investment and insurance companies. The financials sector represented 26.1 percent and 26.6 percent, respectively, of book value and fair value of the taxable fixed-maturity portfolio at December 31, 2005, compared with 24.1 percent and 24.6 percent of book value and fair value at December 31, 2004. Although it is our largest concentration in a single sector, we believe our percentage in the financials sector is below average for the corporate bond market as a whole. No other sector or industry accounted for more than 10 percent of the taxable fixed-maturity portfolio.

Tax-exempt Fixed-maturities

We traditionally have purchased municipal bonds focusing on schools and essential services, such as sewer, water or others. While no single municipal issuer accounted for more than 1.2 percent of the tax-exempt municipal bond portfolio at December 31, 2005, there are higher concentrations within individual states. Holdings in Illinois, Indiana, Michigan, Ohio and Texas accounted for 60.6 percent of the municipal bond portfolio at year-end 2005.

Fixed-maturity and Short-term Portfolio Ratings

Our investments in U.S. agency paper and insured municipal bonds over the past several years have led to a significant rise in the percentage of A and higher rated fixed-maturity and short-term holdings, based on fair value. The majority of our non-rated securities are tax-exempt municipal bonds from smaller municipalities that chose not to pursue a credit rating. Credit ratings as of December 31, 2005 and 2004, for the fixed-maturity and short-term portfolio were:

(Dollars in millions)		2005								2004
		Fair				Percent				Fair				Percent
		value				to total				value				to total
Moody’s Ratings
Aaa, Aa, A		$	3,651				65.8	%		$	3,101				60.3	%
Baa			1,094				19.7				1,069				20.8
Ba			324				5.8				363				7.1
B			110				2.0				125				2.4
Caa			13				0.2				23				0.5
Ca			0				0.0				11				0.2
C			0				0.0				0				0.0
Non-rated			359				6.5				449				8.7
Total		$	5,551				100.0	%		$	5,141				100.0	%
Standard & Poor’s Ratings
AAA, AA, A		$	3,233				58.3	%		$	2,865				55.7	%
BBB			1,112				20.0				1,095				21.3
BB			354				6.4				340				6.6
B			117				2.1				154				3.0
CCC			2				0.0				5				0.1
CC			0				0.0				11				0.2
D			0				0.0				4				0.1
Non-rated			733				13.2				667				13.0
Total		$	5,551				100.0	%		$	5,141				100.0	%

Attributes of the fixed-maturity portfolio include:

		Years ended December 31,
		2005				2004
Weighted average yield-to-book value			5.4	%			5.8	%
Weighted average maturity		9.5		yrs		9.4		yrs
Weighted average duration to worst		5.4		yrs		4.8		yrs
Weighted average modified duration		7.1		yrs		6.9		yrs

The decline in the yield-to-book between 2005 and 2004 was due to investments of new cash flow as well as the reinvestment of calls and redemptions at interest rates below historic norms. The average maturity was essentially unchanged. The modified duration remained nearly flat while modified duration to worst, an option adjusted measure, increased. This was primarily due to a slight increase in rates in the intermediate range of the yield curve and our continued emphasis on purchasing municipal bonds, which have a lower pretax yield. We discuss the maturity of our fixed-maturity portfolio in Item 8, Note 2 to the Consolidated Financial Statements, Page 88.

Equity Investments

Our equity investment portfolio includes both common stocks and nonreedemable preferred stocks. Approximately 87.8 percent of the equity portfolio is made up of a core group of common stocks that we monitor closely to gain an in-depth understanding of their organization and industry. The portfolio also includes a broader group of smaller positions that are a source of trading flexibility and other risk management advantages. Our equity investments had an average dividend yield-to-cost of 11.7 percent at December 31, 2005, compared with 11.5 percent at December 31, 2004.

Common Stocks

At December 31, 2005, 35.1 percent of our common stock holdings (measured by fair value) were held at the parent company level. Our 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 we evaluate include increasing sales and earnings, proven management and a favorable outlook. When investing in common stock, we seek to identify some companies in which we can accumulate more than 5 percent of their outstanding shares. At year-end 2005, we held more than 5 percent of Fifth Third, FirstMerit Corporation, Piedmont Natural Gas Company and First Financial Bancorp. There also is a core group of common stocks in which the company holds a fair value of at least $100 million each. At year-end 2005, there were 14 holdings in that core group.

Largest Common Stock Holdings

(Dollars in millions)						As of and for the year ended December 31, 2005
														Earned				Earned
		Actual				Fair				Percent of				dividend				dividend to
		cost				value				fair value				income				fair value
Fifth Third Bancorp		$	283			$	2,745				39.6	%		$	106				3.9	%
ALLTEL Corporation			117				801				11.6				20				2.5
ExxonMobil Corporation			133				503				7.3				10				2.0
The Procter & Gamble Company			105				335				4.8				6				1.8
National City Corporation			171				329				4.7				14				4.3
PNC Financial Services Group, Inc.			62				291				4.2				10				3.2
Wyeth			62				204				2.9				4				2.0
Alliance Capital Management Holding L.P.			53				179				2.6				9				5.0
U.S. Bancorp			113				172				2.5				7				4.1
Wells Fargo & Company			66				139				2.0				5				3.2
FirstMerit Corporation			54				139				2.0				6				4.2
Johnson & Johnson			115				139				2.0				3				2.0
Piedmont Natural Gas Company, Inc.			62				134				1.9				4				2.9
Sky Financial Group, Inc.			91				130				1.9				4				3.2
All other common stock holdings			474				696				10.0				22				3.2
Total		$	1,961			$	6,936				100.0	%		$	230				3.3

In 2005, we sold 475,000 shares of our holdings of ALLTEL Corporation, which was our second largest common stock holding at year-end. We completed the sale of the remaining 12,700,164 shares of ALLTEL common stock in January 2006. ALLTEL was an excellent investment for the company for over 40 years, bringing an increasing flow of dividend income and healthy market value appreciation. Because of the restructuring that ALLTEL announced in late 2005, we determined that it no longer met our investment parameters.

This emphasis on a small group of equities and long-term investment horizon has resulted in significant concentrations within the portfolio, as this buy-and-hold strategy over many years has built up significant accumulated unrealized appreciation within the equity portfolio. At year-end 2005, the largest industry

concentrations within our common stock holdings were the financials sector at 63.4 percent of total fair value and the healthcare sector at 6.4 percent of total fair value.

Nonreedemable Preferred Stocks

We evaluate preferred stocks similar to the evaluation we make for fixed-maturity investments, seeking attractive relative yields. We generally focus on investment-grade preferred stocks issued by companies that have a strong history of paying common dividends, which provides us with another layer of protection. Additionally, when possible we seek out preferred stocks that offer a dividend received deduction.

Additional information regarding the composition of investments is included in Item 8, Note 2 to the Consolidated Financial Statements, Page 88.

Other

We report as “Other” the operations of the parent company, CFC Investment Company and CinFin Capital Management Company (excluding investment activities) as well as other income of our insurance subsidiary. As of December 31, 2005, CFC Investment Company had 2,815 accounts and $101 million in gross receivables, compared with 2,489 and $92 million at December 31, 2004. As of December 31, 2005, CinFin Capital had 64 institutional, corporate and individual clients and $864 million under management, compared with 60 and $827 million at December 31, 2004.

REGULATION

State Regulation

The business of insurance primarily is regulated by state law. Although our insurance subsidiaries are domiciled in Ohio and primarily subject to Ohio insurance laws and regulations, we also are subject to state regulatory authorities of all states in which we write insurance. The state laws and regulations that have the most significant effect on our insurance operations and financial reporting are discussed below.

•		Insurance Holding Company Regulation – Our 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. These regulations require that we 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 state 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.
•		Subsidiary Dividends — The dividend-paying capacity of our insurance subsidiaries is regulated by the laws of Ohio, the domiciliary state. This regulation requires an insurance subsidiary to provide a 10-day advance informational notice to the Ohio insurance department prior to payment of any dividend or distribution to its shareholders (all of our smaller insurance subsidiaries are 100 percent owned by The Cincinnati Insurance Company, which is 100 percent owned by Cincinnati Financial Corporation). Ordinary dividends must be paid from earned surplus, which is the amount of unassigned funds set forth in an insurance subsidiary’s most recent statutory financial statement.

The Ohio Department of Insurance must give prior approval before the payment of an extraordinary dividend by an insurance subsidiary to shareholders. You can find information about the dividends paid by our insurance subsidiary in 2005 in Item 8, Note 8 to the Consolidated Financial Statements, Page 91.

•

Insurance Operations – All of our 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; policy cancellations and non-renewals; 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.

•		Insurance Guaranty Associations — 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. In 2005, our insurance subsidiaries incurred a negative $3 million for guaranty associations. In 2004, our insurance subsidiaries incurred $2 million. We cannot predict the amount and timing of any future assessments or refunds on our insurance subsidiaries under these laws.
•		Shared Market and Joint Underwriting Plans — 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 our company, have been immaterial to our results of operations.
•		Statutory Accounting — 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 NAIC’s 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.

•		Insurance Reserves — State insurance laws require that property casualty and life insurance subsidiaries analyze the adequacy of reserves annually. Our appointed actuaries must submit an opinion that reserves are adequate for policy claims-paying obligations and related expenses.
•		Risk-Based Capital Requirements — 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 NAIC has a standard formula for annually assessing RBC. The formula for calculating RBC for property casualty companies takes into account asset and credit risks but places more emphasis on underwriting factors for reserving and pricing. The formula for calculating RBC for life insurance companies takes into account factors relating to insurance, business, asset and interest rate risks.

Federal Regulation

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 our business are discussed below.

•		The Terrorism Risk Insurance Act of 2002 (TRIA) – TRIA was signed into law on November 26, 2002, and extended on December 22, 2005, in a revised form. TRIA provides a temporary federal backstop for losses related to the writing of the terrorism peril in property casualty insurance policies. TRIA now is scheduled to expire December 31, 2007. 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, 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 subject written premiums for the preceding calendar year. Our deductible was $328 million (15 percent of 2004 subject premiums) in 2005, $199 million in 2004 (10 percent of 2003 subject premiums) and $136 million in 2003 (7 percent of 2002 subject premiums). For 2006, the deductible is an estimated $318 million (17.5 percent of 2005 subject premiums).
•		Health Insurance Portability and Accountability Act of 1996 (HIPAA) – We protect consumer health information pursuant to regulations promulgated under 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. Effective October 16, 2003, additional regulations required health plans to electronically transmit and receive standardized health care information. These rules and regulations have had a minimal effect on us, as our health insurance writings are limited to our self-funded health plan for our associates and a small number of run-off medical and hospital expense insurance policies. We do not actively market health, medical and hospital expense insurance policies.

•		Office on Foreign Asset Control (OFAC) — Subject to an Executive Order signed on September 24, 2001, intended to thwart financing of terrorists and sponsors of terrorism, financial institutions were required to block and report transactions and attempted transactions between their organization and persons and organizations named in a list published by OFAC. We currently use a combination of software, third-party vendor and manual searches to accomplish our transaction blocking and reporting activities.
•		Investment Advisers Act of 1940 — Our subsidiary, CinFin Capital Management Company, operates an investment advisory business and is therefore subject to regulation by the SEC as a registered investment adviser under the Investment Advisers Act of 1940. This law imposes certain annual reporting, recordkeeping, client disclosure and compliance obligations on CinFin Capital Management.

Item 1A. Risk Factors

Our business involves various risks and uncertainties that may affect achievement of our business objectives. Many of the risks could have ramifications across our integrated business activities. For example, while risks related to setting insurance rates and establishing and adjusting loss reserves are insurance activities, errors in these areas could have an impact on our investment activities. The following discussion should be viewed as a starting point for understanding the significant risks we face. It is not a definitive summary of their potential impact or of our strategies to manage and control the risks. Please see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Page 31, for a discussion of those strategies.

The risks and uncertainties below are not the only ones we face. There are additional risks and uncertainties that we currently do not believe are material. There also may be risk and uncertainties of which we are not aware. If any risks or uncertainties discussed here develop into actual events, they could have a material adverse effect on our business, financial condition or results of operations. In that case, the market price of our common stock could decline materially.

Readers should carefully consider this information together with the other information we have provided in this report and in other reports and materials we file periodically with the Securities and Exchange Commission as well as news releases and other information we disseminate publicly.

We rely exclusively on independent insurance agents to distribute our products.

We market our products through independent, non-exclusive insurance agents. These agents are not obligated to promote our products and can and do sell our competitors’ products. We must offer insurance products that meet the needs of these agencies and their clients. We need to maintain good relationships with the agencies that market our products. If we do not, these agencies may market our competitors’ products instead of ours, which may lead to us having a less desirable mix of business, which could affect our results of operations.

Events or conditions that could diminish a competitive advantage that our independent agencies enjoy:

•		Downgrade of the financial strength ratings of our insurance subsidiaries. We believe our strong insurer financial strength ratings, in particular the A++ rating from A.M. Best of our property casualty insurance subsidiaries, are an important competitive advantage. Only 16 other insurance groups, or 1.7 percent of all insurance groups, qualify for the A++, A.M. Best’s highest rating. If our property casualty ratings were downgraded, our agents might find it more difficult to market our products or might choose to emphasize the products of other carriers, which could adversely affect our results of operations.
•		Concerns that doing business with us is difficult or perceptions that our level of service is no longer a distinguishing characteristic in the marketplace. If agents or policyholders believed that we were no longer providing the prompt, reliable personal service that has long been a distinguishing characteristic of our insurance operations, our results of operations could be adversely affected.
•		Delays in the development, implementation, performance and benefits of technology projects and enhancements or independent agent perceptions that our technology solutions are inadequate to match their needs.

A reduction in the number of independent agencies marketing our products, the failure of these agencies to successfully market our products or the choice of these agencies to reduce their writings of our products could reduce our revenues and our results of operations if we were unable to replace them with agencies that produce adequate premiums.

Further, policyholders may choose a competitor’s product rather than our own because of real or perceived differences in price, terms and conditions, coverage or service. If the quality of the independent agencies with which we do business were to decline, that also might cause policyholders to purchase their insurance through different agencies or channels. Increased comfort in Internet purchasing could further reduce independent agencies’ writings of personal lines products.

Please see Item 1, Our Business and Our Strategy, Page 1, for a discussion of our relationships with independent insurance agents.

Competition could adversely affect our ability to sell policies at rates we deem adequate.

The insurance industry is highly competitive. Competition in our insurance business is based on many factors, including:

•		Competitiveness of premiums charged
•		Underwriting and pricing methodologies that allow insurers to identify and flexibly price risks
•		Underwriting discipline
•		Terms and conditions of insurance coverage
•		Rate at which products are brought to market

•		Technological innovation
•		Ability to control expenses
•		Adequacy of financial strength ratings by independent ratings agencies such as A.M. Best
•		Quality of services provided to agents and policyholders

If we were unable to compete effectively because of one or more of these factors, our premium writings could decline and our results of operations and financial condition could be materially adversely affected.

Please see Item 7, Commercial Lines, Personal Lines and Life Insurance Results of Operations, Page 41, Page 47, and Page 52, for a discussion of our competitive position in the insurance marketplace.

Managing technology initiatives and meeting new data security requirements are significant challenges.

While technology can streamline many business processes and ultimately reduce the cost of operations, technology initiatives present short-term cost and implementation risks. In addition, we may have inaccurate expense projections, implementation schedules or expectations regarding the efficacy of the end product. These issues could escalate over time.

Data security is subject to increasing regulation. We face rising costs and competing time constraints in meeting compliance requirements of new and proposed regulations. Computer viruses, hackers and other external hazards could expose our data systems to security breaches. These increased risks and expanding regulatory requirements could expose us to data loss, damages and significant increases in compliance costs.

Please see Item 1, Technology Solutions, Page 4, for a discussion of our technology initiatives.

The effects of emerging or latent claim and coverage issues on our business are uncertain.

As industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to insurance claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the number or size of claims. In some instances, these changes may not become apparent until some time after we have issued the insurance policies that could be affected by the changes. As a result, the full extent of liability under our insurance contracts may not be known for many years after a policy is issued. The effects of such unforeseeable emerging and latent claim and coverage issues could adversely affect our results of operations.

Please see Item 7, Property Casualty and Life Insurance Reserves, Page 61 and Page 67, for a discussion of our reserving practices.

Our loss reserves, our largest liability, are based on estimates and could be inadequate to cover our actual losses.

Our financial statements are prepared using GAAP. These principles require us to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying Notes. Actual results could differ materially from those estimates. For a discussion of the significant accounting policies we use to prepare our financial statements and the material implications of uncertainties associated with the methods, assumptions and estimates underlying our critical accounting policies, please refer to Item 7, Property Casualty Insurance Loss And Loss Expense Reserves, Page 35, and Item 8, Note 1 to the Consolidated Financial Statements, Page 84.

Our most critical accounting estimate is of loss reserves. Loss reserves are the amounts we expect to pay for covered claims and expenses we incur to adjust those claims. The loss reserves we establish in our financial statements represent an estimate of amounts needed to pay and administer claims arising from insured events that have occurred, including events that have not yet been reported to us. Loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of liability. Accordingly, our loss reserves for past periods could prove to be inadequate to cover our actual losses and related expenses. Any changes in these estimates are reflected in our results of operations during the period in which the changes are made. An increase in our loss reserves would decrease earnings, while a decrease in our loss reserves would increase earnings.

The estimation process for unpaid loss and loss expense obligations involves uncertainty by its very nature. We continually review the estimates and adjust the reserve as facts regarding individual claims develop, additional losses are reported and new information becomes known. Adjustments due to loss development for prior years are reflected in the calendar year in which they are identified.

Unforeseen losses, the type and magnitude of which we cannot predict, may emerge in the future. These additional losses could arise from changes in the legal environment, catastrophic events, increases in loss severity or frequency, or other causes. Such future losses could be substantial.

Please see Item 7, Property Casualty and Life Insurance Reserves, Page 61 and Page 67, for a discussion of our reserving practices.

We could experience an unusually high level of losses due to catastrophic or terrorism events or risk concentrations.

Our financial condition, cash flow and results of operations depend on our ability to underwrite and set rates accurately for a full spectrum of risks. We establish our pricing based on assumptions regarding the level of losses that will occur within classes of business, geographic regions and other criteria. A number of factors could cause our assumptions regarding future losses to be inaccurate.

In the normal course of our business, we provide coverage for exposures for which estimates of losses are highly uncertain, in particular catastrophic and terrorism events. Catastrophes can be caused by a number of events, including hurricanes, tornadoes, windstorms, earthquakes, hailstorms, explosions, severe winter weather and fires. Due to the nature of these events, we are unable to predict precisely the frequency or potential cost of catastrophe occurrences. The extent of losses from a catastrophe is a function of both the total amount of insured exposure in the area affected by the event and the severity of the event.

We have 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, southern Indiana and parts of Ohio.
•		Tornado, wind and hail in the Midwest, Southeast, mid-Atlantic and Western regions.

We have identified terrorism exposure to general commercial risks in the metropolitan Chicago area as well as small co-op utilities, small shopping malls and small colleges throughout our 32 active states.

Additionally, our life insurance subsidiary could be adversely affected in the event of an epidemic such as the avian flu, particularly if the epidemic affects a broad range of the population beyond just the very young or the very old.

Our results of operations would be adversely affected if the level of losses we experienced over a period of time exceeded our actuarially determined expectations. In addition, our financial condition would be adversely affected if we were required to sell securities prior to maturity or at unfavorable prices to pay an unusually high level of loss and loss expenses. Securities pricing might be even less favorable if a number of insurance companies needed to sell securities during a short period of time because of unusually high losses from catastrophic events.

Our geographic concentration ties our performance to business, economic and regulatory conditions in certain states. We market our property casualty insurance product in 32 states, but our business is concentrated in the Midwest and Southeast. We also have exposure in states where we do not actively market insurance when clients of our independent agencies have business or properties in multiple states.

The Cincinnati Insurance Company also participates in three assumed reinsurance treaties with two reinsurers that spread the risk of very high catastrophe losses among many insurers. In 2006, we have exposure to assumed losses of 1 percent of property losses between $400 million and $1.2 billion from a single event under an assumed reinsurance treaty for Munich Re Group. The other two assumed reinsurance treaties are immaterial.

In the event of a severe catastrophic event or terrorist attack elsewhere in the world, our insurance losses may be immaterial. However, the companies in which we invest might be severely affected, which could affect our financial condition and results of operations.

Please see Item 7, Property Casualty and Life Insurance Reserves, Page 61 and Page 67, for a discussion of our reserving practices.

Our ability to obtain or collect on our reinsurance protection could affect our business, financial condition and results of operations.

We buy property casualty and life reinsurance coverage to mitigate the liquidity risk of an unexpected rise in claims severity or frequency from catastrophic events or a single large loss. The availability, amount and cost of reinsurance depend on market conditions and may vary significantly. If we are unable to obtain reinsurance on acceptable terms and in appropriate amounts, our business and financial condition may be adversely affected.

In addition, we are subject to credit risk with respect to our reinsurers. Although we purchase reinsurance to manage our risks and exposures to losses, this reinsurance does not discharge our direct obligations under the policies we write. We would remain liable to our policyholders even if we were unable to recover what we believe we are entitled to receive under our reinsurance contracts. Reinsurers might refuse or fail to pay losses that we cede to them, or they might delay payment. For long-term cases, the creditworthiness of our reinsurers may change before we can recover amounts to which we are entitled. A reinsurer’s insolvency, inability or unwillingness to make payments under the terms of its reinsurance agreement with our insurance subsidiaries could have a material adverse effect on our financial position and results of operations.

Prior to 2003, we participated in USAIG, a joint underwriting association of individual insurance companies that collectively function as a worldwide insurance market for all types of aviation and aerospace accounts. At year-end 2005, 36.9 percent, or $251 million, of our total reinsurance receivables were related to USAIG, primarily for September 11, 2001, events. Although more than 99 percent of the reinsurance recoverables associated with USAIG are backed by securities on deposit, if we are unable to collect these receivables, our financial position and results of operations could be materially affected. We no longer participate in new business generated by USAIG and its members.

Please see Item 7, 2006 Reinsurance Programs, Page 68, for a discussion of our reinsurance treaties.

Our ability to realize our investment objectives could affect our financial condition or our results of operation.

We invest premiums received from policyholders and other available cash to generate investment income and capital appreciation, maintaining sufficient liquidity to pay covered claims and operating expenses, service our debt obligations and pay dividends. At year-end 2005, our investment portfolio was $12.657 billion, or 79.1 percent of our total assets. In 2005, our investment operations contributed 15.6 percent of our revenue and 65.1 percent of our total income before income taxes.

Investment income is an important component of our revenues and net income. The ability to achieve our investment objectives is affected by factors that are beyond our control, such as inflation, economic growth, interest rates, world political conditions, terrorism attacks or threats and other widespread unpredictable events. These events may adversely affect the economy generally and could cause our investment income or the value of securities we own to decrease. A significant decline in our investment income could have an adverse effect on our net income, and thereby on our shareholders’ equity and our policyholders’ surplus. For more detailed discussion of risks associated with our investments; please refer to Item 7A, Qualitative and Quantitative Disclosures About Market Risk, Page 70.

Our investment performance also could suffer because of the types of investments, industry groups and/or individual securities in which we choose to invest. Market value changes related to these choices could cause a material change in our financial condition or results of operations.

One of our investments, Fifth Third, accounted for 26.3 percent of our shareholders’ equity at year-end 2005 and dividends earned from our Fifth Third investment were 20.2 percent of our investment income in 2005. If Fifth Third’s common stock price were to further decline significantly, our financial condition could be materially affected. If Fifth Third were to decrease or discontinue its dividend, our results of operation could be materially affected.

Because we currently own more than 10 percent of Fifth Third’s outstanding shares, we are limited in the amount of Fifth Third stock we could sell in any given period. This limitation could lead us to hold a sizeable position in Fifth Third even if it would no longer meet our investment parameters. This could result in a variety of adverse consequences depending on the reason we had concluded Fifth Third no longer met our investment parameters. For example, if Fifth Third were to stop paying dividends on its common stock, we would not be able to reinvest quickly in other income-earning investments, which would have a material affect on our results of operations.

Please see Item 1, Investments Segment, Page 15, and Item 7, Investments Results of Operations, Page 54, and Liquidity and Capital Resources, Page 57, for discussion of our investment activities.

Our status as an insurance holding company with no direct operations could affect our ability to pay dividends in the future.

Cincinnati Financial Corporation is a holding company that transacts substantially all of its business through its subsidiaries. Our primary assets are the stock in our operating subsidiaries and our investments. Consequently, our cash flow to pay cash dividends and interest on our long-term debt depends on dividends we receive from our operating subsidiaries and income earned on investments held at the parent-company level.

Dividends paid to us by our insurance subsidiary are restricted by the insurance laws of Ohio, our domiciliary state. These laws establish minimum solvency and liquidity thresholds and limits. Currently, the maximum dividend that may be paid without prior regulatory approval is limited to the greater of 10 percent of statutory surplus or 100 percent of statutory net income for the prior calendar year, up to the amount of statutory unassigned surplus as of the end of the prior calendar year. Dividends exceeding these limitations may be paid only with prior approval of the Ohio Department of Insurance. Consequently, at times, we might not be able to receive dividends from our insurance subsidiary or we might not receive dividends in the amounts necessary to meet our debt obligations or to pay dividends on our common stock. This could affect our financial position.

Please see Item 1, Regulation, Page 18, and Item 8, Note 8 to the Consolidated Financial Statements, Page 91, for discussion of insurance holding company dividend regulations.

We could make investment decisions or experience market value fluctuations that trigger restrictions applicable to the parent company under the Investment Company Act of 1940.

Compared to other insurance holding companies, we hold a significant level of investment assets at the parent company level. If these investment assets grow to account for more than 40 percent of parent company’s total assets, excluding assets of our subsidiaries, we might become subject to regulation under the Investment Company Act of 1940. Our operations are limited by the constraint that investment securities held at the holding company level should remain below the 40 percent threshold described above. Efforts to stay below the threshold could result in:

•		Disposal of otherwise desirable investment securities, possibly under undesirable conditions. Such dispositions could result in a lower return on investment, loss of investment income, and if we were unable to manage the timing of the dispositions, we also might realize unnecessary capital gains, which would increase our annual tax payment.
•		Limited opportunities to purchase equity securities that hold the potential for market value appreciation, which could hamper book value growth over the long term.
•		Maintenance of a greater portion of our portfolio of equity securities at the insurance subsidiary, which would cause the parent to be more reliant on its subsidiaries for cash to fund parent-company obligations, including shareholder dividends and interest on long-term debt.

If the parent company’s investment assets were to exceed the 40 percent ratio to total assets, excluding investment in its subsidiaries, and if it were determined that the holding company was an unregistered investment company, the holding company might be unable to enforce contracts with third parties, and third parties could seek rescission of transactions with the holding company undertaken during the period that it was an unregistered investment company, subject to equitable considerations set forth in the Investment Company Act. In addition, the holding company could become subject to monetary penalties or injunctive relief, or both, in an action brought by the SEC.

Please see Item 8, Note 15 to the Consolidated Financial Statements, Page 96, for discussion of the Investment Company Act of 1940.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

Cincinnati Financial Corporation owns our headquarters building located on 100 acres of land in Fairfield, Ohio. This building contains approximately 800,000 total square feet. The property, including land, is carried in our financial statements at $73 million as of December 31, 2005, and is classified as land, building and equipment, net, for company use. John J. & Thomas R. Schiff & Co. Inc., a related party, occupies approximately 6,750 square feet (1 percent).

In 2004, we decided to undertake a $100 million building expansion at our headquarters location in Fairfield, Ohio. Construction of an underground garage and third office tower began in early 2005. The new tower will contain more than 690,000 total square feet, including the garage. It will rise seven stories above three underground parking levels with 700 parking spaces. We estimate a completion date of September 2008 for the project. We believe this expansion will accommodate our business needs for the foreseeable future. The construction project is on schedule and on budget. As of December 31, 2005, construction costs totaled $18 million.

Cincinnati Financial Corporation owns the Fairfield Executive Center, which is located on the northwest corner of our headquarters property in Fairfield, Ohio. This is a four-story office building containing approximately 124,000 square feet. The property is carried in the financial statements at $7 million as of December 31, 2005, and is classified as land, building and equipment, net, for company use. CFC and our subsidiaries occupy approximately 90 percent of the rentable square feet and unaffiliated tenants occupy approximately 10 percent.

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. This property is carried in the financial statements at $3 million as of December 31, 2005, and is classified as other invested assets. Three tenants occupy approximately 50 percent of the rentable square feet. The remaining space is available for lease.

Item 3. Legal Proceedings

Neither the company nor any of our subsidiaries is involved in any material litigation other than ordinary, routine litigation incidental to the nature of our business.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders of Cincinnati Financial during the fourth quarter of 2005.

Part II

Item 5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Cincinnati Financial Corporation had approximately 12,000 shareholders of record as of December 31, 2005. Many of our independent agent representatives and most of the 3,983 associates of our subsidiaries own the company’s common stock. We are unable to accurately quantify those holdings because many are beneficially held.

Our common shares are traded under the symbol CINF on the Nasdaq National Market. The common stock prices and dividend data below reflect the 5 percent stock dividends paid June 15, 2004 and April 26, 2005.

(Source: Nasdaq National Market)						2005																2004
Quarter:		1st				2nd				3rd				4th				1st				2nd				3rd				4th
High		$	43.92			$	43.12			$	42.64			$	45.95			$	41.61			$	41.78			$	41.70			$	43.52
Low			40.84				38.38				39.00				39.91				37.02				37.90				37.46				36.57
Period-end close			41.53				39.56				41.89				44.68				39.41				41.45				39.26				42.15
Cash dividends declared			0.290				0.305				0.305				0.305				0.250				0.262				0.262				0.262

Our ability to pay cash dividends may depend on the ability of our insurance subsidiary to pay dividends to the parent company. The dividend restrictions of our insurance company subsidiaries are discussed in Item 8, Note 8 to the Consolidated Financial Statements, Page 91.

Information regarding securities authorized for issuance under our 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 about options granted under our equity compensation plans is available in Item 8, Note 8 and Note 16 to the Consolidated Financial Statements, Pages 91 and 97.

The board of directors has authorized share repurchases since 1996. We discuss the board authorization in Item 7, Uses of Capital, Page 61. In 2005, we repurchased a total of 1,500,000 shares (unadjusted for stock dividends).

										Total number of shares				Maximum number of
										purchased as part of				shares that may yet be
		Total number of				Average price				publicly announced				purchased under the
Month		shares purchased				paid per share				plans or programs				plans or programs
January 1 -31, 2005			0			$	0.00				0				3,705,977
February 1-28, 2005			0				0.00				0				3,705,977
March 1-31, 2005			115,000				45.54				115,000				3,590,977
April 1-30, 2005			162,728				39.58				162,728				3,428,249
May 1-31, 2005			379,172				39.26				379,172				3,049,077
June 1-30, 2005			308,100				39.41				308,100				2,740,977
July 1-31, 2005			0				0.00				0				2,740,977
August 1-31, 2005			1,035				39.95				1,035				2,739,942
September 1-30, 2005			159,157				41.74				159,157				9,840,843
October 1-31, 2005			0				0.00				0				9,840,843
November 1-30, 2005			0				0.00				0				9,840,843
December 1-31, 2005			374,808				45.13				374,808				9,466,035
Totals			1,500,000				41.54				1,500,000

a)		The current repurchase program became effective on September 1, 2005. It replaced a program announced on February 6, 1999, which replaced a program approved in 1996 and updated in 1998.
b)		The share amount approved for repurchase in 2005 was 10 million shares and the share amount approved for repurchase in 1999 was 17 million shares.
c)		The current repurchase program has no expiration date.
d)		No repurchase program has expired during the period covered by the above table.
e)		The program approved in 1999 was terminated prior to the expiration date when the board approved the current program in August 2005. The program approved in 1996 and updated in 1998 was terminated prior to expiration when the board approved a program in February 1999. There have been no programs for which the issuer has not intended to make further purchases.

Item 6. Selected Financial Data

(In millions except per share data)						Years ended December 31,
		2005				2004				2003				2002
Consolidated Income Statement Data
Earned premiums		$	3,164			$	3,020			$	2,748			$	2,478
Investment income, net of expenses			526				492				465				445
Gross realized investment gains and losses			61				91				(41	)			(94	)
Total revenues			3,767				3,614				3,181				2,843
Net income			602				584				374				238
Net income per common share:
Basic		$	3.44			$	3.30			$	2.11			$	1.33
Diluted			3.40				3.28				2.10				1.32
Cash dividends per common share:
Declared			1.205				1.04				0.90				0.81
Paid			1.162				1.02				0.89				0.80
Shares outstanding
Weighted average, diluted			177				178				178				180
Consolidated Balance Sheet Data
Invested assets		$	12,702			$	12,677			$	12,485			$	11,226
Deferred policy acquisition costs			429				400				372				343
Total assets			16,003				16,107				15,509				14,122
Loss and loss expense reserves			3,661				3,549				3,415				3,176
Life policy reserves			1,343				1,194				1,025				917
Long-term debt			791				791				420				420
Shareholders’ equity			6,086				6,249				6,204				5,598
Book value per share			34.88				35.60				35.10				31.43
Property Casualty Insurance Operations
Earned premiums		$	3,058			$	2,919			$	2,653			$	2,391
Unearned premiums			1,557				1,537				1,444				1,317
Loss and loss expense reserves			3,629				3,514				3,386				3,150
Investment income, net of expenses			338				289				245				234
Loss ratio			49.2	%			49.8	%			56.1	%			61.5	%
Loss expense ratio			10.0				10.3				11.6				11.4
Expense ratio			30.0				29.7				27.0				26.8
Combined ratio			89.2	%			89.8	%			94.7	%			99.7	%

One-time charges or adjustments:

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.

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

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.

2001				2000				1999				1998				1997				1996				1995
	$ 2,152			$	1,907			$	1,732			$	1,613			$	1,516			$	1,423			$	1,314
	421				415				387				368				349				327				300
	(25	)			(2	)			0				65				69				48				31
	2,561				2,331				2,128				2,054				1,942				1,809				1,656
	193				118				255				242				299				224				227
	$   1.10			$	0.67			$	1.40			$	1.31			$	1.64			$	1.21			$	1.24
	1.07				0.67				1.37				1.28				1.61				1.17				1.19
	0.76				0.69				0.62				0.55				0.50				0.44				0.39
	0.74				0.67				0.60				0.54				0.49				0.43				0.38
	179				181				186				190				188				191				191
	$11,534			$	11,276			$	10,156			$	10,296			$	8,778			$	6,340			$	5,525
	286				259				226				143				135				128				120
	13,964				13,274				11,795				11,484				9,867				7,397				6,439
	2,887				2,473				2,154				2,055				1,937				1,881				1,744
	724				641				885				536				482				440				403
	426				449				456				472				58				80				80
	5,998				5,995				5,421				5,621				4,717				3,163				2,658
	33.62				33.80				30.35				30.58				25.71				17.19				14.33
	$ 2,073			$	1,828			$	1,658			$	1,543			$	1,454			$	1,367			$	1,263
	1,060				920				835				458				442				424				407
	2,894				2,416				2,093				1,979				1,889				1,824				1,691
	223				223				208				204				199				190				180
	66.6	%			71.1	%			61.6	%			65.4	%			58.3	%			61.6	%			57.6	%
	10.1				11.3				10.0				9.3				10.1				13.8				14.7
	28.2				30.4				28.6				29.6				30.0				28.2				27.8
	104.9	%			112.8	%			100.2	%			104.3	%			98.4	%			103.6	%			100.1	%

		10-K Page
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction			31
Executive Summary			31
Critical Accounting Estimates			35
Results of Operations			39
Consolidated Property Casualty Insurance Results of Operations			40
Commercial Lines Insurance Results of Operations			41
Personal Lines Insurance Results of Operations			47
Life Insurance Results of Operations			52
Investments Results of Operations			54
Liquidity and Capital Resources			57
Sources of Liquidity			57
Uses of Liquidity			59
Property Casualty Insurance Reserves			61
Life Insurance Reserves			67
2006 Reinsurance Programs			68
Safe Harbor Statement			69
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Introduction			70
Fixed-maturity Investments			71
Short-term Investments			72
Equity Investments			72
Unrealized Investment Gains and Losses			74