Cincinnati Financial Corporation 2004 Annual Report Around the Corner Around the Clock About Your Company 1 Financial Highlights Cincinnati Financial Corporation was formed in 1968 and now operates through six subsidiaries. The Cincinnati Insurance Company, founded in 1950, leads the property casualty insurance group. The Cincinnati Casualty Company and The Cincinnati Indemnity Company round out that group, known for its strong customer focus on a select group of fewer than 1,000 independent insurance agencies that market its broad range of business and personal policies in 31 states. The Cincinnati Life Insurance Company markets life and disability income insurance and annuities, while CFC Investment Company complements the insurance subsidiaries with leasing and financing services. CinFin Capital Management Company provides asset management services to institutions, corporations Financial highlights provide a snapshot of your company’s financial performance and strength. 2 To Our Shareholders A letter from the chairman and chief executive officer discusses events of 2004, your company’s performance and issues that may affect it in 2005 and beyond. 7 Condensed Balance Sheets and Income Statement 8 Six-year Summary of Financial Information Consolidated Investment Income Less expenses (Dollars in millions) 2 9 4 5 6 4 5 4 4 1 2 4 0 1 4 2000* 2001 2002 2003 2004 Combined Ratio Statutory post dividend (Percent) The Cincinnati Insurance Companies Estimated industry (A.M. Best) 115.9 110.4 107.4 9 . 9 0 1 6 . 3 0 1 6 . 9 9 100.1 97.6 0 . 5 9 4 . 9 8 2000* 2001* 2002* 2003 2004 9 Financial Performance Overview 2004 results for property casualty insurance operations, including commercial lines and personal lines; life insurance operations; and investment operations. 12 Around the Corner, Around the Clock Cincinnati’s field associates live and work in the communities they serve, always available to the independent agents who represent your company. Cincinnati streamlines its field structure by eliminating branch office bureaucracy. Read about a day in one of Cincinnati’s field territories: Middle Tennessee. Cincinnati Financial Corporation 2004 Annual Report 21 Corporate Directors and Officers 22 Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures Around the Corner Around the Clock 25 Annual Report on Form 10-K In the Annual Report on Form 10-K, a report required by the U.S. Securities and Exchange Commission of all publicly traded companies, we describe your company’s operations, its results and three-year trends, giving clear and thorough explanations with supporting data. Appendix and individuals. Subsidiary Directors and Officers Inside Back Cover Shareholder Information, Common Stock Price and Dividend Data This report contains forward-looking statements that involve potential risks and uncertainties. Please see Management’s Discussion and Analysis in the Annual Report on Form 10-K, beginning on Page 25, for factors that could cause results to differ materially from those discussed. Financial Highlights Cincinnati Financial Corporation and Subsidiaries (Dollars in millions except share data) Income Statement Data Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Negotiated settlement – software cost recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income before recovery* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized investment gains and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income before realized investment gains and losses before recovery* . . . . . . . . . . . . . . . . . . . . . . . . Per Share Data (diluted) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Negotiated settlement – software cost recovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income before recovery* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net realized investment gains and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income before realized investment gains and losses before recovery* . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Years ended December 31, 2004 2003 Change % $ $ $ $ $ $ 584 – 584 60 524 3.44 – 3.44 0.36 3.08 1.09 37.38 $ $ $ $ $ $ 374 15 359 (27) 386 2.20 0.09 2.11 (0.16) 2.27 0.95 36.85 56.0 – 62.4 324.0 35.6 56.4 – 63.0 325.0 35.7 14.7 1.4 Balance Sheet Data Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,107 6,249 170 $ 15,509 6,204 170 3.9 0.7 – Ratio Data Statutory combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statutory combined ratio (adjusted)* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on equity based on comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89.4% 89.4 9.4 4.6 94.2% 95.0 6.3 13.8 Revenues (Dollars in millions) 4 1 6 , 3 1 8 1 , 3 3 4 8 , 2 1 6 5 , 2 1 3 3 , 2 Net Income/ Dividends Paid Per common share (Dollars) Net income before realized investment gains and losses before one-time items Net income before one-time items Dividends paid 4 4 . 3 8 0 . 3 7 2 . 2 1 1 . 2 3 2 . 1 3 1 . 1 5 7 . 1 9 3 . 1 0.78 0.84 0.93 1.08 6 8 . 0 5 8 . 0 0.70 Book Value Per common share (Dollars) 5 8 . 6 3 8 3 . 7 3 9 4 . 5 3 0 3 . 5 3 0 0 . 3 3 2000 2001 2002 2003 2004 2000* 2001 2002 2003* 2004 2000 2001 2002 2003 2004 Over the past five years, revenues have risen at a compound annual rate of 11.2 percent due to growth in total earned premiums and investment income. 2004 net income reached a record high. Cash dividends paid to shareholders have risen at a 11.3 percent compound annual rate over the past five years. The indicated annual dividend rate rose 15 percent in February 2005 as the board increased the quarterly cash dividend and declared a 5 percent stock dividend. Book value rose to $37.38 per share at year- end 2004 as strong earnings offset lower unrealized gains in the investment portfolio. * The Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures on Page 22 defines and reconciles measures presented in this report that are not based on GAAP or statutory accounting principles. 1 To Our Shareholders: Property Casualty Net Earned Premium (Dollars in millions) Personal lines Commercial lines 2,653 5 4 7 2,391 0 7 6 8 0 9 , 1 1 2 7 , 1 2,073 0 2 6 3 5 4 , 1 1,828 6 9 5 2 3 2 , 1 2,919 3 9 7 6 2 1 , 2 2000 2001 2002 2003 2004 Property casualty net earned premiums increased 10.0 percent in 2004. Measuring premiums on the statutory basis commonly used for industry comparison, net written premiums rose 6.5 percent, and the company continued its track record of outpacing industry growth, which was estimated at 4.8 percent for the year. Consolidated Assets (Dollars in millions) 7 0 1 , 6 1 9 0 5 , 5 1 4 6 9 , 3 1 2 2 1 , 4 1 4 7 2 , 3 1 2000 2001 2002 2003 2004 Over the past five years, assets grew at a 6.4 percent compound annual rate, primarily because of 4.5 percent compound annual growth in invested assets. Your company has never been underwriting and a higher than investment income may again stronger. This is true for our normal level of favorable be in the range of 5 percent to financial condition and results development of prior-year loss 6 percent. as well as business reserves, including the release operations and prospects. of reserves for uninsured/ Financially, most performance measures surpassed last year’s all-time highs. 2004 was a record-setting year in terms of assets, shareholders’ equity, book value, revenues, profits from insurance underwriting, income from our investment portfolio and net income. Assets stood at $16.107 billion at year-end. Strong earnings more than offset lower unrealized gains in the investment portfolio, taking shareholders’ equity to $6.249 billion, or a book value of $37.38 per share, up from year-end 2003’s $6.204 billion, or $36.85 per share. Net income for 2004 rose $210 million to $584 million, or $3.44 per diluted share, including net realized investment gains of 36 cents per share. Total revenues advanced 13.6 percent to $3.614 billion, with total earned premiums up 9.9 percent to $3.020 billion; pretax investment income up 5.7 percent to $492 million; and pretax realized investment gains of $91 million. underinsured motorist (UM/UIM) losses following an Ohio Supreme Court decision late in 2003. Overall, pretax property casualty underwriting profits totaled $298 million. On a statutory basis, our combined ratio improved to 89.4 percent versus an estimated 97.6 percent industrywide, and net written premiums grew 6.5 percent versus 4.8 percent estimated industry growth. Learn More: See Form 10-K Page 31 The impact of these anticipated strong operating trends will be tempered in 2005 by the adoption of option expensing and slightly higher interest expense on long-term debt, which increased modestly with our November 2004 issue of $375 million of senior notes. Additionally, shareholder dividends and CFC stock repurchases will continue to use cash flow that could otherwise be invested to generate investment income. However, your company’s positive earnings trends and strong capital position give us the financial flexibility to Aside from the atypically high manage for the long term. release of reserves into 2004 We willingly incur expenses earnings, your company is when they support and extend working toward similar solid your company’s strategic operating results in 2005. We advantages. Among those anticipate mid-single-digit advantages: A history of growth of property casualty rewarding shareholders with premiums and a combined steadily increasing dividends; ratio in the range of 91 percent. stock option plans that help This estimate counts on a associates at all levels of the return to more typical levels company become responsible of favorable reserve owners with vested interests development and catastrophe in creating value for losses, which also were shareholders; and a unique, higher than usual in 2004. scalable company structure, And with plans to allocate with a single headquarters new investment dollars to housing all of the support staff fixed-income securities for the large, fully distributed through the first half of the field force that serves our agent Those 2004 results benefited year, we estimate that the customers and their clients. from profitable current-year 2005 growth rate of pretax 2 More than 260 members of industry and company flexibility and careful that field force responded to developments in 2004 and risk selection. We hurricane claims in 2004, acted to shape measured, want to remain our making a tremendous effort respectful responses we feel agents’ carrier of under difficult conditions will pass the test of time: choice for their to assist an estimated 7,000 policyholders, mainly in Florida and Alabama, who experienced approximately $134 million of losses. During the two weeks each volunteer was away, other members of their local units in 29 states stepped up to cover their regular assignments, seamlessly continuing the usual high level of service for local claimants. Noted: Competition in our commercial markets is increasing. The industry has recovered from past underwriting losses and added to policyholder surplus. Learn More: See Form 10-K Page 9 Competition for market share may arise in some business lines and regions, tempting quality business and believe that we can use our case-by- case approach to create opportunities in this type of marketplace. Our field marketing associates and agents will work together to select risks and respond appropriately to local pricing trends. They John J. Schiff, Jr., CPCU, chairman, president and chief executive officer Shareholders, agents, carriers to begin pricing policyholders, associates… coverages less adequately. While so much of the business world’s focus today is on analyzing numbers, efficiently transacting business and opportunistically maximizing quarterly profits, we still explain our strengths in terms of serving people, effectively managing relationships and building long-term financial strength. This bias is organic — it grows directly out of the company structure described above. Our structure puts field and headquarters associates, on all levels, in touch daily with the agents and policyholders whose financial stability and prosperity depend on our actions. It was our structure that kept us grounded as we noted Action: Cincinnati is maintaining pricing discipline for both renewal and new business. Our agents, field marketing representatives and headquarters underwriters sharpened their already exceptional underwriting skills as we re-underwrote commercial accounts over the past few years. Their accomplishments and firmly established good habits put us in a position of strength as competition increases. While our agents reported only modest pressure on renewal pricing as 2004 came to a close, they are communicating that winning new business now requires more pricing have proven they are capable Cincinnati policy may deter of balancing risk and price to annual price shopping. achieve growth in new business over the longer term. Noted: Legislators have not yet renewed TRIA, a federal We believe renewals of our program requiring insurers three-year commercial policies to cover certain terror are somewhat less price losses while capping their sensitive thanks to the value- potential losses. The 2002 oriented clientele our agencies law sunsets at the end of tend to attract. Customized 2005, and carriers that insurance programs on a depended on the cap may be three-year term complement challenged to manage their the relationships these exposures to terror risk with policyholders have with their limited terrorism reinsurance agents and with Cincinnati. available. For three years, or even over decades, those policyholders have experienced Cincinnati’s local claims service with a personal touch, benefited from our customized coverage packages and relied on our high financial strength ratings. High perceived value of the Action: Cincinnati has never depended on the cap. We priced our terror coverage reasonably, aware that our three-year commercial policies would remain in force past TRIA’s potential expiration. This approach effectively 3 Property Casualty Statutory Surplus Ratio Net written premiums to surplus Estimated industry net written premiums to surplus (A.M. Best) 1.3 1 . 1 1.1 0 . 1 1.2 0 . 1 1.1 7 . 0 2001 2002 2003 2004 The company historically has maintained its ratio of net written premiums to statutory surplus below the industry average. The lower the ratio, the stronger an insurer’s security for policyholders and its capacity to support business. In August 2004, the company transferred equity securities to the property casualty subsidiary. The transfer accounted for most of the reduction in the ratio from year-end 2003. Life Statutory Capital and Surplus Ratio (Percent) Adjusted capital and surplus to liabilities Estimated industry adjusted capital and surplus to liabilities (A.M. Best) 3 . 2 5 7 . 9 3 2 . 9 3 3 . 8 3 11.0 9.9 10.4 10.5 2001 2002 2003 2004 The ratio of statutory adjusted capital and surplus to liabilities for Cincinnati Life remained more than three times the estimated industry average in 2004, reflecting the financial stability of Cincinnati Life. The higher the ratio, the stronger an insurer’s security for policyholders and its capacity to support business growth. spreads our risk, with about substantial rate increases should position our personal 85 percent of accounts and changes in terms and lines products appropriately in purchasing coverage, a much conditions. Because we have the marketplace. Cincinnati higher acceptance rate than historically marketed three- remains committed to most insurers have reported. year homeowner policies, we personal lines over the long To further manage our have yet to realize the full term. This business brings our exposure, we adjusted benefits of these changes as agents opportunities to nurture underwriting guidelines and they flow through all renewal relationships with individuals negotiated reinsurance policies. And while we who are centers of influence coverage, giving up just a few are moving to one-year in their communities and who accounts that didn’t fit our risk homeowner policies with the may themselves control profile. We believe even the introduction of our Diamond commercial accounts. lower-risk, Main Street processing system, that major policyholders we typically technology initiative itself has underwrite need affordable a long duration, as specific peace-of-mind insurance rules and rates for each state against terrorism, and we are are separately programmed continuing to provide it. and rolled out sequentially. At Learn More: See Form 10-K Page 44 Noted: Industrywide, year- over-year personal lines rate filings have reached a plateau. This could indicate that price softening is on the way even before Cincinnati’s personal lines year-end 2004, Diamond was in use in states that represent 59 percent of personal lines premium volume. By the end of 2005, that should be 90 percent, and Diamond should have new account billing features that make it more convenient for agents and policyholders. operation achieves a return The appeal of Cincinnati to profitability. Action: Cincinnati continued making progress in 2004, driving toward a profit in personal lines for full-year 2005. Personal auto results reached their best level in the past five years and homeowner results are improving. We continue to estimate that the homeowner line is on track to produce profits in 2006, Over the past two years, we have effected personal lines rests mainly on superior claims service, not a small thing when policyholders see four hurricanes in a single year. It also comes from solid products and packages, like the recently improved Executive Classic homeowner policy that we are in the process of delivering to various states. Additionally, changes in our rate structure scheduled to become effective in many territories by mid-year 4 Noted: The New York attorney general sued a large insurance brokerage firm. High-profile investigations have led to heightened regulatory and legal scrutiny of industry marketing and compensation practices. State regulators are surveying their domiciled insurers. Potential exists for overly broad and disruptive new regulations. Action: Cincinnati is cooperating fully with state insurance departments. We have completed their surveys of company practices and commented on drafts of model regulations, urging that any new rules recognize practical considerations. Cincinnati markets our products only through licensed, appointed agents who are contracted to represent the company. We have no broker contracts. We offer total compensation that appropriately recognizes the results of our agents’ marketing and frontline underwriting, as well as the A++ rating earned by less service they provide to than 2 percent of insurer policyholders on our behalf. groups. However, that Our profit-sharing contract judgment is subject to increases rewards for those constant review. Ratings whose Cincinnati business in agencies believe that industry total is profitable over several issues, exposures, legal and years and who pay their regulatory actions and accounts promptly. inactions have created a Moreover, we have fewer than 1,000 agency relationships, so we know the people who manage each agency. Agents market our products within a limited radius of their offices, primarily serving people they volatile and uncertain climate that requires a cushion to Learn More: See Form 10-K Page 7 absorb potential adversity. will meet again and again, not Action: We took specific large, price-sensitive accounts steps in 2004 to protect that come and go. They truly Cincinnati’s high insurer are independent agents: That financial strength ratings generally means they find the and the marketing best value for each client by advantage these ratings navigating the healthy give our agents. Rating competition among carriers, agencies carefully monitor weighing risk tolerance and risk factors that could affect appetite, coverage and terms, our property casualty group’s service and price. At last already strong surplus count, our agents reported position. To increase the holding contracts with four to predictability of that position, 12 insurers, on average, and we added $100 million of each one asks for their coverage to our catastrophe business. In our marketplace, reinsurance program, for a we believe competition is real. total of $500 million. Noted: A. M. Best Co. We also sought to reduce the reported that negative rating group’s ratio of common stock outlooks outpaced positive to statutory surplus, which outlooks by more than a had been maintained below 3-to-1 margin in December 100 percent throughout the 2004. Best, which assesses 1990s. At year-end, the ratio the ability of insurers to meet had improved 11.2 percentage obligations to policyholders, points to 103.5 percent. This has a positive outlook on your progress arose from a company and awards us the temporary increase in the In Tribute to Robert C. Schiff Retired November 12, 2004 Bob Schiff retired November 12, 2004, from the boards of directors for Cincinnati Financial and its four insurance subsidiaries. On February 5, 2005, the board named him director emeritus. Bob retired in 2004 as chairman of Schiff, Kreidler-Shell, Inc., a large, Cincinnati-area insurance agency. He formed Schiff, Kreidler Shell in 1984, leaving his position as senior vice president of Cincinnati Insurance to expand his agency business. His agent career began in 1945, after graduation from The Ohio State University, where he played third base on the baseball team. A charter director of both Cincinnati Insurance in 1950 and Cincinnati Financial in 1968, Bob is the last living company founder. In the early years, Bob emphasized what would become one of the company’s enduring competitive advantages: the company should carefully select its agents, then offer products and underwrite accounts giving those agents broad flexibility to adapt the policy to each client’s specific needs. Bob’s confidence in the professionalism of our agents continued over his 59-year career. To this day, he believes their personal relationships in the community can lead to prosperity for an insurance company smart enough to respect their local knowledge. group’s allocation of new investing that has been investments to almost the cornerstone of our 100 percent fixed income very successful investment securities, versus our historic philosophy. allocation of 65 percent to 75 percent. We also reduced by $356 million our positions in common stocks that no longer met our investment parameters, buying fixed income and convertible securities with the proceeds. We plan to monitor the ratio of common stocks to surplus while resuming the total-return Noted: The status of our parent company under the Investment Company Act of 1940 was uncertain. This Act, established to regulate mutual funds and similar companies, has a series of tests to determine if restrictions apply that could affect operating methods, management, 5 Consolidated Investment Income Less expenses (Dollars in millions) 2 9 4 5 6 4 5 4 4 1 2 4 0 1 4 2000* 2001 2002 2003 2004 Consolidated pretax investment income rose 5.7 percent in 2004. Dividend increases announced during 2004 by companies whose common stock is in the portfolio are expected to add $15 million to investment income in 2005. * The Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures on Page 22 defines and recon- ciles measures presented in this report that are not based on GAAP or statutory accounting principles. capital structure, dividends investment business. We dividend to $1.201/2 per share. and transactions with affiliates. understand that responses to Another way your company The Act and its tests came to exemption requests generally increases your return is by our attention during a review are considered within 12 to repurchasing our common prior to our planned debt 18 months. shares. In 2004, we offering. The Cincinnati Financial parent company had a ratio of invested assets to total assets above 40 percent, a level that could potentially trigger this regulation. Action: Your company acted in good faith by moving the invested assets ratio From our grounded, common- sense perspective, the parent company exists to provide financial flexibility to the insurance subsidiaries. Its Learn More: See Form 10-K Page 51 repurchased 1,571,800 shares at a total cost of $66 million. Approximately 3.7 million shares remain authorized by the board of directors for repurchase. We anticipate continuing this program at a modest level, offsetting dilution from stock option grants. below 40 percent. At substantial assets are another Cincinnati Financial’s December 31, 2004, the ratio level of capital resources for compound annual total return of investment securities held the insurance subsidiaries, to shareholders over the five at the parent-company level and it has the ability to tap years ended December 31, to total parent-company-only the debt markets. All of this 2004, was a positive assets was 36.3 percent, supports your company’s 10.8 percent annually following the transfer of equity ability to be a stable, compared with a negative securities to The Cincinnati consistent market for our 2.3 percent compound annual Insurance Company from agents’ business through all total return for the Standard & the parent company in phases of economic and Poor’s 500 Index. August 2004. insurance cycles. Our measured, people- While meeting the ratio test Your company’s consistency centered approach works. has removed all uncertainty and stability was highlighted With talented associates and about our current status, for shareholders on February 5, solid relationships in place we believe it is in our 2005, when the board of and time-tested strategies to shareholders’ interests to directors increased the support them, we believe we further clarify that the parent quarterly cash dividend are primed for continued company is not subject to the 10.9 percent to 301/2 cents per strong performance. Act’s provisions in the future or past. We have requested share, setting the stage for a 45th straight year of higher Respectfully, an exemption under dividends. At the same provisions of the Act, based time, the board declared a /S/ John J. Schiff, Jr. on our belief that the parent 5 percent stock dividend company is primarily engaged payable April 28 to in the business of insurance shareholders of record on through its subsidiaries. April 6. Taken together, the John J. Schiff, Jr., CPCU Chairman, President and Chief Executive Officer The Act provides for two actions represent a March 4, 2005 exemptions for companies 15 percent increase in the not primarily engaged in the indicated annual cash 6 Condensed Balance Sheets and Income Statements Cincinnati Financial Corporation and Subsidiaries (Dollars in millions) Assets Years ended December 31, 2003 2004 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premiums receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinsurance receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities Insurance reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9% senior debentures due 2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.125% senior notes due 2034 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ Equity Common stock and paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income—unrealized gains on investments and derivatives . . . . . . . . . . . Treasury stock at cost (2004—18 million shares, 2003—16 million shares) . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,677 306 1,119 680 1,325 _________ $ 16,107 _________ _________ $ 4,743 1,539 1,834 420 371 951 _________ 9,858 _________ 988 2,057 3,787 (583) _________ 6,249 _________ $ 16,107 _________ _________ $ 12,485 91 1,060 623 1,250 _________ $ 15,509 _________ _________ $ 4,440 1,446 1,949 420 0 1,050 _________ 9,305 _________ 658 1,986 4,084 (524) _________ 6,204 _________ $ 15,509 _________ _________ (Dollars in millions except per share data) Revenues 2004 Years ended December 31, 2003 2002 Earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment income, net of expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Realized investments gains and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits and Expenses Insurance losses and policyholder benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total benefits and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income Before Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,020 492 91 11 _________ 3,614 _________ 1,846 615 353 _________ 2,814 _________ 800 _________ 216 _________ $ 584 _________ _________ Per Common Share Net income—basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income—diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 3.47 3.44 $ 2,748 465 (41) 9 _________ 3,181 _________ 1,887 536 278 _________ 2,701 _________ 480 _________ 106 _________ $ 374 _________ _________ $ $ 2.22 2.20 $ 2,478 445 (94) 14 _________ 2,843 _________ 1,826 472 266 _________ 2,564 _________ 279 _________ 41 _________ $ 238 _________ _________ $ $ 1.40 1.39 7 Six-year Summary of Financial Information Cincinnati Financial Corporation and Subsidiaries (In millions except share data) Financial Highlights 2004 2003 2002 2001 2000 1999 Years ended December 31, Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One-time items* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income before one-time items* . . . . . . . . . . . . . . . . . . Net realized investment gains and losses . . . . . . . . . . . . . . Net income before net realized investment gains and losses, before one-time items* . . . . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 584 – 584 60 524 287 $ Per Share Data (diluted) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One-time items* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income before one-time items* . . . . . . . . . . . . . . . . . . Net realized investment gains and losses . . . . . . . . . . . . . . Net income before net realized investment gains and losses, before one-time items* . . . . . . . . . . . . . . . . Cash dividends declared . . . . . . . . . . . . . . . . . . . . . . . . . . . Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ratio Data Investment yield-to-cost (pretax) . . . . . . . . . . . . . . . . . . . . Debt-to-capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on equity (ROE) before one-time items* . . . . . . . . ROE based on comprehensive income . . . . . . . . . . . . . . . Property Casualty Insurance Operations (Statutory) Written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Written premiums (adjusted)* . . . . . . . . . . . . . . . . . . . . . . Earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Underwriting expense ratio . . . . . . . . . . . . . . . . . . . . . . . . Combined ratio (reported) . . . . . . . . . . . . . . . . . . . . . . . Combined ratio (adjusted)* . . . . . . . . . . . . . . . . . . . . . . Policyholders’ surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.44 $ – 3.44 0.36 3.08 1.09 37.38 7.2% 11.2 9.4 4.6 $ 2,997 3,026 2,919 49.8% 10.3 29.3 89.4% 89.4% 4,191 Commercial Lines Property Casualty Insurance Operations (Statutory) Written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Written premiums (adjusted)* . . . . . . . . . . . . . . . . . . . . . . Earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Underwriting expense ratio . . . . . . . . . . . . . . . . . . . . . . . . Combined ratio (reported) . . . . . . . . . . . . . . . . . . . . . . . Combined ratio (adjusted)* . . . . . . . . . . . . . . . . . . . . . . $ 2,186 2,209 2,126 43.4% 10.9 29.4 83.7% 83.7% Personal Lines Property Casualty Insurance Operations (Statutory) 811 817 793 66.7% 8.9 29.0 104.6% 104.6% Written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Written premiums (adjusted)* . . . . . . . . . . . . . . . . . . . . . . Earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss expense ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Underwriting expense ratio . . . . . . . . . . . . . . . . . . . . . . . . Combined ratio (reported) . . . . . . . . . . . . . . . . . . . . . . . Combined ratio (adjusted)* . . . . . . . . . . . . . . . . . . . . . . $ 374 15 359 (27) 386 815 2.20 0.09 2.11 (0.16) 2.27 0.95 36.85 7.5% 8.9 6.0 13.8 $ 2,815 2,789 2,653 56.1% 11.6 26.5 94.2% 95.0% 2,783 $ 2,031 2,009 1,908 51.2% 12.7 27.0 90.9% 91.6% $ 784 780 745 68.8% 8.9 25.2 102.9% 103.9% $ $ 238 – 238 (62) 300 (232) 1.39 – 1.39 (0.36) 1.75 0.85 33.00 7.9% 9.7 4.1 (4.0) $ 2,613 2,496 2,391 61.5% 11.4 25.5 98.4% 99.6% 2,340 $ 1,905 1,795 1,721 57.8% 12.5 25.0 95.3% 96.8% $ 708 701 670 71.0% 8.7 26.8 106.5% 106.8% $ $ 193 – 193 (17) 210 150 $ 1.13 $ – 1.13 (0.10) 1.23 0.80 35.30 8.1% 9.2 3.2 2.5 $ 2,590 2,188 2,073 66.8% 10.1 22.6 99.5% 103.6% 2,533 $ 1,827 1,551 1,453 62.6% 11.8 22.3 96.7% 100.7% $ 763 637 620 76.7% 6.2 23.0 105.9% 110.4% 118 (25) 143 (2) 145 744 0.70 (0.15) 0.85 (0.01) 0.86 0.72 35.49 8.4% 9.4 2.5 13.1 $ 1,881 1,936 1,828 71.1% 11.4 30.0 112.5% 109.9% 3,172 $ 1,275 1,326 1,232 71.1% 12.9 33.2 117.2% 114.4% $ 606 610 596 71.1% 8.1 31.4 110.6% 108.4% $ 129 28 30 23,525 1,201 503 76 $ $ 255 – 255 – 255 107 1.44 – 1.44 – 1.44 0.65 31.87 8.1% 9.6 4.6 1.9 $ 1,681 1,681 1,658 61.6% 10.0 28.8 100.4% 100.4% 2,852 $ 1,100 1,100 1,088 61.4% 11.4 28.4 101.2% 101.2% $ 581 581 570 62.1% 7.3 28.4 97.8% 97.8% $ 404 25 21 17,900 1,392 427 75 Life Insurance Operations (Statutory) Written premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income before realized investment gains and losses . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life insurance face amount in force . . . . . . . . . . . . . . . . . Admitted assets excluding separate account business . . . . Risk-based capital Total adjusted capital . . . . . . . . . . . . . . . . . . . . . . . . . . . Authorized control level risk-based capital . . . . . . . . . . $ 176 26 28 44,921 1,713 $ 127 27 20 38,492 1,572 $ 206 20 17 32,486 1,477 $ 93 21 15 27,534 1,329 491 47 443 50 420 47 457 44 * The Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures on Page 22 defines and reconciles measures presented in this report that are not based on GAAP or statutory accounting principles 8 Financial Performance Overview Favorable market trends of the past several years, careful attention to underwriting and sustained efforts of our independent agents and associates all contributed to the record results of 2004. A highlight was the property casualty underwriting profit of $298 million pretax, more than double last year’s level. Looking across your company’s business, we see many trends that we believe will help us continue to provide high quality insurance products for policyholders and long-term value for shareholders. This is a brief overview of 2004 financial results. We encourage you to read the Management’s Discussion and Analysis, which begins on Form 10-K Page 23. That section of the Form 10-K provides a detailed look at management’s view of the results of operations and liquidity and capital resources. Property Casualty Insurance Operations Statutory net written premiums of the property casualty insurance affiliates rose 6.5 percent to a record $2.997 billion for 2004. To restore affected layers of the property catastrophe reinsurance programs, the company incurred $11 million in reinsurance reinstatement premiums, which reduced the growth rate of full-year 2004 net written premium by 0.4 percentage points. Agencies wrote $330 million of direct new business premiums in 2004 compared with $328 million in 2003. Despite unusually high catastrophe losses, our full-year GAAP combined ratio was ahead of even our Learn More: See Form 10-K Page 33 expectations at 89.8 percent. The ratio reflected higher than normal savings due to favorable loss reserve development from prior accident years, including a 1.1 percentage-point benefit from the first-quarter release of UM/UIM reserves. Total 2004 catastrophe losses reached $148 million, net of reinsurance, compared with $97 million in 2003. Events of 2004 showed the value of our catastrophe reinsurance program, which limits losses from catastrophe events such as wind, hail, hurricanes or earthquakes. For the year, total gross losses from hurricanes and other severe weather exceeded $231 million compared with $103 million in 2003. Statutory surplus for the property casualty insurance group was $4.191 billion at year-end 2004, compared with $2.783 billion at year-end 2003, primarily because of the transfer of equity securities in August 2004 from the parent company. The property casualty insurance group’s ratio of common stock holdings to statutory surplus was 103.5 percent at year-end 2004, improved from 114.7 percent at year-end 2003. By offering both commercial and personal insurance, we aim to be a potential market for our agents’ typical accounts, helping them develop the multiple relationships that increase policyholder retention. This strategy has produced strong results over time, but the challenges are different in commercial lines and personal lines, as we discuss below. Commercial Lines Statutory net written premiums for commercial lines of insurance rose 7.6 percent to $2.186 billion in 2004. The $6 million commercial lines share of the reinsurance reinstatement premiums reduced the full-year growth rate by 0.3 percentage points. 9 Premium Mix Percent of 2004 consolidated net earned premiums Life 3% Personal lines 26% Commercial lines 71% Within the commercial lines and personal lines sectors, Cincinnati continues to be a market for 75 percent of the risks typically served by our local independent agencies. Combined Ratio Statutory post dividend (Percent) The Cincinnati Insurance Companies Estimated industry (A.M. Best) 115.9 110.4 107.4 9 . 9 0 1 6 . 3 0 1 6 . 9 9 100.1 97.6 0 . 5 9 4 . 9 8 2000* 2001* 2002* 2003 2004 Despite unusually high catastrophe losses, the company sustained its record as an industry profitability leader in 2004. A ratio under 100 percent indicates that an insurer paid out less in claims and expenses than it received in premiums during the calendar year. * The Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures on Page 22 defines and recon- ciles measures presented in this report that are not based on GAAP or statutory accounting principles. Cincinnati Life – Net Earned Premiums (Dollars in millions) 1 0 1 5 9 7 8 0 8 1 8 2000 2001 2002 2003 2004 Cincinnati Life’s net earned premiums rose again in 2004 as the company’s ordinary life insurance products continued to gain acceptance among property casualty agents. Cincinnati Life – Life Policy Face Amounts In Force Excluding annuities, accident and health business (Dollars in millions) 1 2 9 , 4 4 2 9 4 , 8 3 6 8 4 , 2 3 4 3 5 , 7 2 5 2 5 , 3 2 2000 2001 2002 2003 2004 During 2004, face amounts of life policies in force grew 16.7 percent in strong response to Cincinnati Life’s current product portfolio, underwriting and policy issue services. Agencies wrote $282 million in direct new business premiums in 2004, up 5.2 percent from $268 million in 2003. The commercial lines GAAP combined ratio for 2004 improved to 84.1 percent, including favorable loss reserve development from prior accident years and a Learn More: See Form 10-K Page 35 1.5 percentage-point benefit from the release of UM/UIM reserves. Our agents, field representatives and headquarters underwriters have experienced the value of skilled underwriting as their efforts have generated positive results for the commercial lines area. They continue the efforts that have brought us to where we are today, taking advantage of our local market presence as, together with our agents, field representatives conduct renewal reviews and personally inspect risks. Personal Lines Statutory net written premiums for personal lines of insurance rose 3.4 percent to $811 million in 2004. The $5 million personal lines share of the reinsurance reinstatement premiums 10 reduced the growth rate by 0.6 percentage points. Agencies wrote $48 million in direct new business premiums in 2004, compared with $60 million in 2003. The personal lines GAAP combined ratio for 2004 was 105.0 percent, including 9.7 percentage points from catastrophe losses. During 2004, we moved closer to achieving our two key personal lines objectives: returning to profitability and deploying Diamond, our personal lines policy processing system, to all states where we market personal lines. Learn More: See Form 10-K Page 40 Measuring our progress toward personal lines profitability, the loss and loss expense ratio excluding catastrophe losses improved 4.4 percentage points for the full year, due to improved performance in both the personal auto and homeowner lines of business. Some of the improvement in loss trends was masked by high catastrophe losses, the reinsurance reinstatement premiums and an uneven expense ratio comparison affected by the software cost recovery in 2003 and expensing of Diamond costs in 2004. Personal auto results reached their best level in the past five years, with the loss and loss expense ratio excluding catastrophe losses at 65.1 percent. Homeowner progress remained slow because some three-year policies have yet to renew with one-year policy terms. However, the full-year loss and loss expense ratio excluding catastrophe losses for the homeowner line improved to 69.3 percent. Rate changes scheduled to become effective starting mid-2005 in many territories should position our personal lines products appropriately in the marketplace. The homeowner line remains on track to become profitable in 2006. By year-end 2004, training was complete and Diamond was in use in agencies in five states that accounted for 59 percent of personal lines earned premium volume in 2004. By year-end 2005, we expect to have Diamond in place in states representing more than 90 percent of personal lines earned premiums. Life Insurance Operations For 2004, The Cincinnati Life Insurance Company’s earned premiums increased 5.5 percent to $101 million. Net income before realized investment gains and losses increased 13.8 percent over 2003. For the year, net income including net realized investment gains and losses – a performance indicator for Cincinnati Life – rose to $38 million from $22 million for 2003. Realized gains in Cincinnati Life’s investment portfolio were $6 million in 2004 compared with realized losses of $7 million in 2003. We continue building life insurance relationships with the company’s independent property casualty agencies. We anticipate increased interest in worksite marketing with the addition in 2004 of a new disability income product and an enhanced life insurance product portfolio. In 2005, we are introducing sales modules that support agents as they concentrate on fulfilling the insurance needs Learn More: See Form 10-K Page 45 of specific types of clients and prospects. This program will make it easier for our property casualty agencies to offer life, disability income and annuities through Cincinnati Life. Investment Operations Consolidated pretax investment income rose 5.7 percent in 2004, benefiting from higher interest income due to cash flow invested in the fixed- income portfolio and from dividend increases by companies in the equity portfolio. Fifth Third Bancorp and another 32 of the 51 companies whose common stock is in the portfolio announced dividend Learn More: See Form 10-K Page 47 increases during 2004 that are expected to add $15 million to investment income in 2005. Net realized investment gains were $91 million pretax in 2004, including $6 million in other-than-temporary impairment charges and $10 million in gains from fluctuation of market values of options embedded in convertible securities. The market value of consolidated equity securities was $7.498 billion at year- end 2004, down from $8.217 billion at year-end 2003. The decline resulted from $356 million in net equity sales, which Portfolio of Fixed-Income and Equity Assets As of December 31, 2004 (Percent) Book Value Market Value 3.6% 2.8% 28.2% 13.4% 5.8% 4.7% 23.9% 21.1% 59.1% 37.4% (Dollars in millions) Common stocks Investment-grade bonds Tax-exempt bonds High-yield bonds Convertible securities (preferred stocks and debentures) Total Book Value $ 1,918 2,540 1,622 324 Market Value $ 7,465 2,670 1,694 355 395 6,799 $ 455 12,639 $ Cincinnati Financial’s consolidated investment portfolio includes both fixed-income and equity securities. The equity investing approach focuses on a select group of companies with histories of dividend increases and potential for appreciation. This total-return strategy has helped build the company’s financial strength, creating liquidity to meet short-term obligations and strong capitalization to meet long-term objectives. accounted for the majority of the net realized investments gains, as well as market value fluctuations of the company’s common stock holdings. The market value of consolidated fixed- maturity investments rose 21.5 percent to $5.141 billion at year-end 2004. During 2004, the company made approximately $563 million in net new investments using cash flow and existing cash balances. For most of the year, cash flow for new investments was allocated to fixed-income securities, including corporate and municipal bonds. 11 Around the Corner, Around the Clock More than 1,100 associates of The Cincinnati Insurance Companies live and work in communities across the country. They call on their experience and strong local knowledge to serve the 986 agencies that represent Cincinnati in 31 states. Supported by associates Middle Tennessee Territory at Cincinnati’s headquarters, these field associates translate the company’s relationship- based business Nashville Carthage Murfreesboro McMinnville philosophy into daily actions. They work from their homes, providing service and making decisions unencumbered by branch office bureaucracy. Working closely Middle Tennessee Territory Cincinnati appointed its first Tennessee agencies in 1968. The Middle Tennessee territory was formed in 1997 from a subdivision of Tennessee. The territory’s 16 agencies serve 23 counties. The territory spans from the Tennessee-Kentucky border on the north to Tullahoma on the south and from Cookeville on the east to Waverly on the West. Cincinnati team members serving the territory • 1 field marketing representative • 1 field claims manager • 7 field claims representatives • 1 loss control specialist • 1 machinery and equipment specialist • 1 field auditor • 1 bond representative • 1 life marketing director • Headquarters underwriters and other associates together, Cincinnati and the independent agents who represent the company provide quality financial protection for the people and businesses they serve. In the next few pages, we present a timeline of events during a day in one of Cincinnati’s 92 field marketing territories. As you read along, you can follow the activities of the agency staff and the Cincinnati representatives who serve them. These associates demonstrate the company’s belief that the best way to bring value to consumers – and profitable growth to the company – is through the independent Cincinnati agent. 12 5:45 a.m. 6:45 a.m. 7:15 a.m. 8:50 a.m. The Cincinnati Insurance Before this day is over, they’ll Company’s Middle Tennessee see examples of the spectrum 6:45 a.m. – A Murfreesboro restaurant territory and topics of shared concern. territory, like all of Cincinnati’s represented by Cincinnati This morning’s first stop is a 92 field marketing territories, agencies: Powell & Meadows, restaurant in Murfreesboro, wakes up early. The a small agency in Carthage, where claims representatives Cincinnati team is getting population 2,500; Southern who serve this territory’s ready for a day of person-to- Insurance Group, a newly 16 agencies gather to discuss person business. appointed agency in business with the loss control Field Claims Manager Ken Burian and Claims Representative David Hartman discuss next steps for handling a claim in Dickson. Both had spent an afternoon there inspecting an insured building that had been damaged by fire. The fire chief had called the agent, who then called in Cincinnati. McMinnville, population representative, the machinery 12,700; and Crichton Brandon and equipment specialist Jackson & Ward, a large and Burgdorf. This is a agency in the steadily growing regular, quarterly gathering metro area of Nashville, where the team talks population 545,000. about claims trends in the 7:02 a.m. 5:30 a.m. – A Murfreesboro residence Nick Burgdorf, this territory’s field marketing representative, begins his day at 5:30 a.m. In his home-based office in Murfreesboro, he reviews business insurance applications and packs up reports he prepared the previous night. Meanwhile, the territory’s loss control and field claims representatives also are rising, stepping into their home offices and getting ready to roll. By 6:15 a.m., Burgdorf is on the road. He stops at a local hotel to pick up Information Technology Field Specialist Joe Clabaugh, who is visiting the territory from Cincinnati’s headquarters to answer agencies’ technology questions and to provide personalized training. At their quarterly breakfast meeting, claims representatives in the Middle Tennessee territory discuss activities in their territory. Clockwise, from left foreground, are George Caffey, senior claims representative; Erick Hill, AIC, claims specialist; Alan Ferree, senior claims specialist; and Don Redden, claims representative. 13 Independent Agency System During this decade, industry analysts predict the successful agency will have opportunities to increase in size on average almost three-fold. Agencies are likely to pursue consolidation opportunities, buying or merging with other agencies to create a stronger organization and to U.S. Independent Insurance Agency Marketplace Total agency operations exceeding $250,000 in revenue Average agency volume (total revenue, dollars in millions) Total number of agencies expand services. 35,000 9:05 a.m. 9:14 a.m. additional benefits, helping that in four years with his them to identify potential previous employer, he never 6.10 hazards for policyholders. once met with a policyholder. Analysts predict that, while consolidation will reduce the total number of agencies, today’s successful agencies will continue to thrive with strong leadership and positive results. 20,000 2.10 12,000 0.90 1990 2000 2010 Cincinnati expects to benefit from this trend because of our strategy of appointing a limited number of high quality agencies that are leaders in their local markets. Field claims representatives write risk reports and share them with the agent, who can “Everything there was handled over the phone,” he says. advise the insured about Redden and the other claims safety measures or request representatives spend most of services from a Cincinnati loss the day, every day, visiting control specialist. Risk reports policyholders, claimants and also can confirm safe agents. conditions, protecting a good account’s pricing and terms from changes. In 2004, Cincinnati claims representatives in the Middle Tennessee territory wrote 200 The meeting breaks up on time. Each team member has people to see. Some of them will meet again in agencies later in the day. 9 a.m. – Powell & Meadows Agency, Main Street, Carthage Burgdorf stops to buy bagels to take to the next agency, and after an hour on the road arrives at Powell & Meadows in Carthage just as a local resident is walking in. The man has come to see about some insurance for his home; an agency representative meets with him immediately. Burian has responded to reports, helping to identify Cincinnati claims for 35 years. risks and prevent losses for When asked what has policyholders, agencies and changed in claims philosophy the company. during that period, he is quick to answer: “Nothing.” As the group reviews accounts, side conversations “We still treat policyholders cover everything from the the way anyone would want to grading of local roads to how be treated,” he says, “promptly, fairly and to help a certain agency increase personal lines personally. We insist on business. Claims contact within 24 hours of a Representative Don Redden claim being reported to us by joined Cincinnati eight months an agent, and we check things ago from a national carrier. out in person.” Already, he feels at home in “We’re in the community, right Claims representatives’ personal visits provide 14 Middle Tennessee and with on Main Street,” agency Cincinnati’s style. He notes principal Phillip Piper says. 9:21 a.m. 9:29 a.m. 9:31 a.m. 9:43 a.m. “People know each other, and employee would provide. several months. Also at the they trust us.” “David is here when our They also know the Cincinnati policyholders need him, here team. David Smith, AIC, is before the flames are put out one of two Cincinnati field and here to make decisions,” claims representatives Piper says. table are Piper, agency principal Ray Edwards, an agency producer and several customer service Powell & Meadows Insurance Agency, Inc. “Independent agencies represent clients to carriers. We have our clients’ best representatives (CSRs). While interest at heart. We must the meeting is going on, assigned to Powell & Meadows. “I think some policyholders might be just as acquainted with David as they are with us,” Piper jokes, explaining that Smith provides the same high quality of service to policyholders that an agency 9:25 a.m. Today, Smith, Burgdorf and Clabaugh works one-on-one five other members of this with other CSRs, teaching agency’s Cincinnati field team them shortcuts for using some meet with agency company software. representatives to review commercial lines accounts due for renewal over the next At the renewal meeting, everyone contributes some piece of insight to the account In Carthage, Cincinnati team members and representatives of the Powell & Meadows Insurance Agency, Inc., discuss upcoming renewals. Across the table, from left, are Powell & Meadows representatives Sandra Maynard, customer service agent; Chris Hawkins, agent; and Melissa Thornton, customer service representative. Facing away, from left, are Cincinnati field team members Kevin Yuenger, LUTCF, CIC, ChFC, CLU, Cincinnati Life marketing director; David Smith, AIC, field claims superintendent; and Joe Vinson, loss control consultant. 15 have a good relationship with our carriers because they have to trust us. It’s called frontline underwriting.” — Phillip Piper Serves: • Carthage, pop. 2,500, and surrounding rural area Founded: • 1894 Cincinnati agency since: • 1969 Licensed producers: • 4 Branches: • 2 Cincinnati lines of business offered by agency: • Commercial lines, personal lines, life insurance, bond, machinery and equipment, leasing Cincinnati rank in agency (by volume of business): • No. 1 among 6 standard carriers 9:44 a.m. 11:09 a.m. 11:17 a.m. 11:27 a.m. Southern Insurance Group or the market in general: insured was happy. She just because it is based on local wanted someone to care.” knowledge. Headquarters • “That’s a good account, and “In a rural area like this, if you it’s now on an annual basis. “Most of our business is with ask people who insures them, they’ll say Jerry Helton or Can we renew it on a three- Cincinnati,” Piper says. “We year term?” like the stability and the fact underwriters learn the territory and the accounts, too. They know the history of each account, its strengths and Southern Insurance, not the carrier. Local people depend on us. We depend on the carrier.” – Jerry Helton, CIC Serves: • McMinnville, pop. 12,700, and surrounding rural area Founded: • About 1900 (mergers) Cincinnati agency since: • 2004 Licensed producers: • 7 Branches: • 0 Cincinnati lines of business offered by agency: • Commercial lines, personal lines, life insurance, bond, machinery and equipment, leasing Cincinnati rank in agency (by volume of business): • New in agency • “Joe (Vinson, Cincinnati loss control), you’ve conducted several safety classes there. What do you think?” • “We paid a driveway claim on that account and the 11:15 a.m. that we have one commercial lines underwriter at its risks. Cincinnati’s headquarters to In reviewing account histories contact for renewals. at this meeting, the group also Relationship is so important.” is reviewing agency growth Both agents and policyholders benefit from that relationship and profitability. The numbers are good at Powell & Meadows, so the question turns to how At Southern Insurance Group, Inc., in McMinnville, Jay Bragg, CIC, corporate secretary and an agency principal, discusses a new business prospect with Nick Burgdorf, ARM, RPLU, Cincinnati’s sales field director for the territory. 16 11:35 a.m. 2:51 p.m. the agency can continue that “We want to work with trend. Piper speaks for the agents,” says underwriting agency when he says that life manager Tim Wright. “We Growing with Our Agencies Cincinnati is the No. 1 or No. 2 carrier in more than 70 percent of its independent agencies. As these agencies continue to grow, the company seeks to strengthen that position by meeting the agencies’ needs. Cincinnati expects to continue to win our agencies’ high quality Agency Earned Premiums Average Cincinnati premium per agency relationship (Dollars in millions) 1 . 3 9 . 2 6 . 2 3 . 2 0 . 2 insurance and voluntary have guidelines on business, business by continuing to benefits are the answer, but agents know the territory opening more cross-serving better than we do. We trust opportunities. His comments them to do their jobs.” improve service to each agency, provide competitive products, maintain financial 2000 2001 2002 2003 2004 are timely because Kevin Yuenger, LUTCF, CIC, ChFC, CLU, Cincinnati Life’s marketing representative assigned to assist agencies in this territory, is in the Powell & Meadows office today. All of Although new to Cincinnati, strength and offer “best-in- agency principal Jerry Helton, CIC, already likes what he sees and how class” claims handling. As field and headquarters associates build and strengthen their Cincinnati supports his agency relationships within more recently appointed agencies, the for commercial lines of business. company gains opportunities to work with the agencies on Cincinnati Life’s field “Cincinnati can do what a representatives are licensed national carrier does in terms producers in the states of coverage, but it manages additional business. Agencies that have represented the company for less than five years averaged slightly less than $1 million in Cincinnati premiums in 2004. Established agencies – those they serve. relationships the way a that have represented the company five years or more – “That’s the cool thing about Cincinnati,” Piper says. “They are all right here.” 11 a.m. – At Southern Insurance Group, Main Street, McMinnville Some 50 miles away, in McMinnville, a personal lines team from Cincinnati’s headquarters has spent the morning sharing the Cincinnati philosophy with Southern regional carrier does,” Helton averaged approximately $3.4 million in Cincinnati premiums says. “We like that. We like having someone who will walk in here and work with us one in 2004. on one, someone who has lines CSRs a tour of CinciLink, authority. We have some field Cincinnati’s secure Web site people from other carriers for agencies, Burgdorf and who come by to visit. It’s nice Helton sit down to discuss a to have a cup of coffee with pending application. someone, but if they can’t do anything for our clients, it’s a waste of time.” Shortly, Senior Machinery & Equipment Specialist Mark Shaw and Loss Control Insurance Group, a newly Burgdorf and Clabaugh arrive Consultant Vinson meet appointed agency. That at the agency’s office on Main Burgdorf and Helton at the philosophy has a lot to do with Street around 11:30. While agency. Together, they go out agent autonomy. Clabaugh gives commercial to visit a new business 17 Improving Service Cincinnati had 92 property casualty field marketing territories at year-end 2004, adding territories in Cleveland, Kansas City, 2:53 p.m. 2:59 p.m. Milwaukee, upstate New York and St. Louis during the year. Smaller field marketing territories let us provide a higher level of sales support and service to the agents who serve our policyholders. The company anticipates reaching 100 field marketing territories by subdividing eight additional territories in 2005: Field Marketing Territories Number of field marketing territories at year-end 92 87 83 76 74 100 large agency on the second challenged, but that is floor of a modern office tower getting better.” outside Nashville’s I-440 beltway. Vice President Rob Crichton notes that Crichton Brandon Beverly McMahon, the Jackson & Ward needs receptionist, greets them volume to do a good job warmly and says, “I’ll tell selling personal lines, and 2000 2001 2002 2003 2004 2005E everybody you’re here.” right now the agency doesn’t Birmingham, Alabama; Central Indiana; Chattanooga, Tennessee; Chicago; Delaware/Maryland; Detroit; Nashville, Tennessee; and Utah. To create a Delaware/Maryland territory, it will subdivide the current Maryland territory and enter Delaware, the company's first new state since 2000. prospect, and they are looking beyond nuts and bolts. “Housekeeping tells a lot about the risk exposure,” Vinson says after the group visits the potential insured’s place of business. The consensus on this prospect is that Cincinnati likely will pass. 2:45 p.m. – At Crichton Brandon Jackson & Ward, Armory Drive, Nashville Clabaugh heads to cubicles in the CSR area to answer technology questions while Burgdorf sets up shop in a conference room. Commercial lines agents and CSRs check have the tools to do that with Cincinnati. Diamond, Cincinnati’s new personal lines processing system, is scheduled for a future release to Tennessee agencies. in to discuss business Even so, Cincinnati is the fifth prospects, provide updates on largest carrier for the agency recently quoted business and by premium volume, and first get new coverage quotes. in several specific lines of “Cincinnati is the most valuable carrier in our agency,” says Marketing business. “We wish all regional carriers were like Cincinnati,” Crichton says. Director Beth Price, whose Speaking about softening agency represents 20 different general market conditions, carriers. “Cincinnati is a true Crichton says, “We try to talk generalist with the unique with clients early in the ability to go outside the box renewal process. It is often in and write business that makes their best interest to stay sense. They do have some with the same carrier over peculiar rules: We can’t target the long haul. That’s best Burgdorf and Clabaugh grab a business already written by for everyone.” late lunch on the road and Cincinnati through another head west to Crichton agency. The company also Brandon Jackson & Ward, a has been automation “The three-year commercial policy is huge,” agency 18 3:01 p.m. 3:10 p.m. 3:17 p.m. 3:20 p.m. President Jimmy Ward adds. daughter Abbey are still in “It’s a real benefit, as is after-school activities. No 5:30 p.m. – A School Gymnasium, Murfreesboro Cincinnati’s financial strength.” matter; 17-month-old Allie is Nine athletes look up to Claims service, Ward says, on hand to greet him. Burgdorf, and for good Crichton Brandon Jackson & Ward “We have a major commitment to safety, a major also is a selling point. After a quick catch-up with “If clients have been with Paula, his wife, Burgdorf Cincinnati, especially through heads for his office off the a claim, they’ll stay,” he says. front hall. He has calls to reason…they are all 9 years old, a mass of ponytails, untied shoes and giggles. Burgdorf coaches his daughter’s team, running drills, shouting encouragement and soothing tears. make, e-mails to check, appointments to schedule and 45 minutes before he leaves again – this time for basketball Like most Cincinnati field practice. team members, Burgdorf is active in his community. He 4:30 p.m. – Nick Burgdorf’s home in Murfreesboro When Burgdorf arrives home in Murfreesboro, 6-year-old son Cole and 9-year-old 2:56 p.m. commitment to doing things right. We know the character of a client. That’s what we bring to the table. We know our clients.” — Jimmy Ward Serves: • Nashville, pop. 545,000, and surrounding urban and suburban areas Founded: • 1979 Cincinnati agency since: • 1995 Licensed producers: • 13 Branches: • 0 Cincinnati lines of business offered by agency: • Commercial lines, life insurance, bond, machinery and equipment, leasing Cincinnati rank in agency (by volume of business): • No. 4 among more than 10 standard carriers At the Nashville agency of Crichton Brandon Jackson & Ward, Randy Deskins, AFSB, senior regional director for Cincinnati’s Bond & Executive Risk department, far left, listens while agency partners Parkes Brandon, corporate secretary; Rob Crichton, vice president; and Jimmy Ward, president, assess market conditions. 19 Appointing New Agencies With approximately a 1 percent overall share of the insurance marketplace in our 31 active states, we know there are 4:37 p.m. 7:20 p.m. opportunities for additional growth. While ensuring the franchise value of current agency relationships, smaller territories allow our marketing representatives to appoint additional, high-quality agencies Market Share Based on direct written premiums 2003 market share in states where Cincinnati actively markets property casualty insurance: Above 5% 1% to 5% Less than 1% * DE in 2005 Headquarters (no branches) coaches this basketball team and helps with another, and 7 p.m. – Home in Murfreesboro also serves on a committee to Back home, Burgdorf and his * raise money for his children’s family enjoy a chicken that school. “I don’t just work here; has been stewing in the slow I live here,” Burgdorf says, cooker. After reviewing the “I give my neighbors and the kids’ homework, Burgdorf has company’s local agents the some homework of his own. in markets where we identify growth opportunities. kind of care and respect that And so he goes back to his We appointed 48 new agencies in 2004 and anticipate appointing build loyalties that will last for office, wakes up his computer a long time. That’s a good and settles in. There is a lot of approximately 100 new agencies during 2005 and 2006. deal for them and for territory for Cincinnati to Cincinnati Insurance, too.” cover tomorrow. 5:45 p.m. Cincinnati field marketing representative Nick Burgdorf, top center, and his friend Brian Sears, right, coach their 9-year-old daughters’ basketball team in Murfreesboro. 20 Cincinnati Financial Corporation Directors and Officers Directors (as of March 4, 2005) William F. Bahl, CFA Chairman Bahl & Gaynor, Inc. (investment advisers) Director since 1995 (1)(2)(4)(5*) James E. Benoski Vice Chairman and Chief Insurance Officer Cincinnati Financial Corporation Director since 2000 (3)(4) Michael Brown President Cincinnati Bengals, Inc. Director since 1980 (3) Dirk J. Debbink President MSI General Corporation Director since 2004 (1) Kenneth C. Lichtendahl President and Chief Executive Officer Tradewinds Beverage Company Director since 1988 (1*)(2)(5) W. Rodney McMullen Vice Chairman The Kroger Co. Director since 2001(2*)(4) Gretchen W. Price Vice President-Finance & Accounting Global Operations Procter & Gamble Director since 2002 (1)(2) John J. Schiff, Jr., CPCU Chairman, President and Chief Executive Officer Cincinnati Financial Corporation Director since 1968 (3*)(4*) Officers (as of March 4, 2005) John J. Schiff, Jr., CPCU Chairman, President and Chief Executive Officer James E. Benoski Vice Chairman and Chief Insurance Officer Kenneth W. Stecher Chief Financial Officer and Senior Vice President, Secretary, Treasurer Directors Emeriti Vincent H. Beckman Robert J. Driehaus John E. Field, CPCU Jackson H. Randolph Lawrence H. Rogers II John Sawyer Thomas R. Schiff Chairman and Chief Executive Officer John J. & Thomas R. Schiff & Co., Inc. (insurance agency) Director since 1975 (4) Frank. J. Schultheis President (retired) Schultheis Insurance Agency, Inc. Director since 1995 (3) John M. Shepherd Chairman and Chief Executive Officer The Shepherd Chemical Company Director since 2001 (3)(5) Douglas S. Skidmore President and Chief Executive Officer Skidmore Sales & Distributing Company, Inc. Director since 2004 (1) Larry R. Webb, CPCU President Webb Insurance Agency, Inc. Director since 1979 (3) E. Anthony Woods Chairman Deaconess Associations, Inc. (health care) Director since 1998 (1)(4) (1) Audit Committee (2) Compensation Committee; also Lawrence H. Rogers II, adviser (3) Executive Committee (4) Investment Committee; also Richard M. Burridge, CFA, adviser (5) Nominating Committee * Committee Chair Kenneth S. Miller, CLU, ChFC Chief Investment Officer and Senior Vice President, Assistant Secretary, Assistant Treasurer Eric N. Mathews, CPCU, AIAF Vice President, Assistant Secretary, Assistant Treasurer Robert C. Schiff David B. Sharrock Thomas J. Smart Alan R. Weiler, CPCU Charles I. Westheimer William H. Zimmer 21 W.F. Bahl J.E. Benoski M. Brown D.J. Debbink K.C. Lichtendahl W.R. McMullen G.W. Price J.J. Schiff, Jr. T.R. Schiff J.M. Shepherd D.S. Skidmore L.R. Webb E.A. Woods After 10 years of service as a director of Cincinnati Financial, Frank Schultheis will not stand for re-election in April 2005. He retired F.J. Schultheis in 2004 from Schultheis Insurance Agency, Inc., an Evansville, Indiana-based agency that has represented The Cincinnati Insurance Companies since 1970. Your company has been a grateful beneficiary of his many professional achievements and his community spirit. We thank Frank, as we also thank our shareholders who have elected him to serve several consecutive terms. Definitions of Non-GAAP Information and Reconciliation to Comparable GAAP Measures Cincinnati Financial Corporation prepares its public financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP). Statutory data is prepared in accordance with statutory accounting rules as defined by the National Association of Insurance Commissioners’ (NAIC) Accounting Practices and Procedures Manual and therefore is not reconciled to GAAP data. Management uses certain non-GAAP and non-statutory financial measures to evaluate its primary business areas – property casualty insurance, life insurance and investments – when analyzing both GAAP and certain non-GAAP measures may improve understanding of trends in the underlying business, helping avoid incorrect or misleading assumptions and conclusions about the success or failure of company strategies. Management adjustments to GAAP measures generally: apply to non-recurring events that are unrelated to business performance and distort short-term results; involve values that fluctuate based on events outside of management’s control; or relate to accounting refinements that affect comparability between periods, creating a need to analyze data on the same basis. • Net income before realized investment gains and losses: Net income before realized investment gains and losses (readers also may have seen this measure defined as operating income) is calculated by excluding net realized investment gains and losses from net income. Management evaluates net income before realized investment gains and losses to measure the success of pricing, rate and underwriting strategies. While realized investment gains (or losses) are integral to the company’s insurance operations over the long term, the determination to realize investment gains or losses in any period may be subject to management’s discretion and is independent of the insurance underwriting process. Moreover, under applicable GAAP accounting requirements, gains and losses can be recognized from certain changes in market values of securities without actual realization. Management believes that the level of realized investment gains or losses for any particular period, while it may be material, may not fully indicate the performance of ongoing underlying business operations in that period. For these reasons, many investors and shareholders consider net income before realized investment gains and losses to be one of the more meaningful measures for evaluating insurance company performance. Equity analysts who report on the insurance industry and the company generally focus on this metric in their analyses. The company presents net income before realized investment gains and losses so that all investors have what management believes to be a useful supplement to GAAP information. • Statutory accounting rules: For public reporting, insurance companies prepare financial statements in accordance with GAAP. However, insurers also must calculate certain data according to statutory accounting rules as defined in the NAIC’s Accounting Practices and Procedures Manual, which may be, and has been, modified by various state insurance departments. 22 Statutory data is publicly available, and various organizations use it to calculate aggregate industry data, study industry trends and compare insurance companies. • Written premium: Under statutory accounting rules, written premium is the amount recorded for policies issued and recognized on an annualized basis at the effective date of the policy. Management analyzes trends in written premium to assess business efforts. Earned premium, used in both statutory and GAAP accounting, is calculated ratably over the policy term. The difference between written and earned premium is unearned premium. • Written premium adjustment – statutory basis only: In 2002, the company refined its estimation process for matching written premiums to policy effective dates, which added $117 million to 2002 written premiums. To better assess ongoing business trends, management may exclude this adjustment when analyzing trends in written premiums and statutory ratios that make use of written premiums. • Codification: Adoption of Codification of Statutory Accounting Principles was required for Ohio-based insurance companies effective January 1, 2001. The adoption of Codification changed the manner in which the company recognized statutory property casualty written premiums. As a result, 2001 statutory written premiums included $402 million to account for unbooked premiums related to policies with effective dates prior to January 1, 2001. To better assess ongoing business trends, management excludes this $402 million when analyzing written premiums and statutory ratios that make use of written premiums. • Life insurance gross written premiums: In analyzing the life insurance company’s gross written premiums, management excludes five larger, single-pay life insurance policies (bank- owned life insurance or BOLIs) written in 2004, 2002, 2000 and 1999 to focus on the trend in premiums written through the independent agency distribution channel. • One-time charges or adjustments: Management analyzes earnings and profitability excluding the impact of one-time items. * In 2003, as the result of a settlement negotiated with a vendor, pretax results included the recovery of $23 million of the $39 million one-time, pretax charge incurred in 2000. * In 2000, the company recorded a one-time charge of $39 million, pre-tax, to write down previously capitalized costs related to the development of software to process property casualty policies. * In 2000, the company earned $5 million in interest in the first quarter from a $303 million single-premium BOLI policy that was booked at the end of 1999 and 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. Reconciliation of Consolidated Financial Data Cincinnati Financial Corporation and Subsidiaries (Dollars in millions except per share data) Income Statement Data Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One-time items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income before one-time items . . . . . . . . . . . . . . . . . . . Net realized investment gains and losses . . . . . . . . . . . . . . Net income before realized investment gains and losses, before one-time item . . . . . . . . . . . . . . . . . . . . . Per Share Data (diluted) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . One-time items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income before one-time items . . . . . . . . . . . . . . . . . . . Net realized investment gains and losses . . . . . . . . . . . . . . Net income before realized investment gains and losses, before one-time item . . . . . . . . . . . . . . . . . Return on Average Equity 2004 Years ended December 31, 2001 2002 2003 2000 1999 $ __________ $ __________ 584 – 584 60 $ __________ $ __________ 374 15 359 (27) $ __________ $ __________ 238 – 238 (62) $ __________ $ __________ 193 – 193 (17) $ __________ __________ 524 $ __________ __________ 386 $ __________ __________ 300 $ __________ __________ 210 $ __________ $ __________ 3.44 – 3.44 0.36 $ __________ $ __________ 2.20 0.09 2.11 (0.16) $ __________ $ __________ 1.39 – 1.39 (0.36) $ __________ $ __________ 1.13 – 1.13 (0.10) $ __________ __________ 3.08 $ __________ __________ 2.27 $ __________ __________ 1.75 $ __________ __________ 1.23 $ $ 255 – __________ __________ $ 255 0 __________ __________ 118 (25) 143 (2) $ $ __________ __________ __________ __________ 145 255 $ $ $ 1.44 – __________ __________ $ 1.44 – __________ __________ 0.70 (0.15) 0.85 (0.01) $ $ __________ __________ __________ __________ 0.86 1.44 $ Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . One-time items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average equity before one-time items . . . . . . . . 9.4% – __________ 9.4% __________ __________ 6.3% (0.3) __________ 6.0% __________ __________ 4.1% – __________ 4.1% __________ __________ 3.2% – __________ 3.2% __________ __________ 4.6% – __________ __________ 4.6% __________ __________ __________ __________ 2.1% 0.4 2.5% Return on Average Equity Based on Comprehensive Income ROE based on comprehensive income . . . . . . . . . . . . . . . One-time items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ROE based on comprehensive income before 4.6% – __________ 13.8% (0.3) __________ (4.0%) – __________ 2.5% – __________ 13.1% 0.4 __________ __________ 1.9% – one-time items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6% __________ __________ 13.5% __________ __________ (4.0%) __________ __________ 2.5% __________ __________ 1.9% __________ __________ __________ __________ 13.5 Investment Income Investment income, net of expenses . . . . . . . . . . . . . . . . . Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . Investment income, net of expenses, before BOLI . . . . . . $ __________ $ __________ __________ 492 – 492 $ __________ $ __________ __________ 465 – 465 $ __________ $ __________ __________ 445 – 445 $ __________ $ __________ __________ 421 – 421 $ $ __________ __________ $ __________ __________ __________ __________ 415 (5) 410 387 – 387 $ Reconciliation of Property Casualty Data (Statutory)(1) Cincinnati Insurance Property Casualty Group (Dollars in millions) Premiums(1) 2004 Years ended December 31, 2001 2002 2003 2000 1999 Written premiums (adjusted) . . . . . . . . . . . . . . . . . . . . . . . Codification(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Written premium adjustment(2) . . . . . . . . . . . . . . . . . . . . . Written premiums (reported)(2) . . . . . . . . . . . . . . . . . . . . . Unearned premiums change . . . . . . . . . . . . . . . . . . . . . . . . Earned premiums (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,026 – (29) __________ 2,997 (78) __________ $2,919 __________ __________ $ 2,789 – 26 __________ 2,815 (162) __________ $2,653 __________ __________ $ 2,496 – 117 __________ 2,613 (222) __________ $2,391 __________ __________ $ 2,188 402 – __________ 2,590 (517) __________ $2,073 __________ __________ $ 1,936 (55) – 1,881 (53) $1,828 $ 1,681 – – 1,681 (23) $1,658 __________ __________ __________ __________ __________ __________ __________ __________ Year-over-year Growth Rate: Written premiums (adjusted)(2) . . . . . . . . . . . . . . . . . . . . . Written premiums (reported)(2) . . . . . . . . . . . . . . . . . . . . . Earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.5% 6.5 10.0 11.7% 7.7 10.9 14.0% 0.9 15.4 13.0% 37.7 13.3 15.2% 11.9 10.3 7.9% 7.9 7.5 Combined Ratio(1) Combined ratio (reported) . . . . . . . . . . . . . . . . . . . . . . . . . Codification(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Written premium adjustment . . . . . . . . . . . . . . . . . . . . . . . One-time items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Combined ratio (adjusted) . . . . . . . . . . . . . . . . . . . . . . . . . Catastrophe losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Combined ratio excluding catastrophe losses (adjusted) . . . . . . . . . . . . . . . . . . . . . 89.4% – nm – __________ 89.4% __________ (5.1) __________ 94.2% – nm 0.8 __________ 95.0% __________ (3.6) __________ 98.4% – 1.2 – __________ 99.6% __________ (3.6) __________ 99.5% 4.1 – – __________ 103.6% __________ (3.1) __________ 100.4% – – – __________ __________ 100.4% __________ __________ (2.5) __________ __________ 112.5% (0.9) – (1.7) 109.9% (2.7) 84.3% __________ __________ 91.4% __________ __________ 96.0% __________ __________ 100.5% __________ __________ 97.9% __________ __________ __________ __________ 107.2% Dollar amounts shown are rounded to millions; certain amounts may not add due to rounding. Ratios are calculated based on whole dollar amounts. nm – not meaningful 1 Statutory data prepared in accordance with statutory accounting rules as defined by the National Association of Insurance Commissioners and filed with the appropriate regulatory bodies. 2 Prior to 2001, property casualty written premiums were recognized as they were billed throughout the policy period. Effective January 1, 2001, written premiums have been recognized on an annualized basis at the effective date of the policy. Written premiums for 2000 were reclassified to conform with the 2001 presentation; information was not readily available to reclassify earlier year statutory data. The growth rates in written premiums between 1999 and 2000 are overstated because 1999 premiums are shown on a billed basis. 23 Reconciliation of Commercial Lines Property Casualty Data (Statutory)(1) Cincinnati Insurance Property Casualty Group (Dollars in millions) Premiums(1) 2004 2003 2001 2001 2000 1999 Years ended December 31, Written premiums (adjusted) . . . . . . . . . . . . . . . . . . . . . . . Codification(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Written premium adjustment(2) . . . . . . . . . . . . . . . . . . . . . Written premiums (reported)(2) . . . . . . . . . . . . . . . . . . . . . Unearned premiums change . . . . . . . . . . . . . . . . . . . . . . . . Earned premiums (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,209 – (23) __________ 2,186 (60) __________ $ 2,126 __________ __________ $ 2,009 – 22 __________ 2,031 (123) __________ $ 1,908 __________ __________ $ 1,795 – 110 __________ 1,905 (184) __________ $ 1,721 __________ __________ $ 1,551 276 – __________ 1,827 (374) __________ $ 1,453 __________ __________ $ 1,326 (51) – $ 1,100 – – __________ __________ 1,100 (12) __________ __________ $ 1,088 $ 1,232 __________ __________ __________ __________ 1,275 (43) Year-over-year Growth Rate: Written premiums (adjusted)(2) . . . . . . . . . . . . . . . . . . . . . Written premiums (reported)(2) . . . . . . . . . . . . . . . . . . . . . Earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.0% 7.6 11.4 13.1% 6.6 10.8 15.8% 4.2 18.6 16.9% 43.3 17.9 20.5% 15.9 13.2 7.8% 7.8 6.7 Combined Ratio(1) Combined ratio (reported) . . . . . . . . . . . . . . . . . . . . . . . . . Codification(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Written premium adjustment . . . . . . . . . . . . . . . . . . . . . . . One-time items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Combined ratio (adjusted) . . . . . . . . . . . . . . . . . . . . . . . . . Catastrophe losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Combined ratio excluding catastrophe losses (adjusted) . . . 83.7% – nm – __________ 83.7% __________ (3.4) __________ 80.3% __________ __________ 90.9% – nm 0.7 __________ 91.6% __________ (2.2) __________ 89.4% __________ __________ 95.3% – 1.5 – __________ 96.8% __________ (2.3) __________ 94.5% __________ __________ 96.7% 4.0 – – __________ 100.7% __________ (1.9) __________ 98.8% __________ __________ 101.2% – – – __________ __________ 101.2% __________ __________ (2.7) __________ __________ 98.5% __________ __________ __________ __________ 117.2% (1.2) – (1.6) 114.4% (1.5) 112.9% Reconciliation of Personal Lines Property Casualty Data (Statutory)(1) Cincinnati Insurance Property Casualty Group (Dollars in millions) Premiums(1) Written premiums (adjusted) . . . . . . . . . . . . . . . . . . . . . . . Codification(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Written premium adjustment(2) . . . . . . . . . . . . . . . . . . . . . Written premiums (reported)(2) . . . . . . . . . . . . . . . . . . . . . Unearned premiums change . . . . . . . . . . . . . . . . . . . . . . . . Earned premiums (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . Year-over-year Growth Rate: 2004 2003 2001 2001 2000 1999 Years ended December 31, $ $ $ $ 610 $ __________ __________ __________ __________ __________ 701 – 7 708 (38) 670 $ 637 126 – __________ 763 (143) 620 __________ $ __________ __________ (4) – 606 (10) 596 581 – – 581 (11) 570 __________ $ __________ __________ __________ $ __________ __________ __________ $ __________ __________ __________ __________ $ __________ __________ __________ __________ $ 780 – 4 784 (39) 745 817 – (6) 811 (18) 793 Written premiums (adjusted)(2) . . . . . . . . . . . . . . . . . . . . . Written premiums (reported)(2) . . . . . . . . . . . . . . . . . . . . . Earned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7% 3.4 6.4 12.0% 10.8 11.2 9.8% (7.2) 8.1 4.6% 26.1 4.0 5.0% 4.3 4.6 8.0% 8.0 9.0 Combined Ratio(1) Combined ratio (reported) . . . . . . . . . . . . . . . . . . . . . . . . . Codification(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Written premium adjustment . . . . . . . . . . . . . . . . . . . . . . . One-time items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Combined ratio (adjusted) . . . . . . . . . . . . . . . . . . . . . . . . . Catastrophe losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Combined ratio excluding catastrophe losses (adjusted) . . . 104.6% – nm – __________ 104.6% __________ (9.7) __________ 94.9% __________ __________ 102.9% – nm 1.0 __________ 103.9% __________ (7.3) __________ 96.6% __________ __________ 106.5% – 0.3 – __________ 106.8% __________ (7.1) __________ 99.7% __________ __________ 105.9% 4.6 – – __________ 110.4% __________ (5.8) __________ 104.6% __________ __________ 97.8% – – – __________ __________ 97.8% __________ __________ (1.4) __________ __________ 96.4% __________ __________ __________ __________ 110.6% (0.2) – (2.0) 108.4% (5.4) 103.0% Reconciliation of Life Company Data (Statutory)(1) The Cincinnati Life Insurance Company (Dollars in millions) Gross written premiums (reported) . . . . . . . . . . . . . . . . . . . . Bank-owned life insurance (BOLI) adjustment . . . . . . . . . . . Gross written premiums (adjusted) . . . . . . . . . . . . . . . . . . . . Years ended December 31, 2004 $ __________ $ __________ __________ 230 (10) 220 2003 173 – 173 $ __________ $ __________ __________ 2001 244 (34) 210 $ __________ $ __________ __________ 2001 122 – 122 $ __________ $ __________ __________ 2000 157 (20) 137 $ $ __________ __________ $ __________ __________ __________ __________ $ 1999 421 (303) 118 Dollar amounts shown are rounded to millions; certain amounts may not add due to rounding. Ratios are calculated based on whole dollar amounts. nm – Not meaningful 1 Statutory data prepared in accordance with statutory accounting rules as defined by the National Association of Insurance Commissioners and filed with the appropriate regulatory bodies. 2 Prior to 2001, property casualty written premiums were recognized as they were billed throughout the policy period. Effective January 1, 2001, written premiums have been recognized on an annualizedbasis at the effective date of the policy. Written premiums for 2000 were reclassified to conform with the 2001 presentation; information was not readily available to reclassify earlier year statutory data. The growth rates in written premiums between 1999 and 2000 are overstated because 1999 premiums are shown on a billed basis. 24 Subsidiary Directors and Officers The Cincinnati Casualty Company (CCC) The Cincinnati Life Insurance Company (CLIC) CFC Investment Company (CFC-I) CinFin Capital Management (CCM) As of March 4, 2005, listed alphabetically The Cincinnati Insurance Company (CIC) The Cincinnati Indemnity Company (CID) Executive Officers James E. Benoski CIC, CID, CCC Vice Chairman of the Board CIC, CID, CCC, CLIC Chief Insurance Officer and Senior Vice President—Headquarters Claims Director of all subsidiaries Craig W. Forrester, CLU CIC, CID, CCC, CLIC Senior Vice President— Information Technology Thomas A. Joseph, CPCU CIC, CID, CCC Senior Vice President— Commercial Lines CCC Director Eric N. Mathews, CPCU, AIAF CIC, CID, CCC Senior Vice President—Corporate Accounting and Treasurer Daniel T. McCurdy CIC, CID, CCC Senior Vice President—Bond & Executive Risk CCC Director Larry R. Plum, CPCU CCC President CIC, CID Senior Vice President—Personal Lines CIC, CID, CCC, CLIC Director David H. Popplewell, FALU, LLIF CLIC President and Chief Operating Officer; Director J. F. Scherer CIC, CID, CCC, CLIC Senior Vice President— Sales & Marketing; Director CFC-I Director John J. Schiff, Jr., CPCU CIC, CID Chairman, President and Chief Executive Officer CCC Chairman and Chief Executive Officer CLIC Chief Executive Officer CIC, CID, CCC, CLIC, CFC-I Director Joan O. Shevchik, CPCU, CLU CIC, CID, CCC Senior Vice President— Corporate Communications Kenneth W. Stecher CIC, CID, CCC, CLIC, CFC-I Chief Financial Officer and Senior Vice President— Corporate Accounting; Secretary CCM Treasurer Director of all subsidiaries Timothy L. Timmel CIC, CID, CCC, CLIC, CFC-I Senior Vice President—Operations; Director Senior Officers Michael R. Abrams CCM Vice President Donald R. Adick, FLMI CLIC Senior Vice President—Life Marketing Administration Dawn M. Alcorn CIC, CID, CCC Vice President—Administrative Services Brad E. Behringer CLIC Senior Vice President and Chief Underwriter Douglas A. Bogenreif, CLU CLIC Vice President—Life Marketing Administration David L. Burbrink CLIC Vice President—Life Field Services Richard W. Cumming, ChFC, CLU, FSA, MAAA CIC, CID, CCC, CLIC Senior Vice President and Chief Actuary CLIC Director Joel W. Davenport, CPCU, AAI Donald J. Doyle, Jr., CPCU, AIM CIC, CID, CCC, CLIC Senior Vice President— Internal Audit Harold L. Eggers, CLU, FLMI, FALU, HIAA CLIC Vice President—Life Policy Issue Frederick A. Ferris CIC, CID, CCC Vice President—Commercial Lines Bruce S. Fisher, CPCU, AIC CIC, CID, CCC Vice President—Headquarters Claims Carl C. Gaede, CPCU, AFSB CIC, CID, CCC Vice President— Bond & Executive Risk Michael J. Gagnon CIC, CID, CCC Vice President—Headquarters Claims Kevin E. Guilfoyle CFC-I Senior Vice President—Leasing David L. Helmers, CPCU, API, ARe, AIM CIC, CID, CCC Vice President—Personal Lines Theresa A. Hoffer CIC, CID, CCC Vice President— Corporate Accounting Martin F. Hollenbeck, CFA CIC, CID, CCC, CLIC, CCM Vice President— Investments Timothy D. Huntington, CPCU, AU CIC, CID, CCC Vice President—Commercial Lines Thomas H. Kelly CIC, CID, CCC Vice President— Bond & Executive Risk Christopher O. Kendall, CPCU, AIT, AIM, ARe, ARM, ARP CIC, CID, CCC Vice President—Commercial Lines Gary J. Kline, CPCU CIC, CID, CCC Vice President—Commercial Lines Robert L. Laymon, CIC, CID, CCC Vice President— Bond & Executive Risk Steven W. Leibel, CPCU, AIM CIC, CID, CCC Vice President—Personal Lines Jerry L. Litton CFC-I Treasurer Richard L. Mathews, CPCU CIC, CID, CCC, CLIC Vice President— Information Technology Richard P. Matson CIC, CID, CCC, CFC-I, CLIC Vice President— Purchasing/Fleet Kenneth S. Miller, CLU, ChFC CFC-I President and Chief Operating Officer CIC, CID, CCC, CLIC Chief Investment Officer and Senior Vice President—Investments CCM President Director of all subsidiaries Martin J. Mullen, CPCU CIC, CID, CCC Vice President—Headquarters Claims Glenn D. Nicholson, LLIF CLIC Senior Vice President and Senior Marketing Officer; Director Michael K. O’Connor, CFA, AFSB CCM Vice President Marc A. O’Dowd, CPA, CPCU CIC, CID, CCC, CLIC Internal Audit Officer Todd H. Pendery, FLMI CLIC Vice President—Corporate Accounting and Treasurer Charles E. Robinson, CPCU CIC, CID, CCC Vice President—Field Claims CIC, CID, CCC Vice President—Commercial Lines Michael A. Rouse J. Michael Dempsey, CLU CIC, CID, CCC Vice President—Commercial Lines CLIC Vice President—Life Marketing Administration Thomas J. Scheid Mark R. DesJardins, CPCU, AIM, AIC, ARP CIC, CID, CCC, CLIC Vice President—Premium Audit CIC, CID, CCC Vice President— Education & Training Appendix Gregory D. Schmidt, CPCU, ARP, CPP, ACP, ARC CIC, CID, CCC, CLIC Vice President— Staff Underwriting Norman R. Settle CIC, CID, CCC Senior Vice President— Administrative Services/Machinery & Equipment Specialties/Loss Control J. B. Shockey, CPCU, CIC, CLU CIC, CID, CCC Vice President—Sales & Marketing David W. Sloan CFC-I Vice President—Leasing Scott K. Smith, CPCU, ARM, AIM, AU CIC, CID, CCC Vice President—Commercial Lines Steven A. Soloria, CFA CIC, CID, CCC, CLIC, CCM Vice President— Investments CCM Secretary Charles P. Stoneburner II, CPCU CIC, CID, CCC Vice President—Field Claims Gary B. Stuart CIC, CID, CCC Vice President—Sales & Marketing Duane I. Swanson, CIC CIC, CID, CCC Vice President—Sales & Marketing Philip J. Van Houten, CFE, FCLS CIC, CID, CCC Vice President—Special Investigations Jody L. Wainscott CIC, CID, CCC Vice President—Research & Development Mark A. Welsh CIC, CID, CCC, CLIC Vice President— Staff Underwriting Mark S. Wietmarschen CIC, CID, CCC Vice President—Commercial Lines Heather J. Wietzel CIC, CID, CCC Vice President and Investor Relations Officer Gregory J. Ziegler CIC, CID, CCC, CLIC, CFC-I Vice President— Personnel Mark J. Huller CIC, CID, CCC, CLIC Senior Counsel Eugene M. Gelfand CIC, CID, CCC, CLIC Counsel G. Gregory Lewis CIC, CID, CCC, CLIC Counsel Lisa A. Love CIC, CID, CCC, CLIC Senior Counsel Stephen C. Roach CIC, CID, CCC, CLIC Counsel Non-Officer Directors William F. Bahl, CFA CIC, CID, CCC, CLIC Director W. Rodney McMullen CIC, CID, CCC, CLIC Director Thomas R. Schiff CIC, CID, CCC, CLIC Director Frank J. Schultheis CIC, CID Director Larry R. Webb, CPCU CIC, CID Director E. Anthony Woods CIC, CID, CCC, CLIC Director CIC Directors Emeriti Vincent H. Beckman Robert J. Driehaus Richard L. Hildbold, CPCU William H. Zimmer Shareholder Information Cincinnati Financial Corporation had approximately 11,850 shareholders of record as of December 31, 2004. Many of the company’s independent agent representatives and most of the 3,884 associates of its subsidiaries own the company’s common stock. Stock Listing Common shares are traded under the symbol CINF on the Nasdaq National Market. Annual Meeting The Annual Meeting of Shareholders of Cincinnati Financial Corporation will take place at 9:30 a.m. on Saturday, April 23, 2005, at the Cincinnati Art Museum in Eden Park, Cincinnati, Ohio. If you are unable to attend, you may listen to an audio webcast from the Investors section of the company’s Web site, www.cinfin.com. Shareholder Services Please direct inquiries about stock transfer, dividend reinvestment, dividend direct deposit, lost certificates, change of address or electronic delivery and elimination of duplicate mailings to Kenneth W. Stecher, Chief Financial Officer, Cincinnati Financial Corporation, P.O. Box 145496, Cincinnati, Ohio 45250-5496, (513) 870-2639, or e-mail shareholder_inquiries@cinfin.com. Form 10-K Cincinnati Financial Corporation’s Annual Report on Form 10-K, filed annually with the Securities and Exchange Commission, is included in this Annual Report. Additional copies are available at no cost by contacting Mr. Stecher. You also may access and print this document from the Investors section of www.cinfin.com. Interim Communications During 2005, Cincinnati Financial Corporation is tentatively scheduled to report interim results as follows: First quarter ending March 31 Second quarter ending June 30 Third quarter ending September 30 April 20 July 20 October 19 Information regarding actual interim release dates and quarterly conference call webcasts is available approximately two weeks after the end of each quarter on www.cinfin.com, by calling (513) 870-2768 or by e-mailing investor_inquiries@cinfin.com. Corporate Headquarters Cincinnati Financial Corporation 6200 South Gilmore Road Fairfield, Ohio 45014-5141 Phone: (513) 870-2000 Fax: (513) 870-2066 Independent Registered Public Accounting Firm Deloitte & Touche LLP 250 East Fifth Street Cincinnati, Ohio 45202-5109 Common Stock Price and Dividend Data ___________________________________________________________________________________________________ 2004 ____________________________________________________________________________________________________ 2003 Quarter: High . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43.69 38.87 Low . . . . . . . . . . . . . . . . . . . . . . . . . . 41.38 Period-end close . . . . . . . . . . . . . . . . . 0.262 Cash dividends declared . . . . . . . . . . . __________________ 1st __________________ 2nd $ 43.87 39.80 43.52 0.275 __________________ 3rd $ 43.79 39.33 41.22 0.275 4th 45.70 38.40 44.26 0.275 __________________ __________________ __________________ __________________ $ $ $ $ 1st 37.57 31.50 33.40 0.238 2nd 37.49 33.43 35.28 0.238 3rd 39.73 34.86 38.10 0.238 __________________ 4th $ 39.91 37.77 39.76 0.238 Source: Nasdaq National Market The common stock prices and dividend data above are adjusted to reflect the 5 percent stock dividend paid June 15, 2004; the data is not adjusted to reflect the 5 percent stock dividend declared February 5, 2005, and payable April 26, 2005, to shareholders of record on April 6, 2005. CINCINNATI FINANCIAL CORPORATION The Cincinnati Insurance Company The Cincinnati Casualty Company The Cincinnati Indemnity Company The Cincinnati Life Insurance Company CFC Investment Company CinFin Capital Management Company P.O. Box 145496 Cincinnati, Ohio 45250-5496 (513) 870-2000 www.cinfin.com