Fitch Affirms Rating for Ohio Casualty’s IFS, Debt Ratings; Outlook Stable

December 22, 2004

Fitch Ratings has affirmed the ‘A-‘ insurer financial strength (IFS) ratings of Ohio Casualty Group’s intercompany pool members. In addition, Fitch has affirmed Ohio Casualty Corporation’s ‘BBB-‘ long-term issuer rating, as well as the ratings on its outstanding debt. The Rating Outlook is Stable.

The ratings reflect Ohio Casualty’s improved operating results, strong capitalization and reasonable financial leverage. Weighted against these positives are significant adverse reserve development for prior years’ losses and a high operating expense ratio relative to peers and the industry.

Fitch believes that management has generally been successful at putting the building blocks in place for a consistently profitable company, although improvement has been slower than the company initially expected when they started the turnaround plan about four years ago. Fitch will continue to monitor the company as it builds upon this foundation to improve its competitive position and maintain its focus on underwriting discipline, particularly as the market softens, with proper pricing throughout the underwriting cycle and operating with a more efficient and competitive cost structure.

Fitch considers Ohio Casualty’s statutory capital position to be strong and in support of the current rating. Consolidated statutory surplus increased $205 million or 28% recently from $726 million at Dec. 31, 2002 to $931 million at Sept. 30, 2004, due to more favorable operating results.

This compares to a $385 million or 35% decline over the preceding five-year period from $1.1 billion at year-end 1997, as the company suffered more than $900 million of underwriting losses during this period. Due to the recent increase in surplus and flat net premiums written, the company’s operating leverage as measured by net premium written to surplus has improved from 2.0x in 2002 to 1.6x at Sept. 30, 2004.

Over the 2000-2003 period, Ohio Casualty had to substantially increase reserves for prior accident years, most notably in the 1999 and 2000 accident years, but also in much older accident years for environmental reserves. Total adverse reserve development was almost $234 million over this four-year period across many lines of business, including workers’ compensation, construction defect liability and New Jersey private passenger auto.

Positively, through the first nine months of 2004, the company posted $15.8 million of favorable reserve development, driven by redundancies in the 2002 and 2003 accident years. Fitch would view positively continued favorable reserve development as an indication of a conservative reserving policy.

Ohio Casualty Corporation’s financial leverage was 24% debt to total capital at Sept. 30, 2004, as the company issued $200 million of senior notes in June 2004 that will be used to repay the existing $201.3 million aggregate principal 20-year convertible notes, which are redeemable on March 23, 2005.

Upon redemption, leverage is expected to decline back down to previous prudent debt to total capital levels of 14-15%.

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