Harleysville Group 1stQ Results Impacted by Workers’ Comp, Winter Storm and Personal Lines Losses

April 25, 2003

Pennsylvania-based Harleysville Group Inc. reported a diluted operating loss of $0.10 per share for the first quarter, reflecting the impact of its previously announced $20 million pretax workers’ compensation reserve adjustment and $3.6 million of winter storm property catastrophe losses, as well as poor personal lines results. At the same time, the company reported ongoing strong premium growth in its core commercial business segment during the first quarter of 2003.

The diluted net loss per share for the first quarter of 2003 was $0.11, versus diluted net income of $0.44 in the first quarter of 2002. On a per share basis, the company had $0.01 of realized investment losses in the first quarter of 2003, compared to a $0.01 gain in the first quarter of 2002.

The $0.10 diluted operating loss per share, which excludes the impact of net realized after-tax investment losses that are included in the net loss, compared to diluted operating earnings of $0.43 for the same period in 2002.

“We are disappointed in our results this quarter, but we have taken the quick action necessary to address workers’ compensation reserve adequacy,” commented Walter Bateman, Harleysville Group’s chairman and CEO. “Our decisive response to the adverse activity we saw late in the quarter underscores our commitment to maintaining reserve adequacy. Overall, our disciplined small commercial strategy continues to deliver double-digit premium growth and our balance sheet remains strong.”

The company’s first quarter earnings were reduced by $20 million pretax, or $0.43 per share after tax, due to the workers’ compensation reserve adjustment, while the property catastrophe losses resulting from the winter storms of $3.6 million, or $0.08 per share after tax, were capped by the quarterly aggregate reinsurance agreement with Harleysville Mutual Insurance Company. In the first quarter of 2002, Harleysville Group’s property catastrophe losses were $0.8 million, or $0.02 per share after tax.

Harleysville Group’s overall statutory combined ratio* was 115.4 percent in the first quarter of 2003, compared to 103.3 percent in the first quarter of 2002. The workers’ compensation reserve adjustment added 10.0 points to the combined ratio. The property catastrophe losses added 1.8 points, in contrast to the first quarter of 2002 when property catastrophe losses contributed 0.4 points to the combined ratio.

First quarter net written premiums rose 13 percent to $215.3 million in 2003 from $190.7 million in 2002.

First quarter pretax investment income was unchanged at $21.4 million in 2003, while after-tax investment income rose 1 percent to $16.5 million. Operating cash flow for the first quarter was $37.5 million, $12.5 million higher than the prior year’s first quarter.

Commercial lines
Triggered by significantly higher-than-expected loss reporting that emerged near the quarter’s end, the company strengthened its workers’ compensation reserves and reviewed its workers’ compensation claims files. That evaluation identified the need for additional strengthening, and the company announced on April 23 that it had increased its total reserve adjustments for the quarter to $20 million.

Reserve adjustments in this line accounted for 70.5 points of the 192.2 percent workers’ compensation combined ratio, and represented 13.4 points of the 114.1 percent commercial lines combined ratio. The commercial lines combined ratio for the first quarter of 2002 was 103.2 percent. The company reported underwriting profitability in its commercial auto and commercial multi-peril business, which generated combined ratios of 96.0 percent and 98.8 percent, respectively. Commercial lines net written premiums rose 16 percent in the first quarter to $170.5 million – the company’s 12th consecutive quarterly double-digit premium increase – primarily reflecting the result of higher pricing.

Personal lines
Harleysville Group’s personal lines combined ratio was 119.3 percent in the first quarter of 2003, versus 103.1 percent during the first quarter of 2002. In addition to property catastrophe losses, large loss activity in personal auto and homeowners further impacted the quarter’s results. For the quarter, net written premiums increased by 1 percent to $44.7 million in 2003.

“We are not wavering from the execution of our strategy,” Bateman stated. “We have a high-quality small commercial risk portfolio – which accounts for more than three-quarters of our business – and a solid balance sheet. With those as our foundation, we believe we can achieve operating earnings per share in the $1.45 to $1.55 range for the year.”

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