Harleysville Group Releases Q2 Earnings

July 28, 2003

Pennsylvania-based Harleysville Group Inc. reported diluted operating income of $0.33 per share for the second quarter ended June 30, 2003, compared to $0.46 per share in the same period of 2002.

For the six months ended June 30, 2003 and 2002, diluted operating income per share was $0.23 and $0.89, respectively. Operating income is a non-GAAP financial measure defined by the company as net income excluding after-tax realized gains and losses on investments.

“Unusual large loss activity and the poor performance of our personal lines business were the primary drivers of our unsatisfactory results in the quarter,” commented Walter Bateman, Harleysville Group’s chairman and chief executive officer. “These factors detract from the underlying strength of our commercial lines risk portfolio, which now represents about 78 percent of our business and continues to show strong growth and pricing.”

Diluted net income per share for the second quarter of 2003 was $0.33, versus diluted net income of $0.01 in the second quarter of 2002. Last year’s second quarter reflected realized investment losses of $0.45 per share, due to the write down of securities in the company’s investment portfolio. On a per share basis, the company had no realized investment gains or losses in the second quarter of 2003. Diluted net income per share for the first six months was $0.23 in 2003, compared to $0.45 in 2002.

The company’s six-month earnings were reduced by $20 million pretax, or $0.43 per share after tax, due to the previously reported first quarter workers compensation reserve adjustment, and property catastrophe losses of $7.2 million pretax, or $0.16 per share after tax. In the first six months of 2002, Harleysville Group’s property catastrophe losses were $3.4 million pretax, or $0.07 per share after tax.

Harleysville Group’s overall statutory combined ratio* was 105.2 percent in the second quarter of 2003, compared to 100.6 percent in the second quarter of 2002. For the six months, the statutory combined ratio was 110.2 percent in 2003, versus 101.9 percent in 2002. The workers compensation reserve adjustment added 4.9 points to the 2003 six-month statutory combined ratio.

Second quarter net written premiums rose 5 percent to $222.6 million in 2003, while net written premiums through six months increased by 9 percent to $437.8 million in 2003.

Second quarter pretax investment income grew by 1 percent to $21.6 million in 2003, while six-month pretax investment income of $43.1 million showed no change from the previous year. After-tax investment income rose 2 percent to $16.6 million in the second quarter of 2003, while after-tax investment income for the first six months was up 1 percent to $33.1 million. Operating cash flow for the second quarter was $59.2 million, $12.4 million higher than the prior year’s second quarter.

Commercial lines Net written premiums climbed 10 percent to $172.9 million in the second quarter of 2003 and 13 percent to $343.4 million during the first six months of this year. The increase in written premiums is primarily due to higher pricing. The commercial lines statutory combined ratio was 101.7 percent in the second quarter of 2003, versus 96.6 percent in the second quarter of 2002. For the six months, the statutory combined ratio was 107.8 percent in 2003, compared to 99.8 percent in 2002. In 2003, the second quarter statutory combined ratio was impacted by large losses, while the first quarter workers compensation reserve adjustment added 6.6 points to the six-month commercial lines statutory combined ratio and 36.0 points to the six-month workers compensation statutory combined ratio.

Harleysville Group made progress in improving its workers’ compensation results by realizing double-digit price increases and by reducing its exposure, especially in severity-prone classes. The line now accounts for 18 percent of the company’s commercial lines premium volume, compared to 21 percent in the first half of 2002.

Personal lines
Harleysville Group’s personal lines statutory combined ratio was 115.8 percent in the second quarter of 2003, versus 110.7 percent during the second quarter of 2002. For the six months, the statutory combined ratio was 117.5 percent in 2003, compared to 106.9 percent in 2002. The increases were driven by weather-related losses and abnormally high large loss activity in its homeowners line. For the quarter, net written premiums declined 7 percent to $49.7 million in the second quarter of 2003 and 3 percent to $94.4 million during the first six months of this year.

As part of its ongoing efforts to address this segment of its operations, during the second quarter the company named a new senior vice president of personal lines, initiated other organizational leadership and structural changes, and obtained double-digit price increases.

Outlook
“We have yet to see the expected impact of the actions taken to improve personal lines and workers compensation, but we are not deterred from continuing with our improvement plans for these two lines,” Bateman concluded. “Our balance sheet is strong and our overall commercial risk portfolio is of very high quality, but personal lines and workers compensation continue to be a drag on our 2003 results. Therefore, our revised guidance is that we can achieve diluted operating earnings per share in the $1.05 to $1.15 range for the year.”

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