Fitch Downgrades Harleysville Debt to ‘BBB’; Assigns ‘A’ IFS Rating

December 8, 2003

Fitch Ratings announced that it has downgraded Harleysville Group Inc.’s (HGIC) long-term and senior debt ratings to ‘BBB’ from ‘BBB+’ and has concurrently removed the ratings from Rating Watch Negative where they were placed on October 28, 2003.

Fitch also said it has assigned an ‘A’ insurer financial strength rating to the insurers that comprise the Harleysville inter-company pool, and assigned a stable outlook.

“Fitch’s rating action reflects HGIC’s recent poor underwriting results which have been outside of Fitch’s expectations,” said the bulletin. “Fitch’s rating actions also reflects concerns about HGIC’s ability to generate run-rate operating profitability that is supportive of the company’s previous ratings.

“The ratings continue to reflect HGIC’s moderate financial leverage, strong risk-based capitalization, and solid relationships with the independent agents that distribute its products,” it continued.

The rating agency indicated that “through the first nine months of 2003, HGIC reported a 119.4 percent statutory basis combined ratio. In comparison, the company’s full-year 2002 combined ratio was 101.9 percent and its five-year average combined ratio through year-end 2002 was 105.2 percent. HGIC’s combined ratio through the first nine months of 2003 includes the impact of $75 million of adverse prior accident year reserve development, primarily in the company’s commercial insurance book. The majority of this development was derived from accident years 1998-2002.”

Fitch noted that HGIC has “implemented rate increases and re-underwritten portions of its book of business in an effort to improve underwriting profitability. ” While it viewed these actions favorably, Fitch said that it “believes that competitive conditions in HGIC’s core small commercial lines market complicate the company’s ability to implement the rate increases necessary to improve underwriting profitability while maintaining retention. In addition, Fitch believes that HGIC’s re-underwriting efforts make it more difficult for the company to lower its expense ratio, which Fitch views as comparatively high for the company’s business mix.”

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