Harleysville Group Moves On Q3 Results

Pennsylvania-based Harleysville Group Inc. reported a diluted net loss of $1.16 per share in the third quarter of 2003, reflecting the previously announced loss reserve increases in several business lines and the cost of claims resulting from Hurricane Isabel. The net loss includes net realized after-tax investment losses of $0.01 per share.

The company had diluted net income of $0.50 per share in the third quarter of 2002. For the nine months, the company reported a diluted net loss per share of $0.93, compared to diluted net income per share of $0.95 in 2002. The 2003 result includes realized investment losses of $0.02 per share, compared to $0.44 per share of realized losses in 2002.

The company reported a diluted operating loss of $1.15 per share for the third quarter ended Sept. 30, 2003, compared to diluted operating income of $0.50 per share in the same period of 2002. For the nine months ended Sept. 30, 2003 the diluted operating loss was $0.91 per share, compared to diluted operating income of $1.39 per share in the same period of 2002.

“As I stated in our preliminary earnings announcement last week, our third quarter results are not acceptable,” commented Michael Browne, Harleysville Group’s chairman of the board. “We have moved quickly to bolster our reserves to assure the continued strength and integrity of our balance sheet, and we are taking the steps necessary to improve operating results.”

The company’s third quarter and nine-month results were reduced by the previously announced addition of $55 million pretax, or $1.19 per share after tax, to the company’s loss and loss adjustment reserves for prior accident years, specifically in its workers compensation ($17 million), commercial automobile liability ($19 million), commercial multi-peril liability ($14 million) and personal automobile liability ($5 million) lines of business. Harleysville Group’s end-of-the-quarter reserve analysis showed higher-than- expected development in the casualty lines of business in accident years prior to 2003, which caused the company to make the reserve adjustment. Of the reserve development, 87 percent relates to the 1998 to 2002 accident years.

Harleysville Group’s nine-month earnings were reduced by an additional $20 million pretax, or $0.43 per share after tax, due to a first quarter workers compensation reserve adjustment. In light of the higher-than-expected development in prior accident years, the company raised its loss estimates for the 2003 accident year, which also impacted the company’s third quarter and nine-month results.

The third quarter results also reflect claims costs of $9.4 million pretax, or $0.20 per share after tax, from Hurricane Isabel in September. In the first nine months of 2003, Harleysville Group’s property catastrophe losses were $17.7 million pretax, or $0.38 per share after tax. That compares to property catastrophe losses of $3.9 million pretax, or $0.08 per share after tax, for the first nine months of 2002.

Harleysville Group’s overall statutory combined ratio* was 137.2 percent in the third quarter of 2003, compared to 101.7 percent in the third quarter of 2002. For the nine months, the statutory combined ratio was 119.4 percent in 2003, versus 101.9 percent in 2002. Reserve development added 26.4 points and 12.5 points to the 2003 third quarter and nine-month statutory combined ratios, respectively. In addition, property catastrophe losses added 5.0 points and 2.9 points to the 2003 third quarter and nine-month statutory combined ratios, respectively. In 2002, catastrophe losses amounted to 0.3 points and 0.7 points for the third quarter and nine months, respectively.

Third quarter net written premiums rose 2 percent to $208.1 million in 2003, while net written premiums through nine months increased by 6 percent to $645.9 million in 2003.

Pretax investment income was virtually unchanged in the third quarter and through nine months at $21.6 million and $64.7 million, respectively. After- tax investment income rose 1 percent in both the third quarter and the year to date at $16.7 million and $49.8 million, respectively. Operating cash flow for the nine months was $113.3 million, or $39.0 million higher than the prior year’s nine months.

Commercial lines
Net written premiums climbed 5 percent to $159.1 million in the third quarter of 2003 and 10 percent to $502.5 million during the first nine months of this year. The increase in written premiums is primarily due to higher pricing. The commercial lines statutory combined ratio was 140.1 percent in the third quarter of 2003, versus 100.0 percent in the third quarter of 2002. For the nine months, the statutory combined ratio was 119.0 percent in 2003, compared to 99.9 percent in 2002. In 2003, the third quarter reserve development added 31.2 points to the quarter’s commercial lines statutory combined ratio, while reserve development added 15.1 points to the nine-month commercial lines statutory combined ratio.

Personal lines
Harleysville Group’s personal lines statutory combined ratio was 127.3 percent in the third quarter of 2003, versus 106.4 percent during the third quarter of 2002. For the nine months, the statutory combined ratio was 120.7 percent in 2003, compared to 106.7 percent in 2002. In 2003, reserve development added 9.7 points to the third quarter personal lines statutory combined ratio and 4.7 points to the nine-month personal lines statutory combined ratio. The higher catastrophe losses also contributed to the higher statutory combined ratio. Net written premiums declined 9 percent to $49.0 million in the third quarter of 2003 and were down 5 percent to $143.4 million during the first nine months of this year.

Outlook
“Our strong balance sheet, productive partnerships with our agents and focused strategy position us as one of the country’s premier regional insurance companies and enable us to succeed in the marketplace,” stated M. Lee Patkus, Harleysville Group’s president and chief operating officer. “We see plenty of opportunity in front of us. We’re confident that with better and more consistent execution we can produce the superior results our shareholders expect.”