Harleysville Warning Sparks Rating Firms Watch

NU Online News Service, Oct. 20, 12:20 p.m.EDT?Harleysville Group in Harleysville, Pa., said it expects toreport a net loss per share in the range of $1.15 to $1.17 in thethird quarter of 2003 as a result of $55 million in loss reserveincreases and claims from Hurricane Isabel.

In last year's third quarter, the company reported net income of50 cents per share.

The company announced Friday it also expects a loss through ninemonths?of between 92 cents and 94 cents per share, compared to netincome per share of 95 cents for the same period in 2002.

"These earnings are unacceptable," stated Michael L. Browne,chairman of the board of Harleysville Group.

"Harleysville's board of directors and management are committedto reserve adequacy and to the strength and integrity of ourbalance sheet. We also are determined to take the steps necessaryto improve operating results to appropriate levels," Mr. Brownesaid.

The third-quarter 2003 estimate reflects the addition of $55million pretax to the company's loss and loss adjustment reservesfor prior accident years. Breaking down the reserve hit by line,Harleysville said that $17 million relates to workers' comp, $19million to commercial automobile liability, $14 million tocommercial multiperil, and $5 million to personal automobileliability.

The company stated that 87 percent of the reserve developmentrelates to the 1998 to 2002 accident years.

For Hurricane Isabel, estimated claims costs are $9.4 millionpretax, or 20 cents per share after taxes, Harleysville said.

Separately, New York-based Standard & Poor's RatingsServices said that it placed its "triple-B" senior debt ratings onHarleysville Group on CreditWatch with negative implications.

S&P not only noted the reserve additions, but, in addition,said that it is reviewing the transition of management following arecent announcement that Harleysville's chief executive Walter R.Bateman will retire in December.

"Although management expects double-digit rate increases in thecompany's commercial lines segment and the re-underwriting orshedding of different portions of its personal lines segment, atthis time Standard & Poor' does not expect the company to meetunderwriting expectations, measured by a combined ratio of about100," said S&P analyst Thomas Thun, in a statement.

S&P expects to meet with management before the end ofNovember and said it will either affirm the ratings or lower themby one notch.

Moody's Investors Service in New York also revised the ratingsoutlook on the debt ratings of Harleysville Group Inc. (seniorunsecured debt at Baa1), and the A2 insurance financial strengthratings of the members of the Harleysville Group intercompany pool,to negative from stable.

According to Moody's, the outlook change was prompted bycontinued weakness in operating performance and the $55 millionpretax charge. This charge, Moody's said, follows a $20 millionpre-tax reserve charge taken during the first quarter for workers'compensation business written from 1998-2001.

"Taken together, these charges are significant relative toHGIC's core earnings power and fall outside of Moody's range ofexpectations for the company's performance," Moody's said. Moody'swent on to forecast that "with pricing increases moderating andwith the company facing intense competition within its core smallcommercial lines business, Harleysville will be challenged to fixthe problems that have contributed to its poor recent operatingperformance."

Meanwhile, in Oldwick, N.J., A.M. Best affirmed the financialstrength rating of "A" (excellent) for the property-casualty pooledmembers of Harleysville Insurance, and debt ratings of HarleysvilleGroup Inc, but changed the outlook on the ratings to stable frompositive.

"Despite the losses, the rating affirmation reflects thecompany's strong capitalization, historical profitability andstrong regional market franchise," Best said.

Citing some concerns, Best noted that, according to Harleysvillemanagement, the loss reserve development stems from increased lossseverity and different loss patterns since the recentreorganization of the group's claims operations. The rating agencyalso expressed concerns about the future direction of the company'sleadership upon Mr. Bateman's retirement.

Harleysville Group will release its third-quarter 2003 earningson Friday.