Fitch Downgrades Harleysville Debt Ratings

By Michael Ha

NU Online News Service, Dec. 8, 3:40 p.m.EST?Fitch Ratings, concerned about Harleysville GroupInc.'s lackluster underwriting results, downgraded its long-termand senior debt ratings for the company to "triple-B" from"triple-B-plus," while assigning for the first time an "A" insurerfinancial strength rating for the Harleysville intercompanypool.[@@]

The debt ratings for Harleysville have now been removed fromFitch's Rating Watch "Negative" status where they were placed lastOctober. The outlook is "Stable" for all ratings. The debt ratingsdowngrade reflects Harleysville's "recent poor underwritingresults," which were lower than Fitch expected, Fitch analyst MarkRouck told National Underwriter.

Explaining the new insurer financial strength rating assignedfor the Harleysville intercompany pool, Mr. Rouck said thattypically there is "a three-tick gap" between senior debt ratingsand an insurer financial strength rating, which, in case ofHarleysville, means an "A" insurer financial strength rating forthe newly downgraded "triple-B" debt ratings.

"That's pretty standard with regard to the way Fitch ratescompanies," he said.

Mr. Rouck noted that the ratings reflect the fact that financialstrength ratings "represent much more senior obligations thansenior debt ratings. That's the rationale for the differencebetween these two ratings."

Fitch first assigned senior debt ratings for Harleysville inearly 2002. Back then, Mr. Rouck said, "we kind of viewedHarleysville as a regional insurer, a good regional franchise."

The profile of the company, though, is such that in order forthe company to be in the "?A-plus' insurer financial strengthrating/ ?triple-B-plus' senior debt ratings" type of ratingcategory, "it really has to have what Fitch would consider to bestrong underwriting results," he said.

Last year, when Fitch assigned debt ratings, "we kind of thoughtthose underwriting results were there," but Fitch has seen themdeteriorate and slip in 2003.

As a result, Mr. Rouck said, Fitch has put the company's profiletogether with underwriting results that have slipped somewhatduring the past year. "It just looks to us that the company's moresuited at the "single-A insurer financial strength rating/ straighttriple-B senior debt ratings level," he said.

Fitch observed that through the 2003 first nine months,Harleysville reported a 119.4 percent combined ratio, much worsethan 101.9 percent reported for the company's full-year 2002results and 105.2 percent for a five-year average combined ratiothrough last year.

This year, the company was hurt by $75 million in adverseprior-accident-year reserve additions, mostly in the company'scommercial insurance book.

But Harleysville also has much to be proud of. For example, thecompany still boasts moderate financial leverage, strong risk-basedcapitalization, and solid relationships with independent agentsthat distribute its products.

"With regard to moderate financial leverage," Mr. Rouck said,"they don't have a lot of debt at the holding company level, andtheir interest requirements are really quite low. And it'srelatively long-term debt, so from that perspective, they have afavorable capital structure."

Harleysville continues to maintain strong relationships withindependent agents. Mr. Rouck added, "They use independentdistributions and they are in the small commercial market. It's oneof their core markets, and their relationships with theirdistribution continue to be strong."