S&P Downgrades Harleysville Group Ratings

NU Online News Service, Jan. 2, 2:05 p.m.EST?Standard & Poor's Ratings Services has lowered itscounterparty-credit and senior-debt ratings for Harleysville GroupInc. to "triple-B minus" from "triple-B," citing concerns over thecompany's poor underwriting results and business position.[@@]

The Harleysville Group ratings now have been removed fromCreditWatch, but the ratings outlook is "negative," the NewYork-based S&P added.

On Harleysville Group's underwriting results, S&P indicatedits concern for the company's adverse loss-reserve development for1997-2001 accident years, which totaled $76.8 million, pretax, andearned a 119 percent combined ratio during 2003's first threequarters.

The ratings firm called Harleysville's weak underwriting results"particularly troubling" because over the last three years theindustry has experienced strong rate hikes.

S&P also forecast Harleysville "will continue to struggle"and that the insurer is expected to have a combined ratio of morethan 100 percent at year-end 2004.

Additionally, it's possible that further reserve adjustment toprior accident years will take place, as Harleysville continues torecast its claims divisions and identify weakness in its casereserves. S&P added that Harleysville would continue to seechallenges in maintaining its top line and defending its marketposition, as rate hikes begin to taper off and reserves possiblyincrease.

S&P also predicted that Harleysville will continue to facedifficulties as it competes with local, regional and nationalinsurance companies. "As a middle-tier insurer focusing on mainstreet business with 50 or fewer employees, the company maystruggle to maintain its market share," the ratings firmobserved.

Furthermore, S&P is worried that the company will lack clearand strong leadership following the departure of its ChiefExecutive Officer Walter Bateman.

S&P observed that Mr. Bateman officially retired as of Dec.31, 2003, as announced by Harleysville board directors lastSeptember. But the ratings firm pointed out there is still noobvious replacement for Mr. Bateman.

"Succession planning is currently under way by the board ofdirectors," S&P said. "However, for an undefined periodHarleysville's senior management team will report to the board ofdirectors."