Harleysville Warning Sparks Rating Firms Watch

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 to report a net loss per share in the range of $1.15 to $1.17 in the third quarter of 2003 as a result of $55 million in loss reserve increases and claims from Hurricane Isabel.

In last year's third quarter, the company reported net income of 50 cents per share.

The company announced Friday it also expects a loss through nine months?of between 92 cents and 94 cents per share, compared to net income 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 committed to reserve adequacy and to the strength and integrity of our balance sheet. We also are determined to take the steps necessary to improve operating results to appropriate levels," Mr. Browne said.

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

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

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

Separately, New York-based Standard & Poor's Ratings Services said that it placed its "triple-B" senior debt ratings on Harleysville 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 a recent announcement that Harleysville's chief executive Walter R. Bateman will retire in December.

"Although management expects double-digit rate increases in the company's commercial lines segment and the re-underwriting or shedding of different portions of its personal lines segment, at this time Standard & Poor' does not expect the company to meet underwriting expectations, measured by a combined ratio of about 100," said S&P analyst Thomas Thun, in a statement.

S&P expects to meet with management before the end of November and said it will either affirm the ratings or lower them by one notch.

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

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

"Taken together, these charges are significant relative to HGIC's core earnings power and fall outside of Moody's range of expectations for the company's performance," Moody's said. Moody's went on to forecast that "with pricing increases moderating and with the company facing intense competition within its core small commercial lines business, Harleysville will be challenged to fix the problems that have contributed to its poor recent operating performance."

Meanwhile, in Oldwick, N.J., A.M. Best affirmed the financial strength rating of "A" (excellent) for the property-casualty pooled members of Harleysville Insurance, and debt ratings of Harleysville Group Inc, but changed the outlook on the ratings to stable from positive.

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

Citing some concerns, Best noted that, according to Harleysville management, the loss reserve development stems from increased loss severity and different loss patterns since the recent reorganization of the group's claims operations. The rating agency also expressed concerns about the future direction of the company's leadership upon Mr. Bateman's retirement.

Harleysville Group will release its third-quarter 2003 earnings on Friday.