S&P’s Cuts Harleysville Group Inc.’s Ratings

Standard & Poor’s Ratings Services said that it lowered its counterparty credit and senior debt rating on Pennsylvania-based Harleysville Group Inc. to ‘BBB’ from ‘BBB+’. The outlook is stable.

Concurrently, Standard & Poor’s assigned its preliminary ‘BBB’ senior debt, ‘BBB-‘ subordinate debt, and ‘BB+’ preferred stock ratings to HGI’s $200 million universal shelf registration filed April 10, 2003.

“The ratings action reflects the higher than expected first quarter losses and the historically volatile underwriting performance of the company’s insurance subsidiaries,” said Standard & Poor’s credit analyst Thomas Thun. “Although the insurance subsidiaries maintain a good franchise, they are at times challenged as middle tier insurers primarily underwriting in the Mid-Atlantic and New England states,” Thun added. This is offset by HGI’s modest financial leverage, good financial flexibility and liquidity, and the insurance subsidiaries’ extremely strong capital positions.

Standard & Poor’s expects that the fixed-coverage ratio will remain in the 5x-8x range and debt to capital to remain less than 30 percent. Standard & Poor’s also expects HGI’s operating subsidiaries underwriting performance to stabilize and earn a combined ratio of less than 105 percent for year-end 2003.

Despite continuing improvement in the pricing environment within the property/casualty market, the company posted a disappointing combined ratio in the first quarter of 2003 compared with first-quarter 2002. Standard & Poor’s expects HGI’s operating subsidiaries earnings to stabilize as reserving issues related to its workers’ compensation business were resolved in the first quarter of 2003 and various line segments are run off that have proven to be susceptible to higher frequency and severities. In addition, the operating performance of the first quarter of 2003 was adversely affected by winter storm losses.

Although the financial leverage (debt to capital) of HGI at present measures a modest 13 percent, Standard & Poor’s expects that the company will draw down on the shelf filing in the near term, increasing its financial leverage to about 17 percent. In the long term this measure is not expected to be more than 30 percent. The use of the proceeds will be geared toward contributions to operating subsidiaries to support growth, strategic acquisitions, refinancing of $75 million of debt due in Nov. 2003, and for general corporate purposes.

HGI’s overall liquidity is good. Liquidity resources at the holding company are expected at all times to include cash and short-term securities that are at least equal to one year’s cash obligations.