A.M. Best Assigns Debt Ratings to Harleysville’s Senior Notes

A.M. Best Co. has assigned an “a-” senior debt rating to Pennsylvania-based Harleysville Group Inc.’s (HGIC) $100 million of 5.75 percent 10-year senior unsecured notes due July 2013.

In addition, the current “a-” debt rating on existing senior notes has been affirmed. The financial strength ratings of A (Excellent) of the property/casualty pooling members of Harleysville Insurance and the financial strength rating of A- (Excellent) of Harleysville Life Insurance Company are unaffected. The rating outlook for Harleysville Insurance is positive. The rating outlook for the remainder of the ratings is stable.

The notes are being issued under HGIC’s $200 million universal shelf registration to which A.M. Best has assigned indicative ratings of “a-” senior debt, “bbb+” subordinated debt, “bbb” trust preferred securities and “bbb” preferred stock to HGIC’s $200 million universal shelf registration.

The proceeds from the senior debt issue may be used for general corporate purposes, including the payment of outstanding debt, acquisition activities and capital contributions to insurance operating subsidiaries to support initiatives. HGIC, which is approximately 56 percent owned by Harleysville Mutual Insurance Company, maintains modest financial leverage, after the transaction with debt to capital of approximately 20% and excellent fixed-charge coverage of about seven times.

These ratings reflect HGIC’s excellent capitalization, generally solid earnings and strong regional market franchise. These attributes are derived from HGIC’s conservative balance sheet, sound underwriting fundamentals and well-established agency relationships. Under a regional insurer approach, HGIC benefits from its strong name recognition, extensive local market knowledge and stable market presence.

Somewhat offsetting these positive rating factors are HGIC’s unrewarding personal lines results and ongoing susceptibility to catastrophes and weather-related losses, which may lead to earnings variability. Personal lines results in recent years have been negatively impacted by weather-related losses and rising loss costs. Additionally, total returns have been dampened by investment losses. However, HGIC has implemented corrective actions to improve earnings that include re-underwriting, pricing adjustments, agency management actions and discontinuing business in unprofitable states.