Harleysville Group’s Negative Outlook

Standard & Poor’s Ratings Services commented on Harleysville Group Inc., (HGIC), “BBB-” and its negative outlook. As part of HGIC’s fourth-quarter 2003 earnings release, it expects its underlying insurance operations to incur an additional $42 million pretax charge on top of a $76.8 million pretax reserve increase through the first three quarters of 2003. S&P is not taking any rating action on HGIC as a result of this.

The additional reserve strengthening was not a complete surprise, as S&P expected the insurance operations to continue to identify weakness in its reserves. The magnitude of the charge is within S&P’s expectations and will still allow HGIC to maintain capital at a level appropriate for the rating. S&P believes the company maintains an adequate cushion to sustain further reserve increases of up to 5 percent of it is current $1.2 billion loss and loss expense reserve base. Any development on reserves beyond 5 percent of the reserve base would prompt S&P to re-evaluate the ratings.

S&P believes that the company does maintain adequate liquidity to service interest on its $100 million, 5.75 percent senior unsecured notes due July 15, 2013, by way of cash on hand and fees derived from the management of the insurance operations.

The negative outlook reflects S&P expectations that reserve adjustment to prior accident years might continue. It is expected the company will continue to be challenged in maintaining its top line and defend its market position as market rate increases begin to taper off. This could weaken the organization’s retention level, as it is forced to increase rates to more than the industry average.