Harleysville Ratings Affirmed

December 25, 2002

A.M. Best Co. has the financial strength ratings of “A” (Excellent) of Harleysville Insurance’s pool members (Harleysville) (Harleysville, Pa.). Concurrently, A.M. Best has affirmed the “a-” debt rating of Harleysville Group Inc.’s (HGIC) existing senior notes. A positive rating outlook was assigned to all the ratings.

A.M. Best said the ratings reflect Harleysville’s excellent capitalization, generally solid earnings and strong regional market franchise. These attributes are derived from Harleysville’s conservative balance sheet, sound underwriting fundamentals and well-established agency relationships.

Under a regional insurer approach, Harleysville benefits from its strong name recognition, extensive local market knowledge and stable market presence. Harleysville ranks among the top 50 property/casualty insurance organizations in the United States.

Harleysville has discontinued non-core and unprofitable business lines to focus on small commercial accounts. As a result, the pool exited the highly regulated Massachusetts and New Jersey private passenger automobile markets through the transfer of renewal rights and depopulated personal lines exposures in some Midwest and Mid-Atlantic states.

Harleysville continues to operate through a unique corporate structure that affords financial flexibility through HGIC’s status as a publicly traded downstream holding company. HGIC maintains modest financial leverage with debt to capital of approximately 11 percent and excellent fixed-charge coverage of approximately 8 percent

Somewhat offsetting these positive rating factors are Harleysville’s unrewarding personal lines results and ongoing susceptibility to catastrophes and weather-related losses, which may lead to earnings variability. In recent years, personal lines results have been negatively impacted by weather-related losses and rising loss costs.

Additionally, total returns have been dampened by investment losses. However, Harleysville has implemented corrective actions to improve earnings that include re-underwriting, pricing adjustments, agency management actions and discontinuing business in unprofitable states.

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