Pa.-based Harleysville Insurance In Transition to Restore Historic Results

By | February 22, 2005

Several events stand out in the history of Harleysville Insurance. There was its launch as an auto theft protection association in 1915 in the Pennsylvania community whose name it shares and there was its debut as a public company in 1986.

The year 2003 was also an historic year but not one the company wants to recall. That was when years of insurer acquisitions, inconsistent underwriting, and inadequate systems caught up with it. The company had to boost its loss reserves by $119 million. Its combined loss ratio that year skyrocketed to 123.2. The company reported a net loss of $47.6 million or $1.59 per share.

But if changes now in place at Harleysville succeed, 2006 could be another historic year, a year when company officials will have the improved financial results to wipe out the bad memories of 2003.

Michael L. Browne, a former Pennsylvania insurance commissioner from 1980 to 1983, a former partner in the law firm of ReedSmith in Philadelphia and long time member of Harleysville’s board of directors, took over as chief executive officer at Harleysville Group and president and chief executive officer of Harleysville Mutual in February of last year. His mission has been to “restore the company to its past levels of financial performance.”

2004 results; 2006 targets
Preliminary results for 2004 suggest the company is making progress. Net income per share for the nine months ended Sept. 30, 2004, was $1.17, compared to a $0.93 per share loss in 2003. For the third quarter 2004, the net income per share was $0.29 versus a loss of $1.16 last year. Operating income per share for the nine months was $0.89; for the third quarter, $0.29. The 2004 nine month combined ratio was 106.4 percent; 106.6 percent for the third quarter. There was some commercial lines premium growth. “Our third quarter results show that we continue to improve,” Browne said.

During a recent meeting with analysts, Browne was upbeat that things are on the right track. “With the activities we have underway, I am confident we can drive our combined ratio lower and, over time, close the gap that currently exists between our results and those of our competitors,” the CEO said.

Later, in an interview with Insurance Journal, Browne affirmed some of his financial targets:
• A combined ratio under 100 in 2006
• Underwriting profitability in commercial lines in 2006
• Return on equity between 11 and 12 percent in 2006
• Expense ratio under 30 percent in three to five years
• Annual premium growth in the mid-to-high single digits

Achieving these goals would make 2006 a memorable year for Harleysville, one of several in its long history. Harleysville Insurance traces its origins to 1915 when citizens formed an association to spread the risk of their cars being stolen. In the ensuing years, Harleysville became a mutual fire as well as auto insurer and also added life, disability and retirement products. It then got the idea of building a national network of regional insurance companies through acquisitions. The sale of stock in 1986 helped secure the capital.

From 1987 through 1997, Harleysville went on a spree, acquiring more than a half dozen insurers. In 2001, Harleysville consolidated all the individual companies under the Harleysville name. Great Oaks was renamed Harleysville Insurance Company of Ohio, Lake States Insurance was changed to Harleysville Lake States Insurance Company, Minnesota Fire and Casualty became Harleysville Insurance Company, New York Casualty was renamed Harleysville Insurance Company of New York, and Worcester Insurance was renamed Harleysville Worcester Insurance Company.

Transition period
Until the mid-1970s, the majority of Harleysville’s business was personal lines, but after its acquisitions, its profile changed. Commercial lines premiums ballooned to more than three-quarters of its annual premium. Its territory expanded far beyond Pennsylvania to 32 Eastern and Midwestern states.

The years 1999-2002 produced respectable financial results but there were years when Harleysville was also straining to integrate all the new business, people and systems it had acquired. “Our history of growth has created some inconsistency in how we do things. So it’s a matter of getting at some of the inconsistency,” Browne told Insurance Journal.

While 2003 was a year to forget, 2004 and 2005 represent an important transition period. During 2004, the company conducted a critical audit that involved employees, agents and outside consultants. According to Browne, while the audit uncovered flaws, it also highlighted what was right about the company. It validated that its core business—small commercial lines and personal lines —remained viable. It also confirmed that Harleysville had talented employees and loyal agents with whom it could move forward. “So there’s not going to be a revolution in the direction of our business,” Browne explained.

The audit also revealed the insurer clearly had work to do to achieve more consistency in underwriting and claims, better communication, and quicker and more efficient processing. Browne said the review showed that “it wasn’t one thing but lots of things need to improve.” Making up 10 points in its ratio isn’t going to happen by improving just one or two things, the CEO noted.

While there is no revolution occurring in Harleysville’s market strategy of targeting small-to-medium commercial accounts and personal lines, Browne is attempting to revolutionize how Harleysville executes that strategy, using what he calls “performance excellence groups” inspired by the Six Sigma methodology. Browne said he adopted the Six Sigma methodology because it is driven by data. “Winston Churchill said that ‘facts are better than dreams.’ You can’t manage any large enterprise without the facts,” Browne said, quickly adding that he is not a micro-manager but does believe it is important to know details. (Browne retains details including the first piece of advice he was given as a CEO: “Always remember that a CEO’s underwriting or claims authority is zero.”)

Commercial lines accounts with premium of from $2,500 to $250,000 remain the company’s “sweet spot,” according to Browne. To better serve these markets, Harleysville is organizing dozens of Commercial Lines Territorial Managers, each aligned with one of its approximately 1,600 independent agencies to help them access the insurer’s underwriters, claims personnel and other resources.

Within commercial lines, workers’ compensation has been a difficult line—and not just for Harleysville. In the past year, Harleysville has raised its rates and re-underwritten, steering away from certain trades such as masonry and roofing. It no longer writes workers’ comp as a stand-alone account but Harleysville is not abandoning the line. “We’re going to write workers’ comp. We’re not getting out. There are good accounts out there and agents need a market to write them,” Browne said.

While the company writes personal lines in 21 states it is currently concentrating on growing this segment in six, with plans to move additional states into the “growth mode” one at a time. It is also re-underwriting this segment. While the insurer writes fewer autos and homes compared to commercial risks than it used to, personal lines is still part of the overall strategy. Browne added, “I see it as having a good future. Personal lines results have shown dramatic improvement, although we’re not declaring victory yet.”

This story originally appeared in the February 2, 2005 edition of Insurance Journal East.

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