Harleysville Group Inc. Outlook Revised To Stable

March 17, 2006

Standard & Poor’s Ratings Services has revised its outlook on Harleysville, Pa.-based Harleysville Group Inc. to stable from negative.

Standard & Poor’s also said that it affirmed its ‘BBB-‘ counterparty credit ratings on the company.

“We revised the outlook because after two years of underperformance compared with the industry, Harleysville’s competitive position is stabilizing,” said Standard & Poor’s credit analyst Tom E. Thun. “The company has thinned its exposure to workers’ compensation and increased rates while maintaining its share of its targeted market.”

At year-end 2005, Harleysville’s operations produced pretax earnings of $79 million and a combined ratio of 102.2 percent. Nevertheless, industry peers reported combined ratios in commercial and personal lines of less than 100 percent. The company’s reserve adequacy, which had plagued it in recent years, is good, and future reserving changes are not expected to be material, S&P says. This belief is based on an analysis of Schedule P data, benefits derived from continued but tapering rate increases, improved risk selection, and progress in the reorganization of key operating units.

GAAP financial leverage is conservative and stable at about 16.6 percent, and the company has cash on hand to service debt payments for about three years. Holding-company cash flow has been derived chiefly from dividend payments and fees associated with the management of Harleysville Mutual Insurance Co. (HMI), which adds an additional layer of cash flow.

HGI is expected to develop a strong risk-management culture and will have a transparent risk-management process. The stable outlook reflects the stabilization in its management team, additional organizational and structural controls, improved underwriting, and a sustainable level of earnings.

The outlook could be revised to positive if the company continues to demonstrate solid improvements to both its bottom line and operational efficiencies. Standard & Poor’s believes if Harleysville continues to improve over the near to mid-term, it will be positioned to equal or exceed its peers in terms of earnings, capitalization, and enterprise risk management.

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