Earnings announcement—
1999 second quarter results; claims department reorganization announced

HARLEYSVILLE, PA—JULY 29, 1999—Harleysville Group Inc. (NASDAQ:HGIC), a holding company that includes nine regional property and casualty insurance companies, today reported its results for the second quarter of 1999 and announced plans to restructure its claims operation.

"We are pleased with our performance in the midst of the ongoing difficult underwriting environment," commented Walter R. Bateman, the company’s chairman of the board, president and chief executive officer. "Our diluted operating earnings were $0.50 per share for the second quarter of this year. We credit these earnings to our successful underwriting performance, especially in personal auto—our largest line of business."

The second quarter diluted operating earnings of $0.50 per share in 1999 compares with $0.48 per share in 1998. For the six months, Harleysville Group’s diluted operating earnings were $0.89 per share in 1999 and $0.87 per share in 1998.

Second quarter diluted net income per share was $0.52 in 1999, compared with $0.56 in 1998. Through six months, diluted net income was $0.92 per share in 1999, versus $1.03 per share in 1998. Six-month diluted net income was reduced by $0.10 per share as a result of adopting AICPA Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments," in the first quarter of 1999. The adoption of this statement resulted in a one-time, after-tax charge that did not impact operating earnings.

After-tax diluted realized investment gains amounted to $0.02 per share in the second quarter of 1999 and $0.08 per share in the second quarter of 1998. For the first six months, diluted realized gains per share were $0.13 in 1999 and $0.16 in 1998.

Harleysville Group’s statutory combined ratio for the second quarter of 1999 was 101.3 percent, compared with 102.3 percent in the second quarter of 1998. For the six months, the statutory combined ratio was 102.9 percent, compared with 103.2 percent in 1998. Outstanding underwriting results in the personal auto line are the primary force behind these improved combined ratios.

Earned premiums increased 6 percent to $175.1 million in the second quarter of 1999, compared with $165.8 million in 1998. For the first six months, earned premiums were up 5 percent to $344.9 million from $328.5 million in 1998.

Second quarter after-tax investment income was up slightly to $16.8 million in 1999 from $16.7 million in 1998. For the first six months, after-tax investment income rose 2 percent to $33.7 million in 1999, compared with $33.2 million in 1998.

Total revenues—which include realized investment gains—climbed 4 percent in the second quarter to $201.3 million in 1999, compared with $194.0 million in 1998. For the corresponding six-month periods, total revenues increased 4 percent to $401.0 million in 1999 from $384.5 million in 1998.

Shareholders’ equity was $541.9 million ($18.48 per share) at June 30, 1999, compared with $529.7 million ($18.17 per share) at December 31, 1998.

Harleysville Group will consolidate its claims operations from 23 general claims offices into a centralized direct reporting center and four specialized regional claims service centers. The company expects to incur a one-time, after-tax charge to earnings of approximately $1.7 million ($0.06 per diluted share) in the third quarter of 1999 associated with the restructuring. The consolidation of management and administrative functions, which will begin immediately, should be completed during the second quarter of 2000. Based on our current analysis of achievable cost savings, this change is expected to result in annualized after-tax savings of approximately $2.3 million ($0.08 per diluted share) after implementation. The restructuring will reduce Harleysville Group’s claims staff by an estimated 125 people companywide. (Despite the expected decrease in claims staff, Harleysville’s work force is expected to increase by approximately 80-85 positions in the Delaware Valley area.)

Commenting on the claims consolidation, Bateman said: "In light of Harleysville’s significant growth over the past decade, during the past year we have thoroughly reviewed all aspects of our claims operations. The new organizational structure will enable us to improve our service, gain economies of scale and achieve consistency in claim handling. The consolidation will also position our claims operation for any future changes in service delivery, business mix and geography."

All claims will be reported to the company’s centralized direct reporting center (DRC) in Harleysville, Pa. Employees at the DRC will handle most basic "fast-track" claims, while the more complicated claims will be forwarded to the appropriate regional claims service center. The regional centers will be located in Minneapolis, Minn., Moorestown, N. J., Nashville, Tenn., and Worcester, Mass. Those sites were chosen after considering the accessibility of Harleysville’s current work force to the location, the availability of a qualified labor pool, access to policyholders, convenience of transportation, reasonable real estate and labor costs, and the desirability of the location to live and work.

Harleysville Group Inc. is a holding company that includes nine regional property and casualty insurance companies whose marketing territory encompasses 31 states in the eastern half of the United States. The companies include: Great Oaks Insurance Company; Harleysville-Atlantic Insurance Company; Harleysville Insurance Company of New Jersey; Huron Insurance Company; Lake States Insurance Company; Mid-America Insurance Company; Minnesota Fire and Casualty Company; New York Casualty Insurance Company; and Worcester Insurance Company. Additionally, the company operates two limited partnerships: Harleysville Asset Management L.P. and Insurance Management Resources L.P.

This is a "Safe Harbor" statement under the Private Securities Litigation Reform Act of 1995. Certain statements contained herein are forward-looking statements that involve risks and uncertainties. Future actual results may materially differ from those in these statements because of many factors. For instance, the estimate of savings and the charge to earnings on account of the claims department reorganization may be impacted by a number of reasons, such as how many employees relocate to the new centers, the future mix of business written, the types of claims reported by policyholders and the labor market for each office. Furthermore, insurance industry price competition has made it more difficult to attract and retain adequately priced business, state regulatory actions can impede the company’s ability to charge adequate rates, and neither the quantity nor severity of natural catastrophes can be anticipated to the degree necessary to assure adequate but competitive pricing of risks. Accordingly, Harleysville Group’s premium growth and underwriting results have been and will continue to be potentially materially affected by these factors.

© Copyright 2000 Harleysville Group Inc., Harleysville, Pa., U.S.A. All rights reserved.
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