Harleysville Group Inc. Reports Third Quarter 2009 Results

Harleysville Group Inc. (NASDAQ:HGIC) today reported diluted operating income of $0.83 per share for the third quarter of 2009, compared to $0.79 per share in the third quarter of 2008. For the nine-month periods, the company reported diluted operating income of $2.17 per share in 2009 and $1.90 per share in 2008. Operating income is a non-GAAP financial measure defined by the company as net income excluding after-tax realized gains and losses on investments. See below for the company’s reported GAAP net income.

"Our focus on the basics of our business has produced another strong quarterly performance for Harleysville Group,” commented Michael L. Browne, Harleysville Group’s president and chief executive officer. "Our operating return on equity (ROE) for the trailing 12 months was 12.9 percent—exceeding our long-term ROE goal of at least 12 percent. We also reported a statutory combined ratio of 98.9 percent, and operating income of $0.83 per share.

"Our balance sheet remains very strong, with our book value increasing 19 percent from year-end 2008,” Browne continued. "Our sound financial position also is evidenced by a blue chip investment portfolio, a solid reserve position, a debt-to-capital ratio of 15 percent¹ and a premium-to-surplus ratio of 1.3 to 1. And, yesterday we declared a regular quarterly cash dividend of $0.325 per share, marking the 94th consecutive quarter we have paid a dividend since going public in 1986.”

The company reported diluted net income of $0.88 per share in the third quarter of 2009, compared to $0.14 per share in the third quarter of 2008. Realized investment gains after tax in the third quarter of 2009 were $0.05 per share, compared to after-tax investment losses of $0.65 per share in 2008. For the nine-month periods, diluted net income was $2.20 per share in 2009 and $1.26 per share in 2008. For the nine months, the company reported $0.03 per share after tax of realized investment gains in 2009, compared to after-tax investment losses of $0.64 per share in 2008.

The company’s third quarter net written premiums decreased 8.1 percent to $202.3 million in 2009, compared to $220.1 million in the same period in 2008. Net written premiums through nine months were down 7.0 percent to $641.4 million in 2009, compared to $689.9 million in 2008, excluding the non-recurring impact of the pooling change in 2008.

Harleysville Group’s overall statutory combined ratio was 98.9 percent in the third quarter of 2009, compared to 98.8 percent in the third quarter of 2008. Catastrophe losses added 0.4 points to the third quarter result in 2009, compared to 1.6 points in 2008. For the nine months, the statutory combined ratio was 100.1 percent in 2009, versus 101.0 percent in 2008. Catastrophe losses added 1.0 points to the nine-month result in 2009 and 4.6 points in 2008. Adjusting for the one-time impact of the 2008 pooling change, the statutory combined ratio for the nine months of 2008 was 101.5 percent.

Third quarter pretax investment income decreased 4.6 percent to $26.3 million, while after-tax investment income was down 1.5 percent in the third quarter to $19.9 million. For the nine months, pretax investment income declined 7.4 percent to $79.1 million, while after-tax investment income was down 4.8 percent to $59.3 million. Operating cash flow for the nine months of 2009 was $61.3 million, compared to $80.0 million in the nine months of 2008, excluding the non-recurring impact of the pooling change in 2008.

Commercial lines Net written premiums in commercial lines decreased 12.3 percent to $154.3 million in the third quarter of 2009. For the nine months, net written premiums were down 10.2 percent to $509.1 million. The commercial lines statutory combined ratio was 100.1 percent in the third quarter of 2009, versus 100.3 percent in the third quarter of 2008. For the nine months, the statutory combined ratio was 100.9 percent in 2009, compared to 101.7 percent in 2008, adjusting for the non-recurring impact of the pooling change in 2008.

Personal lines Net written premiums in personal lines were up 8.8 percent to $48.1 million in the third quarter of 2009. For the nine months, net written premiums grew 7.8 percent to $132.2 million. Harleysville Group’s personal lines statutory combined ratio was 95.7 percent in the third quarter of 2009, versus 92.2 percent during the third quarter of 2008. For the nine months, the statutory combined ratio was 97.1 percent in 2009, compared to 100.5 percent in 2008, adjusting for the non-recurring impact of the pooling change in 2008.

Outlook "All in all, we are very well positioned as we manage through these difficult economic times,” Browne said. "While the insurance marketplace continues to be challenging, we remain committed to retaining our best business, as well as generating responsible, profitable growth. But, we are not going to compromise underwriting quality to chase a near-term growth goal. Instead, we will work closely with our agency partners to remain disciplined—despite current market conditions—as we focus on our goal of producing results that will continue to differentiate us favorably from our competition.”

Webcast The company will host a live Webcast tomorrow, October 29, 2009, at 8 a.m. (ET) to discuss its third quarter results. The Webcast and a replay will be available from the Investors section of the company’s Web site (www.harleysvillegroup.com).

GAAP and non-GAAP financial measures The company uses a non-GAAP financial measure called "operating income” that management believes is useful to investors because it illustrates the performance of normal, ongoing operations, which is important in understanding and evaluating the company’s financial condition and results of operations. While this measure is utilized by investors to evaluate performance, it is not a substitute for the U.S. GAAP financial measure of net income. Therefore, a reconciliation of this non-GAAP financial measure to the U.S. GAAP financial measure of net income is provided following the Consolidated Statements of Income contained in this release. Management also uses operating income for, among other things, goal setting, determining employee and senior management compensation, and evaluating performance.

Corporate profile Harleysville Insurance is a leading super-regional provider of insurance products and services for small and mid-sized businesses, as well as for individuals, and ranks among the top 60 U.S. property/casualty insurance groups based on net written premiums. As a Trusted Choice^® company partner, Harleysville distributes its products exclusively through a network of independent agents primarily across 32 states. Harleysville was listed recently as #7 in the InformationWeek 500, the publication’s annual listing of the most innovative information technology organizations in the U.S., and has been ranked on the list in each of the last three years. Harleysville Mutual Insurance Company owns 53 percent of Harleysville Group Inc. (NASDAQ: HGIC), a publicly traded holding company for eight regional property/casualty insurance companies collectively rated A- (Excellent) by A.M. Best Company. Harleysville Group is listed on the NASDAQ Global Select Market, which is comprised of the top third of all NASDAQ member companies and has the highest initial listing standards of any exchange in the world based on financial and liquidity requirements. Harleysville Group has paid a dividend every quarter since the company went public in 1986, and was recognized with a 2009 Mergent Dividend Achiever Award for its long-term history of dividend increases. Further information can be found on the company’s Web site at www.harleysvillegroup.com.

Forward-looking information Certain of the statements contained herein (other than statements of historical facts) are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and include estimates and assumptions related to economic, competitive and legislative developments. These forward-looking statements are subject to change and uncertainty that are, in many instances, beyond the company’s control, and have been made based upon management’s expectations and beliefs concerning future developments and their potential effect on Harleysville Group Inc. There can be no assurance that future developments will be in accordance with management’s expectations so that the effect of future developments on Harleysville Group will be those anticipated by management. Actual financial results, including operating return on equity, premium growth and underwriting results, could differ materially from those anticipated by Harleysville Group depending on the outcome of certain factors, which may include changes in property and casualty loss trends and reserves; catastrophe losses; the insurance product pricing environment; changes in applicable law; government regulation and changes therein that may impede the ability to charge adequate rates; performance of and instability in the financial markets; investment losses; fluctuations in interest rates; availability and price of reinsurance; and the status of the labor markets in which the company operates.

¹ Excludes the effects of SFAS No. 115.

² "Statutory combined ratio” is a non-GAAP measure of underwriting profitability and is based on numbers determined under statutory accounting practices as filed with state insurance regulators. It is the sum of the ratio of losses to premiums earned plus the ratio of underwriting expenses to premiums written. A ratio of less than 100 percent indicates underwriting profitability.