Harleysville Group Inc. Reports Third Quarter 2010 Results

Harleysville Group Inc. (NASDAQ: HGIC) today reported diluted operating income of $0.76 per share for the third quarter of 2010, compared to $0.83 per share in the third quarter of 2009. Catastrophe losses incurred during the third quarter of 2010 reduced operating income by $0.09 per share after taxes, compared to catastrophe losses of $0.02 per share in the third quarter of 2009. For the nine-month periods, the company reported diluted operating income of $1.64 per share in 2010 and $2.17 per share in 2009. Catastrophe losses incurred during the first nine months of 2010 reduced operating income by $0.76 per share after taxes, compared to catastrophe losses of $0.14 per share in the first nine months of 2009. 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.

"I’m pleased to say that our focus on the basics of our business has produced another strong quarterly performance for Harleysville Group. Excluding the impact of catastrophe losses, our operating earnings were comparable to a year ago and our statutory combined ratio was slightly better than last year—all of which indicate that we continue to perform well in the fundamental areas of our business, which include maintaining our underwriting discipline in a competitive market,” commented Michael L. Browne, Harleysville Group’s president and chief executive officer. "We also continue to be encouraged by the fact that our premium volume is increasing in a targeted way. Specifically, we have been successful in executing our strategy to grow our small commercial and personal lines business, where we think pricing is stronger than in commercial middle-market business. This growth is due in large part to new technology that continues to make it easier for our agents to do business with us.

"Our balance sheet remains very strong, while our balanced capital management strategy continues to differentiate us from many of our competitors,” Browne continued. "As we also announced today, we are paying a special cash dividend of $1.44 per share—which represents the amount of our current annualized dividend—in addition to our regular quarterly cash dividend of $0.36 per share. With limited opportunities to reinvest cash in our investment portfolios due to historically low interest rates, we feel it is appropriate to distribute some of our excess capital to our shareholders. This special dividend is another example of our commitment to managing capital efficiently. All told, we have returned $327 million of our capital to our shareholders since June 2007 via dividends and the six stock repurchase programs that have amounted to 20 percent of our outstanding shares. Our ability to continue increasing our dividend and buying back shares reflects our financial strength, which is evidenced by a high-quality investment portfolio, a strong capital base and reserve position, a debt-to-capital ratio of 15 percent¹, and a premium-to-surplus ratio of 1.3 to 1. This solid foundation positions us to continue to be a strong and stable market for our agents’ best business.”

The company reported diluted net income of $0.76 per share in the third quarter of 2010, compared to $0.88 per share in the third quarter of 2009. There were no realized investment gains after tax in the third quarter of 2010, compared to after-tax investment gains of $0.05 per share in 2009. For the nine-month periods, diluted net income was $1.65 per share in 2010 and $2.20 per share in 2009. For the nine months, the company reported after-tax investment gains of $0.01 per share in 2010, compared to after-tax investment gains of $0.03 per share in 2009.

The company’s third quarter net written premiums increased 6.7 percent to $215.9 million in 2010, compared to $202.3 million in the same period in 2009. Net written premiums through nine months were up 3.4 percent to $663.0 million in 2010, compared to $641.4 million in 2009.

Harleysville Group’s overall statutory combined ratio was 99.9 percent in the third quarter of 2010, compared to 98.9 percent in the third quarter of 2009. The company had 1.7 points of catastrophe losses in the third quarter of 2010, compared to 0.4 points in 2009. For the nine months, the statutory combined ratio was 102.9 percent in 2010, versus 100.1 percent in 2009. Catastrophe losses added 5.1 points to the nine-month result in 2010 and 1.0 points in 2009.

Third quarter pretax investment income decreased 3.7 percent to $25.3 million, while after-tax investment income was down 1.2 percent in the third quarter to $19.7 million. For the nine months, pretax investment income declined 2.6 percent to $77.0 million, while after-tax investment income was up 1.0 percent to $60.0 million.

Operating cash flow for the nine months of 2010 was $69.1 million, compared to $61.3 million in the nine months of 2009.

Commercial lines Net written premiums in commercial lines increased 4.2 percent to $160.8 million in the third quarter of 2010. For the nine months, net written premiums were up 0.5 percent to $511.8 million in 2010. The commercial lines statutory combined ratio was 100.9 percent in the third quarter of 2010, versus 100.1 percent in the third quarter of 2009. For the nine months, the statutory combined ratio was 102.3 percent in 2010, compared to 100.9 percent in 2009.

Personal lines Net written premiums in personal lines were up 14.7 percent to $55.1 million in the third quarter of 2010. For the nine months, net written premiums grew 14.3 percent to $151.2 million in 2010. Harleysville Group’s personal lines statutory combined ratio was 97.2 percent in the third quarter of 2010, versus 95.7 percent during the third quarter of 2009. For the nine months, the statutory combined ratio was 105.4 percent in 2010, compared to 97.1 percent in 2009.

Outlook "I am confident that we are very well positioned as we manage through these difficult economic times,” Browne said. "Looking ahead, we will remain focused on the basics of our business—underwriting, claims, service and productivity—in order to retain our best business and generate responsible, profitable growth despite the challenging insurance marketplace. That said, we will not compromise our underwriting quality in order to chase a near-term growth goal. Rather, we will continue to work closely with our agency partners to remain disciplined—despite the current market conditions—as we focus on our goal of producing results that will continue to differentiate us favorably from our competition. We are well positioned for profitable growth, and we have plenty of capital to fund the right acquisition or other growth opportunities.”

Webcast The company will host a live webcast on Tuesday, November 2, 2010, 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 website (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 70 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 is ranked #21 in the most recent InformationWeek 500, the publication’s annual listing of the most innovative information technology organizations in the U.S., and has been included on the list in each of the last five years. Harleysville Mutual Insurance Company owns approximately 54 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 2010 Mergent Dividend Achiever Award for its long-term history of dividend increases. Further information can be found on the company’s website 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; reduced economic activity; the insurance product pricing environment; changes in applicable law and accounting standards; government regulation and changes therein that may impede the ability to charge adequate rates or to do business; 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 ASC 320.

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.