Earnings announcement—
1998 fourth quarter and year-end results

HARLEYSVILLE, PA.—FEBRUARY 24, 1999—Harleysville Group Inc. (NASDAQ:HGIC), a holding company that includes nine regional property and casualty insurance companies, today reported record results for both the fourth quarter and the year 1998.

"1998 was another record-setting year for Harleysville Group. In fact, earnings for the fourth quarter and the year were the best in our history," commented Walter R. Bateman, Harleysville Group’s chairman, president and chief executive officer. "Our strong underwriting results and continued solid investment results all contributed to our record earnings. And, we posted a 14.8 percent return on equity, our best return in eight years."

Fourth quarter diluted operating earnings were $0.49 per share in 1998, compared with $0.46 per share in 1997. For the year, Harleysville Group’s diluted operating earnings were $1.79 per share, compared with $1.71 per share in 1997. As reflected in our third quarter results, Hurricane Bonnie reduced the company’s operating earnings by $0.07 per share, after pooling and taxes.

Fourth quarter diluted net income per share was $0.64 in 1998, compared with $0.49 in 1997. Diluted net income for the year was $2.15 per share in 1998 and $1.86 per share in 1997. After-tax diluted realized investment gains amounted to $0.15 per share in the fourth quarter of 1998 and $0.03 per share in the fourth quarter of 1997. For the year, diluted realized gains per share were $0.36 in 1998 and $0.15 in 1997. The increase in 1998 realized gains was attributable to sales from the company’s equity portfolio.

Harleysville Group’s statutory combined ratio for the fourth quarter of 1998 was 102.7 percent, compared with 102.3 percent in the fourth quarter of 1997. For the year, the statutory combined ratio was 103.2 percent, versus 103.5 percent in 1997. Hurricane Bonnie added 0.4 points to the 1998 combined ratio.

Earned premiums increased 6 percent to $170.4 million in the fourth quarter of 1998, compared with $160.7 million in 1997. For the 12 months, earned premiums were up 6 percent to $664.6 million from $624.9 million in 1997.

"During 1998, our premium growth outpaced the industry as we increased our writings within existing agencies and new agencies. We also introduced a number of new products that attracted customers from new niche market segments, and we assimilated the business generated by Minnesota Fire and Casualty Company," Bateman explained.

"We expect the commercial lines competitive environment we’ve experienced over the past several years to continue," he said. "Nevertheless, our regional customer focus, our strong relationships with agents and our demonstrated underwriting discipline will enable us to continue to compete profitably.

"In personal lines, a favorable market and regulatory environment continues to fuel profitable auto results in our standard and preferred lines. At the same time, we continue to increase pricing on our homeowners book of business," Bateman concluded.

After-tax investment income in the fourth quarter increased 7 percent to $17.2 million in 1998 from $16.1 million in 1997. For the year, after-tax investment income climbed 6 percent to $67.2 million in 1998, compared with $63.6 million in 1997.

Total revenues—which include realized investment gains—rose 9 percent in the fourth quarter to $202.1 million in 1998, compared with $185.4 million in 1997. For the corresponding 12-month periods, total revenues increased 8 percent to $779.3 million in 1998 from $724.2 million in 1997.

Shareholders’ equity was $529.7 million ($18.17 per share) at December 31, 1998, compared with $446.5 million ($15.49 per share) at December 31, 1997, reflecting the improved earnings and appreciation in the portion of our investment portfolio that is available for sale.

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 owns 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, 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.

Year Ended December 31