Earnings announcement—
1999 fourth quarter and year-end results

Fourth quarter diluted operating earnings were $0.26 per share in 1999, compared with $0.49 per share in 1998. For the year, Harleysville Group’s diluted operating earnings were $1.09 per share, compared with $1.79 per share in 1998. The 1999 results reflect catastrophe losses of $0.33 per share from Hurricane Floyd, poor commercial lines underwriting results and the previously announced $0.06 per share charge related to the consolidation of the company’s claims operation.

Fourth quarter diluted net income per share was $0.44 in 1999, compared with $0.64 in 1998. Diluted net income for the year was $1.35 per share in 1999 and $2.15 per share in 1998. Twelve-month diluted net income for 1999 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 $0.18 per share in the fourth quarter of 1999 and $0.15 per share in the fourth quarter of 1998. For both years, diluted realized gains were $0.36 per share. The realized gains were attributable to sales from the company’s equity portfolio.

“We recognize that our 1999 earnings did not meet our stakeholders’ expectations, nor did they meet our own. As a result, we have been taking comprehensive and aggressive measures to improve our operational performance,” commented Walter R. Bateman, Harleysville Group’s chairman, president and chief executive officer. “To that end, we are raising prices to restore premium adequacy in underperforming classes of commercial lines business and providing additional growth opportunities to the many agents who continue to contribute to our success, while ending relationships with those who do not. In addition, we are implementing major initiatives to reduce future business costs and improve customer service, including the reorganization of our claims operations, a streamlining of our field support staff and ongoing progress in building our information technology network.”

Harleysville Group’s statutory combined ratio for the fourth quarter of 1999 was 109.5 percent, compared with 102.7 percent in the fourth quarter of 1998. For the year, the statutory combined ratio was 107.8 percent, versus 103.2 percent in 1998. Hurricane Floyd added 2.0 points to the 1999 combined ratio, while the claims restructuring charge added 0.4 points. In 1998, Hurricane Bonnie added 0.4 points to the full-year combined ratio.

As reported earlier this month, the company will be streamlining selected support services and office functions throughout its field operations, reducing the number of non-claims positions by about 120. This effort is expected to result in annualized after-tax savings of approximately $2.7 million ($0.09 per diluted share) and is estimated to result in a one-time, after-tax charge to earnings of approximately $0.6 million ($0.02 per diluted share) in the first quarter of 2000.

In July 1999, Harleysville Group announced plans to consolidate its claims operations from 23 general claims offices into a centralized direct reporting center and four specialized regional claims service centers. As a result, the company incurred 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. Based on an 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.

Earned premiums increased 7 percent to $182.8 million in the fourth quarter of 1999, compared with $170.4 million in 1998. For the 12 months, earned premiums were up 6 percent to $707.2 million from $664.6 million in 1998.

After-tax investment income in the fourth quarter declined 1 percent to $17.0 million in 1999 from $17.2 million in 1998. For the year, after-tax investment income climbed 1 percent to $67.6 million in 1999, compared with $67.2 million in 1998.

Total revenues—which include realized investment gains—rose 7 percent in the fourth quarter to $216.3 million in 1999, compared with $202.1 million in 1998. For the corresponding 12-month periods, total revenues increased 6 percent to $824.8 million in 1999 from $779.3 million in 1998.

Shareholders’ equity was $526.9 million ($18.29 ­­per share) at December 31, 1999, compared with $529.7 million ($18.17 per share) at December 31, 1998.

“While much of the insurance industry reported disappointing earnings in 1999, we are committed to distancing ourselves from the negative aura surrounding our industry at this time,” Bateman concluded. “We will continue to work closely with our agents to retain and grow our more profitable business segments. Although we do not expect to realize the benefits of a repriced commercial lines book until later this year, we are encouraged by the early results of our overall pricing and reunderwriting plans.”

Harleysville Group Inc. is a holding company that includes nine regional property and casualty insurance companies whose marketing territory encompasses 32 states primarily 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, insurance industry price competition has made it more difficult to charge adequate prices, 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.

CONSOLIDATED STATEMENTS OF INCOME

Year ended 
December 31

December 31, 1999*