Earnings announcement—
1999 third quarter results; share repurchase increase authorized

HARLEYSVILLE, PA—OCTOBER 28, 1999—Harleysville Group Inc. (NASDAQ:HGIC), a holding company that includes nine regional property and casualty insurance companies, today announced its results for the third quarter of 1999 and an increase in its share repurchase program.

For the third quarter of 1999, Harleysville Group reported a $0.06 per diluted share operating loss, compared with operating earnings of $0.43 per diluted share in the third quarter of 1998. As reported on October 4, the primary factors contributing to the operating loss included: catastrophe losses of $0.27 per share from Hurricane Floyd; a deteriorating commercial lines loss ratio; and the previously announced $0.06 per share charge relating to the consolidation of the company’s claims operation. For nine months, Harleysville Group’s diluted operating earnings were $0.83 per share in 1999 and $1.30 per share in 1998.

"As reported earlier this month, we are disappointed in our results and we take no solace in the fact that other property/casualty companies are experiencing similar hardships," commented Walter R. Bateman, chairman of the board, president and chief executive officer of Harleysville Group. "Therefore, we will make the changes necessary to compete profitably in this marketplace and return to our prior earnings levels. This includes continuing to effect commercial lines price increases, while walking away from underpriced, underperforming business.

"At the same time, we continue to seek ways to optimize our operational performance," Bateman said. "For example, the consolidation of our claims operation will enable us to improve our service, gain economies of scale and achieve consistency in claim handling. As a result, we expect to realize annualized after-tax savings of approximately $0.08 per share."

Harleysville Group reported a third quarter diluted net loss per share of $0.01 in 1999, compared with diluted net income of $0.48 in 1998. Through nine months, diluted net income was $0.91 per share in 1999, versus $1.51 per share in 1998. Nine-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 $0.05 per share in the third quarter of 1999 and $0.05 per share in the third quarter of 1998. For the nine months, diluted realized gains per share were $0.18 in 1999 and $0.21 in 1998.

Harleysville Group’s statutory combined ratio for the third quarter of 1999 was 116.0 percent, compared with 104.1 percent in the third quarter of 1998. For nine months, the statutory combined ratio was 107.4 percent, compared with 103.5 percent in 1998. Hurricane Floyd and the claims restructuring charge added 8.3 points to the third quarter’s combined ratio and 2.8 points to the nine-month combined ratio.

Earned premiums increased 8 percent to $179.5 million in the third quarter of 1999, compared with $165.7 million in 1998 due to premium growth in personal and commercial lines. For the nine months, earned premiums were up 6 percent to $524.4 million from $494.2 million in 1998.

Third quarter after-tax investment income was $16.9 million in both 1999 and 1998. For the nine months, after-tax investment income rose 1 percent to $50.6 million in 1999, compared with $50.1 million in 1998.

Total revenues—which include realized investment gains—climbed 8 percent in the third quarter to $207.5 million in 1999, compared with $192.6 million in 1998. For the corresponding nine-month periods, total revenues increased 5 percent to $608.4 million in 1999 from $577.2 million in 1998.

Shareholders’ equity was $524.6 million ($17.84 per share) at September 30, 1999, compared with $529.7 million ($18.17 per share) at December 31, 1998.

On October 27, the boards of both Harleysville Group and Harleysville Mutual Insurance Company authorized repurchase plans for each company to purchase up to 500,000 shares of Harleysville Group common stock, in addition to the 500,000 shares authorized for each company earlier this year. Through October 25, each company had purchased 308,165 shares, at an average price of $15.45 per share, leaving 691,835 authorized shares available for repurchase by each company.

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 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.