Harleysville Group Inc. Reports Third Quarter 2009 Results

--Operating return on equity(1) of 12.9 percent

--Statutory combined ratio(2) of 98.9 percent

--Book value of $27.69 per share; up 19 percent from year-end 2008

--Quarterly dividend of $0.325; represents 8 percent increase from a year ago

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 percent(1) 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(R) 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.

Harleysville Group Inc. and Subsidiaries
FINANCIAL HIGHLIGHTS                                                Quarter ended                       Nine months ended
                                                                    September 30                        September 30
(in thousands, except per share data)                               2009        2008                    2009        2008
OPERATING RESULTS
Diluted earnings per common share:
Operating income*                                                   $0.83       $0.79                   $2.17       $1.90
Realized investment gains (losses), net of income taxes (benefits)  0.05        (0.65              )    0.03        (0.64             )
Net income                                                          $0.88       $0.14                   $2.20       $1.26
Cash dividends per common share                                     $0.325      $0.30                   $0.925      $0.80
FINANCIAL CONDITION                                                             September 30, 2009                  December 31, 2008
Assets                                                                          $3,275,209                          $3,155,318
Shareholders' equity                                                            $765,665                            $652,634
Per common share                                                                $27.69                              $23.18
CONSOLIDATED STATEMENTS OF INCOME                                   Quarter ended                       Nine months ended
                                                                    September 30                        September 30
(in thousands, except per share data)                               2009        2008                    2009        2008
REVENUES:
Premiums earned                                                     $212,591    $230,433                $645,403    $689,641
Investment income, net of investment expense                        26,299      27,567                  79,052      85,330
Realized investment gains (losses)                                  2,440       (28,996            )    1,399       (29,045           )
Other income                                                        2,962       3,508                   9,793       9,961
Total revenues                                                      244,292     232,512                 735,647     755,887
LOSSES AND EXPENSES:
Losses and loss settlement expenses                                 132,635     147,466                 418,114     465,509
Amortization of deferred policy acquisition costs                   53,835      56,860                  161,714     170,514
Other underwriting expenses                                         21,625      22,480                  64,418      63,820
Interest expense                                                    1,516       1,618                   4,702       4,915
Other expenses                                                      972         1,189                   3,139       3,479
Total expenses                                                      210,583     229,613                 652,087     708,237
Income before income taxes                                          33,709      2,899                   83,560      47,650
Income taxes (benefit)                                              8,985       (1,289             )    21,415      9,958
Net income                                                          $24,724     $4,188                  $62,145     $37,692
Weighted average number of shares outstanding:
Basic                                                               27,764,870  28,642,831              28,017,293  29,539,304
Diluted                                                             27,942,458  28,907,052              28,186,653  29,822,193
Per common share:
Basic earnings                                                      $0.89       $0.15                   $2.22       $1.28
Diluted earnings                                                    $0.88       $0.14                   $2.20       $1.26
RECONCILIATION TO OPERATING INCOME :
Net income                                                          $24,724     $4,188                  $62,145     $37,692
Less realized investment gains (losses), net of income taxes        1,587       (18,848            )    910         (18,880           )
(benefits)
Operating income                                                    $23,137     $23,036                 $61,235     $56,572

These financial figures are unaudited.
*Operating income is a non-GAAP financial measure defined by the
company as net income excluding after-tax realized gains and losses
on investments.

Harleysville Group Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)                                 September 30, 2009*    December 31, 2008
ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value $217,523 and      $207,129               $246,855
$250,798)
Available for sale, at fair value (amortized cost $2,049,115 and  2,168,897              1,914,051
$1,889,778)
Equity securities, at fair value (cost $135,389 and $96,004)      177,008                98,815
Short-term investments, at cost, which approximates fair value    98,722                 210,682
Other invested assets, at cost, which approximates fair value     2,578                  3,189
Total investments                                                 2,654,334              2,473,592
Cash                                                              146                    146
Premiums in course of collection                                  137,661                142,602
Reinsurance receivable                                            206,419                212,654
Accrued investment income                                         25,703                 25,630
Deferred policy acquisition costs                                 111,516                110,339
Prepaid reinsurance premiums                                      42,696                 41,481
Property and equipment, net                                       13,724                 12,511
Deferred income taxes                                             20,531                 68,892
Other assets                                                      62,479                 67,471
Total assets                                                      $3,275,209             $3,155,318
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss settlement expenses                        $1,761,691             $1,767,601
Unearned premiums                                                 481,744                484,560
Accounts payable and accrued expenses                             138,849                119,063
Due to affiliate                                                  8,760                  12,960
Debt                                                              118,500                118,500
Total liabilities                                                 2,509,544              2,502,684
Shareholders' equity:
Preferred stock, $1 par value; authorized 1,000,000 shares; none
issued
Common stock, $1 par value, authorized 80,000,000 shares; issued  34,551                 34,254
34,550,961 and 34,254,581 shares; outstanding 27,653,052 and
28,156,672 shares
Additional paid-in capital                                        243,074                231,715
Accumulated other comprehensive income (loss)                     70,803                 (17,390           )
Retained earnings                                                 625,466                589,146
Treasury stock, at cost, 6,897,909 and 6,097,909 shares           (208,229            )  (185,091          )
Total shareholders' equity                                        765,665                652,634
Total liabilities and shareholders' equity                        $3,275,209             $3,155,318
*These financial figures are unaudited.

Harleysville Group Inc. and Subsidiaries
SUPPLEMENTARY FINANCIAL ANALYSTS' DATA
                                                     Quarter ended               Nine months ended
                                                     September 30                September 30
(dollars in thousands)                               2009          2008          2009          2008
Net premiums written*                                $202,333      $220,141      $641,371      $735,587
Statutory surplus*                                                               $649,955      $592,527
Pretax investment income                             $26,299       $27,567       $79,052       $85,330
Related federal income taxes                         6,350         7,310         19,712        23,024
After-tax investment income                          $19,949       $20,257       $59,340       $62,306
SEGMENT INFORMATION
                                                     Quarter ended               Nine months ended
                                                     September 30                September 30
(dollars in thousands)                               2009          2008          2009          2008
Revenues:
Premiums earned:
Commercial lines                                     $170,098      $189,894      $521,228      $569,152
Personal lines                                       42,493        40,539        124,175       120,489
Total premiums earned                                212,591       230,433       645,403       689,641
Net investment income                                26,299        27,567        79,052        85,330
Realized investment gains (losses)                   2,440         (28,996  )    1,399         (29,045  )
Other                                                2,962         3,508         9,793         9,961
Total revenues                                       $244,292      $232,512      $735,647      $755,887
Income before income taxes:
Underwriting gain (loss):
Commercial lines                                     $5,907        $4,361        ($371    )    ($18,576 )
Personal lines                                       132           2,070         1,144         (3,274   )
SAP underwriting gain (loss)                         6,039         6,431         773           (21,850  )
GAAP adjustments                                     (1,543   )    (2,804   )    384           11,648
GAAP underwriting gain (loss)                        4,496         3,627         1,157         (10,202  )
Net investment income                                26,299        27,567        79,052        85,330
Realized investment gains (losses)                   2,440         (28,996  )    1,399         (29,045  )
Other                                                474           701           1,952         1,567
Income before income taxes                           $33,709       $2,899        $83,560       $47,650
Income taxes on net investment income                $6,350        $7,310        $19,712       $23,024
Income taxes (benefits) on remaining gains (losses)  2,635         (8,599   )    1,703         (13,066  )
Total income taxes (benefit)                         $8,985        ($1,289  )    $21,415       $9,958
Effective tax rate on:
Net investment income                                24.1     %    26.5     %    24.9     %    27.0     %
Income                                               26.7     %    N/M           25.6     %    20.9     %

These financial figures are unaudited.
*Statutory data is a non-GAAP measure. Because it is prepared in
accordance with statutory accounting rules as defined by the
National Association of Insurance Commissioners' Accounting
Practices and Procedures Manual, a reconciliation to GAAP is not
required.

Harleysville Group Inc. and Subsidiaries
STATUTORY DATA BY LINE OF BUSINESS*
                                                        Quarter ended September 30                Nine months ended September 30
                                                                                                                Without
                                                                                                                Intercompany
                                                                                                                Pooling
                                                                                                                Transfer**
(dollars in thousands)                                                              Percentage                                              Percentage
                                                        2009          2008          Change        2009          2008          2008          Change***
Net premiums written:
Commercial:
Automobile                                              $42,937       $47,734       -10.0      %  $137,038      $152,041      $162,344      -9.9       %
Workers' compensation                                   17,679        22,637        -21.9      %  62,886        80,672        85,780        -22.0      %
Commercial multi-peril                                  73,566        83,690        -12.1      %  245,844       267,008       284,638       -7.9       %
Other commercial                                        20,072        21,901        -8.4       %  63,371        67,496        71,681        -6.1       %
Total commercial                                        $154,254      $175,962      -12.3      %  $509,139      $567,217      $604,443      -10.2      %
Personal:
Automobile                                              $22,685       $20,106       12.8       %  $63,391       $57,379       $61,238       10.5       %
Homeowners                                              22,169        20,974        5.7        %  59,751        56,974        61,106        4.9        %
Other personal                                          3,225         3,099         4.1        %  9,090         8,299         8,800         9.5        %
Total personal                                          $48,079       $44,179       8.8        %  $132,232      $122,652      $131,144      7.8        %
Total personal and commercial                           $202,333      $220,141      -8.1       %  $641,371      $689,869      $735,587      -7.0       %
Statutory combined ratios:
Commercial:
Automobile                                              93.2     %    93.1     %                  90.6     %    94.9     %    94.3     %
Workers' compensation                                   104.2    %    116.9    %                  108.1    %    113.2    %    112.6    %
Commercial multi-peril                                  103.5    %    103.3    %                  105.1    %    104.3    %    103.7    %
Other commercial                                        97.7     %    84.2     %                  99.6     %    93.2     %    92.7     %
Total commercial                                        100.1    %    100.3    %                  100.9    %    101.7    %    101.2    %
Personal:
Automobile                                              96.9     %    94.1     %                  102.4    %    94.0     %    93.4     %
Homeowners                                              97.8     %    87.6     %                  95.0     %    107.4    %    106.8    %
Other personal                                          73.3     %    109.8    %                  75.1     %    98.5     %    98.6     %
Total personal                                          95.7     %    92.2     %                  97.1     %    100.5    %    100.0    %
Total personal and commercial statutory combined ratio  98.9     %    98.8     %                  100.1    %    101.5    %    101.0    %
GAAP combined ratio                                     97.9     %    98.4     %                  99.8     %                  101.5    %
GAAP losses paid                                        $146,743      $146,799                    $416,937                    $431,772
Net catastrophe losses incurred                         $946          $3,692                      $6,244                      $31,787

These financial figures are unaudited.
*Statutory data is a non-GAAP measure. Because it is prepared in
accordance with statutory accounting rules as defined by the
National Association of Insurance Commissioners' Accounting
Practices and Procedures Manual, a reconciliation to GAAP is not
required.
**The effect of the January 1, 2008, pooling transfer of
$45,718,282 of net premiums written (representing the transfer of
the January 1, 2008, unearned premium balance) and the effect of
the pool transfer on the statutory combined ratios are excluded
below for comparative purposes.
***Comparison current year to date versus prior year without the
intercompany pooling transfer.

SOURCE: Harleysville Group Inc.

Harleysville Group Inc. 
Mark Cummins (Investors) 
215-256-5025 
mcummins@harleysvillegroup.com 
or 
Randy Buckwalter (Media) 
215-256-5288 
rbuckwalter@harleysvillegroup.com

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