The loss-reserve adjustments announced last week were made primarily for the workers' compensation line ($11.8 million), as well as to commercial auto ($9.5 million), commercial multi-peril ($19.3 million) and personal auto ($3.8 million) lines of business.

Harleysville said its quarter-end reserve analysis revealed a higher-than-expected development in casualty lines in accident years prior to 2003, which prompted the company to take the charge.

For full-year 2003, Harleysville posted a $47.6 million net loss, down from net profit of $46.2 million for full-year 2002. Harleysville had also posted a $34 million net loss during its 2003 third quarter after adding $55 million, pre-tax, to loss reserves. The full-year results also included claims costs of $8.8 million, pre-tax, from Hurricane Isabel.

Michael Browne, Harleysville Group's chief executive officer, called the 2003 results "totally unacceptable" and promised that the management team will return Harleysville "not only to profitability but also to superior levels of profitability."

Mr. Browne said Harleysville has "strengthened management in key areas, including claims, and conducted thorough claims and actuarial reviews using internal and external resources in order to address the issues that led to our additions to loss reserves in 2003."

"With these changes in place, we can now focus on growing our business and our profits," he said.

Net premiums written for the 2003 fourth quarter were $197.59 million, up from $191.12 million posted one year ago. Net premiums written for full-year 2003 were $843.54 million, better than $797.85 million reported for 2002.

A.M. Best was less optimistic about Harleysville's future, saying it has a "cautious view of Harleysville's earnings prospects over the near term."

The Oldwick, N.J.-based ratings agency also cited concerns about the recent volatility and continued uncertainty regarding the insurer's future loss-reserve development, weaker-than-expected 2003 results and diminished capitalization.

A.M. Best's ratings action includes the downgrade of financial strength ratings to "A-minus" (Excellent) from "A" (Excellent) for the property-casualty pool members of Harleysville Insurance. Concurrently, Best has lowered debt ratings of Harleysville Group's existing senior notes to "triple-B-minus" from "triple-B-plus" and indicative ratings of senior debt to "triple-B-minus" from "triple-B-plus." The rating outlook for all of the ratings is stable.

A.M. Best noted that the $42 million of additional reserve charges and a net operating loss follows significant charges already taken in the first three quarters of 2003 and involves several of its leading lines of p-c business.

"It is apparent that Harleysville has lagged its peers in terms of implementing more stringent underwriting standards, particularly in personal lines, which could result in continued unfavorable accident-year underwriting performance relative to its competitors," Best cautioned.