The New York-based S&P said that the ratings outlook is "stable."
"The ratings action reflects the higher-than-expected first-quarter losses and the historically volatile underwriting performance of the company's insurance subsidiaries," said Thomas Thun, credit analyst at S&P.
Late last month, Harleysville posted a first-quarter net loss of $3.2 million, after setting aside $20 million to cover workers' compensation claims.
Mr. Thun added that although Harleysville's insurance subsidiaries maintain a good franchise, "they are at times challenged as middle tier insurers primarily underwriting in the Mid-Atlantic and New England states."
Still, he said, these difficulties are offset by the company's modest financial leverage, good financial flexibility and liquidity and the subsidiaries' "extremely strong" capital positions.
Mr. Thun also expects Harleysville's operating subsidiaries' underwriting performance to stabilize and reach a combined ratio of below 105 percent for 2003.
S&P noted that the company's operating performance in the 2003 first quarter, like those of some other property-casualty insurers, was hurt by winter storm losses.
The ratings firm also forecast that Harleysville's earnings would stabilize, as its workers' compensation business reserving issues are resolved. And earnings would stabilize further, S&P predicted, as various line segments more susceptible to higher frequency and severity are run off.
Based in Harleysville, Pa., Harleysville offers a broad line of coverage in homeowners, auto, commercial multi-peril and workers' compensation. The company operates in more than 30 states, with about 1,700 agencies.