SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
------------------ -------------------
Commission file number 0-14697
HARLEYSVILLE GROUP INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0241172
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
355 Maple Avenue, Harleysville, PA 19438-2297
- ---------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 256-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 par value
--------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes X . No .
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
On March 8, 1996, the aggregate market value (based on the closing sales
price on that date) of the voting stock held by non-affiliates of the
Registrant was $168,526,808.
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date: 13,769,602 shares of
Common Stock outstanding on March 8, 1996.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's annual report to stockholders for the
fiscal year ended December 31, 1995 are incorporated by reference in
Parts I, II and IV of this report.
2. Portions of the Registrant's proxy statement relating to the annual
meeting of stockholders to be held April 24, 1996 are incorporated by
reference in Parts I and III of this report.
<PAGE> Page 1
HARLEYSVILLE GROUP INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1995
PART I PAGE
------ ----
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 26
ITEM 3. LEGAL PROCEEDINGS 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 26
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS 29
ITEM 6. SELECTED FINANCIAL DATA 29
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 29
ITEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 29
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT 29
ITEM 11. EXECUTIVE COMPENSATION 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 30
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K 31
<PAGE> Page 2
PART I
ITEM 1. BUSINESS.
- ------- ---------
(a) GENERAL DEVELOPMENT OF BUSINESS.
Harleysville Group Inc. (the "Company") is a regional
insurance holding company headquartered in Pennsylvania which
engages, through its subsidiaries, in the property and casualty
insurance business. As used herein, "Harleysville Group" refers to
Harleysville Group Inc. and its subsidiaries. Harleysville Group
is approximately 56% owned by Harleysville Mutual Insurance Company
(the "Mutual Company").
Harleysville Group and the Mutual Company operate together as
a network of regional insurance companies that underwrite a broad
line of personal and commercial coverages. These insurance
coverages are marketed primarily in the eastern half of the United
States through approximately 13,700 independent insurance agents
associated with approximately 2,300 insurance agencies. Regional
offices are maintained in Georgia, Illinois, Indiana, Maryland,
Massachusetts, Michigan, New Jersey, New York, North Carolina,
Ohio, Pennsylvania, Tennessee and Virginia. The Company's property
and casualty insurance subsidiaries are: Great Oaks Insurance
Company ("Great Oaks"), Harleysville-Atlantic Insurance Company
("Atlantic"), Harleysville Insurance Company of New Jersey
("HNJ"), Huron Insurance Company ("Huron"), Lake States Insurance
Company ("Lake States"), Mid-America Insurance Company ("Mid-
America"), New York Casualty Insurance Company ("New York
Casualty") and Worcester Insurance Company ("Worcester").
The Company is pursuing a strategy of building a national
network of regional insurance companies. Management believes that
the Company's regional organization permits each regional operation
to benefit from economies of scale provided by centralized support
while encouraging local marketing autonomy and managerial
entrepreneurship. Services which directly involve the insured or
the agent (i.e., underwriting, claims and marketing) generally are
performed locally in accordance with Company-wide standards to
promote high quality service, while actuarial, investment, legal,
data processing and similar services are performed centrally. The
Company's network of regional insurance companies has expanded
significantly in the last thirteen years. In 1983, the Company
acquired Worcester, a property and casualty insurer which has
conducted business in New England since 1823. In 1984, HNJ was
formed by the Company and began underwriting property and casualty
insurance in New Jersey. In 1987, the Company acquired Atlantic,
a property and casualty insurer which has conducted business in the
southeastern United States since 1905. In 1991, the Company
acquired Mid-America, (formerly named Connecticut Union Insurance
Company) which conducted business in Connecticut, and New York
Casualty, which conducts business in upstate New York. In 1993,
the Company acquired Lake States, which primarily conducts business
in Michigan. In 1994, the Company formed Great Oaks which began
underwriting property and casualty insurance in Ohio.
<PAGE> Page 3
The Company's property and casualty subsidiaries other than
Lake States participate in an intercompany pooling arrangement
whereby these subsidiaries cede to the Mutual Company all of their
net premiums written and assume from the Mutual Company a portion
of the pooled business, which included all of the Mutual Company's
property and casualty insurance business except for new and renewal
Pennsylvania personal automobile insurance insured after January 1,
1991 by a subsidiary of the Mutual Company, Pennland Insurance
Company ("Pennland") and new and renewal New Jersey personal
automobile insurance insured after January 1, 1992 by another
subsidiary of the Mutual Company, Harleysville-Garden State
Insurance Company ("Garden State"). Beginning January 1, 1996,
Harleysville Group's participation in the pooling arrangement
increased from 60% to 65% and Pennland became a participant in the
pooling arrangement. See "Business - Narrative Description of
Business - Pooling Arrangement."
The Company is a Delaware corporation formed in 1979 as a
wholly-owned subsidiary of the Mutual Company. In May 1986, the
Company completed an initial public offering of its Common Stock,
reducing the percentage of outstanding shares owned by the Mutual
Company to approximately 70%. In April 1992, the Mutual Company
completed a secondary public offering further reducing the
percentage of outstanding shares owned by the Mutual Company to
approximately 55%.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company is of the opinion that all of its operations are
within one industry segment and that no information as to industry
segments is required pursuant to Statement of Financial Accounting
Standards No. 14 or Regulation S-K.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
PROPERTY AND CASUALTY UNDERWRITING
Harleysville Group and the Mutual Company together underwrite
a broad line of personal and commercial property and casualty
coverages, including automobile, homeowners, commercial multi-peril
and workers compensation. The Mutual Company and the Company's
insurance subsidiaries other than Lake States participate in an
intercompany pooling arrangement under which such subsidiaries and
the Mutual Company combine their property and casualty business.
Pennland and Garden State have not participated in the pooling
arrangement. Beginning January 1, 1996, Pennland participates in
the pooling arrangement and Harleysville Group's participation
increased to 65%.
Harleysville Group (except for Lake States) and the Mutual
Company have maintained a pooled rating of "A+" (superior) by A.M.
Best Company, Inc. ("Best's") based upon 1994 statutory results
and operating performance. Lake States' Best's rating is "A-"
(excellent). Best's ratings are based upon factors relevant to
<PAGE> Page 4
policyholders and are not directed toward the protection of
investors. Management believes that the Best's rating is an
important factor in marketing Harleysville Group's products to its
agents and customers.
The following table sets forth the premiums earned, by line of
insurance, for Harleysville Group for the periods indicated:
HARLEYSVILLE GROUP BUSINESS ONLY
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
PREMIUMS EARNED
- ---------------
Commercial:
Automobile $ 85,210 $ 81,052 $ 74,011
Workers compensation 103,794 91,684 83,285
Commercial multi-peril 100,375 90,303 73,174
Other 24,767 23,021 21,105
-------- -------- --------
Total commercial 314,146 286,060 251,575
-------- -------- --------
Personal:
Automobile 92,315 92,631 73,802
Homeowners 62,599 61,197 55,324
Other 7,982 7,843 7,840
-------- -------- --------
Total personal 162,896 161,671 136,966
-------- -------- --------
Total Harleysville Group Business $477,042 $447,731 $388,541
======== ======== ========
The following table sets forth ratios for the Company's
property and casualty subsidiaries, prepared in accordance with
generally accepted accounting principles ("GAAP") and with
statutory accounting practices ("SAP") prescribed or permitted by
state insurance authorities. The statutory combined ratio is a
standard measure of underwriting profitability. This ratio is the
sum of (i) the ratio of incurred losses and loss settlement
expenses to net earned premium ("loss ratio"); (ii) the ratio of
expenses incurred for commissions, premium taxes, administrative
and other underwriting expenses to net written premium ("expense
ratio"); and (iii) the ratio of dividends to policyholders to net
earned premium ("dividend ratio"). The GAAP combined ratio is
calculated in the same manner except that it is based on GAAP
amounts and the denominator for each component is net earned
premium. When the combined ratio is under 100%, underwriting
results are generally considered profitable. Conversely, when the
combined ratio is over 100%, underwriting results are generally
considered unprofitable. The combined ratio does not reflect
investment income, federal income taxes or other non-operating
income or expense. Harleysville Group's operating income is a
function of both underwriting results and investment income.
<PAGE> Page 5
HARLEYSVILLE GROUP BUSINESS ONLY
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------ ------ ------
GAAP combined ratio 104.0% 111.5% 106.7%
===== ===== =====
Statutory operating ratios:
Loss ratio 70.3% 77.9% 72.9%
Expense and dividend ratios 33.1% 33.5% 33.8%
----- ----- -----
Statutory combined ratio 103.4% 111.4% 106.7%
===== ===== =====
Industry statutory combined
ratio<F1> 107.2% 108.5% 106.9%
===== ===== =====
- ------------------
[FN]
<F1> Source: Best's Insurance Management Reports, Property/Casualty
Supplement, January 3, 1996.
POOLING ARRANGEMENT
The Company's property and casualty subsidiaries other than
Lake States participate in an intercompany pooling arrangement with
the Mutual Company. The underwriting pool is intended to produce
a more uniform and stable underwriting result from year to year for
all companies in the pool than they would experience individually
and to reduce the risk of loss of any of the pool participants by
spreading the risk among all the participants. Each company
participating in the pool has at its disposal the capacity of the
entire pool, rather than being limited to policy exposures of a
size commensurate with its own capital and surplus. The additional
capacity exists because such policy exposures are spread among all
the pool participants which each have their own capital and
surplus. Regulation is applied to the individual companies rather
than to the pool.
Pursuant to the terms of the pooling agreement with the Mutual
Company, each of the Company's subsidiary participants cedes
premiums, losses and expenses on all of their business to the
Mutual Company which, in turn, retrocedes to such subsidiaries a
specified portion of premiums, losses and expenses of the Mutual
Company and such subsidiaries. Under the terms of the intercompany
pooling agreement which became effective January 1, 1986, Huron and
HNJ ceded to the Mutual Company all of their insurance business
written on or after January 1, 1986. All of the Mutual Company's
property and casualty insurance business written or in force on or
after January 1, 1986, was also included in the pooled business.
The pooling agreement provides, however, that Harleysville Group is
not liable for any losses occurring prior to January 1, 1986. The
pooling agreement does not legally discharge Harleysville Group
from its primary liability for the full amount of the policies
ceded. However, it makes the Mutual Company liable to Harleysville
Group to the extent of the business ceded.
<PAGE> Page 6
The following table sets forth a chronology of the changes
that have occurred in the pooling agreement since it became
effective on January 1, 1986.
CHRONOLOGY OF CHANGES IN POOLING AGREEMENT
HARLEYSVILLE MUTUAL
GROUP COMPANY
DATE PERCENTAGE PERCENTAGE EVENT
------ ------------ ---------- ----------------------------------
January 1, 1986 30% 70% Current pooling agreement began with
Huron and HNJ as participants with
the Mutual Company.
July 1, 1987 35% 65% Atlantic acquired and included in
the pool.
January 1, 1989 50% 50% Worcester included in the pool.
January 1, 1991 60% 40% New York Casualty and Mid-America
acquired and included in the pool
and the Mutual Company formed
Pennland (not a pool participant)
to write Pennslyvania personal
automobile business.
January 1, 1996 65% 35% Pennland included in the pool.
Effective as of January 1, 1992, Garden State began insuring
new and renewal New Jersey personal automobile insurance policies
that had been included in the pooling arrangement.
When pool participation percentages increased as described
above, cash and investments equal to the net increase in
liabilities assumed less a ceding commission related to the net
increase in the liability for unearned premiums, was transferred
from the Mutual Company to Harleysville Group. See Note 3(a) of
the Notes to Consolidated Financial Statements.
All premiums, losses, loss settlement expenses and other
underwriting expenses are prorated among the parties to the pooling
arrangement on the basis of their participation in the pool. The
method of establishing reserves is set forth under "Business -
Reserves." The pooling agreement may be amended or terminated by
agreement of the parties. Termination may occur only at the end of
a calendar year. The Company and the Mutual Company maintain a
coordinating committee which reviews and evaluates the pooling
arrangements between the Company and the Mutual Company. See
"Business-Relationship with the Mutual Company." In evaluating
pool participation changes, the coordinating committee considers
current and proposed acquisitions, the relative capital positions
and revenue contributions of the pool participants, and growth
prospects and ability to access capital markets to support that
growth. Harleysville Group does not intend to terminate its
participation in the pooling agreement.
<PAGE> Page 7
The following table sets forth the net written premiums and
combined ratios by line of insurance for the total pooled business
after elimination of management fees, prepared in accordance with
statutory accounting practices prescribed or permitted by state
insurance authorities, for the periods indicated.
TOTAL POOLED BUSINESS
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
-------- --------- ---------
(dollars in thousands)
PREMIUMS WRITTEN
- ----------------
Commercial:
Automobile $136,197 $122,807 $121,342
Workers compensation 154,812 125,881 138,981
Commercial multi-peril 144,742 122,964 119,763
Other 39,703 36,007 35,393
-------- -------- --------
Total commercial 475,454 407,659 415,479
-------- -------- --------
Personal:
Automobile 113,440 110,900 121,806
Homeowners 93,141 88,864 91,501
Other 13,751 13,088 12,610
-------- -------- --------
Total personal 220,332 212,852 225,917
-------- -------- --------
Total pooled business $695,786 $620,511 $641,396
======== ======== ========
COMBINED RATIOS<F1>
- ---------------
Commercial:
Automobile 107.5% 105.2% 103.8%
Workers compensation 87.5% 110.6% 114.6%
Commercial multi-peril 111.3% 110.3% 101.5%
Other 110.6% 109.7% 87.9%
Total commercial 102.4% 109.0% 105.4%
Personal:
Automobile 112.2% 107.6% 107.1%
Homeowners 104.8% 140.2% 113.7%
Other 88.6% 108.1% 115.6%
Total personal 107.7% 121.0% 110.2%
Total pooled business 104.1% 113.2% 107.1%
- -----------------
[FN]
<F1> See the definition of combined ratio in "Business-Property and
Casualty Underwriting".
<PAGE> Page 8
The following table sets forth the net written premiums and
statutory combined ratios by line of insurance for Lake States for
1995 and for 1994, the first full year after being acquired by the
Company.
LAKE STATES
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
-------- --------
(dollars in thousands)
PREMIUMS WRITTEN
- ----------------
Commercial:
Automobile $ 8,024 $ 7,622
Workers compensation 21,381 16,157
Commercial multi-peril 21,799 18,744
Other 2,785 1,365
------- -------
Total commercial 53,989 43,888
------- -------
Personal:
Automobile 26,030 24,642
Homeowners 7,985 8,521
------- -------
Total personal 34,015 33,163
------- -------
Total Lake States $88,004 $77,051
======= =======
COMBINED RATIOS<F1>
- ------------------
Commercial:
Automobile 145.4% 107.8%
Workers compensation 81.0% 100.9%
Commercial multi-peril 101.9% 95.6%
Other 43.2% 52.1%
Total commercial 97.6% 97.0%
Personal:
Automobile 112.7% 105.5%
Homeowners 102.4% 136.7%
Total personal 110.1% 113.2%
Total Lake States 102.7% 104.0%
- ----------------
[FN]
<F1> See the definition of combined ratio in "Business-Property and
Casualty Underwriting".
<PAGE> Page 9
RESERVES. Loss reserves are estimates at a given point in
time of what the insurer expects to pay to claimants for claims
occurring on or before such point in time, including claims which
have not yet been reported to the insurer. These are estimates,
and it can be expected that the ultimate liability will exceed or
be less than such estimates. During the loss settlement period,
additional facts regarding individual claims may become known, and
consequently it often becomes necessary to refine and adjust the
estimates of liability.
Harleysville Group maintains reserves for the eventual payment
of losses and loss settlement expenses with respect to both
reported and unreported claims. Loss settlement expense reserves
are intended to cover the ultimate costs of settling all claims,
including investigation and litigation costs relating to such
claims. The amount of loss reserves for reported claims is based
primarily upon a case-by-case evaluation of the type of risk
involved and knowledge of the circumstances surrounding each claim
and the insurance policy provisions relating to the type of loss.
The amounts of loss reserves for unreported claims and loss
settlement expense reserves are determined on the basis of
historical information by line of insurance as adjusted to current
conditions. Inflation is implicitly provided for in the reserving
function through analysis of costs, trends and reviews of
historical reserving results. Reserves are closely monitored and
are recomputed periodically by Harleysville Group and the Mutual
Company using new information on reported claims and a variety of
statistical techniques. With the exception of reserves relating to
some workers compensation long-term disability cases, loss reserves
are not discounted.
<PAGE> Page 10
The following table sets forth a reconciliation of beginning
and ending net reserves for unpaid losses and loss settlement
expenses for the years indicated for the total pooled business on
a statutory basis.
TOTAL POOLED BUSINESS
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- --------- ---------
(in thousands)
Reserves for losses and loss
settlement expenses,
beginning of the year $855,305 $825,028 $784,514
-------- -------- --------
Incurred losses and loss
settlement expenses:
Provision for insured events
of the current year 483,560 497,983 464,399
Decrease in provision for
insured events of prior
years (18,050) (5,534) (2,767)
-------- -------- --------
Total incurred losses
and loss settlement
expenses 465,510 492,449 461,632
-------- -------- --------
Payments:
Losses and loss settlement
expenses attributable to
insured events of the
current year 173,544 207,094 176,908
Losses and loss settlement
expenses attributable to
insured events of prior
years 246,935 255,078 244,210
-------- -------- --------
Total payments 420,479 462,172 421,118
-------- -------- --------
Reserves for losses and loss
settlement expenses,
end of the year $900,336 $855,305 $825,028
======== ======== ========
<PAGE> Page 11
The following table sets forth the development of net reserves
for unpaid losses and loss settlement expenses from 1985 through
1995 for the pooled business of the Mutual Company and Harleysville
Group. "Reserve for losses and loss settlement expenses" sets
forth the estimated liability for unpaid losses and loss settlement
expenses recorded at the balance sheet date for each of the
indicated years. This liability represents the estimated amount of
losses and loss settlement expenses for claims arising in the
current and all prior years that are unpaid at the balance sheet
date, including losses incurred but not reported.
The "Reserves reestimated as a percent of initial reserves"
portion of the table shows the reestimated amount (expressed as a
percentage of the initial reserve) of the previously recorded
liability based on experience of each succeeding year. The
estimate is increased or decreased as payments are made and more
information becomes known about the severity of remaining unpaid
claims. For example, the 1990 liability has developed a deficiency
after five years, in that reestimated losses and loss settlement
expenses are expected to exceed the initial estimated liability
established in 1990 of $676.5 million by 0.3%.
The "Cumulative paid as a percent of current reserves" portion
of the table shows the cumulative losses and loss settlement
expense payments (expressed as a percentage of current reserves)
made in succeeding years for losses incurred prior to the balance
sheet date. For example, the 1990 column indicates that as of
December 31, 1995, payments equal to 83.1% of the currently
reestimated ultimate liability for losses and loss settlement
expenses had been made.
The "Redundancy (deficiency) expressed as a percentage of year
end reserves" shows the cumulative redundancy or deficiency at
December 31, 1995 of the reserve estimate shown on the top line of
the corresponding column. A redundancy in reserves means that
reserves established in prior years exceeded actual losses and loss
settlement expenses or were reevaluated at less than the original
reserved amount. A deficiency in reserves means that the reserves
established in prior years were less than actual losses and loss
settlement expenses or were reevaluated at more than the originally
reserved amount.
The following table includes all 1995 pool participants as if
they had participated in the pooling arrangement in all years
indicated except for acquired pool participant companies, which are
included from their date of acquisition. Under the terms of the
pooling arrangement, Harleysville Group is not responsible for
losses on the pooled business occurring prior to January 1, 1986.
<PAGE> Page 12
<TABLE>
<CAPTION>
TOTAL POOLED BUSINESS
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- --------- --------- --------- ------- -------- -------- -------- -------- --------
(dollars in thousands)
Reserve for losses
and loss
settlement
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
expenses $309,985 $353,516 $425,880 $517,426 $610,128 $676,526 $742,989 $784,514 $825,028 $855,305 $900,336
Reserves
reestimated
as a percent
of initial
reserves:
One year
later 106.9% 101.4% 100.3% 98.8% 98.0% 97.8% 99.5% 99.6% 99.3% 97.9%
Two years
later 108.3 103.7 101.5 97.6 98.1 98.8 99.4 99.2 97.2
Three years
later 110.3 105.3 101.6 98.9 99.7 99.5 99.2 98.7
Four years
later 112.5 105.9 103.4 100.5 100.4 99.9 99.1
Five years
later 113.4 107.1 104.7 101.1 101.1 100.3
Six years
later 114.7 108.6 104.8 101.8 101.7
Seven years
later 115.6 108.9 105.6 102.8
Eight years
later 115.9 109.3 106.5
Nine years
later 116.5 110.4
Ten years
later 117.6
Cumulative
paid as a
percent of
current
reserves:
One year
later 34.2% 32.4% 30.1% 29.8% 32.3% 32.5% 32.2% 31.5% 31.8% 29.5%
Two years
later 53.5 49.9 48.0 49.6 52.6 53.5 52.1 52.0 50.3
Three years
later 64.5 62.4 62.3 64.0 67.4 67.7 65.9 65.0
Four years
later 72.5 71.2 72.2 74.5 76.5 77.4 74.7
Five years
later 77.6 77.6 79.7 80.7 82.8 83.1
Six years
later 82.0 82.7 83.6 84.9 86.6
Seven years
later 85.2 85.3 86.4 87.6
Eight years
later 86.9 87.3 88.4
Nine years
later 88.4 88.8
Ten years
later 89.8
Redundancy
(deficiency)
expressed as
a percent of
year end
reserves (17.6)% (10.4)% (6.5)% (2.8)% (1.7)% (0.3)% 0.9% 1.3% 2.8% 2.1%
</TABLE>
<PAGE> Page 13
Harleysville Group's reserves are derived from those established for the
total pooled business. The terms of the pooling agreement provide that
Harleysville Group is responsible only for pooled losses incurred on or after
the effective date, January 1, 1986. The GAAP loss reserve experience of
Harleysville Group, as reflected in its financial statements, is shown in the
following table which sets forth a reconciliation of beginning and ending net
reserves for unpaid losses and loss settlement expenses for the years
indicated for the business of Harleysville Group only.
HARLEYSVILLE GROUP BUSINESS ONLY
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
--------- --------- ---------
(in thousands)
Reserves for losses and loss
settlement expenses,
beginning of the year $535,452 $499,272 $437,883
-------- -------- --------
Reserves of acquired companies 32,293
-------- -------- --------
Incurred losses and loss
settlement expenses:
Provision for insured
events of the current
year 346,383 352,085 283,526
Increase (decrease) in
provision for insured
events of prior years (10,887) (3,215) 252
-------- -------- --------
Total incurred losses
and loss settlement
expenses 335,496 348,870 283,778
-------- -------- --------
Payments:
Losses and loss settlement
expenses attributable to
insured events of the
current year 129,446 151,133 110,217
Losses and loss settlement
expenses attributable to
insured events of prior
years 164,849 161,557 144,465
-------- -------- --------
Total payments 294,295 312,690 254,682
-------- -------- --------
Reserves for losses and loss
settlement expenses, end
of the year $576,653 $535,452 $499,272
======== ======== ========
<PAGE> Page 14
Harleysville Group recognized a decrease in the provision for insured
events of prior years (favorable development) of $10.9 and $3.2 million in
1995 and 1994, respectively. The favorable development primarily related
to lower than expected claim severity in workers compensation. The
development in 1993 was not significant.
The following table is a reconciliation of reserves for losses and
loss settlement expenses based on GAAP to those based on SAP.
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
-------- -------- --------
(in thousands)
Gross reserves for losses and
loss settlement expenses,
based on GAAP $645,941 $603,088 $560,811
Reinsurance recoverable 69,288 67,636 61,539
-------- -------- --------
Net reserves for losses and
loss settlement expenses,
based on GAAP 576,653 535,452 499,272
Salvage and subrogation
recoverable on property
lines 3,474
-------- -------- --------
Reserves for losses and loss
settlement expenses, based
on SAP $576,653 $535,452 $502,746
======== ======== ========
The following table sets forth the development of the 1994, 1993 and
1992 net reserves for losses and loss settlement expenses, reinsurance
recoverable and gross reserves for losses and loss settlement expenses as
of December 31, 1995:
1994 1993 1992
--------- --------- ---------
(in thousands)
Gross re-estimated reserve $594,625 $551,080 $477,960
Re-estimated recoverable 70,060 67,445 47,232
-------- -------- --------
Net re-estimated reserve $524,565 $483,635 $430,728
======== ======== ========
Net cumulative redundancy $(10,887) $(15,637) $ (7,155)
======== ======== ========
The following table sets forth the development of net reserves for
unpaid losses and loss settlement expenses for Harleysville Group from 1986,
the year of the Company's initial public offering and the commencement of
the pooling arrangement, to 1995. The effect of changes to the pooling
agreement participation is reflected in this table. For example, the
January 1, 1989 increase in Harleysville Group's pooling participation
from 35% to 50% is reflected in the first line of the 1989 column. Amounts
<PAGE> Page 15
of assets equal to increases in net liabilities was transferred to
Harleysville Group from the Mutual Company in conjunction with each
respective pooling change. The amount of the assets transferred has been
netted against and has reduced the cumulative amounts paid for years
prior to the pooling changes. For example, the 1988 column of the
"Cumulative paid as a percent of current reserves" portion of the table
reflects the assets transferred in conjunction with the 1989 increase in
the pooling percentage from 35% to 50% as a decrease netted in the "one
year later" line.
<PAGE> Page 16
<TABLE>
<CAPTION>
HARLEYSVILLE GROUP BUSINESS
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- -------- -------- --------- -------- -------- -------- ------- -------- -------
(dollars in thousands)
<S>
Reserve for
losses and
loss
settlement
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
expenses $56,082 $117,058 $166,994 $259,522 $300,197 $406,619 $437,883 $499,272 $535,452 $576,653
Reserves
reestimated as
a percent
of initial
reserves:
One year
later 99.2% 98.3% 96.1% 97.1% 97.1% 99.8% 100.1% 99.4% 98.0%
Two years
later 100.4 97.6 93.4 96.3 98.1 99.6 99.3 96.9
Three years
later 99.1 96.6 94.4 98.0 98.7 99.2 98.4
Four years
later 98.7 98.5 96.3 98.7 99.0 98.5
Five years
later 99.0 99.9 97.0 99.3 98.8
Six years
later 101.3 99.6 97.7 99.3
Seven years
later 101.3 100.5 98.3
Eight years
later 101.4 100.5
Nine years
later 101.7
Cumulative paid
as a percent
current
reserves:
One year
later 25.9% 35.2% 17.7% 35.3% 22.8% 33.7% 33.5% 33.4% 31.4%
Two years
later 47.2 43.4 44.1 49.1 49.2 54.7 54.6 52.7
Three years
later 56.2 63.0 56.6 67.8 67.4 69.0 67.9
Four years
later 69.8 71.5 72.8 79.6 79.5 78.0
Five years
later 75.5 82.8 82.6 87.2 86.3
Six years
later 84.2 88.7 88.8 91.6
Seven years
later 88.4 92.5 92.0
Eight years
later 90.9 94.4
Nine years
later 91.5
Redundancy
(deficiency)
expressed as
a percent of
year end
reserves (1.7)% (0.5)% 1.7% 0.7% 1.2% 1.5% 1.6% 3.1% 2.0%
</TABLE>
<PAGE> Page 17
REINSURANCE. Harleysville Group follows the customary industry
practice of reinsuring a portion of its exposures and paying to the
reinsurers a portion of the premiums received on all policies. Insurance
is ceded principally to reduce net liability on individual risks and to
protect against catastrophic losses. Reinsurance does not legally
discharge an insurer from its primary liability for the full amount of
the policies, although it does make the assuming reinsurer liable to the
insurer to the extent of the reinsurance ceded. Therefore, a ceding
company is subject to credit risk with respect to its reinsurers.
The reinsurance described below is maintained for the participants
in the pooling arrangement with the Mutual Company. Reinsurance premiums
and recoveries are allocated according to pooling percentages.
Reinsurance for property and auto physical damage losses is currently
maintained under a per risk excess of loss treaty affording recovery
to $4,250,000, above a retention paid by the pool participants of $750,000.
In addition, the Company's subsidiaries (other than Lake States) and
the Mutual Company and its wholly-owned subsidiaries are reinsured under
a catastrophe reinsurance treaty effective for one year from July 1, 1995
which provides coverage for 85% of up to $127 million in excess of a
retention of $20 million for any given catastrophe. Accordingly, pursuant
to the terms of the treaty, the Company's maximum recovery would be $108
million for any catastrophe involving an insured loss equal to or
greater than $147 million. The treaty includes reinstatement provisions
providing for coverage for a second catastrophe and requiring payment of
an additional premium in the event of a first catastrophe occurring.
Harleysville Group has not purchased funded catastrophe covers.
Casualty reinsurance (including liability and workers compensation)
is currently maintained under an excess of loss treaty affording recovery
to $19,000,000 above a retention of $1,000,000 each loss occurrence.
In addition, there is reinsurance to protect Harleysville Group from large
workers compensation losses. For umbrella liability coverages,
reinsurance protection up to $4,000,000 is provided over a retention of
$1,000,000.
Effective January 1, 1996, Lake States reinsurance for property, casualty
and umbrella liability coverages are under the same treaties described
above. Furthermore, Lake States has purchased a lower layer of reinsurance
from the Mutual Company on each of these coverages with retentions of
$300,000, $250,000 and $250,000, respectively. Effective January 1, 1996,
Lake States has purchased property catastrophe reinsurance from the
Mutual Company affording recovery of 95% of $19,000,000 in excess of
$1,000,000. Since the premiums and recoveries for such reinsurance would
be subject to the pooling arrangement, Harleysville Group's participation is
eliminated in consolidation.
<PAGE> Page 18
The terms and charges for reinsurance coverage are typically negotiated
annually. The reinsurance market is subject to conditions which are
similar to those in the direct property and casualty insurance market,
and there can be no assurance that reinsurance will remain available to the
Company to the same extent and at the same cost currently maintained by
the Company.
The Company considers numerous factors in choosing reinsurers, the
most important of which is the financial stability of the reinsurer. The
Company has not experienced any material collectibility problems for
its reinsurance recoverables.
COMPETITION. The property and casualty insurance industry is highly
competitive on the basis of both price and service. There are numerous
companies competing for this business in the geographic areas where the
Harleysville Group operates, many of which are substantially larger and
have considerably greater financial resources than Harleysville Group.
In addition, because the insurance products of Harleysville Group and the
Mutual Company are marketed exclusively through independent insurance
agencies, most of which represent more than one company, Harleysville Group
faces competition within each agency.
INVESTMENTS
An important element of the financial results of Harleysville Group is
the return on invested assets. Harleysville Group's investment objective
is to maintain a widely diversified fixed maturities portfolio structured
to maximize after-tax investment income while minimizing credit risk
through investments in high quality instruments. Its objective also is to
provide adequate funds to pay claims without forced sales of investments.
During 1995 and 1994, Harleysville Group invested $30 million in equity
securities with the objective of capital appreciation and expects to
gradually increase this investment to $48 million in the next few years.
At December 31, 1995, the investment portfolio did not contain any
securities that were rated at less than investment grade, and it did not
contain any real estate or mortgage loans.
Harleysville Group has adopted and follows an investment philosophy
which precludes the purchase of non-investment grade securities. However,
due to uncertainties in the economic environment, it is possible that the
quality of investments held in Harleysville Group's portfolio may change.
<PAGE> Page 19
The following table shows the composition of Harleysville Group's
fixed maturity investment portfolio at amortized cost, excluding short-
term investments, by rating as of December 31, 1995:
DECEMBER 31, 1995
---------------------
AMOUNT PERCENT
-------- -------
RATING<F1> (dollars in thousands)
---------
U.S. Treasury and U.S. agency bonds<F2> $234,273 23.9%
Aaa 171,967 17.6%
Aa 314,763 32.2%
A 250,319 25.6%
Baa 6,730 .7%
-------- -----
Total $978,052 100.0%
======== =====
- ----------------
[FN]
<F1> Ratings assigned by Moody's Investors Services, Inc.
<F2> Includes GNMA pass-through obligations and collateralized mortgage
obligations.
Harleysville Group invests in both taxable and tax-exempt
securities as part of its strategy to maximize after-tax income.
Such strategy considers, among other factors, the impact of the
alternative minimum tax. Tax-exempt bonds made up approximately
37%, 42% and 44% of the total investment portfolio at December 31,
1995, 1994 and 1993, respectively.
The following table shows the composition of Harleysville
Group's investment portfolio at carrying value, excluding short-
term investments, by type of security as of December 31, 1995:
DECEMBER 31, 1995
---------------------
AMOUNT PERCENT
-------- -------
(dollars in thousands)
Fixed maturities:
U.S. Treasury obligations $ 55,662 5.3%
U.S. agency obligations 75,464 7.3%
GNMA pass-through obligations 3,025 .3%
Collateralized mortgage obligations 115,790 11.1%
Obligations of states and political
subdivisions 383,026 36.8%
Corporate securities 373,474 35.9%
---------- -----
Total fixed maturities 1,006,441 96.7%
---------- -----
Equity securities 34,584 3.3%
---------- -----
Total $1,041,025 100.0%
========== =====
<PAGE> Page 20
Investment results of Harleysville Group's fixed maturity
investment portfolio for the three years ended December 31, 1995
are shown in the following table:
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
--------- --------- ---------
(dollars in thousands)
Invested assets<F1> $960,114 $917,368 $796,266
Investment income<F2> $ 67,428 $ 63,293 $ 59,143
Average yield 7.0% 6.9% 7.4%
- ---------------
[FN]
<F1> Average of the aggregate invested amounts at amortized cost at
the beginning and end of the period, adjusted for the 1993 Lake
States acquisition and proceeds from the related public note
offering.
<F2> Investment income does not include investment expenses, realized
investment gains or losses or provision for income taxes.
The following table indicates the composition of Harleysville
Group's fixed maturity investment portfolio at carrying value,
excluding short-term investments, by time to maturity as of
December 31, 1995:
DECEMBER 31, 1995
---------------------
AMOUNT PERCENT
-------- -------
(dollars in thousands)
DUE IN<F1>
---------
1 year or less $ 46,041 4.6%
Over 1 year through 5 years 206,711 20.5%
Over 5 years through 10 years 357,976 35.6%
Over 10 years 276,898 27.5%
---------- -----
887,626 88.2%
Mortgage-backed securities 118,815 11.8%
---------- -----
Total $1,006,441 100.0%
========== =====
- ----------------
[FN]
<F1> Based on stated maturity dates with no prepayment assumptions.
Actual maturities may differ because borrowers may have the
right to call or prepay obligations with or without call or
prepayment penalties.
The average life of Harleysville Group's investment portfolio
as of December 31, 1995 was approximately 7 years.
<PAGE> Page 21
REGULATION
Insurance companies are subject to supervision and regulation
in the states in which they transact business. Such supervision
and regulation relate to numerous aspects of an insurance company's
business and financial condition. The primary purpose of such
supervision and regulation is the protection of policyholders. The
extent of such regulation varies, but generally derives from state
statutes which delegate regulatory, supervisory and administrative
authority to state insurance departments. Accordingly, the
authority of the state insurance departments includes the
establishment of standards of solvency which must be met and
maintained by insurers, the licensing to do business of insurers
and agents, the nature of and limitations on investments, premium
rates for property and casualty insurance, the provisions which
insurers must make for current losses and future liabilities, the
deposit of securities for the benefit of policyholders and the
approval of policy forms. Such insurance departments also conduct
periodic examinations of the affairs of insurance companies and
require the filing of annual and other reports relating to the
financial condition of insurance companies.
All of the states in which Harleysville Group and the Mutual
Company do business have guaranty fund laws under which insurers
doing business in such states can be assessed up to 2% of annual
written premiums earned by the insurer in that state in order to
fund policyholder liabilities of insolvent insurance companies.
Under these laws in general, an insurer is subject to assessment,
depending upon its market share of a given line of business, to
assist in the payment of policyholder and third party claims
against insolvent insurers. Since the likelihood and amount of any
particular assessment cannot be determined until an insolvency has
occurred, potential liabilities for assessments are not reflected
in the reserves of insurers. During the five years ended December
31, 1995, the amount of such insolvency assessments paid by
Harleysville Group and the Mutual Company was not material.
State laws also require Harleysville Group to participate in
involuntary insurance programs for automobile insurance, as well as
other property and casualty lines, in states in which Harleysville
Group operates. These programs include joint underwriting
associations, assigned risk plans, fair access to insurance
requirements ("FAIR") plans, reinsurance facilities and wind storm
plans. These state laws generally require all companies that write
lines covered by these programs to provide coverage (either
directly or through reinsurance) for insureds who cannot obtain
insurance in the voluntary market. The legislation creating these
programs usually allocates a pro rata portion of risks attributable
to such insureds to each company on the basis of direct written
premiums or the number of automobiles insured. Generally, state
law requires participation in such programs as a condition to doing
business. The loss ratio on insurance written under involuntary
programs generally has been greater than the loss ratio on
insurance in the voluntary market.
<PAGE> Page 22
State insurance holding company acts regulate insurance
holding company systems. Each insurance company in the holding
company system is required to register with the insurance
supervisory agency of its state of domicile and furnish certain
information concerning the operations of companies within the
holding company system that may materially affect the operations,
management or financial condition of the insurer within the system.
Such laws further require disclosure of material transactions
including the payment of "extraordinary dividends" from the
insurance subsidiaries to the Company.
Insurance holding company acts require that all transactions
within the holding company system affecting the Mutual Company and
the Company's insurance subsidiaries must be fair and equitable.
Further, approval of the applicable insurance commissioner is
required prior to the consummation of transactions affecting the
control of an insurer.
The property and casualty insurance industry has been subject
to significant public scrutiny and comment primarily due to
concerns regarding solvency issues, rising insurance costs, and the
industry's methods of operations. Accordingly, new regulations and
legislation are being proposed to bring the insurance industry
under federal control; to strengthen state oversight, particularly
in the field of solvency and investments; to further restrict an
insurer's ability to underwrite and price risks; and to impose new
taxes and assessments. It is not possible to predict whether, in
what form or in what jurisdictions any of these proposals might be
adopted or the effect, if any, on the Company.
The Company's insurance subsidiaries are restricted by the
insurance laws of their respective states of domicile as to the
amount of dividends they may pay to the Company without the prior
approval of the respective state regulatory authorities.
Generally, the maximum dividend that may be paid by an insurance
subsidiary during any year without prior regulatory approval is
limited to a stated percentage of that subsidiary's statutory
surplus as of a certain date, or adjusted net income of the
subsidiary, for the preceding year. Applying current regulatory
restrictions as of December 31, 1995, the Company's insurance
subsidiaries would have been able to pay, without prior regulatory
approval, approximately $37.6 million in dividends to the Company.
The Company's insurance subsidiaries have not paid any dividends to
Harleysville Group Inc. in 1995, 1994 or 1993.
The National Association of Insurance Commissioners (NAIC) has
adopted risk-based capital (RBC) standards that require insurance
companies to calculate and report statutory capital and surplus
needs based on a formula measuring underwriting, investment and
other business risks inherent in an individual company's
operations. These RBC standards have not affected the operations
of Harleysville Group since each of the Company's insurance
subsidiaries have statutory capital and surplus in excess of RBC
requirements.
<PAGE> Page 23
Harleysville Group is required to file financial statements
for its subsidiaries, prepared by using statutory accounting
practices, with state regulatory authorities. SAP differs from
GAAP primarily in the recognition of revenue and expense. The
adjustments necessary to reconcile net income and stockholders'
equity determined by using SAP to net income and stockholders'
equity determined in accordance with GAAP are as follows:
NET INCOME STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31 DECEMBER 31,
-------------------------------- ----------------------
1995 1994 1993 1995 1994
-------- -------- -------- --------- ---------
(in thousands)
SAP amounts $36,063 $16,674 $26,103 $303,675 $262,841
Adjustments:
Deferred
policy
acquisition
costs 6,619 143 1,820 59,109 52,490
Deferred
income
taxes (502) 5,647 2,949 23,875 38,767
Unrealized
investment
gains
(losses) 27,834 (8,215)
Other, net (608) (4,579) (28) 8,322 3,527
Holding
company<F1> (241) 569 1,096 (77,806) (72,486)
------- ------- ------- -------- --------
GAAP amounts $41,331 $18,454 $31,940 $345,009 $276,924
======= ======= ======= ======== ========
[FN]
<F1> Represents the GAAP income and equity amounts for Harleysville
Group Inc., excluding the earnings of and investment in
subsidiaries.
RELATIONSHIP WITH THE MUTUAL COMPANY
Harleysville Group's operations are interrelated with the
operations of the Mutual Company due to the pooling arrangement and
other factors. The Mutual Company owns approximately 56% of
Harleysville Group. Harleysville Group employees provide a variety
of services to the Mutual Company and its wholly-owned
subsidiaries. The cost of facilities and employees required to
conduct the business of both companies is charged on a cost-
allocated basis. Harleysville Group also manages the operations of
the Mutual Company and its wholly owned subsidiaries pursuant to a
management agreement which commenced January 1, 1993 under which
Harleysville Group receives a management fee. Harleysville Group
also manages the operations of Berkshire Mutual Insurance Company,
<PAGE> Page 24
a small property and casualty insurance company, pursuant to a
management services agreement. Harleysville Group received $6.9
million, $6.6 million and $4.7 million for the years ended December
31, 1995, and 1994 and 1993 for all such management services.
All of the Company's officers are officers of the Mutual
Company, and six of the Company's nine directors are directors of
the Mutual Company. A coordinating committee exists to review and
evaluate the pooling agreement and is responsible for matters
involving actual or potential conflicts of interest between the two
companies. The decisions of the coordinating committee are binding
on the two companies. No intercompany transaction can be
authorized by the coordinating committee unless the Company's
committee members conclude that such transaction is fair and
equitable to Harleysville Group. The coordinating committee
consists of seven non-employee directors, three from Harleysville
Group Inc. and three from the Mutual Company all of whom are not
members of both Boards and one, the Chairman, who is a member of
both Boards. For information concerning the members of the
coordinating committee, see "The Board of Directors and its
Committees" section on pages 5 to 6 of the Company's proxy
statement relating to the annual meeting of the stockholders to be
held April 24, 1996 which is incorporated by reference in this Form
10-K Report.
The Mutual Company leases the home office from Harleysville
Group with which it shares most of the facility. Rental income
under the lease was $2,750,000, $2,668,000 and $2,569,000 for 1995,
1994 and 1993, respectively. Harleysville Group believes that the
lease terms are no less favorable to it than if the property were
leased to a non-affiliate.
In connection with the acquisition of Lake States, the
Company borrowed $44 million from the Mutual Company on a short-
term basis. It was repaid with the proceeds of a public note
offering. In connection with the acquisition of Mid-America and
New York Casualty, the Company borrowed approximately $18.5 million
from the Mutual Company. See "Management's Discussion and Analysis
of Results of Operations and Financial Condition -- Liquidity and
Capital Resources" and Notes 2 and 8 of the Notes to Consolidated
Financial Statements. For additional information with respect to
transactions with the Mutual Company, see Note 3 of the Notes to
Consolidated Financial Statements.
EMPLOYEES
All employees are paid by Harleysville Group and, accordingly,
are considered to be employees of Harleysville Group. As of
December 31, 1995, there were 2,508 employees. They provide a
variety of services to the Mutual Company and its wholly-owned
subsidiaries. See "Business-Relationship with the Mutual Company"
and Note 3(c) of the Notes to Consolidated Financial Statements.
<PAGE> Page 25
ITEM 2. PROPERTIES.
- ------- -----------
The buildings which house the headquarters of Harleysville
Group and the Mutual Company are leased by the Mutual Company from
a subsidiary of Harleysville Group. See "Business-Relationship
with the Mutual Company." The Mutual Company charges Harleysville
Group for an appropriate portion of the rent under an intercompany
allocation agreement. The buildings containing the headquarters of
Harleysville Group and the Mutual Company have approximately
220,000 square feet of office space. Harleysville Group also rents
office facilities in certain of the states in which it does
business.
ITEM 3. LEGAL PROCEEDINGS.
- ------- ------------------
Harleysville Group is a party to numerous lawsuits arising in
the ordinary course of its insurance business. Harleysville Group
believes that the resolution of these lawsuits will not have a
material adverse effect on its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
No matter was submitted during the fourth quarter of 1995 to
a vote of holders of the Company's Common Stock.
<PAGE> Page 26
EXECUTIVE OFFICERS OF THE COMPANY
All of the persons listed below are executive officers of
Harleysville Group or its affiliates. There are no family
relationships between any of the Company's executive officers and
directors, and there are no arrangements or understandings between
any of these officers and any other person pursuant to which the
officer was selected as an officer.
Name Age Position
- --------------------- --- ----------------------------------
Walter R. Bateman, II 48 President, Chief Executive Officer
and Director
Thomas E. Roden 60 Executive Vice President
Mark R. Cummins 39 Senior Vice President, Chief
Investment Officer and Treasurer
Bruce J. Magee 41 Senior Vice President and
Chief Financial Officer
Spencer M. Roman 47 Senior Vice President
Robert G. Whitlock, Jr. 39 Senior Vice President and Chief
Actuary
Roger J. Beekley 53 Vice President and Controller
Roger A. Brown 47 Vice President, Secretary and
General Counsel
Walter R. Bateman, II has been Chief Executive Officer since
January 1, 1994 and has been President, Chief Operating Officer and
Director of Harleysville Group and the Mutual Company since 1992.
Mr. Bateman was Executive Vice President of Harleysville Group and
the Mutual Company responsible for all insurance operations from
1991 to 1992.
Thomas E. Roden is Executive Vice President of Harleysville
Group and the Mutual Company. He is in charge of insurance
operations for both companies and was previously in charge of
underwriting for both companies since 1983.
Mark R. Cummins has been Senior Vice President, Chief
Investment Officer and Treasurer of Harleysville Group and the
Mutual Company since 1992. Since January 1, 1996, he also has been
in charge of various administrative areas. Mr. Cummins was
employed at Selective Insurance Company from 1982 to 1992, most
recently as Vice President in the investment and treasury
department.
Bruce J. Magee has been Senior Vice President and Chief
Financial Officer of Harleysville Group and the Mutual Company
since January 1, 1994. From 1986 to 1993 he was Vice President and
Controller of Harleysville Group.
<PAGE> Page 27
Spencer M. Roman has been Senior Vice President since 1993.
Since January 1, 1996, he has been in charge of marketing, claims,
underwriting and policy and information services. He was in charge
of marketing for the three preceding years. From 1970 to 1993 he
was employed by General Accident Insurance Company, most recently
as Vice President of Marketing/Planning.
Robert G. Whitlock, Jr. has been Senior Vice President and
Chief Actuary of Harleysville Group and the Mutual Company since
February 1995. He was Vice President and Actuary before assuming
his present position and was in charge of various actuarial
functions since 1991.
Roger J. Beekley has been Vice President and Controller of
Harleysville Group since January 1, 1994 and is Vice President and
Controller of the Mutual Company, a position he has held since
1982.
Roger A. Brown has been Vice President, Secretary and General
Counsel of Harleysville Group and the Mutual Company since April
1995. He was Assistant General Counsel from 1986 until assuming
his present position.
<PAGE> Page 28
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
- ------- ----------------------------------------------------
STOCKHOLDER MATTERS.
- -------------------
The "Market for Common Stock and Related Security Holder
Matters" section from the Company's annual report to stockholders
for the year ended December 31, 1995, which is included as Exhibit
(13)(D) to this Form 10-K Report, is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
The "Selected Consolidated Financial Data" section from the
Company's annual report to stockholders for the year ended December
31, 1995, which is included as Exhibit (13)(A) to this Form 10-K
Report, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------- -----------------------------------------------------------
AND RESULTS OF OPERATIONS.
- --------------------------
The "Management's Discussion and Analysis of Results of
Operations and Financial Condition" section from the Company's
annual report to stockholders for the year ended December 31, 1995,
which is included as Exhibit (13)(B) to this Form 10-K Report, is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
The consolidated financial statements from the Company's
annual report to stockholders for the year ended December 31, 1995,
which is included as Exhibit (13)(C) to this Form 10-K Report, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- ------- -----------------------------------------------------------
AND FINANCIAL DISCLOSURE.
- -------------------------
None.
<PAGE> Page 29
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- ---------------------------------------------------
The "Election of Directors" section, which provides
information regarding the Company's directors, on pages 3 to 5 of
the Company's proxy statement relating to the annual meeting of
stockholders to be held April 24, 1996, is incorporated herein by
reference.
The information concerning executive officers called for by
Item 10 of Form 10-K is set forth in Part I of this Annual Report
on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
The "Executive Compensation and Other Information" section on
pages 8 to 13 and the "Compensation of Directors" section on pages
6 to 7 of the Company's proxy statement relating to the annual
meeting of stockholders to be held April 24, 1996, are incorporated
herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------- ---------------------------------------------------
MANAGEMENT.
- -----------
The "Beneficial Ownership of Common Stock" section on pages 2
to 3 of the Company's proxy statement relating to the annual
meeting of stockholders to be held April 24, 1996, are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
The "Certain Transactions" section on pages 21 to 22 of the
Company's proxy statement relating to the annual meeting of
stockholders to be held April 24, 1996, is incorporated herein by
reference.
<PAGE> Page 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
- -------- ------------------------------------------------------
FORM 8-K.
- ---------
(a) (1) The following consolidated financial statements are filed
as a part of this report:
Consolidated Financial Statements PAGE
------
Consolidated Balance Sheets as of
December 31, 1995 and 1994 29*
Consolidated Statements of Income for
Each of the Years in the Three-year
Period Ended December 31, 1995 30*
Consolidated Statements of Stockholders'
Equity for Each of the Years in the Three-
year Period Ended December 31, 1995 31*
Consolidated Statements of Cash Flows
for Each of the Years in the Three-year
Period Ended December 31, 1995 32*
Notes to Consolidated Financial Statements 33*
Independent Auditors' Report 42*
(2) The following consolidated financial statement
schedules for the years 1995, 1994 and 1993
are submitted herewith:
Financial Statement Schedules
Schedule I. Summary of Investments - Other
Than Investments in Related
Parties 38
Schedule III. Condensed Financial Information
of Parent Company 39
Schedule V. Supplementary Insurance
Information 42
Schedule VI. Reinsurance 43
Schedule X. Supplemental Insurance Information
Concerning Property and Casualty
Subsidiaries 44
Independent Auditors' Consent and Report on Schedules
(filed as Exhibit 23)
All other schedules are omitted because they are not
applicable or the required information is included in the financial
statements or notes thereto.
- --------------------
*Refers to the respective page of Harleysville Group Inc.'s
1995 Annual Report to Stockholders. The Consolidated Financial
Statements and Independent Auditors' Report, which are included as
Exhibit (13)(C), are incorporated herein by reference. With the
exception of the portions of such Annual Report specifically
incorporated by reference in this Item and Items 5, 6, 7 and 8,
such Annual Report shall not be deemed filed as part of this Form
10-K or otherwise subject to the liabilities of Section 18 of the
Securities Exchange Act of 1934.
<PAGE> Page 31
(3) Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -------------------------------------------------
( 3)(A) Amended and restated Certificate of Incor-
poration of Registrant - incorporated herein
by reference to Exhibit 3(A) to the
Registrant's 10-Q filed May 10, 1994.
( 3)(B) Amended and Restated By-laws of Registrant -
incorporated herein by reference to Exhibit
4(B) to the Post-Effective Amendment No. 12 of
Registrant's Form S-3 Registration Statement
No. 33-90810 filed October 10, 1995.
( 4) Indenture between the Registrant and CoreStates
Bank, N.A., dated as of November 15, 1993 -
incorporated herein by reference to Exhibit (4)
to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993.
*(10)(A) Deferred Compensation Plan, as amended, for
Directors of Harleysville Mutual Insurance
Company, Harleysville Group Inc. and
Harleysville Life Insurance Company -
incorporated herein by reference to Exhibit
10(A) to the Registrant's Form S-3 Registration
Statement No. 33-28948 filed May 25, 1989.
*(10)(B) Harleysville Insurance Companies Director
Deferred Compensation Plan Approved by the
Board of Directors November 25, 1987 -
incorporated herein by reference to Exhibit
10(B) to the Registrant's Form S-3 Registration
Statement No. 33-28948 filed May 25, 1989.
*(10)(C) Harleysville Group Inc. Non-qualified Deferred
Compensation Plan - incorporated herein by
reference to Exhibit 10(C) to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1993.
*(10)(D) Pension Plan of Harleysville Group Inc. and
Associated Employers dated December 1, 1994 and
amendment dated February 6, 1995 - incorporated
herein by reference to Exhibit 10(D) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
*(10)(E) Harleysville Insurance Companies Senior
Executive Supplemental Retirement Plan dated
May 25, 1982 - incorporated herein by reference
to Exhibit 10(E) to the Registrant's Form S-1
Registration Statement No. 33-4885 declared
effective May 23, 1986.
<PAGE> Page 32
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------
*(10)(F) Harleysville Mutual Insurance Company/
Harleysville Group Inc. Senior Management
Incentive Bonus Plan As Amended and Restated
December 22, 1993 - incorporated herein by
reference to Exhibit 10(F) to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1993.
(10)(G) Proportional Reinsurance Agreement effective
as of January 1, 1986 among Harleysville Mutual
Insurance Company, Huron Insurance Company and
Harleysville Insurance Company of New Jersey -
incorporated herein by reference to Exhibit
10(N) to the Registrant's Form S-1 Registration
Statement No. 33-4885 declared effective May
23, 1986.
*(10)(H) Equity Incentive Plan of Registrant, as amended
- incorporated herein by reference to Exhibit
(10)(I) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1990.
(10)(I) Tax Allocation Agreement dated December 24,
1986 among Harleysville Insurance Company of
New Jersey, Huron Insurance Company, Worcester
Insurance Company, McAlear Associates, Inc. and
the Registrant - incorporated herein by
reference to Exhibit 10(Q) to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1986.
(10)(J) Amended and Restated Financial Tax Sharing
Agreement dated March 20, 1995 among Huron
Insurance Company, Harleysville Insurance
Company of New Jersey, Worcester Insurance
Company, Harleysville-Atlantic Insurance
Company, New York Casualty Insurance Company,
Connecticut Union Insurance Company, Great Oaks
Insurance Company, Lakes States Insurance
Company and the Registrant - incorporated
herein by reference to Exhibit (10)(L) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
(10)(K) Amendment, effective July 1, 1987, to the
Proportional Reinsurance Agreement effective
January 1, 1986 among Harleysville Mutual
Insurance Company, Huron Insurance Company,
Harleysville Insurance Company of New Jersey
and Atlantic Insurance Company of Savannah -
incorporated herein by reference to the
Registrant's Form 8-K Report dated July 1,
1987.
<PAGE> Page 33
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------
(10)(L) Amendment, effective January 1, 1989, to the
Proportional Reinsurance Agreement effective
January 1, 1986 among Harleysville Mutual
Insurance Company, Huron Insurance Company,
Harleysville Insurance Company of New Jersey,
Atlantic Insurance Company of Savannah and
Worcester Insurance Company - incorporated
herein by reference to Exhibit 10(U) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31,
1988.
(10)(M) Amendment, effective January 1, 1991, to the
Proportional Reinsurance Agreement effective
January 1, 1986 among Harleysville Mutual
Insurance Company, Huron Insurance Company,
Harleysville Insurance Company of New Jersey,
Atlantic Insurance Company of Savannah,
Worcester Insurance Company, Phoenix General
Insurance Company and New York Casualty
Insurance Company - incorporated herein by
reference to Exhibit (10)(O) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1990.
(10)(N) Amendments, effective January 1, 1995 and 1993,
respectively, to the Proportional Reinsurance
Agreement effective January 1, 1986 among
Harleysville Mutual Insurance Company, Huron
Insurance Company, Harleysville Insurance
Company of New Jersey, Harleysville-Atlantic
Insurance Company, Worcester Insurance Company,
Connecticut Union Insurance Company, New York
Casualty Insurance Company and Great Oaks
Insurance Company - incorporated herein by
reference to Exhibit (10)(P) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
(10)(0) Amendment, effective January 1, 1996 to the
Proportional Reinsurance Agreement effective
January 1, 1986 among Harleysville Mutual
Insurance Company, Huron Insurance Company,
Harleysville Insurance Company of New Jersey,
Harleysville-Atlantic Insurance Company,
Worcester Insurance Company, Connecticut Union
Insurance Company, New York Casualty Insurance
Company, Great Oaks Insurance Company and
Pennland Insurance Company.
<PAGE> Page 34
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------
*(10)(P) Long-Term Incentive Plan for senior officers of
Harleysville Mutual Insurance Company and
Registrant - incorporated herein by reference
to Exhibit 10(V) to the Registrant's Annual
Report on Form 10-K for the year ended December
31, 1988.
(10)(Q) Lease effective January 1, 1995 between Harleys-
ville, Ltd. and Harleysville Mutual Insurance
Company - incorporated herein by reference to
Exhibit (10)(R) to the Registrant's Annual
Report on Form 10-K for the year ended December
31, 1994.
*(10)(R) 1990 Directors' Stock Option Program of
Registrant - incorporated herein by reference
to Exhibit (10)(R) to the Registrant's Annual
Report on Form 10-K for the year ended December
31, 1990.
*(10)(S) 1995 Directors' Stock Option Program of
Registrant - incorporated herein by reference
to Exhibit (10)(S) to the Registrant's Annual
Report on Form 10-K for the year ended December
31, 1993.
(10)(T) Loan Agreement dated as of March 19, 1991 by
and between Harleysville Group Inc. and
Harleysville Mutual Insurance Company -
incorporated herein by reference to Exhibit
10.5 to the Registrant's Form S-3 Registration
Statement No. 33-41845 filed September 17,
1991.
(10)(U) Form of Management Agreements dated January 1,
1994 between Harleysville Group Inc. and
Harleysville Mutual Insurance Company,
Harleysville-Garden State Insurance Company,
Pennland Insurance Company, Berkshire Mutual
Insurance Company and Harleysville Life
Insurance Company - incorporated herein by
reference to Exhibit (10)(U) to the
Registrant's Annual Statement on Form 10-K for
the year ended December 31, 1993.
<PAGE> Page 35
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------
(10)(V) Form of Salary Allocation Agreements dated
January 1, 1993 between Harleysville Group Inc.
and Harleysville Mutual Insurance Company,
Harleysville-Garden State Insurance Company,
Pennland Insurance Company, Berkshire Mutual
Insurance Company and Harleysville Life
Insurance Company - incorporated herein by
reference to Exhibit (10)(U) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1992.
(10)(W) Equipment and Supplies Allocation Agreement
dated January 1, 1993 between Harleysville
Mutual Insurance Company and Harleysville Group
Inc. - incorporated herein by reference to
Exhibit (10)(V) to the Registrant's Annual
Report on Form 10-K for the year ended December
31, 1992.
*(10)(X) 1992 Incentive Stock Option Plan for Employees
Amended and Restated August 26, 1992 -
incorporated herein by reference to Exhibit
(10)(W) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992.
*(10)(Y) Harleysville Group Inc. Supplemental Pension
Plan dated May 25, 1994 - incorporated herein
by reference to Exhibit (10)(AA) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
(13)(A) Selected Consolidated Financial Data from the
Company's 1995 annual report to stockholders.
(13)(B) Management's Discussion and Analysis of Results
of Operations and Financial Condition from the
Company's 1995 annual report to stockholders.
(13)(C) Consolidated financial statements from the
Company's 1995 annual report to stockholders.
(13)(D) Market for Common Stock and Related Security
Holder Matters from the Company's 1995 annual
report to stockholders.
(21) Subsidiaries of Registrant.
(23) Independent Auditors' Consent and Report on
Schedules.
<PAGE> Page 36
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------
(28) Statement re Registrant.
P(28)(A) Schedule P, of the 1995 statutory annual
statement, for the total pooled business of
Harleysville Mutual Insurance Company and the
pool participant property and casualty insur-
ance subsidiaries of Harleysville Group Inc.
P(28)(B) Schedule P, of the 1995 statutory annual
statement of Lake States Insurance Company.
(99) Form 11-K Annual Report for the Harleysville
Group Inc. Employee Stock Purchase Plan for the
year ended December 31, 1995.
- ----------------
* Management contract or compensatory plan, contract or arrangement
filed pursuant to Item 14(c) of this report.
P - Filed in paper format pursuant to Rule 311, paragraph (c).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
last quarter of the period covered by this report.
<PAGE> Page 37
HARLEYSVILLE GROUP
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
(in thousands)
AMOUNT
AT WHICH
SHOWN IN
THE BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- ------------------------- ---------- ---------- -----------
Fixed maturities:
United States
government and
government agencies
and authorities $ 124,822 $ 131,998 $ 131,126
States, municipalities
and political
subdivisions 372,727 396,263 383,026
Mortgage-backed
securities 111,646 118,815 118,815
All other corporate
bonds 368,857 392,414 373,474
---------- ---------- ----------
Total fixed
maturities 978,052 1,039,490 1,006,441
---------- ---------- ----------
Equity securities:
Common stocks
Public utilities 993 1,323 1,323
Banks, trust and
insurance companies 4,053 4,998 4,998
Industrial,
miscellaneous and
all other 25,301 28,263 28,263
---------- ---------- ----------
Total equities 30,347 34,584 34,584
---------- ---------- ----------
Short-term
investments 44,126 44,126
---------- ----------
Total investments $1,052,525 $1,085,151
========== ==========
<PAGE> Page 38
HARLEYSVILLE GROUP INC.
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31,
------------------------
1995 1994
--------- ---------
ASSETS
Cash $ 525
Short-term investments 1,860 $ 464
Fixed maturities:
Available for sale, at fair
value (cost $12,299 and $22,608) 12,780 20,383
Investments in common
stock of subsidiaries
(equity method) 422,815 349,410
Accrued investment income 165 333
Due from affiliate 3,109 2,826
Other assets 3,128 2,299
-------- --------
Total assets $444,382 $375,715
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $ 93,500 $ 93,500
Accounts payable and
accrued expenses 4,419 3,901
Federal income taxes payable 1,454 1,390
-------- --------
Total liabilities 99,373 98,791
-------- --------
Shareholders' equity:
Preferred stock, $1 par value;
authorized 1,000,000 shares,
none issued
Common stock, $1 par value;
authorized 23,000,000 shares;
shares issued and outstanding
1995, 13,718,086 and 1994, 13,364,062 13,718 13,364
Additional paid-in capital 111,519 103,851
Net unrealized investment gains
(losses), net of deferred income
taxes 21,207 (7,276)
Retained earnings 198,565 166,985
-------- --------
Total shareholders' equity 345,009 276,924
-------- --------
Total liabilities and
shareholders' equity $444,382 $375,715
======== ========
<PAGE> Page 39
HARLEYSVILLE GROUP INC.
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED STATEMENTS OF INCOME
(in thousands)
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
-------- -------- --------
Revenues $ 7,528 $ 8,491 $ 5,630
Expenses:
Interest 6,526 6,143 1,657
Expenses other than interest 1,386 1,472 1,478
------- ------- -------
(384) 876 2,495
Income tax expense (benefit) (143) 307 888
------- ------- -------
Income (loss) before equity in
undistributed net income of
subsidiaries and cumulative
effect of accounting changes (241) 569 1,607
Equity in undistributed income
of subsidiaries before
cumulative effect of
accounting changes 41,572 17,885 30,614
------- ------- -------
Income before cumulative effect
of accounting changes, net
of income taxes 41,331 18,454 32,221
Cumulative effect of accounting
changes, net of income taxes
(Harleysville Group Inc.,
($511)) (281)
------- ------- -------
Net income $41,331 $18,454 $31,940
======= ======= =======
<PAGE> Page 40
HARLEYSVILLE GROUP INC.
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993
--------- --------- ---------
Cash flows from operating
activities:
Net income $ 41,331 $ 18,454 $ 31,940
Adjustments to reconcile
net income to net cash
provided (used) by operating
activities:
Equity in undistributed
earnings of subsidiaries (41,572) (17,885) (30,844)
Increase (decrease) in accrued
investment income 168 88 (189)
Increase (decrease) in
accrued income taxes (883) 1,260 2,365
(Gain) loss on sale of
investments 667 (70) 21
Other, net (737) (1,236) (800)
------- -------- --------
Net cash provided (used)
by operating activities (1,026) 611 2,493
------- -------- --------
Cash flows from investing activities:
Fixed maturity investments:
Purchases (5,964) (499) (22,717)
Sales 15,616 7,937 1,479
Net sales (purchases) or
maturities of short-term
investments (1,396) (70) (392)
Acquisition (44,300)
Contributions to subsidiaries (5,000) (6,000) (10,008)
-------- -------- --------
Net cash provided (used)
by investing activities 3,256 1,368 (75,938)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock 8,022 6,712 6,172
Debt proceeds 119,000
Debt repayment (44,000)
Dividends from subsidiaries 24 24 24
Dividends paid (9,751) (8,715) (7,751)
-------- -------- --------
Net cash provided (used)
by financing activities (1,705) (1,979) 73,445
-------- -------- --------
Change in cash 525 - -
Cash at beginning of year - - -
-------- -------- --------
Cash at end of year $ 525 $ - $ -
======== ======== ========
<PAGE> Page 41
<TABLE>
<CAPTION>
HARLEYSVILLE GROUP
SCHEDULE V - SUPPLEMENTARY INSURANCE INFORMATION
YEARS ENDED DECEMBER 31, 1995, 1994 and 1993
(in thousands)
LIABILITY
FOR UNPAID AMORTIZATION
DEFERRED LOSSES AND LOSSES OF DEFERRED
POLICY LOSS NET AND LOSS POLICY OTHER
ACQUISITION SETTLEMENT UNEARNED EARNED INVESTMENT SETTLEMENT ACQUISITION UNDERWRITING PREMIUMS
COSTS EXPENSES PREMIUMS PREMIUMS INCOME EXPENSES COSTS EXPENSES WRITTEN
----------- ---------- -------- -------- ---------- ---------- ----------- ------------ --------
Year Ended:
December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $59,109 $645,941 $238,710 $477,042 $68,445 $335,496 $123,019 $37,764 $505,478
======= ======== ======== ======== ======= ======== ======== ======= ========
December 31,
1994 $52,490 $603,088 $209,570 $447,731 $64,366 $348,870 $116,398 $33,909 $449,357
======= ======== ======== ======== ======= ======== ======== ======= ========
December 31,
1993 $52,347 $560,811 $208,923 $388,541 $59,198 $283,778 $103,601 $27,352 $395,163
======= ======== ======== ======== ======= ======= ======== ======= ========
</TABLE>
<PAGE> Page 42
HARLEYSVILLE GROUP
SCHEDULE VI - REINSURANCE
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(in thousands)
ASSUMED PERCENTAGE
CEDED FROM OF AMOUNT
GROSS TO OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- --------- --------- -------- ----------
Year ended
December 31, 1995
Property and
casualty
premiums $426,486 $388,950 $439,506 $477,042 92.1%
======== ======== ======== ======== ======
Year ended
December 31, 1994
Property and
casualty
premiums $401,495 $373,778 $420,014 $447,731 93.8%
======== ======== ======== ======== ======
Year ended
December 31, 1993
Property and
casualty
premiums $324,285 $360,727 $424,983 $388,541 109.4%
======== ======== ======== ======== ======
Note: The amounts ceded and assumed include the amounts ceded and
assumed under the terms of the pooling arrangement.
<PAGE> Page 43
HARLEYSVILLE GROUP
SCHEDULE X - SUPPLEMENTAL INSURANCE INFORMATION CONCERNING
PROPERTY AND CASUALTY SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(in thousands)
LOSSES AND LOSS
LIABILITY SETTLEMENT EXPENSES
FOR UNPAID DISCOUNT, (BENEFITS) INCURRED
LOSSES AND IF ANY, RELATED TO PAID LOSSES
-------------------
LOSS DEDUCTED AND LOSS
SETTLEMENT FROM CURRENT PRIOR SETTLEMENT
EXPENSES RESERVES YEAR YEARS EXPENSES
---------- -------- -------- ------- -----------
Year ended:
December 31,
1995 $645,941 $5,271 $346,383 $(10,887) $294,295
======== ====== ======== ======== ========
December 31,
1994 $603,088 $5,464 $352,085 $ (3,215) $312,690
======== ====== ======== ======== ========
December 31,
1993 $560,811 $5,243 $283,526 $ 252 $254,682
======== ====== ======== ======== ========
Notes: (1) The amount of discount relates to certain long-term
disability workers' compensation cases. A discount
rate of 3.5% (5% on New Jersey cases) was used.
(2) Information required by remaining columns is contained
in Schedule V.
<PAGE> Page 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
HARLEYSVILLE GROUP INC.
Date: March 27, 1996 By: /s/WALTER R. BATEMAN
--------------------------------
Walter R. Bateman
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf
of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------- ------------------------- ---------------
Chairman of the Board
/s/BRADFORD W. MITCHELL and a Director March 27, 1996
- -----------------------
Bradford W. Mitchell
President,
Chief Executive Officer
/s/WALTER R. BATEMAN and a Director March 27, 1996
- ----------------------
Walter R. Bateman
Senior Vice President
and Chief Financial
Officer (principal financial
officer and principal
/s/BRUCE J. MAGEE accounting officer) March 27, 1996
- ----------------------
Bruce J. Magee
<PAGE> Page 45
SIGNATURES
(Continued)
SIGNATURE TITLE DATE
- ----------------------- ------------------------- --------------
/s/MICHAEL L. BROWNE Director March 27, 1996
- ----------------------
Michael L. Browne
Director March , 1996
- ----------------------
Robert D. Buzzell
Director March , 1996
- ----------------------
Gerard G. Johnson
Director March , 1996
- ----------------------
H. Bryce Jordan
/s/JOHN J. KEENAN Director March 27, 1996
- ----------------------
John J. Keenan
/s/FRANK E. REED Director March 27, 1996
- ----------------------
Frank E. Reed
/s/WILLIAM E. STRASBURG Director March 27, 1996
- -----------------------
William E. Strasburg
<PAGE> Page 46
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- -----------------------------------------------
(10)(O) Amendment, effective January 1, 1996 to the
proportional Reinsurance Agreement effective
January 1, 1986 among Harleysville Mutual
Insurance Company, Huron Insurance Company,
Harleysville Insurance Company of New
Jersey, Harleysville-Atlantic Insurance
Company, Worcester Insurance Company,
Connecticut Union Insurance Company, New
York Casualty Insurance Company, Great Oaks
Insurance Company and Pennland Insurance
Company.
(13)(A) Selected Consolidated Financial Data from
the Company's 1995 annual report to
stockholders.
(13)(B) Management's Discussion and Analysis of
Results of Operations and Financial
Condition from the Company's 1995 annual
report to stockholders.
(13)(C) Consolidated financial statements from the
Company's 1995 annual report to
stockholders.
(13)(D) Market for Common Stock and Related Security
Holder Matters from the Company's 1995
annual report to stockholders.
(21) Subsidiaries of Registrant.
(23) Independent Auditors' Consent and Report on
Schedules.
(28) Statement re Registrant
(99) Form 11-K Annual Report for the Harleysville
Group Inc. Employee Stock Purchase Plan for
the year ended December 31, 1995.
<PAGE>
EXHIBIT (10)(O)
SEVENTH AMENDMENT
TO
HARLEYSVILLE MUTUAL INSURANCE COMPANY
HURON INSURANCE COMPANY
HARLEYSVILLE INSURANCE COMPANY OF NEW JERSEY
HARLEYSVILLE-ATLANTIC INSURANCE COMPANY
WORCESTER INSURANCE COMPANY
MID-AMERICA INSURANCE COMPANY
NEW YORK CASUALTY INSURANCE COMPANY
GREAT OAKS INSURANCE COMPANY
PROPORTIONAL REINSURANCE AGREEMENT
----------------------------------
This Seventh Amendment to the Proportional Reinsurance
Agreement is entered into by and between HARLEYSVILLE MUTUAL
INSURANCE COMPANY ("HMIC"), HURON INSURANCE COMPANY ("HURON"),
HARLEYSVILLE INSURANCE COMPANY OF NEW JERSEY ("HICNJ"),
HARLEYSVILLE-ATLANTIC INSURANCE COMPANY ("HAIC"), WORCESTER
INSURANCE COMPANY ("WIC"), MID-AMERICA INSURANCE COMPANY ("MAIC")
(formerly Connecticut Union Insurance Company), NEW YORK CASUALTY
INSURANCE COMPANY ("NYC"), GREAT OAKS INSURANCE COMPANY ("GOIC"),
and PENNLAND INSURANCE COMPANY ("Pennland").
The purpose of this Amendment is to amend the Proportional
Reinsurance Agreement ("the Agreement") between Harleysville Mutual
Insurance Company, Huron Insurance Company, Harleysville Insurance
Company of New Jersey, Harleysville-Atlantic Insurance Company,
Worcester Insurance Company, Mid-America Insurance Company
(formerly Connecticut Union Insurance Company), New York Casualty
Insurance Company, and Great Oaks Insurance Company, dated April 7,
1986, and amended June 30, 1987, December 30, 1988, November 22,
1989, March 19, 1990, August 9, 1993 (with revision dated August 2,
1994), and March 16, 1996, in which those companies created a
common risk-sharing pool for their underwriting operations, to
adjust the participation of certain participating companies, and to
provide for the participation of a new subsidiary, Pennland.
In consideration of the mutual agreements hereinafter set
forth and contained in the Agreement, the parties hereby agree as
follows:
1. Pennland is a subsidiary of HMIC as that term is defined
in Paragraph 1.6 of Part I of the Proportional
Reinsurance Agreement.
2. Pennland shall participate in the Agreement as of January
1, 1996.
3. As of January 1, 1996, the proportionate share of all
participants shall be as set forth in Exhibit I to this
Seventh Amendment.
4. The definitions of "book of business then in force" and
"net" found in paragraphs 1.3 and 1.4 of Part I of the
Proportional Reinsurance Agreement shall exclude any and
all liabilities assumed by Huron from Lake States
Insurance Company pursuant to any quota share reinsurance
agreement entered into by Huron and Lake States Insurance
Company.
5. As of January 1, 1996, the second sentence of paragraph
1.2 of Part II of the Proportional Reinsurance Agreement
shall be amended to read "In consideration of this
assumption, the Subsidiaries agree to pay to HMIC, as
soon as practicable thereafter, their: (1) net unearned
premium reserves less commission at the rate of 24%
thereon, except in the case of Pennland, for which the
rate will be 16%, (2) reserves for outstanding net
losses, and (3) reserves for outstanding net expenses,
all as of the close of business", and the second sentence
of paragraph 1.4 of Part II shall be amended to read "In
consideration of this assumption, HMIC agrees to pay to
the Subsidiaries, as soon as practicable thereafter,
their proportionate share of the combined net unearned
premium reserves, less commissions at the rate of 24%
thereon, except that with regard to net unearned premium
reserves attributable to cessions from Pennland, the rate
of commission shall be 16%."
6. All other terms and conditions of the Proportional
Reinsurance Agreement as amended shall remain the same
and apply to Pennland, except the term "opening of
business" found in Part I, Paragraph 1.1, shall mean for
Pennland 12:01 A.M., January 1, 1996 (although for the
last sentence of Part II, Paragraph 1.4, the term shall
continue to mean January 1, 1986).
IN WITNESS WHEREOF, the parties hereto have caused this
Seventh Amendment to the Proportional Reinsurance Agreement to be
executed by their duly authorized respective officers on this 18th
day of March, 1996.
ATTEST: HARLEYSVILLE MUTUAL INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/ROGER J. BEEKLEY
- ----------------- -------------------
Roger A. Brown Roger J. Beekley
HURON INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/ANGELA K. BAUER
- ----------------- ------------------
Roger A. Brown Angela K. Bauer
HARLEYSVILLE INSURANCE COMPANY OF
NEW JERSEY
/s/ROGER A. BROWN BY: /s/MARK R. CUMMINS
- ----------------- ------------------
Roger A. Brown Mark R. Cummins
HARLEYSVILLE-ATLANTIC INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/MARK R. CUMMINS
- ----------------- ------------------
Roger A. Brown Mark R. Cummins
WORCESTER INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/MARK R. CUMMINS
- ----------------- ------------------
Roger A. Brown Mark R. Cummins
MID-AMERICA INSURANCE COMPANY
(formerly Connecticut Union Insurance
Company)
/s/ROGER A. BROWN BY: /s/ANGELA K. BAUER
- ----------------- ------------------
Roger A. Brown ANGELA K. BAUER
NEW YORK CASUALTY INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/MARK R. CUMMINS
- ----------------- ------------------
Roger A. Brown Mark R. Cummins
GREAT OAKS INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/MARK R. CUMMINS
- ----------------- ------------------
Roger A. Brown Mark R. Cummins
PENNLAND INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/ROBERT G. WHITLOCK
- ----------------- ---------------------
Roger A. Brown Robert G. Whitlock
<PAGE>
EXHIBIT I
TO THE
SEVENTH AMENDMENT
TO THE
PROPORTIONAL REINSURANCE AGREEMENT
POOL PARTICIPANTS POOL PARTICIPATIONS
----------------- -------------------
Harleysville Mutual Insurance Company 27%
Harleysville-Atlantic Insurance Company 6%
Huron Insurance Company 17%
Harleysville Insurance Company of New Jersey 20%
Mid-America Insurance Company 1%
(Formerly Connecticut Union Insurance Company)
New York Casualty Insurance Company 3%
Worcester Insurance Company 17%
Great Oaks Insurance Company 1%
Pennland Insurance Company 8%
<PAGE>
EXHIBIT 13(A)
SELECTED CONSOLIDATED FINANCIAL DATA
Harleysville Group Inc. (Company) is 56% owned by Harleysville Mutual
Insurance Company (Mutual). Harleysville Group Inc. and its wholly-owned
subsidiaries (Harleysville Group) are engaged in property and casualty
insurance. These subsidiaries are: Great Oaks Insurance Company (Great
Oaks), Harleysville-Atlantic Insurance Company (Atlantic), Harleysville
Insurance Company of New Jersey (HNJ), Huron Insurance Company (Huron), Lake
States Insurance Company (Lake States), Mid-America Insurance Company (Mid-
America), New York Casualty Insurance Company (New York Casualty), and
Worcester Insurance Company (Worcester), and Harleysville Ltd., a real estate
partnership that owns the home office.
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993 1992 1991
--------- --------- --------- -------- ---------
(in thousands, except per share data)
INCOME STATEMENT DATA <F1>:
Premiums earned $ 477,042 $447,731 $388,541 $359,170 $363,853
Investment income, net 68,445 64,366 59,198 57,921 56,484
Realized investment
gains 2,245 3,367 2,721 8,589 437
Total revenues 558,549 525,458 457,811 428,455 421,871
Income before income taxes 52,642 16,832 38,572 32,506 30,687
Income taxes (benefit) 11,311 (1,622) 6,351 5,579 5,660
Net income 41,331 18,454 31,940 26,927 25,027
Earnings per share $ 3.05 $ 1.40 $ 2.48 $ 2.14 $ 2.05
Weighted average number
of shares outstanding 13,532 13,198 12,906 12,593 12,227
Cash dividends per share $ .72 $ .66 $ .60 $ .52 $ .45
BALANCE SHEET DATA AT YEAR END:
Total investments $1,085,151 $956,316 $908,400 $763,601 $716,558
Total assets 1,378,341 1,241,072 1,180,389 957,613 888,977
Debt and lease obligations 97,965 100,195 100,405 22,700 22,800
Shareholders' equity 345,009 276,924 267,749 237,388 211,275
Shareholders' equity
per share $ 25.15 $ 20.72 $ 20.51 $ 18.57 $ 16.98
- --------------------
[FN]
<F1> The Company's insurance subsidiaries, other than Lake States,
participate in an underwriting pooling arrangement with Mutual.
Harleysville Group's participation has been 60% since January 1, 1991.
As of January 1, 1996, Harleysville Group's participation increased to
65%. Lake States was acquired as of November 1, 1993, and is not a
participant in the pool. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and Note 3(a) of the
Notes to Consolidated Financial Statements. For 1993, net income is net
of a $281,000 charge for the cumulative effect of accounting changes,
net of income taxes.
<PAGE>
EXHIBIT 13(B)
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Harleysville Group underwrites property and casualty
insurance, including auto, homeowners, commercial multi-peril,
workers compensation and other lines of business, that is marketed
primarily in the eastern half of the United States through
independent agents. The Company's property and casualty
subsidiaries other than Lake States participate in a pooling
agreement with Mutual. The pooling agreement provides for the
allocation of premiums, losses, loss settlement expenses and
underwriting expenses between Harleysville Group and Mutual.
Harleysville Group is not liable for any pooled losses occurring
prior to January 1, 1986, the date the pooling agreement became
effective. Beginning January 1, 1996, Harleysville Group's
participation in the pooling agreement increased from 60% to 65% as
described in Note 3(a) of Notes to Consolidated Financial
Statements.
Historically, Harleysville Group's results of operations have
been influenced by factors affecting the property and casualty
insurance industry in general. The operating results of the U.S.
property and casualty insurance industry have been subject to
significant variations due to competition, weather, catastrophic
events, regulation, general economic conditions, judicial trends,
fluctuations in interest rates and other changes in the investment
environment.
Insurance industry price competition has made it more
difficult to attract and retain properly priced personal and
commercial lines business. Harleysville Group's premium growth and
underwriting results have been, and continue to be, affected by
this market condition. It is management's policy to maintain its
underwriting standards, even at the expense of premium growth.
1995 COMPARED TO 1994
Premiums earned increased $29.3 million for the year ended
December 31, 1995 primarily due to an increase in commercial lines
business.
Investment income increased $4.1 million for the year ended
December 31, 1995 primarily resulting from an increase in invested
assets provided by operating cash flow.
Realized investment gains declined $1.1 million for the year
ended December 31, 1995 primarily due to a decrease in the amount
of bonds called by their issuers at a premium.
<PAGE> Page 2
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
1995 COMPARED TO 1994 (CONTINUED)
Other income increased by $0.8 million for the year ended
December 31, 1995 primarily due to an increase in the management
fee income received under an agreement whereby Harleysville Group
Inc. provides management services to affiliates.
Income before income taxes increased $35.8 million for the
year ended December 31, 1995 primarily due to improved underwriting
results and the higher investment income, partially offset by the
lower realized investment gains. Harleysville Group's statutory
combined ratio decreased to 103.4% for the year ended December 31,
1995 from 111.4% for the year ended December 31, 1994.
The 1994 results were adversely affected by prolonged severe
winter weather. During the first three months of 1994, there were
claims from seven industry-designated catastrophes and a large
number of additional property claims that occurred on dates other
than the designated catastrophe dates that related to the prolonged
severe winter weather. These winter weather claims adversely
affected Harleysville Group's combined ratio by 6.4 points and its
income before income taxes by $28.5 million ($1.41 per share after
taxes) for the year ended December 31, 1994. Excluding this
impact, the statutory combined ratio improved 1.6 points primarily
due to improved results in the workers compensation line of
business.
The 1995 effective tax expense (benefit) rate was 21.5%
compared to (9.6)% in 1994 primarily due to tax-exempt investment
income comprising a lesser proportion of income before income taxes
in 1995.
Weather-related events have impacted Harleysville Group's
results over the past several years. A severe blizzard and related
winter weather in January 1996 have caused losses that are
currently expected to adversely impact first quarter after-tax
earnings by $9.7 million, or $0.71 per share. Harleysville Group
is attempting to reduce exposure to catastrophes by achieving
greater geographic distribution of risks and reducing exposure in
catastrophe-prone areas. In addition, the limit on the catastrophe
reinsurance treaty has been increased to provide greater protection
for a large catastrophe. Effective for one year from July 1, 1995,
the Company's subsidiaries (other than Lake States), and Mutual and
its wholly-owned subsidiaries are reinsured under a catastrophe
reinsurance treaty that provides coverage for 85% of up to $127
million in excess of a retention of $20 million for any given
catastrophe. Accordingly, pursuant to the terms of the treaty, the
maximum recovery would be $108 million for any catastrophe
involving an insured loss of $147 million or greater.
<PAGE> Page 3
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
1995 COMPARED TO 1994 (CONTINUED)
The treaty includes reinstatement provisions providing for
coverage for a second catastrophe and requiring payment of an
additional premium in the event of a first catastrophe occurring.
Effective January 1, 1996, Lake States purchased catastrophe
reinsurance affording recovery of 95% of $19 million in excess of
$1 million from Mutual. Harleysville Group will share in 65% of
this coverage with Mutual through the pooling arrangement.
Harleysville Group has not purchased funded catastrophe covers.
1994 COMPARED TO 1993
Premiums earned increased $59.2 million for the year ended
December 31, 1994. Premiums earned for Lake States, which was
acquired as of November 1, 1993, increased $61.7 million for the
year ended December 31, 1994. Lake States had premiums earned of
$71.3 million in 1994 compared to $9.6 million of premiums earned
in 1993 subsequent to the acquisition.
Investment income increased $5.2 million for the year ended
December 31, 1994 primarily resulting from an increase in average
invested assets partially offset by a decline in average yield.
Average invested assets increased $132.4 million from 1993 to 1994
from operating cash flow and from a $92.8 million increase in
invested assets in the fourth quarter of 1993 from the acquisition
of Lake States and from the proceeds of a note offering in excess
of the purchase price of Lake States. The 1994 average yield was
6.9% compared to 7.4% for 1993. The decline in average yield is
primarily due to generally lower market interest rates.
Realized investment gains increased $0.6 million for the year
ended December 31, 1994 due to an increase in the amount of bonds
called by their issuers at a premium.
Other income increased by $2.6 million for the year ended
December 31, 1994 primarily due to a $1.9 million increase in the
management fee income received under an agreement whereby
Harleysville Group Inc. provides management services to affiliates.
Policy finance fee income increased $0.7 million in 1994 primarily
due to the inclusion of Lake States' results of operations for a
full year.
Interest expense increased $4.7 million for the year ended
December 31, 1994 due to the note offering that financed the
acquisition of Lake States.
<PAGE> Page 4
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
1994 COMPARED TO 1993 (CONTINUED)
Income before income taxes decreased $21.7 million for the
year ended December 31, 1994 primarily due to higher losses from
severe winter weather and the higher interest expense partially
offset by the higher investment income, realized investment gains
and other income. Harleysville Group's statutory combined ratio
increased to 111.4% for the year ended December 31, 1994 from
106.7% for the year ended December 31, 1993.
During the first three months of 1994, there were claims from
seven industry-designated catastrophes and a large number of
additional property claims that occurred on dates other than the
designated catastrophe dates and that related to the prolonged
severe winter weather. These winter weather claims adversely
affected Harleysville Group's income before income taxes by $28.5
million ($1.41 per share after taxes) for the year ended December
31, 1994. For the year ended December 31, 1993, a blizzard had a
$4.9 million ($0.25 per share after taxes) adverse impact on income
before income taxes. Such weather events impacted Harleysville
Group's statutory combined ratio by 6.4 points and 1.2 points in
1994 and 1993, respectively. Excluding these impacts, the
statutory combined ratio improved 0.5 points primarily due to
improved results in the workers compensation line of business due
to higher rates, stricter underwriting and cost containment
efforts.
The 1994 effective tax expense (benefit) rate was (9.6)%
compared to 16.5% in 1993 primarily due to tax-exempt investment
income comprising a greater proportion of income before income
taxes in 1994. The income tax expense for the year ended December
31, 1993 includes a net benefit of $0.7 million for the effects of
a change in tax rate resulting from the Omnibus Budget
Reconciliation Act of 1993, which was signed into law during the
third quarter of 1993.
NEW ACCOUNTING STANDARD
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," was issued in October
1995 and is effective for fiscal years beginning after December 15,
1995. It permits a company to choose one of two methods of
accounting for stock-based compensation arrangements: either the
intrinsic value-based method as is currently being followed or an
estimated fair value-based method. Harleysville Group has not yet
determined whether it will adopt the new method or continue with
its current practice of accounting for stock-based compensation.
However, the new method, if adopted, is not currently expected to
have a material effect on the financial statements.
<PAGE> Page 5
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the ability to generate sufficient
cash to meet cash obligations as they come due. Harleysville
Group's primary sources of cash are premium income, investment
income and maturing investments. Cash outflows can be variable
because of uncertainties regarding settlement dates for liabilities
for unpaid losses and because of the potential for large losses
either individually or in the aggregate. Accordingly, Harleysville
Group maintains investment and reinsurance programs generally
intended to provide adequate funds to pay claims without forced
sales of investments.
Harleysville Group's policy with respect to fixed maturity
investments is to purchase only those that are of investment grade
quality. Fixed maturity investments are purchased with the
intention of holding them until maturity except for those
classified as available for sale, which may be sold due to changing
strategies or market conditions.
Net cash provided by operating activities was $89.5 million
and $57.3 million for 1995 and 1994, respectively. The increase in
net cash provided by operating activities in 1995 primarily
reflects increased revenues and lower paid losses and loss
settlement expenses.
Net cash used by investing activities was $83.9 million and
$56.1 million for 1995 and 1994, respectively. The higher amount
in 1995 reflects the investment of the cash provided by operating
activities.
Financing activities used net cash of $4.0 million in 1995
compared to $2.2 million in 1994. The change was primarily due to
the prepayment of a $2.0 million capitalized lease obligation in
1995.
The Company maintained $15.2 million of cash and marketable
securities at the holding company level at December 31, 1995, which
is available for general corporate purposes including dividends,
debt service, capital contributions to subsidiaries and
acquisitions. During 1995, Harleysville Group Inc. contributed
$5.0 million of capital to Lake States. Harleysville Group has no
material commitments for capital expenditures as of December 31,
1995.
As a holding company, Harleysville Group Inc.'s principal
source of cash for the payment of dividends is dividends from its
subsidiaries. The Company's insurance subsidiaries are subject to
state laws that restrict their ability to pay dividends.
<PAGE> Page 6
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Applying the current regulatory restrictions as of December
31, 1995, the maximum amount of dividends that may be paid to
Harleysville Group Inc. by its subsidiaries without prior
regulatory approval was $37.6 million. The Company's insurance
subsidiaries have not paid any dividends to Harleysville Group Inc.
in any of the years presented. See the Business-Regulation section
of Harleysville Group Inc.'s 1995 Form 10-K which includes a
reconciliation of net income and shareholders' equity as determined
under statutory accounting practices to net income and
shareholders' equity as determined in accordance with generally
accepted accounting principles. Also, see Note 9 of the Notes to
Consolidated Financial Statements.
The National Association of Insurance Commissioners has
adopted risk-based capital (RBC) standards that require insurance
companies to calculate and report statutory capital and surplus
needs based on a formula measuring underwriting, investment and
other business risks inherent in an individual company's
operations. These RBC standards have not affected the operations
of Harleysville Group since each of the Company's insurance
subsidiaries have statutory capital and surplus in excess of RBC
requirements.
Harleysville Group had off-balance-sheet credit risk related
to $59.0 million of premium balances due to Mutual from agents at
December 31, 1995. At such date, Harleysville Group had recorded
a $1.0 million bad debt allowance related to such credit risk.
IMPACT OF INFLATION
Property and casualty insurance premiums are established
before the amount of losses and loss settlement expenses, or the
extent to which inflation may affect such expenses, are known.
Consequently, Harleysville Group attempts, in establishing rates,
to anticipate the potential impact of inflation. In the past,
inflation has contributed to increased losses and loss settlement
expenses.
<PAGE> Page 7
EXHIBIT 13(C)
HARLEYSVILLE GROUP
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31,
------------------------
1995 1994
---------- ----------
ASSETS
------
Investments:
Fixed maturities:
Held to maturity, at amortized
cost (fair value $542,895
and $535,114) $ 509,846 $ 557,486
Available for sale, at fair value
(cost $468,206 and $384,691) 496,595 374,322
Equity securities, at fair value
(cost $30,347 and $14,999) 34,584 14,184
Short-term investments, at cost,
which approximates fair value 44,126 10,324
---------- ----------
Total investments 1,085,151 956,316
Cash 3,256 1,584
Receivables:
Premiums 62,233 50,308
Reinsurance 70,366 69,190
Accrued investment income 16,496 16,359
---------- ----------
Total receivables 149,095 135,857
Deferred policy acquisition costs 59,109 52,490
Prepaid reinsurance premiums 8,334 7,630
Property and equipment, net 22,578 21,849
Deferred income taxes 23,109 39,292
Other assets 27,709 26,054
---------- ----------
Total assets $1,378,341 $1,241,072
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss
settlement expenses $ 645,941 $ 603,088
Unearned premiums 238,710 209,570
Accounts payable and accrued expenses 48,478 42,576
Debt and capitalized lease obligations 97,965 100,195
Due to affiliate 2,238 8,719
---------- ----------
Total liabilities 1,033,332 964,148
---------- ----------
Shareholders' equity:
Preferred stock, $1 par value, authorized
1,000,000 shares; none issued
Common stock, $1 par value, authorized
23,000,000 shares; shares issued and
outstanding 1995, 13,718,086 and
1994, 13,364,062 13,718 13,364
Additional paid-in capital 111,519 103,851
Net unrealized investment gains (losses),
net of deferred income taxes 21,207 (7,276)
Retained earnings 198,565 166,985
---------- ----------
Total shareholders' equity 345,009 276,924
---------- ----------
Total liabilities and
shareholders' equity $1,378,341 $1,241,072
========== ==========
See accompanying notes to consolidated financial statements.
<PAGE>
HARLEYSVILLE GROUP
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- --------- --------
Revenues:
Premiums earned $477,042 $447,731 $388,541
Investment income, net
of investment expense 68,445 64,366 59,198
Realized investment gains 2,245 3,367 2,721
Other income 10,817 9,994 7,351
-------- -------- --------
Total revenues 558,549 525,458 457,811
-------- -------- --------
Losses and expenses:
Losses and loss settlement
expenses 335,496 348,870 283,778
Amortization of deferred
policy acquisition costs 123,019 116,398 103,601
Other underwriting expenses 37,764 33,909 27,352
Interest expense 6,811 6,476 1,747
Other expenses 2,817 2,973 2,761
-------- -------- --------
Total expenses 505,907 508,626 419,239
-------- -------- --------
Income before income taxes
and cumulative effect
of accounting changes 52,642 16,832 38,572
Income taxes (benefit) 1,311 (1,622) 6,351
-------- -------- --------
Income before cumulative effect
of accounting changes 41,331 18,454 32,221
Cumulative effect of accounting
changes, net of income taxes (281)
-------- -------- --------
Net income $ 41,331 $ 18,454 $ 31,940
======== ======== ========
Weighted average number of
shares outstanding 13,532,371 13,198,038 12,905,650
========== ========== ==========
Earnings per common share:
Income before cumulative effect
of accounting changes $ 3.05 $ 1.40 $ 2.50
Cumulative effect of accounting
changes, net of income taxes (.02)
-------- -------- --------
Net income $ 3.05 $ 1.40 $ 2.48
======== ======== ========
Cash dividends per share $ .72 $ .66 $ .60
======== ======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
HARLEYSVILLE GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(dollars in thousands)
ADDITIONAL NET UNREALIZED
COMMON STOCK PAID-IN INVESTMENT RETAINED
SHARES AMOUNT CAPITAL GAINS (LOSSES) EARNINGS TOTAL
--------- ------- ---------- -------------- -------- --------
Balance at
December 31,
1992 12,782,739 $12,783 $ 91,548 $ - $133,057 $237,388
Net income 31,940 31,940
Issuance of
common stock:
Employee plans 106,026 106 1,184 1,290
Dividend
Reinvestment
Plan 166,808 167 4,348 4,515
Tax benefit from
stock options
exercised 367 367
Cash dividends
paid (7,751) (7,751)
---------- ------- -------- -------- -------- --------
Balance at
December 31,
1993 13,055,573 13,056 97,447 - 157,246 267,749
Net income 18,454 18,454
Issuance of
common stock:
Employee plans 88,963 89 1,346 1,435
Dividend
Reinvestment
Plan 219,526 219 4,896 5,115
Tax benefit from
stock options
exercised 162 162
Cash dividends
paid (8,715) (8,715)
Cumulative
effect of
accounting
change for
investments,
net 19,341 19,341
Change in
unrealized
investment
gains (losses),
net (26,617) (26,617)
---------- ------- -------- -------- -------- --------
Balance at
December 31,
1994 13,364,062 13,364 103,851 (7,276) 166,985 276,924
Net income 41,331 41,331
Issuance of
common stock:
Employee plans 144,295 144 1,770 1,914
Dividend
Reinvestment
Plan 209,729 210 5,524 5,734
Tax benefit from
stock options
exercised 374 374
Cash dividends
paid (9,751) (9,751)
Change in
unrealized
investment
gains (losses),
net 28,483 28,483
---------- ------- -------- -------- -------- --------
Balance at
December 31,
1995 13,718,086 $13,718 $111,519 $ 21,207 $198,565 $345,009
========== ======= ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
HARLEYSVILLE GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 41,331 $ 18,454 $ 31,940
Adjustments to reconcile net
income to net cash provided by
operating activities, excluding
effects of acquisition:
Change in receivables, unearned
premiums, prepaid reinsurance
and due to affiliate 8,717 909 4,753
Increase in unpaid losses
and loss settlement
expenses 42,853 42,277 21,598
Deferred income taxes 845 (5,228) (3,292)
Increase in deferred policy
acquisition costs (6,619) (143) (1,820)
Amortization and depreciation 1,151 1,403 585
Gain on sale of
investments (2,245) (3,367) (2,721)
Other, net 3,460 2,976 5,590
--------- --------- ---------
Net cash provided by
operating activities 89,493 57,281 56,633
--------- --------- ---------
Cash flows from investing activities:
Held to maturity investments:
Purchases (25,492) (85,261) (161,157)
Maturities 25,739 11,497 56,712
Sales 4,766
Available for sale investments:
Purchases (140,176) (90,039) (23,686)
Maturities 20,931 80,213 23,840
Sales 66,250 22,863 29,975
Net sales (purchases) or maturities
of short-term investments (33,802) 5,517 (7,435)
Acquisition, net of cash (42,773)
Purchases of property and
equipment (2,078) (855) (1,166)
--------- --------- ---------
Net cash used by
investing activities (83,862) (56,065) (125,690)
--------- --------- ---------
Cash flows from financing activities:
Issuance of common stock 8,022 6,712 6,172
Debt proceeds 119,000
Repayment of debt and capitalized
lease obligations (2,230) (218) (46,200)
Dividends paid (9,751) (8,715) (7,751)
--------- --------- ---------
Net cash provided (used)
by financing activities (3,959) (2,221) 71,221
--------- --------- ---------
Increase (decrease) in cash 1,672 (1,005) 2,164
Cash at beginning of year 1,584 2,589 425
--------- --------- ---------
Cash at end of year $ 3,256 $ 1,584 $ 2,589
========= ========= ========
See accompanying notes to consolidated financial statements.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF BUSINESS
Harleysville Group consists of Harleysville Group Inc. and
its subsidiaries (all wholly owned). Those subsidiaries are:
- Great Oaks Insurance Company (Great Oaks)
- Harleysville-Atlantic Insurance Company (Atlantic)
- Harleysville Insurance Company of New Jersey (HNJ)
- Huron Insurance Company (Huron)
- Lake States Insurance Company (Lake States)
- Mid-America Insurance Company (Mid-America)
- New York Casualty Insurance Company (New York Casualty)
- Worcester Insurance Company (Worcester)
- Harleysville Ltd. (a real estate partnership that owns the
home office)
Harleysville Group is approximately 56% owned by Harleysville
Mutual Insurance Company (Mutual).
Harleysville Group underwrites property and casualty
insurance, including auto, homeowners, commercial multi-peril,
workers compensation and other lines of business, that is marketed
primarily in the eastern half of the United States through
independent agents.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying financial statements include the accounts of
Harleysville Group prepared in conformity with generally accepted
accounting principles, which differ in some respects from those
followed in reports to insurance regulatory authorities. All
significant intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
INVESTMENTS
Accounting for fixed maturities depends on their
classification as either held to maturity, available for sale or
trading. Fixed maturities classified as available for sale are
carried at fair value, with unrealized gains or losses credited or
charged directly to a separate component of shareholders' equity.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
Investments in fixed maturities that are classified as held to
maturity are carried at amortized cost. Equity securities are
carried at fair value. There were no investments classified as
trading. Short-term investments are recorded at cost, which
approximates fair value.
Realized gains and losses on sales of investments are
recognized in net income on the specific identification basis.
Unrealized investment gains or losses, net of applicable income
taxes, are reflected directly in shareholders' equity and,
accordingly, have no effect on net income.
PREMIUMS
Premiums are recognized as revenue ratably over the terms of
the respective policies. Unearned premiums are calculated on the
monthly pro rata basis.
POLICY ACQUISITION COSTS
Policy acquisition costs, such as commissions, premium taxes
and certain other underwriting and agency expenses that vary with
and are directly related to the production of business, are
deferred and amortized over the effective period of the related
insurance policies. The method followed in computing deferred
policy acquisition costs limits the amount of such deferred costs
to their estimated realizable value, which gives effect to the
premium to be earned, related investment income, losses and loss
settlement expenses and certain other costs expected to be incurred
as the premium is earned.
LOSSES AND LOSS SETTLEMENT EXPENSES
The liability for losses and loss settlement expenses
represents estimates of the ultimate unpaid cost of all losses
incurred. Such estimates may be more or less than the amounts
ultimately paid when the claims are settled. These estimates are
periodically reviewed and adjusted as necessary; such adjustments
are reflected in current operations.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated primarily on the
straight-line basis over the estimated useful lives of the assets
(40 years for buildings and three to 15 years for the equipment).
INCOME TAXES
Deferred income tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
EARNINGS PER SHARE
Earnings per share are computed by dividing earnings by the
weighted average number of common shares outstanding during the
year. The stock options described in Note 11 have no material
dilutive effect on earnings per common share amounts in any of the
periods presented.
2 - ACQUISITION
Effective November 1, 1993, Harleysville Group acquired Lake
States, a property and casualty insurance company conducting
business in Michigan, for a cash purchase price of $44,300,000.
The acquisition was funded with a short-term loan from Mutual that
was repaid with proceeds from an offering of $75,000,000 of notes.
The acquisition was accounted for as a purchase, and resulted in
goodwill of $18,574,000 which is being amortized over 40 years on
the straight-line basis.
The consolidated financial statements include the results of
operations of Lake States from the date of acquisition. Unaudited
pro forma consolidated results of operations for the year ended
December 31, 1993, giving effect to the acquisition and financing
of Lake States as though it had occurred at the beginning of 1993,
would reflect revenues, net income and earnings per share of
$502,991,000, $32,313,000 and $2.50, respectively.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2 - ACQUISITION - (CONTINUED)
Supplemental cash flow information for the acquisition is as
follows:
1993
--------
(in thousands)
Fair value of assets acquired $134,943
Liabilities assumed 90,643
--------
Cash paid 44,300
Less cash acquired 1,527
--------
Net cash paid for acquisition $ 42,773
========
3 - TRANSACTIONS WITH AFFILIATES
(a) UNDERWRITING
The insurance subsidiaries, other than Lake States,
participate in a reinsurance pooling agreement with Mutual whereby
such subsidiaries cede to Mutual all of their insurance business
and assume from Mutual an amount equal to their participation in
the pooling agreement. All losses and loss settlement expenses and
other underwriting expenses are prorated among the parties on the
basis of participation in the pooling agreement. The agreement
pertains to all insurance business written or earned on or after
January 1, 1986. Harleysville Group's participation in the pooling
agreement was 60% for all years presented. Beginning January 1,
1996, Harleysville Group's participation increased to 65% and
Pennland Insurance Company (Pennland) became a participant in the
pooling arrangement. Pennland, a subsidiary of Mutual, writes
Pennsylvania personal automobile insurance policies and had earned
premium of $64,839,000 in 1995. Effective January 1, 1996,
Harleysville Group received cash and investments from Mutual and
Pennland of $117,800,000 which related to the various insurance
liabilities assumed in connection with this change in pool
participation.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3 - TRANSACTIONS WITH AFFILIATES (CONTINUED)
(a) UNDERWRITING (CONTINUED)
The following amounts represent reinsurance transactions
between Harleysville Group and Mutual under the pooling
arrangement:
1995 1994 1993
-------- -------- --------
(in thousands)
Ceded:
Premiums earned $349,280 $331,105 $326,706
======== ======== ========
Unearned premiums $175,903 $158,421 $161,886
======== ======== ========
Losses incurred $254,842 $271,957 $236,581
======== ======== ========
Unpaid losses and
loss settlement
expenses $421,579 $391,883 $368,361
======== ======== ========
Assumed:
Premiums earned $398,778 $376,463 $378,921
======== ======== ========
Unearned premiums $190,308 $171,614 $175,770
======== ======== ========
Losses incurred $277,182 $294,473 $276,363
======== ======== ========
Unpaid losses and
loss settlement
expenses $517,586 $489,532 $469,235
======== ======== ========
(b) PROPERTY
Harleysville Ltd. leases the home office to Mutual which
shares most of the facility with Harleysville Group. Rental income
under the lease was $2,750,000, $2,668,000 and $2,569,000 for 1995,
1994 and 1993, respectively, and is included in other income after
elimination of intercompany amounts of $1,405,000, $1,361,000 and
$1,310,000 in 1995, 1994 and 1993, respectively.
(c) MANAGEMENT AGREEMENTS
Harleysville Group Inc. received $6,944,000, $6,587,000 and
$4,683,000 of management fee income in 1995, 1994 and 1993,
respectively, under agreements whereby Harleysville Group Inc.
provides management services to Mutual and other affiliates.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3 - TRANSACTIONS WITH AFFILIATES (CONTINUED)
(d) INTERCOMPANY BALANCES
Intercompany balances are created primarily from the pooling
arrangement (settled quarterly) and allocation of common expenses,
collection of premium balances and payment of claims (settled
monthly). No interest is charged or received on intercompany
balances due to the timely settlement terms and nature of the
items.
Harleysville Group Inc. paid Mutual $146,000 of interest in
1993 on the short-term loan (LIBOR plus 1%) described in Note 2.
Interest expense on the loan from Mutual described in Note 8 was
$1,360,000, $977,000 and $842,000 in 1995, 1994 and 1993,
respectively.
Harleysville Group had off-balance-sheet credit risk related
to approximately $59,000,000 and $54,000,000 of premium balances
due to Mutual from agents at December 31, 1995 and 1994,
respectively. Harleysville Group had a bad debt allowance related
to such risk of $964,000 and $1,195,000 at December 31, 1995 and
1994, respectively.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - INVESTMENTS
The amortized cost and estimated fair value of investments in
fixed maturity and equity securities are as follows:
DECEMBER 31, 1995
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ----------- ----------
(in thousands)
Held to maturity:
US Treasury securities
and obligations of
US government corpora-
tions and agencies $ 10,288 $ 885 $ (13) $ 11,160
Obligations of states
and political
subdivisions 245,525 13,485 (248) 258,762
Corporate securities 253,734 19,230 (290) 272,674
Mortgage-backed
securities 299 299
-------- ------- -------- ----------
Total held to maturity 509,846 33,600 (551) 542,895
-------- ------- -------- ----------
Available for sale:
US Treasury securities
and obligations of
US government corpora-
tions and agencies 114,534 6,337 (33) 120,838
Obligations of states
and political
subdivisions 127,202 10,405 (106) 137,501
Corporate securities 115,123 4,621 (4) 119,740
Mortgage-backed
securities 111,347 7,169 118,516
-------- ------- -------- ----------
Total available for sale 468,206 28,532 (143) 496,595
-------- ------- -------- ----------
Total fixed maturities $978,052 $62,132 $ (694) $1,039,490
======== ======= ======== ==========
Total equity securities $ 30,347 $ 6,265 $ (2,028) $ 34,584
======== ======= ======== ==========
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - INVESTMENTS (CONTINUED)
DECEMBER 31, 1994
----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ----------- ---------
(in thousands)
Held to maturity:
US Treasury securities
and obligations of
US government corpora-
tions and agencies $ 8,404 $ 129 $ (269) $ 8,264
Obligations of states
and political
subdivisions 268,361 4,155 (12,537) 259,979
Corporate securities 279,408 1,910 (15,578) 265,740
Mortgage-backed
securities 1,313 (182) 1,131
-------- ------- -------- --------
Total held to maturity 557,486 6,194 (28,566) 535,114
-------- ------- -------- --------
Available for sale:
US Treasury securities
and obligations of
US government corpora-
tions and agencies 94,133 361 (2,652) 91,842
Obligations of states
and political
subdivisions 130,250 3,913 (2,019) 132,144
Corporate securities 42,354 29 (2,663) 39,720
Mortgage-backed
securities 117,954 132 (7,470) 110,616
-------- ------- -------- --------
Total available for sale 384,691 4,435 (14,804) 374,322
-------- ------- -------- --------
Total fixed maturities $942,177 $10,629 $(43,370) $909,436
======== ======= ======== ========
Total equity securities $ 14,999 $ 605 $ (1,420) $ 14,184
======== ======= ======== ========
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1995, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - INVESTMENTS (CONTINUED)
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ----------
(in thousands)
Held to maturity:
Due in one year or less $ 14,160 $ 14,389
Due after one year
through five years 81,682 87,458
Due after five years
through ten years 202,469 217,595
Due after ten years 211,236 223,154
-------- ----------
509,547 542,596
Mortgage-backed
securities 299 299
-------- ----------
509,846 542,895
-------- ----------
Available for sale:
Due in one year or less 31,365 31,881
Due after one year
through five years 119,337 125,029
Due after five years
through ten years 145,735 155,507
Due after ten years 60,422 65,662
-------- ----------
356,859 378,079
Mortgage-backed
securities 111,347 118,516
-------- ----------
468,206 496,595
-------- ----------
Total fixed maturities $978,052 $1,039,490
======== ==========
The amortized cost of fixed maturities on deposit with various
regulatory authorities at December 31, 1995 and 1994 amounted to
$10,283,000 and $7,899,000, respectively.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - INVESTMENTS (CONTINUED)
A summary of net investment income is as follows:
1995 1994 1993
-------- -------- --------
(in thousands)
Interest on fixed maturities $67,428 $63,293 $59,143
Dividends on equity securities 478 163
Interest on short-term
investments 1,316 1,501 574
------- ------- -------
Total investment income 69,222 64,957 59,717
Investment expense 777 591 519
------- ------- -------
Net investment income $68,445 $64,366 $59,198
======= ======= =======
Realized gross gains (losses) from investment sales and
redemptions and the change in difference between fair value and
cost of investments, before applicable income taxes, are as
follows:
1995 1994 1993
---------- ---------- --------
(in thousands)
Fixed maturity securities:
Held to maturity:
Gross gains $ 194 $ 141 $ 1,285
Gross losses (44) (6) (57)
Available for sale:
Gross gains 3,079 3,476 1,579
Gross losses (769) (244) (86)
Equity securities:
Gross gains 485
Gross losses (700)
------- --------- -------
Net realized investment gains $ 2,245 $ 3,367 $ 2,721
======= ========= =======
Change in difference between
fair value and cost of
investments<FN1>:
Fixed maturity securities $94,179 $ (99,668) $27,861
Equity securities 5,052 (815)
------- --------- -------
Total $99,231 $(100,483) $27,861
======= ========= =======
[FN]
<F1> Parentheses indicate a net unrealized decline in fair value.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - INVESTMENTS (CONTINUED)
Income taxes on realized investment gains were $786,000,
$1,141,000 and $952,000 for 1995, 1994 and 1993, respectively.
Deferred income taxes (benefits) applicable to unrealized
investment gains (losses) were $11,419,000 and $(3,918,000) at
December 31, 1995 and 1994, respectively.
The Consolidated Statement of Shareholders' Equity for the
year ended December 31, 1994 reflects $19,341,000 in unrealized
investment gains, net of $10,414,000 of deferred income taxes, for
the cumulative effect of adopting Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
In November 1995, the Financial Accounting Standards Board
issued guidance on the implementation of SFAS No. 115. As a result
of adopting this implementation guidance, fixed maturity
investments classified as held to maturity with an amortized cost
of $50,699,000 and unrealized gains of $4,156,000 were transferred
to the available for sale classification. During 1995,
Harleysville Group sold Kmart Corp. bonds that had been classified
as held to maturity due to a significant deterioration in the
issuer's creditworthiness. These bonds had an amortized cost of
$4,690,000, and the sale resulted in a realized gain of $76,000.
There were no other sales or transfers from the held to maturity
portfolio.
Harleysville Group has not held or issued derivative financial
instruments.
5 - REINSURANCE
In the ordinary course of business, Harleysville Group cedes
insurance to, and assumes insurance from, unrelated insurers to
limit its maximum loss exposure through diversification of its
risks. See Note 3(a) for discussion of the reinsurance pooling
agreement with Mutual. Reinsurance contracts do not relieve
Harleysville Group of primary liability as the originating insurer.
The effect of Harleysville Group's share of reinsurance with
unrelated insurers on premiums written and earned is as follows:
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5 - REINSURANCE (CONTINUED)
1995 1994 1993
---------- ---------- ----------
(in thousands)
Premiums written:
Direct $505,198 $448,602 $380,529
Assumed 40,655 42,450 49,323
Ceded (40,375) (41,695) (34,689)
-------- -------- --------
Net premiums written $505,478 $449,357 $395,163
======== ======== ========
Premiums earned:
Direct $475,984 $446,853 $376,500
Assumed 40,728 43,551 46,062
Ceded (39,670) (42,673) (34,021)
-------- -------- --------
Net premiums earned $477,042 $447,731 $388,541
======== ======== ========
Losses and loss settlement expenses are net of reinsurance
recoveries of $19,117,000, $24,399,000 and $20,605,000 for 1995,
1994 and 1993, respectively.
6 - PROPERTY AND EQUIPMENT
Property and equipment consisted of land and buildings with a
cost of $25,346,000 and $25,254,000, and equipment with a cost of
$4,733,000 and $2,841,000 at December 31, 1995 and 1994,
respectively. Accumulated depreciation related to such assets was
$7,501,000 and $6,248,000 at December 31, 1995 and 1994,
respectively.
Rental expense under leases with non-affiliates amounted to
$2,152,000, $1,871,000 and $1,575,000 for 1995, 1994 and 1993,
respectively. Operating lease commitments were not material at
December 31, 1995.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7 - LIABILITY FOR UNPAID LOSSES AND LOSS SETTLEMENT EXPENSES
Activity in the liability for unpaid losses and loss
settlement expenses is summarized as follows:
1995 1994 1993
--------- --------- ---------
(in thousands)
Liability at January 1 $603,088 $560,811 $486,608
Less reinsurance recoverables 67,636 61,539 48,725
-------- -------- --------
Net liability at January 1 535,452 499,272 437,883
-------- -------- --------
Net liability of acquired company 32,293
--------
Incurred related to:
Current year 346,383 352,085 283,526
Prior years (10,887) (3,215) 252
-------- -------- --------
Total incurred 335,496 348,870 283,778
-------- -------- --------
Paid related to:
Current year 129,446 151,133 110,217
Prior years 164,849 161,557 144,465
-------- -------- --------
Total paid 294,295 312,690 254,682
-------- -------- --------
Net liability at December 31 576,653 535,452 499,272
Plus reinsurance recoverables 69,288 67,636 61,539
-------- -------- --------
Liability at December 31 $645,941 $603,088 $560,811
======== ======== ========
Harleysville Group recognized (favorable) adverse development
in the provision for insured events of prior years of
$(10,887,000), $(3,215,000) and $252,000 in 1995, 1994 and 1993,
respectively. The favorable development in 1995 and 1994 primarily
related to lower than expected claim severity in workers
compensation.
In establishing the liability for unpaid losses and loss
settlement expenses, management considers facts currently known and
the current state of the law and coverage litigation. Liabilities
are recognized for known losses (including the cost of related
litigation) when sufficient information has been developed to
indicate the involvement of a specific insurance policy, and
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7 - LIABILITY FOR UNPAID LOSSES AND LOSS SETTLEMENT EXPENSES
(CONTINUED)
management can reasonably estimate its liability. In addition,
liabilities have been established to cover additional exposures on
both known and unasserted losses. Estimates of the liabilities are
reviewed and updated continually.
The property and casualty insurance industry has received
significant publicity about environmental-related losses from
exposures insured many years ago. Since the intercompany pooling
agreement pertains to insurance business written or earned on or
after January 1, 1986, Harleysville Group has not incurred
significant environmental-related losses.
8 - DEBT AND CAPITALIZED LEASE OBLIGATIONS
Debt is as follows:
DECEMBER 31,
--------------------
1995 1994
-------- --------
(in thousands)
Notes, 6.75%, due 2003 $75,000 $ 75,000
Demand term-loan payable
to Mutual, LIBOR plus
1%, due 1998 18,500 18,500
Economic Development
Corporation (EDC)
Revenue Bond obligation 4,465 4,695
Capitalized lease
obligation, 8.5% 2,000
------- --------
$97,965 $100,195
======= ========
The fair value of the Notes was $75,801,000 and $65,100,000 at
December 31, 1995 and 1994, respectively, based on quoted market
prices for the same or similar debt. The carrying value of the
remaining debt and capitalized lease obligations approximates fair
value.
The EDC obligation is secured by Lake States' building.
Interest is payable semiannually at a variable rate (3.9% at
December 31, 1995) equal to the market interest rate that would
allow the bonds to be remarketed at par value. The bonds are
subject to redemption prior to maturity in 2006 at levels dependent
upon the occurrence of certain events.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8 - DEBT AND CAPITALIZED LEASE OBLIGATIONS (CONTINUED)
Interest paid was $6,716,000, $6,347,000 and $1,386,000 in
1995, 1994 and 1993, respectively.
9 - SHAREHOLDERS' EQUITY
A source of cash for the payment of dividends is dividends
from subsidiaries. Harleysville Group Inc.'s insurance
subsidiaries are required by law to maintain certain minimum
surplus on a statutory basis, and are subject to risk-based capital
requirements and to regulations under which payment of a dividend
from statutory surplus is restricted and may require prior approval
of regulatory authorities. Applying the current regulatory
restrictions as of December 31, 1995, $37,620,000 was available for
distribution to Harleysville Group Inc. without prior approval.
The following table contains selected information for
Harleysville Group Inc.'s property and casualty insurance
subsidiaries, as determined in accordance with prescribed statutory
accounting practices:
DECEMBER 31,
--------------------------------
1995 1994 1993
-------- -------- ---------
(in thousands)
Statutory capital and surplus $303,675 $262,841 $238,867
======== ======== ========
Statutory unassigned surplus $185,202 $149,368 $131,393
======== ======== ========
Statutory net income $ 36,063 $ 16,674 $ 26,103
======== ======== ========
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10 - INCOME TAXES
The components of income tax expense (benefit) are as follows:
1995 1994 1993
-------- -------- --------
(in thousands)
Current $10,466 $ 3,606 $ 9,643
Deferred (benefit) 845 (5,228) (3,292)
------- ------- -------
$11,311 $(1,622) $ 6,351
======= ======= =======
Cash paid for federal income taxes in 1995, 1994 and 1993 was
$11,201,000, $1,349,000 and $6,646,000, respectively.
The actual income tax rate differed from the statutory federal
income tax rate applicable to income before income taxes and
cumulative effect of accounting changes as follows:
1995 1994 1993
-------- -------- --------
Statutory federal income
tax rate 35.0 % 35.0 % 35.0 %
Tax-exempt interest (13.0) (45.1) (16.9)
Other, net (0.5) 0.5 (1.6)
----- ------ ------
21.5 % (9.6)% 16.5 %
===== ====== ======
The Consolidated Statement of Income for the year ended
December 31, 1993 reflects a $568,000 cumulative effect benefit of
adopting SFAS No. 109 as of January 1, 1993.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10 - INCOME TAXES (CONTINUED)
The tax effects of the significant temporary differences that
give rise to deferred tax liabilities and assets are as follows:
DECEMBER 31,
---------------------------
1995 1994
-------- --------
(in thousands)
Deferred tax liabilities
Deferred policy acquisition
costs $20,688 $18,372
Unrealized investment gains 11,419
Other 3,051 2,603
------- -------
Total deferred tax
liabilities 35,158 20,975
------- -------
Deferred tax assets
Unearned premiums 16,126 14,135
Losses incurred 35,291 33,657
Unrealized investment
losses 3,918
Tax credit carryforward 809 3,059
Other 6,041 5,498
------- -------
Total deferred tax
assets 58,267 60,267
------- -------
Net deferred tax asset $23,109 $39,292
======= =======
A valuation allowance is required to be established for any
portion of the deferred tax asset that management believes will not
be realized. In the opinion of management, it is more likely than
not that the benefit of the deferred tax asset will be realized
and, therefore, no such valuation allowance has been established.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11 - INCENTIVE PLANS
Harleysville Group has an Equity Incentive Plan for key
employees. Awards may be made in the form of stock options, stock
appreciation rights (SARs), restricted stock, or any combination of
the above. Such awards are limited to an aggregate of 1,407,000
shares of Harleysville Group Inc.'s common stock. The plan
provides that stock options may become exercisable from six months
to 10 years from date of grant with an option price not less than
fair market value on date of grant. The SARs permit surrender of
the option and receipt of current market price over the option
price in cash. SARs associated with 23,123 shares are outstanding.
Results of operations include charges (benefits) related to the
SARs of $132,000, $(143,000) and $58,000 for 1995, 1994 and 1993,
respectively. The income tax benefit related to the difference
between the market price at the date of exercise and the option
price for non-qualified stock options was credited to additional
paid-in capital.
The Harleysville Group Inc. 1995 Directors Stock Option
Program provides for the granting of options to eligible directors
to purchase a maximum of 65,000 shares of common stock. Options
are granted at exercise prices equal to fair market value on the
date of grant. The options vest and become exercisable at the rate
of 20% per year of active service. The options have a term of 10
years.
Harleysville Group adopted stock option plans for
substantially all employees and certain designated agents in 1992.
The plans provide for the granting of options to purchase a maximum
of 425,000 shares of common stock. The plans provide that the
options may become exercisable from three to 10 years from date of
grant with an option price not less than fair market value on date
of grant.
Information regarding the various stock option plans is as
follows:
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11 - INCENTIVE PLANS (CONTINUED)
NUMBER OPTION PRICES
OF SHARES PER SHARE
--------- --------------
Outstanding at
December 31, 1992 891,823 $ 8.73 - 27.25
Granted--1993 80,765 28.00 - 29.13
Exercised--1993 (87,648) 9.60 - 19.00
Forfeited--1993 (15,590) 18.84 - 27.25
-------- --------------
Outstanding at
December 31, 1993 869,350 8.73 - 29.13
Granted--1994 124,600 22.25
Exercised--1994 (44,485) 9.60 - 19.00
Forfeited--1994 23,540) 19.00 - 28.00
-------- --------------
Outstanding at
December 31, 1994 925,925 8.73 - 29.13
Granted--1995 196,210 25.00
Exercised--1995 (130,288) 9.60 - 28.00
Forfeited--1995 (50,085) 22.25 - 28.00
-------- --------------
Outstanding at
December 31, 1995 941,762 $ 8.73 - 29.13
======== ==============
Exercisable at
December 31, 1995 695,651 $ 8.73 - 29.13
======== ==============
SFAS No. 123, "Accounting for Stock-Based Compensation," was
issued in October 1995 and is effective for fiscal years beginning
after December 15, 1995. It permits a company to choose one of two
methods of accounting for stock-based compensation arrangements:
either the intrinsic value-based method as is currently being
followed or an estimated fair value-based method. Harleysville
Group has not yet determined whether it will adopt the new method
or continue with its current practice of accounting for stock-based
compensation. However, the new method, if adopted, is not
currently expected to have a material effect on the financial
statements.
Harleysville Group has incentive bonus plans. Cash bonuses
are paid or deferred on a formula basis depending upon the
performance of Harleysville Group and Mutual in relation to certain
targets. Harleysville Group's expense for such plans was
$1,161,000, $365,000 and $570,000 for 1995, 1994 and 1993,
respectively. Harleysville Group has an Employee Stock Purchase
Plan under which eligible employees may purchase shares of common
stock at a price equal to 85% of the fair market value during a
specified time interval. The number of shares issued under the
plan was 53,421, 44,478 and 36,522 in 1995, 1994 and 1993,
respectively.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11 - INCENTIVE PLANS (CONTINUED)
In 1995, Harleysville Group adopted an Agency Stock Purchase
Plan under which eligible independent insurance agencies may invest
up to $12,500 in shares of common stock at 90% of the fair market
value at the end of each six-month subscription period. There are
500,000 shares of common stock available under the plan. No shares
were issued in 1995.
12 - PENSION AND OTHER BENEFIT PLANS
Harleysville Group Inc. has a pension plan that covers
substantially all full-time employees. Retirement benefits are a
function of both the years of service and level of compensation.
Harleysville Group Inc.'s funding policy is to contribute annually
an amount equal to at least the minimum required contribution in
accordance with minimum funding standards established by ERISA.
Contributions are intended to provide not only for benefits
attributed to service to date, but also for those expected to be
earned in the future.
The following table sets forth the year-end funded status of
the plan including Mutual:
1995 1994
--------- ---------
(in thousands)
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$42,739,000 and $33,603,000 $(44,312) $(35,513)
======== ========
Projected benefit obligation for
service rendered to date $(60,473) $(49,333)
Plan assets at fair value (primarily
listed stocks and fixed income
securities) 50,847 37,652
-------- --------
Excess of the projected benefit
obligation over plan assets (9,626) (11,681)
Unrecognized net loss due to past
experience different from that
assumed and effects of changes
in assumptions 4,761 7,064
Prior service cost not yet
recognized in net periodic
pension cost 2,881 3,295
Unrecognized net transition asset
being recognized over 14 years (884) (1,054)
-------- --------
Accrued pension cost --
entire plan $ (2,868) $ (2,376)
========= ========
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12 - PENSION AND OTHER BENEFIT PLANS (CONTINUED)
The net periodic pension cost for the plan including Mutual
includes the following components:
1995 1994 1993
-------- -------- --------
(in thousands)
Service cost--benefits
earned during the
period $ 3,123 $ 3,113 $ 2,694
Interest cost on
projected benefit
obligation 3,938 3,505 2,939
Actual return on
plan assets (10,433) (149) (2,557)
Net amortization and
deferral 7,709 (2,066) 887
-------- ------- -------
Net periodic pension
cost:
Entire plan $ 4,337 $ 4,403 $ 3,963
======== ======= =======
Harleysville Group
portion $ 2,493 $ 2,485 $ 2,224
======== ======= =======
In determining the actuarial present value of the projected
benefit obligation, the weighted-average discount rate was 7.5%,
8.0% and 7.75% for 1995, 1994 and 1993, respectively, and the rate
of increase in future compensation levels was 5.5%. The expected
long-term rate of return on retirement plan assets was 8.5%.
A non-qualified unfunded Supplemental Executive Retirement
Plan provides for incremental pension payments essentially for
pension benefits that have been reduced by legislative action.
Harleysville Group's expense for such plan was $175,000, $186,000
and $153,000 for 1995, 1994 and 1993, respectively.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12 - PENSION AND OTHER BENEFIT PLANS (CONTINUED)
SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," was issued in December 1990 and
establishes accounting standards principally for postretirement
health care benefits. Effective January 1, 1993, Harleysville
Group adopted SFAS No. 106 and recorded a charge of $393,000, net
of a tax benefit of $202,000, as the cumulative effect of the
accounting change. Postretirement benefit expense was not
material.
SFAS No. 112, "Employers' Accounting for Postemployment
Benefits," was issued in November 1992. It establishes accounting
standards for employers who provide benefits to former or inactive
employees after employment but before retirement. Effective
January 1, 1993, Harleysville Group adopted SFAS No. 112 and
recorded a charge of $456,000, net of a tax benefit of $235,000, as
the cumulative effect of the accounting change. Postemployment
benefit expense was not material.
Harleysville Group has profit sharing plans covering qualified
employees. Harleysville Group's expense under the plans was
$1,314,000, $365,000 and $1,082,000 for 1995, 1994 and 1993,
respectively.
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
1995
---------------------------------------------------
(dollars in thousands, except per share data)
FIRST SECOND THIRD FOURTH TOTAL
--------- -------- -------- -------- --------
Revenues $134,610 $137,295 $140,788 $145,856 $558,549
Losses and
expenses 124,097 124,151 127,268 130,391 505,907
Net income 8,627 10,528 10,467 11,709 41,331
Earnings
per common
share $ .64 $ .78 $ .77 $ .86 $ 3.05
1994
--------------------------------------------------
(dollars in thousands, except per share data)
FIRST SECOND THIRD FOURTH TOTAL
--------- -------- -------- -------- --------
Revenues $133,072 $129,715 $131,375 $131,296 $525,458
Losses and
expenses 143,703 124,994 120,364 119,565 508,626
Net income
(loss) (5,044) 4,984 9,055 9,459 18,454
Earnings
(loss)
per common
share $ (.39) $ .38 $ .68 $ .71 $ 1.40
<PAGE>
Independent Auditors' Report
The Board of Directors
Harleysville Group Inc.:
We have audited the accompanying consolidated balance sheets of
Harleysville Group as of December 31, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended
December 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Harleysville Group as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note 4 to the consolidated financial statements,
the Company adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities" as of January 1, 1994.
/s/KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
February 19, 1996
<PAGE>
EXHIBIT 13(D)
MARKET FOR COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The stock of Harleysville Group Inc. is quoted on the NASDAQ
National Market System, and assigned the symbol HGIC. At the close
of business on March 5, 1996, the approximate number of holders of
record of Harleysville Group Inc.'s common stock was 1,642
(counting all shares held in nominee registration as one
shareholder).
The payment of dividends is subject to the discretion of
Harleysville Group Inc.'s Board of Directors which each quarter
considers, among other factors, Harleysville Group's operating
results, overall financial condition, capital requirements and
general business conditions. The present quarterly dividend of
$0.19 per share paid in each of the third and fourth quarters of
1995 is expected to continue during 1996. As a holding company,
one of Harleysville Group Inc.'s sources of cash with which to pay
dividends is dividends from its subsidiaries. Harleysville Group's
Inc.'s insurance company subsidiaries are subject to state laws
that restrict their ability to pay dividends. See Note 9 of the
Notes to Consolidated Financial Statements.
The following table sets forth the amount of cash dividends
declared per share and the high and low bid quotations as reported
by NASDAQ for Harleysville Group Inc.'s common stock for each
quarter during the past two years.
CASH
DIVIDENDS
1995 HIGH LOW DECLARED
------------------------------------------------
First Quarter $24.75 $23.50 $.17
Second Quarter 24.50 23.75 .17
Third Quarter 29.00 24.25 .19
Fourth Quarter 32.25 26.75 .19
------------------------------------------------
CASH
DIVIDENDS
1994 HIGH LOW DECLARED
------------------------------------------------
First Quarter $29.50 $23.50 $.16
Second Quarter 24.00 19.75 .16
Third Quarter 25.25 20.00 .17
Fourth Quarter 25.00 21.75 .17
------------------------------------------------
<PAGE> Page 36
EXHIBIT (21)
SUBSIDIARIES OF REGISTRANT
Registrant owns 100% of the outstanding stock of each of the
following corporations:
NAME STATE OF INCORPORATION
------------------------------- ----------------------
Great Oaks Insurance Company Ohio
Harleysville-Atlantic Insurance
Company Georgia
Harleysville Insurance Company
of New Jersey New Jersey
Huron Insurance Company Pennsylvania
Lake States Insurance Company Michigan
Mid-America Insurance Company Connecticut
New York Casualty Insurance
Company New York
Worcester Insurance Company Massachusetts
<PAGE>
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES
The Board of Directors
Harleysville Group Inc.:
The audits referred to in our report dated February 19, 1996
include the related financial statement schedules as of December
31, 1995 and for each of the years in the three-year period ended
December 31, 1995 included in the annual report on Form 10-K.
These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statement schedules based on our audits. In our
opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set
forth therein.
We consent to incorporation by reference in the registration
statements (Nos. 33-43532, 33-84348, 33-43494, 33-91718 and 33-
91726) on Form S-8 and registration statements (Nos. 33-78372, 33-
90810 and 33-91720) on Form S-3 of Harleysville Group Inc. of our
report dated February 19, 1996 relating to the consolidated balance
sheets of Harleysville Group as of December 31, 1995 and 1994, and
the related consolidated statements of income, shareholders' equity
and cash flows and related financial statement schedules for each
of the years in the three-year period ended December 31, 1995 which
report appears in the December 31, 1995 annual report on Form 10-K
of Harleysville Group Inc. and of our report dated March 22, 1996
relating to the statements of financial condition of Harleysville
Group Inc. Employee Stock Purchase Plan as of December 31, 1995 and
1994, and the related statements of income and changes in plan
equity for each of the years in the three-year period ended
December 31, 1995, which report appears in the Harleysville Group
Inc. Employee Stock Purchase Plan annual report on Form 11-K.
Our report dated February 19, 1996 refers to the adoption of
Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" as of
January 1, 1994.
/s/KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
March 22, 1996
<PAGE>
EXHIBIT (28)
Registrant is not an insurance company and, accordingly, does
not file annual statements with any state insurance regulatory
agency.
Exhibit 28(A) to this Form 10-K contains Schedule P, of the
1995 annual statement, for the total pooled business of
Harleysville Mutual Insurance Company and the pool participant
property and casualty insurance subsidiaries of Harleysville Group
Inc. which was filed with state insurance regulatory agencies.
Exhibit 28(B) to this Form 10-K contains Schedule P of the
1995 statutory annual statement of Lake States Insurance Company.
<PAGE>
EXHIBIT 99
FORM 11-K
FOR ANNUAL REPORTS OF EMPLOYEE STOCK PURCHASE, SAVINGS
AND SIMILAR PLANS PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
---------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
-------------- ----------------
Commission file number 0-14697
----------------------
A. Full title of the plan and the address of the plan, if
different from that of the issuer named below:
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
B. Name of issuer of the securities held pursuant to the
plan and the address of its principal executive office:
Harleysville Group Inc.
355 Maple Avenue
Harleysville, Pennsylvania 19438-2297
<PAGE> Page 1
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
FORM 11-K
DECEMBER 31, 1995
Financial Statements
- --------------------
Page
----
Independent Auditors' Report 3
Statements of Financial Condition
as of December 31, 1995 and
1994 4
Statements of Income and Changes in
Plan Equity for each of the years
in the three-year period ended
December 31, 1995 5
Notes to Financial Statements 6
Schedules -
Schedules I, II and III have been
omitted because they are not
required, are not applicable,
or the required information is
shown in the financial statements
or notes thereto.
<PAGE> Page 2
INDEPENDENT AUDITORS' REPORT
The Administrative Committee
Harleysville Group Inc.
Employee Stock Purchase Plan:
We have audited the statements of financial condition of
Harleysville Group Inc. Employee Stock Purchase Plan as of December
31, 1995 and 1994, and the related statements of income and changes
in plan equity for each of the years in the three-year period ended
December 31, 1995. These financial statements are the
responsibility of the Plan's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial condition of the
Harleysville Group Inc. Employee Stock Purchase Plan as of December
31, 1995 and 1994, and the income and changes in its plan equity
for each of the years in the three-year period ended December 31,
1995 in conformity with generally accepted accounting principles.
/s/KPMG PEAT MARWICK LLP
March 22, 1996
<PAGE> Page 3
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
STATEMENTS OF FINANCIAL CONDITION
YEARS ENDED
DECEMBER 31,
1995 1994
-------- --------
Assets
- ------
Receivable from affiliate $494,035 $484,607
======== ========
Plan Equity
- -----------
Net assets available for
plan participants $494,035 $484,607
======== ========
See accompanying notes to financial statements.
<PAGE> Page 4
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
STATEMENTS OF INCOME AND CHANGES IN PLAN EQUITY
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
------------ ---------- ----------
Contributions - Employees $ 1,069,528 $ 962,648 $ 808,280
Purchase and distribution
of Harleysville Group Inc.
stock to employees (1,012,258) (862,882) (734,462)
Employee withdrawals and
terminations (47,842) (20,251) (26,091)
----------- --------- ---------
Net increase 9,428 79,515 47,727
Plan equity beginning of
year 484,607 405,092 357,365
----------- --------- ---------
Plan equity end of year $ 494,035 $ 484,607 $ 405,092
=========== ========= =========
See accompanying notes to financial statements.
<PAGE> Page 5
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounts of the plan are maintained on the accrual basis.
The receivable from affiliate represents the biweekly contributions
from employees which are made in the form of regular payroll
deductions and are recorded by the plan after each biweekly pay
period.
2. DESCRIPTION OF THE PLAN
All regular full-time employees and regular part-time
employees who work at least twenty hours a week are eligible to
participate in the plan.
Eligible employees must authorize a payroll deduction equal to
at least 2 percent but not more than 10 percent of base pay during
the enrollment periods to participate in the plan. The enrollment
periods are the 1st through 14th day of January and July of each
plan year. Once enrolled, an eligible employee will continue to
participate in the plan for each succeeding subscription period
until the employee terminates participation or ceases to be an
eligible employee.
Each subscription period will run from January 15 through July
14 or from July 15 through January 14. At the close of each pay
period, the amount to be deducted from each participant's base pay
will be credited to such participant's plan account. On the last
day of each subscription period, the amount credited to each
participant's plan account will be divided by the subscription
price for that subscription period and the participant's account
will be credited with the number of the whole and fractional shares
which results.
If a participant desires to change the rate of contribution
the participant may do so effective for the next subscription
period by filing a new subscription agreement during the applicable
enrollment period. At any time, a participant may withdraw from
the plan and receive the amount credited to the participant's
account in cash by giving written notice to the Company.
Separation from employment for any reason including death,
disability or retirement shall be treated as an automatic
withdrawal from the plan.
At December 31, 1995, there were 540 participants in the plan.
<PAGE> Page 6
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. INVESTMENT
The contributions credited to the participant's account are
used to purchase shares of Harleysville Group Inc. common stock at
a specified subscription price. The subscription price for each
share of common stock shall be the lesser of 85 percent of the fair
market value of such shares on the last trading day before the
first day of the subscription period or 85 percent of the fair
market value of such share on the last day of the subscription
period. The fair market value of a share shall be the closing
price as reported on the NASDAQ National Market System on the
applicable date. The total number of shares to be made available
under the plan is approximately 500,000 shares of capital stock of
the Company.
4. TAX STATUS
The plan is intended to qualify under the provisions of
Section 423 of the Internal Revenue Code. No income will be
realized for federal income tax purposes by a participant upon the
purchase of shares under the plan. Tax consequences to the Company
and to plan participants upon disposition of shares under the plan
vary depending on the length of time held and fair market value at
time of disposition.
5. PLAN TERMINATION
The plan will be in effect until the earlier of July 31, 2005
or the date on which plan participants have subscribed for the
total number of shares available for purchase under the plan. At
December 31, 1995, there are approximately 500,000 shares that
remain available for issuance under the plan. During the effective
duration of the plan, there will be twenty subscription periods.
6. SUBSEQUENT EVENT
On January 15, 1996, 24,961 shares of stock were purchased at
a subscription price of $21.46 per share on behalf of the plan
participants for the subscription period ended January 14, 1996.
<PAGE> Page 7
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the trustees (or other persons who administer the plan) have
duly caused this annual report to be signed by the undersigned
hereunto duly authorized.
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
Date: March 27, 1996 By: /s/BRUCE J. MAGEE
------------------ ---------------------------
Bruce J. Magee, Member,
Administrative Committee for
Harleysville Group Inc.
Employee Stock Purchase Plan
<PAGE> Page 8
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000792013
<NAME> HARLEYSVILLE GROUP INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 496,595
<DEBT-CARRYING-VALUE> 509,846
<DEBT-MARKET-VALUE> 542,895
<EQUITIES> 34,584
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,085,151
<CASH> 3,256
<RECOVER-REINSURE> 1,078
<DEFERRED-ACQUISITION> 59,109
<TOTAL-ASSETS> 1,378,341
<POLICY-LOSSES> 645,941
<UNEARNED-PREMIUMS> 238,710
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 97,965
0
0
<COMMON> 13,718
<OTHER-SE> 331,291
<TOTAL-LIABILITY-AND-EQUITY> 1,378,341
477,042
<INVESTMENT-INCOME> 68,445
<INVESTMENT-GAINS> 2,245
<OTHER-INCOME> 10,817
<BENEFITS> 335,496
<UNDERWRITING-AMORTIZATION> 123,019
<UNDERWRITING-OTHER> 47,392
<INCOME-PRETAX> 52,642
<INCOME-TAX> 11,311
<INCOME-CONTINUING> 41,331
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,331
<EPS-PRIMARY> 3.05
<EPS-DILUTED> 0.00
<RESERVE-OPEN> 535,452
<PROVISION-CURRENT> 346,383
<PROVISION-PRIOR> (10,887)
<PAYMENTS-CURRENT> 129,446
<PAYMENTS-PRIOR> 164,849
<RESERVE-CLOSE> 576,653
<CUMULATIVE-DEFICIENCY> (10,887)
</TABLE>
