SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1996 .
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14697
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HARLEYSVILLE GROUP INC.
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(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, PENNSYLVANIA 19438-2297
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(Address of principal executive offices, including zip code)
(215) 256-5000
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(Registrant's telephone number, including area code)
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 .
----- -----
At July 31, 1996, 13,970,210 shares of common stock of
Harleysville Group Inc. were outstanding.
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Page 2
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
INDEX
Page Number
-----------
Part I - Financial Information
Consolidated Balance Sheets - June 30, 1996 and
December 31, 1995 3
Consolidated Statements of Income - For the three
months ended June 30, 1996 and 1995 4
Consolidated Statements of Income - For the six
months ended June 30, 1996 and 1995 5
Consolidated Statement of Shareholders' Equity -
For the six months ended June 30, 1996 6
Consolidated Statements of Cash Flows -
For the six months ended June 30, 1996
and 1995 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Results
of Operations and Financial Condition 9
Part II - Other Information 12
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Page 3
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
JUNE 30, DECEMBER 31,
1996 1995
----------- ------------
ASSETS
------
Investments:
Fixed maturities:
Held to maturity, at amortized
cost (fair value $585,764
and $542,895) $ 577,722 $ 509,846
Available for sale, at fair value
(amortized cost $568,007 and
$468,206) 574,774 496,595
Equity securities, at fair value
(cost $46,825 and $30,347) 53,358 34,584
Short-term investments, at cost,
which approximates fair value 12,625 44,126
---------- ----------
Total investments 1,218,479 1,085,151
Cash 1,604 3,256
Receivables:
Premiums 70,447 62,233
Reinsurance 80,803 70,366
Accrued investment income 19,051 16,496
---------- ----------
Total receivables 170,301 149,095
Deferred policy acquisition costs 69,864 59,109
Prepaid reinsurance premiums 6,160 8,334
Property and equipment, net 22,579 22,578
Deferred income taxes 35,228 23,109
Other assets 25,226 27,709
---------- ----------
Total assets $1,549,441 $1,378,341
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unpaid losses and loss settlement
expenses $ 774,060 $ 645,941
Unearned premiums 284,757 238,710
Accounts payable and accrued expenses 46,049 48,478
Debt and capitalized lease obligations 97,715 97,965
Due to affiliate 2,323 2,238
---------- ----------
Total liabilities 1,204,904 1,033,332
---------- ----------
Shareholders' equity:
Preferred stock, $1 par value, authorized
1,000,000 shares; none issued
Common stock, $1 par value, authorized
80,000,000 shares; issued and
outstanding 13,920,070 and
13,718,086 shares 13,920 13,718
Additional paid-in capital 116,049 111,519
Net unrealized investment gains,
net of deferred income taxes 8,645 21,207
Retained earnings 205,923 198,565
---------- ----------
Total shareholders' equity 344,537 345,009
---------- ----------
Total liabilities and
shareholders' equity $1,549,441 $1,378,341
========== ==========
See accompanying notes to consolidated financial statements.
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Page 4
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
(dollars in thousands, except per share data)
1996 1995
--------- ---------
Revenues:
Premiums earned $151,838 $117,335
Investment income, net of
investment expenses 19,315 17,050
Realized investment gains 327 259
Other income 2,816 2,651
-------- --------
Total revenues 174,296 137,295
-------- --------
Losses and expenses:
Losses and loss settlement expenses 106,859 82,323
Amortization of deferred policy
acquisition costs 38,176 30,371
Other underwriting expenses 11,964 8,877
Interest expense 1,632 1,743
Other expenses 743 837
-------- --------
Total expenses 159,374 124,151
-------- --------
Income before income taxes 14,922 13,144
Income taxes 3,187 2,616
-------- --------
Net income $ 11,735 $ 10,528
======== ========
Weighted average number of shares
outstanding 13,855,536 13,494,904
Earnings per common share $ .85 $ .78
======== ========
Cash dividend per common share $ .19 $ .17
======== ========
See accompanying notes to consolidated financial statements.
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Page 5
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(dollars in thousands, except per share data)
1996 1995
--------- ---------
Revenues:
Premiums earned $299,857 $232,261
Investment income, net of
investment expenses 38,547 33,731
Realized investment gains 2,526 510
Other income 5,597 5,403
-------- --------
Total revenues 346,527 271,905
-------- --------
Losses and expenses:
Losses and loss settlement expenses 231,084 165,842
Amortization of deferred policy
acquisition costs 75,664 60,208
Other underwriting expenses 21,543 17,153
Interest expense 3,268 3,489
Other expenses 1,392 1,556
-------- --------
Total expenses 332,951 248,248
-------- --------
Income before income taxes 13,576 23,657
Income taxes 968 4,502
-------- --------
Net income $ 12,608 $ 19,155
======== ========
Weighted average number of shares
outstanding 13,809,388 13,444,318
Earnings per common share $ .91 $ 1.42
======== ========
Cash dividends per common share $ .38 $ .34
======== ========
See accompanying notes to consolidated financial statements.
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Page 6
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(dollars in thousands)
NET
UNREALIZED
COMMON STOCK ADDITIONAL INVESTMENT
PAID-IN GAINS RETAINED
SHARES AMOUNT CAPITAL (LOSSES) EARNINGS TOTAL
--------- ------- ---------- ---------- --------- ---------
Balance,
December 31,
1995 13,718,086 $13,718 $111,519 $ 21,207 $198,565 $345,009
Net income 12,608 12,608
Issuance of
common stock 201,984 202 4,530 4,732
Cash dividends
paid (5,250) (5,250)
Change in
unrealized
investment
gains
(losses),
net (12,562) (12,562)
--------- ------- ---------- ---------- --------- ---------
Balance,
June 30,
1996 13,920,070 $13,920 $116,049 $ 8,645 $205,923 $344,537
========== ======= ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
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Page 7
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(in thousands)
1996 1995
--------- ----------
Cash flows from operating activities:
Net income $ 12,608 $ 19,155
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in receivables, unearned
premiums, prepaid reinsurance
and due to affiliate (869) 612
Increase in unpaid losses and
loss settlement expenses 34,153 24,694
Deferred income taxes (5,354) (256)
Increase in deferred policy
acquisition costs (10,755) (4,217)
Amortization and depreciation 754 483
Gain on sale of investments (2,526) (510)
Other, net 3,820 (6,683)
--------- ---------
31,831 33,278
Cash provided from the change in
the pooling agreement participation 117,800
--------- ---------
Net cash provided by operating
activities 149,631 33,278
--------- ---------
Cash flows from investing activities:
Fixed maturity investments:
Purchases (218,346) (92,054)
Sales or maturities 51,188 67,697
Equity securities:
Purchases (31,230) (8,086)
Sales 17,166 1,779
Net sales of short-term
investments 31,501 966
Purchases of property and equipment (794) (473)
--------- ---------
Net cash used by investing
activities (150,515) (30,171)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 4,732 4,030
Payment of debt and lease
obligations (250) (2,230)
Dividends paid (5,250) (4,573)
--------- ---------
Net cash used by
financing activities (768) (2,773)
--------- ---------
Increase (decrease) in cash (1,652) 334
Cash at beginning of period 3,256 1,584
--------- ---------
Cash at end of period $ 1,604 $ 1,918
========= =========
See accompanying notes to consolidated financial statements.
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Page 8
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - Basis of Presentation
The financial information for the interim periods included
herein is unaudited; however, such information reflects all
adjustments (consisting of only normal recurring adjustments) which
are, in the opinion of management, necessary to a fair presentation
of the financial position, results of operations, and cash flows
for the interim periods. The results of operations for interim
periods are not necessarily indicative of results to be expected
for the full year.
These financial statements should be read in conjunction with
the financial statements and notes for the year ended December 31,
1995 included in the Company's 1995 Annual Report filed with the
Securities and Exchange Commission on Form 10-K.
2 - Earnings Per Share
Net income per common share is based on the weighted average
number of shares outstanding during each of the respective periods.
Additional shares arising from the assumed exercise of stock
options, which are considered common stock equivalents, were not
included in the computations because they were either antidilutive
or the assumed additional dilutive effect was not material.
3 - Reinsurance
Premiums earned are net of amounts ceded to unrelated insurers
of $10,387,000 and $19,885,000 for the three and six months ended
June 30, 1996, respectively, and $10,084,000 and $18,375,000 for
the three and six months ended June 30, 1995, respectively. Losses
and loss settlement expenses are net of amounts ceded to unrelated
insurers of $10,090,000 and $18,831,000 for the three and six
months ended June 30, 1996, respectively, and $6,338,000 and
$9,769,000 for the three and six months ended June 30, 1995,
respectively.
4 - Cash Flows
There were cash tax payments of $7,000,000 and $6,550,000 and
cash interest payments of $3,223,000 and $3,447,000 in the first
six months of 1996 and 1995, respectively.
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Page 9
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Effective January 1, 1996, Harleysville Group's pooling
agreement with Harleysville Mutual Insurance Company (Mutual) was
amended to include Pennland Insurance Company (Pennland), a wholly-
owned subsidiary of Mutual that writes Pennsylvania personal
automobile insurance policies. In addition, Harleysville Group's
participation increased from 60% to 65%.
Premiums earned increased $34.5 million and $67.6 million
during the three and six months ended June 30, 1996. Of such
increases, $19.1 million and $38.2 million are due to the increased
pooling participation. Excluding the effect of this change, the
premiums earned from pooled business increased $8.7 million and
$17.8 million for the three and six months ended June 30, 1996 due
to an increase in commercial lines business. The remaining
increases of $6.7 million and $11.6 million is due to growth in
Lake States', primarily from its expansion into the neighboring
states of Indiana, Illinois and Wisconsin.
Investment income increased $2.3 million and $4.8 million for
the three and six months ended June 30, 1996 resulting from an
increase in invested assets. Such increase was primarily provided
by a $117.8 million cash transfer received for various insurance
liabilities assumed January 1, 1996 in connection with the increase
in Harleysville Group's pool participation.
Realized investment gains increased $2.0 million for the six
months ended June 30, 1996 primarily resulting from sales of equity
securities. Realized investment gains were not significantly
different for the three months ended June 30, 1996 and 1995.
Income before income taxes increased $1.8 million for the
three months ended June 30, 1996 primarily due to the higher
investment income. Harleysville Group's statutory combined ratio
improved to 102.3% for the three months ended June 30, 1996 from
102.7% for the three months ended June 30, 1995 primarily due to
expenses that increased at a lower rate than premiums earned. The
lower growth in expenses is primarily due to the inclusion of
Pennland in the pooling agreement, as Pennland has lower expenses
relative to its premium than the other pool participants.
Income before income taxes decreased $10.1 million for the six
months ended June 30, 1996 primarily due to the impact of a
blizzard and related storms that occurred in January 1996 partially
offset by the higher investment income and realized gains. The
blizzard and related January 1996 storms resulted in losses of
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Page 10
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
$15.1 million, or $9.8 million after-tax ($.71 per share).
Harleysville Group's statutory combined ratio increased to 108.1%
for the six months ended June 30, 1996 from 104.2% for the six
months ended June 30, 1995. Of the increase, 5.0 points was due to
the blizzard and related January 1996 storms partially offset by
the lower growth in expenses related to the inclusion of Pennland
in the pool.
The income tax expense for the three and six months ended June
30, 1996 includes the tax benefit of $2.1 million and $3.9 million
associated with tax-exempt interest compared to $1.7 million and
$3.5 million in the same prior year periods.
In July 1996, Hurricane Bertha impacted the eastern United
States. Harleysville Group has received claims totalling
approximately $0.7 million after-tax. Based on experience with
other windstorms, it is likely that this amount will double or
triple by the time all claims are known and settled.
Effective for one year from July 1, 1996, the Company's
subsidiaries (other than Lake States) and the Mutual Company and
its wholly-owned subsidiaries renewed its catastrophe reinsurance
treaty 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 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.
Liquidity and Capital Resources
Net cash provided by operating activities was $149.6 million
and $33.3 million for the six months ended June 30, 1996 and 1995.
The increase primarily reflects the effect of the January 1, 1996
amendment to the pooling agreement with Mutual. A $117.8 million
cash transfer was received by Harleysville Group related to the
various liabilities assumed in connection with such amendment.
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Page 11
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Net cash used by investing activities was $150.5 million and
$30.2 million for the six months ended June 30, 1996 and 1995. The
increase is primarily due to the higher amount of cash provided by
operating activities.
Net cash used by financing activities was $2.0 million lower
for the six months ended June 30, 1996 primarily due to the
prepayment of a $2.0 million capitalized lease obligation during
the first six months of 1995.
Harleysville Group Inc. maintained $14.1 million of cash and
marketable investments at the holding company level at June 30,
1996 which is available for general corporate purposes including
dividends, debt service, capital contributions to subsidiaries and
acquisitions. The Company has no material commitments for capital
expenditures as of June 30, 1996.
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Page 12
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. a. Exhibits - None
b. Reports on Form 8-K - None
SIGNATURE
Pursuant to the requirements 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: August 8, 1996 /s/BRUCE J. MAGEE
-------------------- ---------------------------------
Bruce J. Magee
Senior Vice President and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000792013
<NAME> HARLEYSVILLE GROUP INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 574,774
<DEBT-CARRYING-VALUE> 577,722
<DEBT-MARKET-VALUE> 585,764
<EQUITIES> 53,358
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<REAL-ESTATE> 0
<TOTAL-INVEST> 1,218,479
<CASH> 1,604
<RECOVER-REINSURE> 2,003
<DEFERRED-ACQUISITION> 69,864
<TOTAL-ASSETS> 1,549,441
<POLICY-LOSSES> 774,060
<UNEARNED-PREMIUMS> 284,757
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0
0
<COMMON> 13,920
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299,857
<INVESTMENT-INCOME> 38,547
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