<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission File Number 0-14697
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [ X ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ X ] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Confidential, for Use of the Commission Only (as
permitted by Rule 14a-6(e)(2))
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
Harleysville Group Inc.
----------------------------------------------
(Name of Registrant as Specified in its Charter)
Roger A. Brown, General Counsel
----------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ X ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-
6(i)(2), or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each part to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
1) Title of each class of securities to which transaction
applies:
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2) Aggregate number of securities to which the transaction
applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11:
-----------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------
5) Total fee paid:
-----------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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2) Form, Schedule, or Registration Statement No.:
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3) Filing Party:
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4) Date Filed:
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<PAGE>
HARLEYSVILLE GROUP INC.
[L O G O]
March 22, 1996
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of the
Stockholders of Harleysville Group Inc. which will be held at the
Home Office of the Company at 355 Maple Avenue, Harleysville,
Pennsylvania on Wednesday, April 24, 1996, at 10:00 A.M.
Stockholders will elect a class of directors and will act upon
proposals to approve the adoption of the 1996 Directors' Stock
Purchase Plan and to approve an amendment of the Certificate of
Incorporation to increase the number of authorized shares of Common
Stock of the Company.
Whether or not you plan to attend the meeting in person,
please complete and return the enclosed proxy card in the envelope
provided so that your shares can be voted at the meeting in
accordance with your instructions.
Sincerely,
Bradford W. Mitchell
Chairman of the Board
<PAGE>
HARLEYSVILLE GROUP INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 24, 1996
To the Stockholders of
HARLEYSVILLE GROUP INC.
The Annual Meeting of Stockholders of HARLEYSVILLE GROUP INC.
("Harleysville Group") will be held at 10:00 A.M., local time, on
April 24, 1996, at 355 Maple Avenue, Harleysville, Pennsylvania,
for the following purposes:
1. To elect three Class C directors to serve until the
expiration of their terms and until their successors are
elected;
2. To approve the adoption of the 1996 Directors' Stock
Purchase Plan;
3. To consider and act upon a proposal to amend the
Certificate of Incorporation of Harleysville Group to increase
the number of authorized shares of Common Stock from
23,000,000 to 80,000,000; and
4. To transact such other business as may properly come
before the Annual Meeting and any adjournment thereof.
The Board of Directors has fixed the close of business on
March 13, 1996 as the record date for determining the stockholders
entitled to notice of and to vote at the Annual Meeting.
A copy of Harleysville Group's Annual Report for its fiscal
year ended December 31, 1995 is being mailed to stockholders
together with this Notice.
By Order of the Board of Directors,
Roger A. Brown
-------------------------------------
Secretary
March 22, 1996
Harleysville, Pennsylvania
<PAGE> Page 1
HARLEYSVILLE GROUP INC.
GENERAL. This Proxy Statement and the form of proxy enclosed
herewith, which are first being mailed to stockholders on or about
March 22, 1996 are being furnished in connection with the
solicitation by the Board of Directors of Harleysville Group Inc.
("Harleysville Group") of proxies to be voted at the Annual Meeting
of Stockholders (the "Annual Meeting") to be held at 10:00 A.M.,
local time, on April 24, 1996 and at any adjournment thereof, at
Harleysville Group's principal executive offices, which are located
at 355 Maple Avenue, Harleysville, Pennsylvania.
VOTING. Shares represented by proxies in the accompanying
form, if properly signed and returned, will be voted in accordance
with the specifications made thereon by the stockholders. Any
proxy not specifying to the contrary will be voted for the election
of the nominees for director named below, for the adoption of the
1996 Directors' Stock Purchase Plan and for the approval of an
amendment to the Certificate of Incorporation to increase the
number of authorized shares of the Company's Common Stock.
Holders of Common Stock of record at the close of business on
March 13, 1996 will be entitled to receive notice of and to vote at
the Annual Meeting. Every stockholder entitled to vote at the
meeting shall have the right to one vote for every share having
voting power standing in his or her name on the record date fixed
for the meeting. Cumulative voting rights do not exist with
respect to the election of Directors.
Under Section 216 of the Delaware General Corporation Law and
Harleysville Group's By-Laws, a majority of the shares of Harleys-
ville Group's Common Stock, present in person or represented by
proxy, constitute a quorum for purposes of the Annual Meeting. The
affirmative vote of the majority of shares present in person or
represented by proxy at the Annual Meeting and entitled to vote on
the subject matter is required for stockholder action. In the
election of Directors, stockholders may cast votes for, or withhold
votes from, any nominee; votes that are withheld will not be
included in the vote, and will have no effect on the outcome.
Stockholders may abstain from voting on any proposal (except as to
the election of Directors); abstentions are included in the total
number of shares represented in determining the presence or absence
of a quorum for that proposal. Because approval of the proposal
requires an affirmative vote of a majority of shares present (in
person or by proxy) and entitled to vote, abstentions will have the
effect of a negative vote. A "non-vote" occurs when a broker-
<PAGE> Page 2
dealer holding customer securities in "street name": has not
received voting instructions from the beneficial owner of the
shares; is barred from exercising discretionary authority to vote
under applicable rules of a national stock exchange or of the
National Association of Securities Dealers; and has indicated on
the proxy card or otherwise notified an issuer that it does not
have the authority to vote such securities on a specified matter.
Under Delaware law, a broker non-vote will have no effect on the
outcome of the election of directors or the approval of the
proposal.
As of the close of business on March 13, 1996, Harleysville
Group had outstanding ________ shares of Common Stock,
$1.00 par value (the "Common Stock"). As of March 13, 1996,
Harleysville Mutual Insurance Company ("Harleysville Mutual")
owned 7,641,354 shares of Harleysville Group's outstanding Common
Stock, or approximately 56% of Harleysville Group's outstanding
Common Stock. Harleysville Mutual has advised Harleysville Group
that Harleysville Mutual will vote its shares in favor of the election
of Messrs. Bateman, Johnson and Strasburg, to approve the adoption of
the 1996 Directors' Stock Purchase Plan and to approve the proposal
to amend the Certificate of Incorporation to increase the number of
authorized shares of Common Stock. Accordingly, Messrs. Bateman, Johnson
and Strasburg will be elected regardless of the votes of Harleysville
Group's stockholders other than Harleysville Mutual and the adoption
of the 1996 Directors' Stock Purchase Plan and amendment of the
Certificate of Incorporation will be approved regardless of the
votes of Harleysville Group's stockholders other than Harleysville
Mutual.
SOLICITATION OF PROXIES. The cost of solicitation of proxies
in the accompanying form will be borne by Harleysville Group,
including expenses in connection with preparing and mailing this
Proxy Statement. Such solicitation will be made by mail and may
also be made on behalf of Harleysville Group by Harleysville
Group's regular officers and employees in person or by telephone or
telegram for which they will receive no additional compensation.
Harleysville Group, upon request therefor, will also reimburse
brokers or banks or persons holding shares in their names or in the
names of nominees for their reasonable expenses in sending proxies
and proxy material to beneficial owners.
REVOCABILITY OF PROXIES. A stockholder who signs and returns
a proxy in the accompanying form may revoke it at any time before
it is voted by giving written notice thereof to the Secretary of
Harleysville Group, by a duly executed proxy bearing a later date,
or by voting by ballot at the Annual Meeting.
<PAGE> Page 3
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth, as of December 31, 1995, the
amount and percentage of Harleysville Group's outstanding Common
Stock beneficially owned by each person who is known by Harleys-
ville Group to own beneficially more than five percent of its
Common Stock. The table also lists beneficial ownership, as of
February 1, 1996, of (i) each director and nominee for director;
(ii) each of the executive officers of Harleysville Group named in
the Summary Compensation Table beginning on page _____ (the "Summary
Compensation Table"); and (iii) all executive officers and
directors of Harleysville Group as a group.
<TABLE>
<CAPTION>
Percent of
Name and Address of Amount of Beneficial Class of
Beneficial Owner Ownership Common Stock <F1><F2>
- -------------------- -------------------- --------------------
Harleysville Mutual
Insurance Company
<S> <C> <C>
Harleysville, PA 19438-2297 7,641,354 56%
The Capital Group Companies Inc. 1,054,500<F3> 8%
("Capital Group")
333 South Hope Street
Los Angeles, CA 90071
Putnam Investments, Inc. 704,300<F4> 5%
("Putnam")
One Post Office Square
Boston, MA 02109
Directors and Named Executive Officers
Bradford W. Mitchell............. 27,997<F5>
Walter R. Bateman, II............ 44,501<F6>
Michael L. Browne................ 4,554<F5><F7>
Robert D. Buzzell................ 3,894<F5>
Gerard G. Johnson................ 3,038<F5>
H. Bryce Jordan.................. 4,719<F5>
John J. Keenan................... 13,390<F5>
Frank E. Reed.................... 4,937<F5>
William E. Strasburg............. 6,725<F5>
James C. O'Neill................. 52,999<F8>
Thomas E. Roden.................. 23,430<F9>
Mark R. Cummins.................. 18,983<F10>
Bruce J. Magee................... 18,021<F11>
All directors and executive
officers as a group (16 persons). 254,836<F5><F12> 2%
</TABLE>
[FN]
<F1> At December 31, 1995 and February 1, 1996, Harleysville
Group had 13,718,086 and 13,764,590 shares of Common
Stock outstanding, respectively.
<F2> Less than 1% unless otherwise indicated.
<PAGE> Page 4
<F3> Capital Group is the parent company of several investment
management and advisory companies, including Capital
Guardian Trust Company ("Capital Guardian") and Capital
Research and Management Company ("Capital Research"). In
a Schedule 13G, dated February 9, 1996, filed with the
Securities and Exchange Commission ("SEC"), Capital Group
reported that as of December 29, 1995 its operating
subsidiaries, Capital Guardian and Capital Research, held
679,500 shares and 375,000 shares, respectively, for the
accounts of clients for whom it exercised investment
discretion. Capital Group also reported sole voting
power as to 564,500 of these shares and sole dispositive
power as to all 1,054,500. Capital Group disclaims
beneficial ownership as to all 1,054,500 such shares. No
client account individually holds 5% or more of this
class of security. Capital Group has also represented
that the shares reported were acquired in the ordinary
course of business, and were not acquired for the purpose
of, and do not have the effect of, changing or
influencing control of Harleysville Group.
<F4> Putnam, which is a wholly owned subsidiary of Marsh and
McLennan Companies, Inc., is the parent company of
several investment management and advisory companies,
including Putnam Advisory Company, Inc. ("PAC"). Putnam
filed a Schedule 13G, dated February 2, 1996, with the SEC,
and reported that as of December 31, 1995, PAC held a total
of 704,300 shares, for the accounts of clients. Putnam
also reported sole voting power as to none of these
shares, shared voting power as to 212,200 of these shares
and shared dispositive power as to all of the shares.
Putnam has also represented that the shares reported were
acquired in the ordinary course of business, and were not
acquired for the purpose of, and do not have the effect
of, changing or influencing control of Harleysville
Group.
<F5> Includes shares of Common Stock which the non-employee
directors have the option to purchase within sixty days
under the 1990 and 1995 Directors' Stock Option Programs
respectively, as follows: Bradford W. Mitchell - 1,882;
Michael L. Browne - 4,150; Robert D. Buzzell - 3,394;
Gerard G. Johnson - 2,638; H. Bryce Jordan - 4,150;
John J. Keenan - 1,000; Frank E. Reed - 4,150 ; and
William E. Strasburg - 4,150.
<F6> Includes 34,338 shares of Common Stock which Mr. Bateman
has the right to acquire within sixty days under the
Equity Incentive Plan.
<PAGE> Page 5
<F7> Includes 65 shares held by Mr. Browne as custodian for a
minor child, as to which shares Mr. Browne disclaims
beneficial ownership.
<F8> Includes 44,207 shares of Common Stock which Mr. O'Neill
has the right to acquire within sixty days under the
Equity Incentive Plan.
<F9> Includes 19,423 shares of Common Stock which Mr. Roden
has the right to acquire within sixty days under the
Equity Incentive Plan. Also includes 37 shares held by
Mr. Roden as custodian for a minor child, as to which
shares Mr. Roden disclaims beneficial ownership.
<F10> Includes 16,825 shares of Common Stock which Mr. Cummins
has the right to acquire within sixty days under the
Equity Incentive Plan. Also includes 1,144 shares held
by Mr. Cummins' spouse, as to which shares Mr. Cummins
disclaims beneficial ownership.
<F11> Includes 14,177 shares of Common Stock which Mr. Magee
has the right to acquire within sixty days under the
Equity Incentive Plan.
<F12> Includes 148,554 of Common Stock which all the executive
officers as a group have the right to acquire within
sixty days under the Equity Incentive Plan.
ELECTION OF DIRECTORS
Harleysville Group's Board of Directors currently consists of
nine members but will consist of eight directors following the
Annual Meeting because of John J. Keenan's retirement. Each
director is elected for a three-year term and until his successor
has been duly elected, except that if a nominee will attain the age
of 72 within the next two years following such nominee's election,
such nominee will be nominated for a term of one or two years, as
the case may be, to expire on the first Annual Meeting date
following the nominee's attainment of age 72. The current three-
year terms of Class A, B and C directors expire in the years 1998,
1997 and 1996 respectively.
Three Class C directors are to be elected at the Annual
Meeting. Unless otherwise instructed, proxy holders will vote the
proxies received by them for the election of the nominees named
below. If any nominee becomes unavailable for any reason, it is
intended that the proxies will be voted for a substitute nominee
designated by the Board of Directors or the number of directors to
be elected at the meeting will be reduced accordingly. The Board
of Directors has no reason to believe the nominees named will be
unable to serve if elected. Any vacancy occurring on the Board of
<PAGE> Page 6
Directors for any reason may be filled by a majority of the
directors then in office until the expiration of the term of the
class of directors in which the vacancy exists.
The names of the nominees for Class C directors and the Class
A and B directors who will continue in office after the Annual
Meeting until the expiration of their respective terms, together
with certain information regarding them, are as follows:
<TABLE>
<CAPTION>
NOMINEES FOR CLASS C DIRECTOR
Director Year Term
Name Age Since Will Expire
- ----- --- ------- -----------
<S> <C> <C> <C>
Walter R. Bateman, II 48 1992 1999*
Gerard G. Johnson 55 1993 1999*
William E. Strasburg 68 1986 1999*
</TABLE>
- --------------
*If elected at the Annual Meeting.
<TABLE>
<CAPTION>
DIRECTORS CONTINUING IN OFFICE
CLASS A DIRECTORS
Director Year Term
Name Age Since Will Expire
- ---- --- -------- -----------
<S> <C> <C> <C>
Bradford W. Mitchell 68 1979 1998
Robert D. Buzzell 62 1992 1998
CLASS B DIRECTORS
Director Year Term
Name Age Since Will Expire
- ---- --- -------- -----------
<S> <C> <C> <C>
Michael L. Browne 49 1986 1997
H. Bryce Jordan 71 1986 1997
Frank E. Reed 61 1986 1997
</TABLE>
Mr. Bateman has served as a director of Harleysville Group and
Harleysville Mutual since November 1992 when he was also elected
President and Chief Operating Officer of both companies. Mr.
Bateman was elected President and Chief Executive Officer of
Harleysville Group and Harleysville Mutual, effective January 1,
1994. Prior thereto, from July 1988 to July 1991 Mr. Bateman was
in charge of field operations for Harleysville Group and
Harleysville Mutual. He was Executive Vice President of both
companies and responsible for all insurance operations from July
1991 to November 1992. Mr. Bateman is a member of the Executive
Committee and the Finance Committee.
<PAGE> Page 7
Mr. Johnson was elected a director of Harleysville Group in
April 1993. Mr. Johnson is Vice President - Finance and Chief
Financial Officer of VF Corporation, Wyomissing, Pennsylvania, a
position he has held since 1988. Mr. Johnson is Chairperson of the
Audit Committee and serves on the Coordinating Committee.
Mr. Strasburg became a director of Harleysville Group in
February 1986. Mr. Strasburg is also a director of Harleysville
Mutual, a position he has held since 1975. In 1989, Mr. Strasburg
became Publisher Emeritus of Montgomery Publishing Company, a
newspaper publishing firm located in Fort Washington, Pennsylvania.
In 1991, Mr. Strasburg retired as Vice President of Independent
Publications, Inc., and retired as a member of its Board of
Directors in December 1994. Mr. Strasburg serves on the Executive
Committee and the Compensation & Personnel Development Committee,
and is Chairperson of the Nominating Committee.
Mr. Mitchell has been a director of Harleysville Group since
its formation in 1979, and its Chairman since 1986. He served as
President from 1979 to 1988 and from 1991 to November 1992, and as
Chief Executive Officer from April 1988 until his retirement on
December 31, 1993. Mr. Mitchell is also the Chairman of the Board
and a director of Harleysville Mutual and has served in various
capacities, including President and Chief Executive Officer, since
1976. He retired as Chief Executive Officer of Harleysville Mutual
on December 31, 1993. He is also a director of Harleysville
National Corporation, a bank holding company located in Harleys-
ville, Pennsylvania. Mr. Mitchell is the Chairperson of the
Finance Committee and the Executive Committee, and serves on the
Nominating Committee.
Dr. Buzzell was elected a director of Harleysville Group and
Harleysville Mutual in April 1992. Dr. Buzzell is currently
Distinguished Professor of Marketing, George Mason University,
School of Business Administration, Fairfax, Virginia, a position
he has held since September 1, 1993. Prior thereto, he was
Sebastian S. Kresge Professor of Business Administration at Harvard
University, Graduate School of Business Administration. Dr.
Buzzell currently serves on the board of directors of VF
Corporation. He serves on the Compensation & Personnel Development
Committee and the Nominating Committee.
Mr. Browne was elected a director of Harleysville Group in
February 1986. In 1983, Mr. Browne joined the law firm of Reed,
Smith, Shaw & McClay in Philadelphia, Pennsylvania, as a partner.
He became managing partner in January 1993. From 1980 to 1983,
Mr. Browne was the Insurance Commissioner of the Commonwealth of
Pennsylvania. He is a member of the Executive Committee, Finance
Committee, Nominating Committee, Audit Committee, and Coordinating
Committee.
Dr. Jordan has been a director of Harleysville Group since
February 1986 and a director of Harleysville Mutual since April
1984. Dr. Jordan is President Emeritus of Pennsylvania State
<PAGE> Page 8
University. From 1983 to August 1990, Dr. Jordan was the President
of Pennsylvania State University. He also served until August 1990
as the President, Chief Executive Officer and a director of The
Corporation for Penn State, a non-profit corporation located in
State College, Pennsylvania. Dr. Jordan serves as an advisory
director of Mellon Bank Corporation, a Pennsylvania bank holding
company headquartered in Pittsburgh, Pennsylvania, and of Mellon
Bank NA, a subsidiary of Mellon Bank Corporation. He is also a
director of Quaker State Corporation. He serves on the Executive
Committee and the Finance Committee, and he is Chairperson of the
Compensation & Personnel Development Committee.
Mr. Reed was elected a director of Harleysville Group in
February 1986 and has been a director of Harleysville Mutual since
1985. From 1984 to March 1990, Mr. Reed served as President and
Chief Operating Officer of First Pennsylvania Corporation and First
Pennsylvania Bank, Philadelphia, Pennsylvania. Beginning in March
1990, Mr. Reed became, as a result of a merger between First
Pennsylvania Corporation and CoreStates Financial Corp, President
and Chief Executive Officer of CoreStates Philadelphia National
Bank. Mr. Reed retired from that position in March 1995. Mr. Reed
was a director of Centel Corporation until March 1993 when it
merged with Sprint Corporation. He currently serves as a director
of Sprint Corporation. He is a member of the Executive Committee
and the Finance Committee and serves as Chairperson of the
Coordinating Committee, representing both Harleysville Group and
Harleysville Mutual.
THE BOARD OF DIRECTORS AND ITS COMMITTEES
The full Board of Directors met five times during 1995.
During 1995, the Board of Directors had an Executive Committee, a
Finance Committee, a Compensation & Personnel Development Commit-
tee, a Nominating Committee, an Audit Committee, and a Coordinating
Committee. These Committees met as described below.
Harleysville Group's Executive Committee met eight times in
1995. Messrs. Mitchell, Bateman, Browne, Jordan, Keenan, Reed and
Strasburg are the current members of the Executive Committee. The
Executive Committee meets during the intervals between meetings of
the Board of Directors and has the right and authority to exercise
the full powers of the Board of Directors.
The Finance Committee, on which Messrs. Mitchell, Bateman,
Reed, Jordan, and Browne serve, met twelve times in 1995. This
Committee establishes overall investment policies and guidelines,
and also reviews and approves investments made by Harleysville
Group.
The Compensation & Personnel Development Committee of Harleys-
ville Group consists of Messrs. Jordan, Buzzell and Strasburg. The
Committee met three times in 1995 to determine compensation
policies; to review and recommend compensation plans; to approve
<PAGE> Page 9
certain compensation changes; and to establish awards under and
determine participants in the Equity Incentive Plan, the Senior
Management Incentive Bonus Plan, and the Long-Term Incentive Plan.
Harleysville Group's Nominating Committee met two times in
1995. The persons nominated for Class C Directors by the Board of
Directors were recommended by the Nominating Committee. Messrs.
Strasburg, Mitchell, Browne, and Buzzell serve on the Committee.
The Nominating Committee will consider written nominations from
stockholders, who should submit them to the Secretary of Harleys-
ville Group.
The Audit Committee met three times in 1995. The Audit
Committee reviews the performance and independence of Harleysville
Group's independent accounting firm, makes an annual recommendation
to the Board of Directors with respect to the appointment of such
accounting firm, approves the general nature of the services to be
performed by such accounting firm and solicits and reviews the
accounting firm's recommendations. The Audit Committee also
consults with Harleysville Group's internal audit group and
periodically reviews the relationships among that group, Harleys-
ville Group's management and Harleysville Group's independent
accountants. The members of the Audit Committee are Chairperson
Gerard G. Johnson, Michael L. Browne, and John J. Keenan.
The Coordinating Committee met two times in 1995. It is
generally responsible for reviewing matters involving actual or
potential conflicts between Harleysville Group and Harleysville
Mutual. The decisions of the Coordinating Committee are binding on
Harleysville Group and Harleysville Mutual. No intercompany
transaction between Harleysville Group Inc. and Harleysville Mutual
Insurance Company can be authorized by the Coordinating Committee
unless Harleysville Group's Committee members conclude that such
transaction is fair and equitable to Harleysville Group. The
Coordinating Committee is composed of Gerard G. Johnson, Michael L.
Browne, and John J. Keenan representing Harleysville Group, and
Muriel Fox, W. Thacher Brown and Jerry S. Rosenbloom representing
Harleysville Mutual. It is chaired by Frank E. Reed.
COMPENSATION OF DIRECTORS. Directors of Harleysville Group
who are also officers of Harleysville Group or Harleysville Mutual
receive no fees for services as directors. Outside directors are
currently paid an annual retainer of $16,000 and are paid $1,000
for each Board meeting attended and $900 for each committee meeting
attended, plus travel expenses. Outside directors who chair
committees of the Board of Directors receive annual retainers of
$3,500. Effective at the Annual Meeting, the annual retainers paid
to outside directors will be increased to $17,000 and the annual retainer
paid to Bradford W. Mitchell as non-employee Chairman will be increased
to $34,000. If a director serves on the Board of Directors of both
Harleysville Mutual and Harleysville Group he or she receives only one
annual retainer; and if the Boards of Directors of both companies meet
on the same day, he or she receives only one Board meeting fee. In such
event, the cost of the retainers, meeting fees and expense reimbursements
are allo-
<PAGE> Page 10
cated 50% to Harleysville Mutual and 50% to Harleysville Group. If
a Board meeting and a committee meeting, or two committee meetings,
are held on the same day, a director receives $600 for the second
meeting attended.
Harleysville Group entered into a one-year agreement with
Bradford W. Mitchell, its Chairman and former Chief Executive
Officer, for consultant and advisory services, effective January 1,
1994 which was renewed January 1, 1995 for an additional one year
period. Under the agreement, Mr. Mitchell assisted with the
transition in management of Harleysville Group, and advised
management on corporate matters, as requested. In 1995,
Harleysville Group paid Mr. Mitchell a monthly consulting fee of
$22,916.67 plus reasonable, verified expenses. The agreement was
terminable at the option of the Board of Directors of Harleysville
Group. Although this agreement was not extended for 1996, a new
one-year agreement was entered into with Mr. Mitchell to perform
selected consulting services to management on corporate matters as
requested at a per diem rate of $5,000 plus reasonable verified
expenses. It is anticipated that management will utilize Mr.
Mitchell's services under this Agreement on a limited basis in
1996.
DIRECTORS' STOCK OPTION PROGRAMS. In 1990, Harleysville Group
adopted the 1990 Directors' Stock Option Program (the "1990
Program") which provides for the issuance of an aggregate of 47,250
shares of Common Stock, subject to adjustment for stock splits or
other changes. Under the 1990 Program non-qualified stock options
to purchase 3,150 shares were awarded to all non-employee directors
of Harleysville Group and Harleysville Mutual during the period
1990 through May 1994. The options vest and become exercisable at
the rate of 20% per year of active Board service. The option price
per share is 100% of the fair market value of a share of Common
Stock on the date of grant. The 1990 Program is administered by
the Compensation and Personnel Development Committee of the Board
of Directors of Harleysville Group. The Committee has no
discretion with regard to the eligibility or selection of directors
to receive options under the 1990 Program, the number of shares of
stock subject to such options or the 1990 Program, or the purchase
price thereunder. On February 1, 1996, there were 24,570 shares
subject to such options remaining under this program and the range
of per share exercise prices was $15.00 to $28.00. The 1990 Program
does not provide for stock appreciation rights.
In 1994, Harleysville Group adopted the 1995 Directors' Stock
Option Program (the "1995 Program"), which provides for the
issuance of an aggregate of 65,000 shares subject to adjustment for
stock splits or other changes. Except for options already granted
as described above, the 1995 Program will entirely supersede the
1990 Program. Under the 1995 Program, each existing non-employee
director of Harleysville Group and Harleysville Mutual received a
one-time grant of 5,000 non-qualified stock options, less the
amount of non-vested options, if any, under the 1990 Program, on
May 24, 1995 at the then fair market value of $25.00. Accordingly,
a total of 46,220 options were granted. Thereafter, a newly
<PAGE> Page 11
elected non-employee director or an employee director who becomes
a non-employee director of Harleysville Group or Harleysville
Mutual will receive a one-time grant of 5,000 non-qualified stock
options at the first May Board meeting following his or her
election or becoming a non-employee director. The options vest at
the rate of 20% per year of active Board service with the first 20%
vesting as of the date of grant although no option is exercisable
until six months after the date of grant. The option price per
share is 100% of the fair market value of a share of Common Stock
on the date of grant. The 1995 Program is administered by the
Compensation and Personnel Development Committee of the Board of
Directors of Harleysville Group. The Committee has no discretion
with regard to the eligibility or selection of directors to receive
options under the 1995 Program, the number of shares of stock
subject to such options or the 1995 Program, or the purchase price
thereunder. The Program does not provide for stock appreciation
rights.
<PAGE> Page 12
EXECUTIVE COMPENSATION AND
OTHER INFORMATION
SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION. The following table provides
certain information concerning compensation received by Harleysville Group's
Chief Executive Officer and the four remaining most highly paid executive
officers (hereinafter "Named Executive Officers") as of the last fiscal year,
for the three fiscal years ended December 31, 1995, 1994 and 1993. All bonuses
and salaries are paid by Harleysville Group, and Harleysville Mutual is charged
for its proportional share pursuant to the terms of an intercompany allocation
agreement.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term All
Annual Compensation Compensation Other
------------------- -------------- Compen-
Awards Payouts sation
------ ------- ($)<F5>
Securities -------
Under- Long-
lying Term
Name Stock Incen-
and Options tive
Principal Bonus <F3> (#) Payouts
Position<F1> Year Salary($) ($)<F2> of Shares ($)<F4>
- ----------------- ---- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Walter R. Bateman, II...1995 $340,000 $116,587 15,679 $ 77,375 $15,300
President & 1994 $300,000 $ -0- 8,500 $ 33,661 $ 4,500
Chief Executive 1993 $195,800 $ 40,918 6,100 $ 42,140 $ 8,811
Officer
James C. O'Neill........1995 $231,300 $ 63,699 7,734 $ 82,781 $10,409
Executive Vice 1994 $218,200 $ -0- 6,100 $ 43,693 $ 3,273
President 1993 $193,100 $ 30,921 4,550 $ 54,180 $ 8,690
Corporate Services
& Subsidiary
Operations
Thomas E. Roden........ 1995 $196,500 $ 63,699 7,734 $ 43,779 $ 8,843
Executive Vice 1994 $163,400 $ -0- 4,550 $ -0- $ 2,451
President Insurance 1993 $142,300 $ 19,602 2,070 $ -0- $ 6,406
Operations &
Branch Operations
Mark R. Cummins........ 1995 $193,700 $ 44,168 6,725 $ 45,434 $ 8,717
Senior Vice 1994 $163,400 $ -0- 4,550 $ -0- $ 2,451
President 1993 $152,600 $ 25,906 4,550 $ -0- $ 6,867
Chief Investment
Officer & Treasurer
Bruce J. Magee..........1995 $146,400 $ 33,393 5,084 $ -0- $ 6,588
Senior Vice 1994 $123,700 $ -0- 3,950 $ -0- $ 1,855
President & Chief 1993 $112,700 $ 12,112 910 $ -0- $ 5,071
Financial Officer
</TABLE>
<PAGE> Page 13
[FN]
<F1 Principal position as of December 31, 1995.
<F2> Cash bonuses under the Senior Management Incentive Bonus Plan
(the "SMIP") for services rendered in fiscal years 1995, 1994,
and 1993, have been listed in the year earned, but were actually
paid in the following year. The amount of bonus listed for
fiscal year 1995 is an estimated amount as of March 13, 1996,
and is subject to adjustment. Because peer group ranking is a
factor which represents 25% of the weighting of the target
award, and the necessary information on the peer group companies
was not available as of March 13, the final award payable can
not now be calculated.
<F3> The terms of stock options granted in fiscal years 1995, 1994
and 1993 are described in Footnote (1) to the "Option Grants in
Last Fiscal Year" Table on page_____.
<F4> Cash bonuses under the Long-Term Incentive Plan (the "LTIP") for
services rendered in fiscal years 1990-1993, 1991-1994 and 1992-
1995 have been listed in 1993, 1994, and 1995, respectively, the
years in which earned, although paid in the subsequent year.
<F5> Executive officers are eligible to participate in a tax-
qualified Extra Compensation Plan (a 401(k) plan) and an
Unqualified Match Program ("Excess Match") for executives whose
benefits under the Extra Compensation Plan are affected by
participation limits imposed on higher-paid individuals by
federal tax law. Provided net income as a percentage of premium
earned meets or exceeds prescribed limits set by the Board of
Directors each year, there is a 25%, 50%, or 75% match to the
Extra Compensation Plan for all employee participants and an
allocation under the Excess Match for a percentage of each
higher paid participant's salary up to 6%. The amounts shown
reflect contributions to the Extra Compensation Plan: a) for
1995, of $6,750 on behalf of each of the Named Executive Officers
to match 1995 pre-tax elective deferral contributions made by
each to such plan, except Mr. Magee who received $6,588; b) for
1994, of $2,250 on behalf of each of the Named Executive Officers
to match 1994 pre-tax elective deferral contributions made by
each to such plan, except Mr. Magee who received $1,855; and
c) for 1993, of $6,746 on behalf of each of the Named Executive
Officers, to match 1993 pre-tax elective deferral contributions
made by each to such plan, except for Mr. Roden who received $6,406,
and Mr. Magee who received $5,071. The remainder of each amount is
the allocation for each Named Executive Officer under the Excess
Match.
<PAGE> Page 14
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS. The following table
shows, as to the Named Executive Officers in the Summary
Compensation Table, certain information concerning stock options
granted during the 1995 year under Harleysville Group's Equity
Incentive Plan.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR<F1>
(INDIVIDUAL GRANTS)
%
of Total
Options
Granted
to Exer-
Number of Employees cise
Securities in Price
Underlying Fiscal Per Expir- Grant Date
Options Year Share ation Present
Name Granted(#) <F2> ($/sh) Date Value($)<F3>
- ---- ---------- ----- ----- ----- ------------
<S> <C> <C> <C> <C> <C>
Walter R. Bateman, II 15,679 10% $25.00 05/23/05 $152,880
James C. O'Neill....... 7,734 5% $25.00 05/23/05 $75,412
Thomas E. Roden........ 7,734 5% $25.00 05/23/05 $75,412
Mark R. Cummins........ 6,725 4% $25.00 05/23/05 $65,573
Bruce J. Magee......... 5,084 3% $25.00 05/23/05 $49,572
</TABLE>
[FN]
<F1> All stock options granted under the Harleysville Group Equity
Incentive Plan in fiscal years 1995, 1994, 1993, are non-
qualified options receiving no special tax benefit, have an
exercise price equal to the fair market value of the Common
Stock on the date of grant, have a term of ten years, and vest
at the rate of 50 percent each on the first and second
anniversary dates of award, except that options become
immediately exercisable upon an optionee's retirement, death
or disability (but not prior to six months from the date of
grant). Retired optionees, age 61 and younger, may exercise
non-qualified options within one year of retirement and
retired optionees, age 62 and older, may exercise non-
qualified options within two years of retirement, if the
options have not otherwise expired. The exercise price may
be paid by delivery of already-owned shares. No stock appreciation
rights ("SARs") were granted in 1995, 1994, or 1993. The option
agreements provide that the Compensation Committee may, in its
absolute discretion and upon such terms and conditions as it
deems appropriate, provide for the acceleration of
exercisability of options in the event of the merger or
consolidation of Harleysville Group into another corporation
or the acquisition by another corporation of all or
substantially all of Harleysville Group's assets or of a
controlling interest in Harleysville Group by means of stock
acquisition, or in the event of its liquidation or
dissolution.
<F2> In calendar year 1995, Harleysville Group granted a total of
149,990 options representing the right to purchase 149,990
shares of Common Stock to 136 officers and key employees under
the Equity Incentive Plan.
<F3> The grant date present value was determined using an option
pricing model that is other than the Black-Scholes or binomial
model. The model used assumes the rate of return of the
Common Stock is 15%, less the dividend yield at time of issue.
It assumes the option will be exercised five years into its
ten-year term, and the value at that time is discounted at 15%
per year to determine its present value at time of grant.
These numbers are calculated based on the requirements
promulgated by the SEC and do not reflect Harleysville Group's
estimate of future stock price growth. Use of this model
should not be viewed in any way as a forecast of the future
performance of Harleysville Group's Common Stock, which will
be determined by future events and unknown factors.
<PAGE> Page 15
OPTION/SAR EXERCISES AND HOLDINGS. The following table provides information,
with respect to the Named Executive Officers, concerning the exercise of
options and/or SARs during 1995 and unexercised options and SARs held as of
fiscal year end, December 31, 1995, under Harleysville Group's Equity
Incentive Plan.
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES
IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION/SAR VALUES
---------------------------------------------------------
Number of Number of
Securities Securities
Underlying Underlying Value of Unexer-
Options/ Unexercised cised in-the-
SARs Options/ Money Options/
Exer- Value SARs at SARs at Fiscal
cised Realized Fiscal Year- Year-End ($)
(#) ($) End (#) <F1>
Name ----- ------- ------------- --- ----------
- ---- Exer- Unexer- Exer- Unexer-
cisable cisable cisable cisable
------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Walter R. Bateman, II<F2> 7,482 148,293 34,388 19,929 1,111,864 645,301
James C. O'Neill 7,482 136,023 44,207 10,784 1,431,423 349,186
Thomas E. Roden 1,244 19,195 19,423 10,009 628,917 324,091
Mark R. Cummins -0- -0- 16,825 9,000 544,794 291,420
Bruce J. Magee 850 16,141 14,177 7,059 459,052 228,570
</TABLE>
[FN]
<F1> Market value of Common Stock at year end 1995 was $32.38 per
share. Value reflects, as to both options and SARs, if any,
the fair market value of the underlying security less the
option exercise price.
<F2> On September 27, 1995 the Company purchased 1,613 shares of
Common Stock from Mr. Bateman at a price of $29.75 being the
fair market value of the Company's Common Stock on the NASDAQ
National Market System as of the date of the purchase to defray
tax liabilities.
<PAGE> <Page 16
LONG-TERM INCENTIVE PLAN. The following table provides information concerning
awards made during the last fiscal year to the Named Executive Officers under
the Long-Term Incentive Plan. Subject to the fulfillment of certain
conditions, awards are designed to provide payments at the end of each
successive four-year performance period in amounts approximating a percentage
of each participant's salary at January 1st of the first year of each period.
Subject to the satis-faction of the Plan's conditions, each award represents
the right to receive an amount in cash on the date of payout, the amount of
which depends on Harleysville Group's average annual rate of return on equity
("ROE") from the time of the award until the payout date. The target amount
is payable if Harleysville Group's average ROE exceeds certain levels of
targeted ROE. The maximum payment is payable if Harleysville Group's average
ROE exceeds certain higher levels of targeted ROE. If ROE falls between the
target level and the maximum level then the amount of award is prorated
accordingly. Once an ROE resulting in a 40% of Target Award is achieved, an
additional incentive award based on written premium growth takes effect. If
less than the targeted level is reached, a reduced percentage of target award
may be granted. In the event that ROE falls below a stated level, a negative
percentage of the target award will be assessed, and previously credited
awards will be proportionately reduced. Under the terms of the Long-Term
Incentive Plan, the Compensation Committee retains discretion, subject to plan
limits, to modify the terms of outstanding awards to take into account the
effect of unforeseen or extraordinary events and accounting changes. Awards,
if earned, are paid in cash at the end of the four-year performance period.
Cash payments made under awards for the four-year periods 1990-1993, 1991-
1994, and 1992-1995, are reported in the Summary Compensation Table under the
years 1993, 1994, and 1995 respectively, although paid in the following year.
<PAGE> Page 17
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLANS -
PERFORMANCE OPPORTUNITY AWARDS IN LAST FISCAL YEAR
Estimated Future Payments Under
Non-Stock Price-Based Plans
-----------------------------------
Target
Performance Award
or Other Percent
Period Until of Thres-
Maturation 1/1/95 hold Target Maximum
or Payout<F1> Salary ($) ($) ($)<F2>
------------ ------ ---- ------ --------
<S> <C> <C> <C> <C> <C>
Walter R. Bateman, II..4 years 45% 0 153,000 229,500
James C. O'Neill...... 4 years 35% 0 80,995 121,493
Thomas E. Roden...... 4 years 35% 0 68,775 103,163
Mark R. Cummins...... 4 years 25% 0 48,425 72,638
Bruce J. Magee....... 4 years 25% 0 36,600 54,900
</TABLE>
[FN]
<F1> The table shows the range of potential payouts under the Plan
for a four-year performance period commencing in 1995. Four-
year performance periods under the LTIP were completed in
1993, 1994 and 1995 and actual payments thereunder are shown
in the Summary Compensation Table for those years. Since the
Plan's inception in 1988, successive four-year performance
periods have begun in each fiscal year, and it is intended
that additional four-year performance periods will commence
each year.
<F2> The Maximum Award is set at 150% of the Target Award; if
performance computations would result in a higher award, it
will be reduced to the Maximum Award amount.
<PAGE> Page 18
PENSION PLANS. The tables below show certain estimated annual benefits
payable upon retirement to the Named Executive Officers under the Pension Plan
in conjunction with a Supplemental Pension Plan. (The Pension Plan and the
Supplemental Pension Plan are together referred to as the "Pension Plans").
Pension Plan Table I shows the estimated annual benefits payable upon
retirement under the Pension Plans to Mr. Bateman, Mr. O'Neill, Mr. Roden, and
Mr. Magee, who were first employed prior to January 1, 1989.
<TABLE>
<CAPTION>
PENSION PLAN TABLE I
--------------------
AVERAGE
5 YEAR Estimated Amount of Annual Pension Benefit
CREDITED ------------------------------------------
SALARY 10 15 20 25 30 35
@12/31/95 YEARS YEARS YEARS YEARS YEARS YEARS
- --------- ----- ----- ----- ----- ----- -----
<C> <C> <C> <C> <C> <C> <C>
$600,000 $132,120 $198,180 $264,240 $330,300 $330,300 $330,300
$550,000 $120,870 $181,305 $241,740 $302,175 $302,175 $302,175
$500,000 $109,620 $164,430 $219,240 $274,050 $274,050 $274,050
$450,000 $ 98,370 $147,555 $196,740 $245,925 $245,925 $245,925
$400,000 $ 87,120 $130,680 $174,240 $217,800 $217,800 $217,800
$350,000 $ 75,870 $113,805 $151,740 $189,675 $189,675 $189,675
$300,000 $ 64,620 $ 96,930 $129,240 $161,550 $161,550 $161,550
$250,000 $ 53,370 $ 80,055 $106,740 $133,425 $133,425 $133,425
$200,000 $ 42,120 $ 63,180 $ 84,240 $105,300 $105,300 $105,300
$150,000 $ 30,870 $ 46,305 $ 61,740 $ 77,175 $ 77,175 $ 77,175
$125,000 $ 25,245 $ 37,868 $ 50,490 $ 63,113 $ 63,113 $ 63,113
</TABLE>
Pension Plan Table II shows the estimated annual benefits payable upon
retirement under the Pension Plans to Mr. Cummins, who was first employed
after January 1, 1989.
<TABLE>
<CAPTION>
PENSION PLAN TABLE II
----------------------
AVERAGE
5 YEAR Estimated Amount of Annual Pension Benefit
CREDITED ------------------------------------------
SALARY 10 15 20 25 30 35
@ 12/31/95 YEARS YEARS YEARS YEARS YEARS YEARS
- ---------- ----- ----- ----- ----- ----- ------
<C> <C> <C> <C> <C> <C> <C>
$600,000 $115,704 $173,556 $231,408 $289,260 $289,260 $289,260
$550,000 $105,954 $158,931 $211,908 $264,885 $264,885 $264,885
$500,000 $ 96,204 $144,306 $192,408 $240,510 $240,510 $240,510
$450,000 $ 86,454 $129,681 $172,908 $216,135 $216,135 $216,135
$400,000 $ 76,704 $115,056 $153,408 $191,760 $191,760 $191,760
$350,000 $ 66,954 $100,431 $133,908 $167,385 $167,385 $167,385
$300,000 $ 57,204 $ 85,806 $114,408 $143,010 $143,010 $143,010
$250,000 $ 47,454 $ 71,181 $ 94,908 $118,635 $118,635 $118,635
$200,000 $ 37,704 $ 56,556 $ 75,408 $ 94,260 $ 94,260 $ 94,260
$150,000 $ 27,954 $ 41,931 $ 55,908 $ 69,885 $ 69,885 $ 69,885
$125,000 $ 23,079 $ 34,619 $ 46,158 $ 57,698 $ 57,698 $ 57,698
</TABLE>
<PAGE> Page 19
Covered compensation is the highest five-year average of the amounts
shown in the "Salary" column of the Summary Compensation Table.
For the purposes of the Pension Plans, executive officers named
in the Summary Compensation Table have been credited with the
following years of service: Mr. Bateman, 8 years; Mr. O'Neill, 22
years; Mr. Roden, 12 years; Mr. Cummins, 4 years; and Mr. Magee, 10
years.
The retirement benefits shown in the Pension Plan Tables assume
that benefits will be payable at age 65 in the form of a single life
annuity, and are not subject to any deduction for Social Security or
other offset amounts. For the purposes of calculating benefits under
the Pension Plans, no Named Executive Officer may be credited with
more than 25 years of service.
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF
HARLEYSVILLE GROUP'S PREVIOUS FILINGS UNDER THE SECURITIES ACT OF
1933 OR THE SECURITIES EXCHANGE ACT OF 1934 THAT MIGHT INCORPORATE
FUTURE FILINGS, INCLUDING THIS PROXY STATEMENT, IN WHOLE OR IN PART,
THE FOLLOWING REPORT AND PERFORMANCE GRAPHS ON PAGES ____ AND____ SHALL
NOT BE INCORPORATED BY REFERENCE INTO ANY SUCH FILINGS.
REPORT OF THE COMPENSATION
& PERSONNEL DEVELOPMENT COMMITTEE
The Compensation & Personnel Development Committee (the
"Compensation Committee") is charged generally with the review and
development of compensation and personnel practices regarding
Harleysville Group and its employees, including executive officers.
In addition to setting compensation policies, the Compensation
Committee oversees Harleysville Group's management development and
succession programs.
The Compensation Committee bases its compensation recommenda-
tions upon information derived from multiple sources including the
personnel department of Harleysville Group; outside compensation
consultants; industry surveys; and recommendations of management.
The Committee believes that consideration of these diverse sources
of information helps to create a balanced and appropriate
compensation program.
The Compensation Committee considers factors such as the
following in establishing executive compensation:
. the personal performance of the executive officer;
. the achievement by Harleysville Group of annual corporate
goals;
<PAGE> Page 20
. the achievement by Harleysville Group of an acceptable
return on equity;
. the performance of Harleysville Group contrasted with the
performance of certain of its competitors;
. the need of Harleysville Group to attract, retain and
motivate superior management.
The consideration of these different factors permits the
encouragement of corporate goals including but not limited to
sustained and consistent management; enhancement of stockholder
value; and the completion of strategic initiatives. Reflecting these
different factors, the compensation program for executive officers
contains several components:
1. BASE SALARY - Base salary is based upon a general
competitive review and a review of industry-specific data
in which the peer group is determined primarily by size of
company. This group is unrelated to the performance graph
peer group although each peer group may contain some of the
same companies. Harleysville Group believes size of
company is more useful in determining salary than using the
performance graph peer group which includes companies of
various sizes and substantially different characteristics,
e.g., distribution system and geographical locale. Base
salary reflects corporate performance as measured against
the industry and always reflects an evaluation of the
executive officer's performance of his or her duties. The
corporate performance measures include return on equity,
combined ratio and premium growth. Combined ratio as used
in this report is a standard measurement in the property/
casualty insurance industry and means the ratio produced by
adding the ratio of losses, loss adjustment expenses and
policyholders' dividends to net earned premiums, and the
ratio of underwriting expenses to net written premium.
Working with the advice of its outside compensation
consultants, Harleysville Group generally sets its
competitive salary midpoint for an executive officer
position at the median level compared to those companies
which it surveys. A salary range based on this midpoint is
then developed.
2. SENIOR MANAGEMENT INCENTIVE BONUS PLAN - This plan is
designed to direct executive officer attention to the
attainment of certain annual corporate goals. For 1995,
the goals included: return on equity; direct written
premium growth; combined ratio; service and processing
timeliness; and peer group standing on the basis of
combined ratio. The weightings for each factor are: return
on equity - 20%; premium growth - 15%; combined ratio -
<PAGE> Page 21
25%; service and processing goals - 15%; and peer group
ranking - 25%. The peer group is a group of thirteen property/
casualty insurance companies sharing comparable size and
characteristics with the Company. The plan is designed to pay
bonuses at a level of 20% to 30% of annual salary when the
target goals are achieved. Payouts may range from 50% to 150% of
the target award based upon performance falling within a stated
range of the target. The size of the award range is determined
for the Chief Executive Officer specifically and executive officers
generally based on an analysis of the appropriate competitive total
compensation package that is typically available for executive
officers of a property/casualty insurance company with similar
characteristics. There is no payout if all minimum targets are
not met and there is no payout unless the combined after-tax net
income as reported on the Combined Annual Statement plus after-tax
net income resulting to Harleysville Group from management
agreements is at least 2% of the combined net earned
premium as shown on such statement. The Combined Annual
Statement is a financial statement required to be filed
with state insurance regulatory authorities and includes
financial information on a combined basis for all
property/casualty insurance companies owned by Harleysville
Group and Harleysville Mutual Insurance Company.
Additionally, for years prior to 1996 payouts were subject
to reduction on account of the failure of the executive
officer to achieve personal, discretionary goals.
Commencing in 1996, all payouts will be based solely on
objective criteria. The payouts since 1992 reflect that
the target goals were not fully attained in all instances.
There was no payout earned for 1994 because combined after-
tax net income did not equal or exceed the aforementioned
threshold requirement of 2% of combined net earned premium.
The peer group for the Senior Management Incentive Bonus
Plan consists of companies chosen according to various
factors of comparability including size, method of
operations, and type of distribution system and is
unrelated to the performance graph peer group, although
both peer groups may contain some of the same companies.
3. LONG TERM INCENTIVE PLAN - This plan has been designed to
reward certain executive officers of Harleysville Group
primarily for the attainment of long term return on
equity goals. Under the plan covering the four-year period
beginning in 1995, the target return on equity goal is 11%,
and, if return on equity is 7% or greater, an additional
incentive is payable so long as written premium growth is
at least 8%. Again, the size of the award opportunity is
determined for the Chief Executive Officer specifically and
executive officers generally based on the same factors
<PAGE> Page 22
referenced under Senior Management Incentive Bonus Plan
above. In the event that return on equity falls below a
stated level, a negative percentage of the target award will be
assessed. Potential target awards for each year are
designed to range from 25% to 45% of a participant's
salary. The actual payout under the Plan for the four-year
period ending in 1995, is 128% of target for Mr. Bateman
and the other Named Executive Officers who participate.
These results are due to the return on equity being higher
than the target return for three of the four years, i.e.,
1992, 1993 and 1995.
4. EQUITY INCENTIVE PLAN - This plan is designed to encourage
stock ownership in Harleysville Group by officers and
certain key employees and to provide additional incentives
to work to maximize stockholder value. Harleysville Group
typically grants stock options annually to officers and
key employees of Harleysville Group, its parent and its
designated subsidiaries. For awards in 1995, the
Compensation Committee acted upon the advice of
Harleysville Group's outside compensation consultants to
increase awards above those existing in 1994 and 1993 for
Named Executive Officers. The determination was made by
the Compensation Committee in order to maintain executive
officer total compensation, i.e., the total amount of cash
compensation available to an executive officer in any one
year, closer to the market average. The companies surveyed
in determining the market average are those used for
determining base salary. In order to receive stock options
at a level necessary to keep the total cash compensation
available at the market average, executive officers above
a certain level, including Mr. Bateman and all Named
Executive Officers, must own a minimum number of shares of
Harleysville Group Common Stock. In 1995 all such officers
owned at least the required minimum number of shares.
Mr. Bateman's compensation was determined by the Compensation Committee
following the factors set forth above. His total compensation, composed of
base salary, Senior Management Incentive Bonus Plan award, Long-Term Incentive
Plan award, and stock option grants was compared with compensation packages
of similar officers within the insurance industry. His awards under the
Senior Management Incentive Bonus Plan, Long Term Incentive Plan and Equity
Incentive Plan were made pursuant to those plans and pursuant to the normal
considerations by the Compensation Committee. In determining Mr. Bateman's
base salary in 1995, the Committee evaluated his personal and company
performance on both a qualitative and quantitative level. Harleysville Group
enjoyed an excellent year in 1995. The return on equity in 1995 rebounded
from 6.7% in 1994 to 13.6% in 1995, and the combined ratio declined to 103.4%
from 1994's 111.4%. During 1995 direct written premium grew to $504.7 Million
from $448.6 Million in 1994, while net written premium growth (i.e., all
<PAGE> Page 23
premiums written net of reinsurance premiums paid) increased to $505.5 Million
compared to $449.4 Million in 1994, and earned premium grew from $447.7
Million in 1994 to $477.0 Million in 1995. Operating earnings per share
were $2.95 in 1995 compared to $1.23 in 1994, and net income per share
for the year was $3.06, a 118% increase over 1994 net income per share of
$1.40. Stockholders' equity increased from $276.9 Million to
$345.0 Million with book value per share increasing from $20.72 to $25.15.
The Committee further took into consideration Mr. Bateman's results in
continuing to manage successfully his succession as Chief Executive Officer,
continued geographical expansion into the mid-south and upper mid-west areas,
new product initiatives, expense reduction including enhanced agency/company
interface automation, and implementation of an agency stock purchase plan to
better align the interests of the Harleysville Group and its superior
independent agencies. Based on the foregoing factors, with all being
considered equally, the Committee determined the appropriate base salary
compensation level for Mr. Bateman.
The limits on full deductibility of compensation for Harleysville Group
posed by Section 162(m) are not currently a problem for Harleysville Group
inasmuch as compensation levels for the Named Executive Officers (not
including any compensation derived through exercise of options granted
pursuant to the Equity Incentive Plan) do not currently approach the
$1,000,000 threshold figure and any compensation derived from exercise of
stock options is fully deductible under current requirements for exemption
from inclusion in income. Harleysville Group will, of course, continue to
monitor this situation and intends to take any action required to maintain the
full deductibility of compensation, specifically including future amendment
to the Equity Incentive Plan.
COMPENSATION & PERSONNEL DEVELOPMENT COMMITTEE
H. Bryce Jordan, Chairperson
Robert D. Buzzell
William E. Strasburg
STOCK PERFORMANCE GRAPHS
The following graphs <F1> show changes over the past nine-year period and
five-year period (all full calendar year periods since the Company's initial
public offering in May 1986) in the value of $100 invested in (1) Harleysville
Group Common Stock; (2) the NASDAQ Stock Market index <F2>; and (3) the Peer
Group index <F3>. The stock price performance shown on the graphs below is
not necessarily indicative of future price performance. All values are as of
the last trading day of each year.
<PAGE> Page 24
<TABLE>
<CAPTION>
COMPARISON OF NINE-YEAR CUMULATIVE TOTAL STOCKHOLDER RETURN
{GRAPH}
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S>> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Harleys-
ville
Group
Inc. 100.00 95.00 133.90 209.50 188.20 268.70 365.90 400.30 330.40 452.90
Nasdaq 100.00 95.50 113.30 137.30 116.60 187.20 217.90 250.10 244.50 345.50
Stock
Market
Peer
Group 100.00 96.50 103.00 145.10 138.70 196.90 264.80 273.70 263.80 369.50
</TABLE>
NOTES:
A. The lines represent annual index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. The index level for all series was set to 100.00 on 12/31/86.
<TABLE>
<CAPTION>
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL STOCKHOLDER RETURN
{GRAPH}
1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ----
Harleysville <C> <C> <C> <C> <C> <C>
Group Inc. 100.00 142.80 194.40 212.70 175.50 240.70
Nasdaq
Stock Market 100.00 160.60 186.90 214.50 209.70 296.30
Peer Group 100.00 142.00 190.90 197.40 190.20 266.40
</TABLE>
NOTES:
A. The lines represent annual index levels derived from compounded daily
returns that include all dividends.
B. The indexes are reweighted daily, using the market capitalization on the
previous trading day.
C. The index level for all series was set to 100.00 on 12/29/90.
The year-end values of each investment shown in the preceding
graphs are based on share price appreciation plus dividends, with
the dividends reinvested as of the day such dividends were ex-
dividend. The calculations exclude trading commissions and taxes.
Total stockholder returns from each investment, whether measured in
dollars or percentages, can be calculated from the year-end
investment values shown beneath each graph.
[FN]
<F1> Prepared by the Center for Research in Security Prices
("CRSP").
<F2> Based on CRSP Index for NASDAQ Stock Market (U.S. Companies).
<F3> The Peer Group Index includes all the NASDAQ Company stocks in
SIC Major Group 633 (SIC 6330-6339: U.S. and Foreign fire,
marine and casualty insurance). A complete list of these
companies may be obtained from CRSP, at the University of
Chicago Graduate School of Business, 1101 East 58th Street,
Chicago, Illinois, 60637; (312) 702-7467.
<PAGE> Page 25
APPROVAL OF THE 1996 DIRECTORS' STOCK PURCHASE PLAN
PROPOSAL
At the Annual Meeting the stockholders are being asked to approve
the adoption of the 1996 Directors' Stock Purchase Plan ("1996
Plan") which the Board of Directors adopted on February 28, 1996.
A total of 100,000 shares are reserved for issuance under the 1996
Plan. No shares have been purchased under the 1996 Plan. Approval
of the 1996 Plan requires the affirmative vote of a majority of
votes represented at the meeting in person or by proxy. THE BOARD
OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" APPROVAL
OF THE PLAN. The 1996 Plan is summarized below.
PURPOSE
The purpose of the 1996 Plan is to provide outside directors of
Harleysville Group and its parent, Harleysville Mutual including
Directors Emeriti ("Directors") with an opportunity to increase their
proprietary interest in the Company. A director is an outside
director if he or she is not also a common law employee of
Harleysville Group or its parent. The 1996 Plan is designed to
qualify for exemption from Section 16(b) of the Securities Exchange
Act of 1934 pursuant to Rule 16b-3(c) of the Securities and Exchange
Commission.
SUMMARY OF THE PLAN
ELIGIBILITY AND ENROLLMENT. All Directors of Harleysville Group
and Harleysville Mutual are eligible to participate in the 1996
Plan. At present there are eleven Directors and three Directors Emeriti
of Harleysville Group Inc. and Harleysville Mutual Insurance Company.
There will be twenty (20) subscription periods, with the first
subscription period commencing July 15, 1996 and the last one scheduled
to commence January 15, 2006. Directors may enroll during a two-week
enrollment period immediately preceding each subscription period. No
Director may assign his or her rights to participate in the 1996 Plan to
anyone else.
PURCHASE PRICE. The purchase price of a share will be the lesser
of 85% of the fair market value of such share on the last trading
day before the first day of the subscription period or 85% of the
fair market value of such share on the last trading day of the
subscription period but in no event less than $1.00 per share, the
par value of a share of Company Common Stock. The fair market
value of the stock will be the closing price of a share on the
NASDAQ National Market System for the applicable date.
<PAGE> Page 26
PAYMENT OF PURCHASE PRICE. Contributions may be made through
either (1) deductions from retainer and attendance fees ("Fees"),
or (2) lump sum contribution, or (3) both. Contributions are
subject to the limitations that a Director may deduct from 5% to
100% of his or her Fees with a minimum deduction of $500 per
subscription period, and the total amount that can be contributed
from Fees and lump sum contribution in any subscription period
shall be $20,000. At the close of each subscription period, the
amount of contributions will be determined and credited to the
Directors' Plan Account. A Director may discontinue his or her
participation in the 1996 Plan at any time or may change the rate
of deduction from Fees effective for the next subscription period.
If at any time the number of shares subscribed for exceeds the
number of shares available, the shares available will be allocated
to participating Directors in proportion to existing 1996 Plan
Account balances.
ISSUANCE OF SHARES. Shares will be issued in book entry form. As
a result, at the end of each subscription period, a Director will
be credited with the number of shares, including fractional shares
to four decimal places, produced by dividing the amount contributed
during the subscription period by the purchase price.
HOLDING PERIOD. Directors must hold all stock acquired under the
1996 Plan for a period of at least six months from the date of
acquisition.
WITHDRAWAL. If a Director chooses, he or she may withdraw
participation in the 1996 Plan at any time prior to the last day of
the subscription period and receive the full amount of his or her
contributions without interest. Cessation of Director status for
any reason is an automatic withdrawal.
SOURCE OF SHARES
The shares available under the 1996 Plan may be either authorized
but unissued shares or treasury shares re-acquired by Harleysville
Group. Distribution of shares will be made only after the
registration of such shares with the SEC or pursuant to exemptions
from registration under applicable SEC rules and regulations.
ADMINISTRATION
The 1996 Plan will be administered by the Compensation and
Personnel Committee of the Board of Directors of Harleysville
Group. The Committee will have the general authority to interpret
the provisions of the 1996 Plan and adopt such rules and
regulations as it deems necessary or desirable for the
administration of the Plan; provided, however, that the Committee
will have no discretion with respect to eligibility of Directors to
participate, the number of shares of stock subject to the 1996
Plan, or the purchase price thereunder.
<PAGE> Page 27
FEDERAL INCOME TAX CONSEQUENCES
Income will be realized for federal income tax purposes by a
Director upon the purchase of shares under the 1996 Plan. At the
time of purchase, a Director will be treated as having received
ordinary income in an amount equal to the difference between the
fair market value of the shares purchased and the price paid for
such shares. Such difference will be deductible by the Company
for federal income tax purposes.
A Director's basis in the Common Stock purchased is equal to the
purchase price plus the amount of ordinary income recognized. When
a Director disposes of shares of Common Stock acquired under the
1996 Plan, any amount received in excess of the value of the shares
of Common Stock on which the Director was previously taxed will be
treated as long-term or short-term gain, depending upon the holding
period of the shares; if the amount received is less than that
value, the loss will be treated as long-term or short-term loss,
depending upon the holding period of the shares.
The foregoing is only a summary of federal income tax
consequences, and does not purport to be complete.
ADJUSTMENTS
The 1996 Plan provides for adjustments in the shares reserved and
available for the 1996 Plan, by reason of a stock split, stock
dividend, merger, consolidation, combination of shares or similar
occurrence.
TERMINATION AND AMENDMENTS
The 1996 Plan may be suspended or terminated by the Board at any
time. The Board may amend the 1996 Plan for any reason, except that
it may not, without stockholder approval, change the eligibility to
participate in the 1996 Plan, the number of shares of stock subject
to purchase or the purchase price thereunder, or materially
increase the benefits accruing to participants under the 1996 Plan.
PARTICIPATION IN THE PLAN
Participation in the 1996 Plan is voluntary and is dependent upon each
Director's election to participate and his or her determination of the
level of contribution. Accordingly, future purchases under the Plan are not
determinable. Nevertheless, the following tables set forth an estimate
of the shares that would have been purchased during the subscription
periods commencing in
<PAGE> Page 28
1995 had the Plan been in existence and each director contributed
the maximum of amount of $20,000 per each subscription period.
<TABLE>
<CAPTION>
Dollar Number of
Group<F1> Value ($)<F2> Units (#)
- --------- ------------- ----------
<S> <C> <C>
Non-Executive
Directors Group (14) $560,000 26,490
</TABLE>
[FN]
<F1> None of the Executive Officers (including those named in the Summary
Compensation Table) or other officers and employees of the Company
are eligible to participate in the Plan.
<F2> The dollar value of the shares that could have been purchased
is based on a purchase price of $20.83 per share for the
January 15 to July 14, 1995 subscription period and $21.46 per
share for the July 15 to January 14, 1996 subscription period.
<PAGE> Page 29
APPROVAL OF AMENDMENT OF CERTIFICATE OF INCORPORATION
TO INCREASE AUTHORIZED COMMON STOCK
PROPOSAL
At the Annual Meeting, the stockholders are also being asked to
approve an Amendment of the Certificate of Incorporation to
increase the authorized Common Stock of the Corporation from
23,000,000 shares of the par value of $1.00 per share to 80,000,000
shares of the par value of $1.00 per share. The Board of Directors
approved the Amendment on February 28, 1996. Approval of the
increase in number of authorized shares requires the affirmative
vote of a majority of votes represented at the meeting in person or
by proxy. THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS
VOTE "FOR" APPROVAL OF THE AMENDMENT TO THE CERTIFICATE OF
INCORPORATION.
Article Four, Paragraph (a) as proposed to be amended reads in
its entirety as follows:
"(a) The aggregate number of shares which the Corporation has
authority to issue is: Eighty Million (80,000,000) shares
of Common Stock of the par value of One Dollar ($1.00)
per share (the "Common Stock") and One Million
(1,000,000) shares of Series Preferred Stock of the par
value of One Dollar ($1.00) per share (the "Preferred
Stock")."
The stockholders of Harleysville Group last approved an increase
in the authorized Common Stock in April 1992. Since that time, the
number of outstanding shares of Common Stock has increased from
12,484,791 outstanding shares as of February 10, 1992 to ___________
shares as of March 13, 1996. Additional shares are reserved for
issuance under benefit plans and the Dividend Reinvestment and
Stock Purchase Plan.
PURPOSE
The Board of Directors believes that it is desirable to have the
additional authorized Common Stock available for issuance from time
to time for stock splits, stock dividends or other distributions,
financings, investment opportunities, acquisitions, employee
benefit plans and other corporate purposes. In addition to the
proposed Directors' Stock Purchase Plan described herein, which
provides for the reservation of 100,000 shares, while the Company
has no agreements or commitments at this time with respect to
additional shares, the Company is considering other ways to
increase Directors' ownership of Company stock, in order to better
align their interests with those of stockholders, including a one
time grant of restricted stock and payment of directors' fees, in
whole or in part, in Company stock. Having such additional
authorized shares of Common Stock available for issuance in the
<PAGE> Page 30
future would give Harleysville Group greater flexibility and allow
such shares to be issued without the expense and delay of a special
stockholders' meeting. No further action or authorization by the
stockholders would be necessary prior to the issuance of additional
shares of Common Stock unless such action is required for a
particular transaction by applicable law, regulatory agencies or
rules of any stock exchange on which Harleysville Group's Common
Stock may then be listed. The issuance of such additional shares
in the future could result in a dilution of the equity of and
earnings on the presently outstanding shares of Common Stock.
It should be noted that the increased availability for issuance
of shares of Common Stock could enable the Board of Directors to
render more difficult or discourage an attempt to obtain control of
Harleysville Group by means of a merger, tender offer or other
business combination transaction directed at the Company. For
example, the issuance of shares of common stock in a public or
private sale, merger or similar transaction would increase the
number of a company's outstanding shares, thereby diluting the
interest of a party attempting to obtain control of the company.
Furthermore, some companies have issued warrants or other rights to
acquire additional shares of common stock to the holders of common
stock to discourage or defeat unsolicited stock accumulation
programs and acquisition proposals, which program or proposals may
be viewed by the board of directors as not being in the best
interests of the company and its stockholders. Given the
controlling interest of Harleysville Mutual, Harleysville Group is
not aware of any attempt, whether formal or informal, to acquire a
controlling interest in the Company; moreover, Harleysville Group
has no present plan or intention to utilize the additional shares
of Common Stock as an anti-takeover device.
Stockholders have no preemptive right to purchase additional
shares when issued.
CERTAIN TRANSACTIONS
Harleysville Group was formed by Harleysville Mutual in 1979 and
was a wholly owned subsidiary of Harleysville Mutual until June
1986, when shares of Harleysville Group's Common Stock were sold in
a public offering, thereby reducing Harleysville Mutual's ownership
of Harleysville Group's outstanding Common Stock from 100% to approximately
70% at that time. In April 1992, Harleysville Mutual sold additional shares of
its Harleysville Group Common Stock holdings, further reducing Harleysville
Mutual's ownership to approximately 55%. Harleysville Group's operations
are interrelated with the operations of Harleysville Mutual. Harleysville
Group believes that its various transactions with Harleysville
Mutual, some of which are summarized herein, have been on terms no
less favorable to Harleysville Group than the terms that could have
been negotiated with an independent third party.
Under the terms of a lease effective January 1, 1995,
Harleysville Mutual rents the home office property from a partner-
<PAGE> Page 31
ship owned by Harleysville Group for a five-year term at a base
rent of $2,754,000. Harleysville Mutual may also pay additional
rent, based on a formula, for any additions, improvements or
renovations. There was no additional rental payment for 1995.
Harleysville Mutual is also responsible for all operating expenses
including maintenance and repairs. The base rent and formula for
additional charges are based upon an appraisal obtained from an
independent real estate appraiser. Harleysville Mutual and
Harleysville Group and their respective affiliates share these
facilities and the expenses thereof are allocated according to an
intercompany allocation agreement.
Since January 1, 1993, Harleysville Group has provided certain
management to Harleysville Mutual and certain other affiliates.
Under related agreements, Harleysville Group serves as the
paymaster for the Harleysville companies, with each company being
charged for its proportionate share of salary and employee benefits
expense based upon time allocation. Harleysville Group received a
fee of $6,994,000 in 1995 for its services under these management
agreements.
Harleysville Group borrowed approximately $18.5 million from
Harleysville Mutual in connection with the acquisition of Mid-
America Insurance Company and New York Casualty Insurance Company
in 1991. The loan bears interest at LIBOR plus 1%, with no penalty
for prepayment. It is a demand loan with a stated maturity in
1998.
Harleysville Group's property and casualty insurance subsidiaries
(except for Lake States Insurance Company), participate in an
underwriting pool with Harleysville Mutual whereby such subsidi-
aries cede to Harleysville Mutual all of their insurance business
and assume from Harleysville 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, and Harleysville
Group's pool participants are not liable for losses occurring prior
to January 1, 1986. Harleysville Group's participation in 1995 was
60%. On January 1, 1996, Harleysville Group's pool participation
was increased to 65%. The pooling agreement may be amended or
terminated by agreement of the parties. Information describing the
pooling arrangement is contained in Harleysville Group's 1995
Annual Report to Stockholders, a copy of which is enclosed with
this Proxy Statement and to which reference is hereby made.
Mr. Mitchell will receive in 1996 a payout of $258,248 for the
four-year period 1992-1995 under the Long-Term Incentive Plan for
his services as Chief Executive Officer during 1992 and 1993.
Mr. O'Neill, who retired effective February 16, 1996, entered
into a retirement and consulting agreement with the Company for
consulting services through 1997. Under said agreement Mr. O'Neill
<PAGE> Page 32
will receive approximately $118,000 in 1996 and $110,000 in 1997 plus
expenses which figures include payment for 46 days of consulting services.
In the event the number of days of consulting services at the request of the
Company exceeds 46, Mr. O'Neill will receive $2,000 a day for each
such additional day of consulting services, plus expenses.
INDEPENDENT PUBLIC ACCOUNTANTS
Representatives of KPMG Peat Marwick, LLP, the independent public
accountants who audited Harleysville Group's 1995 financial
statements, will attend the Annual Meeting, will have the oppor-
tunity to make a statement, if they desire to do so, and will be
available to respond to any appropriate questions presented by
stockholders at the Annual Meeting.
ANNUAL REPORT
A copy of Harleysville Group's Annual Report for its fiscal year
ended December 31, 1995 is being mailed to Harleysville Group's
stockholders with this Proxy Statement.
STOCKHOLDER PROPOSALS
Any stockholder who, in accordance with and subject to the
provisions of the proxy rules of the SEC, wishes to submit a
proposal for inclusion in Harleysville Group's proxy statement for
its 1997 Annual Meeting of Stockholders must deliver such proposal
in writing to Harleysville Group's Secretary at Harleysville
Group's principal executive offices at 355 Maple Avenue, Harleys-
ville, Pennsylvania 19438, not later than November 13, 1996.
OTHER PROPOSALS
The Board of Directors does not know of any matters to be
presented for consideration other than the matters described in the
Notice of Annual Meeting, but if any matters are properly pre-
sented, it is the intention of the persons named in the accompany-
ing proxy to vote on such matters in accordance with their
judgment.
Date: March 22, 1996
XPU-056 (Ed. 3-96)
<PAGE> Page 1
APPENDIX 1
HARLEYSVILLE GROUP INC.
1996 DIRECTORS' STOCK PURCHASE PLAN
-----------------------------------
As approved by the Board of Directors
on February 28, 1996
Section I - Purpose
-------------------
The Harleysville Group Inc. Directors' Stock Purchase Plan (the
"Plan") is established by the Harleysville Group Inc. (the
"Company") for the benefit of the outside directors of the Company
and its parent, Harleysville Mutual Insurance Company, including Directors
Emeriti ("Directors"). A Director shall be an outside Director if he or
she is also not a common law employee of the Company or its parent.
The purpose of the Plan is to provide each Director an opportunity
to increase his or her proprietary interest in the Company. The
Plan is designed to qualify for exemption from Section 16(b) of the
Securities Exchange Act of 1934 pursuant to Rule 16b-3(c) of the
Securities and Exchange Commission.
Section II - Eligible Directors
-------------------------------
All Directors are eligible to participate.
Section III - Duration of Offer and Subscription Periods
--------------------------------------------------------
This plan shall be in effect from July 1, 1996 through and
including July 31, 2006. During the duration of the Plan there will
be twenty (20) "Subscription Periods". Each Subscription Period
runs from January 15 through July 14 or from July 15 through
January 14.
Section IV - Number of Shares to be Offered
-------------------------------------------
The total number of shares to be made available under the Plan
is 100,000 shares of common stock of the Company ("Stock"). The
shares issued hereunder may
<PAGE> Page 2
either be authorized but unissued shares or treasury shares reacquired
by the Company. In the event this amount of Stock is subscribed prior to
the expiration of the Plan, the Plan may be terminated in accordance with
Section XIV of the Plan.
Section V - Subscription Price
------------------------------
The "Subscription Price" for each share of Stock shall be the
lesser of eighty-five percent (85%) of the fair market value of
such share on the last trading day before the first day of the
Subscription Period or eighty-five percent (85%) of the fair market
value of such share on the last trading day of the Subscription
Period but in no event less than $1.00 per share, the par value of
a share of Company Common Stock. The fair market value of a share
shall be the Closing Price as reported on the NASDAQ National
Market System for the applicable date.
Section VI - Amount of Stock Available to be Purchased
------------------------------------------------------
and Methods of Payment
----------------------
Directors shall have the option to purchase Stock of the Company
at the end of each Subscription Period. The amount available for
purchase by each Director shall be the amount of stock that can be
purchased at the Subscription Price by the amount of contributions
("Contribution Amount") made during each Subscription Period by a
Director. The Contribution Amount may be paid through either (1)
deduction from retainer and attendance fees ("Fees"), or (2) lump
sum contribution or (3) both and is subject to the limitations that
(a) a Director may deduct from 5% to 100% of his or her Fees,
provided that the minimum deduction shall be $500 per Subscription
Period, and
<PAGE> Page 3
(b) the total amount that can be contributed from Fees and lump sum
contributions in any Subscription Period shall be $20,000. A lump sum
contribution must be received by the Company not later than December 31 or
June 30 of the applicable Subscription Period.
Section VII - Enrollment
------------------------
A Director who desires to exercise his or her option to purchase
stock during a Subscription Period through deduction from Fees must
file a subscription agreement prior to the start of such
Subscription Period. Once enrolled, a Director will continue to
participate in the Plan for each succeeding Subscription Period
until he or she ceases to be a Director or withdraws from the Plan.
If a Director desires to change his or her rate of deduction he or
she may do so effective for the next Subscription Period by filing
a new subscription agreement prior to the start of the next
Subscription Period.
Section VIII - Procedure for Purchases of Shares
------------------------------------------------
The Company will maintain on its books a "Plan Account" in the
name of each participating Director. At the close of each
Subscription Period, the Contribution Amount will be determined and
credited to the Director's Plan Account. As of the last day of each
Subscription Period, the Contribution Amount will be divided by the
Subscription Price for such Subscription Period and the Director's
Plan Account will be credited with the number of whole and
fractional shares which results. Shares will be issued in a book
entry form with the Company's stock transfer agent. Each
participating Director will receive a statement of account in a
timely fashion following the end of each Subscription
<PAGE> Page 4
Period. In the event the number of shares subscribed for any Subscription
Period exceeds the number of shares available for sale under the
Plan for such period, the available shares shall be allocated among
the participating Director in proportion to their Plan Account
balances.
Section IX - Withdrawal from the Plan
--------------------------------------
A Director may withdraw from the Plan at any time. At the time
of withdrawal the amount credited to the Director's Plan Account
will be refunded in cash without interest.
Section X - Holding Period
--------------------------
Directors must hold all Stock acquired under the Plan for a
period of at least six (6) months from the date of acquisition,
i.e., the end of each Subscription Period. The transfer agent
shall not be permitted to transfer such shares until the expiration
of such six (6) month period.
Section XI - Cessation of Directorship
--------------------------------------
Cessation of Director status for any reason including death,
disability or retirement shall be treated as an automatic with-
drawal as set forth in Section IX.
Section XII - Assignment
------------------------
No Director may assign his or her subscription or rights to
subscribe to any other person and any attempted assignment shall be
void.
Section XIII - Adjustment of and Changes in the Stock
------------------------------------------------------
In the event that the shares of Stock shall be changed into or
exchanged for a different number or kind of shares of Stock or
other securities of the Company or of
<PAGE> Page 5
another corporation (whether by reason of merger, consolidation,
recapitalization, split-up, combination of shares, or otherwise), or
if the number of shares of Stock shall be increased through a Stock
split or the payment of a Stock dividend, then there shall be
substituted for or added to each share of Stock theretofore reserved
for sale under the Plan, the number and kind of shares of Stock or
other securities into which each outstanding share of Stock shall be
so changed, or for which each such share shall be exchanged, or to
which each such share shall be entitled, as the case may be.
Section XIV - Amendment or Discontinuance of the Plan
-----------------------------------------------------
The Board of Directors of the Company shall have the right to
amend, modify or terminate the Plan at any time without notice
provided that no participant's existing rights are adversely
affected thereby and provided further that without the approval of
the holders of a majority of the issued and outstanding shares of
Stock no such amendment shall increase the total number of shares
subject to the Plan, change the formula by which the price at which
the shares shall be sold is determined, change eligibility to
participate in the Plan, or materially increase the benefits
accruing to participants under the Plan. The provisions of the
Plan may not be amended more than once every six months other than
to conform to changes in the Internal Revenue Code of 1986 or Rules
thereunder.
Section XV - Administration
---------------------------
The Plan shall be administered by the Compensation and Personnel
Development Committee of the Board of Directors of the Company.
The Committee may from time
<PAGE> Page 6
to time adopt rules and regulations for carrying out the Plan.
Interpretation or construction of any provision of the Plan by the Committee
shall be final and conclusive on all persons.
Section XVI - Titles
--------------------
Titles are provided herein for convenience only and are not to
serve as a basis for interpretation or construction of this
Agreement.
Section XVII - Applicable Law
------------------------------
The Plan shall be construed, administered and governed in all
respects under the laws of the Commonwealth of Pennsylvania.
<PAGE> Page 1
APPENDIX 2
HARLEYSVILLE LOGO
PROXY
HARLEYSVILLE GROUP INC.
ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 24, 1996
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Robert Simpson,
Jr., Bruce J. Magee, and Roger A. Brown, and each or any of them,
proxies of the undersigned, with full power of substitution, to
vote all the shares of Harleysville Group Inc. (the "Company")
which the undersigned may be entitled to vote at the Annual Meeting
of Stockholders of the Company, to be held at 355 Maple Avenue,
Harleysville, Pennsylvania, on April 24, 1996, at 10:00 A.M., local
time, and at any adjournment thereof, as follows:
(Continued, and to be marked,
dated and signed on reverse side)
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Fold and detach here.
ANNUAL MEETING
OF
HARLEYSVILLE GROUP INC. STOCKHOLDERS
Wednesday, April 24, 1996
10:00 A.M.
355 Maple Avenue
Harleysville, PA 19438
<PAGE> Page 2
1. ELECTION OF CLASS C DIRECTORS
FOR WITHHOLD (INSTRUCTION: To withhold authority to vote for any
all the AUTHORITY individual nominee, strike a line through the
nominees to vote for nominee's name below.)
listed. the nominees
listed. Walter R. Bateman, II Gerard G. Johnson
William E. Strasburg
[ ] [ ]
2. Approval of adoption of the 1996
Directors' Stock Purchase Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. Approval of Amendment of Certificate
of Incorporation to increase the
authorized number of Shares of Common
Stock from 23,000,000 to 80,000,000.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. In their discretion, the proxies are
authorized to vote upon such other
business as may properly come before the
meeting and any adjournment thereof.
[ ] This proxy will be voted as specified. If a choice is not
specified, the proxy will be voted FOR each proposal stated
above.
This proxy should be dated, signed by the stockholder
exactly as his name appears herein and returned promptly in
the enclosed envelope. Persons signing in a fiduciary
capacity should so indicate.
[Name and
Address]
---------------------------------------------- (SEAL)
Signature of Stockholder(s)
[ ] ----------------------------------------------- (SEAL)
Signature of Stockholder(s)
Date: ------------------------------------------, 1996
Please sign, date and return the proxy card using the enclosed envelope.
- - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Fold and detach here.
ANNUAL MEETING
OF
HARLEYSVILLE GROUP INC. STOCKHOLDERS
Wednesday, April 24, 1996
10:00 A.M.
355 Maple Avenue
Harleysville, PA 19438
