SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996 .
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14697
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Harleysville Group Inc.
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(Exact name of registrant as specified in its charter)
Delaware 51-0241172
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
355 Maple Avenue, Harleysville, Pennsylvania 19438-2297
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(Address of principal executive offices, including zip code)
(215) 256-5000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes X . No .
----- -----
At May 1, 1996, 13,842,989 shares of common stock of
Harleysville Group Inc. were outstanding.
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Page 2
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
INDEX
Page Number
-----------
Part I - Financial Information
Consolidated Balance Sheets - March 31, 1996 and
December 31, 1995 3
Consolidated Statements of Income - For the
three months ended March 31, 1996 and 1995 4
Consolidated Statement of Shareholders' Equity -
For the three months ended March 31, 1996 5
Consolidated Statements of Cash Flows -
For the three months ended March 31, 1996
and 1995 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Results
of Operations and Financial Condition 8
Part II - Other Information 10
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Page 3
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
MARCH 31, DECEMBER 31,
1996 1995
--------- ------------
ASSETS
------
Investments:
Fixed maturities:
Held to maturity, at amortized
cost (fair value $593,862
and $542,895) $ 578,765 $ 509,846
Available for sale, at fair value
(amortized cost $550,719 and
$468,206) 563,791 496,595
Equity securities, at fair value
(cost $40,027 and $30,347) 44,422 34,584
Short-term investments, at cost,
which approximates fair value 18,635 44,126
---------- ----------
Total investments 1,205,613 1,085,151
Cash 2,107 3,256
Receivables:
Premiums 64,140 62,233
Reinsurance 75,057 70,366
Accrued investment income 19,532 16,496
---------- ----------
Total receivables 158,729 149,095
Deferred policy acquisition costs 66,839 59,109
Prepaid reinsurance premiums 6,856 8,334
Property and equipment, net 22,477 22,578
Deferred income taxes 34,417 23,109
Other assets 27,006 27,709
---------- ----------
Total assets $1,524,044 $1,378,341
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unpaid losses and loss
settlement expenses $ 768,514 $ 645,941
Unearned premiums 272,681 238,710
Accounts payable and accrued expenses 42,503 48,478
Debt and capitalized lease obligations 97,965 97,965
Due to affiliate 6,041 2,238
---------- ----------
Total liabilities 1,187,704 1,033,332
---------- ----------
Shareholders' equity:
Preferred stock, $1 par value, authorized
1,000,000 shares; none issued
Common stock, $1 par value, authorized
23,000,000 shares; issued and
outstanding 13,839,802 and
13,718,086 shares 13,840 13,718
Additional paid-in capital 114,325 111,519
Net unrealized investment gains,
net of deferred income taxes 11,353 21,207
Retained earnings 196,822 198,565
---------- ----------
Total shareholders' equity 336,340 345,009
---------- ----------
Total liabilities and
shareholders' equity $1,524,044 $1,378,341
========== ==========
See accompanying notes to consolidated financial statements.
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Page 4
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(dollars in thousands, except per share data)
1996 1995
--------- ---------
Revenues:
Premiums earned $148,019 $114,926
Investment income, net of
investment expense 19,232 16,681
Realized investment gains 2,199 251
Other income 2,781 2,752
-------- --------
Total revenues 172,231 134,610
-------- --------
Losses and expenses:
Losses and loss settlement expenses 124,225 83,519
Amortization of deferred policy
acquisition costs 37,488 29,837
Other underwriting expenses 9,579 8,276
Interest expense 1,636 1,746
Other expenses 649 719
-------- --------
Total expenses 173,577 124,097
-------- --------
Income (loss) before income taxes (1,346) 10,513
Income taxes (benefit) (2,219) 1,886
-------- --------
Net income $ 873 $ 8,627
======== ========
Weighted average number of shares
outstanding 13,763,239 13,393,168
Earnings per common share $ .06 $ .64
======== ========
Cash dividend per common share $ .19 $ .17
======== ========
See accompanying notes to consolidated financial statements.
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Page 5
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(dollars in thousands)
NET
UNREALIZED
COMMON STOCK ADDITIONAL INVESTMENT
PAID-IN GAINS RETAINED
SHARES AMOUNT CAPITAL (LOSSES) EARNINGS TOTAL
--------- ------- ---------- ---------- -------- --------
Balance,
December 31,
1995 13,718,086 $13,718 $111,519 $21,207 $198,565 $345,009
Net income 873 873
Issuance of
common stock 121,716 122 2,806 2,928
Cash dividend
paid (2,616) (2,616)
Change in
unrealized
investment
gains (losses),
net (9,854) (9,854)
---------- ------- -------- ------- -------- --------
Balance,
March 31,
1996 13,839,802 $13,840 $114,325 $11,353 $196,822 $336,340
========== ======= ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
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Page 6
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(in thousands)
1996 1995
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Cash flows from operating activities:
Net income $ 873 $ 8,627
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in receivables, unearned
premiums, prepaid reinsurance
and due to affiliate 1,648 (3,002)
Increase in unpaid losses and
loss settlement expenses 28,608 12,955
Deferred income taxes (6,002) (102)
Increase in deferred policy
acquisition costs (7,730) (1,299)
Amortization and depreciation 370 222
Gain on sale of investments (2,199) (251)
Other, net (1,323) (7,159)
--------- ---------
14,245 9,991
Cash provided from the change in the
pooling agreement participation 117,800
--------- ---------
Net cash provided by operating
activities 132,045 9,991
--------- ---------
Cash flows from investing activities:
Fixed maturity investments:
Purchases (156,146) (34,103)
Sales or maturities 4,966 26,477
Equity securities:
Purchases (23,550) (1,067)
Sales 16,023 835
Net sales (purchases) of short-term
investments 25,491 (1,064)
Purchase of property and equipment (290) (145)
--------- ---------
Net cash used by investing
activities (133,506) (9,067)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 2,928 1,932
Dividend paid (2,616) (2,278)
--------- ---------
Net cash provided (used) by
financing activities 312 (346)
--------- ---------
Increase (decrease) in cash (1,149) 578
Cash at beginning of period 3,256 1,584
--------- ---------
Cash at end of period $ 2,107 $ 2,162
========= =========
See accompanying notes to consolidated financial statements.
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Page 7
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - Basis of Presentation
The financial information for the interim periods included
herein is unaudited; however, such information reflects all
adjustments which are, in the opinion of management, necessary to
a fair presentation of the financial position, results of
operations, and cash flows for the interim periods. The results of
operations for interim periods are not necessarily indicative of
results to be expected for the full year.
These financial statements should be read in conjunction with
the financial statements and notes for the year ended December 31,
1995 included in the Company's 1995 Annual Report filed with the
Securities and Exchange Commission on Form 10-K.
2 - Earnings Per Share
Net income per common share is based on the weighted average
number of shares outstanding during each of the respective periods.
Additional shares arising from the assumed exercise of stock
options, which are considered common stock equivalents, were not
included in the computations because they were either antidilutive
or the assumed additional dilutive effect was not material.
3 - Reinsurance
Premiums earned are net of amounts ceded to unrelated insurers
of $9,498,000 and $8,291,000 for the three months ended March 31,
1996 and 1995, respectively. Losses and loss settlement expenses
are net of amounts ceded to unrelated insurers of $8,741,000 and
$3,341,000 for the three months ended March 31, 1996 and 1995,
respectively.
4 - Cash Flows
There were cash tax payments of $500,000 and $2,000,000 in the
first quarter of 1996 and 1995, respectively. Cash interest
payments of $304,000 and $359,000 were made in the first quarter of
1996 and 1995, respectively.
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Page 8
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Effective January 1, 1996 Harleysville Group's pooling
agreement with Harleysville Mutual Insurance Company (Mutual) was
amended to include Pennland Insurance Company (Pennland), a wholly-
owned subsidiary of Mutual that writes Pennsylvania personal
automobile insurance policies. In addition, Harleysville Group's
participation increased from 60% to 65%.
Premiums earned increased $33.1 million during the three
months ended March 31, 1996 as compared to the three months ended
March 31, 1995. Of such increase, $19.1 million is due to the
increased pooling participation. Excluding the effect of this
change, the premiums earned from pooled business increased $9.1
million due to an increase in commercial lines business. The
remaining increase of $4.9 million, is due to growth in Lake
States' premiums earned from $18.6 million to $23.5 million
primarily due to an increase in commercial lines business and
expansion into the neighboring states of Indiana, Illinois and
Wisconsin.
Investment income increased $2.6 million for the three months
ended March 31, 1996 resulting from an increase in invested assets.
Such increase was primarily provided by a $117.8 million cash
transfer received for various insurance liabilities assumed January
1, 1996 in connection with the increase in Harleysville Group's
pool participation.
Realized investment gains were $1.9 million higher for the
three months ended March 31, 1996 compared to the same prior year
quarter primarily resulting from sales of equity securities.
Income (loss) before income taxes decreased $11.9 million for
the three months ended March 31, 1996, primarily due to the impact
of a blizzard and related storms that occurred in January 1996,
partially offset by the higher investment income and realized
gains. The blizzard and related January 1996 storms resulted in
losses of $15.0 million, or $9.7 million after-tax ($.71 per
share). Harleysville Group's statutory combined ratio increased to
114.1% for the three months ended March 31, 1996 from 105.8% for
the three months ended March 31, 1995. Of the increase, 10.1
points was due to the blizzard and related January 1996 storms
partially offset by expenses that increased at a lower rate than
premiums earned. The lower growth in expenses is primarily due to
the inclusion of Pennland in the pooling agreement, as Pennland has
lower expenses relative to its premium than the other pool
participants.
The income tax expense for each of the three month periods
ended March 31, 1996 and 1995 includes the tax benefit of tax-
exempt investment income of $1.8 million.
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Page 9
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Liquidity and Capital Resources
Net cash provided by operating activities for the first
quarter was $132.0 million and $10.0 million in 1996 and 1995,
respectively. The increase primarily reflects the effect of the
January 1, 1996 amendment to the pooling agreement with Mutual. A
$117.8 million cash transfer was received by Harleysville Group
related to the various liabilities assumed in connection with such
amendment.
Net cash used by investing activities was $133.5 million and
$9.1 million for the three months ended March 31, 1996 and 1995,
respectively. The increase is primarily due to the higher amount
of cash provided by operating activities.
Net cash from financing activities did not change
significantly.
Harleysville Group Inc. maintained $15.7 million of cash and
investments at the holding company level at March 31, 1996 which
are available for general corporate purposes including dividends,
debt service, capital contributions to subsidiaries and
acquisitions. The Company has no material commitments for capital
expenditures as of March 31, 1996.
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Page 10
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of Harleysville Group
Inc. was held on April 24, 1996 (the ("Annual Meeting" or
"Meeting"), with the following result:
The total number of shares represented at the Annual
Meeting in person or by proxy was 11,778,633 of the
13,770,310 shares of common stock outstanding and entitled
to vote at the Meeting.
On the resolution to elect Walter R. Bateman, Gerard G.
Johnson and William E. Strasburg as class "C" Directors to
serve until the expiration of their respective terms and
until their successors are duly elected, the nominees for
Director received the number of votes set forth opposite
their respective names:
Number of Votes
-----------------------
For Withheld
---------- --------
Walter R. Bateman 11,471,319 307,314
Gerard G. Johnson 11,471,619 307,014
William E. Strasburg 11,471,026 307,607
There were no abstentions or broker non-votes recorded.
On the basis of the above vote, Walter R. Bateman, Gerard
G. Johnson and William E. Strasburg were elected as class
"C" Directors to serve until the expiration of their
respective terms and until their successors are duly
elected.
On the resolution to approve the adoption of Harleysville
Group's 1996 Directors' Stock Purchase Plan, there were
11,598,185 votes for, 93,718 votes against, 83,727
abstentions and 3,003 broker non-votes. On the basis of
the vote, the adoption of Harleysville Group's 1996
Directors' Stock Purchase Plan was approved.
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Page 11
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
(Continued)
On the resolution to approve an amendment of Harleysville
Group's Certificate of Incorporation to increase the
authorized number of shares of common stock from
23,000,000 shares to 80,000,000 shares, there were
10,741,506 votes for, 1,019,734 votes against, 17,393
abstentions and no broker non-votes. On the basis of the
vote, the amendment of Harleysville Group's Certificate of
Incorporation was approved.
ITEM 5. Other Information - None
ITEM 6. a. Exhibits - None
b. Reports on Form 8-K - None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HARLEYSVILLE GROUP INC.
Date: May 13, 1996 /s/BRUCE J. MAGEE
---------------- --------------------------------
Bruce J. Magee
Senior Vice President and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000792013
<NAME> HARLEYSVILLE GROUP INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 563,791
<DEBT-CARRYING-VALUE> 578,765
<DEBT-MARKET-VALUE> 593,862
<EQUITIES> 44,422
<MORTGAGE> 0
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<TOTAL-ASSETS> 1,524,044
<POLICY-LOSSES> 768,514
<UNEARNED-PREMIUMS> 272,681
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0
0
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148,019
<INVESTMENT-INCOME> 19,232
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<BENEFITS> 124,225
<UNDERWRITING-AMORTIZATION> 37,488
<UNDERWRITING-OTHER> 11,864
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<INCOME-TAX> (2,219)
<INCOME-CONTINUING> 873
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<RESERVE-OPEN> 576,653
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