SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1997 .
--------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14697
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HARLEYSVILLE GROUP INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0241172
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
355 MAPLE AVENUE, HARLEYSVILLE, PENNSYLVANIA 19438-2297
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(Address of principal executive offices, including zip code)
(215) 256-5000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes X . No .
----- -----
At July 28, 1997, 14,317,605 shares of common stock of
Harleysville Group Inc. were outstanding.
1
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
INDEX
Page Number
-----------
Part I - Financial Information
Consolidated Balance Sheets - June 30, 1997 and
December 31, 1996 3
Consolidated Statements of Income - For the three
months ended June 30, 1997 and 1996 4
Consolidated Statements of Income - For the six
months ended June 30, 1997 and 1996 5
Consolidated Statement of Shareholders' Equity -
For the six months ended June 30, 1997 6
Consolidated Statements of Cash Flows -
For the six months ended June 30, 1997
and 1996 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Part II - Other Information 13
2
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
Assets
------
Investments:
Fixed maturities:
Held to maturity, at amortized
cost (fair value $615,998
and $606,770) $ 600,898 $ 587,979
Available for sale, at fair value
(amortized cost $616,587 and
$583,449) 628,710 598,193
Equity securities, at fair value
(cost $69,239 and $55,473) 103,639 69,932
Short-term investments, at cost,
which approximates fair value 20,332 35,175
---------- ----------
Total investments 1,353,579 1,291,279
Cash 2,830 2,120
Receivables:
Premiums 78,030 73,963
Reinsurance 70,585 80,163
Accrued investment income 19,918 19,527
---------- ----------
Total receivables 168,533 173,653
Deferred policy acquisition costs 70,713 68,779
Prepaid reinsurance premiums 4,560 5,444
Property and equipment, net 21,660 22,157
Deferred income taxes 25,913 30,963
Other assets 28,258 28,217
---------- ----------
Total assets $1,676,046 $1,622,612
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unpaid losses and loss settlement
expenses $ 831,088 $ 796,820
Unearned premiums 285,502 281,366
Accounts payable and accrued expenses 51,382 60,966
Debt 97,440 97,715
Due to affiliate 7,981 15,500
---------- ----------
Total liabilities 1,273,393 1,252,367
---------- ----------
Shareholders' equity:
Preferred stock, $1 par value, authorized
1,000,000 shares; none issued
Common stock, $1 par value, authorized
80,000,000 shares; issued and
outstanding 14,275,048 and
14,139,862 shares 14,275 14,140
Additional paid-in capital 124,140 121,033
Net unrealized investment gains,
net of deferred income taxes 30,240 18,982
Retained earnings 233,998 216,090
---------- ----------
Total shareholders' equity 402,653 370,245
---------- ----------
Total liabilities and
shareholders' equity $1,676,046 $1,622,612
========== ==========
See accompanying notes to consolidated financial statements.
3
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED JUNE 30, 1997 AND 1996
(dollars in thousands, except per share data)
1997 1996
--------- ---------
Revenues:
Premiums earned $155,251 $151,838
Investment income, net of
investment expenses 20,191 19,315
Realized investment gains 532 327
Other income 2,780 2,816
-------- --------
Total revenues 178,754 174,296
-------- --------
Losses and expenses:
Losses and loss settlement expenses 109,776 106,859
Amortization of deferred policy
acquisition costs 39,045 38,176
Other underwriting expenses 11,179 11,964
Interest expense 1,654 1,632
Other expenses 837 743
-------- --------
Total expenses 162,491 159,374
-------- --------
Income before income taxes 16,263 14,922
Income taxes 3,099 3,187
-------- --------
Net income $ 13,164 $ 11,735
======== ========
Weighted average number of shares
outstanding 14,238,684 13,855,536
Earnings per common share $ .92 $ .85
======== ========
Cash dividend per common share $ .21 $ .19
======== ========
See accompanying notes to consolidated financial statements.
4
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(dollars in thousands, except per share data)
1997 1996
--------- ---------
Revenues:
Premiums earned $311,632 $299,857
Investment income, net of
investment expenses 40,782 38,547
Realized investment gains 998 2,526
Other income 5,524 5,597
-------- --------
Total revenues 358,936 346,527
-------- --------
Losses and expenses:
Losses and loss settlement expenses 224,559 231,084
Amortization of deferred policy
acquisition costs 78,500 75,664
Other underwriting expenses 21,979 21,543
Interest expense 3,295 3,268
Other expenses 1,526 1,392
-------- --------
Total expenses 329,859 332,951
-------- --------
Income before income taxes 29,077 13,576
Income taxes 5,081 968
-------- --------
Net income $ 23,996 $ 12,608
======== ========
Weighted average number of shares
outstanding 14,215,040 13,809,388
Earnings per common share $ 1.69 $ .91
======== ========
Cash dividends per common share $ .42 $ .38
======== ========
See accompanying notes to consolidated financial statements.
5
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(dollars in thousands)
NET
UNREALIZED
COMMON STOCK ADDITIONAL INVESTMENT
PAID-IN GAINS RETAINED
SHARES AMOUNT CAPITAL (LOSSES) EARNINGS TOTAL
-------- ------- ---------- ---------- -------- --------
Balance,
December 31,
1996 14,139,862 $14,140 $121,033 $18,982 $216,090 $370,245
Net income 23,996 23,996
Issuance of
common stock 135,186 135 3,107 3,242
Cash dividends
paid (6,088) (6,088)
Change in
unrealized
investment
gains (losses),
net 11,258 11,258
---------- ------- -------- ------- -------- --------
Balance,
June 30, 1997 14,275,048 $14,275 $124,140 $30,240 $233,998 $402,653
========== ======= ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
6
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HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(in thousands)
1997 1996
--------- ----------
Cash flows from operating activities:
Net income $ 23,996 $ 12,608
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in receivables, unearned
premiums, prepaid reinsurance
and due to affiliate 1,706 (869)
Increase in unpaid losses and
loss settlement expenses 5,949 34,153
Deferred income taxes (1,013) (5,354)
Increase in deferred policy
acquisition costs (1,934) (10,755)
Amortization and depreciation 730 754
Gain on sale of investments (998) (2,526)
Other, net (9,762) 3,820
Cash provided from the change in
the pooling agreement participation 29,002 117,800
--------- ---------
Net cash provided by operating
activities 47,676 149,631
--------- ---------
Cash flows from investing activities:
Fixed maturity investments:
Purchases (92,124) (218,346)
Sales or maturities 47,462 51,188
Equity securities:
Purchases (19,304) (31,230)
Sales 5,565 17,166
Net sales of short-term
investments 14,843 31,501
Purchases of property and equipment (287) (794)
--------- ---------
Net cash used by investing
activities (43,845) (150,515)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 3,242 4,732
Repayment of debt obligations (275) (250)
Dividends paid (6,088) (5,250)
--------- ---------
Net cash used by
financing activities (3,121) (768)
--------- ---------
Increase (decrease) in cash 710 (1,652)
Cash at beginning of period 2,120 3,256
--------- ---------
Cash at end of period $ 2,830 $ 1,604
========= =========
See accompanying notes to consolidated financial statements.
7
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HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - Basis of Presentation
The financial information for the interim periods included
herein is unaudited; however, such information reflects all
adjustments (consisting of only normal recurring adjustments) which
are, in the opinion of management, necessary to a fair presentation
of the financial position, results of operations, and cash flows
for the interim periods. The results of operations for interim
periods are not necessarily indicative of results to be expected
for the full year.
These financial statements should be read in conjunction with
the financial statements and notes for the year ended December 31,
1996 included in the Company's 1996 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 the assumed additional
dilutive effect was not material.
3 - Reinsurance
Premiums earned are net of amounts ceded to unrelated insurers
of $6,564,000 and $13,099,000 for the three and six months ended
June 30, 1997, respectively, and $10,387,000 and $19,885,000 for
the three and six months ended June 30, 1996, respectively. Losses
and loss settlement expenses are net of amounts ceded to unrelated
insurers of $3,403,000 and $7,103,000 for the three and six months
ended June 30, 1997, respectively, and $10,090,000 and $18,831,000
for the three and six months ended June 30, 1996, respectively.
Effective January 1, 1997, Harleysville Group entered into a
reinsurance agreement with Harleysville Mutual Insurance Company
(Mutual) whereby Mutual reinsures accumulated catastrophe losses in
a quarter up to $15,750,000 in excess of $1,750,000 in return for
a reinsurance premium. The agreement excludes catastrophe losses
resulting from earthquakes or hurricanes, and supplements the
existing external catastrophe reinsurance program. Harleysville
Group ceded to Mutual premiums earned of $692,000 and $1,304,000
and losses incurred of $255,000 and $745,000, for the three and six
months ended June 30, 1997, respectively.
8
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HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Harleysville Group cedes business to and assumes business from
Mutual under a reinsurance pooling agreement. Because this
agreement does not relieve Harleysville Group of primary liability
as the originating insurer, there is a concentration of credit risk
arising from business ceded to Mutual. However, the reinsurance
pooling agreement provides for the right of offset and the net
balance with Mutual is a liability at June 30, 1997 and December
31, 1996. Mutual has an A. M. Best rating of "A" (Excellent) and,
in accordance with certain state regulatory requirements,
maintained $327.5 million (fair value) of investments in a trust
account to secure liabilities under the reinsurance pooling
agreement at June 30, 1997.
4 - Cash Flows
There were cash tax payments of $5,214,000 and $7,000,000 and
cash interest payments of $3,247,000 and $3,223,000 in the first
six months of 1997 and 1996, respectively.
9
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Effective January 1, 1997, Harleysville Group's pooling
agreement with Mutual was amended to include Lake States Insurance
Company (Lake States), a wholly-owned subsidiary of Harleysville
Group Inc. that writes insurance in Michigan, Illinois, Indiana and
Wisconsin. In addition, Harleysville Group's participation
increased from 65% to 70%.
Premiums earned increased $3.4 million and $11.8 million
during the three and six months ended June 30, 1997. The increase
is primarily due to an increase in the automobile lines of
business. The change in pool participation did not materially
affect the premium growth. However, the mix of business changed
as, effective January 1, 1997, 30% of Lake States' business is
ceded to and retained by Mutual and an additional 5% of the pooled
business is assumed from Mutual.
Investment income increased $.9 million and $2.2 million for
the three and six months ended June 30, 1997 resulting from an
increase in invested assets. Such increase was primarily provided
by a $29.0 million cash transfer received for various insurance
liabilities assumed January 1, 1997 in connection with the change
in Harleysville Group's pool participation.
Realized investment gains decreased $1.5 million for the six
months ended June 30, 1997 primarily resulting from fewer sales of
equity securities. Realized investment gains were not
significantly different for the three months ended June 30, 1997
and 1996.
Income before income taxes increased $1.3 million for the
three months ended June 30, 1997 primarily due to the higher
investment income. Harleysville Group's statutory combined ratio
did not change significantly and was 102.6% for the three months
ended June 30, 1997 and 102.3% for the three months ended June 30,
1996.
Income before income taxes increased $15.5 million for the six
months ended June 30, 1997 primarily due to improved underwriting
results and higher investment income partially offset by the lower
realized gains. Harleysville Group's statutory combined ratio
decreased to 104.5% for the six months ended June 30, 1997 from
108.1% for the six months ended June 30, 1996. The 1996 period was
adversely affected by a blizzard and related storms that occurred
in January 1996 and resulted in losses of $15.1 million.
10
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
The income tax expense for the three and six months ended June
30, 1997 includes the tax benefit of $2.7 million and $5.2 million
associated with tax-exempt interest compared to $2.1 million and
$3.9 million in the same prior year periods.
Effective for one year from July 1, 1997, the Company's
subsidiaries and Mutual and its wholly-owned subsidiaries renewed
its catastrophe reinsurance treaty which provides coverage for 85%
of up to $147 million in excess of a retention of $20 million for
any given catastrophe. Harleysville Group's 1997 pooling share of
this coverage would be 85% of up to $103 million in excess of a
retention of $14 million for any given catastrophe. Accordingly,
pursuant to the terms of the treaty, the maximum recovery would be
$125 million for any catastrophe involving an insured loss equal to
or greater than $167 million. Harleysville Group's 1997 pooling
share of this maximum recovery would be $88 million for any
catastrophe involving an insured loss of $117 million or greater.
The treaty includes reinstatement provisions providing for coverage
for a second catastrophe and requiring payment of an additional
premium in the event of a first catastrophe occurring.
Liquidity and Capital Resources
Net cash provided by operating activities was $47.7 million
and $149.6 million for the six months ended June 30, 1997 and 1996.
The decrease primarily reflects the effect of the amendments to the
pooling agreement with Mutual. Cash transfers of $29.0 million and
$117.8 million were received effective January 1, 1997 and 1996,
respectively, by Harleysville Group related to the various
liabilities assumed in connection with such amendments.
Net cash used by investing activities was $43.8 million and
$150.5 million for the six months ended June 30, 1997 and 1996.
The decrease is primarily due to the lower amount of cash provided
by operating activities.
11
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Net cash used by financing activities increased $2.4 million
for the six months ended June 30, 1997 primarily due to a decline
in the issuance of common stock as Mutual did not reinvest its
dividend from the Company.
Harleysville Group Inc. maintained $8.8 million of cash and
marketable investments at the holding company level at June 30,
1997 which is available for general corporate purposes including
dividends, debt service, capital contributions to subsidiaries and
acquisitions. The Company has no material commitments for capital
expenditures as of June 30, 1997.
New Accounting Standards
In June 1997, Statement of Financial Accounting Standards
(SFAS) No. 130, "Comprehensive Income", was issued and established
standards for the reporting and disclosure of comprehensive income
and its components (revenues, expenses, gains and losses). The
statement requires that all items that are required to be
recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
The statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement
and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
The statement is effective for fiscal years beginning after
December 15, 1997. Harleysville Group will adopt the statement in
1998.
In June 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", was issued and established
standards for the way that public business enterprises report
information about operating segments in annual financial
statements. The statement requires that those enterprises report
selected information about operating segments in interim financial
reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas
and major customers. The statement is effective for fiscal years
beginning after December 15, 1997. Harleysville Group is in the
process of determining the effect of this statement upon its
financial reporting requirements.
12
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HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
ITEM 6. a. Exhibits - None
b. Reports on Form 8-K - None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HARLEYSVILLE GROUP INC.
Date: August 1, 1997 /s/BRUCE J. MAGEE
-------------------- --------------------------------
Bruce J. Magee
Senior Vice President and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
13
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<ARTICLE> 7
<CIK> 0000792013
<NAME> HARLEYSVILLE GROUP INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 628,710
<DEBT-CARRYING-VALUE> 600,898
<DEBT-MARKET-VALUE> 615,998
<EQUITIES> 103,639
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,353,579
<CASH> 2,830
<RECOVER-REINSURE> 2,087
<DEFERRED-ACQUISITION> 70,713
<TOTAL-ASSETS> 1,676,046
<POLICY-LOSSES> 831,088
<UNEARNED-PREMIUMS> 285,502
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 97,440
0
0
<COMMON> 14,275
<OTHER-SE> 388,378
<TOTAL-LIABILITY-AND-EQUITY> 1,676,046
311,632
<INVESTMENT-INCOME> 40,782
<INVESTMENT-GAINS> 998
<OTHER-INCOME> 5,524
<BENEFITS> 224,559
<UNDERWRITING-AMORTIZATION> 78,500
<UNDERWRITING-OTHER> 26,800
<INCOME-PRETAX> 29,077
<INCOME-TAX> 5,081
<INCOME-CONTINUING> 23,996
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<EPS-PRIMARY> 1.69
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<RESERVE-OPEN> 718,700
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