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 SEPTEMBER 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.
-----------------------------------------------------
(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
------------------------------------------------------------
(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 November 3, 1997, 28,778,145 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 - September 30, 1997
and December 31, 1996 3
Consolidated Statements of Income - For the three
months ended September 30, 1997 and 1996 4
Consolidated Statements of Income - For the nine
months ended September 30, 1997 and 1996 5
Consolidated Statement of Shareholders' Equity -
For the nine months ended September 30, 1997 6
Consolidated Statements of Cash Flows - For the
nine months ended September 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 12
2
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
------
Investments:
Fixed maturities:
Held to maturity, at amortized
cost (fair value $626,196
and $606,770) $ 600,435 $ 587,979
Available for sale, at fair value
(amortized cost $613,446
and $583,449) 635,548 598,193
Equity securities, at fair value
(cost $77,453 and $55,473) 119,199 69,932
Short-term investments, at cost,
which approximates fair value 43,156 35,175
---------- ----------
Total investments 1,398,338 1,291,279
Cash 3,538 2,120
Receivables:
Premiums 76,762 73,963
Reinsurance 71,845 80,163
Accrued investment income 20,008 19,527
---------- ----------
Total receivables 168,615 173,653
Deferred policy acquisition costs 70,178 68,779
Prepaid reinsurance premiums 4,402 5,444
Property and equipment, net 21,651 22,157
Deferred income taxes 19,771 30,963
Other assets 30,022 28,217
---------- ----------
Total assets $1,716,515 $1,622,612
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unpaid losses and loss settlement
expenses $ 836,189 $ 796,820
Unearned premiums 282,115 281,366
Accounts payable and accrued expenses 60,451 60,966
Debt 97,440 97,715
Due to affiliate 11,208 15,500
---------- ----------
Total liabilities 1,287,403 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 28,724,740 and
14,139,862 shares 28,725 14,140
Additional paid-in capital 112,250 121,033
Net unrealized investment gains,
net of deferred income taxes 41,501 18,982
Retained earnings 246,636 216,090
---------- ----------
Total shareholders' equity 429,112 370,245
---------- ----------
Total liabilities and
shareholders' equity $1,716,515 $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 SEPTEMBER 30, 1997 AND 1996
(dollars in thousands, except per share data)
1997 1996
---------- ----------
Revenues:
Premiums earned $152,560 $157,707
Investment income, net of
investment expenses 20,302 19,580
Realized investment gains 4,376 218
Other income 2,655 2,802
-------- --------
Total revenues 179,893 180,307
-------- --------
Losses and expenses:
Losses and loss settlement expenses 104,823 125,209
Amortization of deferred policy
acquisition costs 38,360 39,459
Other underwriting expenses 14,110 11,341
Interest expense 1,654 1,634
Other expenses 636 636
-------- --------
Total expenses 159,583 178,279
-------- --------
Income before income taxes 20,310 2,028
Income taxes (benefit) 4,480 (1,480)
-------- --------
Net income $ 15,830 $ 3,508
======== ========
Weighted average number of shares
outstanding 28,649,248 27,948,522
Earnings per common share $ .55 $ .13
======== ========
Cash dividends per common share $ .12 $ .11
======== ========
See accompanying notes to consolidated financial statements.
4
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(dollars in thousands, except per share data)
1997 1996
---------- ---------
Revenues:
Premiums earned $464,192 $457,564
Investment income, net of
investment expenses 61,084 58,127
Realized investment gains 5,374 2,744
Other income 8,179 8,399
-------- --------
Total revenues 538,829 526,834
-------- --------
Losses and expenses:
Losses and loss settlement expenses 329,382 356,293
Amortization of deferred policy
acquisition costs 116,860 115,123
Other underwriting expenses 36,089 32,884
Interest expense 4,949 4,902
Other expenses 2,162 2,028
-------- --------
Total expenses 489,442 511,230
-------- --------
Income before income taxes 49,387 15,604
Income taxes (benefit) 9,561 (512)
-------- --------
Net income $ 39,826 $ 16,116
======== ========
Weighted average number of shares
outstanding 28,503,932 27,729,496
Earnings per common share $ 1.40 $ .58
======== ========
Cash dividends per common share $ .33 $ .30
======== ========
See accompanying notes to consolidated financial statements.
5
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(dollars in thousands)
NET
COMMON STOCK ADDITIONAL UNREALIZED
PAID-IN INVESTMENT RETAINED
SHARES AMOUNT CAPITAL GAINS EARNINGS TOTAL
--------- ------- ---------- ---------- -------- --------
Balance,
December 31,
1996 14,139,862 $14,140 $121,033 $18,982 $216,090 $370,245
Net income 39,826 39,826
Issuance of
common stock 222,508 223 5,579 5,802
Two-for-one
stock
split 14,362,370 14,362 (14,362)
Cash dividends
paid (9,280) (9,280)
Change in
unrealized
investment
gains, net 22,519 22,519
---------- ------- -------- ------- -------- --------
Balance,
Sept. 30,
1997 28,724,740 $28,725 $112,250 $41,501 $246,636 $429,112
========== ======= ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
6
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(in thousands)
1997 1996
---------- ----------
Cash flows from operating activities:
Net income $ 39,826 $ 16,116
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in receivables, unearned
premiums, prepaid reinsurance
and due to affiliate 1,623 (2,832)
Increase in unpaid losses and
loss settlement expenses 11,050 59,675
Deferred income taxes (934) (6,435)
Increase in deferred policy
acquisition costs (1,399) (11,880)
Amortization and depreciation 1,144 1,078
Gain on sale of investments (5,374) (2,744)
Other, net (2,642) 8,704
Cash provided from the change in the
intercompany pooling agreement
participation 29,002 117,800
--------- ---------
Net cash provided by operating
activities 72,296 179,482
--------- ----------
Cash flows from investing activities:
Fixed maturity investments:
Purchases (117,201) (245,797)
Sales or maturities 76,704 64,337
Equity securities:
Purchases (30,541) (38,618)
Sales 12,624 21,106
Net (purchases) sales of short-term
investments (7,981) 20,032
Purchase of property and equipment (730) (818)
--------- ---------
Net cash used by investing
activities (67,125) (179,758)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 5,802 8,414
Payment of debt (275) (250)
Dividends paid (9,280) (8,188)
--------- ---------
Net cash used by
financing activities (3,753) (24)
--------- ---------
Increase (decrease) in cash 1,418 (300)
Cash at beginning of period 2,120 3,256
--------- ---------
Cash at end of period $ 3,538 $ 2,956
========= =========
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 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 - Per Share Amounts and Restatement for Stock Split
Earnings and dividends per common share are based on the
weighted average number of shares outstanding during the respective
periods giving retroactive effect to a two-for-one stock split in
the form of a 100% stock dividend payable October 6, 1997 to
shareholders of record on September 15, 1997. Additional shares
arising from the assumed issuance of employee stock options, which
are considered common stock equivalents, were not included in the
computations because the assumed additional dilutive effect was not
material.
The balance sheet, as of September 30, 1997 was also adjusted
to reflect such two-for-one stock split.
3 - Reinsurance
Premiums earned are net of amounts ceded to unrelated insurers
of $6,368,000 and $19,467,000 for the three and nine months ended
September 30, 1997, respectively, and $9,104,000 and $29,449,000
for the three and nine months ended September 30, 1996,
respectively. Losses and loss settlement expenses are net of
amounts ceded to unrelated insurers of $4,170,000 and $11,273,000
for the three and nine months ended September 30, 1997,
respectively, and $3,721,000 and $17,899,000 for the three and nine
months ended September 30, 1996, respectively.
8
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HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 $680,000 and $1,984,000
and losses incurred of $711,000 and $1,456,000, for the three and
nine months ended September 30, 1997, respectively.
The Company 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 September 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 $339.0 million (fair value) of investments
in a trust account to secure liabilities under the reinsurance
pooling agreement at September 30, 1997.
4 - Cash Flows
Net cash tax payments of $7,214,000 and $10,100,000 were made
in the first nine months of 1997 and 1996, respectively. Cash
interest payments of $3,572,000 and $3,523,000 were made in the
first nine months of 1997 and 1996, respectively.
5 - Acquisition
On October 1, 1997, the Company acquired Minnesota Fire and
Casualty Company (Minnesota) and paid $35.0 million in cash to the
seller. The acquisition will be accounted for under the purchase
method of accounting. Minnesota underwrites property and casualty
insurance through independent agents in the upper midwestern United
States.
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 decreased $5.1 million for the three months
ended September 30, 1997. The decrease is primarily due to lower
rates in the workers compensation line of business as several state
rating bureaus took action which resulted in rate decreases. These
decreases also will cause workers compensation earned premiums to
be lower in the future. Along with the rate decreases, certain
reforms designed to lower loss costs were enacted. Premiums earned
increased $6.6 million for the nine months ended September 30,
1997. The increase is primarily due to an increase in the
automobile lines of business partially offset by a decline in the
workers compensation line of business. The change in pool
participation did not materially affect the premium growth.
However, 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 $.7 million and $3.0 million for
the three and nine months ended September 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 increase in Harleysville Group's pool participation.
Realized investment gains increased $4.2 million and $2.6
million for the three and nine months ended September 30, 1997
primarily resulting from sales of equity securities.
Income before income taxes increased $18.3 million for the
three months ended September 30, 1997 primarily due to improved
underwriting results and the higher investment income and realized
investment gains. The 1996 period was adversely affected by
Hurricanes Fran and Bertha, which caused losses of $13.0 million.
Harleysville Group's statutory combined ratio decreased to 102.7%
for the three months ended September 30, 1997 from 111.1% for the
three months ended September 30, 1996.
10
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Income before income taxes increased $33.8 million for the
nine months ended September 30, 1997 primarily due to improved
underwriting results and the higher investment income and realized
investment gains. Harleysville Group's statutory combined ratio
decreased to 103.9% for the nine months ended September 30, 1997
from 109.1% for the nine months ended September 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
and the third quarter hurricanes.
The income tax expense for the three and nine months ended
September 30, 1997 includes the tax benefit of $2.6 million and
$7.8 million, compared to $2.2 million and $6.1 million in the same
prior year periods, associated with tax-exempt investment income.
Liquidity and Capital Resources
Net cash provided by operating activities was $72.3 million
and $179.5 million for the nine months ended September 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 $67.1 million and
$179.8 million for the nine months ended September 30, 1997 and
1996. The decrease is primarily due to the lower amount of cash
provided by operating activities.
Net cash used by financing activities increased $3.7 million
for the nine months ended September 30, 1997 primarily due to a
decline in the issuance of common stock as Mutual did not reinvest
its dividend from the Company and to an increase in dividends paid.
Harleysville Group Inc. maintained $8.2 million of cash and
marketable investments at the holding company level at September
30, 1997 which is available for general corporate business purposes
including dividends, debt service, capital contributions to
subsidiaries and acquisitions. On October 1, 1997, the Company
acquired Minnesota Fire and Casualty Company and paid $35.0 million
in cash to the seller. Funding for the acquisition was primarily
provided by $32.0 million of dividends paid to the Company from its
subsidiaries. The Company had no other material commitments for
capital expenditures as of September 30, 1997.
11
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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: November 7, 1997 BRUCE J. MAGEE
------------------ --------------------------------
Bruce J. Magee
Senior Vice President and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
12
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<ARTICLE> 7
<CIK> 0000792013
<NAME> HARLEYSVILLE GROUP INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 635,548
<DEBT-CARRYING-VALUE> 600,435
<DEBT-MARKET-VALUE> 626,196
<EQUITIES> 119,199
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,398,338
<CASH> 3,538
<RECOVER-REINSURE> 3,012
<DEFERRED-ACQUISITION> 70,178
<TOTAL-ASSETS> 1,716,515
<POLICY-LOSSES> 836,189
<UNEARNED-PREMIUMS> 282,115
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 97,440
0
0
<COMMON> 28,725
<OTHER-SE> 400,387
<TOTAL-LIABILITY-AND-EQUITY> 1,716,515
464,192
<INVESTMENT-INCOME> 61,084
<INVESTMENT-GAINS> 5,374
<OTHER-INCOME> 8,179
<BENEFITS> 329,382
<UNDERWRITING-AMORTIZATION> 116,860
<UNDERWRITING-OTHER> 43,200
<INCOME-PRETAX> 49,387
<INCOME-TAX> 9,561
<INCOME-CONTINUING> 39,826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,826
<EPS-PRIMARY> 1.40
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<RESERVE-OPEN> 718,700
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