SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
------------------ -------------------
Commission file number 0-14697
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, PA 19438-2297
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 256-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 par value
--------------------------
(Title of class)
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 .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
On March 12, 1997, the aggregate market value (based on the closing sales
price on that date) of the voting stock held by non-affiliates of the
Registrant was $198,328,731.
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date: 14,202,394 shares of
Common Stock outstanding on March 12, 1997.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's annual report to stockholders for the
fiscal year ended December 31, 1996 are incorporated by reference in
Parts I, II and IV of this report.
2. Portions of the Registrant's proxy statement relating to the annual
meeting of stockholders to be held April 23, 1997 are incorporated by
reference in Parts I and III of this report.
1
<PAGE>
<PAGE>
HARLEYSVILLE GROUP INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1996
PART I PAGE
------ ----
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 25
ITEM 3. LEGAL PROCEEDINGS 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 25
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 28
ITEM 6. SELECTED FINANCIAL DATA 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 28
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT 29
ITEM 11. EXECUTIVE COMPENSATION 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 29
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 30
2
<PAGE>
PART I
ITEM 1. BUSINESS.
- ------- ---------
(a) GENERAL DEVELOPMENT OF BUSINESS.
Harleysville Group Inc. (the "Company") is a regional
insurance holding company headquartered in Pennsylvania which
engages, through its subsidiaries, in the property and casualty
insurance business. As used herein, "Harleysville Group" refers to
Harleysville Group Inc. and its subsidiaries. Harleysville Group
is approximately 55% owned by Harleysville Mutual Insurance Company
(the "Mutual Company").
Harleysville Group and the Mutual Company operate together as
a network of regional insurance companies that underwrite a broad
line of personal and commercial coverages. These insurance
coverages are marketed primarily in the eastern half of the United
States through approximately 15,700 independent insurance agents
associated with approximately 2,500 insurance agencies. Regional
offices are maintained in Georgia, Illinois, Indiana, Maryland,
Massachusetts, Michigan, New Jersey, New York, North Carolina,
Ohio, Pennsylvania, Tennessee, Virginia and Wisconsin. The
Company's property and casualty insurance subsidiaries are: Great
Oaks Insurance Company ("Great Oaks"), Harleysville-Atlantic
Insurance Company ("Atlantic"), Harleysville Insurance Company of
New Jersey ("HNJ"), Huron Insurance Company ("Huron"), Lake States
Insurance Company ("Lake States"), Mid-America Insurance Company
("Mid-America"), New York Casualty Insurance Company ("New York
Casualty") and Worcester Insurance Company ("Worcester").
The Company is pursuing a strategy of building a national
network of regional insurance companies. Management believes that
the Company's regional organization permits each regional operation
to benefit from economies of scale provided by centralized support
while encouraging local marketing autonomy and managerial
entrepreneurship. Services which directly involve the insured or
the agent (i.e., underwriting, claims and marketing) generally are
performed locally in accordance with Company-wide standards to
promote high quality service, while actuarial, investment, legal,
data processing and similar services are performed centrally. The
Company's network of regional insurance companies has expanded
significantly in the last fourteen years. In 1983, the Company
acquired Worcester, a property and casualty insurer which has
conducted business in New England since 1823. In 1984, HNJ was
formed by the Company and began underwriting property and casualty
insurance in New Jersey. In 1987, the Company acquired Atlantic,
a property and casualty insurer which has conducted business in the
southeastern United States since 1905. In 1991, the Company
acquired Mid-America, (formerly named Connecticut Union Insurance
Company) which conducted business in Connecticut, and New York
Casualty, which conducts business in upstate New York. In 1993,
the Company acquired Lake States, which primarily conducts business
in Michigan. In 1994, the Company formed Great Oaks which began
underwriting property and casualty insurance in Ohio.
3
<PAGE>
The Company's property and casualty subsidiaries participate
in an intercompany pooling arrangement whereby these subsidiaries
cede to the Mutual Company all of their net premiums written and
assume from the Mutual Company a portion of the pooled business,
which included all of the Mutual Company's property and casualty
insurance business except for new and renewal Pennsylvania personal
automobile insurance insured after January 1, 1991 by a subsidiary
of the Mutual Company, Pennland Insurance Company ("Pennland") and
new and renewal New Jersey personal automobile insurance insured
after January 1, 1992 by another subsidiary of the Mutual Company,
Harleysville-Garden State Insurance Company ("Garden State").
Beginning January 1, 1996, Harleysville Group's participation in
the pooling arrangement increased from 60% to 65% and Pennland
became a participant in the pooling arrangement. Beginning January
1, 1997, Harleysville Group's participation in the pooling
arrangement increased from 65% to 70% and Lake States became a
participant in the pooling arrangement. See "Business - Narrative
Description of Business - Pooling Arrangement."
The Company is a Delaware corporation formed in 1979 as a
wholly-owned subsidiary of the Mutual Company. In May 1986, the
Company completed an initial public offering of its common stock,
reducing the percentage of outstanding shares owned by the Mutual
Company to approximately 70%. In April 1992, the Mutual Company
completed a secondary public offering further reducing the
percentage of outstanding shares owned by the Mutual Company to
approximately 55%.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company is of the opinion that all of its operations are
within one industry segment and that no information as to industry
segments is required pursuant to Statement of Financial Accounting
Standards No. 14 or Regulation S-K.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
PROPERTY AND CASUALTY UNDERWRITING
Harleysville Group and the Mutual Company together underwrite
a broad line of personal and commercial property and casualty
coverages, including automobile, homeowners, commercial multi-peril
and workers compensation. The Mutual Company and the Company's
insurance subsidiaries participate in an intercompany pooling
arrangement under which such subsidiaries and the Mutual Company
combine their property and casualty business. Garden State has not
participated in the pooling arrangement. On January 1, 1996,
Pennland began participation in the pooling arrangement and
Harleysville Group's participation increased to 65%. Beginning
January 1, 1997, Harleysville Group's participation in the pooling
arrangement increased from 65% to 70% and Lake States became a
participant in the pooling arrangement.
Harleysville Group and the Mutual Company have a pooled rating
of "A" (excellent) by A.M. Best Company, Inc. ("Best's") based upon
4
<PAGE>
1996 statutory results and operating performance. Best's ratings
are based upon factors relevant to policyholders and are not
directed toward the protection of investors. Management believes
that the Best's rating is an important factor in marketing
Harleysville Group's products to its agents and customers.
The following table sets forth the premiums earned, by line of
insurance, for Harleysville Group for the periods indicated:
HARLEYSVILLE GROUP BUSINESS ONLY
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- --------- ---------
(in thousands)
PREMIUMS EARNED
- ---------------
Commercial:
Automobile $103,445 $ 85,210 $ 81,052
Workers compensation 128,563 103,794 91,684
Commercial multi-peril 123,393 100,375 90,303
Other 28,394 24,767 23,021
-------- -------- --------
Total commercial 383,795 314,146 286,060
-------- -------- --------
Personal:
Automobile 151,766 92,315 92,631
Homeowners 70,330 62,599 61,197
Other 9,306 7,982 7,843
-------- -------- --------
Total personal 231,402 162,896 161,671
-------- -------- --------
Total Harleysville Group Business $615,197 $477,042 $447,731
======== ======== ========
The following table sets forth ratios for the Company's
property and casualty subsidiaries, prepared in accordance with
generally accepted accounting principles ("GAAP") and with
statutory accounting practices ("SAP") prescribed or permitted by
state insurance authorities. The statutory combined ratio is a
standard measure of underwriting profitability. This ratio is the
sum of (i) the ratio of incurred losses and loss settlement
expenses to net earned premium ("loss ratio"); (ii) the ratio of
expenses incurred for commissions, premium taxes, administrative
and other underwriting expenses to net written premium ("expense
ratio"); and (iii) the ratio of dividends to policyholders to net
earned premium ("dividend ratio"). The GAAP combined ratio is
calculated in the same manner except that it is based on GAAP
amounts and the denominator for each component is net earned
premium. When the combined ratio is under 100%, underwriting
results are generally considered profitable. Conversely, when the
combined ratio is over 100%, underwriting results are generally
considered unprofitable. The combined ratio does not reflect
investment income, federal income taxes or other non-operating
income or expense. Harleysville Group's operating income is a
function of both underwriting results and investment income.
5
<PAGE>
HARLEYSVILLE GROUP BUSINESS ONLY
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------ ------ ------
GAAP combined ratio 108.4% 104.0% 111.5%
===== ===== =====
Statutory operating ratios:
Loss ratio 76.1% 70.3% 77.9%
Expense and dividend ratios 31.2% 33.1% 33.5%
----- ----- -----
Statutory combined ratio 107.3% 103.4% 111.4%
===== ===== =====
Industry statutory combined
ratio<F1> 107.0% 106.5% 108.5%
===== ===== =====
- ---------------
[FN]
<F1> Source: Best's Review, Property/Casualty Edition, January, 1997.
POOLING ARRANGEMENT
The Company's property and casualty subsidiaries participate
in an intercompany pooling arrangement with the Mutual Company.
The underwriting pool is intended to produce a more uniform and
stable underwriting result from year to year for all companies in
the pool than they would experience individually and to reduce the
risk of loss of any of the pool participants by spreading the risk
among all the participants. Each company participating in the pool
has at its disposal the capacity of the entire pool, rather than
being limited to policy exposures of a size commensurate with its
own capital and surplus. The additional capacity exists because
such policy exposures are spread among all the pool participants
which each have their own capital and surplus. Regulation is
applied to the individual companies rather than to the pool.
Pursuant to the terms of the pooling agreement with the Mutual
Company, each of the Company's subsidiary participants cedes
premiums, losses and expenses on all of their business to the
Mutual Company which, in turn, retrocedes to such subsidiaries a
specified portion of premiums, losses and expenses of the Mutual
Company and such subsidiaries. Under the terms of the intercompany
pooling agreement which became effective January 1, 1986, Huron and
HNJ ceded to the Mutual Company all of their insurance business
written on or after January 1, 1986. All of the Mutual Company's
property and casualty insurance business written or in force on or
after January 1, 1986, was also included in the pooled business.
The pooling agreement provides, however, that Harleysville Group is
not liable for any losses occurring prior to January 1, 1986. The
pooling agreement does not legally discharge Harleysville Group
from its primary liability for the full amount of the policies
ceded. However, it makes the Mutual Company liable to Harleysville
Group to the extent of the business ceded.
6
<PAGE>
<PAGE>
The following table sets forth a chronology of the changes
that have occurred in the pooling agreement since it became
effective on January 1, 1986.
CHRONOLOGY OF CHANGES IN POOLING AGREEMENT
HARLEYSVILLE MUTUAL
GROUP COMPANY
DATE PERCENTAGE PERCENTAGE EVENT
- ------ ----------- ---------- ---------
January 1, 1986 30% 70% Current pooling agreement began with
Huron and HNJ as participants with
the Mutual Company.
July 1, 1987 35% 65% Atlantic acquired and included in
the pool.
January 1, 1989 50% 50% Worcester included in the pool.
January 1, 1991 60% 40% New York Casualty and Mid-America
acquired and included in the pool
and the Mutual Company formed Pennland
(not a pool participant) to write
Pennsylvania personal automobile
personal automobile business.
January 1, 1996 65% 35% Pennland included in the pool.
January 1, 1997 70% 30% Lake States included in the pool.
Effective as of January 1, 1992, Garden State began insuring
new and renewal New Jersey personal automobile insurance policies
that had been included in the pooling arrangement.
When pool participation percentages increased as described
above, cash and investments equal to the net increase in
liabilities assumed less a ceding commission related to the net
increase in the liability for unearned premiums, was transferred
from the Mutual Company to Harleysville Group. See Note 2(a) of
the Notes to Consolidated Financial Statements.
All premiums, losses, loss settlement expenses and other
underwriting expenses are prorated among the parties to the pooling
arrangement on the basis of their participation in the pool. The
method of establishing reserves is set forth under "Business -
Reserves." The pooling agreement may be amended or terminated by
agreement of the parties. Termination may occur only at the end of
a calendar year. The Company and the Mutual Company maintain a
coordinating committee which reviews and evaluates the pooling
arrangements between the Company and the Mutual Company. See
"Business-Relationship with the Mutual Company." In evaluating
pool participation changes, the coordinating committee considers
current and proposed acquisitions, the relative capital positions
and revenue contributions of the pool participants, and growth
prospects and ability to access capital markets to support that
growth. Harleysville Group does not intend to terminate its
participation in the pooling agreement.
7
<PAGE>
The following table sets forth the net written premiums and
combined ratios by line of insurance for the total pooled business
after elimination of management fees, prepared in accordance with
statutory accounting practices prescribed or permitted by state
insurance authorities, for the periods indicated.
TOTAL POOLED BUSINESS
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- --------- --------
(dollars in thousands)
PREMIUMS WRITTEN
- ----------------
Commercial:
Automobile $146,987 $136,197 $122,807
Workers compensation 161,539 154,812 125,881
Commercial multi-peril 150,008 144,742 122,964
Other 39,503 39,703 36,007
-------- -------- --------
Total commercial 498,037 475,454 407,659
-------- -------- --------
Personal:
Automobile 178,166 113,440 110,900
Homeowners 93,513 93,141 88,864
Other 14,405 13,751 13,088
-------- -------- --------
Total personal 286,084 220,332 212,852
-------- -------- --------
Total pooled business $784,121 $695,786 $620,511
======== ======== ========
COMBINED RATIOS<F1>
- -----------------
Commercial:
Automobile 106.8% 107.5% 105.2%
Workers compensation 92.2% 87.5% 110.6%
Commercial multi-peril 118.1% 111.3% 110.3%
Other 108.2% 110.6% 109.7%
Total commercial 105.5% 102.4% 109.0%
Personal:
Automobile 107.5% 112.2% 107.6%
Homeowners 132.2% 104.8% 140.2%
Other 115.0% 88.6% 108.1%
Total personal 116.0% 107.7% 121.0%
Total pooled business 109.4% 104.1% 113.2%
- ----------------
[FN]
<F1> See the definition of combined ratio in "Business-Property and
Casualty Underwriting".
8
<PAGE>
The following table sets forth the net written premiums and
statutory combined ratios by line of insurance for Lake States:
LAKE STATES
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
-------- -------- --------
(dollars in thousands)
PREMIUMS WRITTEN
- ----------------
Commercial:
Automobile $ 12,982 $ 8,024 $ 7,622
Workers compensation 24,875 21,381 16,157
Commercial multi-peril 31,510 21,799 18,744
Other 2,820 2,785 1,365
------- ------- -------
Total commercial 72,187 53,989 43,888
------- ------- -------
Personal:
Automobile 40,288 26,030 24,642
Homeowners 10,621 7,985 8,521
------- ------- -------
Total personal 50,909 34,015 33,163
------- ------- -------
Total Lake States $123,096 $88,004 $77,051
======== ======= =======
COMBINED RATIOS<F1>
- ------------------
Commercial:
Automobile 89.3% 145.4% 107.8%
Workers compensation 74.8% 81.0% 100.9%
Commercial multi-peri 116.4% 101.9% 95.6%
Other 93.4% 43.2% 52.1%
Total commercial 95.7% 97.6% 97.0%
Personal:
Automobile 108.6% 112.7% 105.5%
Homeowners 138.8% 102.4% 136.7%
Total personal 114.9% 110.1% 113.2%
Total Lake States 103.6% 102.7% 104.0%
- -------------------
[FN]
>F1> See the definition of combined ratio in "Business-Property and
Casualty Underwriting".
9
<PAGE>
RESERVES. Loss reserves are estimates at a given point in
time of what the insurer expects to pay to claimants for claims
occurring on or before such point in time, including claims which
have not yet been reported to the insurer. These are estimates,
and it can be expected that the ultimate liability will exceed or
be less than such estimates. During the loss settlement period,
additional facts regarding individual claims may become known, and
consequently it often becomes necessary to refine and adjust the
estimates of liability.
Harleysville Group maintains reserves for the eventual payment
of losses and loss settlement expenses with respect to both
reported and unreported claims. Loss settlement expense reserves
are intended to cover the ultimate costs of settling all claims,
including investigation and litigation costs relating to such
claims. The amount of loss reserves for reported claims is based
primarily upon a case-by-case evaluation of the type of risk
involved and knowledge of the circumstances surrounding each claim
and the insurance policy provisions relating to the type of loss.
The amounts of loss reserves for unreported claims and loss
settlement expense reserves are determined on the basis of
historical information by line of insurance as adjusted to current
conditions. Inflation is implicitly provided for in the reserving
function through analysis of costs, trends and reviews of
historical reserving results. Reserves are closely monitored and
are recomputed periodically by Harleysville Group and the Mutual
Company using new information on reported claims and a variety of
statistical techniques. With the exception of reserves relating to
some workers compensation long-term disability cases, loss reserves
are not discounted.
10
<PAGE>
The following table sets forth a reconciliation of beginning
and ending net reserves for unpaid losses and loss settlement
expenses for the years indicated for the total pooled business on
a statutory basis.
TOTAL POOLED BUSINESS
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
(in thousands)
Reserves for losses and loss
settlement expenses,
beginning of the year $ 900,336 $855,305 $825,028
---------- -------- --------
Adjustment to beginning of the
year reserves for the addition
of Pennland 78,205
---------- -------- --------
Incurred losses and loss
settlement expenses:
Provision for insured events
of the current year 642,448 483,560 497,983
Decrease in provision for
insured events of prior
years (43,843) (18,050) (5,534)
---------- -------- --------
Total incurred losses
and loss settlement
expenses 598,605 465,510 492,449
---------- -------- --------
Payments:
Losses and loss settlement
expenses attributable to
insured events of the
current year 270,026 173,544 207,094
Losses and loss settlement
expenses attributable to
insured events of prior
years 273,744 246,935 255,078
---------- -------- --------
Total payments 543,770 420,479 462,172
---------- -------- --------
Reserves for losses and loss
settlement expenses,
end of the year $1,033,376 $900,336 $855,305
========== ======== ========
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<PAGE>
The following table sets forth the development of net reserves
for unpaid losses and loss settlement expenses from 1986 through
1996 for the pooled business of the Mutual Company and Harleysville
Group. "Reserve for losses and loss settlement expenses" sets
forth the estimated liability for unpaid losses and loss settlement
expenses recorded at the balance sheet date for each of the
indicated years. This liability represents the estimated amount of
losses and loss settlement expenses for claims arising in the
current and all prior years that are unpaid at the balance sheet
date, including losses incurred but not reported.
The "Reserves reestimated" portion of the table shows the
reestimated amount of the previously recorded liability based on
experience of each succeeding year. The estimate is increased or
decreased as payments are made and more information becomes known
about the severity of remaining unpaid claims. For example, the
1990 liability has developed a deficiency after six years, in that
reestimated losses and loss settlement expenses are expected to
exceed the initial estimated liability established in 1990 of
$676.5 million by $9.6 million, or 1.4%.
The "Cumulative amount of reserves paid" portion of the table
shows the cumulative losses and loss settlement expense payments
made in succeeding years for losses incurred prior to the balance
sheet date. For example, the 1990 column indicates that as of
December 31, 1996, payments of $589.5 million of the currently
reestimated ultimate liability for losses and loss settlement
expenses had been made.
The "Redundancy (deficiency)" portion of the table shows the
cumulative redundancy or deficiency at December 31, 1996 of the
reserve estimate shown on the top line of the corresponding column.
A redundancy in reserves means that reserves established in prior
years exceeded actual losses and loss settlement expenses or were
reevaluated at less than the original reserved amount. A
deficiency in reserves means that the reserves established in prior
years were less than actual losses and loss settlement expenses or
were reevaluated at more than the originally reserved amount.
The following table includes all 1996 pool participants as if
they had participated in the pooling arrangement in all years
indicated except for acquired pool participant companies, which are
included from their date of acquisition. Under the terms of the
pooling arrangement, Harleysville Group is not responsible for
losses on the pooled business occurring prior to January 1, 1986.
12
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<TABLE>
<CAPTION>
TOTAL POOLED BUSINESS
YEAR ENDED DECEMBER 31,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
----- ----- ------ ------ ------ ------ ------ ------ ------ ------ ------
(dollars in thousands)
<S>
Reserve for
losses
and loss
settlement
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
expenses $353,516 $425,880 $517,426 $610,128 $676,526 $742,989 $784,514 $825,028 $855,305 $900,336 $1,033,376
Reserves
reestimated:
One year
later 358,328 427,071 511,373 597,709 661,323 739,030 781,746 819,494 837,255 856,493
Two years
later 366,771 432,361 504,888 598,263 668,740 738,557 778,064 802,213 817,330
Three years
later 372,157 432,663 511,780 608,568 673,043 737,408 774,420 800,129
Four years
later 374,450 440,321 519,856 612,455 676,021 736,458 776,687
Five years
later 378,786 445,999 523,070 616,796 678,390 742,878
Six years
later 383,821 446,496 526,611 620,632 686,076
Seven years
later 384,853 449,784 531,760 627,462
Eight years
later 386,563 453,424 538,774
Nine years
later 390,453 459,312
Ten years
later 395,568
Cumulative amount
of reserves paid:
One year
later 126,546 136,389 158,587 200,569 220,747 236,833 244,210 255,078 246,935 273,744
Two years
later 194,751 217,675 263,792 326,313 363,109 383,358 402,394 403,601 406,944
Three years
later 243,825 282,643 340,128 418,355 459,024 485,045 503,309 511,281
Four years
later 277,970 327,264 396,185 475,044 524,757 550,456 572,656
Five years
later 303,039 361,291 429,388 513,573 563,807 594,452
Six years
later 323,030 379,006 451,548 537,609 589,477
Seven years
later 333,233 391,742 465,664 552,083
Eight years
later 340,892 400,736 476,104
Nine years
later 346,700 408,464
Ten years
later 352,713
Redundancy
(defi-
ciency) (42,052) (33,432) (21,348) (17,334) (9,550) 111 7,826 24,899 37,975 43,843
Redundancy
(deficiency)
expressed
as a percent
of year end
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
reserves (11.9)% (7.9)% (4.1)% (2.8)% (1.4)% 0.0% 1.0% 3.0% 4.4% 4.9%
Cumulative
redundancy
(deficiency)
excluding
pre-1986 reserve
development
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<F1> (4,003) 541 6,164 3,255 8,335 13,961 18,800 34,846 46,261 48,588
<FN>
<F1> Excludes years not included in pooling arrangement with Harleysville Group.
</TABLE>
13
<PAGE>
Harleysville Group's reserves primarily are derived from those
established for the total pooled business. The terms of the
pooling agreement provide that Harleysville Group is responsible
only for pooled losses incurred on or after the effective date,
January 1, 1986. The GAAP loss reserve experience of Harleysville
Group, as reflected in its financial statements, is shown in the
following table which sets forth a reconciliation of beginning and
ending net reserves for unpaid losses and loss settlement expenses
for the years indicated for the business of Harleysville Group
only.
HARLEYSVILLE GROUP BUSINESS ONLY
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
(in thousands)
Reserves for losses and loss
settlement expenses,
beginning of the year $576,653 $535,452 $499,272
-------- -------- --------
Incurred losses and loss
settlement expenses:
Provision for insured
events of the current
year 503,489 346,383 352,085
Decrease in provision
for insured events of
prior years (34,999) (10,887) (3,215)
-------- -------- --------
Total incurred losses
and loss settlement
expenses 468,490 335,496 348,870
-------- -------- --------
Payments:
Losses and loss settlement
expenses attributable to
insured events of the
current year 220,669 129,446 151,133
Losses and loss settlement
expenses attributable to
insured events of prior
years 199,740 164,849 161,557
Adjustment to beginning of
the year reserves resulting
from the change in the pool
participation percentage (93,966)
-------- -------- --------
Total payments 326,443 294,295 312,690
-------- -------- --------
Reserves for losses and loss
settlement expenses, end
of the year $718,700 $576,653 $535,452
======== ======== ========
14
<PAGE>
Harleysville Group recognized a decrease in the provision for
insured events of prior years (favorable development) of $35.0,
$10.9 and $3.2 million in 1996, 1995 and 1994, respectively. The
favorable development in 1996 primarily related to lower than
expected claim severity in the workers compensation and automobile
lines of business. The 1995 and 1994 favorable development
primarily related to lower than expected claim severity in workers
compensation.
The following table sets forth the development of net reserves
for unpaid losses and loss settlement expenses for Harleysville
Group. The effect of changes to the pooling agreement
participation is reflected in this table. For example, the January
1, 1989 increase in Harleysville Group's pooling participation from
35% to 50% is reflected in the first line of the 1989 column.
Amounts of assets equal to increases in net liabilities was
transferred to Harleysville Group from the Mutual Company in
conjunction with each respective pooling change. The amount of the
assets transferred has been netted against and has reduced the
cumulative amounts paid for years prior to the pooling changes.
For example, the 1988 column of the "Cumulative amount of reserves
paid" portion of the table reflects the assets transferred in
conjunction with the 1989 increase in the pooling percentage from
35% to 50% as a decrease netted in the "one year later" line. The
cumulative amounts paid are reflected in this manner to maintain
comparability. This is because when Harleysville Group pays claims
subsequent to the date of a pool participation increase, the
amounts paid are greater, however, the prior year's reserve amounts
are reflective of a lower pool participation percentage. By
reflecting pooling participation increases in this manner, loss
development is not obscured. Loss development reflects
Harleysville Group's share of the total pooled business loss
development since January 1, 1986 when Harleysville Group began
participation, plus loss development of any subsidiary not
participating in the pooling agreement.
Loss development information for the total pooled business is
presented on pages 11 to 13 to provide greater analysis of
underlying claims development.
15
<PAGE>
<TABLE>
<CAPTION>
HARLEYSVILLE GROUP BUSINESS
YEAR ENDED DECEMBER 31,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
----- ------ ------- ------- ------- ------ ------ ------ ------ ------ ------
(dollars in thousands)
<S>
Reserve for
losses
and loss
settlement
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
expenses $56,082 $117,058 $166,994 $259,522 $300,197 $406,619 $437,883 $499,272 $535,452 $576,653 $718,700
Reserve
reestimated:
One year
later 55,625 115,123 160,506 251,960 291,629 405,749 438,135 496,057 524,565 541,654
Two years
later 56,318 114,307 155,911 249,871 294,354 404,849 435,005 483,635 507,090
Three years
later 55,550 113,106 157,625 254,329 296,320 403,240 430,728 477,164
Four years
later 55,345 115,280 160,746 256,045 297,187 400,579 429,125
Five years
later 55,526 116,962 162,058 257,653 296,517 401,675
Six years
later 56,822 116,644 163,186 257,828 298,436
Seven years
later 56,825 117,620 164,149 259,184
Eight years
later 56,854 117,678 165,625
Nine years
later 57,062 118,422
Ten years
later 57,304
Cumulative amount
of reserves paid:
One year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
later 14,772 41,427 29,100 90,964 67,570 135,067 144,465 161,557 164,801 105,774
Two years
later 26,925 51,032 72,381 126,668 145,954 219,233 234,991 254,840 219,225
Three years
later 32,051 74,194 92,887 174,860 199,754 276,451 292,381 290,667
Four years
later 39,801 84,111 119,488 205,124 235,650 312,539 314,848
Five years
later 43,098 97,494 135,660 224,882 255,921 328,682
Six years
later 48,059 104,373 145,701 236,145 265,062
Seven years
later 50,431 108,827 151,012 239,937
Eight years
later 51,877 111,065 153,221
Nine years
later 52,203 112,231
Ten years
later 52,720
Redundancy
(defi-
ciency) (1,222) (1,364) 1,369 338 1,761 4,944 8,758 22,108 28,313 34,999
Redundancy
(deficiency)
expressed as
a percent of
year end
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
reserves (2.2)% (1.2)% 0.8% 0.1% 0.6% 1.2% 2.0% 4.4% 5.3% 6.1%
<S> <C> <C> <C> <C> <C>
Gross reserve $486,608 $560,811 $603,088 $645,941 $796,820
Ceded reserve 48,725 61,539 67,636 69,288 78,120
-------- -------- -------- -------- --------
Net reserve $437,883 $499,272 $535,452 $576,653 $718,700
======== ======== ======== ======== ========
Gross re-estimated $478,198 $544,505 $578,239 $614,702
Ceded re-estimated 49,073 67,341 71,149 73,048
-------- -------- -------- --------
Net re-estimated $429,125 $477,164 $507,090 $541,654
======== ======== ======== ========
NOTE: The amount of cash and investments received equal to the increase in
liabilities for unpaid losses and loss settlement expenses was
$9,311,000, $35,582,000, $55,350,000, $93,966,000 and $28,318,000
for the changes in pool participation in 1987, 1989, 1991, 1996
and 1997, respectively.
</TABLE>
16
<PAGE>
REINSURANCE. Harleysville Group follows the customary industry
practice of reinsuring a portion of its exposures and paying to the
reinsurers a portion of the premiums received on all policies.
Insurance is ceded principally to reduce the net liability on
individual risks and to protect against catastrophic losses.
Reinsurance does not legally discharge an insurer from its primary
liability for the full amount of the policies, although it does
make the assuming reinsurer liable to the insurer to the extent of
the reinsurance ceded. Therefore, a ceding company is subject to
credit risk with respect to its reinsurers.
The reinsurance described below is maintained for the Company's
subsidiaries and the Mutual Company and its wholly-owned
subsidiaries. Reinsurance premiums and recoveries are allocated to
participants in the pooling agreement according to pooling
percentages.
Reinsurance for property and auto physical damage losses is
currently maintained under a per risk excess of loss treaty
affording recovery to $4,250,000, above a retention of $750,000.
Harleysville Group's 1997 pooling share of such recovery would be
$2,975,000 above a retention of $525,000. In addition, the
Company's subsidiaries and the Mutual Company and its wholly-owned
subsidiaries are reinsured under a catastrophe reinsurance treaty
effective for one year from July 1, 1996 which provides coverage
for 85% of up to $127 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 $89 million in
excess of a retention of $14 million for any given catastrophe.
Pursuant to the terms of the treaty, the maximum recovery would be
$108 million for any catastrophe involving an insured loss equal to
or greater than $147 million. Harleysville Group's 1997 pooling
share of this maximum recovery would be $76 million for any
catastrophe involving an insured loss of $103 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.
Harleysville Group has not purchased funded catastrophe covers.
Casualty reinsurance (including liability and workers
compensation) is currently maintained under an excess of loss
treaty affording recovery to $19,000,000 above a retention of
$1,000,000 each loss occurrence. Harleysville Group's 1997 pooling
share of such recovery would be $13,300,000 above a retention of
$700,000. In addition, there is reinsurance to protect
Harleysville Group from large workers compensation losses. For
umbrella liability coverages, reinsurance protection up to
$4,000,000 is provided over a retention of $1,000,000.
Harleysville Group's 1997 pooling share would provide for recovery
of $2,800,000 over a retention of $700,000.
17
<PAGE>
Effective January 1, 1997, Harleysville Group entered into a
reinsurance agreement with 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.
The terms and charges for reinsurance coverage are typically
negotiated annually. The reinsurance market is subject to
conditions which are similar to those in the direct property and
casualty insurance market, and there can be no assurance that
reinsurance will remain available to the Company to the same extent
and at the same cost currently maintained by the Company.
The Company considers numerous factors in choosing reinsurers,
the most important of which is the financial stability of the
reinsurer. The Company has not experienced any material
collectibility problems for its reinsurance recoverables.
COMPETITION. The property and casualty insurance industry is
highly competitive on the basis of both price and service. There
are numerous companies competing for this business in the
geographic areas where the Harleysville Group operates, many of
which are substantially larger and have considerably greater
financial resources than Harleysville Group. In addition, because
the insurance products of Harleysville Group and the Mutual Company
are marketed exclusively through independent insurance agencies,
most of which represent more than one company, Harleysville Group
faces competition within each agency.
INVESTMENTS
An important element of the financial results of Harleysville
Group is the return on invested assets. An investment objective of
Harleysville Group is to maintain a widely diversified fixed
maturities portfolio structured to maximize after-tax investment
income while minimizing credit risk through investments in high
quality instruments. An objective also is to provide adequate
funds to pay claims without forced sales of investments. From 1994
to 1996, Harleysville Group invested $52 million in equity
securities with the objective of capital appreciation and expects
to gradually increase this investment to $70 million during 1997.
At December 31, 1996, the investment portfolio did not contain any
securities that were rated at less than investment grade, and it
did not contain any real estate or mortgage loans.
Harleysville Group has adopted and follows an investment
philosophy which precludes the purchase of non-investment grade
securities. However, due to uncertainties in the economic
environment, it is possible that the quality of investments held in
Harleysville Group's portfolio may change.
18
<PAGE>
The following table shows the composition of Harleysville
Group's fixed maturity investment portfolio at amortized cost,
excluding short-term investments, by rating as of December 31,
1996:
DECEMBER 31, 1996
----------------------
Amount Percent
---------- -------
(dollars in thousands)
RATING<F1>
- ---------
U.S. Treasury and
U.S. agency bonds<F2> $ 232,029 19.8%
Aaa 310,114 26.5
Aa 358,503 30.6
A 263,629 22.5
Baa 7,153 0.6
---------- -----
Total $1,171,428 100.0%
========== =====
- -----------------
[FN]
<F1> Ratings assigned by Moody's Investors Services, Inc.
<F2> Includes GNMA pass-through obligations and collateralized
mortgage obligations.
Harleysville Group invests in both taxable and tax-exempt
securities as part of its strategy to maximize after-tax income.
Such strategy considers, among other factors, the impact of the
alternative minimum tax. Tax-exempt bonds made up approximately
45%, 37% and 42% of the total investment portfolio at December 31,
1996, 1995 and 1994, respectively.
The following table shows the composition of Harleysville
Group's investment portfolio at carrying value, excluding short-
term investments, by type of security as of December 31, 1996:
DECEMBER 31, 1996
-----------------------
Amount Percent
---------- -------
(dollars in thousands)
Fixed maturities:
U.S. Treasury obligations $ 44,794 3.5%
U.S. agency obligations 65,492 5.2
GNMA pass-through obligations 2,224 0.2
Collateralized mortgage obligations 125,660 10.0
Obligations of states and political
subdivisions 562,378 44.8
Corporate securities 385,624 30.7
---------- -----
Total fixed maturities 1,186,172 94.4
---------- -----
Equity securities 69,932 5.6
---------- -----
Total $1,256,104 100.0%
========== =====
19
<PAGE>
Investment results of Harleysville Group's fixed maturity
investment portfolio for the three years ended December 31, 1996
are shown in the following table:
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
(dollars in thousands)
Invested assets<F1> $1,133,640 $960,114 $917,368
Investment income<F2> $ 75,204 $ 67,428 $ 63,293
Average yield 6.6% 7.0% 6.9%
- -----------------
[FN]
<F1> Average of the aggregate invested amounts at amortized cost at
the beginning and end of the period, adjusted for the 1996
pooling agreement amendment.
<F2> Investment income does not include investment expenses,
realized investment gains or losses or provision for income
taxes.
The following table indicates the composition of Harleysville
Group's fixed maturity investment portfolio at carrying value,
excluding short-term investments, by time to maturity as of
December 31, 1996:
DECEMBER 31, 1996
---------------------
AMOUNT PERCENT
-------- -------
(dollars in thousands)
DUE IN<F1>
----------
1 year or less $ 39,385 3.3%
Over 1 year through 5 years 228,437 19.3
Over 5 years through 10 years 368,723 31.1
Over 10 years 421,743 35.5
---------- -----
1,058,288 89.2
Mortgage-backed securities 127,884 10.8
---------- -----
Total $1,186,172 100.0%
========== =====
- ------------------
[FN]
<F1> Based on stated maturity dates with no prepayment
assumptions. Actual maturities may differ because borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
The average life of Harleysville Group's investment portfolio
as of December 31, 1996 was approximately 7 years.
20
<PAGE>
REGULATION
Insurance companies are subject to supervision and regulation
in the states in which they transact business. Such supervision
and regulation relate to numerous aspects of an insurance company's
business and financial condition. The primary purpose of such
supervision and regulation is the protection of policyholders. The
extent of such regulation varies, but generally derives from state
statutes which delegate regulatory, supervisory and administrative
authority to state insurance departments. Accordingly, the
authority of the state insurance departments includes the
establishment of standards of solvency which must be met and
maintained by insurers, the licensing to do business of insurers
and agents, the nature of and limitations on investments, premium
rates for property and casualty insurance, the provisions which
insurers must make for current losses and future liabilities, the
deposit of securities for the benefit of policyholders and the
approval of policy forms. Such insurance departments also conduct
periodic examinations of the affairs of insurance companies and
require the filing of annual and other reports relating to the
financial condition of insurance companies.
All of the states in which Harleysville Group and the Mutual
Company do business have guaranty fund laws under which insurers
doing business in such states can be assessed up to 2% of annual
written premiums earned by the insurer in that state in order to
fund policyholder liabilities of insolvent insurance companies.
Under these laws in general, an insurer is subject to assessment,
depending upon its market share of a given line of business, to
assist in the payment of policyholder and third party claims
against insolvent insurers. Since the likelihood and amount of any
particular assessment cannot be determined until an insolvency has
occurred, potential liabilities for assessments are not reflected
in the reserves of insurers. During the five years ended December
31, 1996, the amount of such insolvency assessments paid by
Harleysville Group and the Mutual Company was not material.
State laws also require Harleysville Group to participate in
involuntary insurance programs for automobile insurance, as well as
other property and casualty lines, in states in which Harleysville
Group operates. These programs include joint underwriting
associations, assigned risk plans, fair access to insurance
requirements ("FAIR") plans, reinsurance facilities and wind storm
plans. These state laws generally require all companies that write
lines covered by these programs to provide coverage (either
directly or through reinsurance) for insureds who cannot obtain
insurance in the voluntary market. The legislation creating these
programs usually allocates a pro rata portion of risks attributable
to such insureds to each company on the basis of direct written
premiums or the number of automobiles insured. Generally, state
law requires participation in such programs as a condition to doing
business. The loss ratio on insurance written under involuntary
programs generally has been greater than the loss ratio on
insurance in the voluntary market.
21
<PAGE>
State insurance holding company acts regulate insurance
holding company systems. Each insurance company in the holding
company system is required to register with the insurance
supervisory agency of its state of domicile and furnish certain
information concerning the operations of companies within the
holding company system that may materially affect the operations,
management or financial condition of the insurer within the system.
Such laws further require disclosure of material transactions
including the payment of "extraordinary dividends" from the
insurance subsidiaries to the Company.
Insurance holding company acts require that all transactions
within the holding company system affecting the Mutual Company and
the Company's insurance subsidiaries must be fair and equitable.
Further, approval of the applicable insurance commissioner is
required prior to the consummation of transactions affecting the
control of an insurer.
The property and casualty insurance industry has been subject
to significant public scrutiny and comment primarily due to
concerns regarding solvency issues, rising insurance costs, and the
industry's methods of operations. Accordingly, new regulations and
legislation are being proposed to bring the insurance industry
under federal control; to strengthen state oversight, particularly
in the field of solvency and investments; to further restrict an
insurer's ability to underwrite and price risks; and to impose new
taxes and assessments. It is not possible to predict whether, in
what form or in what jurisdictions any of these proposals might be
adopted or the effect, if any, on the Company.
The Company's insurance subsidiaries are restricted by the
insurance laws of their respective states of domicile as to the
amount of dividends they may pay to the Company without the prior
approval of the respective state regulatory authorities.
Generally, the maximum dividend that may be paid by an insurance
subsidiary during any year without prior regulatory approval is
limited to a stated percentage of that subsidiary's statutory
surplus as of a certain date, or adjusted net income of the
subsidiary, for the preceding year. Applying current regulatory
restrictions as of December 31, 1996, the Company's insurance
subsidiaries would have been able to pay, without prior regulatory
approval, approximately $32.1 million in dividends to the Company.
The Company's insurance subsidiaries have not paid any dividends to
Harleysville Group Inc. in 1996, 1995 or 1994.
The National Association of Insurance Commissioners has
adopted risk-based capital (RBC) standards that require insurance
companies to calculate and report statutory capital and surplus
needs based on a formula measuring underwriting, investment and
other business risks inherent in an individual company's
operations. These RBC standards have not affected the operations
of Harleysville Group since each of the Company's insurance
subsidiaries have statutory capital and surplus in excess of RBC
requirements.
22
<PAGE>
Harleysville Group is required to file financial statements
for its subsidiaries, prepared by using statutory accounting
practices, with state regulatory authorities. SAP differs from
GAAP primarily in the recognition of revenue and expense. The
adjustments necessary to reconcile net income and shareholders'
equity determined by using SAP to net income and shareholders'
equity determined in accordance with GAAP are as follows:
NET INCOME SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, DECEMBER 31,
-------------------------- --------------------
1996 1995 1994 1996 1995
-------- -------- -------- --------- ---------
(in thousands)
SAP amounts $15,332 $36,063 $16,674 $326,455 $303,675
Adjustments:
Deferred
policy
acquisition
costs 9,670 6,619 143 68,779 59,109
Deferred
income
taxes 7,118 (502) 5,647 32,086 23,875
Unrealized
investment
gains 14,532 27,834
Other, net (3,505) (608) (4,579) 7,735 8,322
Holding
company<F1> 65 (241) 569 (79,342) (77,806)
------- ------- ------- -------- --------
GAAP amounts $28,680 $41,331 $18,454 $370,245 $345,009
======= ======= ======= ======== ========
[FN]
<F1> Represents the GAAP income and equity amounts for
Harleysville Group Inc., excluding the earnings of and
investment in subsidiaries.
RELATIONSHIP WITH THE MUTUAL COMPANY
Harleysville Group's operations are interrelated with the
operations of the Mutual Company due to the pooling arrangement and
other factors. The Mutual Company owns approximately 55% of
Harleysville Group. Harleysville Group employees provide a variety
of services to the Mutual Company and its wholly-owned
subsidiaries. The cost of facilities and employees required to
conduct the business of both companies is charged on a cost-
allocated basis. Harleysville Group also manages the operations of
the Mutual Company and its wholly owned subsidiaries pursuant to a
management agreement which commenced January 1, 1993 under which
Harleysville Group receives a management fee. Harleysville Group
also manages the operations of Berkshire Mutual Insurance Company,
23
<PAGE>
a small property and casualty insurance company, pursuant to a
management services agreement. Harleysville Group received $6.6
million, $6.9 million and $6.6 million for the years ended December
31, 1996, and 1995 and 1994, respectively, for all such management
services.
All of the Company's officers are officers of the Mutual
Company, and six of the Company's nine directors are directors of
the Mutual Company. A coordinating committee exists to review and
evaluate the pooling agreement and is responsible for matters
involving actual or potential conflicts of interest between the two
companies. The decisions of the coordinating committee are binding
on the two companies. No intercompany transaction can be
authorized by the coordinating committee unless the Company's
committee members conclude that such transaction is fair and
equitable to Harleysville Group. The coordinating committee
consists of seven non-employee directors, three from Harleysville
Group Inc. and three from the Mutual Company all of whom are not
members of both Boards and one, the Chairman, who is a member of
both Boards. For information concerning the members of the
coordinating committee, see "The Board of Directors and its
Committees" section on pages 6 to 8 of the Company's proxy
statement relating to the annual meeting of the stockholders to be
held April 23, 1997 which is incorporated by reference in this Form
10-K Report.
The Mutual Company leases the home office from Harleysville
Group with which it shares most of the facility. Rental income
under the lease was $2,754,000, $2,750,000 and $2,668,000 for 1996,
1995 and 1994, respectively. Harleysville Group believes that the
lease terms are no less favorable to it than if the property were
leased to a non-affiliate.
In connection with the acquisition of Mid-America and New
York Casualty, the Company borrowed approximately $18.5 million
from the Mutual Company. See Note 7 of the Notes to Consolidated
Financial Statements. For additional information with respect to
transactions with the Mutual Company, see Note 2 of the Notes to
Consolidated Financial Statements.
EMPLOYEES
All employees are paid by Harleysville Group and, accordingly,
are considered to be employees of Harleysville Group. As of
December 31, 1996, there were 2,514 employees. They provide a
variety of services to the Mutual Company and its wholly-owned
subsidiaries. See "Business-Relationship with the Mutual Company"
and Note 2(c) of the Notes to Consolidated Financial Statements.
24
<PAGE>
ITEM 2. PROPERTIES.
- ------- -----------
The buildings which house the headquarters of Harleysville
Group and the Mutual Company are leased by the Mutual Company from
a subsidiary of Harleysville Group. See "Business-Relationship
with the Mutual Company." The Mutual Company charges Harleysville
Group for an appropriate portion of the rent under an intercompany
allocation agreement. The buildings containing the headquarters of
Harleysville Group and the Mutual Company have approximately
220,000 square feet of office space. Harleysville Group also rents
office facilities in certain of the states in which it does
business.
ITEM 3. LEGAL PROCEEDINGS.
- ------- ------------------
Harleysville Group is a party to numerous lawsuits arising in
the ordinary course of its insurance business. Harleysville Group
believes that the resolution of these lawsuits will not have a
material adverse effect on its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
No matter was submitted during the fourth quarter of 1996 to
a vote of holders of the Company's Common Stock.
25
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
All of the persons listed below are executive officers of
Harleysville Group or its affiliates. There are no family
relationships between any of the Company's executive officers and
directors, and there are no arrangements or understandings between
any of these officers and any other person pursuant to which the
officer was selected as an officer.
Name Age Position
- --------------------- --- ----------------------------------
Walter R. Bateman, II 49 President, Chief Executive Officer
and Director
Thomas E. Roden 61 Executive Vice President
Roger A. Brown 48 Senior Vice President, Secretary
and General Counsel
Mark R. Cummins 40 Senior Vice President, Chief
Investment Officer and Treasurer
Bruce J. Magee 42 Senior Vice President and
Chief Financial Officer
Spencer M. Roman 48 Senior Vice President
Robert G. Whitlock, Jr. 40 Senior Vice President and Chief
Actuary
Roger J. Beekley 54 Vice President and Controller
Walter R. Bateman, II has been Chief Executive Officer since
January 1, 1994 and has been President, Chief Operating Officer and
Director of Harleysville Group and the Mutual Company since 1992.
Thomas E. Roden is Executive Vice President of Harleysville
Group and the Mutual Company. He is in charge of field and
subsidiary operations for both companies and was previously in
charge of underwriting for both companies since 1983.
Roger A. Brown has been Senior Vice President, Secretary and
General Counsel of Harleysville Group and the Mutual Company since
April 1995. He was Assistant General Counsel from 1986 until
assuming his present position.
Mark R. Cummins has been Senior Vice President, Chief
Investment Officer and Treasurer of Harleysville Group and the
Mutual Company since 1992. Since January 1, 1996, he also has been
in charge of various administrative areas.
26
<PAGE>
Bruce J. Magee has been Senior Vice President and Chief
Financial Officer of Harleysville Group and the Mutual Company
since January 1, 1994. From 1986 to 1993 he was Vice President and
Controller of Harleysville Group.
Spencer M. Roman has been Senior Vice President since 1993.
Since January 1, 1996, he has been in charge of marketing, claims,
underwriting and policy and information services. He was in charge
of marketing for the three preceding years. From 1970 to 1993 he
was employed by General Accident Insurance Company, most recently
as Vice President of Marketing/Planning.
Robert G. Whitlock, Jr. has been Senior Vice President and
Chief Actuary of Harleysville Group and the Mutual Company since
February 1995. He was Vice President and Actuary before assuming
his present position and was in charge of various actuarial
functions since 1991.
Roger J. Beekley has been Vice President and Controller of
Harleysville Group since January 1, 1994 and is Vice President and
Controller of the Mutual Company, a position he has held since
1982.
27
<PAGE>
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
- ------- ----------------------------------------------------
STOCKHOLDER MATTERS.
- -------------------
The "Market for Common Stock and Related Security Holder
Matters" section from the Company's annual report to stockholders
for the year ended December 31, 1996, which is included as Exhibit
(13)(D) to this Form 10-K Report, is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA.
- ------- ------------------------
The "Selected Consolidated Financial Data" section from the
Company's annual report to stockholders for the year ended December
31, 1996, which is included as Exhibit (13)(A) to this Form 10-K
Report, is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- ------- -----------------------------------------------------------
AND RESULTS OF OPERATIONS.
- --------------------------
The "Management's Discussion and Analysis of Results of
Operations and Financial Condition" section from the Company's
annual report to stockholders for the year ended December 31, 1996,
which is included as Exhibit (13)(B) to this Form 10-K Report, is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
The consolidated financial statements from the Company's
annual report to stockholders for the year ended December 31, 1996,
which is included as Exhibit (13)(C) to this Form 10-K Report, are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
- ------- -----------------------------------------------------------
AND FINANCIAL DISCLOSURE.
- --------------------------
None.
28
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- ---------------------------------------------------
The "Election of Directors" section, which provides
information regarding the Company's directors, on pages 3 to 5 of
the Company's proxy statement relating to the annual meeting of
stockholders to be held April 23, 1997, is incorporated herein by
reference.
The information concerning executive officers called for by
Item 10 of Form 10-K is set forth in Part I of this Annual Report
on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- -----------------------
The "Executive Compensation and Other Information" section on
pages 9 to 15 and the "Compensation of Directors" section on pages
6 to 7 of the Company's proxy statement relating to the annual
meeting of stockholders to be held April 23, 1997, are incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------- ---------------------------------------------------
MANAGEMENT.
- ----------
The "Beneficial Ownership of Common Stock" section on pages 2
to 3 of the Company's proxy statement relating to the annual
meeting of stockholders to be held April 23, 1997, are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
The "Certain Transactions" section on pages 25 to 26 of the
Company's proxy statement relating to the annual meeting of
stockholders to be held April 23, 1997, is incorporated herein by
reference.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
- -------- ------------------------------------------------------
FORM 8-K.
- ----------
(a) (1) The following consolidated financial statements are filed
as a part of this report:
Consolidated Financial Statements Page
------
Consolidated Balance Sheets as of
December 31, 1996 and 1995 25*
Consolidated Statements of Income for
Each of the Years in the Three-year
Period Ended December 31, 1996 26*
Consolidated Statements of Stockholders'
Equity for Each of the Years in the Three-
year Period Ended December 31, 1996 27*
Consolidated Statements of Cash Flows
for Each of the Years in the Three-year
Period Ended December 31, 1996 28*
Notes to Consolidated Financial Statements 29*
Independent Auditors' Report 41*
(2) The following consolidated financial statement
schedules for the years 1996, 1995 and 1994
are submitted herewith:
Financial Statement Schedules
Schedule I. Summary of Investments - Other
Than Investments in Related
Parties 37
Schedule II. Condensed Financial Information
of Parent Company 38
Schedule III. Supplementary Insurance
Information 41
Schedule IV. Reinsurance 42
Schedule VI. Supplemental Insurance Information
Concerning Property and Casualty
Subsidiaries 43
Independent Auditors' Consent and Report on Schedules
(filed as Exhibit 23)
All other schedules are omitted because they are not
applicable or the required information is included in the financial
statements or notes thereto.
- --------------------
*Refers to the respective page of Harleysville Group Inc.'s
1996 Annual Report to Stockholders. The Consolidated Financial
Statements and Independent Auditors' Report, which are included as
Exhibit (13)(C), are incorporated herein by reference. With the
exception of the portions of such Annual Report specifically
incorporated by reference in this Item and Items 5, 6, 7 and 8,
such Annual Report shall not be deemed filed as part of this Form
10-K or otherwise subject to the liabilities of Section 18 of the
Securities Exchange Act of 1934.
30
<PAGE>
(3) Exhibits
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------
( 3)(A) Amended and restated Certificate of Incor-
poration of Registrant - incorporated herein
by reference to Exhibit (4)(A) to the
Registrant's Form S-8 Registration Statement
No. 333-03127 filed May 3, 1996.
( 3)(B) Amended and Restated By-laws of Registrant -
incorporated herein by reference to Exhibit
4(B) to the Post-Effective Amendment No. 12 of
Registrant's Form S-3 Registration Statement
No. 33-90810 filed October 10, 1995.
( 4) Indenture between the Registrant and CoreStates
Bank, N.A., dated as of November 15, 1993 -
incorporated herein by reference to Exhibit (4)
to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993.
*(10)(A) Deferred Compensation Plan, as amended, for
Directors of Harleysville Mutual Insurance
Company, Harleysville Group Inc. and
Harleysville Life Insurance Company -
incorporated herein by reference to Exhibit
10(A) to the Registrant's Form S-3 Registration
Statement No. 33-28948 filed May 25, 1989.
*(10)(B) Harleysville Insurance Companies Director
Deferred Compensation Plan Approved by the
Board of Directors November 25, 1987 -
incorporated herein by reference to Exhibit
10(B) to the Registrant's Form S-3 Registration
Statement No. 33-28948 filed May 25, 1989.
*(10)(C) Harleysville Group Inc. Non-qualified Deferred
Compensation Plan - incorporated herein by
reference to Exhibit 10(C) to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1993.
*(10)(D) Pension Plan of Harleysville Group Inc. and
Associated Employers dated December 1, 1994 and
amendment dated February 6, 1995 - incorporated
herein by reference to Exhibit 10(D) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
*(10)(E) Harleysville Insurance Companies Senior
Executive Supplemental Retirement Plan dated
May 25, 1982 - incorporated herein by reference
to Exhibit 10(E) to the Registrant's Form S-1
Registration Statement No. 33-4885 declared
effective May 23, 1986.
31
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------
*(10)(F) Harleysville Mutual Insurance Company/
Harleysville Group Inc. Senior Management
Incentive Bonus Plan As Amended and Restated
November 20, 1996.
(10)(G) Proportional Reinsurance Agreement effective as
of January 1, 1986 among Harleysville Mutual
Insurance Company, Huron Insurance Company and
Harleysville Insurance Company of New Jersey -
incorporated herein by reference to Exhibit
10(N) to the Registrant's Form S-1 Registration
Statement No. 33-4885 declared effective May
23, 1986.
*(10)(H) Equity Incentive Plan of Registrant, as amended
- incorporated herein by reference to Exhibit
(10)(I) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1990.
(10)(I) Tax Allocation Agreement dated December 24,
1986 among Harleysville Insurance Company of
New Jersey, Huron Insurance Company, Worcester
Insurance Company, McAlear Associates, Inc. and
the Registrant - incorporated herein by
reference to Exhibit 10(Q) to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1986.
(10)(J) Amended and Restated Financial Tax Sharing
Agreement dated March 20, 1995 among Huron
Insurance Company, Harleysville Insurance
Company of New Jersey, Worcester Insurance
Company, Harleysville-Atlantic Insurance
Company, New York Casualty Insurance Company,
Connecticut Union Insurance Company, Great Oaks
Insurance Company, Lakes States Insurance
Company and the Registrant - incorporated
herein by reference to Exhibit (10)(L) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
(10)(K) Amendment, effective July 1, 1987, to the
Proportional Reinsurance Agreement effective
January 1, 1986 among Harleysville Mutual
Insurance Company, Huron Insurance Company,
Harleysville Insurance Company of New Jersey
and Atlantic Insurance Company of Savannah -
incorporated herein by reference to the
Registrant's Form 8-K Report dated July 1,
1987.
32
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------
(10)(L) Amendment, effective January 1, 1989, to the
Proportional Reinsurance Agreement effective
January 1, 1986 among Harleysville Mutual
Insurance Company, Huron Insurance Company,
Harleysville Insurance Company of New Jersey,
Atlantic Insurance Company of Savannah and
Worcester Insurance Company - incorporated
herein by reference to Exhibit 10(U) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1988.
(10)(M) Amendment, effective January 1, 1991, to the
Proportional Reinsurance Agreement effective
January 1, 1986 among Harleysville Mutual
Insurance Company, Huron Insurance Company,
Harleysville Insurance Company of New Jersey,
Atlantic Insurance Company of Savannah,
Worcester Insurance Company, Phoenix General
Insurance Company and New York Casualty
Insurance Company - incorporated herein by
reference to Exhibit (10)(O) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1990.
(10)(N) Amendments, effective January 1, 1995 and 1993,
respectively, to the Proportional Reinsurance
Agreement effective January 1, 1986 among
Harleysville Mutual Insurance Company, Huron
Insurance Company, Harleysville Insurance
Company of New Jersey, Harleysville-Atlantic
Insurance Company, Worcester Insurance Company,
Connecticut Union Insurance Company, New York
Casualty Insurance Company and Great Oaks
Insurance Company - incorporated herein by
reference to Exhibit (10)(P) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
(10)(0) Amendment, effective January 1, 1996 to the
Proportional Reinsurance Agreement effective
January 1, 1986 among Harleysville Mutual
Insurance Company, Huron Insurance Company,
Harleysville Insurance Company of New Jersey,
Harleysville-Atlantic Insurance Company,
Worcester Insurance Company, Connecticut Union
Insurance Company, New York Casualty Insurance
Company, Great Oaks Insurance Company and
Pennland Insurance Company - incorporated
herein by reference to Exhibit (10)(O) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1995.
33
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------
(10)(P) Amendment, effective January 1, 1997 to the
Proportional Reinsurance Agreement effective
January 1, 1986 among Harleysville Mutual
Insurance Company, Huron Insurance Company,
Harleysville Insurance Company of New Jersey,
Harleysville-Atlantic Insurance Company,
Worcester Insurance Company, Mid-America
Insurance Company, New York Casualty Insurance
Company, Great Oaks Insurance Company, Pennland
Insurance Company and Lake States Insurance
Company.
*(10)(Q) Long-Term Incentive Plan for senior officers of
Harleysville Mutual Insurance Company and
Registrant - incorporated herein by reference
to Exhibit 10(V) to the Registrant's Annual
Report on Form 10-K for the year ended December
31, 1988.
(10)(R) Lease effective January 1, 1995 between Harleys-
ville, Ltd. and Harleysville Mutual Insurance
Company - incorporated herein by reference to
Exhibit (10)(R) to the Registrant's Annual
Report on Form 10-K for the year ended December
31, 1994.
*(10)(S) 1990 Directors' Stock Option Program of
Registrant - incorporated herein by reference
to Exhibit (10)(R) to the Registrant's Annual
Report on Form 10-K for the year ended December
31, 1990.
*(10)(T) 1995 Directors' Stock Option Program of
Registrant - incorporated herein by reference
to Exhibit (10)(S) to the Registrant's Annual
Report on Form 10-K for the year ended December
31, 1993.
(10)(U) Loan Agreement dated as of March 19, 1991 by
and between Harleysville Group Inc. and
Harleysville Mutual Insurance Company -
incorporated herein by reference to Exhibit
10.5 to the Registrant's Form S-3 Registration
Statement No. 33-41845 filed September 17,
1991.
34
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -------------------------------------------------
(10)(V) Form of Management Agreements dated January 1,
1994 between Harleysville Group Inc. and
Harleysville Mutual Insurance Company,
Harleysville-Garden State Insurance Company,
Pennland Insurance Company, Berkshire Mutual
Insurance Company and Harleysville Life
Insurance Company - incorporated herein by
reference to Exhibit (10)(U) to the
Registrant's Annual Statement on Form 10-K for
the year ended December 31, 1993.
(10)(W) Form of Salary Allocation Agreements dated
January 1, 1993 between Harleysville Group Inc.
and Harleysville Mutual Insurance Company,
Harleysville-Garden State Insurance Company,
Pennland Insurance Company, Berkshire Mutual
Insurance Company and Harleysville Life
Insurance Company - incorporated herein by
reference to Exhibit (10)(U) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1992.
(10)(X) Equipment and Supplies Allocation Agreement
dated January 1, 1993 between Harleysville
Mutual Insurance Company and Harleysville Group
Inc. - incorporated herein by reference to
Exhibit (10)(V) to the Registrant's Annual
Report on Form 10-K for the year ended December
31, 1992.
*(10)(Y) 1992 Incentive Stock Option Plan for Employees
Amended and Restated August 26, 1992 -
incorporated herein by reference to Exhibit
(10)(W) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1992.
*(10)(Z) Harleysville Group Inc. Supplemental Pension
Plan dated May 25, 1994 - incorporated herein
by reference to Exhibit (10)(AA) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1994.
*(10)(AA) 1996 Directors' Stock Purchase Plan of
Registrant - incorporated herein by reference
to Exhibit (4)(C) to the Registrant's From S-8
Registration Statement No. 333-03127 filed May
3, 1996.
*(10)(AB) Directors Equity Award Program of Registrant -
incorporated herein by reference to Exhibit
(4)(C) to the Registrant's Form S-8
Registration Statement No. 333-09701 filed
August 7, 1996.
35
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------
(13)(A) Selected Consolidated Financial Data from the
Company's 1996 annual report to stockholders.
(13)(B) Management's Discussion and Analysis of Results
of Operations and Financial Condition from the
Company's 1996 annual report to stockholders.
(13)(C) Consolidated financial statements from the
Company's 1996 annual report to stockholders.
(13)(D) Market for Common Stock and Related Security
Holder Matters from the Company's 1996 annual
report to stockholders.
(21) Subsidiaries of Registrant.
(23) Independent Auditors' Consent and Report on
Schedules.
(27) Financial Data Schedule
(28) Statement re Registrant.
P(28)(A) Schedule P, of the 1996 statutory annual
statement, for the total pooled business of
Harleysville Mutual Insurance Company and the
pool participant property and casualty insur-
ance subsidiaries of Harleysville Group Inc.
P(28)(B) Schedule P, of the 1996 statutory annual
statement of Lake States Insurance Company.
(99) Form 11-K Annual Report for the Harleysville
Group Inc. Employee Stock Purchase Plan for the
year ended December 31, 1996.
- ---------------
* Management contract or compensatory plan, contract or arrangement
filed pursuant to Item 14(c) of this report.
P - Filed in paper format pursuant to Rule 311, paragraph (c).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
last quarter of the period covered by this report.
36
<PAGE>
HARLEYSVILLE GROUP
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
(in thousands)
AMOUNT
AT WHICH
SHOWN IN
THE BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- ------------------------- ---------- ---------- -----------
Fixed maturities:
United States
government and
government agencies
and authorities $ 108,623 $ 110,732 $ 110,286
States, municipalities
and political
subdivisions 552,027 574,226 562,378
Mortgage-backed
securities 125,473 127,884 127,884
All other corporate
bonds 385,305 392,121 385,624
---------- ---------- ----------
Total fixed
maturities 1,171,428 1,204,963 1,186,172
---------- ---------- ----------
Equity securities:
Common stocks
Banks, trust and
insurance companies 9,084 11,792 11,792
Industrial,
miscellaneous and
all other 46,389 58,140 58,140
---------- ---------- ----------
Total equities 55,473 69,932 69,932
---------- ---------- ----------
Short-term
investments 35,175 35,175
---------- ----------
Total investments $1,262,076 $1,291,279
========== ==========
37
<PAGE>
HARLEYSVILLE GROUP INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31,
------------------------
1996 1995
--------- ---------
ASSETS
Cash $ 525
Short-term investments $ 1,440 1,860
Fixed maturities:
Available for sale, at fair
value (cost $10,811 and $12,299) 10,989 12,780
Investments in common
stock of subsidiaries
(equity method) 449,586 422,815
Accrued investment income 119 165
Due from affiliate 2,880 3,109
Other assets 4,370 3,128
-------- --------
Total assets $469,384 $444,382
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $ 93,500 $ 93,500
Accounts payable and
accrued expenses 5,187 4,419
Federal income taxes payable 452 1,454
-------- --------
Total liabilities 99,139 99,373
-------- --------
Shareholders' equity:
Preferred stock, $1 par value;
authorized 1,000,000 shares,
none issued
Common stock, $1 par value;
authorized 80,000,000 shares;
shares issued and outstanding
1996, 14,139,862 and 1995, 13,718,086 14,140 13,718
Additional paid-in capital 121,033 111,519
Net unrealized investment gains,
net of deferred income taxes 18,982 21,207
Retained earnings 216,090 198,565
-------- --------
Total shareholders' equity 370,245 345,009
-------- --------
Total liabilities and
shareholders' equity $469,384 $444,382
======== ========
38
<PAGE>
HARLEYSVILLE GROUP INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED STATEMENTS OF INCOME
(in thousands)
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
Revenues $ 7,603 $ 7,528 $ 8,491
Expenses:
Interest 6,378 6,526 6,143
Expenses other than interest 1,116 1,386 1,472
------- ------- -------
109 (384) 876
Income tax expense (benefit) 44 (143) 307
------- ------- -------
Income (loss) before equity in
undistributed net income of
subsidiaries 65 (241) 569
Equity in undistributed income
of subsidiaries 28,615 41,572 17,885
------- ------- -------
Net income $28,680 $41,331 $18,454
======= ======= =======
39
<PAGE>
HARLEYSVILLE GROUP INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- ---------
Cash flows from operating
activities:
Net income $ 28,680 $ 41,331 $ 18,454
Adjustments to reconcile
net income to net cash
provided (used) by operating
activities:
Equity in undistributed
earnings of subsidiaries (28,615) (41,572) (17,885)
Decrease in accrued
investment income 46 168 88
Increase (decrease) in
accrued income taxes (896) (883) 1,260
(Gain) loss on sale of
investments 667 (70)
Other, net (464) (737) (1,236)
-------- -------- --------
Net cash provided (used)
by operating activities (1,249) (1,026) 611
-------- -------- --------
Cash flows from investing activities:
Fixed maturity investments:
Purchases (5,964) (499)
Sales 1,500 15,616 7,937
Net sales (purchases) or
maturities of short-term
investments 420 (1,396) (70)
Contributions to subsidiaries (5,000) (6,000)
-------- -------- --------
Net cash provided by
investing activities 1,920 3,256 1,368
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock 9,936 8,022 6,712
Dividends from subsidiaries 23 24 24
Dividends paid (11,155) (9,751) (8,715)
-------- -------- --------
Net cash used by
financing activities (1,196) (1,705) (1,979)
-------- -------- --------
Change in cash (525) 525 -
Cash at beginning of year 525 - -
-------- -------- --------
Cash at end of year $ - $ 525 $ -
======== ======== ========
40
<PAGE>
<TABLE>
HARLEYSVILLE GROUP
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands)
<CAPTION>
LIABILITY
FOR UNPAID AMORTIZATION
DEFERRED LOSSES AND LOSSES OF DEFERRED
POLICY LOSS NET AND LOSS POLICY OTHER
ACQUISITION SETTLEMENT UNEARNED EARNED INVESTMENT SETTLEMENT ACQUISITION UNDERWRITING PREMIUMS
COSTS EXPENSES PREMIUMS PREMIUMS INCOME EXPENSES COSTS EXPENSES WRITTEN
----------- ---------- -------- -------- ---------- ---------- ----------- ------------ --------
Year Ended:
December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $68,779 $796,820 $281,366 $615,197 $78,008 $468,490 $154,320 $43,965 $660,743
======= ======== ======== ======== ======= ======== ======== ======= ========
December 31,
1995 $59,109 $645,941 $238,710 $477,042 $68,445 $335,496 $123,019 $37,764 $505,478
======= ======== ======== ======== ======= ======== ======== ======= ========
December 31,
1994 $52,490 $603,088 $209,570 $447,731 $64,366 $348,870 $116,398 $33,909 $449,357
======= ======== ======== ======== ======= ======== ======== ======= ========
</TABLE>
41
<PAGE>
HARLEYSVILLE GROUP
SCHEDULE IV - REINSURANCE
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands)
ASSUMED PERCENTAGE
CEDED FROM OF AMOUNT
GROSS TO OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- --------- --------- -------- ----------
Year ended
December 31, 1996
Property and
casualty
premiums $493,755 $422,163 $543,605 $615,197 88.4%
======== ======== ======== ======== ======
Year ended
December 31, 1995
Property and
casualty
premiums $426,486 $388,950 $439,506 $477,042 92.1%
======== ======== ======== ======== ======
Year ended
December 31, 1994
Property and
casualty
premiums $401,495 $373,778 $420,014 $447,731 93.8%
======== ======== ======== ======== ======
Note: The amounts ceded and assumed include the amounts ceded and
assumed under the terms of the pooling arrangement.
42
<PAGE>
HARLEYSVILLE GROUP
SCHEDULE VI - SUPPLEMENTAL INSURANCE INFORMATION CONCERNING
PROPERTY AND CASUALTY SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(in thousands)
LOSSES AND LOSS
SETTLEMENT EXPENSES
LIABILITY (BENEFITS) INCURRED
FOR UNPAID DISCOUNT, RELATED TO
LOSSES AND IF ANY ------------------- PAID LOSSES
LOSS DEDUCTED AND LOSS
SETTLEMENT FROM CURRENT PRIOR SETTLEMENT
EXPENSES RESERVES YEAR YEARS EXPENSES
---------- -------- -------- ------- -----------
Year ended:
December 31,
1996 $796,820 $9,185 $503,489 $(34,999) $326,443
======== ====== ======== ======== ========
December 31,
1995 $645,941 $5,271 $346,383 $(10,887) $294,295
======== ====== ======== ======== ========
December 31,
1994 $603,088 $5,464 $352,085 $ (3,215) $312,690
======== ====== ======== ======== ========
Notes: (1) The amount of discount relates to certain long-term
disability workers' compensation cases. A discount
rate of 3.5% (5% on New Jersey cases) was used.
(2) Information required by remaining columns is contained
in Schedule III.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 24, 1997 By: /s/WALTER R. BATEMAN
--------------------------------
Walter R. Bateman
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf
of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ----------------------- ------------------------- -------------
Chairman of the Board
/s/BRADFORD W. MITCHELL and a Director March 24, 1997
- -----------------------
Bradford W. Mitchell
President,
Chief Executive Officer
/s/WALTER R. BATEMAN and a Director March 24, 1997
- ----------------------
Walter R. Bateman
Senior Vice President
and Chief Financial
Officer (principal financial
officer and principal
/s/BRUCE J. MAGEE accounting officer) March 24, 1997
- ----------------------
Bruce J. Magee
44
<PAGE>
SIGNATURES
(Continued)
SIGNATURE TITLE DATE
- ----------------------- ------------------------- --------------
/s/LOWELL R. BECK Director March 24, 1997
- ----------------------
Lowell R. Beck
/s/MICHAEL L. BROWNE Director March 24, 1997
- ----------------------
Michael L. Browne
/s/ROBERT D. BUZZELL Director March 24, 1997
- ----------------------
Robert D. Buzzell
/s/GERARD G. JOHNSON Director March 24, 1997
- ----------------------
Gerard G. Johnson
/s/H. BRYCE JORDAN Director March 24, 1997
- ----------------------
H. Bryce Jordan
/s/FRANK E. REED Director March 24, 1997
- ----------------------
Frank E. Reed
/s/WILLIAM E. STRASBURG Director March 24, 1997
- -----------------------
William E. Strasburg
45
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------
*(10)(F) Harleysville Mutual Insurance Company/
Harleysville Group Inc. Senior Management
Incentive Bonus Plan as Amended and Restated
November 20, 1996.
(10)(P) Amendment, effective January 1, 1997 to the
Proportional Reinsurance Agreement effective
January 1, 1986 among Harleysville Mutual
Insurance Company, Huron Insurance Company,
Harleysville Insurance Company of New Jersey
Harleysville-Atlantic Insurance Company,
Worcester Insurance Company, Mid-America
Insurance Company, New York Casualty
Insurance Company, Great Oaks Insurance
Company, Pennland Insurance Company and Lake
States Insurance Company.
(13)(A) Selected Consolidated Financial Data from
the Company's 1996 annual report to
stockholders.
(13)(B) Management's Discussion and Analysis of
Results of Operations and Financial
Condition from the Company's 1996 annual
report to stockholders.
(13)(C) Consolidated financial statements from the
Company's 1996 annual report to
stockholders.
(13)(D) Market for Common Stock and Related Security
Holder Matters from the Company's 1996
annual report to stockholders.
(21) Subsidiaries of Registrant.
(23) Independent Auditors' Consent and Report on
Schedules.
(27) Financial Data Schedule
(28) Statement re Registrant.
(99) Form 11-K Annual Report for the Harleysville
Group Inc. Employee Stock Purchase Plan for
the year ended December 31, 1996.
<PAGE>
EXHIBIT (10)(F)
HARLEYSVILLE MUTUAL INSURANCE COMPANY/
HARLEYSVILLE GROUP INC.
SENIOR MANAGEMENT INCENTIVE COMPENSATION PLAN
(AS AMENDED & RESTATED ON NOVEMBER 20, 1996)
<PAGE>
HARLEYSVILLE MUTUAL INSURANCE COMPANY
HARLEYSVILLE GROUP INC.
SENIOR MANAGEMENT INCENTIVE COMPENSATION PLAN
---------------------------------------------
ARTICLE NO. TITLE OF ARTICLE PAGE NO.
- ----------- ---------------- --------
I PURPOSE 1
II DEFINITIONS 1
III ADMINISTRATION 2
IV EFFECTIVE DATES 3
V PARTICIPATION 3
VI REQUIRED MINIMUM PROFIT 4
VII TARGET AWARDS 5
VIII PERFORMANCE OBJECTIVES 5
IX AWARD DETERMINATION 5
X PAYMENT OF AWARDS 6
XI DEFERRED PAYMENT ELECTION 6
XII TREATMENT OF DEFERRED AMOUNTS 6
XIII FORFEITURE OF AWARDS 6
XIV DEATH OF PARTICIPANT 8
XV INCAPACITATED PARTICIPANT 8
XVI AMENDMENT, SUSPENSION OR TERMINATION 8
XVII SUBSIDIARIES 8
XVIII GOVERNING LAW 9
XIX COSTS OF THE PLAN 9
XX NON-ASSIGNABLE 9
XXI NO EMPLOYMENT CONTRACT 9
(i)
<PAGE>
HARLEYSVILLE MUTUAL INSURANCE COMPANY/
HARLEYSVILLE GROUP INC.
SENIOR MANAGEMENT INCENTIVE COMPENSATION PLAN
---------------------------------------------
AS AMENDED & RESTATED ON NOVEMBER 20, 1996
------------------------------------------
ARTICLE I. - PURPOSE
--------------------
This Amended and Restated Senior Management Incentive
Compensation Plan (hereinafter referred to as the "Plan") is
intended to increase the profitability of Harleysville Mutual
Insurance Company and Harleysville Group Inc. (hereinafter referred
to as the "Company") by providing the opportunity for senior
management to earn incentive payments for outstanding achievement
and performance. It is the purpose of this Plan to motivate senior
management to the attainment of demanding goals by providing
recognition and rewards in the form of incentive payments which may
be taken in cash or deferred, at the election of each participant.
The Plan has the further objective of attracting and retaining
senior management personnel of superior caliber and of affording
them a means of participating in the overall success of the
Company's business.
ARTICLE II. - DEFINITIONS
-------------------------
For the purposes of this Plan, the following terms shall have
the meanings set forth below:
(A) "Board of Directors" - The Board of Directors of the
-------------------
Company.
(B) "Committee" - The Compensation & Personnel Development
-----------
Committee of the Board of Directors.
(C) "Incentive Award Year" - A calendar year for which
---------------------
Performance Objectives are set under the Plan and for
which incentive awards may be paid.
(D) "Management" - The Chief Executive Officer of the
-----------
Company.
(E) "Participant" - An Officer or manager of the Company who
------------
is specifically designated as a participant by the
Committee and whose participation is approved by the
Board of Directors.
1
<PAGE>
(F) "Performance Objectives" - The important business and
-----------------------
financial objectives to be achieved during each Incentive
Award Year as determined for each Incentive Award Year by
the Committee and upon which the payment of the
individual incentive awards is based.
(G) "Salary Range Mid-Point" - The dollar value assigned to
-----------------------
the mid-point in the range of salaries within each Salary
Grade as determined under the Company's senior management
position evaluation and salary system.
(H) "Target Award" - An incentive award amount determined at
-------------
the start of each Incentive Award Year for each
Participant which would be paid if the Performance
Objectives for such Incentive Award Year are met fully.
ARTICLE III. - ADMINISTRATION
-----------------------------
(A) The responsibility for the implementation and
administration of this Plan is delegated to the
Committee. In addition to its duties as elsewhere set
forth in this Plan, the Committee's functions shall
include the following:
(1) interpretation of the Plan and establishment of the
rules and regulations governing Plan
administration,
(2) determination of who is a Participant,
(3) determination of Target Awards,
(4) approval of Performance Objectives,
(5) determination of the degree of the attainment of
the Performance Objectives,
(6) determination of the size of individual incentive
awards; and
(7) making provision for offering annually to each
Participant the election of having his incentive
award, if any, for the subsequent Incentive Award
Year credited to a Deferred Incentive Award Account
pursuant to Article XI of the Plan and to have an
Interest Credit Account established pursuant to
Article XII of the Plan.
In reaching its decisions, the Committee shall consider
recommendations made by Management. The Committee may,
in discharging its responsibilities under the Plan,
delegate such duties to officers or other employees of
2
<PAGE>
the Company as it deems appropriate. In addition the
Committee is authorized, if the need should arise, to use
the services of the Company's independent auditors to
determine the level of achievement of the Performance
Objectives. No Committee Member shall be eligible for an
incentive award under this Plan.
(B) Any decision or action made or taken by the Committee,
arising out of or in connection with the construction,
administration, interpretation and effect of the Plan and
of its rules and regulations, shall be conclusive and
binding upon all Participants and any person claiming
through or under any Participant, unless otherwise
determined by the Board of Directors.
(C) The Performance Objectives and designated Participants
which have been approved by the Committee for each
Incentive Award Year in accordance with Article VIII, as
well as each other relevant determination made by the
Committee for each Incentive Award Year, shall be set
forth in written form as an Exhibit which shall be
attached hereto and made a part hereof.
ARTICLE IV - EFFECTIVE DATES
----------------------------
This Amended and Restated Plan shall be effective for the
Incentive Award Year beginning January 1, 1996. Though it is
contemplated by the Company that this Plan shall continue
indefinitely, the Plan is nevertheless subject to the annual
approval of the Board of Directors. If by the end of an Incentive
Award Year, the Board of Directors has failed to extend or renew
the Plan for another year, it shall terminate as of the end of that
Incentive Award Year (except that awards earned for that Incentive
Award Year may be paid in the early part of the succeeding year.)
ARTICLE V - PARTICIPATION
-------------------------
(A) Each eligible officer or manager, as determined pursuant
to the definition of "Participant", shall participate in
the Plan unless
(1) the Committee shall, on or before December 1st of
any Incentive Award Year, determine that he or she
shall not so participate and shall so notify him;
or
3
<PAGE>
(2) prior to the payment of an incentive award to him
or her in accordance with Article X, his or her
employment shall have been terminated, either
involuntarily by the Company or voluntarily without
the Company's consent, for a reason other than
retirement under the Company's retirement plan,
death or disability.
If a person becomes an eligible officer of the Company
during an Incentive Award Year, he or she shall be
eligible to participate on the same basis as each other
eligible officer, provided that he or she will be
entitled to receive only that portion of his or her
Target Award that he or she otherwise would have received
under the Plan for the full Incentive Award Year which
the number of complete calendar months of his or her
participation in the Plan during such Incentive Award
Year bears to twelve (12).
(B) If, prior to the end of an Incentive Award Year, a
Participant's employment with the Company ceases because
of disability, retirement under the Company's retirement
plan or death, he or she shall be entitled to receive
only that proportion of his or her Target Award that he
or she otherwise would have received under the Plan for
the full Incentive Award Year which the number of
complete calendar months of this participation in the
Plan during such Incentive Award Year bears to twelve
(12). If prior to the end of an Incentive Award Year, a
person's employment is not terminated but such
Participant's eligibility is terminated because of change
of duties or position, such person shall not be entitled
to any incentive award for that Incentive Award Year.
ARTICLE VI - REQUIRED MINIMUM PROFIT
------------------------------------
Prior to the beginning of each Incentive Award Year, the Board
of Directors shall determine as a percentage of Net Earned
Premiums, the minimum after-tax net income of the Company that must
be earned for such Incentive Award Year in order for any incentive
awards to be paid. Either before or as soon as practicable after
the end of the Incentive Award Year, the Committee shall determine
whether or not such minimum after-tax net income has been attained
by the Company for the Incentive Award Year. If such minimum after-
4
<PAGE>
tax net income has been attained, incentive awards shall be paid
for the Incentive Award Year; if not, no incentive awards shall be
made.
ARTICLE VII - TARGET AWARDS
---------------------------
The Target Award for each Participant shall be determined by
the Committee at or before the beginning of each Incentive Award
Year, based on Management's recommendations. Each Target Award
will be expressed as a percentage of a Participant's Salary Range
Mid-Point. The size of the Target Award may change from year to
year, at the discretion of the Committee. Once the Participant's
Target Award has been established for a particular Incentive Award
Year, it shall be communicated to him along with applicable
Performance Objective.
ARTICLE VIII - PERFORMANCE OBJECTIVES
-------------------------------------
Each Target Award shall relate directly to the attainment of
Performance Objectives which shall be established at or before the
beginning of each Incentive Award Year. These objectives shall be
set at challenging levels so that their achievement reflects above-
average performance. Performance Objectives shall be expressed in
terms of the most significant performance indicators which are
related to the business goals which the Company desires to achieve
during the Incentive Award Year. Moreover, a "range" of
achievement levels for each of the Performance Objectives, running
from a "minimum" level, to a "target" level and then to a "maximum"
level of achievement, as well as the relative weight to be given to
each of the Performance Objectives will be established. The
Committee shall have the authority, in unusual circumstances, to
alter any and all of the Performance Objectives during the course
of an Incentive Award Year, based on Management's recommendation.
ARTICLE IX - AWARD DETERMINATION
--------------------------------
The size of the Participant's incentive award shall be
determined following the close of each Incentive Award Year.
5
<PAGE>
ARTICLE X - PAYMENT OF AWARDS
-----------------------------
The Committee shall authorize the payment of the incentive
awards after final review and approval of the award determinations.
Except as provided in Article XI, all incentive award payments
shall be made in cash, less required statutory withholding amounts,
as soon as practicable after the Committee's final approval of such
payments, but no later than the March 15th following the end of
each Incentive Award Year if at all possible. Payments may be made
in two or more installments. The incentive award payments shall
not, however, constitute earnings for purposes of determining
benefits under any life insurance, salary continuation or other
employee benefit plan of the Company, except as may be provided in
each such plan.
ARTICLE XI - DEFERRED PAYMENT ELECTION
--------------------------------------
In lieu of the form of payment set forth in Article X, a
Participant may elect to file with the Company, a written,
irrevocable election that the payment of all or a portion of his
incentive award, if any, for an Incentive Award Year be deferred
and payable, together with income accrued thereon, in accordance
with the Harleysville Group Inc. Non-Qualified Deferred
Compensation Plan, a copy of which shall be attached to this Plan
and made a part hereof. The terms and conditions of said Non-
Qualified Deferred Compensation Plan shall govern all Deferred
Payment Elections, provided, however, that a Participant's interest
in the Plan shall be only that of a general unsecured creditor.
ARTICLE XII - TREATMENT OF DEFERRED AMOUNTS
-------------------------------------------
Any amounts deferred shall be governed pursuant to the
Harleysville Group Inc. Non-Qualified Compensation Plan and subject
to all the terms and conditions of said Plan. That Plan may,
nevertheless, be amended from time to time by the Board of
Directors.
ARTICLE XIII - FORFEITURE OF AWARDS
-----------------------------------
(A) With respect to any Deferred amounts, if a Participant at
any time engages in any activity that the Committee
determined, in its discretion, was or is harmful to the
interests of the Company, the Committee may determine
6
<PAGE>
whether or not, and if so, the extent to which any
deferred amount of the Participant shall be forfeited.
This provision shall apply to:
(1) activities that may occur prior to and that do not
result in termination of service, but which become
known to the Committee after termination of
service;
(2) activities that occur prior to or result in
termination of service; or
(3) activities that occur following termination of
service and prior to or during the period when the
Participant would otherwise be entitled to receive
payment of the deferred amounts credited to his
Investment Account.
The Committee shall have the authority, in its
discretion, to determine what kinds of activities shall
be deemed harmful to the interests of the Company for the
purposes of this Plan. A determination by the Committee
under this Article, including its determination as to the
time at which harmful activities commenced, shall be
conclusive; provided, however, that in each case where a
substantial forfeiture is determined by the Committee
under this Article, the Committee's action shall be
reported to the Board of Directors for its concurrence.
(B) All deferred amounts credited to a Participant's account
shall be contingent and to the extent any such amount
shall not have actually been paid to a Participant, it
shall not be so paid and shall be forfeited in the
following circumstances (unless the Committee, in its
discretion, otherwise determines in view of extenuating
circumstances in a particular case):
(1) if a Participant's employment is terminated for any
reason other than death, disability or retirement
under a retirement plan of the Company; or
(2) if, after termination for employment for any
reason, a Participant shall engage in activities
which are harmful to the interests of the Company.
7
<PAGE>
(C) All account balances that are forfeited under this
Article shall be cancelled and removed from the Company's
books and records and the Company shall have no further
liability in connection therewith.
ARTICLE XIV - DEATH OF A PARTICIPANT
------------------------------------
Upon the death of a Participant who has deferred amounts, any
amounts payable under the Non-Qualified Deferred Compensation Plan
shall be paid to the Beneficiary of the Participant in accordance
with the terms and conditions of said Plan.
ARTICLE XV - INCAPACITATED PARTICIPANT
--------------------------------------
If a Participant who has deferred amounts is judged
incompetent or is unqualified to manage his affairs, or becomes
disabled, payment shall be made in accordance with the Harleysville
Group Inc. Non-Qualified Deferred Compensation Plan.
ARTICLE XVI - AMENDMENT, SUSPENSION OR TERMINATION
--------------------------------------------------
While it is the present intention of the Company to grant
incentive awards annually, the Board of Directors reserves the
right to modify this Plan from time to time, or to repeal the Plan
entirely, or to direct a discontinuance of granting incentive
awards either temporarily or permanently; provided, however, that
no modification or termination of this Plan shall operate to annul,
without the consent of a Participant, an incentive award already
granted hereunder, regardless of whether such incentive award is to
be paid in cash or whether payment will be deferred in accordance
with Article XI.
ARTICLE XVII - SUBSIDIARIES
---------------------------
In the discretion of the Committee, one or more eligible
officers of a subsidiary of the Company may be allowed to
participate in the Plan. In allowing such participation, the
Committee may require the subsidiary to consent to the charging of
such subsidiary with the amount of any incentive awards which may
be made to such eligible officers. With the consent of the
Committee, the terms of this Plan may be amended by the
subsidiary's Board of Directors with regard to its application to
8
<PAGE>
the participation of the subsidiary's eligible officers. Any such
amendment shall be evidenced by a written addendum executed by the
subsidiary. Such executed addendum shall be attached to this Plan
and shall become a part hereof. For purposes of this Article,
"subsidiary" shall mean any corporation, of which more than fifty
percent (50%) of the issued and outstanding voting stock is owned
directly, or indirectly, by the Company.
ARTICLE XVIII - GOVERNING LAW
-----------------------------
The place of administration of this Plan shall be conclusively
deemed to be within the Commonwealth of Pennsylvania and the
validity, construction, interpretation, administration and effect
of this Plan, and any of its rules and regulations, and the rights
of any and all persons having or claiming to have an interest
therein or thereunder, shall be governed by, and determined
exclusively and solely in accordance with the laws of the
Commonwealth of Pennsylvania.
ARTICLE XIX - COSTS OF THE PLAN
-------------------------------
The expenses incurred in administering this Plan, including
any Committee fees, any charges by the Company's independent
auditors, or any other costs, shall be borne by the Company and
shall not be charged against the individual award payments.
ARTICLE XX - NON-ASSIGNABLE
---------------------------
A Participant's or beneficiary's rights and interests under
this Plan may not be assigned, transferred, pledged, or
hypothecated and are not subject to attachment, garnishment,
execution or any other creditor's processes. The Company, within
the limits of applicable law, shall be entitled to ignore any
attempted assignment or alienation or any creditor's process and
shall be entitled to pay any amount due directly to the Participant
or Beneficiary.
ARTICLE XXI - NO EMPLOYMENT CONTRACT
-------------------------------------
Neither the establishment of this Plan nor any action taken
hereunder shall be construed as giving any Participant any right to
be retained in the employ of the Company, and all Participants
9
<PAGE>
shall remain subject to discharge to the same extent as if the Plan
had never been adopted.
TO RECORD THE AMENDMENT AND RESTATEMENT OF THIS PLAN, THE
COMPANY HAS CAUSED ITS AUTHORIZED OFFICERS TO AFFIX THE CORPORATE
NAME AND SEAL HERETO THIS 20th DAY OF November, 1996.
---- --------------
HARLEYSVILLE MUTUAL INSURANCE COMPANY
HARLEYSVILLE GROUP INC.
BY: /s/WALTER R. BATEMAN
-----------------------------------------
Walter R. Bateman, II, President & CEO
ATTEST:
/s/ROGER A. BROWN
- ---------------------------------------
Roger A. Brown, Senior Vice President,
Secretary & General Counsel
10
<PAGE>
EXHIBIT (10)(P)
EIGHTH AMENDMENT
TO
HARLEYSVILLE MUTUAL INSURANCE COMPANY
HURON INSURANCE COMPANY
HARLEYSVILLE INSURANCE COMPANY OF NEW JERSEY
HARLEYSVILLE-ATLANTIC INSURANCE COMPANY
WORCESTER INSURANCE COMPANY
MID-AMERICA INSURANCE COMPANY
NEW YORK CASUALTY INSURANCE COMPANY
GREAT OAKS INSURANCE COMPANY
PENNLAND INSURANCE COMPANY
PROPORTIONAL REINSURANCE AGREEMENT
----------------------------------
This Eighth Amendment to the Proportional Reinsurance
Agreement is entered into by and between HARLEYSVILLE MUTUAL
INSURANCE COMPANY ("HMIC"), HURON INSURANCE COMPANY ("HURON"),
HARLEYSVILLE INSURANCE COMPANY OF NEW JERSEY ("HICNJ"),
HARLEYSVILLE-ATLANTIC INSURANCE COMPANY ("HAIC"), WORCESTER
INSURANCE COMPANY ("WIC"), MID-AMERICA INSURANCE COMPANY
("MAIC"), NEW YORK CASUALTY INSURANCE COMPANY ("NYC"), GREAT
OAKS INSURANCE COMPANY ("GOIC"), PENNLAND INSURANCE COMPANY
("Pennland"), and LAKE STATES INSURANCE COMPANY ("LSIC").
The purpose of this Amendment is to amend the Proportional
Reinsurance Agreement ("the Agreement") between Harleysville
Mutual Insurance Company, Huron Insurance Company, Harleysville
Insurance Company of New Jersey, Harleysville-Atlantic
Insurance Company, Worcester Insurance Company, Mid-America
Insurance Company, New York Casualty Insurance Company, Great
1
<PAGE>
Oaks Insurance Company, and Pennland Insurance Company dated
April 7, 1986, and amended June 30, 1987, December 30, 1988,
November 22, 1989, March 19, 1990, August 9, 1993 (with
revision dated August 2, 1994), March 16, 1995, and March 18,
1996, in which those companies created a common risk-sharing
pool for their underwriting operations, to adjust the
participation of certain participating companies, and to
provide for the participation of a new subsidiary, LSIC.
In consideration of the mutual agreements hereinafter set
forth and contained in the Agreement, the parties hereby agree
as follows:
1. LSIC is a subsidiary of HMIC as that term is defined
in Paragraph 1.6 of Part I of the Proportional
Reinsurance Agreement.
2. LSIC shall participate in the Agreement as of January
1, 1997.
3. As of January 1, 1997, the proportionate share of all
participants shall be as set forth in Exhibit I to
this Eighth Amendment.
4. The definitions of "book of business then in force"
and "net" found in paragraphs 1.3 and 1.4 of Part I
of the Proportional Reinsurance Agreement shall
exclude any and all liabilities assumed by Huron from
Lake States Insurance Company pursuant to any quota
share reinsurance agreement entered into by Huron and
LSIC and shall exclude any and all liabilities
assumed by HMIC from certain pool members pursuant to
the Aggregate Catastrophe Reinsurance Agreement
entered into by HMIC and those pool members whose
stock is 100% owned directly or indirectly by
Harleysville Group Inc.
2
<PAGE>
5. As of January 1, 1997, the second sentence of
paragraph 1.2 of Part II of the Proportional
Reinsurance Agreement shall be amended to read: "In
consideration of this assumption, the Subsidiaries
agree to pay to HMIC, as soon as practicable
thereafter, their: (1) net unearned premium reserves
less commission at the rate of 24% thereon, except in
the case of Pennland, for which the rate will be 16%
and in the case of LSIC, for which the rate will be
22%, (2) reserves for outstanding net losses, and (3)
reserves for outstanding net expenses, all as of the
close of business", and the second sentence of
paragraph 1.4 of Part II shall be amended to read "In
consideration of this assumption, HMIC agrees to pay
to the Subsidiaries, as soon as practicable
thereafter, their proportionate share of the combined
net unearned premium reserves, less commissions at
the rate of 24% thereon, except that with regard to
net unearned premium reserves attributable to
cessions from Pennland and LSIC, the rate of
commission shall be 16% and 22%, respectively."
6. All other terms and conditions of the Proportional
Reinsurance Agreement as amended shall remain the
same and apply to LSIC, except the term "opening of
business" found in Part I, Paragraph 1.1, shall mean
for LSIC 12:01 A.M., January 1, 1997 (although for
the last sentence of Part II, Paragraph 1.4, the term
shall continue to mean January 1, 1986).
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Eighth Amendment to the Proportional Reinsurance Agreement to
be executed by their duly authorized respective officers on
this 3rd day of March , 1997.
----- --------------- ----
ATTEST: HARLEYSVILLE MUTUAL INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/WALTER R. BATEMAN
- ------------------------- ------------------------------------
Roger A. Brown, Secretary Walter R. Bateman, President & CEO
HURON INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/THOMAS E. RODEN
- ------------------------- ------------------------------------
Roger A. Brown, Secretary Thomas E. Roden, Vice President
HARLEYSVILLE INSURANCE COMPANY OF NEW JERSEY
/s/ROGER A. BROWN BY: /s/MARK R. CUMMINS
- ------------------------- ------------------------------------
Roger A. Brown, Secretary Mark R. Cummins, Treasurer
HARLEYSVILLE-ATLANTIC INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/THOMAS E. RODEN
- ------------------------- ------------------------------------
Roger A. Brown, Secretary Thomas E. Roden, Vice President
WORCESTER INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/THOMAS E. RODEN
- ------------------------- ------------------------------------
Roger A. Brown, Secretary Thomas E. Roden, Vice President
MID-AMERICA INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/THOMAS E. RODEN
- ------------------------- ------------------------------------
Roger A. Brown, Secretary Thomas E. Roden, Vice President
NEW YORK CASUALTY INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/MARK R. CUMMINS
- ------------------------- ------------------------------------
Roger A. Brown, Secretary Mark R. Cummins, Assistant Treasurer
GREAT OAKS INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/THOMAS E. RODEN
- ------------------------- ------------------------------------
Roger A. Brown, Secretary Thomas E. Roden, Vice President
PENNLAND INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/ROBERT G. WHITLOCK, Jr.
- ------------------------- ---------------------------------------
Roger A. Brown, Secretary Robert G. Whitlock, Jr., Vice President
LAKE STATES INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/THOMAS E. RODEN
- ------------------------- ------------------------------------
Roger A. Brown, Secretary Thomas E. Roden, Vice President
4
<PAGE>
EXHIBIT I
TO THE
EIGHTH AMENDMENT
TO THE
PROPORTIONAL REINSURANCE AGREEMENT
POOL PARTICIPANTS POOL PARTICIPATIONS
----------------- -------------------
Harleysville Mutual Insurance Company 23%
Harleysville-Atlantic Insurance Company 5%
Huron Insurance Company 18%
Harleysville Insurance Company of New Jersey 19%
Mid-America Insurance Company 1%
New York Casualty Insurance Company 3%
Worcester Insurance Company 15%
Great Oaks Insurance Company 1%
Pennland Insurance Company 7%
Lake States Insurance Company 8%
5
<PAGE>
EXHIBIT 13(A)
SELECTED CONSOLIDATED FINANCIAL DATA
Harleysville Group Inc. (Company) is 55% owned by Harleysville Mutual
Insurance Company (Mutual). Harleysville Group Inc. and its wholly-owned
subsidiaries (Harleysville Group) are engaged in property and casualty
insurance. These subsidiaries are: Great Oaks Insurance Company (Great
Oaks), Harleysville-Atlantic Insurance Company (Atlantic), Harleysville
Insurance Company of New Jersey (HNJ), Huron Insurance Company (Huron), Lake
States Insurance Company (Lake States), Mid-America Insurance Company (Mid-
America), New York Casualty Insurance Company (New York Casualty), and
Worcester Insurance Company (Worcester), and Harleysville Ltd., a real estate
partnership that owns the home office.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- --------- --------
(in thousands, except per share data)
INCOME STATEMENT DATA <F1>:
- -------------------------
Premiums earned $ 615,197 $ 477,042 $ 447,731 $ 388,541 $359,170
Investment income,
net 78,008 68,445 64,366 59,198 57,921
Realized investment
gains 3,182 2,245 3,367 2,721 8,589
Total revenues 707,425 558,549 525,458 457,811 428,455
Income before
income taxes 31,375 52,642 16,832 38,572 32,506
Income taxes
(benefit) 2,695 11,311 (1,622) 6,351 5,579
Net income 28,680 41,331 18,454 31,940 26,927
Earnings per share $ 2.06 $ 3.05 $ 1.40 $ 2.48 $ 2.14
Weighted average
number of shares
outstanding 13,922 13,532 13,198 12,906 12,593
Cash dividends
per share $ .80 $ .72 $ .66 $ .60 $ .52
BALANCE SHEET DATA AT YEAR END:
- ------------------------------
Total investments $1,291,279 $1,085,151 $ 956,316 $ 908,400 $763,601
Total assets 1,622,612 1,378,341 1,241,072 1,180,389 957,613
Debt and lease
obligations 97,715 97,965 100,195 100,405 22,700
Shareholders'
equity 370,245 345,009 276,924 267,749 237,388
Shareholders'
equity per
share $ 26.18 $ 25.15 $ 20.72 $ 20.51 $ 18.57
- --------------------
[FN]
<F1>The Company's insurance subsidiaries participate in an underwriting
pooling arrangement with Mutual. Harleysville Group's participation was
60% from January 1, 1992 to December 31, 1995 and 65% for 1996. Lake
States was acquired as of November 1, 1993, and was not a participant in
the pool through 1996. As of January 1, 1997, Harleysville Group's
participation increased to 70% and Lake States became a participant in
the pool. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and Note 2(a) of the Notes to
Consolidated Financial Statements. For 1993, net income is net of a
$281,000 charge for the cumulative effect of accounting changes, net of
income taxes.
1
<PAGE>
EXHIBIT 13(B)
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Harleysville Group underwrites property and casualty
insurance, including auto, homeowners, commercial multi-peril,
workers compensation and other lines of business, that is marketed
primarily in the eastern half of the United States through
independent agents. The Company's property and casualty
subsidiaries participate in a pooling agreement with Mutual. The
pooling agreement provides for the allocation of premiums, losses,
loss settlement expenses and underwriting expenses between
Harleysville Group and Mutual. Harleysville Group is not liable
for any pooled losses occurring prior to January 1, 1986, the date
the pooling agreement became effective. Beginning January 1, 1996,
Harleysville Group's participation in the pooling agreement
increased from 60% to 65% and Pennland Insurance Company
(Pennland), a wholly-owned subsidiary of Mutual that writes
Pennsylvania personal automobile policies, became a participant in
the pooling agreement. Lake States was not a participant in the
pooling agreement in 1996, 1995 or 1994. Beginning January 1,
1997, Harleysville Group's participation increased to 70% and Lake
States became a participant in the pooling arrangement.
When the Company's subsidiaries' pooling participation
increases, there is a larger retrocession of this pooled business
from Mutual. Through this retrocession, Harleysville Group is
assuming a larger share of premiums, losses and expenses for
current and future periods originating both from its subsidiaries
and Mutual. An increase in Harleysville Group's pooling
participation results in a larger share of the pooled liabilities
being assumed by Harleysville Group. Cash and investments are
received by Harleysville Group equal to this greater share of loss
reserves, unearned premiums and other insurance liabilities
(primarily commissions and premium taxes) less a ceding commission
based on acquisition costs related to unearned premiums. An
increase in pool participation also increases Harleysville Group's
leverage and exposure to adverse development. Only balance sheet
entries have been made as of the date of changes in pool
participation and no gain or loss has been recognized on the
transactions.
Historically, Harleysville Group's results of operations have
been influenced by factors affecting the property and casualty
insurance industry in general. The operating results of the U.S.
property and casualty insurance industry have been subject to
significant variations due to competition, weather, catastrophic
events, regulation, general economic conditions, judicial trends,
fluctuations in interest rates and other changes in the investment
environment.
2
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
RESULTS OF OPERATIONS (CONTINUED)
Insurance industry price competition has made it more
difficult to attract and retain properly priced personal and
commercial lines business. Harleysville Group's premium growth and
underwriting results have been, and continue to be, affected by
this market condition. It is management's policy to maintain its
underwriting standards, even at the expense of premium growth.
1996 COMPARED TO 1995
Premiums earned increased $138.2 million for the year ended
December 31, 1996. Of such increase, $76.7 million was due to the
increased pooling participation. Excluding the effect of this
change, the premiums earned from pooled business increased $30.5
million for the year ended December 31, 1996 due to an increase in
commercial lines business. The remaining increase of $31.0 million
was due to growth in Lake States, primarily from its expansion into
the neighboring states of Indiana, Illinois and Wisconsin.
Investment income increased $9.6 million for the year ended
December 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 increased $0.9 million for the year
ended December 31, 1996 primarily resulting from sales of equity
securities.
Income before income taxes decreased $21.3 million for the
year ended December 31, 1996 primarily due to higher losses from
severe weather, partially offset by the higher investment income
and realized investment gains. Harleysville Group's statutory
combined ratio increased to 107.3% for the year ended December 31,
1996 from 103.4% for the year ended December 31, 1995.
The 1996 results were adversely affected by Hurricanes Fran
and Bertha which both struck the North Carolina coast and resulted
in losses of $13.0 million ($0.61 per share after taxes). In
January 1996, a blizzard and related storms resulted in losses of
$15.2 million ($0.71 per share after taxes). Together, these
losses totalled $28.2 million and adversely affected Harleysville
Group's 1996 combined ratio by 4.6 points. Excluding this impact,
the statutory combined ratio improved 0.7 points due to improved
results in the personal automobile line of business.
3
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
1996 COMPARED TO 1995 (CONTINUED)
Harleysville Group recognized favorable development in the
provision for insured events of prior years of $34.5 million and
$10.9 million in 1996 and 1995, respectively. The increase relates
to lower than expected claim severity in the workers compensation
and automobile lines of business.
The 1996 effective tax expense rate declined to 8.6% compared
to 21.5% in 1995 primarily due to tax-exempt investment income
comprising a higher proportion of income before income taxes in
1996.
Weather-related events have impacted Harleysville Group's
results over the past several years. Harleysville Group is
attempting to reduce the impact of catastrophes by achieving
greater geographic distribution of risks, reducing exposure in
catastrophe-prone areas and through reinsurance. Effective January
1, 1997, Harleysville Group entered into a reinsurance agreement
with 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. Effective for one
year from July 1, 1996, the Company's subsidiaries, and Mutual and
its wholly-owned subsidiaries are reinsured under a catastrophe
reinsurance treaty that provides coverage for 85% of up to $127
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 $89 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 $108 million
for any catastrophe involving an insured loss of $147 million or
greater. Harleysville Group's 1997 pooling share of this maximum
recovery would be $76 million for any catastrophe involving an
insured loss of $103 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.
1995 COMPARED TO 1994
Premiums earned increased $29.3 million for the year ended
December 31, 1995 primarily due to an increase in commercial lines
business.
4
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
1995 COMPARED TO 1994 (CONTINUED)
Investment income increased $4.1 million for the year ended
December 31, 1995 primarily resulting from an increase in invested
assets provided by operating cash flow.
Realized investment gains declined $1.1 million for the year
ended December 31, 1995 primarily due to a decrease in the amount
of bonds called by their issuers at a premium.
Other income increased by $0.8 million for the year ended
December 31, 1995 primarily due to an increase in the management
fee income received under an agreement whereby Harleysville Group
Inc. provides management services to affiliates.
Income before income taxes increased $35.8 million for the
year ended December 31, 1995 primarily due to improved underwriting
results and the higher investment income, partially offset by the
lower realized investment gains. Harleysville Group's statutory
combined ratio decreased to 103.4% for the year ended December 31,
1995 from 111.4% for the year ended December 31, 1994.
The 1994 results were adversely affected by prolonged severe
winter weather. During the first three months of 1994, there were
claims from seven industry-designated catastrophes and a large
number of additional property claims that occurred on dates other
than the designated catastrophe dates that related to the prolonged
severe winter weather. These winter weather claims adversely
affected Harleysville Group's combined ratio by 6.4 points and its
income before income taxes by $28.5 million ($1.41 per share after
taxes) for the year ended December 31, 1994. Excluding this
impact, the statutory combined ratio improved 1.6 points primarily
due to improved results in the workers compensation line of
business.
The 1995 effective tax expense (benefit) rate was 21.5%
compared to (9.6)% in 1994 primarily due to tax-exempt investment
income comprising a lesser proportion of income before income taxes
in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the ability to generate sufficient
cash to meet cash obligations as they come due. Harleysville
Group's primary sources of cash are premium income, investment
income and maturing investments. Cash outflows can be variable
5
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
because of uncertainties regarding settlement dates for liabilities
for unpaid losses and because of the potential for large losses
either individually or in the aggregate. Accordingly, Harleysville
Group maintains investment and reinsurance programs generally
intended to provide adequate funds to pay claims without forced
sales of investments. Harleysville Group models its exposure to
catastrophes and has the ability to pay claims without selling held
to maturity securities even for events having a low probability
(less than 1%). In recent years, Harleysville Group has
experienced more frequent catastrophes than in prior years and has
been able to pay claims without liquidating any investments.
Harleysville Group has also considered scenarios of declines in
revenue and increases in loss payments and has the ability to meet
cash requirements under such scenarios without selling held to
maturity securities. Harleysville Group's policy with respect to
fixed maturity investments is to purchase only those that are of
investment grade quality.
Net cash provided by operating activities was $207.0 million
and $89.5 million for 1996 and 1995, respectively. The increase in
net cash provided by operating activities in 1996 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 $206.6 million and
$83.9 million for 1996 and 1995, respectively. The higher amount
in 1996 reflects the investment of the cash provided by operating
activities.
Financing activities used net cash of $1.5 million in 1996
compared to $4.0 million in 1995. The change was primarily due to
the prepayment of a $2.0 million capitalized lease obligation in
1995.
The Company maintained $12.4 million of cash and marketable
securities at the holding company level at December 31, 1996, which
is available for general corporate purposes including dividends,
debt service, capital contributions to subsidiaries and
acquisitions. Harleysville Group has no material commitments for
capital expenditures as of December 31, 1996.
6
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
As a holding company, Harleysville Group Inc.'s principal
source of cash for the payment of dividends is dividends from its
subsidiaries. The Company's insurance subsidiaries are subject to
state laws that restrict their ability to pay dividends.
Applying the current regulatory restrictions as of December
31, 1996, the maximum amount of dividends that may be paid to
Harleysville Group Inc. by its subsidiaries without prior
regulatory approval was $32.1 million. The Company's insurance
subsidiaries have not paid any dividends to Harleysville Group Inc.
in any of the years presented. See the Business-Regulation section
of Harleysville Group Inc.'s 1996 Form 10-K which includes a
reconciliation of net income and shareholders' equity as determined
under statutory accounting practices to net income and
shareholders' equity as determined in accordance with generally
accepted accounting principles. Also, see Note 8 of the Notes to
Consolidated Financial Statements.
The National Association of Insurance Commissioners has
adopted risk-based capital (RBC) standards that require insurance
companies to calculate and report statutory capital and surplus
needs based on a formula measuring underwriting, investment and
other business risks inherent in an individual company's
operations. These RBC standards have not affected the operations
of Harleysville Group since each of the Company's insurance
subsidiaries have statutory capital and surplus in excess of RBC
requirements.
Harleysville Group had off-balance-sheet credit risk related
to $59.0 million of premium balances due to Mutual from agents at
December 31, 1996.
IMPACT OF INFLATION
Property and casualty insurance premiums are established
before the amount of losses and loss settlement expenses, or the
extent to which inflation may affect such expenses, are known.
Consequently, Harleysville Group attempts, in establishing rates,
to anticipate the potential impact of inflation. In the past,
inflation has contributed to increased losses and loss settlement
expenses.
7
<PAGE>
EXHIBIT 13(C)
HARLEYSVILLE GROUP
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31,
------------------------
1996 1995
---------- ----------
ASSETS
------
Investments:
Fixed maturities:
Held to maturity, at amortized
cost (fair value $606,770
and $542,895) $ 587,979 $ 509,846
Available for sale, at fair value
(cost $583,449 and $468,206) 598,193 496,595
Equity securities, at fair value
(cost $55,473 and $30,347) 69,932 34,584
Short-term investments, at cost,
which approximates fair value 35,175 44,126
---------- ----------
Total investments 1,291,279 1,085,151
Cash 2,120 3,256
Receivables:
Premiums 73,963 62,233
Reinsurance 80,163 70,366
Accrued investment income 19,527 16,496
---------- ----------
Total receivables 173,653 149,095
Deferred policy acquisition costs 68,779 59,109
Prepaid reinsurance premiums 5,444 8,334
Property and equipment, net 22,157 22,578
Deferred income taxes 30,963 23,109
Other assets 28,217 27,709
---------- ----------
Total assets $1,622,612 $1,378,341
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unpaid losses and loss
settlement expenses $ 796,820 $ 645,941
Unearned premiums 281,366 238,710
Accounts payable and accrued expenses 60,966 48,478
Debt 97,715 97,965
Due to affiliate 15,500 2,238
---------- ----------
Total liabilities 1,252,367 1,033,332
---------- ----------
Shareholders' equity:
Preferred stock, $1 par value, authorized
1,000,000 shares; none issued
Common stock, $1 par value, authorized
80,000,000 shares; shares issued and
outstanding 1996, 14,139,862 and
1995, 13,718,086 14,140 13,718
Additional paid-in capital 121,033 111,519
Net unrealized investment gains,
net of deferred income taxes 18,982 21,207
Retained earnings 216,090 198,565
---------- ----------
Total shareholders' equity 370,245 345,009
---------- ----------
Total liabilities and
shareholders' equity $1,622,612 $1,378,341
========== ==========
See accompanying notes to consolidated financial statements.
8
<PAGE>
HARLEYSVILLE GROUP
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
--------- --------- --------
Revenues:
Premiums earned $615,197 $477,042 $447,731
Investment income, net
of investment expense 78,008 68,445 64,366
Realized investment gains 3,182 2,245 3,367
Other income 11,038 10,817 9,994
-------- -------- --------
Total revenues 707,425 558,549 525,458
-------- -------- --------
Losses and expenses:
Losses and loss settlement
expenses 468,490 335,496 348,870
Amortization of deferred
policy acquisition costs 154,320 123,019 116,398
Other underwriting expenses 43,965 37,764 33,909
Interest expense 6,548 6,811 6,476
Other expenses 2,727 2,817 2,973
-------- -------- --------
Total expenses 676,050 505,907 508,626
-------- -------- --------
Income before income taxes 31,375 52,642 16,832
Income taxes (benefit) 2,695 11,311 (1,622)
-------- -------- --------
Net income $ 28,680 $ 41,331 $ 18,454
======== ======== ========
Weighted average number of
shares outstanding 13,922,058 13,532,371 13,198,038
========== ========== ==========
Earnings per common share $ 2.06 $ 3.05 $ 1.40
======== ======== ========
Cash dividends per share $ .80 $ .72 $ 66
======== ======== ========
See accompanying notes to consolidated financial statements.
9
<PAGE>
<TABLE>
HARLEYSVILLE GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(dollars in thousands)
<CAPTION>
ADDITIONAL NET UNREALIZED
COMMON STOCK PAID-IN INVESTMENT RETAINED
SHARES AMOUNT CAPITAL GAINS (LOSSES) EARNINGS TOTAL
--------- ------- ---------- -------------- -------- --------
Balance at
December 31,
<S> <C> <C> <C> <C> <C> <C>
1993 13,055,573 $13,056 $ 97,447 $ - $157,246 $267,749
Net income 18,454 18,454
Issuance of
common stock:
Incentive
plans 88,963 89 1,346 1,435
Dividend
Reinvestment
Plan 219,526 219 4,896 5,115
Tax benefit
from stock
options
exercised 162 162
Cash dividends
paid (8,715) (8,715)
Cumulative
effect of
accounting
change for
investments,
net 19,341 19,341
Change in
unrealized
investment
gains (losses),
net (26,617) (26,617)
---------- ------- -------- -------- -------- --------
Balance at
December 31,
1994 13,364,062 13,364 103,851 (7,276) 166,985 276,924
Net income 41,331 41,331
Issuance of
common stock:
Incentive
plans 144,295 144 1,770 1,914
Dividend
Reinvestment
Plan 209,729 210 5,524 5,734
Tax benefit from
stock options
exercised 374 374
Cash dividends
paid (9,751) (9,751)
Change in
unrealized
investment
gains (losses),
net 28,483 28,483
---------- ------- -------- -------- -------- --------
Balance at
December 31,
1995 13,718,086 13,718 111,519 21,207 198,565 345,009
Net income 28,680 28,680
Issuance of
common stock:
Incentive
plans 234,470 235 4,249 4,484
Dividend
Reinvestment
Plan 187,306 187 4,776 4,963
Tax benefit from
stock options
exercised 489 489
Cash dividends
paid (11,155) (11,155)
Change in
unrealized
investment
gains (losses),
net (2,225) (2,225)
---------- ------- -------- -------- -------- --------
Balance at
December 31,
1996 14,139,862 $14,140 $121,033 $ 18,982 $216,090 $370,245
========== ======= ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
10
<PAGE>
HARLEYSVILLE GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1995 1994
---------- --------- ----------
Cash flows from operating activities:
Net income $ 28,680 $ 41,331 $ 18,454
Adjustments to reconcile net
income to net cash provided by
operating activities:
Change in receivables, unearned
premiums, prepaid reinsurance
and due to affiliate 6,282 8,717 909
Increase in unpaid losses
and loss settlement
expenses 56,914 42,853 42,277
Deferred income taxes (6,655) 845 (5,228)
Increase in deferred policy
acquisition costs (9,670) (6,619) (143)
Amortization and depreciation 1,430 1,151 1,403
Gain on sale of
investments (3,182) (2,245) (3,367)
Other, net 15,380 3,460 2,976
Cash provided from the change in
the intercompany pooling
agreement participation 117,800
--------- --------- ---------
Net cash provided by
operating activities 206,979 89,493 57,281
--------- --------- ---------
Cash flows from investing activities:
Held to maturity investments:
Purchases (97,062) (25,492) (85,261)
Maturities 19,279 25,739 11,497
Sales 4,766
Available for sale investments:
Purchases (244,185) (140,176) (90,039)
Maturities 69,829 20,931 80,213
Sales 37,724 66,250 22,863
Net sales (purchases) or maturities
of short-term investments 8,951 (33,802) 5,517
Purchases of property and
equipment (1,182) (2,078) (855)
--------- --------- ---------
Net cash used by
investing activities (206,646) (83,862) (56,065)
--------- --------- ---------
Cash flows from financing activities:
Issuance of common stock 9,936 8,022 6,712
Repayment of debt (250) (2,230) (218)
Dividends paid (11,155) (9,751) (8,715)
--------- --------- ---------
Net cash used by financing
activities (1,469) (3,959) (2,221)
--------- --------- ---------
Increase (decrease) in cash (1,136) 1,672 (1,005)
Cash at beginning of year 3,256 1,584 2,589
--------- --------- ---------
Cash at end of year $ 2,120 $ 3,256 $ 1,584
========= ========= ========
See accompanying notes to consolidated financial statements.
11
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
DESCRIPTION OF BUSINESS
Harleysville Group consists of Harleysville Group Inc. and
its subsidiaries (all wholly owned). Those subsidiaries are:
- Great Oaks Insurance Company (Great Oaks)
- Harleysville-Atlantic Insurance Company (Atlantic)
- Harleysville Insurance Company of New Jersey (HNJ)
- Huron Insurance Company (Huron)
- Lake States Insurance Company (Lake States)
- Mid-America Insurance Company (Mid-America)
- New York Casualty Insurance Company (New York Casualty)
- Worcester Insurance Company (Worcester)
- Harleysville Ltd., a real estate partnership that owns the
home office
Harleysville Group is approximately 55% owned by Harleysville
Mutual Insurance Company (Mutual).
Harleysville Group underwrites property and casualty
insurance, including auto, homeowners, commercial multi-peril,
workers compensation and other lines of business, that is marketed
primarily in the eastern half of the United States through
independent agents.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying financial statements include the accounts of
Harleysville Group prepared in conformity with generally accepted
accounting principles, which differ in some respects from those
followed in reports to insurance regulatory authorities. All
significant intercompany balances and transactions have been
eliminated in consolidation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
INVESTMENTS
Accounting for fixed maturities depends on their
classification as held to maturity, available for sale or trading.
Fixed maturities classified as available for sale are carried at
fair value, with unrealized gains or losses credited or charged
directly to a separate component of shareholders' equity.
12
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
INVESTMENTS (CONTINUED)
Investments in fixed maturities that are classified as held to
maturity are carried at amortized cost. Equity securities are
carried at fair value. There were no investments classified as
trading. Short-term investments are recorded at cost, which
approximates fair value.
Realized gains and losses on sales of investments are
recognized in net income on the specific identification basis.
Unrealized investment gains or losses, net of applicable income
taxes, are reflected directly in shareholders' equity and,
accordingly, have no effect on net income.
PREMIUMS
Premiums are recognized as revenue ratably over the terms of
the respective policies. Unearned premiums are calculated on the
monthly pro rata basis.
POLICY ACQUISITION COSTS
Policy acquisition costs, such as commissions, premium taxes
and certain other underwriting and agency expenses that vary with
and are directly related to the production of business, are
deferred and amortized over the effective period of the related
insurance policies. The method followed in computing deferred
policy acquisition costs limits the amount of such deferred costs
to their estimated realizable value, which gives effect to the
premium to be earned, related investment income, losses and loss
settlement expenses, and certain other costs expected to be
incurred as the premium is earned.
LOSSES AND LOSS SETTLEMENT EXPENSES
The liability for losses and loss settlement expenses
represents estimates of the ultimate unpaid cost of all losses
incurred which includes the gross liabilities to Harleysville
Group's policyholders plus the net liability to Mutual under the
pooling agreement. See Note 2(a). Such estimates may be more or
less than the amounts ultimately paid when the claims are settled.
These estimates are periodically reviewed and adjusted as
necessary; such adjustments are reflected in current operations.
13
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
Stock-based compensation plans are accounted for under the
provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation expense would be recorded
on the date of a stock option grant only if the current market
price of the underlying stock exceeded the exercise price.
Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," is effective for 1996
and permits entities to recognize as expense, over the vesting
period, the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 allows entities to continue to
apply the provisions of APB Opinion No. 25 and provide pro forma
net income and earnings per share disclosures for employee stock
option grants made in 1995 and future years as if the fair-value-
based method defined in SFAS No. 123 had been applied.
Harleysville Group has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosures under
SFAS No. 123.
PROPERTY AND EQUIPMENT
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is calculated primarily on the
straight-line basis over the estimated useful lives of the assets
(40 years for buildings and three to 15 years for equipment).
INCOME TAXES
Deferred income tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
EARNINGS PER SHARE
Earnings per share are computed by dividing earnings by the
weighted average number of common shares outstanding during the
year. The stock options described in Note 10 have no material
dilutive effect on earnings per common share amounts in any of the
periods presented.
14
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2 - TRANSACTIONS WITH AFFILIATES
(a) UNDERWRITING
The insurance subsidiaries participate in a reinsurance
pooling agreement with Mutual whereby such subsidiaries cede to
Mutual all of their insurance business and assume from 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.
Harleysville Group's participation in the pooling agreement was 60%
for 1995 and 1994. Beginning January 1, 1996, Harleysville Group's
participation increased to 65% and Pennland Insurance Company
(Pennland) became a participant in the pooling arrangement.
Pennland, a subsidiary of Mutual, only writes Pennsylvania personal
automobile business which had earned premiums of $63.0 million in
1996. Lake States was not a participant in the pooling agreement
in 1996, 1995 or 1994. Beginning January 1, 1997, Harleysville
Group's participation increased to 70% and Lake States became a
participant in the pooling arrangement. In connection with these
changes in pool participation, Harleysville Group received cash and
investments from Mutual of $29,002,000 and $117,800,000 which
related to the various insurance liabilities assumed on January 1,
1997 and 1996, respectively. These liabilities consist of the
following at January 1:
1997 1996
-------- --------
(in thousands)
Unpaid losses and loss
settlement expenses $ 28,318 $ 93,966
Unearned premiums 441 22,225
Other liabilities 243 1,609
-------- --------
$ 29,002 $117,800
======== ========
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
December 31, 1996 and 1995. Mutual has an A. M. Best rating of "A"
(Excellent) and, in accordance with certain state regulatory
requirements, maintained $311.8 million (fair value) of investments
in a trust account to secure liabilities under the reinsurance
pooling agreement at December 31, 1996.
15
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2 - TRANSACTIONS WITH AFFILIATES (CONTINUED)
(a) UNDERWRITING (CONTINUED)
The following amounts represent reinsurance transactions
between Harleysville Group and Mutual under the pooling
arrangement:
1996 1995 1994
-------- -------- --------
(in thousands)
Ceded:
Premiums written $394,787 $366,763 $327,640
======== ======== ========
Premiums earned $383,593 $349,280 $331,105
======== ======== ========
Losses incurred $280,421 $254,842 $271,957
======== ======== ========
Assumed:
Premiums written $537,648 $417,472 $372,307
======== ======== ========
Premiums earned $505,921 $398,778 $376,463
======== ======== ========
Losses incurred $386,009 $277,182 $294,473
======== ======== ========
Net assumed from Mutual:
Unearned premiums $ 34,937 $14,405 $13,193
======== ======== ========
Unpaid losses and loss
settlement expenses $205,790 $96,007 $97,649
======== ======== ========
Effective January 1, 1997, Harleysville Group entered into a
reinsurance agreement with 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.
(b) PROPERTY
Harleysville Ltd. leases the home office to Mutual which
shares most of the facility with Harleysville Group. Rental income
under the lease was $2,754,000, $2,750,000 and $2,668,000 for 1996,
1995 and 1994, respectively, and is included in other income after
elimination of intercompany amounts of $1,552,000, $1,405,000 and
$1,361,000 in 1996, 1995 and 1994, respectively.
16
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2 - TRANSACTIONS WITH AFFILIATES (CONTINUED)
(c) MANAGEMENT AGREEMENTS
Harleysville Group Inc. received $6,628,000, $6,944,000 and
$6,587,000 of management fee income in 1996, 1995 and 1994,
respectively, under agreements whereby Harleysville Group Inc.
provides management services to Mutual and other affiliates.
(d) INTERCOMPANY BALANCES
Intercompany balances are created primarily from the pooling
arrangement (settled quarterly), allocation of common expenses,
collection of premium balances and payment of claims (settled
monthly). No interest is charged or received on intercompany
balances due to the timely settlement terms and nature of the
items. Interest expense on the loan from Mutual described in Note
7 was $1,212,000, $1,360,000 and $977,000 in 1996, 1995 and 1994,
respectively.
Harleysville Group had off-balance-sheet credit risk related
to approximately $59,000,000 of premium balances due to Mutual from
agents at both December 31, 1996 and 1995.
17
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3 - INVESTMENTS
The amortized cost and estimated fair value of investments in
fixed maturity and equity securities are as follows:
DECEMBER 31, 1996
-------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ---------- ---------- ----------
(in thousands)
Held to maturity:
US Treasury securities
and obligations of
US government corpora-
tions and agencies $ 9,298 $ 509 $ (63) $ 9,744
Obligations of states
and political
subdivisions 322,283 12,113 (265) 334,131
Corporate securities 256,164 9,469 (2,972) 262,661
Mortgage-backed
securities 234 234
---------- ------- ------- ----------
Total held to maturity 587,979 22,091 (3,300) 606,770
---------- ------- ------- ----------
Available for sale:
US Treasury securities
and obligations of
US government corpora-
tions and agencies 99,325 2,334 (671) 100,988
Obligations of states
and political
subdivisions 229,744 10,381 (30) 240,095
Corporate securities 129,141 1,469 (1,150) 129,460
Mortgage-backed
securities 125,239 3,304 (893) 127,650
---------- ------- ------- ----------
Total available for sale 583,449 17,488 (2,744) 598,193
---------- ------- ------- ----------
Total fixed maturities $1,171,428 $39,579 $(6,044) $1,204,963
========== ======= ======= ==========
Total equity securities $ 55,473 $15,920 $(1,461) $ 69,932
========== ======= ======= ==========
18
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3 - INVESTMENTS (CONTINUED)
December 31, 1995
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ----------- ----------
(in thousands)
Held to maturity:
US Treasury securities
and obligations of
US government corpora-
tions and agencies $ 10,288 $ 885 $ (13) $ 11,160
Obligations of states
and political
subdivisions 245,525 13,485 (248) 258,762
Corporate securities 253,734 19,230 (290) 272,674
Mortgage-backed
securities 299 299
-------- ------- ------- ----------
Total held to maturity 509,846 33,600 (551) 542,895
-------- ------- ------- ----------
Available for sale:
US Treasury securities
and obligations of
US government corpora-
tions and agencies 114,534 6,337 (33) 120,838
Obligations of states
and political
subdivisions 127,202 10,405 (106) 137,501
Corporate securities 115,123 4,621 (4) 119,740
Mortgage-backed
securities 111,347 7,169 118,516
-------- ------- -------- ----------
Total available for sale 468,206 28,532 (143) 496,595
-------- ------- -------- ----------
Total fixed maturities $978,052 $62,132 $ (694) $1,039,490
======== ======= ======== ==========
Total equity securities $ 30,347 $ 6,265 $ (2,028) $ 34,584
======== ======= ======== ==========
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1996, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
19
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3 - INVESTMENTS (CONTINUED)
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- ----------
(in thousands)
Held to maturity:
Due in one year or less $ 17,705 $ 17,976
Due after one year
through five years 84,516 88,876
Due after five years
through ten years 224,629 232,005
Due after ten years 260,895 267,679
---------- ----------
587,745 606,536
Mortgage-backed
securities 234 234
---------- ----------
587,979 606,770
---------- ----------
Available for sale:
Due in one year or less 21,358 21,680
Due after one year
through five years 138,637 143,921
Due after five years
through ten years 141,481 144,094
Due after ten years 156,734 160,848
---------- ----------
458,210 470,543
Mortgage-backed
securities 125,239 127,650
---------- ----------
583,449 598,193
---------- ----------
Total fixed maturities $1,171,428 $1,204,963
========== ==========
The amortized cost of fixed maturities on deposit with various
regulatory authorities at December 31, 1996 and 1995 amounted to
$11,312,000 and $10,283,000, respectively.
20
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3 - INVESTMENTS (CONTINUED)
A summary of net investment income is as follows:
1996 1995 1994
--------- -------- --------
(in thousands)
Interest on fixed maturities $ 75,204 $67,428 $63,293
Dividends on equity securities 776 478 163
Interest on short-term
investments 2,917 1,316 1,501
-------- ------- -------
Total investment income 78,897 69,222 64,957
Investment expense 889 777 591
-------- ------- -------
Net investment income $ 78,008 $68,445 $64,366
======== ======= =======
Realized gross gains (losses) from investment sales and
redemptions and the change in difference between fair value and
cost of investments, before applicable income taxes, are as
follows:
1996 1995 1994
---------- ---------- ----------
(in thousands)
Fixed maturity securities:
Held to maturity:
Gross gains $ 178 $ 194 $ 141
Gross losses (2) (44) (6)
Available for sale:
Gross gains 69 3,079 3,476
Gross losses (323) (769) (244)
Equity securities:
Gross gains 4,716 485
Gross losses (1,456) (700)
-------- ------- ---------
Net realized investment gains $ 3,182 $ 2,245 $ 3,367
========= ======= =========
Change in difference between
fair value and cost of
investments<FN1>:
Fixed maturity securities $(27,903) $94,179 $ (99,668)
Equity securities 10,222 5,052 (815)
-------- ------- ---------
Total $(17,681) $99,231 $(100,483)
========= ======= =========
[FN]
<F1> Parentheses indicate a net unrealized decline in fair value.
21
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3 - INVESTMENTS (CONTINUED)
Income taxes on realized investment gains were $1,114,000,
$786,000 and $1,141,000 for 1996, 1995 and 1994, respectively.
Deferred income taxes applicable to net unrealized investment gains
included in shareholders' equity were $10,221,000 and $11,419,000
at December 31, 1996 and 1995, respectively.
The Consolidated Statement of Shareholders' Equity for the
year ended December 31, 1994 reflects $19,341,000 in unrealized
investment gains, net of $10,414,000 of deferred income taxes, for
the cumulative effect of adopting Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," as of January 1, 1994.
During 1995, Harleysville Group sold Kmart Corp. bonds that
had been classified as held to maturity due to a significant
deterioration in the issuer's creditworthiness. These bonds had an
amortized cost of $4,690,000, and the sale resulted in a realized
gain of $76,000. There were no other sales from the held to
maturity portfolio.
Harleysville Group has not held or issued derivative financial
instruments.
4 - REINSURANCE
In the ordinary course of business, Harleysville Group cedes
insurance to, and assumes insurance from, unrelated insurers to
limit its maximum loss exposure through diversification of its
risks. See Note 2(a) for discussion of the reinsurance pooling
agreement with Mutual. Reinsurance contracts do not relieve
Harleysville Group of primary liability as the originating insurer.
The effect of Harleysville Group's share of reinsurance with
unrelated insurers on premiums written and earned is as follows:
22
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - REINSURANCE (CONTINUED)
1996 1995 1994
---------- ---------- ----------
(in thousands)
Premiums written:
Direct $659,053 $505,198 $448,602
Assumed 37,369 40,655 42,450
Ceded (35,679) (40,375) (41,695)
-------- -------- --------
Net premiums written $660,743 $505,478 $449,357
======== ======== ========
Premiums earned:
Direct $616,083 $475,984 $446,853
Assumed 37,684 40,728 43,551
Ceded (38,570) (39,670) (42,673)
-------- -------- --------
Net premiums earned $615,197 $477,042 $447,731
======== ======== ========
Losses and loss settlement expenses are net of reinsurance
recoveries of $31,560,000, $19,117,000 and $24,399,000 for 1996,
1995 and 1994, respectively.
5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of land and buildings with a
cost of $25,565,000 and $25,346,000, and equipment with a cost of
$5,647,000 and $4,733,000 at December 31, 1996 and 1995,
respectively. Accumulated depreciation related to such assets was
$9,055,000 and $7,501,000 at December 31, 1996 and 1995,
respectively.
Rental expense under leases with non-affiliates amounted to
$2,497,000, $2,152,000 and $1,871,000 for 1996, 1995 and 1994,
respectively. Operating lease commitments were not material at
December 31, 1996.
23
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6 - LIABILITY FOR UNPAID LOSSES AND LOSS SETTLEMENT EXPENSES
Activity in the liability for unpaid losses and loss
settlement expenses is summarized as follows:
1996 1995 1994
--------- --------- ---------
(in thousands)
Liability at January 1 $645,941 $603,088 $560,811
Less reinsurance recoverables 69,288 67,636 61,539
-------- -------- --------
Net liability at January 1 576,653 535,452 499,272
-------- -------- --------
Incurred related to:
Current year 503,489 346,383 352,085
Prior years (34,999) (10,887) (3,215)
-------- -------- --------
Total incurred 468,490 335,496 348,870
-------- -------- --------
Paid related to:
Current year 220,669 129,446 151,133
Prior years 199,740 164,849 161,557
Adjustments to beginning
of the year reserves
resulting from the change
in the pool participation
percentage (93,966)
-------- -------- --------
Total paid 326,443 294,295 312,690
-------- -------- --------
Net liability at December 31 718,700 576,653 535,452
Plus reinsurance recoverables 78,120 69,288 67,636
-------- -------- --------
Liability at December 31 $796,820 $645,941 $603,088
======== ======== ========
Harleysville Group recognized favorable development in the
provision for insured events of prior years of $34,999,000,
$10,887,000 and $3,215,000 in 1996, 1995 and 1994, respectively.
The favorable development in 1996 primarily related to lower than
expected claim severity in the workers compensation and automobile
lines of business. The 1995 and 1994 favorable development
primarily related to lower than expected claim severity in workers
compensation.
In establishing the liability for unpaid losses and loss
settlement expenses, management considers facts currently known and
the current state of the law and coverage litigation. Liabilities
are recognized for known losses (including the cost of related
litigation) when sufficient information has been developed to
indicate the involvement of a specific insurance policy, and
24
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6 - LIABILITY FOR UNPAID LOSSES AND LOSS SETTLEMENT EXPENSES
(CONTINUED)
management can reasonably estimate its liability. In addition,
liabilities have been established to cover additional exposures on
both known and unasserted losses. Estimates of the liabilities are
reviewed and updated continually.
The property and casualty insurance industry has received
significant publicity about environmental-related losses from
exposures insured many years ago. Since the intercompany pooling
agreement pertains to insurance business written or earned on or
after January 1, 1986, Harleysville Group has not incurred
significant environmental-related losses.
7 - DEBT
Debt is as follows:
DECEMBER 31,
--------------------
1996 1995
-------- --------
(in thousands)
Notes, 6.75%, due 2003 $75,000 $75,000
Demand term-loan payable
to Mutual, LIBOR plus
1%, due 1998 18,500 18,500
Economic Development
Corporation (EDC)
Revenue Bond obligation 4,215 4,465
------- -------
$97,715 $97,965
======= =======
The fair value of the notes was $73,267,000 and $75,801,000 at
December 31, 1996 and 1995, respectively, based on quoted market
prices for the same or similar debt. The carrying value of the
remaining debt approximates fair value.
The EDC obligation is secured by Lake States' building.
Interest is payable semiannually at a variable rate (3.8% at
December 31, 1996) equal to the market interest rate that would
allow the bonds to be remarketed at par value. The bonds are
subject to redemption prior to maturity in 2006 at levels dependent
upon the occurrence of certain events.
25
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7 - DEBT (CONTINUED)
Interest paid was $6,446,000, $6,716,000 and $6,347,000 in
1996, 1995 and 1994, respectively.
8 - SHAREHOLDERS' EQUITY
A source of cash for the payment of dividends is dividends
from subsidiaries. Harleysville Group Inc.'s insurance
subsidiaries are required by law to maintain certain minimum
surplus on a statutory basis, and are subject to risk-based capital
requirements and to regulations under which payment of a dividend
from statutory surplus is restricted and may require prior approval
of regulatory authorities. Applying the current regulatory
restrictions as of December 31, 1996, $32,096,000 was available for
distribution to Harleysville Group Inc. without prior approval.
The following table contains selected information for
Harleysville Group Inc.'s property and casualty insurance
subsidiaries, as determined in accordance with prescribed statutory
accounting practices:
DECEMBER 31,
---------------------------------------
1996 1995 1994
-------- -------- ---------
(in thousands)
Statutory capital
and surplus $326,455 $303,675 $262,841
======== ======== ========
Statutory unassigned
surplus $209,199 $185,202 $149,368
======== ======== ========
Statutory net income $ 15,332 $ 36,063 $ 16,674
======== ======== ========
26
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9 - INCOME TAXES
The components of income tax expense (benefit) are as follows:
1996 1995 1994
-------- -------- --------
(in thousands)
Current $ 9,350 $10,466 $ 3,606
Deferred (benefit) (6,655) 845 (5,228)
------- ------- -------
$ 2,695 $11,311 $(1,622)
======= ======= =======
Cash paid for federal income taxes in 1996, 1995 and 1994 was
$10,100,000, $11,201,000 and $1,349,000, respectively.
The actual income tax rate differed from the statutory federal
income tax rate applicable to income before income taxes as
follows:
1996 1995 1994
-------- -------- --------
Statutory federal income
tax rate 35.0 % 35.0 % 35.0 %
Tax-exempt interest (26.8) (13.0) (45.1)
Other, net 0.4 (0.5) 0.5
------ ------ ------
8.6 % 21.5 % (9.6)%
====== ====== ======
27
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
9 - INCOME TAXES (CONTINUED)
The tax effects of the significant temporary differences that
give rise to deferred tax liabilities and assets are as follows:
DECEMBER 31,
---------------------------
1996 1995
-------- --------
(in thousands)
Deferred tax liabilities:
Deferred policy acquisition
costs $24,072 $20,688
Unrealized investment gains 10,221 11,419
Other 3,501 3,051
------- -------
Total deferred tax
liabilities 37,794 35,158
------- -------
Deferred tax assets:
Unearned premiums 19,315 16,126
Losses incurred 42,060 35,291
Tax credit carryforward 580 809
Other 6,802 6,041
------- -------
Total deferred tax
assets 68,757 58,267
------- -------
Net deferred tax asset $30,963 $23,109
======= =======
A valuation allowance is required to be established for any
portion of the deferred tax asset that management believes will not
be realized. In the opinion of management, it is more likely than
not that the benefit of the deferred tax asset will be realized
and, therefore, no such valuation allowance has been established.
28
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10 - INCENTIVE PLANS
Harleysville Group applies APB Opinion 25 in accounting for
its stock-based compensation plans. Accordingly, no compensation
cost has been recognized for its fixed stock option plans and
certain of its stock purchase plans. Had compensation cost for
these stock-based compensation plans been determined under SFAS No.
123, Harleysville Group's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
1996 1995
------- -------
(in thousands, except per share data)
Net income:
As reported $28,680 $41,331
Pro forma $27,691 $40,717
Earnings per share:
As reported $ 2.06 $ 3.05
Pro forma $ 1.99 $ 3.01
The per share weighted-average fair value of options granted
during 1996 and 1995 was $7.65 and $7.89, respectively. The fair
value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-
average assumptions used for grants in 1996 and 1995, respectively:
dividend yield of 2.87% and 2.72%; expected volatility of 26.13%
and 29.69%; risk-free interest rate of 6.4% and 6.25%; and an
expected life of 6.5 years for both years.
Pro forma net income reflects only options granted in 1996 and
1995. Therefore, the full impact of calculating compensation cost
for stock options under SFAS No. 123 is not reflected in the pro
forma net income amounts presented above because compensation cost
is reflected over the options' vesting period of two years and
compensation cost for options granted prior to January 1, 1995 is
not considered.
Fixed Stock Option Plans
- ------------------------
Harleysville Group has an Equity Incentive Plan for key
employees. Awards may be made in the form of stock options, stock
appreciation rights (SARs), restricted stock or any combination of
the above. Such awards are limited to an aggregate of 1,407,000
shares of Harleysville Group Inc.'s common stock. The plan
provides that stock options may become exercisable from six months
to 10 years from the date of grant with an option price not less
than fair market value on the date of grant. The options normally
vest 50% at the end of one year and 50% at the end of two years
from the date of grant. SARs have not been material.
The income tax benefit related to the difference between the
market price at the date of exercise and the option price for non-
qualified stock options was credited to additional paid-in capital.
29
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10 - INCENTIVE PLANS (CONTINUED)
The Harleysville Group Inc. 1995 Directors' Stock Option
Program provides for the granting of options to eligible directors
to purchase a maximum of 65,000 shares of common stock. Options
are granted at exercise prices equal to fair market value on the
date of grant. The options vest and become exercisable as follows:
20% on the date of grant and thereafter 20% per year of active
service. The options have a term of 10 years.
Harleysville Group maintains stock option plans for
substantially all employees and certain designated agents. The
plans provide for the granting of options to purchase a maximum of
425,000 shares of common stock. The plans provide that the options
become exercisable from three to 10 years from the date of grant
with an option price not less than fair market value on the date of
grant.
Information regarding activity in Harleysville Group's fixed
stock option plans is presented below:
WEIGHTED-AVERAGE
NUMBER EXERCISE PRICE
OF SHARES PER SHARE
--------- ----------------
Outstanding at
December 31, 1993 869,350 $ 20.60
Granted--1994 124,600 22.25
Exercised--1994 (44,485) 12.87
Forfeited--1994 (23,540) 25.96
-------- ------
Outstanding at
December 31, 1994 925,925 21.06
Granted--1995 196,210 25.00
Exercised--1995 (130,288) 15.57
Forfeited--1995 (50,085) 26.84
-------- ------
Outstanding at
December 31, 1995 941,762 22.33
Granted--1996 156,760 26.53
Exercised--1996 (129,739) 14.31
Forfeited--1996 (20,100) 26.86
-------- ------
Outstanding at
December 31, 1996 948,683 $24.02
======== ======
Exercisable at:
December 31, 1995 695,651 $21.61
======== ======
December 31, 1996 698,953 $23.34
======== ======
30
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10 - INCENTIVE PLANS (CONTINUED)
The following table summarizes information about fixed stock
options at December 31, 1996:
RANGE OF EXERCISE PRICES
------------------------------------------
$9.60-14.13 $15.00-22.25 $25.00-29.13
----------- ------------ ------------
Options outstanding at
December 31, 1996:
Number of options 58,492 218,211 671,980
========= ========== ==========
Weighted-average
remaining contractual
life 1.7 years 5.8 years 7.4 years
========= ========== ==========
Weighted-average
exercise price $11.66 $19.68 $26.51
========= ========== ==========
Options exercisable at
December 31, 1996:
Number of options 58,492 216,951 423,510
========= ========== ==========
Weighted-average
exercise price $11.66 $19.66 $26.84
========= ========== ==========
Other Stock Purchase and Incentive Plans
- ----------------------------------------
Harleysville Group Inc. is authorized to issue up to 500,000
shares of common stock under the terms of the 1995 Employee Stock
Purchase Plan. Virtually all employees are eligible to participate
in the plan, under which a participant may elect to have a minimum
of 2% and a maximum of 10% of his base pay withheld to purchase
shares. The purchase price of the stock is 85% of the lower of the
beginning-of-the-subscription period or end-of-the-subscription
period fair market value. Each subscription period runs from
January 15 through July 14, or July 15 through January 14. Under
the plan, Harleysville Group Inc. issued 49,895, 53,421 and 44,478
shares to employees in 1996, 1995 and 1994, respectively.
31
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10 - INCENTIVE PLANS (CONTINUED)
Under Harleysville Group Inc.'s 1995 Agency Stock Purchase
Plan, eligible independent insurance agencies may invest up to
$12,500 in shares of common stock at 90% of the fair market value
at the end of each six-month subscription period. There are
500,000 shares of common stock available under the plan. In 1996,
36,932 shares were issued under the plan for which $69,000 of
expense was recognized. No shares were issued prior to 1996.
The 1996 Directors' Stock Purchase Plan provides for the
issuance of up to 100,000 shares of Harleysville Group Inc. common
stock to outside directors of Harleysville Group Inc. and Mutual.
The purchase price of the stock is 85% of the lower of the
beginning-of-the-subscription period or end-of-the-subscription
period fair market value. No shares were issued under the plan in
1996.
The Harleysville Group Inc. Directors' Equity Award Program,
which was adopted in 1996, granted directors a one-time award
totaling 22,584 shares of restricted common stock with a fair value
of $26.50 per share. Under the terms of the program, the shares
may not be transferred until the director retires after attaining
age 72, dies or becomes disabled. The director has the right to
receive dividends and the right to vote the shares during the
restriction period. Compensation expense of $31,000 associated
with this award program has been recognized in 1996.
Harleysville Group has incentive bonus plans. Cash bonuses
are earned on a formula basis depending upon the performance of
Harleysville Group and Mutual in relation to certain targets.
Harleysville Group's expense for such plans was $627,000,
$1,161,000 and $365,000 for 1996, 1995 and 1994, respectively.
11 - PENSION AND OTHER BENEFIT PLANS
Harleysville Group Inc. has a pension plan that covers
substantially all full-time employees. Retirement benefits are a
function of both the years of service and level of compensation.
Harleysville Group Inc.'s funding policy is to contribute annually
an amount equal to at least the minimum required contribution in
accordance with minimum funding standards established by ERISA.
Contributions are intended to provide not only for benefits
attributed to service to date, but also for those expected to be
earned in the future.
32
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11 - PENSION AND OTHER BENEFIT PLANS (CONTINUED)
The following table sets forth the year-end funded status of
the plan including Mutual:
1996 1995
--------- ---------
(in thousands)
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$49,746,000 and $42,739,000 $(51,394) $(44,312)
======== ========
Projected benefit obligation for
service rendered to date $(66,546) $(60,473)
Plan assets at fair value (primarily
listed stocks and fixed income
securities) 63,161 50,847
-------- --------
Excess of the projected benefit
obligation over plan assets (3,385) (9,626)
Unrecognized net (gain) loss due to
past experience different from
that assumed and effects of
changes in assumptions (2,893) 4,761
Prior service cost not yet
recognized in net periodic
pension cost 2,444 2,881
Unrecognized net transition asset
being recognized over 14 years (714) (884)
-------- --------
Accrued pension cost --
entire plan $ (4,548) $ (2,868)
========= ========
33
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11 - PENSION AND OTHER BENEFIT PLANS (CONTINUED)
The net periodic pension cost for the plan including Mutual
includes the following components:
1996 1995 1994
--------- -------- --------
(in thousands)
Service cost--benefits
earned during the
period $ 3,679 $ 3,123 $ 3,113
Interest cost on
projected benefit
obligation 4,548 3,938 3,505
Actual return on
plan assets (10,273) (10,433) (149)
Net amortization and
deferral 7,303 7,709 (2,066)
-------- ------- -------
Net periodic pension
cost:
Entire plan $ 5,257 $ 4,337 $ 4,403
======== ======= =======
Harleysville Group
portion $ 3,286 $ 2,493 $ 2,485
======== ======= =======
In determining the actuarial present value of the projected
benefit obligation, the weighted-average discount rate was 7.75%,
7.5% and 8.0% for 1996, 1995 and 1994, respectively. The rate of
increase in future compensation levels was 5.0% for 1996 and 5.5%
for 1995 and 1994. The expected long-term rate of return on
retirement plan assets was 8.5%.
A non-qualified unfunded Supplemental Executive Retirement
Plan provides for incremental pension payments essentially for
pension benefits that have been reduced by legislative action.
Harleysville Group's expense for such plan was $218,000, $175,000
and $186,000 for 1996, 1995 and 1994, respectively.
Harleysville Group has profit-sharing plans covering qualified
employees. Harleysville Group's expense under the plans was
$1,526,000, $1,314,000 and $365,000 for 1996, 1995 and 1994,
respectively.
34
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
1996
--------------------------------------------------
(dollars in thousands, except per share data)
FIRST SECOND THIRD FOURTH TOTAL
-------- -------- -------- -------- --------
Revenues $172,231 $174,296 $180,307 $180,591 $707,425
Losses and
expenses 173,577 159,374 178,279 164,820 676,050
Net income 873 11,735 3,508 12,564 28,680
Earnings
per common
share $ .06 $ .85 $ .25 $ .89 $ 2.06
1995
--------------------------------------------------
(dollars in thousands, except per share data)
FIRST SECOND THIRD FOURTH TOTAL
--------- -------- -------- -------- --------
Revenues $134,610 $137,295 $140,788 $145,856 $558,549
Losses and
expenses 124,097 124,151 127,268 130,391 505,907
Net income 8,627 10,528 10,467 11,709 41,331
Earnings
per common
share $ .64 $ .78 $ .77 $ .86 $ 3.05
35
<PAGE>
Independent Auditors' Report
The Board of Directors
Harleysville Group Inc.:
We have audited the accompanying consolidated balance sheets of
Harleysville Group as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity,
and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Harleysville Group as of December 31, 1996 and 1995,
and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements,
the Company adopted Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities," as of January 1, 1994.
/s/KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
February 17, 1997
36
<PAGE>
EXHIBIT 13(D)
MARKET FOR COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The stock of Harleysville Group Inc. is quoted on the NASDAQ
National Market System, and assigned the symbol HGIC. At the close
of business on March 6, 1997, the approximate number of holders of
record of Harleysville Group Inc.'s common stock was 2,382
(counting all shares held in nominee registration as one
shareholder).
The payment of dividends is subject to the discretion of
Harleysville Group Inc.'s Board of Directors which each quarter
considers, among other factors, Harleysville Group's operating
results, overall financial condition, capital requirements and
general business conditions. The present quarterly dividend of
$0.21 per share paid in each of the third and fourth quarters of
1996 is expected to continue during 1997. As a holding company,
one of Harleysville Group Inc.'s sources of cash with which to pay
dividends is dividends from its subsidiaries. Harleysville Group
Inc.'s insurance company subsidiaries are subject to state laws
that restrict their ability to pay dividends. See Note 8 of the
Notes to Consolidated Financial Statements.
The following table sets forth the amount of cash dividends
declared per share, and the high and low bid quotations as reported
by NASDAQ for Harleysville Group Inc.'s common stock for each
quarter during the past two years.
CASH
DIVIDENDS
1996 HIGH LOW DECLARED
------------------------------------------------
First Quarter $32.00 $26.50 $.19
Second Quarter 29.25 25.25 .19
Third Quarter 28.75 24.50 .21
Fourth Quarter 30.75 26.00 .21
------------------------------------------------
CASH
DIVIDENDS
1995 HIGH LOW DECLARED
------------------------------------------------
First Quarter $24.75 $23.50 $.17
Second Quarter 24.50 23.75 .17
Third Quarter 29.00 24.25 .19
Fourth Quarter 32.25 26.75 .19
------------------------------------------------
37
<PAGE>
EXHIBIT (21)
SUBSIDIARIES OF REGISTRANT
Registrant owns 100% of the outstanding stock of each of the
following corporations:
NAME STATE OF INCORPORATION
------------------------------ ----------------------
Great Oaks Insurance Company Ohio
Harleysville-Atlantic Insurance
Company Georgia
Harleysville Insurance Company
of New Jersey New Jersey
Huron Insurance Company Pennsylvania
Lake States Insurance Company Michigan
Mid-America Insurance Company Connecticut
New York Casualty Insurance
Company New York
Worcester Insurance Company Massachusetts
<PAGE>
EXHIBIT (23)
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULES
The Board of Directors
Harleysville Group Inc.:
The audits referred to in our report dated February 17, 1997
include the related financial statement schedules as of December
31, 1996 and for each of the years in the three-year period ended
December 31, 1996 included in the annual report on Form 10-K.
These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion
on these financial statement schedules based on our audits. In our
opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set
forth therein.
We consent to incorporation by reference in the registration
statements (Nos. 333-09701, 333-03127, 33-84348, 33-43494, 33-
91718, 33-91726, 33-43532, 33-29589) on Form S-8 and registration
statements (Nos. 33-78372, 33-90810, 33-91720) on Form S-3 of
Harleysville Group Inc. of our report dated February 17, 1997
relating to the consolidated balance sheets of Harleysville Group
as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity and cash flows and
related financial statement schedules for each of the years in the
three-year period ended December 31, 1996 which report appears in
the December 31, 1996 annual report on Form 10-K of Harleysville
Group Inc. and of our report dated March 21, 1997 relating to the
statements of financial condition of Harleysville Group Inc.
Employee Stock Purchase Plan as of December 31, 1996 and 1995, and
the related statements of income and changes in plan equity for
each of the years in the three-year period ended December 31, 1996,
which report appears in the Harleysville Group Inc. Employee Stock
Purchase Plan annual report on Form 11-K.
Our report dated February 17, 1997 refers to the adoption of
Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" as of
January 1, 1994.
/s/ KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
March 21, 1997
EXHIBIT (28)
Registrant is not an insurance company and, accordingly, does
not file annual statements with any state insurance regulatory
agency.
Exhibit 28(A) to this Form 10-K contains Schedule P, of the
1996 annual statement, for the total pooled business of
Harleysville Mutual Insurance Company and the pool participant
property and casualty insurance subsidiaries of Harleysville Group
Inc. which was filed with state insurance regulatory agencies.
Exhibit 28(B) to this Form 10-K contains Schedule P of the
1996 statutory annual statement of Lake States Insurance Company.
<PAGE>
EXHIBIT (99)
FORM 11-K
FOR ANNUAL REPORTS OF EMPLOYEE STOCK PURCHASE, SAVINGS
AND SIMILAR PLANS PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
---------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
-------------- -----------------
Commission file number 0-14697
----------------------
A. Full title of the plan and the address of the plan, if
different from that of the issuer named below:
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
B. Name of issuer of the securities held pursuant to the
plan and the address of its principal executive office:
Harleysville Group Inc.
355 Maple Avenue
Harleysville, Pennsylvania 19438-2297
1
<PAGE>
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
FORM 11-K
DECEMBER 31, 1996
Financial Statements
- --------------------
Page
----
Independent Auditors' Report 3
Statements of Financial Condition
as of December 31, 1996 and
1995 4
Statements of Income and Changes in
Plan Equity for each of the years
in the three-year period ended
December 31, 1996 5
Notes to Financial Statements 6
Schedules -
Schedules I, II and III have been
omitted because they are not
required, are not applicable,
or the required information is
shown in the financial statements
or notes thereto.
2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Administrative Committee
Harleysville Group Inc.
Employee Stock Purchase Plan:
We have audited the statements of financial condition of
Harleysville Group Inc. Employee Stock Purchase Plan as of December
31, 1996 and 1995, and the related statements of income and changes
in plan equity for each of the years in the three-year period ended
December 31, 1996. These financial statements are the
responsibility of the Plan's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial condition of the
Harleysville Group Inc. Employee Stock Purchase Plan as of December
31, 1996 and 1995, and the income and changes in its plan equity
for each of the years in the three-year period ended December 31,
1996 in conformity with generally accepted accounting principles.
/s/KPMG PEAT MARWICK LLP
March 21, 1997
3
<PAGE>
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
STATEMENTS OF FINANCIAL CONDITION
AS OF
DECEMBER 31,
--------------------
1996 1995
-------- --------
Assets
- ------
Receivable from affiliate $542,767 $494,035
======== ========
Plan Equity
- -----------
Net assets available for
plan participants $542,767 $494,035
======== ========
See accompanying notes to financial statements.
4
<PAGE>
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
STATEMENTS OF INCOME AND CHANGES IN PLAN EQUITY
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
------------ ------------ ----------
Contributions - Employees $ 1,179,486 $ 1,069,528 $ 962,648
Purchase and distribution
of Harleysville Group Inc.
stock to employees (1,102,646) (1,012,258) (862,882)
Employee withdrawals and
terminations (28,108) (47,842) (20,251)
----------- ----------- ---------
Net increase 48,732 9,428 79,515
Plan equity beginning of
year 494,035 484,607 405,092
----------- ----------- ---------
Plan equity end of year $ 542,767 $ 494,035 $ 484,607
=========== =========== =========
See accompanying notes to financial statements.
5
<PAGE>
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounts of the plan are maintained on the accrual basis.
The receivable from affiliate represents the biweekly contributions
from employees which are made in the form of regular payroll
deductions and are recorded by the plan after each biweekly pay
period.
2. DESCRIPTION OF THE PLAN
All regular full-time employees and regular part-time
employees who work at least twenty hours a week are eligible to
participate in the plan.
Eligible employees must authorize a payroll deduction equal to
at least 2 percent but not more than 10 percent of their base pay
during the enrollment periods to participate in the plan. The
enrollment periods are the 1st through 14th day of January and July
of each plan year. Once enrolled, an eligible employee will
continue to participate in the plan for each succeeding
subscription period until the employee terminates participation or
ceases to be an eligible employee.
Each subscription period will run from January 15 through July
14 or from July 15 through January 14. At the close of each pay
period, the amount to be deducted from each participant's base pay
will be credited to such participant's plan account. On the last
day of each subscription period, the amount credited to each
participant's plan account will be divided by the subscription
price for that subscription period and the participant's account
will be credited with the number of the whole and fractional shares
which results. Participants may request such shares to be issued
in certificate form.
If a participant desires to change the rate of contribution
the participant may do so effective for the next subscription
period by filing a new subscription agreement during the applicable
enrollment period. At any time, a participant may withdraw from
the plan and receive cash for the amount deducted from the
participant's base pay during that subscription period by giving
written notice to the Company. Separation from employment for any
reason including death, disability or retirement shall be treated
as an automatic withdrawal from the plan.
At December 31, 1996, there were 579 participants in the plan.
6
<PAGE>
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. INVESTMENT
The contributions credited to the participant's account are
used to purchase shares of Harleysville Group Inc. common stock at
a specified subscription price. The subscription price for each
share of common stock shall be the lesser of 85 percent of the fair
market value of such shares on the last trading day before the
first day of the subscription period or 85 percent of the fair
market value of such share on the last day of the subscription
period. The fair market value of a share shall be the closing
price as reported on the NASDAQ National Market System on the
applicable date. The total number of shares to be made available
under the plan is approximately 500,000 shares of capital stock of
the Company.
4. TAX STATUS
The plan is intended to qualify under the provisions of
Section 423 of the Internal Revenue Code. No income will be
realized for federal income tax purposes by a participant upon the
purchase of shares under the plan. Tax consequences to the Company
and to plan participants upon disposition of shares under the plan
vary depending on the length of time held and fair market value at
time of disposition.
5. PLAN TERMINATION
The plan will be in effect until the earlier of July 31, 2005
or the date on which plan participants have subscribed for the
total number of shares available for purchase under the plan. At
December 31, 1996, there are approximately 459,802 shares that
remain available for issuance under the plan. During the effective
duration of the plan, there will be twenty subscription periods.
6. SUBSEQUENT EVENT
On January 15, 1997, approximately 25,448 shares of stock were
purchased at a subscription price of $22.74 per share on behalf of
the plan participants for the subscription period ended January 14,
1997.
7
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the trustees (or other persons who administer the plan) have
duly caused this annual report to be signed by the undersigned
hereunto duly authorized.
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
Date: March 24, 1997 By: /s/BRUCE J. MAGEE
------------------ ---------------------------
Bruce J. Magee, Member,
Administrative Committee for
Harleysville Group Inc.
Employee Stock Purchase Plan
8
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000792013
<NAME> HARLEYSVILLE GROUP INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 598,193
<DEBT-CARRYING-VALUE> 587,979
<DEBT-MARKET-VALUE> 606,770
<EQUITIES> 69,932
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,291,279
<CASH> 2,120
<RECOVER-REINSURE> 2,043
<DEFERRED-ACQUISITION> 68,779
<TOTAL-ASSETS> 1,622,612
<POLICY-LOSSES> 796,820
<UNEARNED-PREMIUMS> 281,366
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 97,715
0
0
<COMMON> 14,140
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<TOTAL-LIABILITY-AND-EQUITY> 1,622,612
615,197
<INVESTMENT-INCOME> 78,008
<INVESTMENT-GAINS> 3,182
<OTHER-INCOME> 11,038
<BENEFITS> 468,490
<UNDERWRITING-AMORTIZATION> 154,320
<UNDERWRITING-OTHER> 53,240
<INCOME-PRETAX> 31,375
<INCOME-TAX> 2,695
<INCOME-CONTINUING> 28,680
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<RESERVE-OPEN> 576,653
<PROVISION-CURRENT> 503,489
<PROVISION-PRIOR> (34,999)
<PAYMENTS-CURRENT> 220,669
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