SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 1998.
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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, PENNSYLVANIA 19438-2297
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(215) 256-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days.
Yes X . No .
----- -----
At July 27, 1998, 29,086,572 shares of common stock of
Harleysville Group Inc. were outstanding.
1
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
INDEX
Page Number
-----------
Part I - Financial Information
Consolidated Balance Sheets - June 30, 1998
and December 31, 1997 3
Consolidated Statements of Income - For the three
months ended June 30, 1998 and 1997 4
Consolidated Statements of Income - For the six
months ended June 30, 1998 and 1997 5
Consolidated Statement of Shareholders' Equity -
For the six months ended June 30, 1998 6
Consolidated Statements of Cash Flows -
For the six months ended June 30, 1998
and 1997 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Results
of Operations and Financial Condition 11
Part II - Other Information 14
2
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(unaudited)
ASSETS
------
Investments:
Fixed maturities:
Held to maturity, at amortized
cost (fair value $672,537
and $643,951) $ 640,636 $ 611,604
Available for sale, at fair value
(amortized cost $677,579 and
$660,911) 704,483 689,806
Equity securities, at fair value
(cost $86,135 and $79,221) 151,238 121,830
Short-term investments, at cost,
which approximates fair value 19,724 28,350
---------- ----------
Total investments 1,516,081 1,451,590
Cash 18,926 1,460
Receivables:
Premiums 92,184 83,948
Reinsurance 90,082 78,750
Accrued investment income 21,598 21,253
---------- ----------
Total receivables 203,864 183,951
Deferred policy acquisition costs 77,863 72,076
Prepaid reinsurance premiums 11,364 14,504
Property and equipment, net 24,708 24,778
Deferred income taxes 12,906 18,906
Other assets 35,159 33,930
---------- ----------
Total assets $1,900,871 $1,801,195
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------
Liabilities:
Unpaid losses and loss
settlement expenses $ 905,231 $ 868,393
Unearned premiums 317,187 298,625
Accounts payable and accrued
expenses 91,328 72,427
Debt 97,140 97,440
Due to affiliate 3,158 17,795
---------- ----------
Total liabilities 1,414,044 1,354,680
---------- ----------
Shareholders' equity:
Preferred stock, $1 par value,
authorized 1,000,000 shares;
none issued
Common stock, $1 par value,
authorized 80,000,000 shares;
issued and outstanding
29,003,261 and 28,821,973 shares 29,003 28,822
Additional paid-in capital 116,658 113,646
Accumulated other comprehensive
income 59,805 46,478
Retained earnings 281,361 257,569
---------- ----------
Total shareholders' equity 486,827 446,515
---------- ----------
Total liabilities and
shareholders' equity $1,900,871 $1,801,195
========== ==========
See accompanying notes to consolidated financial statements.
3
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(dollars in thousands, except per share data)
1998 1997
--------- ---------
Revenues:
Premiums earned $165,834 $155,251
Investment income, net of
investment expenses 21,343 20,191
Realized investment gains 3,702 532
Other income 3,143 2,780
-------- --------
Total revenues 194,022 178,754
-------- --------
Losses and expenses:
Losses and loss settlement
expenses 114,425 109,776
Amortization of deferred
policy acquisition costs 42,033 39,045
Other underwriting expenses 13,640 11,179
Interest expense 1,625 1,654
Other expenses 1,087 837
-------- --------
Total expenses 172,810 162,491
-------- --------
Income before income taxes 21,212 16,263
Income taxes 4,660 3,099
-------- --------
Net income $ 16,552 $ 13,164
======== ========
Per common share:
Basic earnings $ .57 $ .46
======== ========
Diluted earnings $ .56 $ .46
======== ========
Cash dividend $ .115 $ .105
======== ========
See accompanying notes to consolidated financial statements.
4
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(dollars in thousands, except per share data)
1998 1997
--------- ---------
Revenues:
Premiums earned $328,466 $311,632
Investment income, net of
investment expenses 42,578 40,782
Realized investment gains 7,350 998
Other income 6,133 5,524
-------- --------
Total revenues 384,527 358,936
-------- --------
Losses and expenses:
Losses and loss settlement
expenses 230,716 224,559
Amortization of deferred
policy acquisition costs 83,145 78,500
Other underwriting expenses 26,938 21,979
Interest expense 3,265 3,295
Other expenses 1,972 1,526
-------- --------
Total expenses 346,036 329,859
-------- --------
Income before income taxes 38,491 29,077
Income taxes 8,037 5,081
-------- --------
Net income $ 30,454 $ 23,996
======== ========
Per common share:
Basic earnings $ 1.05 $ .84
======== ========
Diluted earnings $ 1.03 $ .83
======== ========
Cash dividend $ .23 $ .21
======== ========
See accompanying notes to consolidated financial statements.
5
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(dollars in thousands)
<TABLE>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
PAID-IN COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL INCOME EARNINGS TOTAL
-------- ------- ---------- ------------- -------- --------
<CAPTION>
<S>
Balance,
December 31,
<S> <C> <C> <C> <C> <C> <C>
1997 28,821,973 $28,822 $113,646 $46,478 $257,569 $446,515
--------
Net income 30,454 30,454
Other compre-
hensive income,
net of tax:
Unrealized
investment
gains, net of
reclassifica-
tion
adjustment 13,327 13,327
--------
Comprehensive
income 43,781
--------
Issuance of
common stock 181,288 181 3,012 3,193
Cash dividend
paid (6,662) (6,662)
---------- ------- -------- ------- -------- --------
Balance,
June 30,
1998 29,003,261 $29,003 $116,658 $59,805 $281,361 $486,827
========== ======= ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(in thousands)
1998 1997
--------- ----------
Cash flows from operating activities:
Net income $30,454 $ 23,996
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in receivables, unearned
premiums, prepaid reinsurance
and due to affiliate (15,774) 1,706
Increase in unpaid losses and
loss settlement expenses 24,446 5,949
Deferred income taxes (1,176) (1,013)
Increase in deferred policy
acquisition costs (5,787) (1,934)
Amortization and depreciation 1,215 730
Gain on sale of investments (7,350) (998)
Other, net 17,575 (9,762)
Cash provided from change in
pooling agreement 14,962 29,002
--------- ---------
Net cash provided by operating
activities 58,565 47,676
--------- ---------
Cash flows from investing activities:
Fixed maturity investments:
Purchases (114,471) (92,124)
Sales or maturities 69,802 47,462
Equity securities:
Purchases (14,999) (19,304)
Sales 14,678 5,565
Net sales of short-term investments 8,626 14,843
Purchases of property and equipment (966) (287)
--------- ---------
Net cash used by investing
activities (37,330) (43,845)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 3,193 3,242
Repayment of debt obligations (300) (275)
Dividends paid (6,662) (6,088)
--------- ---------
Net cash used by
financing activities (3,769) (3,121)
--------- ---------
Increase in cash 17,466 710
Cash at beginning of period 1,460 2,120
--------- ---------
Cash at end of period $ 18,926 $ 2,830
========= =========
See accompanying notes to consolidated financial statements.
7
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - Basis of Presentation
The financial information for the interim periods included
herein is unaudited; however, such information reflects all
adjustments (consisting of only normal recurring adjustments) which
are, in the opinion of management, necessary to a fair presentation
of the financial position, results of operations, and cash flows
for the interim periods. The results of operations for interim
periods are not necessarily indicative of results to be expected
for the full year.
These financial statements should be read in conjunction with
the financial statements and notes for the year ended December 31,
1997 included in the Company's 1997 Annual Report filed with the
Securities and Exchange Commission on Form 10-K.
2 - Earnings Per Share
The computation of basic and diluted earnings per share is as
follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
--------- --------- --------- ---------
(in thousands,
except per share data)
Numerator for basic
and diluted earnings
earnings per share:
Net income $16,552 $13,164 $30,454 $23,996
======= ======= ======= =======
Denominator for basic
earnings per share --
weighted average
shares outstanding 28,986 28,477 28,949 28,430
Effect of stock
incentive plans 511 359 535 320
------- ------- ------- -------
Denominator for
diluted earnings
per share 29,497 28,836 29,484 28,750
======= ======= ======= =======
Basic earnings
per share $ .57 $ .46 $ 1.05 $ .84
======= ======= ======= =======
Diluted earnings
per share $ .56 $ .46 $ 1.03 $ .83
======= ======= ======= =======
8
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3 - Reinsurance
Premiums earned are net of amounts ceded of $1,900,000 and
$11,770,000 for the three and six months ended June 30, 1998,
respectively, and $6,564,000 and $13,099,000 for the three and six
months ended June 30, 1997, respectively. The ceded earned
premiums for the three and six months ended June 30, 1998 are net
of a $8,132,000 refund of premiums previously ceded to the Michigan
Catastrophic Claims Association. Such premiums were refunded to
Harleysville Group which were then immediately refunded to
policyholders. Losses and loss settlement expenses are net of
amounts ceded of $21,010,000 and $31,549,000 for the three and six
months ended June 30, 1998, respectively, and $3,403,000 and
$7,103,000 for the three and six months ended June 30, 1997,
respectively. Such amounts do not include the reinsurance
transactions with Mutual under the pooling arrangement, but do
include the reinsurance described in the following paragraph.
Harleysville Group has a reinsurance agreement with
Harleysville Mutual Insurance Company (Mutual) whereby Mutual
reinsures accumulated catastrophe losses in a quarter up to
$16,200,000 ($15,750,000 in 1997) in excess of $1,800,000
($1,750,000 in 1997) in return for a reinsurance premium. The
agreement excludes catastrophe losses resulting from earthquakes or
hurricanes, and supplements the existing external catastrophe
reinsurance program. Harleysville Group ceded to Mutual premiums
earned of $798,000 and $692,000 and losses incurred of $15,318,000
and $255,000, for the three months ended June 30, 1998 and 1997,
respectively. Harleysville Group ceded to Mutual premiums earned
of $1,482,000 and $1,304,000 and loss incurred of $19,925,000 and
$745,000 for the six months ended June 30, 1998 and 1997,
respectively.
Harleysville Group cedes business to and assumes business from
Mutual under a reinsurance pooling agreement. Because this
agreement does not relieve Harleysville Group of primary liability
as the originating insurer, there is a concentration of credit risk
arising from business ceded to Mutual. However, the reinsurance
pooling agreement provides for the right of offset and the net
balance with Mutual is a liability at June 30, 1998 and December
31, 1997. Mutual has an A. M. Best rating of "A" (Excellent) and,
in accordance with certain state regulatory requirements,
maintained $329.5 million (fair value) of investments in a trust
account to secure liabilities under the reinsurance pooling
agreement at June 30, 1998.
4 - Cash Flows
There were cash tax payments of $9,125,000 and $5,214,000 and
cash interest payments of $3,219,000 and $3,247,000 in the first
six months of 1998 and 1997, respectively.
9
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5 - Comprehensive Income
Comprehensive income consisted of the following (all amounts
are net of taxes):
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1998 1997 1998 1997
-------- -------- -------- ---------
Net income $16,552 $13,164 $30,454 $23,996
Other comprehensive
income:
Unrealized
investment
holding gains
arising during
period 7,194 18,564 18,050 11,792
Less:
Reclassification
adjustment for
gains included
in net income (2,395) (312) (4,723) (534)
------- ------- ------- -------
Net unrealized
investment gains 4,799 18,252 13,327 11,258
------- ------- ------- -------
Comprehensive income $21,351 $31,416 $43,781 $35,254
======= ======= ======= =======
10
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Effective January 1, 1998 Harleysville Group's pooling
agreement with Harleysville Mutual Insurance Company (Mutual) was
amended to include Minnesota Fire and Casualty Company (Minnesota
Fire), a wholly-owned subsidiary of Harleysville Group Inc. that
writes insurance primarily in Minnesota and neighboring states. In
addition, Harleysville Group's pool participation increased from
70% to 72%.
Premiums earned increased $10.6 million and $16.8 million
during the three and six months ended June 30, 1998. The increases
are primarily due to Minnesota Fire which was acquired on
October 1, 1997, partially offset by a decline in workers
compensation premiums due to lower rates.
Investment income increased $1.2 million and $1.8 million for
the three and six months ended June 30, 1998 resulting from an
increase in invested assets. Such increase was primarily provided
by cash flow from operations including a $15.0 million cash
transfer received for various insurance liabilities assumed
January 1, 1998 in connection with the change in Harleysville
Group's pool participation.
Realized investment gains increased $3.2 million and $6.4
million for the three and six months ended June 30, 1998 primarily
resulting from greater sales of equity securities.
Income before income taxes increased $4.9 million and $9.4
million for the three and six months ended June 30, 1998 and 1997,
respectively. The increases primarily were due to improved
underwriting results, higher investment income and higher realized
gains. Harleysville Group's statutory combined ratio decreased to
102.3% and 103.2% for the three and six months ended June 30, 1998,
respectively, from 102.6% and 104.5% for the three and six months
ended June 30, 1997, respectively, primarily due to improved
results in the automobile lines of business. Losses ceded under
the aggregate catastrophe reinsurance agreement with Mutual
increased by $15.1 million and $19.2 million for the three and six
months ended June 30, 1998, respectively, primarily due to several
severe spring storms in the second quarter and a first quarter ice
storm in upstate New York. The effect of catastrophes, net of
reinsurance, on income before income taxes was essentially the same
for the three and six months ended June 30, 1998 and 1997. It is
likely that the aggregate catastrophe reinsurance agreement with
Mutual will provide for a higher ceded premium or retention, or
both, in the event it is renewed January 1, 1999.
11
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
The income tax expense for the three and six months ended June
30, 1998 includes the tax benefit of $2.8 million and $5.5 million
associated with tax-exempt interest compared to $2.7 million and
$5.2 million in the same prior year periods.
Effective for one year from July 1, 1998, the Company's
subsidiaries and Mutual and its wholly-owned subsidiaries renewed
its catastrophe reinsurance treaty which provides coverage for
85.5% of up to $147 million in excess of a retention of $20 million
for any given catastrophe. Harleysville Group's 1998 pooling share
of this coverage would be 85.5% of up to $106 million in excess of
a retention of $14.4 million for any given catastrophe.
Accordingly, pursuant to the terms of the treaty, the maximum
recovery would be $126 million for any catastrophe involving an
insured loss equal to or greater than $167 million. Harleysville
Group's 1998 pooling share of this maximum recovery would be $90
million for any catastrophe involving an insured loss of $120
million or greater. The treaty includes reinstatement provisions
providing for coverage for a second catastrophe and requiring
payment of an additional premium in the event of a first
catastrophe occurring.
Liquidity and Capital Resources
Net cash provided by operating activities was $58.6 million
and $47.7 million for the six months ended June 30, 1998 and 1997,
respectively. The increase primarily is from an increase in other
liabilities due to $18.2 million of cash received as collateral for
security lending transactions, offset by the effect of amendments
to the pooling agreement with Mutual. Cash transfers of $15.0
million and $29.0 million were received effective January 1, 1998
and 1997, respectively, by Harleysville Group related to the
various liabilities assumed in connection with such amendments.
Net cash used by investing activities was $37.3 million and
$43.8 million for the six months ended June 30, 1998 and 1997. The
decrease is primarily due to the lower amount of cash provided by
the change in the pooling agreement participation.
Net cash used by financing activities increased $.6 million
for the six months ended June 30, 1998 primarily due to the
increase in dividends paid.
12
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Harleysville Group Inc. maintained $9.3 million of cash and
marketable investments at the holding company level at June 30,
1998 which is available for general corporate purposes including
dividends, debt service, capital contributions to subsidiaries and
acquisitions. The Company has no material commitments for capital
expenditures as of June 30, 1998.
New Accounting Standards
In June 1998, Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities", was issued and established standards for accounting
and reporting of derivative instruments and hedging activities.
The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Harleysville Group is in the
process of determining the effect, if any, of this statement on its
financial statements.
13
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information -
Stockholder Proposal Deadline
If a stockholder who plans to present a matter at the
1999 Annual Meeting of Stockholders fails to provide
notice of the matter to the Secretary of the Company by
February 3, 1999, it is the intention of the Company
that, pursuant to CFR section 240.14a-4(c)(1),
the persons authorized under management proxies
will have discretionary authority to vote and act
according to their best judgment on said matter.
ITEM 6. a. Exhibits - None
b. Reports on Form 8-K - None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HARLEYSVILLE GROUP INC.
Date: July 30, 1998 /s/BRUCE J. MAGEE
-------------------- --------------------------------
Bruce J. Magee
Senior Vice President and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
14
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000792013
<NAME> HARLEYSVILLE GROUP INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 704,483
<DEBT-CARRYING-VALUE> 640,636
<DEBT-MARKET-VALUE> 672,537
<EQUITIES> 151,238
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,516,081
<CASH> 18,926
<RECOVER-REINSURE> 4,718
<DEFERRED-ACQUISITION> 77,863
<TOTAL-ASSETS> 1,900,871
<POLICY-LOSSES> 905,231
<UNEARNED-PREMIUMS> 317,187
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 97,140
0
0
<COMMON> 29,003
<OTHER-SE> 457,824
<TOTAL-LIABILITY-AND-EQUITY> 1,900,871
328,466
<INVESTMENT-INCOME> 42,578
<INVESTMENT-GAINS> 7,350
<OTHER-INCOME> 6,133
<BENEFITS> 230,716
<UNDERWRITING-AMORTIZATION> 83,145
<UNDERWRITING-OTHER> 32,175
<INCOME-PRETAX> 38,491
<INCOME-TAX> 8,037
<INCOME-CONTINUING> 30,454
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,454
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.03
<RESERVE-OPEN> 793,563
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 819,866
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
