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, 1997.
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 [ ].
On March 11, 1998, 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 $328,669,935.
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date: 28,922,599 shares of
Common Stock outstanding on March 11, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's annual report to stockholders for the
fiscal year ended December 31, 1997 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 22, 1998 are incorporated by
reference in Parts I and III of this report.
1
<PAGE>
HARLEYSVILLE GROUP INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1997
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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 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- 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 54% 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 and midwestern
United States through approximately 22,600 independent insurance
agents associated with approximately 3,000 insurance agencies.
Regional offices are maintained in Georgia, Illinois, Indiana,
Maryland, Massachusetts, Michigan, Minnesota, 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"), Minnesota Fire and
Casualty Company ("Minnesota Fire"), 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,
3
<PAGE>
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. In 1997, the
Company acquired Minnesota Fire, which primarily conducts business
in Minnesota and neighboring states.
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. Beginning January 1, 1998,
Harleysville Group's participation in the pooling arrangement
increased from 70% to 72% and Minnesota Fire 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 54%.
(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.
4
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(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. Beginning January 1,
1998, Harleysville Group's participation in the pooling arrangement
increased from 70% to 72% and Minnesota Fire 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
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,
---------------------------------
1997 1996 1995
-------- --------- ---------
(in thousands)
PREMIUMS EARNED
- ---------------
Commercial:
Automobile $110,128 $103,445 $ 85,210
Workers compensation 113,832 128,563 103,794
Commercial multi-peril 127,247 123,393 100,375
Other 28,581 28,394 24,767
-------- -------- --------
Total commercial 379,788 383,795 314,146
-------- -------- --------
Personal:
Automobile 162,416 151,766 92,315
Homeowners 72,800 70,330 62,599
Other 9,901 9,306 7,982
-------- -------- --------
Total personal 245,117 231,402 162,896
-------- -------- --------
Total Harleysville Group Business $624,905 $615,197 $477,042
======== ======== ========
5
<PAGE>
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.
HARLEYSVILLE GROUP BUSINESS ONLY
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
------ ------ ------
GAAP combined ratio 103.6% 108.4% 104.0%
===== ===== =====
Statutory operating ratios:
Loss ratio 70.3% 76.1% 70.3%
Expense and dividend ratios 33.2% 31.2% 33.1%
----- ----- -----
Statutory combined ratio 103.5% 107.3% 103.4%
===== ===== =====
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.
6
<PAGE>
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 its 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.
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
business.
January 1, 1996 65% 35% Pennland included in the pool.
January 1, 1997 70% 30% Lake States included in the pool.
January 1, 1998 72% 28% Minnesota Fire 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. Garden State is
not a participant in the pooling arrangement.
7
<PAGE>
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 3(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.
8
<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,
--------------------------------------
1997 1996 1995
-------- --------- ---------
(dollars in thousands)
PREMIUMS WRITTEN
- ----------------
Commercial:
Automobile $154,833 $146,987 $136,197
Workers compensation 146,267 161,539 154,812
Commercial multi-peril 184,547 150,008 144,742
Other 37,924 39,503 39,703
-------- -------- --------
Total commercial 523,571 498,037 475,454
-------- -------- --------
Personal:
Automobile 228,689 178,166 113,440
Homeowners 102,791 93,513 93,141
Other 14,031 14,405 13,751
-------- -------- --------
Total personal 345,511 286,084 220,332
-------- -------- --------
Total pooled business $869,082 $784,121 $695,786
======== ======== ========
COMBINED RATIOS<F1>
- ---------------
Commercial:
Automobile 109.7% 106.8% 107.5%
Workers compensation 93.2% 92.2% 87.5%
Commercial multi-peril 116.0% 118.1% 111.3%
Other 104.0% 108.2% 110.6%
Total commercial 106.7% 105.5% 102.4%
Personal:
Automobile 100.3% 107.5% 112.2%
Homeowners 100.8% 132.2% 104.8%
Other 69.5% 115.0% 88.6%
Total personal 99.2% 116.0% 107.7%
Total pooled business 103.8% 109.4% 104.1%
- ----------------
[FN]
<F1>
See the definition of combined ratio in "Business-Property and
Casualty Underwriting".
9
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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,
----------------------------------------
1997 1996 1995
----------- ----------- ---------
(in thousands)
Reserves for losses and loss
settlement expenses,
beginning of the year $1,033,376 $ 900,336 $855,305
---------- ---------- --------
Adjustment to beginning of the
year reserves for the addition
of Lake States (1997) and
Pennland (1996) 71,544 78,205
---------- ---------- --------
Incurred losses and loss
settlement expenses:
Provision for insured events
of the current year 662,468 642,448 483,560
Decrease in provision for
insured events of prior
years (37,720) (43,843) (18,050)
---------- ---------- --------
Total incurred losses
and loss settlement
expenses 624,748 598,605 465,510
---------- ---------- --------
Payments:
Losses and loss settlement
expenses attributable to
insured events of the
current year 276,067 270,026 173,544
Losses and loss settlement
expenses attributable to
insured events of prior
years 328,691 273,744 246,935
---------- ---------- --------
Total payments 604,758 543,770 420,479
---------- ---------- --------
Reserves for losses and loss
settlement expenses,
end of the year $1,124,910 $1,033,376 $900,336
========== ========== ========
11
<PAGE>
The following table sets forth the development of net reserves
for unpaid losses and loss settlement expenses from 1987 through
1997 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 seven 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 $12.8 million, or 1.9%.
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, 1997, payments of $605.4 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, 1997 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 1997 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,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
-------- -------- ------- ------- -------- -------- -------- -------- -------- ---------- ----------
(dollars in thousands)
Reserve for
losses and
and loss
settlement
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
expenses $425,880 $517,426 $610,128 $676,526 $742,989 $784,514 $825,028 $855,305 $900,336 $1,033,376 $1,124,910
Reserves
reestimated:
One year
later 427,071 511,373 597,709 661,323 739,030 781,746 819,494 837,255 856,493 995,656
Two years
later 432,361 504,888 598,263 668,740 738,557 778,064 802,213 817,330 820,894
Three years
later 432,663 511,780 608,568 673,043 737,408 774,420 800,129 800,365
Four years
later 440,321 519,856 612,455 676,021 736,458 776,687 792,901
Five years
later 445,999 523,070 616,796 678,390 742,878 770,420
Six years
later 446,496 526,611 620,632 686,076 741,032
Seven years
later 449,784 531,760 627,462 689,367
Eight years
later 453,424 538,774 632,778
Nine years
later 459,312 544,191
Ten years
later 464,237
Cumulative
amount of
reserves paid:
One year
later 136,389 158,587 200,569 220,747 236,833 244,210 255,078 246,935 273,744 328,691
Two years
later 217,675 263,792 326,313 363,109 383,358 402,394 403,601 406,944 448,497
Three years
later 282,643 340,128 418,355 459,024 485,045 503,309 511,281 525,840
Four years
later 327,264 396,185 475,044 524,757 550,456 572,656 587,900
Five years
later 361,291 429,388 513,573 563,807 594,452 616,940
Six years
later 379,006 451,548 537,609 589,477 619,780
Seven years
later 391,742 465,664 552,083 605,440
Eight years
later 400,736 476,104 562,642
Nine years
later 408,464 484,047
Ten years
later 413,638
Redundancy
(defi-
ciency) (38,357) (26,765) (22,650) (12,841) 1,957 14,094 32,127 54,940 79,442 37,720
Redundancy
(deficiency)
expressed as
a percent
of year end
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
reserves (9.0)% (5.2)% (3.7)% (1.9)% 0.3% 1.8% 3.9% 6.4% 8.8% 3.7%
Cumulative
redundancy
excluding
pre-1986
reserve
develop-
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ment <F1> 527 5,658 2,850 9,955 20,718 29,978 46,985 68,137 89,098 42,631
<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,
---------------------------------
1997 1996 1995
--------- --------- ---------
(in thousands)
Reserves for losses and loss
settlement expenses,
beginning of the year $718,700 $576,653 $535,452
-------- -------- --------
Reserves of acquired company 34,836
-------- -------- --------
Incurred losses and loss
settlement expenses:
Provision for insured
events of the current
year 469,216 503,489 346,383
Decrease in provision
for insured events of
prior years (29,728) (34,999) (10,887)
-------- -------- --------
Total incurred losses
and loss settlement
expenses 439,488 468,490 335,496
-------- -------- --------
Payments:
Losses and loss settlement
expenses attributable to
insured events of the
current year 198,554 220,669 129,446
Losses and loss settlement
expenses attributable to
insured events of prior
years 229,225 199,740 164,849
Adjustment to beginning of
the year reserves resulting
from the change in the pool
participation percentage (28,318) (93,966)
-------- -------- --------
Total payments 399,461 326,443 294,295
-------- -------- --------
Reserves for losses and loss
settlement expenses, end
of the year $793,563 $718,700 $576,653
======== ======== ========
14
<PAGE>
Harleysville Group recognized a decrease in the provision for
insured events of prior years (favorable development) of $29.7,
$35.0 and $10.9 million in 1997, 1996 and 1995, respectively. The
favorable development in 1997 and 1996 primarily related to lower
than expected claim severity in the workers compensation and
automobile lines of business. The 1995 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,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- ------- -------- -------- -------- -------- -------
(dollars in thousands)
Reserves for
losses
and loss
settlement
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
expenses $117,058 $166,994 $259,522 $300,197 $406,619 $437,883 $499,272 $535,452 $576,653 $718,700 $793,563
Reserves
reestimated:
One year
later 115,123 160,506 251,960 291,629 405,749 438,135 496,057 524,565 541,654 688,972
Two years
later 114,307 155,911 249,871 294,354 404,849 435,005 483,635 507,090 513,555
Three years
later 113,106 157,625 254,329 296,320 403,240 430,728 477,164 491,919
Four years
later 115,280 160,746 256,045 297,187 400,579 429,125 468,804
Five years
later 116,962 162,058 257,653 296,517 401,675 421,408
Six years
later 116,644 163,186 257,828 298,436 397,275
Seven years
later 117,620 164,149 259,184 297,598
Eight years
later 117,678 165,625 259,775
Nine years
later 118,422 166,299
Ten years
later 118,749
Cumulative amount
of reserves paid:
One year
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
later 41,427 29,100 90,964 67,570 135,067 144,465 161,557 164,849 105,774 200,907
Two years
later 51,032 72,381 126,668 145,954 219,233 234,991 254,840 219,225 204,030
Three years
later 74,194 92,887 174,860 199,754 276,451 292,381 290,667 283,816
Four years
later 84,111 119,488 205,124 235,650 312,539 314,848 329,830
Five years
later 97,494 135,660 224,882 255,921 328,682 335,411
Six years
later 104,373 145,701 236,145 265,062 338,515
Seven years
later 108,827 151,012 239,937 270,201
Eight years
later 111,065 153,221 242,514
Nine years
later 112,231 154,577
Ten years
later 112,223
Redundancy
(defi-
ciency) (1,691) 695 (253) 2,599 9,344 16,475 30,468 43,533 63,098 29,728
Redundancy
(deficiency)
expressed as
a percent of
year end
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
reserves (1.4)% 0.4% (0.1)% 0.9% 2.3% 3.8% 6.1% 8.1% 10.9% 4.1%
<S> <C> <C> <C> <C> <C> <C>
Gross reserve $486,608 $560,811 $603,088 $645,941 $796,820 $868,393
Ceded reserve 48,725 61,539 67,636 69,288 78,120 74,830
-------- -------- -------- -------- -------- --------
Net reserve $437,883 $499,272 $535,452 $576,653 $718,700 $793,563
======== ======== ======== ======== ======== ========
Gross re-
estimated $467,800 $536,070 $560,458 $583,985 $767,656
Ceded re-
estimated 46,392 67,266 68,539 70,430 78,684
-------- -------- -------- -------- --------
Net re-
estimated $421,408 $468,804 $491,919 $513,555 $688,972
======== ======== ======== ======== ========
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 1998 pooling share of such recovery would be
$3,060,000 above a retention of $540,000. 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, 1997 which provides coverage
for 85% of up to $147 million in excess of a retention of $20
million for any given catastrophe. Harleysville Group's 1998
pooling share of this coverage would be 85% of up to $105.8 million
in excess of a retention of $14.4 million for any given
catastrophe. Pursuant to the terms of the treaty, the maximum
recovery would be $125 million for any catastrophe involving an
insured loss equal to or greater than $167 million. Harleysville
Group's 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. 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 1998 pooling
share of such recovery would be $13,680,000 above a retention of
$720,000. 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 1998 pooling share would provide for recovery
of $2,880,000 over a retention of $720,000.
17
<PAGE>
Harleysville Group has a reinsurance agreement with Mutual
whereby, in 1998, Mutual reinsures accumulated catastrophe losses
in a quarter up to $16,200,000 in excess of $1,800,000 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 Harleysville Group to the same
extent and at the same cost currently maintained.
Harleysville Group considers numerous factors in choosing
reinsurers, the most important of which is the financial stability
of the reinsurer. Harleysville Group 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 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 1997, Harleysville Group invested $64 million in equity
securities with the objective of capital appreciation. At December
31, 1997, 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
fixed income 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,
1997:
DECEMBER 31, 1997
-----------------------
AMOUNT PERCENT
---------- -------
(dollars in thousands)
RATING<F1>
- ------
U.S. Treasury and U.S.
agency bonds<F2> $ 240,892 18.9%
Aaa 347,568 27.3
Aa 421,776 33.2
A 239,332 18.8
Baa 22,947 1.8
---------- -----
Total $1,272,515 100.0%
========== =====
- ---------------
[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%, 45% and 37% of the total investment portfolio at December 31,
1997, 1996 and 1995, 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, 1997:
DECEMBER 31, 1997
-----------------------
AMOUNT PERCENT
---------- -------
(dollars in thousands)
Fixed maturities:
U.S. Treasury obligations $ 44,188 3.1%
U.S. agency obligations 61,420 4.3
Mortgage-backed securities 146,217 10.3
Obligations of states and
political subdivisions 638,007 44.8
Corporate securities 411,578 28.9
---------- -----
Total fixed maturities 1,301,410 91.4
---------- -----
Equity securities 121,830 8.6
---------- -----
Total $1,423,240 100.0%
========== =====
19
<PAGE>
Investment results of Harleysville Group's fixed maturity
investment portfolio for each of the three years ended December 31,
1997 are shown in the following table:
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---------- ---------- ---------
(dollars in thousands)
Invested assets<F1> $1,223,175 $1,133,640 $960,114
Investment income<F2> $ 79,765 $ 75,204 $ 67,428
Average yield 6.5% 6.6% 7.0%
- ---------------
[FN]
<F1>Average of the aggregate invested amounts at amortized cost at
the beginning and end of the period, adjusted for the 1997 and
1996 pooling agreement amendments and the acquisition of
Minnesota Fire.
<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, 1997:
DECEMBER 31, 1997
---------------------
AMOUNT PERCENT
-------- -------
(dollars in thousands)
DUE IN<F1>
---------
1 year or less $ 51,971 4.0%
Over 1 year through 5 years 245,131 18.8
Over 5 years through 10 years 440,813 33.9
Over 10 years 417,278 32.1
---------- -----
1,155,193 88.8
Mortgage-backed securities 146,217 11.2
---------- -----
Total $1,301,410 100.0%
========== =====
- ---------------
[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, 1997 was approximately 6 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
premiums written 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. During the five years ended December
31, 1997, 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, 1997, $24,061,000 would be
available for distribution to Harleysville Group Inc. without prior
approval until September 30, 1998, after which $57,808,000 would be
available for distribution to Harleysville Group Inc. without prior
approval. The Company's insurance subsidiaries paid dividends of
$31.7 million to Harleysville Group Inc. in 1997. No dividends
were paid in 1996 or 1995.
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 has 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,
-------------------------- --------------------
1997 1996 1995 1997 1996
-------- -------- -------- --------- ---------
(in thousands)
SAP amounts $59,658 $15,332 $36,063 $398,468 $326,455
Adjustments:
Deferred
policy
acquisition
costs (841) 9,670 6,619 72,076 68,779
Deferred
income
taxes 507 7,118 (502) 20,338 32,086
Unrealized
investment
gains 28,833 14,532
Other, net (4,519) (3,505) (608) 14,724 7,735
Holding
company<F1> (733) 65 (241) (87,924) (79,342)
------- ------- ------- -------- --------
GAAP amounts $54,072 $28,680 $41,331 $446,515 $370,245
======= ======= ======= ======== ========
[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 54% 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 $6.0
million, $6.6 million and $6.9 million for the years ended December
31, 1997, 1996 and 1995, respectively, for all such management
services.
All of the Company's officers are officers of the Mutual
Company, and five of the Company's eight 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 "Board and Committee Meetings" section
on pages 5 to 6 of the Company's proxy statement relating to the
annual meeting of the shareholders to be held April 22, 1998 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 for 1997 and 1996 and $2,750,000 for
1995. 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 8 of the Notes to Consolidated
Financial Statements. For additional information with respect to
transactions with the Mutual Company, see Note 3 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, 1997, there were 2,732 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 3(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 1997 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 50 President, Chief Executive Officer
and Director
Thomas E. Roden 62 Executive Vice President
Roger A. Brown 49 Senior Vice President, Secretary
and General Counsel
Mark R. Cummins 41 Senior Vice President, Chief
Investment Officer and Treasurer
Bruce J. Magee 43 Senior Vice President and
Chief Financial Officer
E. Wayne Ratz 52 Senior Vice President and Chief
Information Officer
Spencer M. Roman 49 Senior Vice President
Robert G. Whitlock, Jr. 41 Senior Vice President and Chief
Actuary
Roger J. Beekley 55 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 corporate administration.
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.
E. Wayne Ratz has been Senior Vice President and Chief
Information Officer of Harleysville Group and the Mutual Company
since February 1997. From 1967 to 1997 he was employed by General
Accident Insurance Company, most recently as Vice President of
Information Services/Application Services.
Spencer M. Roman has been Senior Vice President since 1993.
Since January 1, 1996, he has been in charge of marketing, claims
and underwriting. 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, 1997, 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, 1997, 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, 1997,
which is included as Exhibit (13)(B) to this Form 10-K Report, is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
- ------- -----------------------------------------------------
RISK.
- ----
Not applicable.
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, 1997,
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 and
the "Section 16(a) Beneficial Ownership Reporting Compliance"
section on page 23 of the Company's proxy statement relating to the
annual meeting of stockholders to be held April 22, 1998, are
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 information set forth on pages 10 to 21 and the
"Compensation of Directors" section on pages 6 to 8 of the
Company's proxy statement relating to the annual meeting of
stockholders to be held April 22, 1998, are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- ------- ---------------------------------------------------
MANAGEMENT.
- ----------
The "Ownership of Common Stock" section on pages 8 to 9 of the
Company's proxy statement relating to the annual meeting of
stockholders to be held April 22, 1998, are incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ------- ----------------------------------------------
The "Transactions with Harleysville Mutual" section on pages
22 to 23 of the Company's proxy statement relating to the annual
meeting of stockholders to be held April 22, 1998, 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, 1997 and 1996 23*
Consolidated Statements of Income for
Each of the Years in the Three-year
Period Ended December 31, 1997 24*
Consolidated Statements of Stockholders'
Equity for Each of the Years in the Three-
year Period Ended December 31, 1997 25*
Consolidated Statements of Cash Flows
for Each of the Years in the Three-year
Period Ended December 31, 1997 26*
Notes to Consolidated Financial Statements 27*
Independent Auditors' Report 39*
(2) The following consolidated financial statement
schedules for the years 1997, 1996 and 1995
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
1997 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 - incorporated herein by
reference to Exhibit (10)(F) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 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
(4)(C) to the Registrant's Form S-8 Registra-
tion Statement No. 333-25817 filed April 25,
1997.
(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 - incorporated herein by reference to
Exhibit (10)(P) to the Registrant's Annual
Report on Form 10-K for the year ended December
31, 1996.
(10)(Q) Amendment, effective January 1, 1998 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, Lake States Insurance
Company and Minnesota Fire and Casualty
Company.
*(10)(R) 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)(S) 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)(T) 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)(U) 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.
34
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------
(10)(V) Loan Agreement dated as of March 19, 1998 by
and between Harleysville Group Inc. and
Harleysville Mutual Insurance Company.
(10)(W) 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)(X) 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)(Y) 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)(Z) 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)(AA) 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)(AB) 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.
35
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------
*(10)(AC) 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.
(13)(A) Selected Consolidated Financial Data from the
Company's 1997 annual report to stockholders.
(13)(B) Management's Discussion and Analysis of Results
of Operations and Financial Condition from the
Company's 1997 annual report to stockholders.
(13)(C) Consolidated financial statements from the
Company's 1997 annual report to stockholders.
(13)(D) Market for Common Stock and Related Security
Holder Matters from the Company's 1997 annual
report to stockholders.
(21) Subsidiaries of Registrant.
(23) Independent Auditors' Consent and Report on
Schedules.
(27) Financial Data Schedule
(99) Form 11-K Annual Report for the Harleysville
Group Inc. Employee Stock Purchase Plan for the
year ended December 31, 1997.
- ---------------
* 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, 1997
(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 $ 103,037 $ 106,121 $ 105,608
States, municipalities
and political
subdivisions 621,453 657,257 638,007
Mortgage-backed
securities 139,081 146,217 146,217
All other corporate
bonds 408,944 424,162 411,578
---------- ---------- ----------
Total fixed
maturities 1,272,515 1,333,757 1,301,410
---------- ---------- ----------
Equity securities:
Common stocks
Banks, trust and
insurance companies 13,181 21,820 21,820
Industrial,
miscellaneous and
all other 66,040 100,010 100,010
---------- ---------- ----------
Total equities 79,221 121,830 121,830
---------- ---------- ----------
Short-term
investments 28,350 28,350
---------- ----------
Total investments $1,380,086 $1,451,590
========== ==========
37
<PAGE>
HARLEYSVILLE GROUP INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31,
------------------------
1997 1996
--------- ---------
ASSETS
Short-term investments $ 1,921 $ 1,440
Fixed maturities:
Available for sale, at fair
value (cost $1,843 and $10,811) 1,911 10,989
Investments in common
stock of subsidiaries
(equity method) 534,439 449,586
Accrued investment income 33 119
Due from affiliate 3,872 2,880
Other assets 4,831 4,370
-------- --------
Total assets $547,007 $469,384
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $ 93,500 $ 93,500
Accounts payable and
accrued expenses 5,895 5,187
Federal income taxes payable 1,097 452
-------- --------
Total liabilities 100,492 99,139
-------- --------
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
1997, 28,821,973 and 1996, 14,139,862 28,822 14,140
Additional paid-in capital 113,646 121,033
Net unrealized investment gains,
net of deferred income taxes 46,478 18,982
Retained earnings 257,569 216,090
-------- --------
Total shareholders' equity 446,515 370,245
-------- --------
Total liabilities and
shareholders' equity $547,007 $469,384
======== ========
38
<PAGE>
HARLEYSVILLE GROUP INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED STATEMENTS OF INCOME
(in thousands)
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
Revenues $ 6,747 $ 7,603 $ 7,528
Expenses:
Interest 6,441 6,378 6,526
Expenses other than
interest 1,435 1,116 1,386
------- ------- -------
(1,129) 109 (384)
Income tax expense
(benefit) (397) 44 (143)
------- ------- -------
Income (loss) before
equity in income of
subsidiaries (732) 65 (241)
Equity in income of
subsidiaries 54,804 28,615 41,572
------- ------- -------
Net income $54,072 $28,680 $41,331
======= ======= =======
39
<PAGE>
HARLEYSVILLE GROUP INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
Cash flows from operating
activities:
Net income $ 54,072 $ 28,680 $ 41,331
Adjustments to reconcile
net income to net cash
used by operating activities:
Equity in undistributed
earnings of subsidiaries (54,804) (28,615) (41,572)
Decrease in accrued
investment income 86 46 168
Increase (decrease) in
accrued income taxes 684 (896) (883)
(Gain) loss on sale of
investments (62) 667
Other, net (983) (464) (737)
-------- -------- --------
Net cash used by
operating activities (1,007) (1,249) (1,026)
-------- -------- --------
Cash flows from investing activities:
Fixed maturity investments:
Purchases (5,964)
Sales 9,043 1,500 15,616
Net sales (purchases) or
maturities of short-term
investments (481) 420 (1,396)
Acquisition (33,986)
Contributions to subsidiaries (5,000)
-------- -------- --------
Net cash provided (used)
by investing activities (25,424) 1,920 3,256
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock 7,295 9,936 8,022
Dividends from subsidiarie 31,729 23 24
Dividends paid (12,593) (11,155) (9,751)
-------- -------- --------
Net cash provided (used)
by financing activities 26,431 (1,196) (1,705)
-------- -------- --------
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, 1997, 1996 and 1995
(in thousands)
<CAPTION>
LIABILITY
FOR UNPAID AMORTIZATION
DEFERRED LOSSES LOSSES OF DEFERRED
POLICY AND 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>
1997 $72,076 $868,393 $298,625 $624,905 $81,783 $439,488 $157,591 $50,108 $616,937
======= ======== ======== ======== ======= ======== ======== ======= ========
December 31,
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
======= ======== ======== ======== ======= ======== ======== ======= ========
</TABLE>
41
<PAGE>
HARLEYSVILLE GROUP
SCHEDULE IV - REINSURANCE
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands)
ASSUMED PERCENTAGE
CEDED FROM OF AMOUNT
GROSS TO OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- --------- --------- -------- ----------
Year ended
December 31, 1997
Property and
casualty
premiums $542,887 $566,440 $648,458 $624,905 103.8%
======== ======== ======== ======== ======
Year ended
December 31, 1996
Property and
casualty
premiums $494,215 $422,623 $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%
======== ======== ======== ======== ======
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, 1997, 1996 AND 1995
(in thousands)
LOSSES AND LOSS
LIABILITY SETTLEMENT EXPENSES
FOR UNPAID DISCOUNT, (BENEFITS) INCURRED
LOSSES AND IF ANY, RELATED TO PAID LOSSES
LOSS DEDUCTED ------------------- AND LOSS
SETTLEMENT FROM CURRENT PRIOR SETTLEMENT
EXPENSES RESERVES YEAR YEARS EXPENSES
---------- -------- -------- ------- -----------
Year ended:
December 31,
1997 $868,393 $9,433 $469,216 $(29,728) $399,461
======== ====== ======== ======== ========
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
======== ====== ======== ======== ========
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 25, 1998 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 25, 1998
- -----------------------
Bradford W. Mitchell
President,
Chief Executive Officer
/s/WALTER R. BATEMAN and a Director March 25, 1998
- ----------------------
Walter R. Bateman
Senior Vice President
and Chief Financial
Officer (principal financial
officer and principal
/s/BRUCE J. MAGEE accounting officer) March 25, 1998
- ----------------------
Bruce J. Magee
44
<PAGE>
SIGNATURES
(Continued)
SIGNATURE TITLE DATE
- ----------------------- ------------------------- --------------
/s/LOWELL R. BECK Director March 25, 1998
- ----------------------
Lowell R. Beck
/s/MICHAEL L. BROWNE Director March 25, 1998
- ----------------------
Michael L. Browne
/s/ROBERT D. BUZZELL Director March 25, 1998
- ----------------------
Robert D. Buzzell
/s/GERARD G. JOHNSON Director March 25, 1998
- ----------------------
Gerard G. Johnson
/s/FRANK E. REED Director March 25, 1998
- ----------------------
Frank E. Reed
/s/WILLIAM E. STRASBURG Director March 25, 1998
- -----------------------
William E. Strasburg
45
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------
(10)(Q) Amendment, effective January 1, 1998 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, Lake
States Insurance Company and Minnesota Fire
and Casualty Company.
(10)(V) Loan Agreement dated as of March 19, 1998 by
and between Harleysville Group Inc. and
Harleysville Mutual Insurance Company.
(13)(A) Selected Consolidated Financial Data from
the Company's 1997 annual report to
stockholders.
(13)(B) Management's Discussion and Analysis of
Results of Operations and Financial
Condition from the Company's 1997 annual
report to stockholders.
(13)(C) Consolidated financial statements from the
Company's 1997 annual report to
stockholders.
(13)(D) Market for Common Stock and Related Security
Holder Matters from the Company's 1997
annual report to stockholders.
(21) Subsidiaries of Registrant.
(23) Independent Auditors' Consent and Report on
Schedules.
(27) Financial Data Schedule
(99) Form 11-K Annual Report for the Harleysville
Group Inc. Employee Stock Purchase Plan for
the year ended December 31, 1997.
<PAGE>
EXHIBIT (10)(Q)
NINTH 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
LAKE STATES INSURANCE COMPANY
PROPORTIONAL REINSURANCE AGREEMENT
----------------------------------
This Ninth Amendment to the proportional Reinsurance Agreement
is entered into by and between HARLEYSVILLE 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"), LAKES STATES INSURANCE COMPANY ("LSIC") AND
MINNESOTA FIRE AND CASUALTY COMPANY ("MF&C").
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 Oaks Insurance Company,
Pennland Insurance Company and Lake States 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, March 18, 1986, and March 3,
1997 (with Addendum dated March 3, 1997), in which those companies
created a common risk-sharing pool for their underwriting
operations, to address business assumed by HMIC from Boyertown
Mutual Insurance Company ("Boyertown") prior to its renewal at
Harleysville's rates, and to provide for the participation of a new
subsidiary, MF&C.
1
<PAGE>
In consideration of the mutual agreements hereinafter set
forth and contained in the Agreement, the parties hereby agree as
follows:
1. HMIC has entered into a Liability and Asset Transfer with
Boyertown, which is only licensed in the Commonwealth of
Pennsylvania, whereby HMIC will assume the assets and
liabilities, policy and corporate, of Boyertown, which
assumption is being undertaken with the approval of the
Pennsylvania Insurance Department because of Boyertown's
precarious financial condition. Therefore until such
policies are renewed by HMIC or another company which is
a participant in the Agreement, such business shall be
excluded from this Agreement and be solely a liability or
asset of HMIC.
2. MF&C is a subsidiary of HMIC as that term is defined in
Paragraph 1.6 of Part I of the Proportional Reinsurance
Agreement.
3. MF&C shall participate in the Agreement as of January 1,
1998.
4. As of January 1, 1998, the proportionate share of all
participants shall be as set forth in Exhibit I to this
Ninth Amendment.
5. All other terms and conditions of the Proportional
Reinsurance Agreement, as amended from time to time, shall
remain the same and apply to MF&C, except the term
"opening of business" found in Part I, Paragraph 1.1 shall
mean for MF&C 12:01 A.M., January 1, 1998 (although for
the last sentence of Part II, Paragraph 1.4, the term
shall continue to mean January 1, 1986).
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Ninth
Amendment to the Proportional Reinsurance Agreement to be executed
by their duly authorized respective officers on this 4th day of
March, 1998.
ATTEST: HARLEYSVILLE MUTUAL INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/BRUCE J. MAGEE
- ------------------------- ----------------------------------------
Roger A. Brown, Secretary Bruce J. Magee, Senior Vice Pres.
and Chief Financial Officer
ATTEST: HURON INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/WALTER R. BATEMAN, II
- ------------------------- ----------------------------------------
Roger A. Brown, Secretary Walter R. Bateman, II,
Chairman, President & CEO
ATTEST: HARLEYSVILLE INSURANCE COMPANY OF NEW JERSEY
/s/ROGER A. BROWN BY: /s/SPENCER M. ROMAN
- ------------------------- ----------------------------------------
Roger A. Brown, Secretary Spencer M. Roman, Vice President
ATTEST: HARLEYSVILLE-ATLANTIC INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/SPENCER M. ROMAN
- ------------------------- ----------------------------------------
Roger A. Brown, Secretary Spencer M. Roman, Vice President
ATTEST: WORCESTER INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/MARK R. CUMMINS
- ------------------------- ----------------------------------------
Roger A. Brown, Secretary Mark R. Cummins, Treasurer
ATTEST: MID-AMERICA INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/WALTER R. BATEMAN, II
- ------------------------- ----------------------------------------
Roger A. Brown, Secretary Walter R. Bateman, II,
Chairman, President & CEO
ATTEST: NEW YORK CASUALTY INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/SPENCER M. ROMAN
- ------------------------- ----------------------------------------
Roger A. Brown, Secretary Spencer M. Roman, Vice President
ATTEST: GREAT OAKS INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/ANGELA K. BAUER
- ------------------------- ----------------------------------------
Roger A. Brown, Secretary Angela K. Bauer, Assistant Treasurer
ATTEST: PENNLAND INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/ROBERT G. WHITLOCK, JR.
- ------------------------- ----------------------------------------
Roger A. Brown, Secretary Robert G. Whitlock, Jr., Vice President
ATTEST: LAKE STATES INSURANCE COMPANY
/s/ROGER A. BROWN BY: /s/THOMAS E. RODEN
- ------------------------- ----------------------------------------
Roger A. Brown, Secretary Thomas E. Roden, Vice President
ATTEST: MINNESOTA FIRE AND CASUALTY COMPANY
/s/ROGER A. BROWN BY: /s/MARK R. CUMMINS
- ------------------------- ----------------------------------------
Roger A. Brown, Secretary Mark R. Cummins, Treasurer
3
<PAGE>
EXHIBIT I
TO THE
NINTH 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 2%
Worcester Insurance Company 15%
Great Oaks Insurance Company 1%
Pennland Insurance Company 5%
Lake States Insurance Company 8%
Minnesota Fire and Casualty Company 3%
4
<PAGE>
EXHIBIT (10)(V)
SECOND AMENDMENT TO LOAN AGREEMENT
THIS SECOND AMENDMENT TO LOAN AGREEMENT (the "Amendment) dated
this 4th day of March, 1998, effective as of March 19, 1998, by and
between HARLEYSVILLE GROUP INC., a corporation organized and
existing under the laws of the State of Delaware with an address of
355 Maple Avenue, Harleysville, PA 19438 (the "Borrower"), and
HARLEYSVILLE MUTUAL INSURANCE COMPANY, an insurance company
organized and existing under the laws of the Commonwealth of
Pennsylvania, with an address of 355 Maple Avenue, Harleysville, PA
19438 (the "Lender"):
WITNESSETH:
----------
WHEREAS, The Borrower and the Lender entered into a Loan
Agreement (the "Agreement") dated March 19, 1991 whereby the
borrower borrowed the sum of $18,500,000 (the "Loan") from the
Lender for the purpose of acquiring the shares of stock of Phoenix
General Insurance Company and its subsidiaries, and the principal
amount of the loan remains unpaid and outstanding; and
WHEREAS, The Borrower and the Lender desire to extend the Loan
Agreement an additional seven (7) years at an interest rate of
LIBOR plus sixty-five one-hundredths (0.65%) per cent with all
other terms and conditions of the Loan Agreement remaining the
same; and
WHEREAS, Section 8.03 of the Agreement provides, inter alia,
that the Borrower and the lender may enter into a written agreement
amending, modifying or supplementing the Agreement.
NOW, THEREFORE, In consideration of the premises and the
mutual covenants and conditions herein contained, and intending to
be legally bound hereby, the parties hereto agree as follows;
1. The definition of "Maturity Date" in Section 1.01 of
Article I of the Agreement shall be deleted, and the
following shall be substituted in its place:
"'Maturity Date' shall mean the earlier
---------------
to occur of March 18, 2005 or the date on which
the Lender makes a demand for payment of the Note
in full."
2. The last sentence of Section 2.01(b) of Article II of the
Agreement shall be deleted, and the following shall be
substituted in its place:
"The rate of interest shall be equal to
LIBOR, as established by the LIBOR
interest period selected by the Borrower
plus sixty-five one-hundredths (0.65%)
per cent.
1
<PAGE>
3. The last line of Section 2.06 of Article II of the
Agreement shall be deleted and the following shall be
substituted in its place:
"...then current LIBOR plus sixty-five
one-hundredths (0.65%) per cent."
4. Exhibit A referred to in Section 2.03 of Article II of the
Agreement shall be amended and Exhibit A-1, copy of which
is attached hereto and made a part hereof, shall amend
Exhibit A, as set forth therein.
5. Exhibit B referred to in Section 3.11 of Article III of
the Agreement shall be deleted and Exhibit B-1, which is
attached hereto and made a part hereof, shall be
substituted in its place.
6. All other terms, conditions, and provisions of
the Agreement are hereby ratified and confirmed
by the Borrower and the Lender and remain in
full force and effect, except as herein
modified, amended and changed.
IN WITNESS WHEREOF, The parties hereto, by their duly
authorized officers, have executed and delivered this Second
Amendment to Loan Agreement on the date first above written,
effective as of the date stated herein.
HARLEYSVILLE MUTUAL INSURANCE COMPANY
BY: /s/MARK R. CUMMINS
---------------------------------
Mark R. Cummins
Senior Vice President, Chief
Investment Officer and Treasurer
HARLEYSVILLE GROUP INC.
BY: /s/BRUCE J. MAGEE
---------------------------------
Bruce J. Magee
Senior Vice President and
Chief Financial Officer
2
<PAGE>
Exhibit A-1
AMENDMENT TO PROMISSORY NOTE
----------------------------
By the Second Amendment to Loan Agreement dated as of March
19, 1991 by and between HARLEYSVILLE GROUP INC. and HARLEYSVILLE
MUTUAL INSURANCE COMPANY, certain modifications, amendments and
changes were made, as set forth therein. As a result of those
modifications, amendments and changes, the Promissory Note dated
March 19, 1991 is amended as follows:
1. The Maturity Date has been extended from March 18, 1998 to
March 18, 2005.
2. The interest rate has been changed from LIBOR plus one
(1%) per cent to LIBOR plus sixty-five one-hundredths
(0.65%) per cent.
Dated: March 4, 1998
HARLEYSVILLE GROUP INC.
Attest:
BY: /s/BRUCE J. MAGEE
--------------------------
/s/ROGER A. BROWN Bruce J. Magee
- ---------------------- Senior Vice President and
Roger A. Brown Chief Financial Officer
Secretary
3
<PAGE>
Exhibit B-1
HARLEYSVILLE GROUP INC. SUBSIDIARIES
------------------------------------
STATE OF PERCENTAGE OWNED BY
NAME OF SUBSIDIARY DOMICILE HARLEYSVILLE GROUP INC.
- --------------------------------- ------------ -----------------------
Carlton Holding Corporation New York 100%
Great Oaks Insurance Company Ohio 100%
Harleysville-Atlantic Insurance
Company Georgia 100%
Harleysville Insurance Company
of New Jersey New Jersey 100%
Huron Insurance Company Pennsylvania 100%
Lake States Insurance Company Michigan 100%
Mid-America Insurance Company Pennsylvania 100%
Minnesota Fire and Casualty
Company Minnesota 100%
New York Casualty Insurance
Company New York 100%
Worcester Insurance Company Massachusetts 100%
Harleysville Asset Management Pennsylvania 100%
Insurance Management Resources LP Pennsylvania 100%
4
<PAGE>
EXHIBIT 13(A)
SELECTED CONSOLIDATED FINANCIAL DATA
Harleysville Group Inc. (Company) is 54% 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), Minnesota Fire and Casualty Company (Minnesota
Fire), 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,
-----------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
INCOME STATEMENT DATA <F1>:
- -------------------------
Premiums earned $ 624,905 $ 615,197 $ 477,042 $ 447,731 $ 388,541
Investment income,
net 81,783 78,008 68,445 64,366 59,198
Realized investment
gains 6,541 3,182 2,245 3,367 2,721
Total revenues 724,179 707,425 558,549 525,458 457,811
Income before
income taxes 67,281 31,375 52,642 16,832 38,572
Income taxes
(benefit) 13,209 2,695 11,311 (1,622) 6,351
Net income 54,072 28,680 41,331 18,454 31,940
Basic earnings
per share $ 1.89 $ 1.03 $ 1.53 $ .70 $ 1.24
Diluted earnings
per share $ 1.86 $ 1.02 $ 1.51 $ .69 $ 1.22
Cash dividends
per share $ .44 $ .40 $ .36 $ .33 $ .30
BALANCE SHEET DATA AT YEAR END:
- ------------------------------
Total
investments $1,451,590 $1,291,279 $1,085,151 $ 956,316 $ 908,400
Total assets 1,801,195 1,622,612 1,378,341 1,241,072 1,180,389
Debt and lease
obligations 97,440 97,715 97,965 100,195 100,405
Shareholders'
equity 446,515 370,245 345,009 276,924 267,749
Shareholders'
equity
per share $ 15.49 $ 13.09 $ 12.57 $ 10.36 $ 10.25
- --------------------
[FN]
<F1> The Company's insurance subsidiaries participate in an underwriting
pooling arrangement with Mutual. Harleysville Group's participation was
60% from January 1, 1993 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. Minnesota Fire was acquired as of October 1, 1997 and became
a participant in the pool as of January 1, 1998 at which time
Harleysville Group's participation increased to 72%. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition" and Note 3(a) of the Notes to Consolidated Financial
Statements. The presentation of earnings per share amounts prior to
1997 reflect retroactive application of a new accounting standard. See
Note 1. 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 and midwestern 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 or 1995. Beginning January 1, 1997,
Harleysville Group's participation increased to 70% and Lake States
became a participant in the pooling arrangement. Minnesota Fire
was acquired as of October 1, 1997 and became a participant in the
pooling agreement as of January 1, 1998 at which time Harleysville
Group's participation increased to 72%.
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.
1997 COMPARED TO 1996
Premiums earned increased $9.7 million for the year ended
December 31, 1997. Of such increase, $9.6 million was due to the
acquisition of Minnesota Fire. The change in pool participation
did not materially affect premiums earned. However, effective
January 1, 1997, 30% of Lake States' business was ceded to and
retained by Mutual and an additional 5% of the pooled business was
assumed from Mutual.
Investment income increased $3.8 million for the year ended
December 31, 1997 primarily resulting from an increase in invested
assets provided by operating cash flow including $29.0 million from
a cash transfer received for various insurance liabilities assumed
January 1, 1997 in connection with the increase in Harleysville
Group's pool participation. Also, invested assets increased by
$26.4 million due to the October 1, 1997 acquisition of Minnesota
Fire.
Realized investment gains increased $3.4 million for the year
ended December 31, 1997 primarily resulting from sales of equity
securities at greater gains.
Income before income taxes increased $35.9 million for the
year ended December 31, 1997 primarily due to improved underwriting
results and the higher investment income and realized investment
gains. Harleysville Group's combined ratio determined under
generally accepted accounting principles (GAAP) decreased to 103.6%
for the year ended December 31, 1997 from 108.4% for the year ended
December 31, 1996. The 1996 results were adversely affected by two
hurricanes that struck the North Carolina coast and a blizzard
which, together, resulted in losses of $28.2 million ($0.66 per
basic share after taxes) and adversely affected Harleysville
Group's 1996 combined ratio by 4.6 points. Excluding this impact,
the GAAP combined ratio improved 0.2 points primarily 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)
1997 COMPARED TO 1996 (CONTINUED)
Harleysville Group recognized favorable development in the
provision for insured events of prior years of $29.7 million and
$35.0 million in 1997 and 1996, respectively. The decreased
favorable development primarily related to a smaller variance from
expected claim severity in the automobile lines of business.
The 1997 effective tax expense rate increased to 19.6%
compared to 8.6% in 1996 primarily due to tax-exempt investment
income comprising a lower proportion of income before income taxes
in 1997.
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 ($16,200,000 in 1998) in excess of
$1,750,000 ($1,800,000 in 1998) in return for a reinsurance
premium. The agreement excludes catastrophe losses resulting from
earthquakes or hurricanes. Under this agreement, Harleysville
Group ceded to Mutual premiums earned of $2.6 million and losses
incurred of $1.6 million for 1997. Effective for one year from
July 1, 1997, 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 $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% of up to $105.8 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
$125 million for any catastrophe involving an insured loss of $167
million or greater. 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.
4
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
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 GAAP combined
ratio increased to 108.4% for the year ended December 31, 1996 from
104.0% for the year ended December 31, 1995.
The 1996 results were adversely affected by Hurricanes Fran
and Bertha that both struck the North Carolina coast and resulted
in losses of $13.0 million. In January 1996, a blizzard and
related storms resulted in losses of $15.2 million. Together,
these losses totaled $28.2 million ($0.66 per basic share after
taxes) and adversely affected Harleysville Group's 1996 combined
ratio by 4.6 points. Excluding this impact, the GAAP combined
ratio improved 0.2 points due to improved results in the personal
automobile line of business.
Harleysville Group recognized favorable development in the
provision for insured events of prior years of $35.0 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.
5
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
YEAR 2000
Harleysville Group is in the process of comprehensively
assessing and modifying, where necessary, its computer applications
to ensure their functionality with respect to the year 2000
millennium change. This process began in 1996 with an assessment
of the basic transaction processing systems, which include the
policy issuance, billing and claims systems. The modifications of
these systems is planned to be completed and tested during the
second half of 1998. Currently, Harleysville Group is completing
detailed plans for the remaining work to be done. As most of
Harleysville Group's computer systems have been internally
developed, Harleysville Group primarily is utilizing internal
resources through redeployment of existing information technology
resources. Costs incurred have not been material and, at present,
are not expected to be material in any single future year.
Year 2000 computer problems create risk for Harleysville Group
because of unforeseen problems in computer systems of its own and
of third parties with whom Harleysville Group does business.
Failure of the Harleysville Group or third party computer systems
could have a material impact on Harleysville Group's ability to
conduct its business.
Harleysville Group is in the process of reviewing the
coverages provided under insurance policies it underwrites to
evaluate the potential impact on future results of operations, if
any, of year 2000 computer problems.
NEW ACCOUNTING STANDARDS
In 1997, Statement of Financial Accounting Standards (SFAS)
No. 130, "Comprehensive Income," was issued and established
standards for the reporting and disclosure of comprehensive income
and its components (revenues, expenses, gains and losses). The
statement requires that all items that are required to be
recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
The statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement
and (b) display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
The statement is effective for fiscal years beginning after
December 31, 1997. Harleysville Group will adopt the statement in
1998.
6
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
NEW ACCOUNTING STANDARDS (CONTINUED)
In 1997, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," was issued and established
standards for the way public business enterprises report
information about operating segments in annual financial
statements. The statement requires that those enterprises report
selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas
and major customers. The statement is effective for fiscal years
beginning after December 15, 1997. Harleysville Group is in the
process of determining the effect of this statement upon its
financial reporting requirements.
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 in-
come and maturing investments. Cash outflows can be variable
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 experi-
enced more frequent catastrophes than in prior years and has been
able to pay claims without liquidating any investments. Harleys-
ville 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 $89.8 million
and $207.0 million for 1997 and 1996, respectively. The decrease
in net cash provided by operating activities in 1997 primarily
reflects the effect of amendments to the pooling agreement with
Mutual. Cash transfers of $29.0 million and $117.8 million were
received effective January 1, 1997 and 1996, respectively, by
Harleysville Group related to the various liabilities assumed in
connection with such amendments.
7
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash used by investing activities was $84.9 million and
$206.6 million for 1997 and 1996, respectively. The lower amount
in 1997 reflects the investment of the cash provided by operating
activities.
Financing activities used net cash of $5.6 million in 1997
compared to $1.5 million in 1996. The change was primarily due to
an increase in dividend payments and a decrease in the issuance of
common stock as Mutual did not reinvest its dividend from the
Company.
The Company maintained $3.8 million of cash and marketable
securities at the holding company level at December 31, 1997, 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, 1997.
As a holding company, the Company'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, 1997, $24.1 million would be available for distribution to the
Company by its subsidiaries without prior regulatory approval until
September 30, 1998, after which $57.8 million would be available
for distribution to the Company without prior approval. In 1997,
the Company's insurance subsidiaries paid dividends of $31.7
million to the Company which was used to purchase Minnesota Fire.
See the Business-Regulation section of the Company's 1997 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 9 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 has statutory capital and surplus in excess of RBC
requirements.
8
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Harleysville Group had off-balance-sheet credit risk related
to $59.0 million of premium balances due to Mutual from agents at
December 31, 1997.
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.
9
<PAGE>
EXHIBIT 13(C)
HARLEYSVILLE GROUP
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31,
-------------------------
1997 1996
---------- ----------
ASSETS
------
Investments:
Fixed maturities:
Held to maturity, at amortized
cost (fair value $643,951
and $606,770) $ 611,604 $ 587,979
Available for sale, at fair value
(cost $660,911 and $583,449) 689,806 598,193
Equity securities, at fair value
(cost $79,221 and $55,473) 121,830 69,932
Short-term investments, at cost,
which approximates fair value 28,350 35,175
---------- ----------
Total investments 1,451,590 1,291,279
Cash 1,460 2,120
Receivables:
Premiums 83,948 73,963
Reinsurance 78,750 80,163
Accrued investment income 21,253 19,527
---------- ----------
Total receivables 183,951 173,653
Deferred policy acquisition costs 72,076 68,779
Prepaid reinsurance premiums 14,504 5,444
Property and equipment, net 24,778 22,157
Deferred income taxes 18,906 30,963
Other assets 33,930 28,217
---------- ----------
Total assets $1,801,195 $1,622,612
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unpaid losses and loss
settlement expenses $ 868,393 $ 796,820
Unearned premiums 298,625 281,366
Accounts payable and accrued expenses 72,427 60,966
Debt 97,440 97,715
Due to affiliate 17,795 15,500
---------- ----------
Total liabilities 1,354,680 1,252,367
---------- ----------
Shareholders' equity:
Preferred stock, $1 par value,
authorized 1,000,000 shares;
none issued
Common stock, $1 par value,
authorized 80,000,000 shares;
shares issued and outstanding
1997, 28,821,973 and 1996,
14,139,862 28,822 14,140
Additional paid-in capital 113,646 121,033
Net unrealized investment gains,
net of deferred income taxes 46,478 18,982
Retained earnings 257,569 216,090
---------- ----------
Total shareholders' equity 446,515 370,245
---------- ----------
Total liabilities and
shareholders' equity $1,801,195 $1,622,612
========== ==========
See accompanying notes to consolidated financial statements.
10
<PAGE>
HARLEYSVILLE GROUP
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
Revenues:
Premiums earned $624,905 $615,197 $477,042
Investment income, net
of investment expense 81,783 78,008 68,445
Realized investment gains 6,541 3,182 2,245
Other income 10,950 11,038 10,817
-------- -------- --------
Total revenues 724,179 707,425 558,549
-------- -------- --------
Losses and expenses:
Losses and loss settlement
expenses 439,488 468,490 335,496
Amortization of deferred
policy acquisition costs 157,591 154,320 123,019
Other underwriting expenses 50,108 43,965 37,764
Interest expense 6,597 6,548 6,811
Other expenses 3,114 2,727 2,817
-------- -------- --------
Total expenses 656,898 676,050 505,907
-------- -------- --------
Income before income taxes 67,281 31,375 52,642
Income taxes 13,209 2,695 11,311
-------- -------- --------
Net income $ 54,072 $ 28,680 $ 41,331
======== ======== ========
Per common share:
Basic earnings $ 1.89 $ 1.03 $ 1.53
======== ======== ========
Diluted earnings $ 1.86 $ 1.02 $ 1.51
======== ======== ========
Cash dividends $ .44 $ .40 $ .36
======== ======== ========
See accompanying notes to consolidated financial statements.
11
<PAGE>
<TABLE>
<PAGE>
HARLEYSVILLE GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(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>
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
Net income 54,072 54,072
Issuance of
common stock:
Incentive plans 303,682 304 5,161 5,465
Dividend
Reinvestment
Plan 15,984 16 500 516
Tax benefit from
stock options
exercised 1,314 1,314
Cash dividends
paid (12,593) (12,593)
Two-for-one
stock split 14,362,445 14,362 (14,362)
Change in
unrealized
investment
gains (losses),
net 27,496 27,496
---------- ------- -------- ------- -------- --------
Balance at
December 31,
1997 28,821,973 $28,822 $113,646 $46,478 $257,569 $446,515
========== ======= ======== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
12
<PAGE>
HARLEYSVILLE GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 54,072 $ 28,680 $ 41,331
Adjustments to reconcile net
income to net cash provided by
operating activities:
Change in receivables, unearned
premiums, prepaid reinsurance
and due to affiliate (132) 6,282 8,717
Increase in unpaid losses
and loss settlement
expenses 2,502 56,914 42,853
Deferred income taxes (159) (6,655) 845
(Increase) decrease in deferred
policy acquisition costs 841 (9,670) (6,619)
Amortization and depreciation 1,794 1,430 1,151
Gain on sale of investments (6,541) (3,182) (2,245)
Other, net 8,430 15,380 3,460
Cash from change in
intercompany pooling
agreement 29,002 117,800
--------- --------- ---------
Net cash provided by
operating activities 89,809 206,979 89,493
--------- --------- ---------
Cash flows from investing activities:
Held to maturity investments:
Purchases (36,419) (97,062) (25,492)
Maturities 28,630 19,279 25,739
Sales 4,766
Available for sale investments:
Purchases (139,859) (244,185) (140,176)
Maturities 28,970 69,829 20,931
Sales 57,427 37,724 66,250
Net sales (purchases) or
maturities of short-term
investments 11,042 8,951 (33,802)
Acquisition, net of cash (32,920)
Purchases of property and
equipment (1,767) (1,182) (2,078)
--------- -------- ---------
Net cash used by
investing activities (84,896) (206,646) (83,862)
--------- --------- ---------
Cash flows from financing activities:
Issuance of common stock 7,295 9,936 8,022
Repayment of debt (275) (250) (2,230)
Dividends paid (12,593) (11,155) (9,751)
--------- --------- ---------
Net cash used by financing
activities (5,573) (1,469) (3,959)
--------- --------- ---------
Increase (decrease) in cash (660) (1,136) 1,672
Cash at beginning of year 2,120 3,256 1,584
--------- --------- ---------
Cash at end of year $ 1,460 $ 2,120 $ 3,256
========= ========= ========
See accompanying notes to consolidated financial statements.
13
<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)
- Minnesota Fire and Casualty Company (Minnesota Fire)
- 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 54% 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 and midwestern 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.
14
<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 3(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.
15
<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. For
disclosure purposes, pro forma net income and earnings per share
are provided in accordance with Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation."
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
In 1997, SFAS No. 128 "Earnings Per Share," was issued and
replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Basic earnings
per share are computed by dividing earnings by the weighted-average
number of common shares outstanding during the year. For
Harleysville Group, basic and primary earnings per share do not
differ for the years presented. Diluted earnings per share
includes the dilutive effect of the stock option and stock purchase
plans described in Note 11. Share and per share amounts have been
retroactively adjusted to reflect a two-for-one stock split in
1997.
16
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2 - ACQUISITION
On October 1, 1997 Harleysville Group Inc. acquired Minnesota
Fire, a property and casualty insurance company conducting business
primarily in Minnesota and neighboring states, for $33,986,000 in
cash. The acquisition was accounted for as a purchase and resulted
in goodwill of $7,028,000 which is being amortized over 40 years on
the straight-line basis. The consolidated financial statements
include the results of operations of Minnesota Fire from the date
of acquisition. Pro forma consolidated results of operations are
not presented because the amounts are not materially different from
Harleysville Group's historical results. Supplemental cash flow
information for the acquisition is as follows:
(in thousands)
Fair value of assets $112,795
Liabilities assumed 78,809
--------
Cash paid 33,986
Less cash acquired 1,066
--------
$ 32,920
========
3 - 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. Beginning January 1, 1996, Harleysville Group's
participation increased to 65% and Pennland Insurance Company
(Pennland), a subsidiary of Mutual, became a participant in the
pooling arrangement. Pennland 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 or 1995. Beginning January 1, 1997, Harleysville Group's
participation increased to 70% and Lake States became a participant
in the pooling arrangement. Minnesota Fire was acquired as of
October 1, 1997 and became a participant in the pool as of January
1, 1998, at which time Harleysville Group's participation increased
to 72%. In connection with these changes in pool participation,
Harleysville Group received cash and investments from Mutual of
$14,962,000, $29,002,000 and $117,800,000, which related to the
17
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3 - TRANSACTIONS WITH AFFILIATES (CONTINUED)
(a) UNDERWRITING (CONTINUED)
various insurance liabilities assumed on January 1, 1998, 1997 and
1996, respectively. These liabilities consist of the following at
January 1:
1998 1997 1996
-------- -------- --------
(in thousands)
Unpaid losses and loss
settlement expenses $ 12,392 $ 28,318 $ 93,966
Unearned premiums 2,271 441 22,225
Other liabilities 299 243 1,609
-------- -------- --------
$ 14,962 $ 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, 1997 and 1996. Mutual has an A. M. Best rating of "A"
(Excellent) and, in accordance with certain state regulatory
requirements, maintained $334.0 million (fair value) of investments
in a trust account to secure liabilities under the reinsurance
pooling agreement at December 31, 1997.
The following amounts represent reinsurance transactions
between Harleysville Group and Mutual under the pooling
arrangement:
1997 1996 1995
-------- -------- --------
(in thousands)
Ceded:
Premiums written $533,311 $394,787 $366,763
======== ======== ========
Premiums earned $532,456 $383,593 $349,280
======== ======== ========
Losses incurred $381,650 $280,421 $254,842
======== ======== ========
Asssumed:
Premiums written $609,270 $537,648 $417,472
======== ======== ========
Premiums earned $617,899 $505,921 $398,778
======== ======== ========
Losses incurred $433,886 $386,009 $277,182
======== ======== ========
Net assumed from Mutual:
Unearned premiums $ 25,453 $ 34,937 $ 14,405
======== ======== ========
Unpaid losses and loss
settlement expenses $205,756 $205,790 $ 96,007
======== ======== ========
18
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3 - TRANSACTIONS WITH AFFILIATES (CONTINUED)
(a) UNDERWRITING (CONTINUED)
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
($16,200,000 in 1998) in excess of $1,750,000 ($1,800,000 in 1998)
in return for a reinsurance premium. The agreement excludes
catastrophe losses resulting from earthquakes or hurricanes, and
supplements the existing external catastrophe reinsurance program.
Under this agreement, Harleysville Group ceded to Mutual premiums
earned of $2,615,000 and losses incurred of $1,616,000 for 1997.
(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, for both 1997 and 1996 and
$2,750,000 for 1995 and is included in other income after
elimination of intercompany amounts of $1,639,000, $1,552,000 and
$1,405,000 in 1997, 1996 and 1995, respectively.
(c) MANAGEMENT AGREEMENTS
Harleysville Group Inc. received $5,992,000, $6,628,000 and
$6,944,000 of management fee income in 1997, 1996 and 1995,
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
8 was $1,275,000, $1,212,000 and $1,360,000 in 1997, 1996 and 1995,
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, 1997 and 1996.
19
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - INVESTMENTS
The amortized cost and estimated fair value of investments in
fixed maturity and equity securities are as follows:
DECEMBER 31, 1997
-------------------------------------------------
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 $ 10,295 $ 527 $ (14) $ 10,808
Obligations of states
and political
subdivisions 333,946 19,250 353,196
Corporate securities 267,194 13,081 (497) 279,778
Mortgage-backed
securities 169 169
---------- ------- ------- ----------
Total held to maturity 611,604 32,858 (511) 643,951
---------- ------- ------- ----------
Available for sale:
US Treasury securities
and obligations of
US government corpora-
tions and agencies 92,742 2,655 (84) 95,313
Obligations of states
and political
subdivisions 287,507 16,667 (113) 304,061
Corporate securities 141,750 2,705 (71) 144,384
Mortgage-backed
securities 138,912 7,137 (1) 146,048
---------- ------- ------- ----------
Total available for sale 660,911 29,164 (269) 689,806
---------- ------- ------- ----------
Total fixed maturities $1,272,515 $62,022 $ (780) $1,333,757
========== ======= ======= ==========
Total equity securities $ 79,221 $43,049 $ (440) $ 121,830
========== ======= ======= ==========
20
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - INVESTMENTS (CONTINUED)
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
========== ======= ======= ==========
The amortized cost and estimated fair value of fixed maturity
securities at December 31, 1997, 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.
21
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - INVESTMENTS (CONTINUED)
ESTIMATED
AMORTIZED FAIR
COST VALUE
---------- ----------
(in thousands)
Held to maturity:
Due in one year or less $ 12,568 $ 12,623
Due after one year
through five years 110,777 116,227
Due after five years
through ten years 280,588 296,072
Due after ten years 207,502 218,860
---------- ----------
611,435 643,782
Mortgage-backed
securities 169 169
---------- ----------
611,604 643,951
---------- ----------
Available for sale:
Due in one year or less 39,128 39,403
Due after one year
through five years 130,152 134,354
Due after five years
through ten years 153,514 160,225
Due after ten years 199,205 209,776
---------- ----------
521,999 543,758
Mortgage-backed
securities 138,912 146,048
---------- ----------
660,911 689,806
---------- ----------
Total fixed maturities $1,272,515 $1,333,757
========== ==========
The amortized cost of fixed maturities on deposit with various
regulatory authorities at December 31, 1997 and 1996 amounted to
$17,665,000 and $11,312,000, respectively.
22
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - INVESTMENTS (CONTINUED)
A summary of net investment income is as follows:
1997 1996 1995
-------- -------- --------
(in thousands)
Interest on fixed maturities $79,765 $75,204 $67,428
Dividends on equity securities 1,345 776 478
Interest on short-term
investments 1,626 2,917 1,316
------- ------- -------
Total investment income 82,736 78,897 69,222
Investment expense 953 889 777
------- ------- -------
Net investment income $81,783 $78,008 $68,445
======= ======= =======
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:
1997 1996 1995
--------- -------- --------
(in thousands)
Fixed maturity securities:
Held to maturity:
Gross gains $ 255 $ 178 $ 194
Gross losses (3) (2) (44)
Available for sale:
Gross gains 1,263 69 3,079
Gross losses (223) (323) (769)
Equity securities:
Gross gains 6,934 4,716 485
Gross losses (1,685) (1,456) (700)
-------- ------- -------
Net realized investment gains $ 6,541 $ 3,182 $ 2,245
======== ======= =======
Change in difference between
fair value and cost of
investments(1):
Fixed maturity securities $ 27,707 $(27,903) $94,179
Equity securities 28,150 10,222 5,052
-------- ------- -------
Total $ 55,857 $(17,681) $99,231
======== ======== =======
(1) Parentheses indicate a net unrealized decline in fair value.
23
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - INVESTMENTS (CONTINUED)
Income taxes on realized investment gains were $2,289,000,
$1,114,000 and $786,000 for 1997, 1996 and 1995, respectively.
Deferred income taxes applicable to net unrealized investment gains
included in shareholders' equity were $25,026,000 and $10,221,000
at December 31, 1997 and 1996, respectively.
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.
5 - REINSURANCE
In the ordinary course of business, Harleysville Group cedes
insurance to, and assumes insurance from, insurers to limit its
maximum loss exposure through diversification of its risks. See
Note 3(a) for discussion of reinsurance with Mutual. Reinsurance
contracts do not relieve Harleysville Group of primary liability as
the originating insurer. After excluding reinsurance transactions
with Mutual under the pooling arrangement, the effect of
Harleysville Group's share of other reinsurance on premiums written
and earned is as follows:
24
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5 - REINSURANCE (CONTINUED)
1997 1996 1995
---------- ---------- ----------
(in thousands)
Premiums written:
Direct $620,330 $659,053 $505,198
Assumed 28,871 37,369 40,655
Ceded (32,264) (35,679) (40,375)
-------- -------- --------
Net premiums written $616,937 $660,743 $505,478
======== ======== ========
Premiums earned:
Direct $628,330 $616,543 $475,984
Assumed 30,559 37,684 40,728
Ceded (33,984) (39,030) (39,670)
-------- -------- --------
Net premiums earned $624,905 $615,197 $477,042
======== ======== ========
Losses and loss settlement expenses are net of reinsurance
recoveries of $18,401,000, $26,907,000 and $19,117,000 for 1997,
1996 and 1995, respectively.
6 - PROPERTY AND EQUIPMENT
Property and equipment consisted of land and buildings with a
cost of $28,060,000 and $25,565,000, and equipment with a cost of
$7,281,000 and $5,647,000 at December 31, 1997 and 1996,
respectively. Accumulated depreciation related to such assets was
$10,563,000 and $9,055,000 at December 31, 1997 and 1996,
respectively.
Rental expense under leases with non-affiliates amounted to
$2,941,000, $2,497,000 and $2,152,000 for 1997, 1996 and 1995,
respectively. Operating lease commitments were not material at
December 31, 1997.
25
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7 - LIABILITY FOR UNPAID LOSSES AND LOSS SETTLEMENT EXPENSES
Activity in the liability for unpaid losses and loss
settlement expenses is summarized as follows:
1997 1996 1995
--------- --------- ---------
(in thousands)
Liability at January 1 $796,820 $645,941 $603,088
Less reinsurance recoverables 78,120 69,288 67,636
-------- -------- --------
Net liability at January 1 718,700 576,653 535,452
-------- -------- --------
Net liability of acquired company 34,836
-------- -------- --------
Incurred related to:
Current year 469,216 503,489 346,383
Prior years (29,728) (34,999) (10,887)
-------- -------- --------
Total incurred 439,488 468,490 335,496
-------- -------- --------
Paid related to:
Current year 198,554 220,669 129,446
Prior years 229,225 199,740 164,849
Adjustments to beginning
reserves resulting from
change in pool
participation percentage (28,318) (93,966)
-------- -------- --------
Total paid 399,461 326,443 294,295
-------- -------- --------
Net liability at December 31 793,563 718,700 576,653
Plus reinsurance recoverables 74,830 78,120 69,288
-------- -------- --------
Liability at December 31 $868,393 $796,820 $645,941
======== ======== ========
Harleysville Group recognized favorable development in the
provision for insured events of prior years of $29,728,000,
$34,999,000 and $10,887,000 in 1997, 1996 and 1995, respectively.
The favorable development in 1997 and 1996 primarily related to
lower than expected claim severity in the workers compensation and
automobile lines of business. The 1995 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
26
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7 - 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.
8 - DEBT
Debt is as follows:
DECEMBER 31,
--------------------
1997 1996
-------- --------
(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 3,940 4,215
------- -------
$97,440 $97,715
======= =======
The fair value of the notes was $75,517,000 and $73,267,000 at
December 31, 1997 and 1996, 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 (3.85% at
December 31, 1997) 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.
27
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8 - DEBT (CONTINUED)
Interest paid was $6,493,000, $6,446,000 and $6,716,000 in
1997, 1996 and 1995, respectively.
9 - 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, 1997, $24,061,000 would be
available for distribution to Harleysville Group Inc. without prior
approval until September 30, 1998, after which $57,808,000 would be
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,
--------------------------------
1997 1996 1995
-------- -------- ---------
(in thousands)
Statutory capital and surplus $398,468 $326,455 $303,675
======== ======== ========
Statutory unassigned surplus $264,199 $209,199 $185,202
======== ======== ========
Statutory net income $ 59,658 $ 15,332 $ 36,063
======== ======== ========
28
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10 - INCOME TAXES
The components of income tax expense (benefit) are as follows:
1997 1996 1995
-------- -------- --------
(in thousands)
Current $13,368 $ 9,350 $10,466
Deferred (159) (6,655) 845
------- ------- -------
$13,209 $ 2,695 $11,311
======= ======= =======
Cash paid for federal income taxes in 1997, 1996 and 1995 was
$11,564,000, $10,100,000 and $11,201,000, respectively.
The actual income tax rate differed from the statutory federal
income tax rate applicable to income before income taxes as
follows:
1997 1996 1995
-------- -------- --------
Statutory federal income
tax rate 35.0 % 35.0 % 35.0 %
Tax-exempt interest (15.6) (26.8) (13.0)
Other, net 0.2 0.4 (0.5)
------ ----- ------
19.6 % 8.6 % 21.5 %
====== ===== ======
29
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10 - 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,
---------------------------
1997 1996
-------- --------
(in thousands)
Deferred tax liabilities:
Deferred policy acquisition
costs $25,226 $24,072
Unrealized investment gains 25,026 10,221
Other 3,755 3,501
------- -------
Total deferred tax
liabilities 54,007 37,794
------- -------
Deferred tax assets:
Unearned premiums 19,889 19,315
Losses incurred 44,788 42,060
Tax credit carryforward 96 580
Other 8,140 6,802
------- -------
Total deferred tax
assets 72,913 68,757
------- -------
Net deferred tax asset $18,906 $30,963
======= =======
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.
30
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11 - INCENTIVE PLANS
Harleysville Group applies APB Opinion No. 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:
1997 1996 1995
-------- -------- --------
(in thousands, except per share data)
Net income:
As reported $54,072 $28,680 $41,331
Pro forma $52,726 $27,691 $40,717
Basic earnings
per share:
As reported $ 1.89 $ 1.03 $ 1.53
Pro forma $ 1.85 $ .99 $ 1.50
Diluted earnings
per share:
As reported $ 1.86 $ 1.02 $ 1.51
Pro forma $ 1.82 $ .99 $ 1.49
The per share weighted-average fair value of options granted
during 1997, 1996 and 1995 was $5.36, $3.83 and $3.95,
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 1997,
1996 and 1995, respectively: dividend yield of 2.34%, 2.87% and
2.72%; expected volatility of 26.06%, 26.13% and 29.69%; risk-free
interest rate of 6.65%, 6.4% and 6.25%; and an expected life of
5.75 years for 1997 and 6.5 years for 1996 and 1995.
Fixed Stock Option Plans
- ------------------------
Harleysville Group has an Equity Incentive Plan (EIP) 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. The EIP was amended in 1997 and limited future awards
to an aggregate of 4,260,946 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.
31
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11 - 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 130,000 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% six months after 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
850,000 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, 1994 1,851,850 $10.53
Granted--1995 392,420 12.50
Exercised--1995 (260,576) 7.79
Forfeited--1995 (100,170) 13.42
--------- ------
Outstanding at
December 31, 1995 1,883,524 11.17
Granted--1996 313,520 13.27
Exercised--1996 (259,478) 7.16
Forfeited--1996 (40,200) 13.43
--------- ------
Outstanding at
December 31, 1996 1,897,366 12.01
Granted--1997 318,212 17.94
Exercised--1997 (377,622) 10.03
Forfeited--1997 (49,744) 13.43
--------- ------
Outstanding at
December 31, 1997 1,788,212 $13.45
========= ======
Exercisable at:
December 31, 1995 1,391,302 $10.81
========= ======
December 31, 1996 1,397,906 $11.67
========= ======
December 31, 1997 1,292,018 $12.39
========= ======
32
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11 - INCENTIVE PLANS (CONTINUED)
The following table summarizes information about fixed stock
options at December 31, 1997:
RANGE OF EXERCISE PRICES
------------------------------------------
$4.97-10.25 $11.13-13.75 $14.00-17.94
----------- ------------ ------------
Options outstanding at
December 31, 1997:
Number of options 176,822 1,207,278 404,112
========== ========== ==========
Weighted-average
remaining contractual
life 3.2 years 6.5 years 8.6 years
========== ========== ==========
Weighted-average
exercise price $ 8.52 $12.94 $17.11
========== ========== ==========
Options exercisable at
December 31, 1997:
Number of options 176,822 1,026,896 88,300
========== ========== ==========
Weighted-average
exercise price $ 8.52 $12.91 $14.14
========== ========== ==========
Other Stock Purchase and Incentive Plans
- ----------------------------------------
Harleysville Group Inc. is authorized to issue up to 1,000,000
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 up to a
maximum of 15% 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 97,424, 99,790 and 106,842 shares to
employees in 1997, 1996 and 1995, respectively.
33
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
11 - 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
1,000,000 shares of common stock available under the plan. There
were 38,671 and 73,864 shares issued under the plan for which
$45,000 and $69,000 of expense was recognized in 1997 and 1996,
respectively. No shares were issued prior to 1996.
The 1996 Directors' Stock Purchase Plan provides for the
issuance of up to 200,000 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. In 1997, there were 32,538 shares issued
under the plan for which $126,000 of expense was recognized. There
were no shares issued prior to 1997.
The Harleysville Group Inc. Directors' Equity Award Program,
which was adopted in 1996, granted directors a one-time award
totaling 45,168 shares of restricted common stock with a fair value
of $13.25 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 $56,000 and $31,000
associated with this award program was recognized in 1997 and 1996,
respectively.
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 $842,000, $627,000
and $1,161,000 for 1997, 1996 and 1995, respectively.
12 - 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.
34
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12 - PENSION AND OTHER BENEFIT PLANS (CONTINUED)
The following table sets forth the year-end funded status of
the plan including Mutual:
1997 1996
--------- ---------
(in thousands)
Actuarial present value of benefit
obligations:
Accumulated benefit obligation,
including vested benefits of
$64,392,000 and $49,746,000 $(67,595) $(51,394)
======== ========
Projected benefit obligation for
service rendered to date $(83,760) $(66,546)
Plan assets at fair value (primarily
listed stocks and fixed income
securities) 87,154 63,161
-------- --------
Plan assets in excess of (less than)
projected benefit obligation 3,394 (3,385)
Unrecognized net gain due to
past experience different from
that assumed and effects of
changes in assumptions (14,036) (2,893)
Prior service cost not yet
recognized in net periodic
pension cost 3,834 2,444
Unrecognized net transition asset
being recognized over 14 years (544) (714)
-------- --------
Accrued pension cost --
entire plan $ (7,352) $ (4,548)
======== ========
35
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12 - PENSION AND OTHER BENEFIT PLANS (CONTINUED)
The net periodic pension cost for the plan including Mutual
includes the following components:
1997 1996 1995
--------- -------- --------
(in thousands)
Service cost--benefits
earned during the
period $ 3,825 $ 3,679 $ 3,123
Interest cost on
projected benefit
obligation 5,270 4,548 3,938
Actual return on
plan assets (20,866) (10,273) (10,433)
Net amortization and
deferral 16,990 7,303 7,709
-------- -------- --------
Net periodic pension
cost:
Entire plan $ 5,219 $ 5,257 $ 4,337
======== ======== ========
Harleysville Group
portion $ 3,365 $ 3,286 $ 2,493
======== ======== ========
In determining the actuarial present value of the projected
benefit obligation, the weighted-average discount rate was 7.25%,
7.75% and 7.5% for 1997, 1996 and 1995, respectively. The rate of
increase in future compensation levels was 4.5% for 1997, 5.0% for
1996 and 5.5% for 1995. 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 $236,000, $218,000
and $175,000 for 1997, 1996 and 1995, respectively.
Harleysville Group has profit-sharing plans covering qualified
employees. Harleysville Group's expense under the plans was
$2,450,000, $1,526,000 and $1,314,000 for 1997, 1996 and 1995,
respectively.
36
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13 - EARNINGS PER SHARE
The computation of basic and diluted earnings per share is as
follows:
1997 1996 1995
--------- -------- --------
(dollars in thousands, except per share data)
Numerator for basic
and diluted earnings
per share:
Net income $ 54,072 $ 28,680 $ 41,331
======== ======== ========
Denominator for basic
earnings per share --
weighted-average
shares outstanding 28,573,192 27,844,116 27,064,742
Effect of stock
incentive plans 458,846 236,330 243,359
-------- -------- --------
Denominator for
diluted earnings
per share 29,032,038 28,080,446 27,308,101
========== ========== ==========
Basic earnings
per share $ 1.89 $ 1.03 $ 1.53
======== ======== ========
Diluted earnings
per share $ 1.86 $ 1.02 $ 1.51
======== ======== ========
37
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14 - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
1997
--------------------------------------------------
(in thousands, except per share data)
FIRST SECOND THIRD FOURTH TOTAL
--------- -------- -------- -------- --------
Revenues $180,182 $178,754 $179,893 $185,350 $724,179
Losses and
expenses 167,368 162,491 159,583 167,456 656,898
Net income 10,832 13,164 15,830 14,246 54,072
Earnings per
common share:
Basic $ .38 $ .46 $ .55 $ .50 $ 1.89
Diluted $ .38 $ .46 $ .54 $ .49 $ 1.86
1996
--------------------------------------------------
(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:
Basic $ .03 $ .42 $ .13 $ .45 $ 1.03
Diluted $ .03 $ .42 $ .12 $ .44 $ 1.02
38
<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, 1997 and 1996, 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, 1997. 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, 1997 and 1996,
and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
February 16, 1998
39
<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 3, 1998, the approximate number of holders of
record of Harleysville Group Inc.'s common stock was 2,766
(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
$0.115 per share paid in each of the third and fourth quarters of
1997 is expected to continue during 1998. 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 9 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
1997 HIGH LOW DECLARED
--------------------------------------------------
First Quarter $15.90 $14.65 $.105
Second Quarter 17.98 16.52 .105
Third Quarter 20.98 19.10 .115
Fourth Quarter 26.52 22.00 .115
--------------------------------------------------
CASH
DIVIDENDS
1996 HIGH LOW DECLARED
--------------------------------------------------
First Quarter $16.00 $13.25 $.095
Second Quarter 14.63 12.63 .095
Third Quarter 14.38 12.25 .105
Fourth Quarter 15.38 13.00 .105
--------------------------------------------------
40
<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
Minnesota Fire and Casualty
Company Minnesota
New York Casualty Insurance
Company New York
Worcester Insurance Company Massachusetts
1
<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 16, 1998
include the related financial statement schedules as of December
31, 1997 and for each of the years in the three-year period ended
December 31, 1997 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 16, 1998
relating to the consolidated balance sheets of Harleysville Group
as of December 31, 1997 and 1996, 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, 1997 which report appears in
the December 31, 1997 annual report on Form 10-K of Harleysville
Group Inc. and of our report dated March 16, 1998 relating to the
statements of financial condition of Harleysville Group Inc.
Employee Stock Purchase Plan as of December 31, 1997 and 1996, and
the related statements of income and changes in plan equity for
each of the years in the three-year period ended December 31, 1997,
which report appears in the Harleysville Group Inc. Employee Stock
Purchase Plan annual report on Form 11-K.
/s/ KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
March 25, 1998
<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, 1997
---------------------------------------
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, 1997
Financial Statements
- --------------------
Page
----
Independent Auditors' Report 3
Statements of Financial Condition
as of December 31, 1997 and
1996 4
Statements of Income and Changes in
Plan Equity for each of the years
in the three-year period ended
December 31, 1997 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 accompanying statements of financial condition
of Harleysville Group Inc. Employee Stock Purchase Plan as of
December 31, 1997 and 1996, and the related statements of income
and changes in plan equity for each of the years in the three-year
period ended December 31, 1997. 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, 1997 and 1996, and the income and changes in its plan equity
for each of the years in the three-year period ended December 31,
1997 in conformity with generally accepted accounting principles.
/s/KPMG PEAT MARWICK LLP
Philadelphia, Pennsylvania
March 16, 1998
3
<PAGE>
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
STATEMENTS OF FINANCIAL CONDITION
AS OF
DECEMBER 31,
--------------------
1997 1996
-------- --------
Assets
- ------
Receivable from affiliate $676,722 $542,767
======== ========
Plan Equity
- -----------
Net assets available for
plan participants $676,722 $542,767
======== ========
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,
---------------------------------------
1997 1996 1995
------------ ------------ -----------
Contributions - Employees $ 1,355,248 $ 1,179,486 $1,069,528
Purchase and distribution
of Harleysville Group Inc.
stock to employees (1,174,483) (1,102,646) (1,012,258)
Employee withdrawals and
terminations (46,810) (28,108) (47,842)
------------ ----------- ----------
Net increase 133,955 48,732 9,428
Plan equity beginning of
year 542,767 494,035 484,607
----------- ----------- ----------
Plan equity end of year $ 676,722 $ 542,767 $ 494,035
=========== =========== ==========
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
no more than 15 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, 1997, there were 672 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 1,000,000 shares of common 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, 1997, there are approximately 689,576 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, 1998, 45,384 shares of stock were purchased at
a subscription price of $15.94 per share on behalf of the plan
participants for the subscription period ended January 14, 1998.
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 25, 1998 By: /s/BRUCE J. MAGEE
------------------ ---------------------------
Bruce J. Magee, Member,
Administrative Committee for
Harleysville Group Inc.
Employee Stock Purchase Plan
8
<PAGE>
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<NAME> HARLEYSVILLE GROUP INC.
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0
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<INCOME-PRETAX> 67,281
<INCOME-TAX> 13,209
<INCOME-CONTINUING> 54,072
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