SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
-------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission file number 0-14697
--------------
HARLEYSVILLE GROUP INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0241172
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
355 MAPLE AVENUE, HARLEYSVILLE, PENNSYLVANIA 19438-2297
----------------------------------------------------------
(Address of principal executive offices, including zip code)
(215) 256-5000
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports) and (2) has
been subject to such filing requirements for the past 90 days.
Yes X . No .
----- ------
At May 1, 1998 28,985,537 shares of common stock of Harleysville Group
Inc. were outstanding.
1
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
INDEX
Page Number
-----------
Part I - Financial Information
Consolidated Balance Sheets - March 31, 1998 and
December 31, 1997 3
Consolidated Statements of Income - For the
three months ended March 31, 1998 and 1997 4
Consolidated Statement of Shareholders' Equity -
For the three months ended March 31, 1998 5
Consolidated Statements of Cash Flows -
For the three months ended March 31, 1998
and 1997 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Part II - Other Information 12
2
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, DECEMBER 31,
1998 1997
------------ -----------
(Unaudited)
ASSETS
------
Investments:
Fixed maturities:
Held to maturity, at amortized
cost (fair value $673,158
and $643,951) $ 642,565 $ 611,604
Available for sale, at fair value
(amortized cost $671,588 and
$660,911) 697,905 689,806
Equity securities, at fair value
(cost $82,686 and $79,221) 140,994 121,830
Short-term investments, at cost,
which approximates fair value 11,217 28,350
---------- ----------
Total investments 1,492,681 1,451,590
Cash 23,475 1,460
Receivables:
Premiums 81,408 83,948
Reinsurance 82,254 78,750
Accrued investment income 20,853 21,253
---------- ----------
Total receivables 184,515 183,951
Deferred policy acquisition costs 73,668 72,076
Prepaid reinsurance premiums 11,118 14,504
Property and equipment, net 24,656 24,778
Deferred income taxes 15,834 18,906
Other assets 34,590 33,930
---------- ----------
Total assets $1,860,537 $1,801,195
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unpaid losses and loss
settlement expenses $ 893,417 $ 868,393
Unearned premiums 302,874 298,625
Accounts payable and accrued expenses 89,120 72,427
Debt 97,440 97,440
Due to affiliate 9,471 17,795
---------- ----------
Total liabilities 1,392,322 1,354,680
---------- ----------
Shareholders' equity:
Preferred stock, $1 par value, authorized
1,000,000 shares; none issued
Common stock, $1 par value, authorized
80,000,000 shares; issued and
outstanding 28,967,604 and
28,821,973 shares 28,968 28,822
Additional paid-in capital 116,098 113,646
Accumulated other comprehensive income 55,006 46,478
Retained earnings 268,143 257,569
---------- ----------
Total shareholders' equity 468,215 446,515
---------- ----------
Total liabilities and
shareholders' equity $1,860,537 $1,801,195
========== ==========
See accompanying notes to consolidated financial statements.
3
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(dollars in thousands, except per share data)
1998 1997
-------- --------
Revenues:
Premiums earned $162,632 $156,381
Investment income, net of
investment expense 21,235 20,591
Realized investment gains 3,648 466
Other income 2,990 2,744
-------- --------
Total revenues 190,505 180,182
-------- --------
Losses and expenses:
Losses and loss settlement expenses 116,291 114,783
Amortization of deferred policy
acquisition costs 41,112 39,455
Other underwriting expenses 13,298 10,800
Interest expense 1,640 1,641
Other expenses 885 689
-------- --------
Total expenses 173,226 167,368
-------- --------
Income before income taxes 17,279 12,814
Income taxes 3,377 1,982
-------- --------
Net income $ 13,902 $ 10,832
======== ========
Per common share:
Basic earnings $ . 48 $ . 38
======== ========
Diluted earnings $ . 47 $ . 38
======== ========
Cash dividend $ .115 $ .105
======== ========
See accompanying notes to consolidated financial statements.
4
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(dollars in thousands)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
PAID-IN COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL INCOME EARNINGS TOTAL
--------- ------- ---------- --------- -------- ------
Balance,
December 31,
1997 28,821,973 $28,822 $113,646 $46,478 $257,569 $446,515
--------
Net income 13,902 13,902
Other compre-
hensive income,
net of tax:
Unrealized
investment
gains, net of
reclassification
adjustment 8,528 8,528
--------
Comprehensive
income 22,430
--------
Issuance of
common stock 145,631 146 2,452 2,598
Cash dividend
paid (3,328) (3,328)
--------- ------ -------- ------- -------- --------
Balance,
March 31,
1998 28,967,604 $28,968 $116,098 $55,006 $268,143 $468,215
========== ======= ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
5
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(in thousands)
1998 1997
--------- ---------
Cash flows from operating activities:
Net income $ 13,902 $ 10,832
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in receivables, unearned
premiums, prepaid reinsurance
and due to affiliate (4,177) 8,940
Increase in unpaid losses and
loss settlement expenses 12,632 1,917
Deferred income taxes (1,520) (1,115)
Increase in deferred policy
acquisition costs (1,592) (358)
Amortization and depreciation 618 366
Gain on sale of investments (3,648) (466)
Other, net 16,146 (8,360)
Cash from change in intercompany
pooling agreement 14,962 29,002
-------- ---------
Net cash provided by operating
activities 47,323 40,758
-------- ---------
Cash flows from investing activities:
Fixed maturity investments:
Purchases (81,890) (80,266)
Sales or maturities 40,961 31,905
Equity securities:
Purchases (9,097) (16,560)
Sales 8,711 3,847
Net sales of short-term investments 17,133 22,858
Purchase of property and equipment (396) (149)
-------- ---------
Net cash used by investing
activities (24,578) (38,365)
-------- ---------
Cash flows from financing activities:
Issuance of common stock 2,598 1,871
Dividend paid (3,328) (2,984)
-------- ---------
Net cash used by
financing activities (730) (1,113)
-------- ---------
Increase in cash 22,015 1,280
Cash at beginning of period 1,460 2,120
-------- ---------
Cash at end of period $ 23,475 $ 3,400
======== =========
See accompanying notes to consolidated financial statements.
6
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - Basis of Presentation
The financial information for the interim periods included herein
is unaudited; however, such information reflects all adjustments
which are, in the opinion of management, necessary to a fair
presentation of the financial position, results of operations,
and cash flows for the interim periods. The results of operations
for interim periods are not necessarily indicative of results to
be expected for the full year.
These financial statements should be read in conjunction with the
financial statements and notes for the year ended December 31, 1997
included in the Company's 1997 Annual Report filed with the
Securities and Exchange Commission on Form 10-K.
2 - Earnings Per Share
The computation of basic and diluted earnings per share is as follows
for the three months ended March 31:
1998 1997
--------- ---------
(dollars in thousands,
except per share data)
Numerator for basic
and diluted earnings
per share:
Net income $ 13,902 $ 10,832
======== ========
Denominator for basic
earnings per share --
weighted average
shares outstanding 28,912,067 28,382,272
Effect of stock
incentive plans 556,009 262,323
---------- ----------
Denominator for
diluted earnings
per share 29,468,076 28,644,595
========== ==========
Basic earnings
per share $ .48 $ .38
======== ========
Diluted earnings
per share $ .47 $ .38
======== ========
7
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3 - Reinsurance
Premiums earned are net of amounts ceded of $9,870,000 and $6,535,000
for the three months ended March 31, 1998 and 1997, respectively.
Losses and loss settlement expenses are net of amounts ceded of
$10,539,000 and $3,700,000 for the three months ended March 31,
1998 and 1997, respectively. Such amounts do not include the
reinsurance transactions with Mutual under the pooling arrangement.
Harleysville Group has a reinsurance agreement with Harleysville
Mutual Insurance Company (Mutual) whereby Mutual reinsures accumulated
catastrophe losses in a quarter up to $16,200,000 ($15,750,000 in
1997) in excess of $1,800,000 ($1,750,000 in 1997) in return for a
reinsurance premium. The agreement excludes catastrophe losses
resulting from earthquakes or hurricanes, and supplements the
existing external catastrophe reinsurance program. Harleysville
Group ceded premiums earned of $684,000 and $612,00,000 and
$490,000 to Mutual for the three months ended March 31, 1998
and 1997, respectively.
Harleysville Group cedes business to and assumes business from
Mutual under a reinsurance pooling agreement. Because this agreement
does not relieve Harleysville Group of primary liability as the
originating insurer, there is a concentration of credit risk
arising from business ceded to Mutual. However, the reinsurance
pooling agreement provides for the right of offset and the net
balance with Mutual is a liability at March 31, 1998 and December
31, 1997. Mutual has an A. M. Best rating of "A" (Excellen
a in state regulatory requirements, maintained $338.3 million
(fair value) of investments in a trust account to secure liabilities
under the reinsurance pooling agreement at March 31, 1998.
4 - Cash Flows
There were no cash tax payments in the first quarter of 1998 or 1997.
Cash interest payments of $311,000 and $308,000 were made in the first
quarter of 1998 and 1997, respectively.
8
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5 - Comprehensive Income
In 1997, Statement of Financial Accounting Standards 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. Harleysville
Group adopted the statement in 1998.
Other comprehensive income (losses) for the three months ended
March 31, 1998 and 1997 consisted of the following (all amounts are net
of taxes):
1998 1997
-------- --------
Unrealized investment holding
gains (losses) arising
during period $10,856 $(6,772)
Less:
Reclassification adjustment
for gains included in net
income (2,328) (222)
------- -------
Net unrealized investment
gains (losses) $ 8,528 $(6,994)
======= =======
Comprehensive income for the three months ended March 31, 1997 was
$3,838,000 and included net income of $10,832,000 and other comprehensive
loss, net of tax of $6,994,000.
9
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Effective January 1, 1998 Harleysville Group's pooling agreement with
Harleysville Mutual Insurance Company (Mutual) was amended to include
Minnesota Fire and Casualty Company (Minnesota Fire), a wholly-owned
subsidiary of Harleysville Group Inc. that writes insurance primarily
in Minnesota and neighboring states. In addition, Harleysville Group's
participation increased from 70% to 72%.
Premiums earned increased $6.3 million during the three months ended
March 31, 1998 as compared to the three months ended March 31, 1997.
The increase is primarily due to Minnesota Fire which was acquired on
October 1, 1997, partially offset by a decline in workers compensation
premiums due to lower rates.
Investment income increased $0.6 million for the three months ended
March 31, 1998 resulting from an increase in invested assets. Such
increase was primarily provided by cash flow from operations including
a $15.0 million cash transfer received for various insurance liabilities
assumed January 1, 1998 in connection with the change in Harleysville
Group's pool participation.
Realized investment gains were $3.2 million higher for the three months
ended March 31, 1998 compared to the same prior year quarter primarily
resulting from greater sales of equity securities.
Income before income taxes increased $4.5 million for the three months
ended March 31, 1998, primarily due to improved underwriting results,
higher investment income and higher realized gains. Harleysville Group's
statutory combined ratio decreased to 104.0% for the three months ended
March 31, 1998 from 106.4% for the three months ended March 31, 1997
primarily due to improved results in the personal automobile line of
business. Losses ceded under the aggregate catastrophe reinsurance
agreement with Mutual increased by $4.1 million for the three months
ended March 31, 1998 primarily due to an ice storm in upstate New York.
The effect of catastrophes, net of reinsurance, on income before income
taxes was essentially the same for the three months ended March 31, 1998
and 1997.
The income tax expense for each of the three month periods ended March 31,
1998 and 1997 includes the tax benefit of tax-exempt investment income of
$2.7 million and $2.5 million, respectively.
10
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Liquidity and Capital Resources
Net cash provided by operating activities for the first quarter was
$47.3 million and $40.8 million in 1998 and 1997, respectively. The
increase primarily is from an increase in other liabilities due to $20.6
million of cash received as collateral for security lending transactions,
offset by the effect of the amendments to the pooling agreement with
Mutual. Cash transfers of $15.0 million and $29.0 million were received,
effective January 1, 1998 and 1997, respectively, by Harleysville Group
related to the various liabilities assumed in connection with such
amendments.
Net cash used by investing activities was $24.6 million and $38.4 million
for the three months ended March 31, 1998 and 1997, respectively.
The decrease is primarily due to the lower amount of cash provided by
the change in the pooling agreement participation.
Net cash used by financing activities decreased $0.4 million for the
three months ended March 31, 1998 primarily due to an increase in the
issuance of common stock.
Harleysville Group Inc. maintained $3.1 million of cash and investments
at the holding company level at March 31, 1998 which are available for
general corporate purposes including dividends, debt service, capital
contributions to subsidiaries and acquisitions. The Company has no
material commitments for capital expenditures as of March 31, 1998.
New Accounting Standards
In March 1998, the AICPA issued Statement of Position (SOP) 98-1,
Accounting for Costs of Computer Software Developed or Obtained for
Internal Use. This SOP requires that certain costs related to the
development or purchase of internal-use software be capitalized and
amortized over the estimated useful life of the software. This SOP
also requires that costs related to the preliminary project stage and
the post implementation/operations stage in an internal-use computer
software development project be expensed as incurred. SOP 98-1 is
effective for financial statements issued for fiscal years being after
December 15, 1998. The Company, which expects to adopt this SOP on
January 1, 1999, is currently assessing its impact on the Company's
financial reporting.
11
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of Harleysville Group Inc. was held
on April 22, 1998 (the "Annual Meeting" or "Meeting"), with the following
result:
The total number of shares represented at the Annual Meeting in person
or by proxy was 27,129,386 of the 28,922,449 shares of common stock
outstanding and entitled to vote at the Meeting.
On the resolution to elect Bradford W. Mitchell, Lowell R. Beck and
Robert D. Buzzell as class "A" Directors to serve until the expiration
of their respective terms and until their successors are duly elected,
the nominees for Director received the number of votes set forth opposite
their respective names:
Number of Votes
---------------------
For Withheld
---------- --------
Bradford W. Mitchell 27,092,177 37,209
Lowell R. Beck 27,094,270 35,116
Robert D. Buzzell 27,092,794 36,592
There were no abstentions or broker non-votes recorded. On the basis of
the above vote, Bradford W. Mitchell, Lowell R. Beck and Robert D. Buzzell
were elected as class "A" Directors to serve until the expiration of their
respective terms and until their successors are duly elected.
12
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
(Continued)
ITEM 5. Other Information - None
ITEM 6. a. Exhibits - None
b. Reports on Form 8-K - None
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARLEYSVILLE GROUP INC.
Date: May 11, 1998 /s/BRUCE J. MAGEE
--------------- -------------------------------
Bruce J. Magee
Senior Vice President and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<CIK> 0000792013
<NAME> HARLEYSVILLE GROUP INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 697,905
<DEBT-CARRYING-VALUE> 642,565
<DEBT-MARKET-VALUE> 673,158
<EQUITIES> 140,994
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,492,681
<CASH> 23,475
<RECOVER-REINSURE> 5,400
<DEFERRED-ACQUISITION> 73,668
<TOTAL-ASSETS> 1,860,537
<POLICY-LOSSES> 893,417
<UNEARNED-PREMIUMS> 302,874
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 97,440
0
0
<COMMON> 28,968
<OTHER-SE> 439,247
<TOTAL-LIABILITY-AND-EQUITY> 1,860,537
162,632
<INVESTMENT-INCOME> 21,235
<INVESTMENT-GAINS> 3,648
<OTHER-INCOME> 2,990
<BENEFITS> 116,291
<UNDERWRITING-AMORTIZATION> 41,112
<UNDERWRITING-OTHER> 15,823
<INCOME-PRETAX> 17,279
<INCOME-TAX> 3,377
<INCOME-CONTINUING> 13,902
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,902
<EPS-PRIMARY> 0.48
<EPS-DILUTED> 0.47
<RESERVE-OPEN> 796,563
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 816,563
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
