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, 1999.
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF T
HE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
------------- ------------
Commission file number 0-14697
HARLEYSVILLE GROUP INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0241172
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
355 Maple Avenue, Harleysville, PA 19438-2297
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 256-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 par value
--------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that
the Registrant was required to file such reports) and
(2) has been subject to such filing requirements for
the past 90 days. Yes X . No .
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this
Form 10-K [X].
On March 9, 2000, 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
$160,651,706.
Indicate the number of shares outstanding of each of
the Registrant's classes of common stock, as of the
latest practicable date: 28,890,846 shares of Common
Stock outstanding on March 9, 2000.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's annual report to
stockholders for the fiscal year ended December
31, 1999 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 26, 2000 are
incorporated by reference in Parts I and III of this report.
<PAGE>
HARLEYSVILLE GROUP INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 1999
PART I PAGE
------ ----
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 26
ITEM 3. LEGAL PROCEEDINGS 26
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 26
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS 30
ITEM 6. SELECTED FINANCIAL DATA 30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 30
ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 30
PART III
--------
ITEM10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT 31
ITEM11. EXECUTIVE COMPENSATION 31
ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 31
ITEM13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 31
PART IV
-------
ITEM14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 32
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
Mutual Insurance Company (the "Mutual Company") owns
approximately 57% of the issued and outstanding common stock of
Harleysville Group.
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 19,800 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, and
Virginia. 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 has followed 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 regionally 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 sixteen 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
3
<PAGE>
1905. In 1991, the Company acquired Mid-America (formerly named
Connecticut Union Insurance Company), which conducted business in
Connecticut, and New York Casualty, which conducts business in
upstate New York. In 1993, the Company acquired Lake States,
which primarily conducts business in Michigan. In 1994, the
Company formed Great Oaks which began underwriting property and
casualty insurance in Ohio. 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 of a portion of the
Company's common stock then owned by it, further reducing the
percentage of outstanding shares owned by the Mutual Company. At
December 31, 1999, the Mutual Company owned approximately 57% of
the Company's outstanding shares.
(b) FINANCIAL INFORMATION ABOUT SEGMENTS.
Harleysville Group has three segments which consist of the
personal lines of insurance, the commercial lines of insurance
and the investment function. Financial information about these
segments is set forth in Note 15 of the Notes to Consolidated
Financial Statements.
4
<PAGE>
(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 1998 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,
---------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
PREMIUMS EARNED
- ---------------
Commercial:
Automobile $140,100 $124,305 $110,128
Workers compensation 113,685 105,918 113,832
Commercial multi-peril 150,382 138,931 127,247
Other 33,944 32,795 28,581
-------- -------- --------
Total commercial 438,111 401,949 379,788
-------- -------- --------
Personal:
Automobile 180,264 173,503 162,416
Homeowners 77,364 78,341 72,800
Other 11,461 10,811 9,901
-------- -------- --------
Total personal 269,089 262,655 245,117
-------- -------- --------
Total Harleysville
Group Business $707,200 $664,604 $624,905
======== ======== ========
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,
------------------------
1999 1998 1997
------ ------ ------
GAAP combined ratio 108.3% 103.6% 103.6%
===== ===== =====
Statutory operating ratios:
Loss ratio 73.9 69.9% 70.3%
Expense and dividend ratios 33.9% 33.3% 33.2%
----- ----- -----
Statutory combined ratio 107.8% 103.2% 103.5%
===== ===== =====
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.
7
<PAGE>
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.
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,
-----------------------------------
1999 1998 1997
---------- -------- --------
(dollars in thousands)
PREMIUMS WRITTEN
- ----------------
Commercial:
Automobile $ 200,678 $182,972 $154,833
Workers compensation 158,660 147,981 146,267
Commercial multi-peril 220,410 202,043 184,547
Other 49,177 47,469 37,924
---------- -------- --------
Total commercial 628,925 580,465 523,571
---------- -------- --------
Personal:
Automobile 258,463 245,786 228,689
Homeowners 112,203 111,195 102,791
Other 16,066 15,674 14,031
---------- -------- --------
Total personal 386,732 372,655 345,511
---------- -------- --------
Total pooled business $1,015,657 $953,120 $869,082
========== ======== ========
COMBINED RATIO <F1>
- ----------------
Commercial:
Automobile 116.4% 108.4% 109.7%
Workers compensation 88.5% 98.8% 93.2%
Commercial multi-peril 117.7% 119.2% 116.0%
Other 108.6% 97.3% 104.0%
Total commercial 109.1% 108.8% 106.7%
Personal:
Automobile 99.3% 98.1% 100.3%
Homeowners 120.6% 123.3% 100.8%
Other 96.2% 97.0% 69.5%
Total personal 105.4% 105.6% 99.2%
Total pooled business 107.7% 107.5% 103.8%
- ----------------
[FN]
<F1> See the definition of combined ratio in "Business-Property
and Casualty Underwriting".
9
<PAGE>
The combined ratio for the total pooled business differs
from Harleysville Group's combined ratio primarily because of the
effect of the aggregate catastrophe reinsurance agreement with
the Mutual Company. See Notes 3(a) and 15 of the Notes to
Consolidated Financial Statements and Business-Reinsurance.
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,
---------------------------------------
1999 1998 1997
----------- ----------- ----------
(in thousands)
Reserves for losses
and loss settlement
expenses, beginning
of the year $1,172,664 $1,124,910 $1,033,376
---------- ---------- ----------
Adjustment to beginning
of the year reserves
for the addition of
Minnesota Fire (1998)
and Lake States (1997) 33,353 71,544
---------- ---------- ----------
Incurred losses and loss
settlement expenses:
Provision for insured
events of the current
year 816,931 744,842 662,468
Decrease in provision
for insured events of
prior years (82,024) (56,223) (37,720)
---------- ---------- ----------
Total incurred
losses and loss
settlement expenses 734,907 688,619 624,748
---------- ---------- ----------
Payments:
Losses and loss
settlement expenses
attributable to
insured events of
the current year 367,979 335,841 276,067
Losses and loss
settlement expenses
attributable to
insured events of
prior years 358,526 338,377 328,691
---------- ---------- ----------
Total payments 726,505 674,218 604,758
---------- ---------- ----------
Reserves for losses and
loss settlement expenses,
end of the year $1,181,066 $1,172,664 $1,124,910
========== ========== ==========
11
<PAGE>
The following table sets forth the development of net
reserves for unpaid losses and loss settlement expenses from 1989
through 1999 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 nine years, in
that reestimated losses and loss settlement expenses are expected
to exceed the initial estimated liability established in 1990 of
$676.5 million by $9.2 million, or 1.4%.
The "Cumulative amount of reserves paid" portion of the
table shows the cumulative losses and loss settlement expense
payments made in succeeding years for losses incurred prior to
the balance sheet date. For example, the 1990 column indicates
that as of December 31, 1999, payments of $623.3 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, 1999 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 1999 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
<PAGE>
<TABLE>
<CAPTION>
TOTAL POOLED BUSINESS
YEAR ENDED DECEMBER 31,
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
------- ------- -------- ------- ------- ------- ------- ---------- --------- --------- ---------
(dollars in thousands)
Reserve for
losses and
loss
settlement
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
expenses $610,128 $676,526 $742,989 $784,514 $825,028 $855,305 $900,336 $1,033,376 $1,124,910 $1,172,664 $1,181,066
Reserves
reestimated:
One year
later 597,709 661,323 739,030 781,746 819,494 837,255 856,493 995,656 1,068,687 1,090,640
Two years
later 598,263 668,740 738,557 778,064 802,213 817,330 820,894 961,228 1,005,208
Three years
later 608,568 673,043 737,408 774,420 800,129 800,365 799,191 918,006
Four years
later 612,455 676,021 736,458 776,687 792,901 790,234 768,704
Five years
later 616,796 678,390 742,878 770,420 786,731 768,815
Six years
later 620,632 686,076 741,032 767,777 771,015
Seven years
later 627,462 689,367 741,941 756,912
Eight years
later 632,778 691,025 733,082
Nine years
later 634,248 685,708
Ten years
later 630,958
Cumulative
amount of
reserves paid:
One year
later 200,569 220,747 236,833 244,210 255,078 246,935 273,744 328,691 338,377 358,526
Two years
later 326,313 363,109 383,358 402,394 403,601 406,944 448,497 523,307 540,522
Three years
later 418,355 459,024 485,045 503,309 511,281 525,840 566,804 656,234
Four years
later 475,044 524,757 550,456 572,656 587,900 599,336 643,451
Five years
later 513,573 563,807 594,452 616,940 629,908 645,271
Six years
later 537,609 589,477 619,780 639,186 657,570
Seven years
later 552,083 605,440 633,771 656,913
Eight years
later 562,642 615,239 645,576
Nine years
later 569,841 623,323
Ten years
later 575,484
Redundancy
(defi-
ciency) (20,830) (9,182) 9,907 27,602 54,013 86,490 131,632 115,370 119,702 82,024
Redundancy
(deficiency)
expressed as
a percent
of year end
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
reserves (3.4)% (1.4)% 1.3% 3.5% 6.5% 10.1% 14.6% 11.2% 10.6% 7.0%
Cumulative
redundancy
excluding
pre-1986
reserve
develop-
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ment<F1> 8,689 17,633 32,687 47,506 72,890 103,706 145,307 124,300 123,721 83,556
<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,
--------------------------------
1999 1998 1997
-------- --------- --------
(in thousands)
Reserves for losses and
loss settlement expenses,
beginning of the year $813,519 $793,563 $718,700
-------- -------- --------
Reserves of acquired company 34,836
-------- -------- --------
Incurred losses and loss
settlement expenses:
Provision for insured
events of the current
year 582,534 507,087 469,216
Decrease in provision
for insured events of
prior years (59,532) (42,607) (29,728)
-------- -------- --------
Total incurred losses
and loss settlement
expenses 523,002 464,480 439,488
-------- -------- --------
Payments:
Losses and loss settlement
expenses attributable to
insured events of the
current year 259,635 215,902 198,554
Losses and loss settlement
expenses attributable to
insured events of prior
years 252,972 241,014 229,225
Adjustment to beginning of
the year reserves resulting
from the change in the pool
participation percentage (12,392) (28,318)
-------- -------- --------
Total payments 512,607 444,524 399,461
-------- -------- --------
Reserves for losses and loss
settlement expenses, end
of the year $823,914 $813,519 $793,563
======== ======== ========
14
<PAGE>
Harleysville Group recognized a decrease in the provision
for insured events of prior years (favorable development) of
$59.5, $42.6 and $29.7 million in 1999, 1998 and 1997,
respectively. The favorable development primarily related to
lower than expected claim severity in the workers compensation
and automobile lines of business.
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 1990 column of the "Cumulative
amount of reserves paid" portion of the table reflects the assets
transferred in conjunction with the 1991 increase in the pooling
percentage from 50% to 60% 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,
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-------- ------- -------- ------- ------- ------- ------- ------- ------- ------- -------
(dollars in thousands)
Reserve for
losses
and loss
settlement
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
expenses $259,522 $300,197 $406,619 $437,883 $499,272 $535,452 $576,653 $718,700 $793,563 $813,519 $823,914
Reserves
reestimated:
One year
later 251,960 291,629 405,749 438,135 496,057 524,565 541,654 688,972 750,956 753,987
Two years
later 249,871 294,354 404,849 435,005 483,635 507,090 513,555 662,393 704,157
Three years
later 254,329 296,320 403,240 430,728 477,164 491,919 496,138 630,170
Four years
later 256,045 297,187 400,579 429,125 468,804 482,834 473,084
Five years
later 257,653 296,517 401,675 421,408 462,571 466,309
Six years
later 257,828 298,436 397,275 417,715 450,152
Seven years
later 259,184 297,598 396,139 408,789
Eight years
later 259,775 297,001 388,657
Nine years
later 259,043 292,069
Ten years
later 255,570
Cumulative amount
of reserves paid:
One year
later 90,964 67,570 135,067 144,465 161,557 164,849 105,774 200,907 228,622 252,972
Two years
later 126,668 145,954 219,233 234,991 254,840 219,225 204,030 330,158 371,624
Three years
later 174,860 199,754 276,451 292,381 290,667 283,816 281,546 423,337
Four years
later 205,124 235,650 312,539 314,848 329,830 330,705 334,204
Five years
later 224,882 255,921 328,682 335,411 355,338 361,250
Six years
later 236,145 265,062 338,515 347,731 372,727
Seven years
later 239,937 270,201 345,511 357,966
Eight years
later 242,514 274,703 351,482
Nine years
later 245,534 277,995
Ten years
later 247,069
Redundancy 3,952 8,128 17,962 29,094 49,120 69,143 103,569 88,530 89,406 59,532
Redundancy
expressed as
a percent
of year end
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
reserves 1.5% 2.7% 4.4% 6.6% 9.8% 12.9% 18.0% 12.3% 11.3% 7.3%
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gross reserve $486,608 $560,811 $603,088 $645,941 $796,820 $868,393 $893,420 $901,352
Ceded reserve 48,725 61,539 67,636 69,288 78,120 74,830 79,901 77,438
-------- -------- -------- -------- -------- -------- -------- --------
Net reserve $437,883 $499,272 $535,452 $576,653 $718,700 $793,563 $813,519 $823,914
======== ======== ======== ======== ======== ======== ======== ========
Gross re-
estimated $460,696 $518,703 $537,616 $545,451 $710,265 $783,377 $831,857
Ceded re-
estimated 51,907 68,551 71,307 72,367 80,095 79,220 77,870
-------- -------- -------- -------- -------- -------- --------
Net re-
estimated $408,789 $450,152 $466,309 $473,084 $630,170 $704,157 $753,987
======== ======== ======== ======== ======== ======== ========
</TABLE>
NOTE: The amount of cash and investments received equal to the
increase in liabilities for unpaid losses and loss settlement
expenses was $35,582,000, $55,350,000, $93,966,000, $28,318,000,
and $12,392,000 for the changes in pool participation in
1989, 1991, 1996, 1997, and 1998, respectively.
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 1999 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, 1999 which provides
coverage for 85.5% of up to $147 million in excess of a retention
of $20 million for any given catastrophe. Harleysville Group's
1999 pooling share of this coverage would be 85.5% of up to $106
million in excess of a retention of $14.4 million for any given
catastrophe. Pursuant to the terms of the treaty, the maximum
recovery would be $126 million for any catastrophe involving an
insured loss equal to or greater than $167 million. Harleysville
Group's 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 1999
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 1999 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 the
Mutual Company whereby the Mutual Company reinsures accumulated
catastrophe losses in a quarter up to $14,400,000 in excess of
$3,600,000 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. Harleysville Group has invested in equity
securities with the objective of capital appreciation. At
December 31, 1999, 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,
1999:
DECEMBER 31, 1999
------------------------
AMOUNT PERCENT
---------- --------
(dollars in thousands)
RATING <F1>
U.S. Treasury and
U.S. agency bonds<F2> $ 191,098 14.1%
Aaa 426,655 31.4
Aa 445,026 32.8
A 267,123 19.6
Baa 29,160 2.1
---------- -----
Total $1,359,062 100.0%
========== =====
- --------------
[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
46%, 47% and 45% of the total investment portfolio at December
31, 1999, 1998 and 1997, 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, 1999:
DECEMBER 31, 1999
----------------------
AMOUNT PERCENT
---------- -------
(dollars in thousands)
Fixed maturities:
U.S. Treasury obligations $ 53,839 3.5%
U.S. agency obligations 19,340 1.2
Mortgage-backed securities 117,331 7.6
Obligations of states and
political subdivisions 707,067 45.8
Corporate securities 449,025 29.1
---------- -----
Total fixed maturities 1,346,602 87.2
---------- -----
Equity securities 198,197 12.8
---------- -----
Total $1,544,799 100.0%
========== =====
19
<PAGE>
Investment results of Harleysville Group's fixed maturity
investment portfolio for each of the three years ended December
31, 1999 are shown in the following table:
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
---------- ----------- ---------
(dollars in thousands)
Invested assets <F1> $1,356,853 $1,321,061 $1,223,175
Investment income <F2> $ 83,457 $ 83,689 $ 79,765
Average yield 6.2% 6.3% 6.5%
- ---------------
[FN]
<F1> Average of the aggregate invested amounts at amortized cost
at the beginning and end of the period, adjusted for cash
transferred in connection with the 1998 and 1997 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, 1999:
DECEMBER 31, 1999
-----------------------
AMOUNT PERCENT
---------- -------
(dollars in thousands)
Due in<F1>
1 year or less $ 63,441 4.7%
Over 1 year through 5 years 305,405 22.7
Over 5 years through 10 years 608,198 45.2
Over 10 years 252,227 18.7
---------- -----
1,229,271 91.3
Mortgage-backed securities 117,331 8.7
---------- -----
Total $1,346,602 100.0%
========== =====
- ---------------
[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.
20
<PAGE>
The average expected life of Harleysville Group's investment
portfolio as of December 31, 1999 was approximately 6.4 years.
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, 1999, 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
21
<PAGE>
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.
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 transactions between companies within the
holding company system that may materially affect the operations,
management or financial condition of the insurer within the
system 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,
regulations and legislation may be 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 Harleysville Group.
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, 1999, $50,286,000 would be
available for distribution to Harleysville Group Inc. without
22
<PAGE>
prior approval during 2000. The Company's insurance subsidiaries
paid dividends of $15.0 million (another $20.0 million is
receivable from the subsidiaries) in 1999, $10.0 million in 1998
and $31.7 million in 1997 to Harleysville Group Inc.
The National Association of Insurance Commissioners (NAIC)
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.
The NAIC has adopted the Codification of Statutory
Accounting Principles with a recommended effective date of
January 1, 2001. The codified principles are intended to provide
a basis of accounting recognized and adhered to in the absence of
conflict with, or silence of, state statutes and regulations.
Various state laws and regulations of the Company's insurance
subsidiaries' respective states of domicile may need to be
amended for the codified principles to become effective for
Harleysville Group. The affect of the codified principles on the
statutory financial statements of the Company's insurance
subsidiaries has not yet been determined.
23
<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,
----------------------------- ---------------------
1999 1998 1997 1999 1998
-------- -------- -------- --------- ---------
(in thousands)
SAP amounts $38,710 $62,133 $59,658 $502,863 $489,665
Adjustments:
Deferred
policy
acquisition
costs 4,557 6,908 (841) 83,541 78,984
Deferred
income
taxes 2,652 (32) 507 22,315 5,373
Unrealized
investment
gains (10,214) 34,980
Other, net (6,255) (4,925) (4,520) 53 7,546
Holding
company<F1> 249 (671) (732) (71,664) (86,890)
------- ------- ------- -------- --------
GAAP amounts $39,913 $63,413 $54,072 $526,894 $529,658
======= ======= ======= ======== ========
[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 57% of
the issued and outstanding common stock of Harleysville Group
Inc. 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
24
<PAGE>
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, a small
property and casualty insurance company, pursuant to a management
services agreement. Harleysville Group received $7.3 million,
$6.3 million, and $6.0 million for the years ended December 31,
1999, 1998 and 1997, respectively, for all such management
services.
All of the Company's officers are officers of the Mutual
Company, and six of the Company's nine directors are directors of
the Mutual Company. A coordinating committee exists to review
and evaluate the pooling agreement and is responsible for matters
involving actual or potential conflicts of interest between the
two companies. The decisions of the coordinating committee are
binding on the two companies. No intercompany transaction can be
authorized by the coordinating committee unless the Company's
committee members conclude that such transaction is fair and
equitable to Harleysville Group. The coordinating committee
consists of seven non-employee directors, three from Harleysville
Group Inc. and three from the Mutual Company all of whom are not
members of both Boards and one, the Chairman, who is a member of
both Boards. For information concerning the members of the
coordinating committee, see "Board and Committee Meetings"
section on pages 8 to 9 of the Company's proxy statement relating
to the annual meeting of the shareholders to be held April 26,
2000 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 $2,816,000 for 1999 and $2,754,000 for 1998
and 1997. 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, 1999, there were 2,804 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.
25
<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 1999 to
a vote of holders of the Company's Common Stock.
26
<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 52 Chairman of the Board, President,
Chief Executive Officer and
Director
Bruce C. Bassman 50 Executive Vice President
Mark R. Cummins 43 Executive Vice President, Chief
Investment Officer and Treasurer
M. Lee Patkus 48 Executive Vice President
Roger A. Brown 51 Senior Vice President, Secretary
and General Counsel
Dennis M. Hyland 56 Senior Vice President
Bruce J. Magee 45 Senior Vice President and
Chief Financial Officer
E. Wayne Ratz 54 Senior Vice President and
Chief Information Officer
Catherine B. Strauss 52 Senior Vice President
Robert G. Whitlock, Jr. 43 Senior Vice President and Chief
Actuary
Roger J. Beekley 57 Vice President and Controller
Walter R. Bateman, II has been Chairman of the Board since
August 1998 and has been Chief Executive Officer since January 1,
1994. He has been President and Director of Harleysville Group
and the Mutual Company since 1992.
27
<PAGE>
Bruce C. Bassman has been Executive Vice President in charge
of corporate development of Harleysville Group and the Mutual
Company since June 1999. He was a principal with Tillinghast-
Towers Perrin where he was employed from 1986 to 1999. He is a
Fellow of the Casualty Actuarial Society.
Mark R. Cummins is Executive Vice President, Chief
Investment Officer and Treasurer of Harleysville Group and the
Mutual Company, and has been in charge of the investment and
treasury function, since 1992. Since January 1, 1996, he also
has been in charge of corporate administration and fee income
businesses.
M. Lee Patkus has been Executive Vice President in charge of
the field and subsidiary operations of Harleysville Group and the
Mutual Company since November 1999. From 1994 to 1999 he worked
for St. Paul Insurance Companies and its predecessor, USF&G, and
was in charge of various regional operations. Most recently he
was Regional President of the Southeast Commercial Region.
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.
Dennis M. Hyland has been Senior Vice President since 1993.
Since August 1998, he has been in charge of marketing, claims and
underwriting. From 1991 to 1998 he was in charge of commercial
lines underwriting.
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.
Catherine B. Strauss has been Senior Vice President since
April 1998 and has been in charge of human resources since 1996.
From 1979 to 1996 she was employed by Penn Mutual Insurance
Company, most recently as Vice President of human resources.
28
<PAGE>
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.
29
<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, 1999, which is included as
Exhibit (13)(E) 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, 1999, 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,
1999, 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.
- -----
The "Quantitative and Qualitative Disclosures About Market
Risk" section from the Company's annual report to stockholders
for the year ended December 31, 1999, which is included as
Exhibit (13)(C) to this Form 10-K Report, is incorporated herein
by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- ------- --------------------------------------------
The consolidated financial statements from the Company's
annual report to stockholders for the year ended December 31,
1999, which is included as Exhibit (13)(D) 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.
30
<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 6 to 7
and the "Section 16 Reporting Compliance" section on page 33 of
the Company's proxy statement relating to the annual meeting of
stockholders to be held April 26, 2000, 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 26 to 31 and the
"Compensation of Directors" section on pages 9 to 11 of the
Company's proxy statement relating to the annual meeting of
stockholders to be held April 26, 2000, are incorporated herein
by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------- --------------------------------------------------------
MANAGEMENT.
- ----------
The "Ownership of Common Stock" section on pages 18 and 19
of the Company's proxy statement relating to the annual meeting
of stockholders to be held April 26, 2000, is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- -----------------------------------------------
The "Transactions with Harleysville Mutual" section on pages
32 and 33 of the Company's proxy statement relating to the annual
meeting of stockholders to be held April 26, 2000, is
incorporated herein by reference.
31
<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, 1999 and 1998 26*
Consolidated Statements of Income for
Each of the Years in the Three-year
Period Ended December 31, 1999 27*
Consolidated Statements of Shareholders'
Equity for Each of the Years in the Three-
year Period Ended December 31, 1999 28*
Consolidated Statements of Cash Flows
for Each of the Years in the Three-year
Period Ended December 31, 1999 29*
Notes to Consolidated Financial Statements 30*
Independent Auditors' Report 43*
(2) The following consolidated financial statement
schedules for the years 1999, 1998 and 1997
are submitted herewith:
Financial Statement Schedules
Schedule I. Summary of Investments - Other
Than Investments in Related
Parties 40
Schedule II. Condensed Financial Information
of Parent Company 41
Schedule III. Supplementary Insurance
Information 44
Schedule IV. Reinsurance 45
Schedule VI. Supplemental Insurance Information
Concerning Property and Casualty
Subsidiaries 46
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
1999 Annual Report to Stockholders. The Consolidated Financial
Statements and Independent Auditors' Report, which are included
as Exhibit (13)(D), 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.
32
<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) Standard Deferred Compensation Plan for
Directors of Harleysville Mutual Insurance
Company and Harleysville Group Inc. Amended and
Restated November 17, 1999.
*(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 Amended and Restated
November 17, 1999.
*(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.
33
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -------------------------------------------------
*(10)(E) Harleysville Mutual Insurance Company/
Harleysville Group Inc. Senior Management
Incentive Compensation Plan As Amended and
Restated November 17, 1999.
(10)(F) 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)(G) Equity Incentive Plan of Registrant, as
amended - incorporated herein by reference to
Exhibit (4)(C) to the Registrant's Form S-8
Registration Statement No. 33-25817 filed
April 25, 1997.
(10)(H) 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)(I) 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.
34
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -------------------------------------------
(10)(J) 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.
(10)(K) 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)(L) 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)(M) 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.
35
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- ------------------------------------------------
(10)(N) 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.
(10)(O) 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)(P) 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 - incorporated herein by
reference to Exhibit (10)(Q) to the
Registrant's Annual Report on Form 10-K for
the year ended December 31, 1997.
36
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------
*(10)(Q) Long-Term Incentive Plan for senior officers
of Harleysville Mutual Insurance Company and
Registrant - incorporated herein by reference
to Exhibit 10(V) to the Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1988.
(10)(R) Lease and amendment effective January 1, 2000
between Harleysville, Ltd. and
Harleysville Mutual Insurance Company.
*(10)(S) 1990 Directors' Stock Option Program of
Registrant - incorporated herein by reference
to Exhibit (10)(R) to the Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1990.
*(10)(T) 1995 Directors' Stock Option Program of
Registrant - incorporated herein by reference
to Exhibit (10)(S) to the Registrant's Annual
Report on Form 10-K for the year ended
December 31, 1993.
*(10)(U) Harleysville Group Inc. Year 2000 Directors'
Stock Option Program of Registrant -
incorporated herein by reference to Exhibit
(4)(C) to the Registrant's Form S-8
Registration Statement No. 333-85941, filed
August 26, 1999.
(10)(V) Loan Agreement dated as of March 19, 1998 by
and between Harleysville Group Inc. and
Harleysville Mutual Insurance Company -
incorporated herein by reference to Exhibit
(10)(V) to the Registrant's Annual Report on
Form 10-K for the year ended December 31,
1997.
(10)(W) Form of Management Agreements dated January 1,
1994 between Harleysville Group Inc. and
Harleysville Mutual Insurance Company,
Harleysville-Garden State Insurance Company,
Mainland 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.
37
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -----------------------------------------------------
(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, Mainland 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) Form of Change of Control Employment
Agreements dated July 1, 1999.
*(10)(AA) 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)(AB) Harleysville Group Inc. Supplemental Retirement
Plan Amended and Restated November 17, 1999.
*(10)(AC) 1996 Directors' Stock Purchase Plan of
Registrant - incorporated herein by reference
to Exhibit (4)(C) to the Registrant's Form S-8
Registration Statement No. 333-03127 filed May
3, 1996.
*(10)(AD) 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 1999 annual report to stockholders.
(13)(B) Management's Discussion and Analysis of
Results of Operations and Financial Condition
from the Company's 1999 annual report to
stockholders.
38
<PAGE>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- ----------------------------------------------------
(13)(C) Quantitative and Qualitative Disclosures About
Market Risk from the Company's 1999 annual
report to stockholders.
(13)(D) Consolidated financial statements from the
Company's 1999 annual report to stockholders.
(13)(E) Market for Common Stock and Related Security
Holder Matters from the Company's 1999 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, 1999.
- ---------------
* A management contract, compensatory plan or arrangement
required to be separately identified by reason of the provision
of Item 14(a)(3).
(b) Reports on Form 8-K
On November 1, 1999 Harleysville Group Inc. filed a report
on Form 8-K, reporting under Item 5, that its Board of Directors
authorized an increase in its share repurchase program.
39
<PAGE>
HARLEYSVILLE GROUP
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1999
(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 $ 74,239 $ 73,297 $ 73,179
States, municipalities
and political
subdivisions 710,782 710,854 707,067
Mortgage-backed
securities 117,036 117,331 117,331
All other corporate
bonds 457,005 445,255 449,025
---------- ---------- ----------
Total fixed
maturities 1,359,062 1,346,737 1,346,602
---------- ---------- ----------
Equity securities:
Common stocks
Banks, trust and
insurance companies 19,866 27,114 27,114
Industrial,
miscellaneous and
all other 86,359 171,083 171,083
---------- ---------- ----------
Total equities 106,225 198,197 198,197
---------- ---------- ----------
Short-term
investments 59,223 59,223
---------- ----------
Total investments $1,524,510 $1,604,022
========== ==========
40
<PAGE>
HARLEYSVILLE GROUP INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31,
------------------------
1999 1998
-------- --------
ASSETS
Short-term investments $ 1,697 $ 5,362
Fixed maturities:
Available for sale, at fair
value (cost $10 and $11) 10 11
Investments in common
stock of subsidiaries
(equity method) 598,558 616,548
Accrued investment income 19 39
Due from affiliate 2,412 5,883
Dividends receivable from
subsidiaries 20,000
Other assets 10,356 5,200
-------- --------
Total assets $633,052 $633,043
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $ 93,500 $ 93,500
Accounts payable and
accrued expenses 11,800 6,884
Federal income taxes payable 858 3,001
-------- --------
Total liabilities 106,158 103,385
-------- --------
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 1999, 29,498,651 and
1998, 29,150,518 shares;
outstanding 1999, 28,812,086
and 1998, 29,150,518 shares 29,499 29,151
Additional paid-in capital 124,798 119,302
Accumulated other
comprehensive income 51,682 74,167
Retained earnings 331,769 307,038
Treasury stock, at cost,
686,565 shares (10,854)
-------- --------
Total shareholders' equity 526,894 529,658
-------- --------
Total liabilities and
shareholders' equity $633,052 $633,043
======== ========
41
<PAGE>
HARLEYSVILLE GROUP INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED STATEMENTS OF INCOME
(in thousands)
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998 1997
-------- -------- --------
Revenues $ 7,565 $ 6,756 $ 6,747
Expenses:
Interest 6,274 6,322 6,441
Expenses other than interest 1,688 1,474 1,435
------- ------- -------
(397) (1,040) (1,129)
Income tax benefit (646) (369) (397)
------- ------- -------
Income (loss) before equity in
income of subsidiaries 249 (671) (732)
Equity in income of subsidiaries 39,664 64,084 54,804
------- ------- -------
Net income $39,913 $63,413 $54,072
======= ======= =======
42
<PAGE>
HARLEYSVILLE GROUP INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- --------- ---------
Cash flows from operating
activities:
Net income $ 39,913 $ 63,413 $ 54,072
Adjustments to reconcile
net income to net cash
used by operating activities:
Equity in undistributed
earnings of subsidiaries (39,664) (64,084) (54,804)
(Increase) decrease in
accrued investment income 20 (6) 86
Increase (decrease) in
accrued income taxes (2,143) 1,927 684
Gain on sale of
investments (76) (62)
Other, net 3,386 (1,707) (983)
-------- -------- --------
Net cash provided (used)
by operating activities 1,512 (533) (1,007)
-------- -------- --------
Cash flows from investing activities:
Sales of fixed maturity
investments 1,908 9,043
Net sales (purchases) or
maturities of short-term
investments 3,665 (3,441) (481)
Acquisition (33,986)
-------- -------- --------
Net cash provided (used)
by investing activities 3,665 (1,533) (25,424)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock 5,844 5,985 7,295
Dividends from subsidiaries 15,015 10,025 31,729
Dividends paid (15,182) (13,944) (12,593)
Purchase of treasury stock (10,854)
-------- -------- --------
Net cash provided (used)
by financing activities (5,177) 2,066 26,431
-------- -------- --------
Change in cash - - -
Cash at beginning of year
-------- -------- --------
Cash at end of year $ - $ - $ -
======== ======== ========
43
<PAGE>
<TABLE>
HARLEYSVILLE GROUP
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(in thousands)
<CAPTION>
LIABILITY
FOR UNPAID AMORTIZATION
DEFERRED LOSSES AND LOSSES OF DEFERRED
POLICY LOSS NET AND LOSS POLICY OTHER
ACQUISITION SETTLEMENT UNEARNED EARNED INVESTMENT SETTLEMENT ACQUISITION UNDERWRITING PREMIUMS
COSTS<F1> EXPENSES PREMIUMS PREMIUMS INCOME EXPENSES COST<F1> EXPENSES<F1> WRITTEN
----------- ---------- ---------- ---------- ---------- ---------- ----------- ------------ ---------
Year ended
December 31,
1999
Commercial
<S> <C> <C> <C> <C> <C>
lines $ 919,511 $ 287,093 $ 614,431 $ 454,681 $ 628,925
Personal
lines 261,555 161,244 377,422 280,226 386,732
Elimina-
tions<F2> (279,714) (96,627) (284,653) (211,905) (291,318)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total $83,541 $ 901,352 $ 351,710 $ 707,200 $ 523,002 $182,337 $60,226 $ 724,339
======= ========= ========= ========= ========= ======== ======= =========
Net investment
<S> <C>
income $85,894
=======
Year ended
December 31,
1998
Commercial
<S> <C> <C> <C> <C> <C>
lines $ 898,086 $ 272,599 $ 560,551 $ 411,560 $ 580,465
Personal
lines 274,579 151,934 366,712 277,058 372,655
Elimina-
tions<F2> (279,245) (106,761) (262,659) (224,138) (266,974)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total $78,984 $ 893,420 $ 317,772 $ 664,604 $ 464,480 $169,567 $54,154 $ 686,146
======= ========= ========= ========= ========= ======== ======= =========
Net investment
<S> <C>
income $86,025
=======
Year ended
December 31,
1997
Commercial
<S> <C> <C> <C> <C> <C>
lines $ 875,231 $ 252,685 $ 542,632 $ 387,776 $ 528,467
Personal
lines 283,032 145,991 349,701 244,188 350,897
Elimina-
tions<F2> (289,870) (100,051) (267,428) (192,476) (262,427)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total $72,076 $ 868,393 $ 298,625 $ 624,905 $ 439,488 $157,591 $50,108 $ 616,937
======= ========= ========= ========= ========= ======== ======= =========
Net investment
<S> <C>
income $81,783
=======
</TABLE>
[FN]
<F1> Deferred policy acquisition costs and other
underwriting expenses are not determined separately for
commercial and personal lines.
See Note 15 of the Notes to Consolidated Financial Statements.
<F2> See Note 15 of Notes to Consolidated Financial Statements.
44
<PAGE>
HARLEYSVILLE GROUP
SCHEDULE IV - REINSURANCE
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(in thousands)
ASSUMED PERCENTAGE
CEDED FROM OF AMOUNT
GROSS TO OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- --------- --------- -------- ----------
Year ended
December 31, 1999
Property and
casualty
premiums $638,604 $670,669 $739,265 $707,200 104.5%
======== ======== ======== ======== ======
Year ended
December 31, 1998
Property and
casualty
premiums $589,956 $619,230 $693,878 $664,604 104.4%
======== ======== ======== ======== ======
Year ended
December 31, 1997
Property and
casualty
premiums $542,887 $566,440 $648,458 $624,905 103.8%
======== ======== ======== ======== ======
Note: The amounts ceded and assumed include the amounts ceded and
assumed under the terms of the pooling arrangement.
45
<PAGE>
HARLEYSVILLE GROUP
SCHEDULE VI - SUPPLEMENTAL INSURANCE INFORMATION CONCERNING
PROPERTY AND CASUALTY SUBSIDIARIES
Years Ended December 31, 1999, 1998 and 1997
(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<F1> YEAR YEARS EXPENSES
---------- ----------- -------- -------- ----------
Year ended:
December 31,
1999 $901,352 $ 8,992 $582,534 $(59,532) $512,607
======== ======= ======== ======== ========
December 31,
1998 $893,420 $10,272 $507,087 $(42,607) $444,524
======== ======= ======== ======== ========
December 31,
1997 $868,393 $ 9,433 $469,216 $(29,728) $399,461
======== ======= ======== ======== ========
[FN]
Notes: <F1> 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.
46
<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 28, 2000 By: /s/WALTER R. BATEMAN
---------------------------
Walter R. Bateman
Chairman of the Board,
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,
President,
Chief Executive Officer
/s/WALTER R. BATEMAN and a Director March 28, 2000
- ----------------------
Walter R. Bateman
Senior Vice President
and Chief Financial
Officer (principal financial
officer and principal
/s/BRUCE J. MAGEE accounting officer) March 28, 2000
- ----------------------
Bruce J. Magee
47
<PAGE>
SIGNATURES
(Continued)
SIGNATURE TITLE DATE
- ---------------------------- --------------- ---------------
/s/LOWELL R. BECK Director March 28, 2000
- ----------------------------
Lowell R. Beck
/s/MICHAEL L. BROWNE Director March 28, 2000
- ----------------------------
Michael L. Browne
/s/ROBERT D. BUZZELL Director March 28, 2000
- ----------------------------
Robert D. Buzzell
/s/MIRIAN M. GRADDICK Director March 28, 2000
- ----------------------------
Mirian M. Graddick
/s/JOSEPH E. MCMENAMIN Director March 28, 2000
- ----------------------------
Joseph E. McMenamin
/s/FRANK E. REED Director March 28, 2000
- ----------------------------
Frank E. Reed
/s/WILLIAM E. STRASBERG Director March 28, 2000
- -----------------------------
William E. Strasburg
/s/JERRY S. ROSENBLOOM Director March 28, 2000
- ----------------------------
Jerry S. Rosenbloom
48
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- ---------------------------------------------
*(10)(A) Standard Deferred Compensation Plan for
Directors of Harleysville Mutual Insurance
Company and Harleysville Group Inc. Amended
and Restated November 17, 1999.
*(10)(C) Harleysville Group Inc. Non-qualified
Deferred Compensation Plan Amended and
Restated November 17, 1999.
*(10)(E) Harleysville Mutual Insurance
Company/Harleysville Group Inc. Senior
Management Incentive Compensation Plan As
Amended and Restated November 17, 1999.
(10)(R) Lease and amendment effective January 1,
2000 between Harleysville, Ltd. and
Harleysville Mutual Insurance Company.
*(10)(Z) Form of Change of Control Employment
Agreements dated July 1, 1999.
* (10)(AB) Harleysville Group Inc. Supplemental
Retirement Plan Amended and Restated
November 17, 1999.
(13)(A) Selected Consolidated Financial Data from
the Company's 1999 annual report to
stockholders.
(13)(B) Management's Discussion and Analysis of
Results of Operations and Financial
Condition from the Company's 1999 annual
report to stockholders.
(13)(C) Quantitative and Qualitative Disclosures
About Market Risk from the Company's 1999
annual report to stockholders.
(13)(D) Consolidated financial statements from the
Company's 1999 annual report to stockholders.
(13)(E) Market for Common Stock and Related
Security Holder Matters from the Company's
1999 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,
1999.
<PAGE>
EXHIBIT (10)(A)
STANDARD DEFERRED COMPENSATION PLAN
FOR DIRECTORS OF
HARLEYSVILLE MUTUAL INSURANCE COMPANY
AND
HARLEYSVILLE GROUP
AMENDED AND RESTATED: NOVEMBER 17, 1999
<PAGE>
STANDARD DEFERRED COMPENSATION PLAN
FOR DIRECTORS OF
HARLEYSVILLE MUTUAL INSURANCE COMPANY
AND
HARLEYSVILLE GROUP INC.
AS AMENDED & RESTATED NOVEMBER 17, 1999
TABLE OF CONTENTS
------------------------------------------
ARTICLE NO. TITLE OF ARTICLE PAGE NO.
- ---------- --------------------------------- --------
I ADMINISTRATION 1
II PARTICIPATION 1
III AMOUNT AND TIMING OF DEFERRALS 2
IV INVESTMENT OF DEFERRAL ACCOUNTS 2
V SECURITIES INVESTING 2
VI CREDITING OF INTEREST 3
VII PAYMENT OF BENEFITS 4
VIII HARDSHIP WITHDRAWAL 5
IX BENEFICIARY DESIGNATION 6
X AMENDMENT AND TERMINATION 6
XI PROHIBITION OF ALIENATION 6
XII GOVERNING LAW 7
XIII COSTS OF THE PLAN 7
<PAGE>
STANDARD DEFERRED COMPENSATION PLAN
FOR DIRECTORS OF
HARLEYSVILLE MUTUAL INSURANCE COMPANY
AND
HARLEYSVILLE GROUP INC.
AS AMENDED & RESTATED NOVEMBER 17, 1999
Harleysville Mutual Insurance Company and Harleysville Group
Inc. (collectively the "Company") have established the following
Standard Deferred Compensation Plan to provide a method whereby
their Directors may elect to defer receipt of compensation
payable to them for their services as a Member of the Board of
Directors of the Company or as a Member of any Committee to which
said Director is appointed.
ARTICLE I - ADMINISTRATION
---------------------------
The responsibility for the implementation and administration
of this Plan is delegated to the Committee which shall be the
Compensation & Personnel Development Committee of the Board of
Directors of both Companies. The Committee shall interpret the
Plan and establish the rules and regulations governing its
administration. Any decision or action made or taken by the
Committee, arising out of or in connection with the construction,
administration, interpretation and effect of the Plan and of its
rules and regulations, shall be conclusive and binding upon all
Directors who have deferral accounts established hereunder and
any person claiming through or under any Director, unless
otherwise determined by the Board of Directors of the Company.
ARTICLE II - PARTICIPATION
---------------------------
Any current Director may be a participant in the Plan. To
defer compensation, each Director must indicate in writing that
he or she wishes to participate prior to December 31 of the
Calendar Year preceding the Calendar Year in which the
compensation to be deferred is earned or paid, whichever occurs
first, unless a Director becomes eligible for a this Plan for the
first time, in which case he or she has thirty (30) days after
initial notice of eligibility for the Plan to elect to become a
participant. The Committee shall prepare appropriate forms and
may amend them from time to time as it finds appropriate. Upon
becoming eligible to be a participant in a plan, a Director shall
receive a copy of this Plan and the pertinent forms.
1
<PAGE>
ARTICLE III - AMOUNT AND TIMING OF DEFERRALS
--------------------------------------------
A Director may elect to defer a specified dollar amount or a
specified percentage of Director's compensation. A deferral may
not be changed during the year by the Director.
ARTICLE IV - INVESTMENT OF DEFERRAL ACCOUNTS
--------------------------------------------
Directors may elect to have their deferred funds invested in
mutual funds or a self-directed brokerage account as described in
Article V, or to have such funds earn interest as provided in
Article VI.
ARTICLE V - SECURITIES INVESTING
--------------------------------
(A) Cash equal to any amount deferred pursuant to Article III
shall be set aside by Company and delivered by Company to
Fidelity Institutional Retirement Services Company ("Fidelity")
for investment in a selection of mutual funds or in a self-
directed brokerage account through Fidelity Brokerage. The
amounts so delivered and earnings thereon ("Amounts"),
nevertheless, shall remain part of the general assets of the
Company and said Amounts shall be held by Fidelity in the name of
Company which shall retain full title to them and be owner and
beneficiary thereof. The Amounts shall not be considered as held
in trust for Directors and Company has only a contractual
obligation to make payment of the Amounts credited to a Director
when due. The Amounts are subject to the claims of general
creditors of the Company and a Director is only an unsecured
general creditor with regard to any Amounts. The Company is
responsible for payment of any taxes due on the Amounts and
Company will include all the income, deductions and credits
pertaining to the Amounts in computing its taxable income and
financial statements.
(B) Amounts credited to each Director shall be placed into a sub-
account for each Director by Fidelity and shall be invested by
the Director in the mutual fund(s) that the Committee has
selected to offer or individual securities through the Fidelity
Brokerage and in such increments as permitted from time to time
under rules promulgated by Fidelity relating to institutional
retirement investments. It is anticipated (but not guaranteed)
that the mutual fund selections and investment rules of this Plan
will generally follow those applicable to Company's Extra
Compensation Plan. A Director shall bear all investment risk and
sub-account balances for Directors shall reflect investment gains
and losses. All Directors will
2
<PAGE>
receive the current Plan rules on investing, which may
be changed by the Committee from time to time and which
shall be incorporated by reference and be considered an
integral part hereof, provided that such rules shall
not be inconsistent with this Plan.
(C) All sub-accounts shall be valued every business
day by Fidelity. The value as determined by Fidelity
shall be final and binding on the Company and Directors
and their beneficiaries.
(D) Loans are not available from the sub-accounts.
(E) Payments for any reason shall be drawn pro-rata
from the Mutual Funds and individual stocks, if any, in
which a Director has invested his or her Amounts.
ARTICLE VI - CREDITING OF INTEREST
----------------------------------
(A) Any amount deferred pursuant to Article III shall,
during the period of deferral, be held in a deferred
compensation account, which shall be maintained on the
Company's financial books only for record-keeping and
bookkeeping purposes ("Deferral Account"). No Company
funds or assets shall be transferred or designated to
the Deferral Account. Interest shall be credited on an
annual basis on the amount reflected in each Deferral
Account on or about the first day of April of each year
and shall become part of the Deferral Account. The
annual rate of interest to be credited shall be
according to the Standard & Poor Intermediate
Government Bond Index on the last day of each month for
the twelve (12) months immediately prior to each April
first.
(B) The amount credited to each Deferral Account shall
not be considered as held in trust for the Director,
and the Company has only a contractual obligation to
make payment of the Deferral Account when due. The
Deferral Account is subject to the claims of general
creditors of the Company, and a Director is only an
unsecured general creditor with regard to any Deferred
Account. After the Deferral Account has been
exhausted, the Company shall have no further obligation
to make payment of any additional compensation to the
Director under this Plan.
(C) Loans are not available from Deferral Accounts.
3
<PAGE>
ARTICLE VII - PAYMENT OF BENEFITS
----------------------------------
(A) Upon a Director first electing to defer fees
hereunder, a Director may elect one of the four
following payments schedules which will govern all
subsequent amounts deferred:
(1) Payment to the Director in ten (10)
approximately equal annual installments beginning
at the later of age 65 or termination of the
Director's service as a Director, with any unpaid
balance at the Director's death paid in a lump sum
to a beneficiary designated by the Director.
(2) Payment to the Director in five (5)
approximately equal annual installments beginning
at the earlier of termination of the Director's
services as a Director or age 70, with any unpaid
balance at the Director's death paid in a lump sum
to a beneficiary designated by the Director.
(3) Payments to the Director in five (5)
approximately equal annual installments beginning
after the calendar year in which the Director
attains age 70, or, if later, upon termination of
the Director's services as a Director, with any
unpaid balance at the Director's death paid in a
lump sum to a beneficiary designated by the
Director.
(4) Payment upon the Director's death only
in a lump sum to a beneficiary designated by the
Director.
(B) Alternatively, a Director, upon first electing to
defer fees hereunder, may elect to receive payouts in
accordance with the following schedule:
Participant's Total
Sub-Account Balance
At Beginning of Distribution Payout Period
---------------------------- -------------
Under $50,000 Lump sum
$50,000 to $200,000 5 Annual Installments
$200,000 to $500,000 10 Annual Installments
$500,000 to $1,000,000 15 Annual Installments
over $1,000,000 20 Annual Installments
Payouts will occur or commence in the tax year
following termination of Board service. Payouts will
be made by January 31st of the applicable year. Also,
a Director who has previously deferred may, within 30
days after (i) the November 17,
4
<PAGE>
1999 Amendment and Restatement elect on a one time
irrevocable basis to adopt this schedule and (ii) to
have balances that are scheduled to be paid out over
five or more years to be paid out over any other payout
period included in the above chart. Annual
Installments shall be equal to the figure developed by
dividing the cash value of the sub-account on the
January valuation day each year (chosen by the
Committee) by the number of years left in the payout
period. The Company may, from time to time, adjust the
balance levels that trigger the Payout Periods to
reflect inflation. In the case of a lump sum payment,
any reasonable valuation date selected by the Company
shall be binding on the Participant.
Payouts for all Directors, once commenced, shall continue in
accordance with the payout schedule in existence at commencement
of the payout period. If a Director has funds invested in Mutual
Funds and individual stocks under Article V and has funds earning
interest under Article VI, payments shall be made pro-rata from
each source. All payments shall be made by the Company (not by
Fidelity if applicable) and are subject to any applicable
withholding and related taxes. The enumeration of the foregoing
choices shall nevertheless not prevent any other mode of payment
requested by the Director and agreed to by the Committee to the
extent that such request does not result in constructive receipt
of such fees and earnings thereon by the Director.
ARTICLE VIII - HARDSHIP WITHDRAWAL
----------------------------------
The Committee may accelerate distribution of funds to a
Director in the event of an unforeseeable emergency, which shall
be defined as only:
(A) a severe financial hardship to the Director caused
by a sudden and unexpected illness or accident of the
Director or a dependent of the Director (as defined in
Internal Revenue Code Section 152(a));
(B) a loss of the Director's property due to casualty;
or
(C) other similar extraordinary and unforeseeable
circumstances caused by events beyond the Director's
control.
Payment may not be made to the extent the hardship may be
relieved by insurance or other similar reimbursement or
compensation, liquidation of assets (to the extent such
liquidation would not itself cause severe financial hardship), or
a cessation of deferrals under the Plan. College tuition or the
costs of purchasing a home are not considered unforeseeable
emergencies. The amount withdrawn as a result of a financial
hardship must be limited to the amount reasonably
5
<PAGE>
needed to satisfy the emergency. The valuation of the Amounts or
Deferral Account on account of hardship shall be made as of the
day the Committee approves the hardship withdrawal.
ARTICLE IX - BENEFICIARY DESIGNATION
------------------------------------
In the event of a Director's death prior to full payment of
his or her sub-account, payment will thereafter be made in
accordance with the applicable Payout Period to the Director's
beneficiary or contingent beneficiary or, if no beneficiary of
the Director is then living, then to the Director's estate. A
Director's beneficiary and contingent beneficiary shall be that
person or persons named by the Director to be such in the most
recent written beneficiary designation executed by the Director
and filed with the Secretary of the Company. In the event a
Director becomes disabled, or, is judged incompetent, or in the
judgment of the Committee, unqualified to manage his or her
affairs, the Committee may direct that payment to any amounts due
be made to the legal guardian of such Director or, if none has
been appointed, to his or her spouse or adult child or any other
person or any institution who is caring for such Director; and
any payment so made shall to the extent thereof fully release and
discharge the Committee and the Company from any further
liability to the Director.
ARTICLE X - AMENDMENT AND TERMINATION
-------------------------------------
The Company reserves the right to modify, amend, alter or
terminate this Plan at any time and in any way. If the Plan is
terminated, all Amounts or the Deferral Account credited to a
Director will be immediately distributed, in cash or in kind, to
such Director.
ARTICLE XI - PROHIBITION OF ALIENATION
--------------------------------------
Any Amounts or Deferral Account may not be voluntarily or
involuntarily assigned, anticipated, or alienated by the Director
and shall not be subject to attachment, levy or encumbrance by a
creditor of a Director. The right of the Director to an Amounts
or Deferral Account shall be not greater than the right of any
unsecured general creditor of the Company.
6
<PAGE>
ARTICLE XII - GOVERNING LAW
---------------------------
The place of administration of this Plan shall be
conclusively deemed to be within the Commonwealth of Pennsylvania
and the validity, construction, interpretation, administration
and effect of this Plan, and any of its rules and regulations,
and the rights of any and all persons having or claiming to have
an interest herein or hereunder, shall be governed by, and
determined exclusively and solely in accordance with the laws of
the Commonwealth of Pennsylvania, unless pre-empted by the laws
of the Federal Government.
ARTICLE XIII - COSTS OF THE PLAN
--------------------------------
The expenses incurred in administering this Plan, including
any Committee fees, taxes payable on earnings in the sub-accounts
prior to distribution, fees payable to Fidelity, any charges by
the Company's independent auditors, legal fees or any other
costs, shall be borne by the Company and shall not be charged
against the credits in each sub-account.
TO RECORD THE AMENDMENT AND RESTATEMENT OF THIS PLAN, THE
COMPANY HAS CAUSED ITS AUTHORIZED OFFICERS TO AFFIX THE CORPORATE
NAME AND SEAL HERETO THIS 17 day of November, 1999.
- --- -------- ----
HARLEYSVILLE GROUP INC.
BY: /s/WALTER R. BATEMAN
-------------------------------
Walter R. Bateman, II, Chairman,
President & CEO
ATTEST:
/s/ROGER A. BROWN
- --------------------------------------
Roger A, Brown, Senior Vice President,
Secretary & General Counsel
7
<PAGE>
EXHIBIT (10)(C)
HARLEYSVILLE GROUP INC.
NON-QUALIFIED DEFERRED COMPENSATION PLAN
AMENDED AND RESTATED: NOVEMBER 17, 1999
<PAGE>
HARLEYSVILLE GROUP INC.
NON-QUALIFIED DEFERRED COMPENSATION PLAN
-----------------------------------------
AMENDED AND RESTATED NOVEMBER 17, 1999
--------------------------------------
TABLE OF CONTENTS
------------------
ARTICLE NO. TITLE OF ARTICLE PAGE NO.
- ---------- ------------------------------ --------
I PURPOSE 1
II ADMINISTRATION 2
III EFFECTIVE DATE 2
IV PARTICIPATION 2
V AMOUNT AND TIMING OF DEFERRALS 2
VI PARTICIPANTS ACCOUNTS 3
VII PAYMENT OF BENEFITS 4
VIII AMENDMENT AND TERMINATION 6
IX PROHIBITION OF ALIENATION 6
X GOVERNING LAW 6
XI COSTS OF THE PLAN 6
XII NO EMPLOYMENT CONTRACT 6
<PAGE>
HARLEYSVILLE GROUP INC.
NON-QUALIFIED DEFERRED COMPENSATION PLAN
----------------------------------------
AMENDED AND RESTATED NOVEMBER 17, 1999
ARTICLE I - PURPOSES
---------------------
Harleysville Group Inc. (the "Company") sponsors two cash
incentive plans for senior management (the Long Term Incentive
Plan and the Senior Management Incentive Plan), a Non-Qualified
Salary Deferral Arrangement, and an Non-Qualified Excess Match
Program for executives whose benefits under the Extra
Compensation Plan ("ECP") are affected by federal tax law. The
two incentive plans and the salary deferral plan permit employees
eligible for those plans, if such employees are part of a select
group of management or highly compensated employees, to defer the
receipt of such compensation and the excess match plan provides a
deferred match if an employee, who is part of a select group of
management or highly compensated employee, is prevented by the
401(k) and 401(m) discrimination tests from obtaining a full
match in the Company's qualified Extra Compensation Plan. This
Non-Qualified Deferred Compensation Plan is intended to provide
an administratively convenient arrangement with consistent rules
whereby participants in these plans can 1) defer compensation
that would otherwise be available under the Company's Senior
Management Incentive Plan, Long Term Incentive Plan, and Non-
Qualified Salary Deferral Arrangement, and, 2) achieve earnings
commensurate with the employee's investment risk tolerance on
compensation deferred, and, where applicable, amounts credited to
an employee under the Company's Non-Qualified Excess Match
Program. This Plan is intended to be made a part of each such
plan and incorporated by reference in each such plan. It is
further intended that this Plan be unfunded for tax purposes and
for purposes of Title I of E.R.I.S.A. This Plan replaces any and
all previous non-qualified unfunded deferred compensation plan or
arrangements of Company for certain management employees of
Company.
1
<PAGE>
ARTICLE II - ADMINISTRATION
---------------------------
The responsibility for the implementation and administration
of this Plan is delegated to the Committee which shall be the
Extra Compensation Plan Administrative Committee. The Committee
shall interpret the Plan and establish the rules and regulations
governing its administration. Any decision or action made or
taken by the Committee, arising out of or in connection with the
construction, administration, interpretation and effect of the
Plan and of its rules and regulations, shall be conclusive and
binding upon all employees who have sub-accounts established
hereunder ("Participants") and any person claiming through or
under any Participant, unless otherwise determined by the Board
of Directors of Company.
ARTICLE III - EFFECTIVE DATE
----------------------------
The Plan was effective January 1, 1994, and was amended and
restated November 17, 1999.
ARTICLE IV - PARTICIPATION
--------------------------
An Employee in paygrade 20 or over may be a Participant in
the Plan. All members of management entitled to a non-qualified
ECP match shall also be Participants in this Plan. To defer
compensation, each employee must indicate in writing that he or
she wishes to participate prior to December 31 of the Calendar
Year preceding the Calendar Year in which the compensation to be
deferred is earned or paid, whichever occurs first, unless a
Participant becomes eligible for a plan for the first time, in
which case he or she has 30 days after initial notice of
eligibility for a plan to elect to become a Participant. The
Committee shall prepare appropriate forms and may amend them from
time to time as it finds appropriate. Upon becoming eligible to
be a participant in a plan, a prospective Participant shall
receive a copy of this Plan and the pertinent forms.
ARTICLE V - AMOUNT AND TIMING OF DEFERRALS
------------------------------------------
A Participant may specify any amount of compensation from
salary or bonus payment to be deferred. If salary is deferred,
the amount so specified shall be deferred pro-rata throughout the
specified Calendar Year and, for all deferrals, may not be
changed during the year by the Participant.
2
<PAGE>
ARTICLE VI - PARTICIPANT ACCOUNTS
---------------------------------
(A) Cash equal to any amount deferred or contributed
pursuant hereto shall be set aside by Company and delivered by
Company to Fidelity Institutional Retirement Services Company
("Fidelity") for investment in the Fidelity family of mutual
funds or in a self-directed brokerage account through Fidelity
Brokerage. The amounts so delivered and earnings thereon
("Amounts"), nevertheless, shall remain part of the general
assets of the Company and said Amounts shall be held by Fidelity
in the name of Company which shall retain full title to them and
be owner and beneficiary thereof. The Amounts shall not be
considered as held in trust for Participants and Company has only
a contractual obligation to make payment of the Amounts credited
to a Participant when due. The Amounts are subject to the claims
of general creditors of the Company and a Participant is only an
unsecured general creditor with regard to any Amounts. The
Company is responsible for payment of any taxes due on the
Amounts and Company will include all the income, deductions and
credits pertaining to the Amounts in computing its taxable income
and financial statements.
(B) Amounts credited to each Participant shall be placed
into a sub-account for each Participant by Fidelity and shall be
invested by the Participant in the Fidelity Mutual Fund(s) that
the Committee has selected to offer or individual securities
through the Fidelity Brokerage and in such increments as
permitted from time to time under rules promulgated by Fidelity
relating to institutional retirement investments. It is
anticipated (but not guaranteed) that the mutual fund selections
and investment rules of this Plan will generally follow those
applicable to Company's ECP. A Participant shall bear all
investment risk and sub-account balances for Participants shall
reflect investment gains and losses. All Participants will
receive the current Plan rules on investing, which may be changed
by the Committee from time to time and which shall be
incorporated by reference and be considered an integral part
hereof, provided that such rules shall not be inconsistent with
this Plan. No participant shall select Harleysville Group Inc.
securities as an investment under the self-directed brokerage
account option.
(C) All sub-accounts shall be valued every business day by
Fidelity. The value as determined by Fidelity shall be final and
binding on the Company and Participants and their beneficiaries.
(D) Loans are not available from the sub-accounts.
(E) Balances in existing deferral accounts as of December
31, 1993 will be transferred to this Plan.
3
<PAGE>
ARTICLE VII - PAYMENT OF BENEFITS
---------------------------------
Any Amounts shall be credited to the sub-account established
for each Participant by the Company and shall not be paid to the
Participant until said Participant dies, retires and is
immediately entitled to a benefit under the Company Pension Plan
("retirement"), becomes permanently and totally disabled, or
otherwise terminates employment with the Company. At said time,
the amounts credited to the Participant's Sub-Account will be
paid or will commence to be paid to the Participant by January 31
of the next year following retirement in accordance with the
following chart, except that in the case of termination of
employment for other than retirement, death, or disability any
amount payable shall be payable immediately in a lump sum:
Participant's Total
Sub-Account Balance
at Beginning of Distribution Payout Period
---------------------------- ----------------------
Under $50,000 Lump Sum
$50,000 to $200,000 5 Annual Installments
$200,000 to $500,000 10 Annual Installments
$500,000 to $1,000,000 15 Annual Installments
over $1,000,000 20 Annual Installments
This schedule shall apply to all funds in the sub-account
regardless of when amounts were deferred. Notwithstanding the
foregoing, each Participant upon first becoming eligible for the
Plan (or within 30 days after the November 17, 1999 Amendment and
Restatement) may elect on a one-time irrevocable basis (1) to
have the commencement of a payout period delayed for 5 years
and/or (2) to have balances that are scheduled to be paid out
over 5 or more years to be paid out over any other payout period
included in the above chart. For 30 days after November 17,
1999, Participants may also elect to retain the payout schedule
in effect on November 16, 1999. Annual Installments shall be
equal to the figure developed by dividing the cash value of the
sub-account on the January valuation day each year (chosen by the
Committee) by the number of years left in the payout period. The
Company may, from time to time, adjust the balance levels that
trigger the Payout Periods to reflect inflation. In the case of
a lump sum payment, any reasonable valuation date selected by the
Company shall be binding on the Participant.
Notwithstanding the foregoing, payouts for all Participants,
once commenced, shall continue in accordance with the payout
schedule in existence at commencement of the payout period.
Payments shall be made by Company (not by Fidelity) and are
subject to all applicable withholding and related taxes.
4
<PAGE>
In the event of a Participant's death prior to full payment
of his or her sub-account, payment will thereafter be made in
accordance with the applicable Payout Period to the Participant's
beneficiary or contingent beneficiary or, if no beneficiary of
the Participant is then living, then to the Participant's estate
in a lump sum. A Participant's beneficiary and contingent
beneficiary shall be that person or persons named by the
Participant to be such in the most recent written beneficiary
designation executed by the Participant. In the event a
Participant becomes disabled, or, is judged incompetent, or in
the judgment of the Committee, unqualified to manage his or her
affairs, the Committee may direct that payment to any amounts due
be made to the legal guardian of such Participant or, if none has
been appointed, to his or her spouse or adult child or any other
person or any institution who is caring for such Participant; and
any payment so made shall to the extent thereof fully release and
discharge the Committee and the Company from any further
liability to the Participant.
Notwithstanding the foregoing, the Committee may accelerate
distribution of funds to a Participant in the event of an
unforeseeable emergency, which shall be defined as only:
1. a severe financial hardship to the Participant
caused by a sudden and unexpected illness or accident
of the Participant or a dependent of the Participant
(as defined in Code Section 152(a));
2. a loss of the Participant's property due to casualty;
or
3. other similar extraordinary and unforeseeable
circumstances caused by events beyond the Participant's
control.
Payment may not be made to the extent the hardship may be
relieved by insurance or other similar reimbursement or
compensation, liquidation of assets (to the extent such
liquidation would not itself cause severe financial hardship), or
a cessation of deferrals under the Plan. College tuition or the
costs of purchasing a home are not considered unforeseeable
emergencies.
The amount withdrawn as a result of a financial hardship
must be limited to the amount reasonably needed to satisfy the
emergency.
The valuation of the Amounts on account of hardship shall be
made as of the day the Committee approves the hardship
withdrawal.
Payments for any reason shall be drawn pro-rata from the
mutual funds in which a Participant has invested his or her
Amounts. For the purposes of this paragraph, a self-directed
brokerage account shall be considered a single mutual fund.
5
<PAGE>
ARTICLE VIII - AMENDMENT AND TERMINATION
----------------------------------------
The Company reserves the right to modify, amend, alter or
terminate this Plan at any time and in any way. If the Plan is
terminated, all Amounts credited to a Participant will be
immediately distributed, in cash or in kind, to such Participant.
ARTICLE IX - PROHIBITION OF ALIENATION
---------------------------------------
Any Amounts may not be voluntarily or involuntarily
assigned, anticipated, or alienated by the Participant and shall
not be subject to attachment, levy or encumbrance by a creditor
of a Participant. The right of the Participant to a sub-account
shall be not greater than the right of any unsecured general
creditor of the Company.
ARTICLE X - GOVERNING LAW
-------------------------
The place of administration of this Plan shall be
conclusively deemed to be within the Commonwealth of Pennsylvania
and the validity, construction, interpretation, administration
and effect of this Plan, and any of its rules and regulations,
and the rights of any and all persons having or claiming to have
an interest herein or hereunder, shall be governed by, and
determined exclusively and solely in accordance with the laws of
the Commonwealth of Pennsylvania, unless pre-empted by the laws
of the Federal Government.
ARTICLE XI - COSTS OF THE PLAN
-------------------------------
The expenses incurred in administering this Plan, including
any Committee fees, taxes payable on earnings in the sub-accounts
prior to distribution, fees payable to Fidelity, any charges by
the Company's independent auditors, legal fees or any other
costs, shall be borne by the Company and shall not be charged
against the credits in each sub-account, except that any fees for
the self-directed brokerage account shall be paid by a
Participant from funds within his or her account or otherwise and
all commissions payable for activity in a self-directed brokerage
account will be assessed against that account.
ARTICLE XII - NO EMPLOYMENT CONTRACT
-------------------------------------
Neither the establishment of this Plan nor any action taken
hereunder shall be construed as giving any Participant any right
to be retained in the employ of the Company, and all Participants
shall remain subject to discharge to the same extent as if the
Plan had never been adopted.
6
<PAGE>
TO RECORD THE ADOPTION OF THIS PLAN, THE COMPANY HAS CAUSED
ITS AUTHORIZED OFFICERS TO AFFIX THE CORPORATE NAME AND SEAL
HERETO THIS 17TH DAY OF NOVEMBER, 1999.
HARLEYSVILLE GROUP INC.
By:/s/WALTER R. BATEMAN,
---------------------------
Walter R. Bateman, II
Chairman, President and
Chief Executive Officer
ATTEST:
/s/ROGER A. BROWN
- -------------------------
Roger A. Brown, Secretary
7
<PAGE>
EXHIBIT (10)(E)
HARLEYSVILLE MUTUAL INSURANCE COMPANY/
HARLEYSVILLE GROUP INC.
SENIOR MANAGEMENT INCENTIVE COMPENSATION PLAN
AMENDED AND RESTATED: NOVEMBER 17, 1999
<PAGE>
HARLEYSVILLE MUTUAL INSURANCE COMPANY
HARLEYSVILLE GROUP INC.
SENIOR MANAGEMENT INCENTIVE COMPENSATION PLAN
---------------------------------------------
AMENDED AND RESTATED: NOVEMBER 17, 1999
-----------------------------------------
TABLE OF CONTENTS
------------------------------------------
ARTICLE NO. TITLE OF ARTICLE PAGE NO.
- ---------- ------------------------------------ --------
I PURPOSE 1
II DEFINITIONS 1
III ADMINISTRATION 2
IV EFFECTIVE DATES 2
V PARTICIPATION 3
VI TARGET AWARDS 3
VII PERFORMANCE OBJECTS 4
VIII PROFIT CENTER & SUBSIDIARY PLANS 4
IX REQUIRED MINIMUM PROFIT 4
X PAYMENT OF AWARDS 4
XI COMMITTEE CERTIFICATION 5
XII DEFERRED PAYMENT ELECTION 5
XIII FORFEITURE OF AWARDS 5
XIV AMENDMENT, SUSPENSION OR TERMINATION 6
XV GOVERNING LAW 6
XVI COSTS OF THE PLAN 7
XVII NON-ASSIGNABLE 7
XVIII NO EMPLOYMENT CONTRACT 7
<PAGE>
HARLEYSVILLE MUTUAL INSURANCE COMPANY/
HARLEYSVILLE GROUP INC.
SENIOR MANAGEMENT INCENTIVE COMPENSATION PLAN
----------------------------------------------
AMENDED AND RESTATED: NOVEMBER 17, 1999
----------------------------------------
ARTICLE I. - PURPOSE
--------------------
This Amended and Restated Senior Management Incentive
Compensation Plan (hereinafter referred to as the "Plan") is
intended to increase the profitability of Harleysville Mutual
Insurance Company and Harleysville Group Inc. (hereinafter
referred to as the "Company") and their subsidiaries by providing
the opportunity for senior management to earn incentive payments
for outstanding achievement and performance. It is the purpose
of this Plan to motivate senior management to the attainment of
demanding goals by providing recognition and rewards in the form
of incentive payments which may be taken in cash or deferred, at
the election of each participant. The Plan has the further
objective of attracting and retaining senior management personnel
of superior caliber and of affording them a means of
participating in the overall success of the Company's business.
ARTICLE II. - DEFINITIONS
-------------------------
For the purposes of this Plan, the following terms shall
have the meanings set forth below:
(A) "Board of Directors" - The Board of Directors of the
Company.
(B) "Committee" - The Compensation & Personnel Development
Committee of the Board of Directors.
(C) "Incentive Award Year" - A calendar year for which
Performance Objectives are set under the Plan and for
which incentive awards may be paid.
(D) "Management" - The chief executive officer of the
Company.
(E) "Participant" - An officer or manager of the Company
who is designated as a participant by the Committee and
whose participation is approved by the Board of
Directors.
(F) "Performance Objectives" - The important business and
financial objectives to be achieved during each
Incentive Award Year as determined for each Incentive
Award Year by the Committee and upon which the payment
of the individual incentive awards is based.
(G) "Target Award" - An incentive award amount determined at the
start of each Incentive Award Year for each Participant which
would be paid if the Performance Objectives for such Incentive
Award Year are met fully.
1
<PAGE>
ARTICLE III. - ADMINISTRATION
-----------------------------
(A) The responsibility for the implementation and administration
of this Plan is delegated to the Committee. In addition to its
duties as elsewhere set forth in this Plan, the Committee's
functions shall include the following:
(1) interpretation of the Plan and establishment of the rules
and regulations governing Plan administration,
(2) determination of who is a Participant,
(3) determination of Target Awards,
(4) approval of Performance Objectives,
(5) determination of the degree of the attainment of the
Performance Objectives, and
(6) determination of the size of individual incentive
awards.
In reaching its decisions, the Committee shall consider
recommendations made by Management. The Committee may, in
discharging its responsibilities under the Plan, delegate such
duties to officers or other employees of the Company as it deems
appropriate. In addition the Committee is authorized, if the
need should arise, to use the services of the Company's
independent auditors to determine the level of achievement of the
Performance Objectives. No Committee Member shall be eligible
for an incentive award under this Plan.
(B) Any decision or action made or taken by the Committee,
arising out of or in connection with the construction,
administration, interpretation and effect of the Plan
and of its rules and regulations, shall be conclusive
and binding upon all Participants and any person
claiming through or under any Participant, unless
otherwise determined by the Board of Directors.
(C) The Performance Objectives and designated Participants
which have been approved by the Committee for each
Incentive Award Year in accordance with Article VIII,
as well as each other relevant determination made by
the Committee for each Incentive Award Year, shall be
set forth in written form as an Exhibit which shall be
attached hereto and made a part hereof.
ARTICLE IV - EFFECTIVE DATES
----------------------------
This Amended and Restated Plan shall be effective for the
Incentive Award Year beginning January 1, 2000. While it is
intended that this Plan shall continue indefinitely, its
continuation is, nevertheless, subject to the annual approval of
the Board of Directors. If by the end of an Incentive Award
Year, the Board of Directors has failed to extend or renew the
Plan for another year, it shall
2
<PAGE>
terminate as of the end of that Incentive Award Year (except that
awards earned for that Incentive Award Year may be paid in the
early part of the succeeding year.) Target award levels must be
established by March 30th of any Award Year.
ARTICLE V - PARTICIPATION
-------------------------
(A) An officer or manager shall participate in the Plan as
designated by the Committee prior to January 1 of the
Incentive Year; provided, that, if prior to end of the
Incentive Year, his or her employment shall have been
terminated, either involuntarily by the Company or
voluntarily without the Company's consent, for a reason
other than retirement under the Company's retirement plan,
death or disability, such participation shall cease.
If a person becomes an eligible officer or manager of
the Company during an Incentive Award Year, he or she
shall be eligible to participate on the same basis as
other similarly situated officers or managers, provided
that he or she will be entitled to receive only that
portion of his or her Target Award that he or she
otherwise would have received under the Plan for the
full Incentive Award Year which the number of complete
calendar months of his or her participation in the Plan
during such Incentive Award Year bears to twelve (12).
(B) If, prior to the end of an Incentive Award Year, a
Participant's employment with the Company ceases
because of disability, retirement under the Company's
retirement plan or death, he or she shall be entitled
to receive only that proportion of his or her Target
Award that he or she otherwise would have received
under the Plan for the full Incentive Award Year which
the number of complete calendar months of this
participation in the Plan during such Incentive Award
Year bears to twelve (12). If prior to the end of an
Incentive Award Year, a person's employment is not
terminated but such Participant's eligibility is
terminated because of change of duties or position,
such person shall not be entitled to any incentive
award for that Incentive Award Year.
ARTICLE VI - TARGET AWARDS
--------------------------
The Target Award for each Participant shall be determined by
the Committee at or before the beginning of each Incentive Award
Year, based on Management's recommendations. Each Target Award
will be expressed as a percentage of a Participant's Base Salary
for the Incentive Year. The size of the Target Award may change
from year to year, at the discretion of the Committee. Once the
Participant's Target Award has been established for a particular
Incentive
3
<PAGE>
Award Year, it shall be communicated to him along with
applicable Performance Objective. The maximum target award is
$1,000,000.
ARTICLE VII - PERFORMANCE OBJECTIVES
------------------------------------
Each Target Award shall relate directly to the attainment of
Performance Objectives which shall be established at or before
the beginning of each Incentive Award Year. These objectives
shall be set at challenging levels so that their achievement
reflects above-average performance. Performance Objectives shall
be expressed in terms of the most significant performance
indicators which are related to the business goals which the
Company desires to achieve during the Incentive Award Year.
Moreover, a "range" of achievement levels for each of the
Performance Objectives, running from a "minimum" level, to a
"target" level and then to a "maximum" level of achievement, as
well as the relative weight to be given to each of the
Performance Objectives will be established. The Committee shall
have the authority, in unusual circumstances, to alter any and
all of the Performance Objectives during the course of an
Incentive Award Year, based on Management's recommendation.
ARTICLE VIII - PROFIT CENTER & SUBSIDIARY PLANS
-----------------------------------------------
The Committee may delegate to Management the determination
of participation, target awards, and performance objectives for
profit centers within the Company and subsidiaries, subject, of
course, to any necessary approval by any subsidiary's Board of
Directors.
ARTICLE IX- REQUIRED MINIMUM PROFIT
-----------------------------------
Prior to the beginning of each Incentive Award Year, the
Committee shall determine as a percentage of Net Earned Premiums,
the minimum after-tax net income of the Company that must be
earned for such Incentive Award Year in order for any incentive
awards to be paid. At the end of the Incentive Award Year, if
such minimum after-tax net income has been attained by the
Company for the Incentive Award Year, incentive awards shall be
paid for the Incentive Award Year; if not, no incentive awards
shall be made.
ARTICLE X - PAYMENT OF AWARDS
-----------------------------
The amount of the Participant's incentive award shall be
calculated following the close of each Incentive Award Year.
Except as provided in Article XI, all incentive award payments
shall be made in cash, less required statutory withholding
amounts, as soon as practicable after the
4
<PAGE>
performance measures are determined, but no later than the March
15th following the end of each Incentive Award Year if at all
possible. Payments may be made in two or more installments. The
incentive award payments shall not, however, constitute earnings
for purposes of determining benefits under any life insurance,
salary continuation or other employee benefit plan of the
Company, except as may be provided in each such plan.
ARTICLE XI - COMMITTEE CERTIFICATION
------------------------------------
Prior to payment of the Awards, the Committee shall review
the TSR for the three-year period just completed and certify, in
writing or as reflected in the minutes of the Committee Meeting,
that the Company has attained the TSR levels entitling
Participants to a payout.
ARTICLE XII - DEFERRED PAYMENT ELECTION
---------------------------------------
In lieu of the form of payment set forth in Article X, a
Participant may elect to file with the Company, a written,
irrevocable election that the payment of all or a portion of his
or her incentive award, if any, for an Incentive Award Year be
deferred and payable, together with income accrued thereon, in
accordance with the Harleysville Group Inc. Non-Qualified
Deferred Compensation Plan, as may be amended from time to time.
The terms and conditions of said Non-Qualified Deferred
Compensation Plan shall govern all Deferred Payment Elections,
provided, however, that a Participant's interest in the Plan
shall be only that of a general unsecured creditor.
ARTICLE XIII - FORFEITURE OF AWARDS
-----------------------------------
(A) With respect to any Deferred amounts or amounts not yet
paid, if a Participant at any time engages in any activity that
the Committee determines, in its discretion, was or is harmful to
the interests of the Company, the Committee may determine whether
or not, and if so, the extent to which any deferred amount of the
Participant shall be forfeited. This provision shall apply to:
(1) activities that may occur prior to termination of service
but did not result in termination of service, but which become
known to the Committee after termination of service;
(2) activities that occur prior to and resulted in termination
of service; or
(3) activities that occur following termination of service and
prior to or during the period when the Participant would
otherwise be entitled to receive payment of the deferred amounts
or amounts not yet paid, credited to his Investment Account.
5
<PAGE>
The Committee shall have the authority, in its
discretion, to determine what kinds of activities shall
be deemed harmful to the interests of the Company for
the purposes of this Plan. A determination by the
Committee under this Article, including its
determination as to the time at which harmful
activities commenced, shall be conclusive; provided,
however, that in each case where a substantial
forfeiture is determined by the Committee under this
Article, the Committee's action shall be reported to
the Board of Directors for its concurrence.
(B) All deferred amounts credited to a Participant's account in
the Non-Qualified Deferred Compensation Plan shall be contingent
and to the extent any such amount shall not have actually been
paid to a Participant, it shall not be so paid and shall be
forfeited in the following circumstances (unless the Committee,
in its discretion, otherwise determines in view of extenuating
circumstances in a particular case):
(1) if a Participant's employment is terminated by
Harleysville for willful misconduct; or
(2) if, after termination for employment for any reason, a
Participant shall engage in activities which are
harmful to the interests of the Company.
(C) All account balances that are forfeited under this Article
shall be cancelled and removed from the Company's books and
records and the Company shall have no further liability in
connection therewith.
ARTICLE XIV - AMENDMENT, SUSPENSION OR TERMINATION
--------------------------------------------------
While it is the present intention of the Company to grant
incentive awards annually, the Board of Directors reserves the
right to modify this Plan from time to time, or to repeal the
Plan entirely, or to direct a discontinuance of granting
incentive awards either temporarily or permanently; provided,
however, that no modification or termination of this Plan shall
operate to annul, without the consent of a Participant, an
incentive award already granted hereunder, regardless of whether
such incentive award is to be paid in cash or whether payment
will be deferred in accordance with Article XII.
ARTICLE XV - GOVERNING LAW
--------------------------
The place of administration of this Plan shall be
conclusively deemed to be within the Commonwealth of Pennsylvania
and the validity, construction, interpretation, administration
and effect of this Plan, and any of its rules and regulations,
and the rights of any and all persons having
6
<PAGE>
or claiming to have an interest therein or thereunder, shall be
governed by, and determined exclusively and solely in accordance
with the laws of the Commonwealth of Pennsylvania.
ARTICLE XVI - COSTS OF THE PLAN
-------------------------------
The expenses incurred in administering this Plan, including
any Committee fees, any charges by the Company's independent
auditors, or any other costs, shall be borne by the Company and
shall not be charged against the individual award payments.
ARTICLE XVII - NON-ASSIGNABLE
------------------------------
A Participant's or beneficiary's rights and interests under
this Plan may not be assigned, transferred, pledged, or
hypothecated and are not subject to attachment, garnishment,
execution or any other creditor's processes. The Company, within
the limits of applicable law, shall be entitled to ignore any
attempted assignment or alienation or any creditor's process and
shall be entitled to pay any amount due directly to the
Participant or Beneficiary.
ARTICLE XVIII - NO EMPLOYMENT CONTRACT
--------------------------------------
Neither the establishment of this Plan nor any action taken
hereunder shall be construed as giving any Participant any right
to be retained in the employ of the Company, and all Participants
shall remain subject to discharge to the same extent as if the
Plan had never been adopted.
TO RECORD THE AMENDMENT AND RESTATEMENT OF THIS PLAN,
THE COMPANY HAS CAUSED ITS AUTHORIZED OFFICERS TO AFFIX THE
CORPORATE NAME AND SEAL HERETO THIS 17TH DAY OF NOVEMBER, 1999.
---- ---------------
HARLEYSVILLE MUTUAL INSURANCE COMPANY
HARLEYSVILLE GROUP INC.
BY:/s/WALTER R. BATEMAN
----------------------------
Walter R. Bateman, II,
Chairman, President & CEO
ATTEST:
/s/ROGER A. BROWN
- --------------------------------------
Roger A. Brown, Senior Vice President,
Secretary & General Counsel
7
<PAGE>
EXHIBIT (10)(R)
LEASE AGREEMENT
---------------
THIS AGREEMENT OF LEASE (hereinafter "Lease") made as of
this 1st day of January, A.D., 1995, between Harleysville, Ltd.,
a Pennsylvania limited partnership, (hereinafter "Lessor"),
AND
Harleysville Mutual Insurance Company, a Pennsylvania
insurance corporation doing business at 355 Maple Avenue,
Harleysville, PA 19438, (hereinafter "Lessee").
W I T N E S S E T H:
In consideration of the mutual covenants and agreements set
forth in this Lease, and other good and valuable considerations,
Lessor leases to Lessee and Lessee leases from Lessor all that
certain parcel of land, together with the buildings and
improvements erected thereon, situate at 355 Maple Avenue,
Harleysville, Montgomery County, Pennsylvania, and more fully
described in Exhibit "A," which is attached hereto and made a
part hereof, (hereinafter, collectively, "Premises").
NOW, THEREFORE, the undersigned, intending to be legally
bound hereby, agree as follows:
1
<PAGE>
1. PRIOR LEASE. This Lease supersedes and replaces in
its entirety the Lease dated as of January 1, 1990.
2. TERM. The term of this Lease shall be for a period of
five (5) years commencing on January 1, 1995 and ending on
December 31, 1999.
3. RENT.
a. Base Rent. The base rent is Twelve Dollars and
Fifty Cents ($12.50) per square foot of office space per
year. This base rental charge is to be applied to each
square foot of office space located on the Premises. The
base rent is payable monthly in advance.
b. Additional Rent. Lessee agrees to pay additional
rent, the amount of which shall be equal to the cost of any
additions, improvements, or renovations, fully amortized
over the life of same, at an annual interest rate of twelve
per cent (12%). Such additions, renovations or
improvements, if any, shall be the property of Lessor.
Lessee agrees to pay all of said charges, if any, on or
before December 31st of each year of the term of the Lease.
4. TAXES, CHARGES, AND INSURANCE. Lessee agrees to pay
taxes, charges, and insurance as follows:
a. The full amount of all real estate taxes, water
and sewer charges, special assessments of any kind or nature
whatsoever, and any other public charge levied upon or
assigned against the Premises or any portion thereof, or on
any buildings or improvements now or hereafter located
thereon, or arising by reason of
2
<PAGE>
occupancy, use or possession thereof any other similar
charges now or hereafter in effect, whether or not such
charges or any of them are or may become a lien on the
Premises.
b. All premiums on the insurance policies referred to in
Paragraph 13.
5. REPAIRS AND MAINTENANCE. Lessee agrees at its own
expense and risk, to maintain and keep the Premises, during any
term of this Lease, in good order and condition, including, but
not limited to, making all repairs and replacements, renewals and
additions, interior and exterior, structural and non-structural,
ordinary and extraordinary, foreseen and unforeseen, necessary to
keep and maintain the Premises and all systems, equipment and
apparatus appurtenant thereto, or used in connection therewith,
in good order and condition.
6. UTILITIES. Lessee shall pay all utility charges for
water, sewer, electricity, heat, telephone or other services or
utilities used in or about the Premises during the term of the
Lease. Lessee shall also be responsible for and shall pay for
the removal of all garbage and rubbish from the Premises during
the term of the Lease. Under no circumstances shall Lessor be
required to furnish any utilities or any other services of any
kind to the Premises or any part thereof.
7. COVENANT TO SURRENDER. Lessee covenants to surrender
the Premises in good order and condition, reasonable wear and
tear, casualty, and fire excepted.
8. COVENANT TO COMPLY WITH GOVERNMENTAL AUTHORITIES.
Lessee agrees to perform and to fully obey and comply with all of
the ordinances, rules, regulations and statutes of all public
authorities and/or regulatory bodies and officers enforcing said
3
<PAGE>
ordinances, rules, regulations, and statutes relating to the
Premises or to the use being made of the Premises by the Lessee.
9. MECHANIC'S LIENS. Lessee shall not do or suffer
anything to be done or any work to be performed upon the Premises
which would be encumbered by any mechanic's lien. In the event
any such lien is filed against the Premises which purports to be
for labor or material, furnished or to be furnished by Lessee,
the Lessee shall discharge the same of record within ten (10)
days after notice of the date of filing of the said lien. In the
event the Lessee fails to discharge the same of record, then
Lessor may, at its option, pay the lien or any portion thereof,
and the cost to pay the mechanic's lien and any legal expenses
shall be assessed against the Lessee the same as rent can be
assessed against the Lessee under this Lease and shall be
collected in accordance with the provisions of this Lease in the
same manner as rental. Lessor shall not be liable for any labor
and materials furnished or to be furnished to the Lessee upon
credit and no mechanic's or other liens for any such labor and
materials shall attach to or affect the reversionary interest of
the Lessor in and to the Premises.
10. WAIVER OF LIENS. Lessee agrees that in the event that
the Lessor gives written approval and permits any alterations or
repairs to be made to the Premises, before any work is started or
performed, a Waiver of Liens shall be prepared by the Lessor at
the Lessee's expense and signed by the contractor and/or
materialmen and the Lessor. Said Waiver of Liens shall be filed
of record at the Lessee's expense in accordance with the
Mechanic's Lien Laws of the Commonwealth of Pennsylvania. The
parties hereto agree that a Waiver of Liens will only be required
where the improvements are in excess of FIVE HUNDRED DOLLARS
($500.00).
4
<PAGE>
11. ALTERATIONS, ADDITIONS, AND IMPROVEMENTS. Lessee
agrees that it will not demolish any building on the Premises or
make any alterations, additions, or improvements to the Premises
without first obtaining the prior written consent and approval of
the Lessor. Lessee agrees that in the event of any changes or
alterations or additions as approved by the Lessor, it must
comply with the Waiver of Liens provision as set forth in this
Lease, and that all such improvements, additions and repairs made
to the Premises during the term of Lease, with the approval of
the Lessor, shall, upon the expiration of the same, be and
become, the sole and exclusive property of the Lessor, its
successors and assigns, without any cost to Lessor. It is agreed,
however, that all trade fixtures installed by the Lessee and/or
its successors and assigns, in the Premises shall remain the
property of the Lessee subject to the provisions herein on
removal.
12. OWNERSHIP. Lessor herewith covenants that it has good
title to the Premises and that the Lessee, upon paying the
rentals and upon keeping and observing the covenants, agreements
and conditions herein specified to be kept and performed by the
Lessee, shall and may lawfully, peacefully and quietly have,
hold, use, occupy, possess, and enjoy the Premises for and during
the term hereof without any hindrance, eviction, molestation, or
interruption of or by the Lessor or any person or persons.
13. INSURANCE AND INDEMNIFICATION.
a. Lessee agrees to indemnify and save harmless
Lessor against and from any and all claims by or on behalf
of any person or persons, firm or firms, corporation or
corporations, (i) arising from any condition of the interior
or exterior of the premises; (ii) arising from any breach or
default on the part of Lessee in the
5
<PAGE>
performance of any covenant, agreement, or condition on the
part of Lessee to be performed, pursuant to the terms of
this Lease; or (iii) arising from any act or negligence of
Lessee, or any of its agents, servants or employees. In
case any action or proceeding is brought against Lessor by
reason of such claim, Lessee, upon notice from Lessor,
covenants to resist or defend such action or proceeding by
counsel satisfactory to Lessor.
b. Lessee agrees to maintain, at its own expense,
during the term of this Lease a policy of general liability
insurance with a reputable company authorized to do business
in the Commonwealth of Pennsylvania, in which policy Lessor
and Lessee shall be named as insureds, and Lessee shall
furnish current certificates evidencing the existence of
such insurance. Such policy shall provide coverage in an
amount not less than ONE MILLION DOLLARS ($1,000,000.00)
(single limit combined bodily injury and property damage
each occurrence) to cover all situations involving claims
for Bodily Injury, death or property damage arising upon the
Premises. Such insurance may be carried under a blanket
policy covering other locations of the Lessee, provided the
protection and coverage afforded the Lessor is not reduced
thereby.
c. Lessee agrees, at its own expense, during the term of this
Lease, to keep the Premises insured against loss or damage by
fire or theft, and such other hazards, casualties and
contingencies as are usually covered by the special cause of loss
form in the area and boiler insurance, from time to time. The
property coverage insurance shall be in the amount of the full
insurable value of the
6
<PAGE>
Premises, without deduction for depreciation, and the other
insurance, if any, shall be in such amounts as Lessor may
reasonably require. Said policy shall be written by a
reputable company authorized to do business in the
Commonwealth of Pennsylvania. Said policy or policies of
insurance shall name both Lessor and Lessee as insureds.
14. DESTRUCTION OF PREMISES.
a. In the event that the Premises is totally
destroyed or so damaged by fire or other casualty not
occurring through the fault or negligence of the Lessee, or
those employed by or acting for it, that the same cannot be
repaired or restored within a reasonable time, this Lease
shall absolutely cease and terminate, and the rent shall
abate for the balance of the term. The determination of what
is a reasonable time shall be the sole conclusion of the
Lessor under the circumstances.
b. In the event the damage to the Premises, be only
partial and such that it can be restored to its condition
existing at the time of the damage within a reasonable time,
the Lessor may at its option, restore the same with
reasonable promptness, reserving the right to enter upon the
Premises for that purpose. In that event the rent may be
apportioned and suspended during the time the Lessor is in
possession, taking into account the proportion of the
Premises rendered untenantable and the duration of the
Lessor's possession. If dispute arises as to the amount of
rent due under this clause, Lessee agrees to pay the full
amount claimed to the Lessor, but Lessee, however, shall
have the right to proceed by law to recover the excess
payment, if any. The Lessor shall have such election to
repair
7
<PAGE>
the Premises or terminate this Lease by giving written
thereof to the Lessee at the Premises within sixty (60) days
from the day the Lessor receives notice that the Premises
have been damaged by fire or other casualty.
15. SIGNS. Lessee shall have the right to erect signs at
its sole cost, on any portion of the Premises, subject to and in
accordance with all applicable laws, ordinances, rules, and
regulations.
16. PARKING. Lessor shall provide an area for the
employees, customers, and vendors of the Lessee to park.
17. DEFAULT. An event of default shall include Lessor's
failure to pay the base rent, additional rent, or any other sum
payable under this Lease, or either party's failure to perform or
comply with any other terms, covenants, agreements, or conditions
of this Lease. However, it is agreed that no default on the part
of Lessee or Lessor shall be deemed to have occurred unless the
non-defaulting party shall have given the defaulting party
written notice of the alleged default, and the defaulting party
shall not have within thirty (30) days after receipt of such
notice commenced action to remedy such default.
18. CONSTRUCTION OF LEASE. Words of gender used in this
lease shall be held to include any other gender and words in the
singular number shall be held to include the plural when the
sense requires. The headings as to the contents of particular
paragraphs herein are inserted only for convenience and are in no
way to be construed as part of the Lease or as a limitation of
the scope of the particular paragraphs to which they refer.
19. NOTICES. All notices required or permitted to be
served hereunder or by law between Lessor and Lessee shall be in
writing and delivered by hand or by Certified
8
<PAGE>
Mail, Return Receipt Requested, postage prepaid, addressed to
Bruce J. Magee, Senior Vice President, Chief Financial Officer &
Assistant Secretary on behalf of Lessor and Clark D. Kulp, Vice
President-Facilities Services on behalf of Lessee, at 355 Maple
Avenue, Harleysville, PA 19438, or to such other address as a
party shall specify by written notice to the other.
20. ASSIGNMENT AND SUBLETTING. Lessee may not assign this
Lease, or sublease the whole or any party of the Premises,
without the prior written consent of Lessor, provided, however,
that no such assignment or subletting shall relieve Lessee from
its duty to perform fully all of the agreements, covenants, and
conditions set forth in this Lease.
21. LEASE ALL INCLUSIVE. This Lease contains the entire
agreement between the parties hereto and no representation or
statement not herein contained shall vary or modify this Lease,
and this Lease shall not be effective between the parties until
the execution thereof and the required delivery of any and all
resolutions to the Lessor by the Lessee.
22. GOVERNING LAW. This Lease shall be governed by and
construed under the laws of the Commonwealth of Pennsylvania.
23. AMENDMENT. No amendment, modification or alteration
of the terms of this Lease shall be binding unless it is in
writing, dated subsequent to the date of this Lease, and duly
executed by the Lessor and Lessee.
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<PAGE>
IN WITNESS WHEREOF, the parties hereunto have set their
hands and seals the day and year first above written.
Lessor:
HARLEYSVILLE LTD.
BY: HARLEYSVILLE GROUP INC.,
General Partner
Witness:
/s/CANDY J. SHUSTACK BY: /s/BRUCE J. MAGEE
- -------------------- -------------------------
Candy J. Shustack Bruce J. Magee
Senior Vice President,
CFO & Asst. Secretary
Lessee:
HARLEYSVILLE MUTUAL INSURANCE COMPANY
Attest:
/s/C. STEPHENS VONDERCRONE BY:/s/CLARK D. KULP
- -------------------------- ----------------------------
C. Stephens Vondercrone Clark D. Kulp
Asst. Secretary Vice President
10
<PAGE>
EXHIBIT A
-----------
PARCEL #1:
- ---------
ALL THAT CERTAIN lot, piece and parcel of land with the building
and improvements thereon situated in Lower Salford Township,
Montgomery County, Pennsylvania, bounded and described according
to survey made by Eckert and Malone, Inc., Civil Engineers and
Land Surveyors, dated 2/8/79 and revised 5/6/82, bounded and
described as follows, to wit:
BEGINNING at a point, said point being a railroad spike at the
intersection of Harleysville Pike, A/K/A Maple Avenue, and Oak
Drive; thence, along the center line of Oak Drive North forty-
three degrees, four minutes and zero seconds West, a distance of
eight hundred seventy-six and six one-hundredths feet (N 43o 04'
00" W, 876.06') North forty-eight degrees, eighteen minutes,
thirty-six seconds East twenty-five and fifty-six one-hundredths
feet (25.56') to an iron pipe, being the true point of beginning
of this description; thence continuing North forty-eight degrees,
eighteen minutes thirty-six seconds East six hundred twenty-six
and nineteen one-hundredths feet (N 48o 18' 36" E, 626.19'), to a
point along the common property line of Harleysville Mutual
Insurance Company and now or late Isaac Bucher; thence North
forty-two degrees fifty-eight minutes thirty-seven seconds West
six hundred nineteen and sixty-two one-hundredths feet (N 42o 58'
37" W, 619.62') to a railroad spike on the Southside of
Lederachville Road; thence North forty-seven degrees twenty
minutes and fifteen seconds East, three hundred eighty-one and
fifty-six one-hundredths feet (N 47o 20' 15" E, 381.56') to a
railroad spike on the Southside of Lederachville Road; thence,
North thirty-eight degrees thirteen minutes forty-eight seconds
East eighty-three and fifty-three one-hundredths feet (N 38o 13'
48" E, 83.53') to a railroad spike on the Southside of
Lederachville Road; thence South fifty degrees fifty-six minutes
twelve seconds East thirteen and sixty one-hundredths feet (S 50o
56' 12" E, 13.60') to an iron pipe; thence, continuing South
fifty degrees fifty-six minutes twelve seconds East two hundred
forty-five feet (S 50o 56' 12" E, 245') along the land now or
late of Prescol Inc. to an iron pipe; thence North thirty-three
degrees twenty-six minutes four seconds East five hundred eighty-
three and ninety one-hundredths feet (N 33o 26' 04" E, 583.90')
along the land now or late of Prescol Inc. to an iron pipe;
thence, North thirty-eight degrees fourteen minutes thirty-four
seconds East two hundred five and eighty-three one-hundredths
feet (N 38o 14' 34" E, 205.83') along the land now or late of
Prescol Inc. to an iron pipe; thence, South forty-seven degrees
sixteen minutes fifty-four seconds East three hundred seventy-
three and sixty-three one-hundredths feet (S 47o 16' 54" E,
373.63') to an iron pipe; thence North forty-two degrees forty-
three minutes six seconds East eighteen feet (N 42o 43' 06" E,
18') to an iron pipe; thence South forty-seven degrees sixteen
1
<PAGE>
minutes fifty-four seconds East sixty-six and forty-eight one--
hundredths feet (S 47o 16' 54" E, 66.48') to an iron pipe; thence
along the arc of a curve having a radius of nine hundred four and
seventy-three one-hundredths feet (904.73') a delta of six
degrees four minutes twenty-eight seconds (06o 04' 28") and an
arc of ninety-five and ninety-two one-hundredths feet (95.92') in
distance to an iron pipe; thence South forty-three degrees twenty-
seven minutes fifty-eight seconds West five hundred ninety-four
and fifty-six one-hundredths feet (S 43o 27' 58" W, 594.46') to
an iron pipe; thence South forty-seven degrees thirty-three
minutes nine seconds West along the boundary line now or late of
Joseph C. Price, three hundred fifty-nine and two one-hundredths
feet (S 47o 33' 09" W, 359.02') to an iron pipe; thence South
forty-five degrees seventeen minutes forty-four seconds East
along the boundary line now or late of Joseph C. Price and now or
late of Claude G. Groff, nine hundred fourteen and fifty-one one-
hundredths feet (S 45o 17' 44" E, 914.51') to an iron pipe;
thence continuing the same direction South forty--five degrees
seventeen minutes forty-four seconds East twenty and twenty-two
one-hundredths feet (S 45o 17' 44" E, 20.22') to a railroad spike
near the Northside of Harleysville Pike A/K/A Maple Avenue;
thence South fifty degrees twenty-seven minutes sixteen seconds
West one thousand forty-nine and seventy-two one-hundredths feet
(S 50o 27' 16" W, 1049.72') to a railroad spike to the point and
place of beginning, containing 37.0485 acres of land, more or
less.
BEING the same premises which Harleysville Mutual Insurance
Company, by Indenture dated September 30, 1985, and duly recorded
in the office for the Recording of Deeds, in and for the County
of Montgomery, at Norristown, Pennsylvania, on October 25, 1985,
in Deed Book 4782, at Page 1426, granted and conveyed unto
Harleys-ville, Ltd.
UNDER AND SUBJECT to easements of record.
BEING Parcel Numbers 50-00-02419-00-6 and 50-00-00772-00-6.
PARCEL #2:
- ----------
ALL THAT CERTAIN LOT OR PIECE OF GROUND tract or piece of land
situate in Lower Salford Township, Montgomery County and State of
Pennsylvania, bounded and described according to a re-survey
thereof made by Stanley F. Moyer, C.E. on August 22nd 1952 as
follows, to wit:
BEGINNING at a pin set at the intersection of State Highway Route
No. 46025 and the center line of Saddler Shop Road both 33 feet
wide also known as the Lederachville Road; thence along the
Meeting House Road North forty-three degrees East 643.5 feet to a
spike at the line of now or late Reuben F. Anders; thence along
the Anders line South forty-six degrees and fifteen minutes East
619.62 feet to an iron pin in line of the Harleysville Mutual
Casualty Co. property; thence by the same South forty-five
2
<PAGE>
degrees West 642.69 feet to an iron pin at or near the center
line of Saddler Shop Road; thence by the same North forty-six
degrees and twenty-one minutes West 597.21 feet to the center
line of the Lederachville Road the point of beginning.
BEING the same premises which Isaac S. Bucher by Indenture dated
November 16, 1987, and duly recorded in the Office for the
Recording of Deeds, in and for the County of Montgomery, at
Norristown, Pennsylvania, on November 19, 1987 in Deed Book 4857,
at Page 2029, granted and conveyed unto Harleysville, Ltd.
BEING Parcel Number 50-00-02953-00-3.
3
<PAGE>
AMENDMENT TO LEASE AGREEMENT
-----------------------------
THIS AMENDMENT TO AGREEMENT OF LEASE (hereinafter
"Amendment") made as of this 1st day of January AD 2000 between
Harleysville, Ltd., a Pennsylvania limited partnership
(hereinafter "Lessor"), and Harleysville Mutual Insurance
Company, a Pennsylvania insurance corporation doing business at
355 Maple Avenue, Harleysville, PA 19438 (hereinafter "Lessee").
WITNESSETH:
WHEREAS, Lessor and Lessee entered into a Lease Agreement
(hereinafter "Lease"), for all that certain parcel of land,
together with buildings and improvements erected thereon as set
forth in Exhibit "A" to the Lease; and
WHEREAS, Lessor and Lessee desire to amend the Lease with
regard to the amount of base rent to be paid.
NOW, THEREFORE, the parties hereto, for the mutual promises
hereinafter contained, intending to be legally bound, do hereby
agree as follows:
1. Section 2 of the Lease shall be deleted in its entirety and
the following substituted in its place:
"The term of this Lease shall be for a period of five (5)
years commencing on January 1, 2000 and ending on December
31, 2004.
2. The first sentence of Section 3(a) of the Lease shall be
deleted in its entirety and the following shall be inserted in
its place:
"The base rent is Fifteen Dollars and Fifty-three Cents
($15.53) per square foot of office space per year."
1
<PAGE>
3. All terms, conditions, and provisions of the Lease are
hereby ratified and confirmed, excepted as amended herein.
IN WITNESS WHEREOF, the Lessor and the Lessee have set their
hands and seals the day and year first above written.
Lessor:
BY: HARLEYSVILLE GROUP INC.,
General Partner
Attest:
/s/ROGER A. BROWN BY:/s/BRUCE J. MAGEE
- --------------------- ---------------------------
Roger A. Brown Bruce J. Magee
Senior Vice President, Senior Vice President, CFO, and
Secretary & Assistant Secretary
General Counsel
BY: HURON INSURANCE COMPANY,
Limited Partner
Attest:
/s/ROGER A. BROWN BY: /s/ROGER J. BEEKLEY
- -------------------- -----------------------------
Roger A. Brown Roger J. Beekley
Secretary Vice President
Lessee:
HARLEYSVILLE MUTUAL INSURANCE COMPANY
Attest:
/s/ROGER A. BROWN BY:/s/CLARK D. KULP
- --------------------- ------------------------
Roger A. Brown Clark D. Kulp
Senior Vice President, Vice President
Secretary &
General Counsel
2
<PAGE>
EXHIBIT (10)(Z)
FORM OF CHANGE OF CONTROL EMPLOYMENT AGREEMENT
The agreement contained below has the same form as
separate agreements between the Company and its
executive officers except the factor in section
4(c)(ii)(b) is 2.999 for the Chief Executive Officer
instead of 2.000.
July 1, 1999
Name & Title of Employee
Harleysville Group Inc. and
Harleysville Mutual Insurance Company
355 Maple Avenue
Harleysville, PA 19438
RE: EMPLOYMENT AGREEMENT
Dear :
------------
Harleysville Group Inc. ("Employer") considers the
establishment and maintenance of a sound and vital management
team essential to protecting and enhancing the best interests of
it and its stockholders and those of its parent company,
Harleysville Mutual Insurance Company ("Parent") and the Parent's
policyholders. In this connection, the Employer recognizes that,
as is the case with many publicly held corporations, the
possibility of a change in control of the Employer exists and
that such possibility and the uncertainty and questions which it
may raise among management personnel as to the effect of such
change in control on the Employer, may result in the departure or
distraction of such personnel to the detriment of the Employer,
the Parent, the Employer's stockholders and the Parent's
policyholders. Accordingly, the Board of Directors of the
Employer ("Board") has determined that appropriate steps should
be taken to reinforce and encourage the continued attention and
dedication of the key members of the Employer's management,
including yourself, to their assigned duties without the
distraction arising from the possibility of a change in control.
In order to induce you to remain in the Employer's employ,
this letter agreement ("Agreement") sets forth the severance
benefits which the Employer agrees will be provided to you in the
event your employment is terminated subsequent to a "change in
control" (as defined in Section 2) and under the circumstances
described below.
1. Term. This Agreement shall commence on the date
hereof and shall continue in effect through December 31, 1999;
provided, however, that commencing on January 1, 2000, and each
January 1 thereafter, the term of this Agreement shall
automatically be extended for one additional year unless, not
later than September 30 of the preceding year, the Employer shall
have given notice that it does not wish to extend this Agreement;
provided, further, if a change in control of the Employer shall
have occurred during the original or extended term of this
Agreement, this Agreement shall continue in effect for a period
of thirty-six (36) months beyond the month in which such change
in control occurred.
1
<PAGE>
Name of Employee - Employment Agreement
July 1, 1999 - Page No. 2
2. Change in Control. Except as provided in Section 5(a),
no benefits shall be payable hereunder unless there shall have
been a change in control of the Employer or of the Parent, as set
forth below, and your employment shall thereafter have been
terminated in accordance with Section 3 below. For purposes of
this Agreement, a "change in control" shall mean, if any of the
following have occurred: (i) there shall consummated (a) any
consolidation or merger of the Employer or the Parent in which
they are not the continuing or survivor corporation or pursuant
to which shares of the Employer's stock would be converted in
whole or in part into cash, securities or other property, other
than a merger of the Employer in which the holders of the
Employer's stock immediately prior to the merger have
substantially the same proportionate ownership of Common Stock of
the surviving corporation immediately after the merger or (b) any
sale, lease, exchange or transfer (in one transaction or a series
of related transactions) of all or substantially all the assets
of the Employer or the Parent; (ii) the stockholders of the
Employer or policyholders of the Parent shall approve any plan or
proposal for the liquidation or dissolution of the Employer or
the Parent; (iii) any "person" (as such term is used in
Sections 13(d) and 14(d) (2) of the Exchange Act, other than the
Employer, the Parent, or a subsidiary thereof or any employee
benefit plan sponsored by the Employer, the Parent, or a
subsidiary thereof, shall become the beneficial owner (within the
meaning of Rule 13d-3 under the Exchange Act) of securities of
the Employer representing 20% or more of the combined voting
power of the Employer then outstanding securities ordinarily
(and apart from special circumstances) having the right to vote
in the election of Directors, as a result of a tender or exchange
offer, open market purchases, privately negotiated purchases or
otherwise; (iv) at any time during a period of two consecutive
years, individuals who at the beginning of such period
constituted the Board of the Employer or the Parent shall cease
for any reason to constitute at least a majority thereof, unless
the election or the nomination for election of each new Director
during such two-year period was approved by a vote of a least two-
thirds of the Directors then still in office who were Directors
at the beginning of such two-year period; (v) any other event
shall occur that would be required to be reported in response to
Item 6(e) of Schedule 14A of Regulation 14A promulgated under the
Exchange Act; or (vi) any other change in the power to direct or
cause the direction of management and policies of the Employer or
the Parent, by contract or otherwise.
3. Termination Following Change in Control. If any of the
events described in Section 2 hereof constituting a change in
control shall occur during the term hereof, you shall be entitled
to the benefits provided in Section 4 hereof upon the subsequent
termination of your employment unless such termination is (a)
because of your death or Retirement, (b) by the Employer for
Cause or Disability, or (c) by you other than for Good Reason, in
accordance with the following:
2
<PAGE>
Name of Employee - Employment Agreement
July 1, 1999 - Page No. 3
(a) Disability; Retirement.
(i) If, as a result of your incapacity due to
physical or mental illness, you shall have
been absent from your duties with the
Employer on a full time basis for six (6)
consecutive months and within 30 days after
written notice of termination is given you
shall not have returned to the full time
performance of your duties, the Employer may
terminate this Agreement for "Disability."
(ii) Termination of your employment based on
"Retirement" shall mean termination in
accordance with the Employer's retirement
policy, including early retirement, generally
applicable to its salaried employees or in
accordance with any retirement arrangement
established with your consent with respect to
you.
(b) Cause. The Employer may terminate your employment
for Cause. Termination by the Employer of your
employment for "Cause" shall mean termination upon
(A) the willful and continued failure by you to
substantially perform your duties with the
Employer (other than any such failure resulting
from your incapacity due to physical or mental
illness), or any such actual or anticipated
failure after the issuance of a Notice of
Termination by you for Good Reason, as such terms
are defined in Subsections 3(d) and 3(c),
respectively, after a written demand specifically
identifies the manner in which the Board believes
that you have not substantially performed your
duties, or (B) the willful engaging by you in
conduct which is demonstrably and materially
injurious to the Company, monetarily or otherwise.
For purposes of this paragraph, no act or failure
to act on your part shall be considered "willful"
unless done or omitted to be done by you not in
good faith and without reasonable belief that your
action or omission was in the best interest of the
Employer. Notwithstanding the foregoing, you
shall not be deemed to have been terminated for
Cause unless and until there shall have been
delivered to you a copy of a resolution duly
adopted by the affirmative vote of not less than
three-quarters of the entire membership of the
Board of a meeting of the Board called and held
for the purpose (after reasonable notice to you
and an opportunity for you, together with your
counsel, to be heard before the Board) finding
that, in the good faith opinion of the Board, you
were guilty of conduct set forth above and
specifying the particulars thereof in detail.
(c) Good Reason. You may terminate your employment
for Good Reason. For purposes of this Agreement,
"Good Reason" shall mean, after any change in
control and without your express written consent:
(i) the assignment to you of any duties
inconsistent with your positions, duties,
responsibilities and status with the Employer
immediately prior to a change in control or a
change in your reporting responsibilities,
titles or offices as in effect immediately
prior to a change in control, or any removal
of you from or any failure to re-elect you to
any of such positions, except in connection
with the termination of your employment for
Cause, Disability, Retirement or by you other
than for Good Reason or as a result of your
death;
3
<PAGE>
Name of Employee - Employment Agreement
July 1, 1999 - Page No. 4
(ii) a reduction in your base salary under the
Employer's Wage and Salary Program in effect
immediately prior to a change in control or
as the same may be increased from time to
time thereafter;
(iii) a failure by the Employer to continue
its executive incentive plans, as the same
may be amended or modified from time to time
but substantially in the form presently in
effect ("Program"), or failure by the
Employer to continue you as a participant in
the Program on at least the basis in effect
immediately preceding a change in control or
to pay you any installment of a previous
award or of deferred compensation, if any,
under the Program or any deferred
compensation program in effect in which you
participate immediately preceding a change in
control;
(iv) the Employer requiring you to be based
anywhere other than the office in
Harleysville, Pennsylvania, except for
required travel on business to an extent
substantially consistent with the business
travel obligations you experienced
immediately preceding a change in control;
(v) the failure by the Employer to continue in
effect any benefit or compensation plan or
arrangement, in which you are participating
immediately preceding change in control, the
taking of any action by the Employer not
required by law which would adversely affect
your participation in or materially reduce
your benefits under any of such plans or
deprive you of any material fringe benefit
enjoyed by you at the time of the change in
control or the failure by the Employer to
provide you with the number of paid vacation
days, holidays and personal days to which you
are then entitled in accordance with the
Employer's normal leave policy in effect
immediately preceding a change in control;
(vi) the failure of the Employer to obtain the
assumption of the agreement to perform this
Agreement by any successor as contemplated in
Section 5 hereof; or
(vii) any purported termination of your
employment by the Employer which is not
effected pursuant to a Notice of Termination
satisfying the requirements of subparagraph
(d) below (and, if applicable, subparagraph
(b) above). Your continued employment shall
not constitute consent to, or a waiver of
rights with respect to, any circumstance
constituting Good Reason hereunder.
(d) Notice of Termination. Any termination by the Employer
pursuant to subparagraphs (a) or (b), above, or by you pursuant
to subparagraph (c), above, shall be communicated by a written
Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a notice
which shall indicate the specific
4
<PAGE>
Name of Employee - Employment Agreement
July 1, 1999 - Page No. 5
termination provision in this Agreement relied
upon and shall set forth, in reasonable detail,
the facts and circumstances claimed to provide a
basis for termination of your employment under the
provision so indicated.
(e) Date of Termination. "Date of Termination" shall
mean (A) if this Agreement is terminated for
Disability, 30 days after Notice of Termination is
given (provided that you shall not have returned
to the performance of your duties on a full-time
basis during such 30-day period), (B) if your
employment is terminated pursuant to subparagraph
(c), above, the date specified in the Notice of
Termination and (C) if your employment is
terminated for any other reason, the date on
which a Notice of Termination is given; provided
that, if within 30 days after any Notice of
Termination is given, the party receiving such
Notice of Termination gives good faith notice to
the other party that a dispute exists concerning
the termination and the party giving such Notice
shall pursue his claim diligently and in good
faith, the Date of Termination shall be the date
on which the dispute is finally resolved, either
by mutual written agreement of the parties, by a
binding and final arbitration award or by a final
judgement, order or decree of a court of competent
jurisdiction (the time for appeal therefrom having
expired and no appeal having been perfected).
4. Compensation Upon Termination Or During Disability Following
A Change In
Control.
(a) During any period following a change in control
that you fail to perform your duties hereunder as
a result of incapacity due to physical or mental
illness, you shall continue to receive your full
base salary at the rate then in effect and any
installments of deferred portions of awards under
the Program paid during such period until your
employment is terminated pursuant to paragraph
3(a) hereof. Thereafter, your benefits shall be
determined in accordance with the Employer's Long-
Term Disability Plan, or any substitute plan then
in effect.
(b) If, following a change in control, you terminate your
employment other than for Good Reason or your employment
shall be terminated for Cause, the Employer shall pay
you your full base salary through the Date of Termination
at the rate in effect at the time Notice of Termination
or regulatory order is given plus all other amounts to
which you are entitled under any compensation plan, the
annual incentive plan, long-term incentive plan, or stock
option plan of the Employer at the time such payments
are due and the Employer shall have no further
obligation to you.
(c) If, following a change in control, the Employer shall
terminate your employment other than pursuant to paragraph
(a) or (b) hereof or if you shall terminate your employment
for Good Reason, then the Employer shall pay to you as
severance pay in a lump sum on the thirtieth day
following the Date of Termination or, at your election,
provided such
5
<PAGE>
Name of Employee - Employment Agreement
July 1, 1999 - Page No. 6
election is made by you by written notice to the
Employer at least 90 days prior to change of
control, in substantially equal monthly payments
over two years, the following amounts:
(i) your full base salary through the Date of
Termination at the rate in effect at the time
Notice of Termination is given and an amount
equal to the amount, if any, of the deferred
portion of any awards which have been awarded
to you pursuant to the Program but which have
not yet been paid to you and the amount of
Deferred Compensation, if any, under the
Program which has accrued to your account;
and
(ii) in lieu of any further salary payments to you
for periods subsequent to the Date of
Termination, an amount equal to the product
of (a) your annual base salary in effect as
of the Date of Termination plus the average
target awards under any annual incentive plan
for the last three years, multiplied by (b)
the number 2.000; and
(iii) in lieu of payments of
any type under any long-term incentive plan,
a cash amount equal to the sum of the target
bonuses, pro-rated on a month-completed
basis, for all long-term incentive plan
periods in which you are currently
participating plus any incentive compensation
which has been allocated or awarded to you
for a fiscal year or other measuring period
preceding the Date of Termination but has not
yet been paid. If all or part of a target
award is comprised of shares of Employer's
stock, the amount paid in cash shall be equal
to the fair market value of the stock at the
beginning of the plan period; and
(iv) to the extent you may not legally exercise
any stock options at the time of change of
control for valid securities law reasons or
other reasons, then in lieu of shares of
stock of the Company otherwise issuable upon
exercise of stock options ("Options"), if
any, granted to you under the Employer's
Equity Incentive Plan or other plan then in
effect (which Options shall be cancelled upon
the making of the payment referred to below),
you shall receive an amount in cash equal to
the aggregate spread between the exercise
prices of all Options held by you and the
higher of (a) the highest closing price of
the stock subject to the Options during the
twelve months immediately preceding the Date
of Termination, or (b) the highest price per
share actually paid in connection with any
change in control of the Parent including,
without limitation, prices paid in any
subsequent merger or combination with any
entity that acquires control (the higher
price being hereinafter referred to as the
Termination Price"); and
6
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Name of Employee - Employment Agreement
July 1, 1999 - Page No. 7
(v) in the event that any payments made to you
under this Agreement or otherwise (the
"Payments") are subject to the excise tax
imposed by Section 4999 of the Internal
Revenue Code (the "Excise Tax"), then the
Employer shall pay you an additional amount
("Gross Up") such that the net amount
retained by you after deduction of any Excise
Tax on the Payments and any Federal and State
income taxes and Excise Tax upon the Payments
shall be equal to the Payments. For purposes
of determining the amount of the Gross Up,
you shall be deemed to pay Federal, State and
local income taxes at the highest marginal
rate of taxation in the calendar year in
which the Payment is to be made. State and
local income taxes shall be determined based
upon the state and locality of your domicile
on the Termination Date. The determination
of whether such Excise Tax is payable and the
amount thereof shall be based upon the
opinion of tax counsel selected by the
Employer and acceptable to you. If such
opinion is not finally accepted by the IRS
upon audit, then appropriate adjustments
shall be computed (without interest but with
Gross Up, if applicable) by such tax counsel
based upon the final amount of the Excise Tax
so determined. The amount shall be paid by
the appropriate party in one lump cash sum
within 30 days of such computation; and
(vi) the Employer shall pay all legal fees and
expenses incurred by you as a result of such
termination (including all such fees and
expenses, if any, incurred in contesting or
disputing any such termination or in seeking
to obtain or enforce any right or benefit
provided by this Agreement or in connection
with any tax audit or proceeding to the
extent attributable to the application of
Section 4999 of the Code to any payment or
benefit hereunder). Reimbursement of such
legal fees and expenses shall be made on a
regular and periodic basis by the Employer
upon your presentation to the Employer of a
statement of such fees and expenses prepared
by your counsel under standard and customary
methods; and
(d) Unless you are terminated for Cause or by regulatory order,
the Employer shall maintain in full force and effect, for your
continued benefit for three years after the Date of Termination,
all employee benefit plans, programs or arrangements in which you
were entitled to participate immediately prior to the Date of
Termination including without limitation medical and dental,
life, disability, accident and death insurance plans provided
your continued participation is possible under the general terms
and provisions of such plans and programs. In the event that
your participation in any such plan or program is barred, the
Employer shall arrange to provide you with benefits substantially
similar to those which you would have been entitled to receive
under such plans and programs. Except for any insurance policy
used by the Employer to fund any Rabbi Trust, at the
7
<PAGE>
Name of Employee - Employment Agreement
July 1, 1999 - Page No. 8
end of the period of coverage, you shall have the
option to have assigned to you at no cost and with
no apportionment of prepaid premiums, any
assignable insurance policy owned by the Employer
and relating specifically to you. In addition,
the Employer shall make a lump sum payment of an
amount necessary to continue these premiums
through your normal retirement age; and
(e) You shall not be required to mitigate the amount
of any payment provided for in this Section 4 by
seeking other employment or otherwise, nor shall
the amount of any payment or benefit provided for
in this Section 4 be reduced by any compensation
earned by you or benefits including retirement
benefits provided to you as the result of
employment by another employer after the Date of
Termination or otherwise.
(f) Should you elect to receive payments hereunder in
installments over two years, the amount of the
Employer's outstanding obligation to you shall be
credited with interest on a monthly basis at a
rate equal to the then current rate for one-year
insured certificates of deposit at a commercial
bank.
(g) In addition to all other amounts payable to you
under Section 4, you shall be entitled to receive
all benefits payable to you under the Extra
Compensation Plan, the Supplemental Retirement
Plan, the Pension Plan, the Non-Qualified Deferred
Compensation Plan and any other plan or agreement
relating to retirement benefits.
5. Successors' Binding Agreement
(a) The Employer will require any successor (whether
direct or indirect, by purchase, merger,
consolidation or otherwise) to all or
substantially all of the business and/or assets of
the Employer, by agreement in form and substance
reasonably satisfactory to you, to expressly
assume and agree to perform this Agreement in the
same manner and to the same extent that the
Employer would be required to perform it if no
such succession had taken place. The Employer
will also obtain agreement from such successor
that it will not exercise its non-renewal option
at any time within one year from the date of the
change in control. Failure of the Employer to
obtain such agreement prior to the effectiveness
of any such succession shall be a breach of this
Agreement and shall entitle you to compensation
from the Employer in the same amount and on the
same terms as you would be entitled hereunder if
you terminated your employment for Good Reason,
except that for purposes of implementing the
foregoing, the date on which any such succession
becomes effective shall be deemed the Date of
Termination. As used in the Agreement, "Employer"
shall mean the Employer as hereinbefore defined
and any successor to its business and/or assets as
aforesaid which executes and delivers the
agreement provided for in this Section 5 or which
otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law.
8
<PAGE>
Name of Employee - Employment Agreement
July 1, 1999 - Page No. 9
(b) This Agreement shall inure to the benefit of and
be enforceable by your personal or legal
representatives, executors, administrators,
successors, heirs, distributees, devisees and
legatees. If you should die while any amounts
would still be payable to you hereunder if you had
continued to live, all such amounts, unless
otherwise provided herein, shall be paid in
accordance with the terms of this Agreement to
your devisee, legatee, or other designee or, if
there be no such designee, to your estate.
6. Notice. For the purposes of this Agreement, notices
and all other communications provided for in the Agreement shall
be in writing and shall be deemed to have been duly given when
delivered or mailed by United States registered mail, return
receipt requested, postage prepaid, addressed to the respective
addresses set forth on the first page of this Agreement, provided
that all notices to the Employer shall be directed to the
attention of the Corporate Secretary or to such other address as
either party may have furnished to the other in writing in
accordance herewith, except that notices of change of address
shall be effective only upon receipt.
7. Miscellaneous. No provisions of this Agreement may be
modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing and signed by you and such
officer as may be authorized by the Board. No waiver by either
party hereto at any time of any breach by the other party hereto
of or compliance with any condition or provision of this
Agreement to be performed by such other party shall be deemed a
waiver of similar or dissimilar provision or conditions at the
same or at any prior o r subsequent time. No agreements or
representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either
party which are not set forth expressly in the Agreement. It is
intended that the benefits payable hereunder shall be considered
paid to you for your past services to the Employer and continuing
services from the date hereof. Any payment provided for
hereunder shall be paid net of any applicable withholding
required under Federal, State and local law. The validity,
interpretation, construction and performance of this Agreement
shall be governed by the substantive law of the Commonwealth of
Pennsylvania.
8. Validity. The invalidity or unenforceability of any
provisions of this Agreement shall not affect the validity of
enforceability of any other provisions of this Agreement, which
shall remain in full force and effect.
9. Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an
original but all of which together will constitute one and the
same instrument.
10. Arbitration. Any dispute or controversy arising under
or in connection with this Agreement shall be settled exclusively
by arbitration in the Commonwealth of Pennsylvania in accordance
with the rules of the American Arbitration Association then in
effect. Notwithstanding the pendancy of any such dispute or
controversy, the Employer will continue to pay your full
compensation in effect when the notice giving rise to the dispute
was given (including, but not limited to, base salary and
installments under the Program) and, to the extent permitted by
law, continue you as a participant in all compensation, benefits
and insurance plans in which you were participating when the
notice giving rise to the dispute was given, until the dispute is
finally resolved in accordance with paragraph 3(e) hereof.
Amounts paid under
9
<PAGE>
Name of Employee - Employment Agreement
July 1, 1999 - Page No. 10
this Section are in addition to all other amounts due under
this Agreement and shall not be offset against or reduce any
other amounts due under this Agreement. Judgment may be
entered on the arbitrator's award in any court having
jurisdiction; provided, however, that you shall be entitled
to seek specific performance of your right to be paid until
the Date of Termination during pendancy of any dispute or
controversy arising under or in connection with this
Agreement .
Very truly yours,
Walter R. Bateman
Chairman, President & CEO
- ----------------------------
NAME OF EMPLOYEE
AGREED TO THIS DAY
---------
OF ,
----------------- ----
10
<PAGE>
RAB:agd
EXHIBIT (10)(AB)
HARLEYSVILLE GROUP INC.
SUPPLEMENTAL RETIREMENT PLAN
AMENDED AND RESTATED: NOVEMBER 17, 1999
<PAGE>
HARLEYSVILLE GROUP INC.
SUPPLEMENTAL RETIREMENT PLAN
----------------------------
AMENDED AND RESTATED: NOVEMBER 17, 1999
TABLE OF CONTENTS
------------------------------------------
ARTICLE NO. TITLE OF ARTICLE PAGE NO.
- ---------- ------------------------------ --------
I PURPOSE 1
II DEFINITIONS 1
III ADMINISTRATION 2
IV EFFECTIVE DATES 2
V OFFSET FORMULA 2
VI STEP-RATE FORMULA 3
VII ELIGIBILITY FOR BENEFITS UNDER
ARTICLES V AND VI 5
VIII PAYMENT OF BENEFITS 5
IX SOURCE OF BENEFITS 5
X AMENDMENT AND TERMINATION 6
XI PROHIBITION OF ALIENATION 6
XII GOVERNING LAW 6
XIII COSTS OF THE PLAN 6
XIV NO EMPLOYMENT CONTRACT 7
<PAGE>
HARLEYSVILLE GROUP INC.
SUPPLEMENTAL RETIREMENT PLAN
----------------------------
AMENDED AND RESTATED: NOVEMBER 17, 1999
ARTICLE I - PURPOSE
--------------------
This Supplemental Retirement Plan (hereinafter referred to
as the "Plan") is intended to supplement the retirement benefits
payable to certain management Employees of Harleysville Group
Inc. (hereinafter the "Company"), from the Pension Plan of
Harleysville Group Inc. and Associated Employees through a non-
qualified unfunded deferred compensation plan. It is further
intended that this Plan shall be a Plan that is made available
only to a select group of management and highly compensated
employees pursuant to the Employment Retirement Income Security
Act of 1974.
ARTICLE II - DEFINITIONS
------------------------
For the purposes of this Plan, the definitions found in the
Company's qualified Pension Plan shall govern except that the
following terms shall have the meanings set forth below:
(A) "Board" shall mean the Board of Directors of the
Company.
(B) "Committee" shall mean the Compensation and Personnel
Development Committee of the Board of Directors.
(C) "Compensation" shall mean, for Article V, average
annual base salary during the most recent five years prior to
retirement, and for Article VI, shall mean the average annual
base salary, whether actually paid or deferred, and the average
amount of all payments, whether actually paid or deferred, made
pursuant to any annual incentive plan of the Company, during the
most recent five years prior to retirement.
(D) "Pension Plan" means the qualified and funded defined
benefit pension plan adopted by the Company as of January 1, 1953
and as amended thereafter from time to time.
1
<PAGE>
(E) "Retirement" shall mean termination of employment under
such circumstances that a Participant is entitled to an immediate
benefit from the Pension Plan whether or not benefits commence on
such date. As set forth in the Pension Plan, a disabled employee
is entitled to accrue benefits under the Pension Plan until his
or her Normal Retirement date.
(F) "Social Security Benefit" shall mean the benefit
payable at age 65 for an age 65 employee. For retirement ages
between 62 and 65, the Social Security Benefit will be the
benefit payable at retirement age. For retirement prior to age
62, the Social Security Benefit will be the benefit payable at
age 62 reduced by 5/9 of 1% for each month that the benefit
commencement date precedes age 62.
ARTICLE III - ADMINISTRATION
----------------------------
The responsibility for the implementation and administration
of this Plan is delegated to the Committee. The Committee shall
interpret the Plan and establish rules and regulations governing
its administration. Any decision or action made or taken by the
Committee, arising out of or in connection with the construction,
administration, interpretation and effect of the Plan and of its
rules and regulations, shall be conclusive and binding upon all
Participants and any person claiming through or under any
Participant, unless otherwise determined by the Board of
Directors.
ARTICLE IV - EFFECTIVE DATES
----------------------------
The Plan was adopted as of January 1, 1992, amended and
restated on May 25, 1994, and amended and restated on November
17, 1999.
ARTICLE V - OFFSET FORMULA
--------------------------
A. All employees of the Company who (1) were in paygrade 20
and above and in active employment on December 31, 1991 or (2)
retired from the Company during the period January 1,
2
<PAGE>
1989 through December 31, 1991 and were in paygrade 20 or above,
shall be Participants in the Plan and eligible for benefits under
the benefit formula set forth in Article VI.A; provided, however,
that otherwise eligible employees who retired in the period
January 1, 1989 through December 31, 1991 and received benefits
under other specialized Company supplemental retirement programs
are not eligible for participation in this Plan.
B. Upon his or her Retirement, a Participant meeting the
qualifications of Article V.A shall be entitled to a benefit from
this plan. The amount of the benefit shall be (1) the benefit
that a Participant would have accrued upon the retirement under
the Pension Plan formula(s) in effect on December 31, 1988
applicable to that Participant assuming that such formula(s) had
stayed in effect until the Participant's Retirement, less (2) the
benefit which the Participant has accrued upon Retirement under
the Pension Plan formula in effect at the time of Retirement.
All terms and conditions of the Pension Plan in effect on
December 31, 1988 shall govern the benefit calculated under the
formula(s) in effect on said date; provided, however, that it is
further expressly intended that the calculation under (1) above
shall not employ any limit on compensation required by Section
401(a)(17) of the Internal Revenue Code (or its equivalent) for
qualified plans applicable to plan years commencing on or after
January 1, 1989; and that any benefit so calculated shall not be
limited by the application of Section 415 of the Internal Revenue
Code (or its equivalent).
ARTICLE VI - STEP-RATE FORMULA
------------------------------
A. All employees of the Company who are in paygrade 20 and
above upon Retirement shall be Participants in the Plan and
eligible for benefits under the benefit formula set forth in this
Article VI.
B. Upon his or her Retirement, a Participant meeting the
qualifications of this Article V.B may be entitled to a benefit
from this Plan. The amount of the benefit shall be (1) the
benefit that would have accrued at Retirement under the Pension
Plan formula in effect on date of hire,
3
<PAGE>
without the application of any limitation on compensation
pursuant to Section 401(a)(17) of the Internal Revenue Code (or
its equivalent) and without the application of any limitation on
benefits required by Section 415 of the Internal Revenue Code (or
its equivalent) less (2) the benefit that the Participant has
accrued upon Retirement under the Pension Plan formula in effect
at the time of Retirement. Notwithstanding the foregoing, the
maximum benefit ("Maximum Benefit") calculated under (1) shall be
reduced, if necessary, in order that the sum of (a) the Social
Security Benefit, (b) the benefits payable under the Pension
Plan, and (c) the benefits payable under this Plan shall not
exceed 1.85% of a Participant's Compensation times the years of
service with the Company up to a maximum of 25 years.
C. The Maximum Benefit shall be reduced by the early
retirement factors that apply under the Pension Plan step-rate
formula which are (8%) per year from age 65 to age 62 and 4% per
year thereafter.
D. Notwithstanding the foregoing, if an employee is a
Participant in any Participation Period under the Company's Long-
Term Incentive Plan or has been such within the past two years,
then the Maximum Benefit shall not be reduced under "C" above if
the Participant has at least twenty years of service and retires
at or after age 62, and benefits shall be reduced by 4% per year
if the Participant has at least 20 years of service and retires
prior to age 62 but no earlier than age 60. The Social Security
Benefit utilized in the determination of Maximum Benefit shall be
the benefit payable at age 62. If the benefits under this Plan
commence prior to age 62, the Social Security Benefit utilized
shall be the benefit payable at 62, reduced by 5/9 of 1% for each
month that the benefit commencement date precedes age 62. The
Maximum Benefit shall further be reduced by 4% per year if
retirement occurs prior to age 62 but no earlier than age 60.
4
<PAGE>
ARTICLE VII - ELIGIBILITY FOR BENEFITS UNDER ARTICLES V AND VI
--------------------------------------------------------------
A Participant that qualifies for benefits under both Article
V and VI receive the greater of the two benefits.
ARTICLE VIII - PAYMENT OF BENEFITS
----------------------------------
Any benefits payable to a Participant under this Plan shall
commence as of the date that benefits commence under the Pension
Plan, be paid on the same payment schedule as payments under the
Pension Plan, and shall be the same form of benefit selected
under the Pension Plan, i.e., single life, joint and survivor,
etc. The surviving beneficiary, if any, of a Participant shall
be the same as under the Pension Plan. If an individual entitled
to receive any benefits hereunder is determined by the Committee
or is adjudged to be legally incapable of giving valid receipt
and discharge for such benefits, they shall be paid to the duly
appointed and acting guardian, if any, and if no such guardian is
appointed and acting, to such persons as the Committee may
designate. Such payment shall, to the extent made, be deemed a
complete discharge for such payments under this Plan.
ARTICLE IX - SOURCE OF BENEFITS
-------------------------------
Benefits under this Plan shall not be prefunded, but shall
be payable by the Company when they become due from the general
assets of the Company as provided herein, and the Participant's
interest in his or her benefits under this Plan (and the interest
of any beneficiary) shall not be greater than that of an
unsecured creditor of the Company. Any funds reserved by the
Company to pay any benefits due hereunder shall not be considered
as held in trust for the exclusive benefit of Participants. The
Company only has a contractual obligation to make payment of the
benefit when due.
5
<PAGE>
ARTICLE X - AMENDMENT AND TERMINATION
-------------------------------------
The Board may at any time, or from time to time, amend this
Plan in any respect or terminate this Plan without restriction
and without consent of any Participant or beneficiary, provided,
that any such amendment or termination shall not impair the right
of any Participant or any surviving beneficiary of any then
deceased Participant to receive benefits earned hereunder prior
to such amendment or termination without the consent of such
Participant or such surviving beneficiary. No beneficiary of a
Participant shall have any right to benefits under this Plan or
any other interest herein before becoming a surviving
beneficiary.
ARTICLE XI - PROHIBITION OF ALIENATION
--------------------------------------
Any amounts accrued by a Participant hereunder may not be
voluntarily or involuntarily assigned, anticipated, or alienated
and shall not be subject to attachment, levy or encumbrance.
ARTICLE XII - GOVERNING LAW
---------------------------
The place of administration of this Plan shall be
conclusively deemed to be within the Commonwealth of Pennsylvania
and the validity, construction, interpretation, administration
and effect of this Plan, and any of its rules and regulations,
and the rights of any and all persons having or claiming to have
an interest therein or thereunder, shall be governed by, and
determined exclusively and solely in accordance with the laws of
the Commonwealth of Pennsylvania.
ARTICLE XIII - COSTS OF THE PLAN
--------------------------------
The expenses incurred in administering this Plan, including
any Committee fees, any charges by the Company's independent
auditors, or any other costs, shall be borne by the Company and
shall not be charged against the benefit of any Participant.
6
<PAGE>
ARTICLE XIV - NO EMPLOYMENT CONTRACT
------------------------------------
Neither the establishment of this Plan nor any action taken
hereunder shall be construed as giving any Participant any right
to be retained in the employ of the Company, and all Participants
shall remain subject to discharge to the same extent as if the
Plan had never been adopted.
TO RECORD THE ADOPTION OF THIS PLAN, THE COMPANY HAS CAUSED
ITS AUTHORIZED OFFICERS TO AFFIX THE CORPORATE NAME AND SEAL
HERETO THIS 17TH DAY OF NOVEMBER, 1999.
HARLEYSVILLE GROUP INC.
By: /s/WALTER R. BATEMAN, II
-------------------------
Walter R. Bateman, II
Chairman, President and
Chief Executive Officer
ATTEST:
/s/ROGER A. BROWN
- ---------------------------------
Roger A. Brown, Secretary
7
<PAGE>
EXHIBIT (13)(A)
SELECTED CONSOLIDATED FINANCIAL DATA
Harleysville Group Inc. (Company) is 57% 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), Worcester Insurance Company
(Worcester), and Harleysville Ltd., a real estate
partnership that owns the home office.
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)
INCOME STATEMENT DATA <F1>:
- -------------------------
Premiums earned $ 707,200 $ 664,604 $ 624,905 $ 615,197 $ 477,042
Investment
income, net 85,894 86,025 81,783 78,008 68,445
Realized
investment gains 16,222 16,085 6,541 3,182 2,245
Total revenues 824,756 779,311 724,179 707,425 558,549
Income before
income taxes 47,752 80,441 67,281 31,375 52,642
Income taxes 4,935 17,028 13,209 2,695 11,311
Net income 39,913 63,413 54,072 28,680 41,331
Basic earnings
per share $ 1.37 $ 2.18 $ 1.89 $ 1.03 $ 1.53
Diluted earnings
per share $ 1.35 $ 2.15 $ 1.86 $ 1.02 $ 1.51
Cash dividends
per share $ .52 $ .48 $ .44 $ .40 $ .36
BALANCE SHEET DATA AT YEAR END:
- ------------------------------
Total
investments $1,604,022 $1,579,566 $1,451,590 $1,291,279 $1,085,151
Total assets $2,020,056 1,934,497 1,801,195 1,622,612 1,378,341
Debt and lease
obligations 96,810 97,140 97,440 97,715 97,965
Shareholders'
equity 526,894 529,658 446,515 370,245 345,009
Shareholders'
equity per
share $ 18.29 $ 18.17 $ 15.49 $ 13.09 $ 12.57
- ----------------------
[FN]
<F1> The Company's insurance subsidiaries participate
in an underwriting pooling arrangement with
Mutual. Harleysville Group's participation was
60% for 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.
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 in both the personal and commercial lines of insurance.
The personal lines of insurance include both auto and homeowners,
and the commercial lines include auto, commercial multi-peril and
workers compensation. The business 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, 1997, Harleysville Group's
participation increased from 65% to 70% and Lake States became a
participant in the pooling agreement. 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.
Harleysville Group is reducing the potential impact of
future 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, in return for a reinsurance premium, reinsured
accumulated catastrophe losses in a quarter up to $14.4 million,
$16.2 million and $15.8 million for 1999, 1998 and 1997,
respectively. This reinsurance coverage was in excess of a
retention of $3.6 million for 1999 and $1.8 million for 1998 and
1997. The agreement
2
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
RESULTS OF OPERATIONS (Continued)
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 $6.9 million, $3.0 million and
$2.6 million and losses incurred of $5.0 million, $29.5 million
and $1.6 million for 1999, 1998 and 1997, respectively.
Effective for one year from July 1, 1999, the Company's
subsidiaries, and Mutual and its wholly owned subsidiaries are
reinsured under a catastrophe reinsurance treaty that provides
coverage for 85.5% of up to $147 million in excess of a retention
of $20 million for any given catastrophe. Harleysville Group's
2000 pooling share of this coverage would be 85.5% 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 $126 million for any
catastrophe involving an insured loss of $167 million or greater.
Harleysville Group's 2000 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 for coverage for a second catastrophe
and payment of an additional premium in the event of a first
catastrophe occurring.
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 United States 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.
Harleysville Group's premium growth and underwriting results
have been, and continue to be, influenced by market conditions.
Insurance industry price competition has made it more difficult
to attract and retain properly priced personal and commercial
lines business. It is management's policy to maintain its
underwriting standards, even at the expense of premium growth.
3
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(CONTINUED)
1999 COMPARED TO 1998
Premiums earned increased $42.6 million for the year ended
December 31, 1999. Of the increase, $36.2 million was from
commercial lines and $6.4 million from personal lines. The
increase in commercial lines was primarily due to increased
commercial policy counts. The increase in personal lines is
primarily due to $8.9 million of earned premium produced through
a managing general agency. Such earned premium will not continue
as the arrangement with the managing general agent is terminating
and the business is being ceded to a reinsurer.
Investment income declined by $0.1 million for the year
ended December 31, 1999 as a lower yield on the investment
portfolio was partially offset by an increase in invested assets.
Realized investment gains increased $0.1 million primarily
resulting from $2.2 million of greater gains on investments sold
or called partially offset by a $2.1 million loss for an equity
investment that declined in value on an other-than-temporary
basis.
Income before income taxes and cumulative effect of
accounting change declined $32.7 million primarily due to greater
losses incurred relative to premiums earned. Harleysville
Group's statutory combined ratio increased to 107.8% for the year
ended December 31, 1999, from 103.2% for the year ended December
31, 1998. Hurricane Floyd, which struck the east coast of the
United States during the third quarter of 1999, caused losses of
$15.1 million ($.33 per basic share after taxes) and adversely
affected the statutory combined ratio by 2.1 points for the year
ended December 31, 1999. Hurricane Bonnie, which struck North
and South Carolina and Virginia during the third quarter of 1998,
caused losses of $3.0 million ($.07 per basic share after taxes)
and adversely affected the statutory combined ratio by 0.4 points
for the year ended December 31, 1998. Hurricane losses are not
covered under the aggregate catastrophe reinsurance agreement
with Mutual.
The year ended December 31, 1999 included a pre-tax charge
of $2.5 million ($.06 per basic share after taxes) related to the
consolidation of 23 claims offices into a centralized direct
reporting center and four specialized regional claims service
centers. The restructuring is expected to result in a net
reduction in claims staff of approximately 125 people. The
4
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
1999 COMPARED TO 1998 (Continued)
consolidation is expected to be completed by the end of the
second quarter of 2000 and result in annualized after-tax savings
of approximately $2.3 million based on a preliminary analysis of
achievable cost savings. This claims restructuring charge
adversely affected the statutory combined ratio by 0.4 points for
the year ended December 31, 1999. Excluding the impacts of the
hurricanes and claims restructuring charge, the statutory
combined ratio increased 2.5 points for the year ended December
31, 1999 primarily due to worse results in the automobile lines
of business, particularly commercial automobile. Harleysville
Group is effecting price increases that could mitigate the
combined ratio trend or cause premium growth to decline.
Losses ceded under the aggregate catastrophe reinsurance
agreement with Mutual decreased by $24.5 million for the year
ended December 31, 1999, due to fewer and less severe non-
hurricane catastrophes in 1999. In 1998, there were several
severe spring and summer storms and a first quarter ice storm in
upstate New York.
Harleysville Group recognized favorable development in the
provision for insured events of prior years of $59.5 million and
$42.6 million in 1999 and 1998, respectively. The increased
favorable development primarily related to a greater variance
from expected claim severity in the workers compensation and
automobile lines of business.
The 1999 effective tax expense rate decreased to 10.3% from
21.2% in 1998 primarily due to tax-exempt investment income
comprising a greater proportion of income before income taxes in
1999.
1998 COMPARED TO 1997
Premiums earned increased $39.7 million for the year ended
December 31, 1998. The increase was primarily due to the
acquisition of Minnesota Fire on October 1, 1997 and its
inclusion in the pooling agreement on January 1, 1998.
Investment income increased $4.2 million for the year ended
December 31, 1998 resulting from an increase in invested assets
provided by operating cash flows including a $15.0 million cash
5
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
1998 COMPARED TO 1997 (Continued)
transfer received for various insurance liabilities assumed
January 1, 1998 in connection with the increase in Harleysville
Group's pool participation.
Realized investment gains increased $9.5 million for the
year ended December 31, 1998 due to sales of equity securities at
greater gains.
Income before income taxes increased $13.2 million for the
year ended December 31, 1998 primarily due to the higher
investment income and realized investment gains. Harleysville
Group's statutory combined ratio decreased to 103.2% for the year
ended December 31, 1998 from 103.5% for the year ended December
31, 1997 primarily due to improved results in the personal and
commercial automobile lines of business, partially offset by the
effect of Hurricane Bonnie. Hurricane Bonnie, which struck North
and South Carolina and Virginia during the third quarter of 1998,
caused losses of $3.0 million ($.07 per basic share after taxes)
and adversely affected Harleysville Group's combined ratio by 0.4
points. Hurricane losses are not covered under the aggregate
catastrophe reinsurance agreement with Mutual.
Losses ceded under the aggregate catastrophe reinsurance
agreement with Mutual increased by $27.9 million for the year
ended December 31, 1998 primarily due to several spring and
summer storms and a first quarter ice storm in upstate New York.
Harleysville Group recognized favorable development in the
provision for insured events of prior years of $42.6 million and
$29.7 million in 1998 and 1997, respectively. The increased
favorable development primarily related to a greater variance
from expected claim severity in the automobile lines of business.
The 1998 effective tax expense rate increased to 21.2%
compared to 19.6% in 1997 primarily due to tax-exempt investment
income comprising a lower proportion of income before income
taxes in 1998.
YEAR 2000
Harleysville Group has not encountered difficulties to date
with respect to the year 2000 millennium change, either
internally or with third parties. Harleysville Group will
continue to monitor exposure to any year 2000-related problems.
6
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
YEAR 2000 (Continued)
Harleysville Group's expenses since 1996 to address year
2000 issues were approximately $3.6 million as of December 31,
1999 and consisted primarily of costs of internal resources.
Harleysville Group has risk that claims related to year 2000
issues will be made under insurance policies that it underwrites.
Harleysville Group has concluded that its policies do not
generally provide coverage for losses relating to year 2000
issues and has issued endorsements further clarifying this
exclusion. However, due in part to the potential for judicial
decisions which expand policies to cover risks that were not
contemplated by the policy, which in turn may produce
unanticipated claims, and because there is no prior history of
such claims at this point in time, the amount of any potential
year 2000 coverage liabilities is not determinable. Harleysville
Group has not had any material claims related to year 2000
issues.
NEW ACCOUNTING STANDARDS
In June 1999, Statement of Financial Accounting Standards
(SFAS) No. 137, "Accounting for Derivative Instruments and
Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133," was issued deferring the effective date of
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," from all fiscal quarters of fiscal years beginning
after June 15, 1999 to all fiscal quarters of fiscal years
beginning after June 15, 2000. Harleysville Group is in the
process of determining the effect, if any, of SFAS No. 133 on its
financial statements. Harleysville Group has not held or issued
derivative financial instruments.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of the ability to generate sufficient
cash to meet cash obligations as they come due. Harleysville
Group's primary sources of cash are premium income, investment
income and maturing investments. Cash outflows can be variable
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
7
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
(less than 1%) probability. Even in years of greater catastrophe
frequency, Harleysville Group has been able to pay claims without
liquidating any investments. Harleysville Group has also
considered scenarios of declines in revenue and increases in loss
payments and has the ability to meet cash requirements under such
scenarios without selling held to maturity securities.
Harleysville Group's policy with respect to fixed maturity
investments is to purchase only those that are of investment
grade quality.
Net cash provided by operating activities was $84.9 million
and $81.9 million for 1999 and 1998, respectively. The increase
in net cash provided by operating activities in 1999 primarily
reflects an increase of $18.8 million in cash held as collateral
for security lending transactions, and partially offset by the
effect of the 1998 amendment to the pooling agreement with
Mutual. A cash transfer of $15.0 million was received effective
January 1, 1998 by Harleysville Group related to the various
liabilities assumed in connection with such amendment.
Net cash used by investing activities was $47.9 million and
$71.3 million for 1999 and 1998, respectively. The lower amount
in 1999 reflects the increases in cash used for financing
activities and in cash held as collateral for security lending
transactions offset by the investment of the cash provided by
operating activities.
Financing activities used net cash of $20.5 million in 1999
compared to $8.3 million in 1998. The change was primarily due
to an increase in dividend payments and the purchase of treasury
stock.
The Company had $1.7 million of cash and marketable
securities and $20.0 million of dividends receivable from its
subsidiaries at December 31, 1999, which is available for general
corporate purposes including dividends, debt service, capital
contributions to subsidiaries, acquisitions and the repurchase of
stock. In 1999, the Company adopted a stock repurchase plan
under which the Company and Mutual may each purchase up to 1.0
million shares of Harleysville Group Inc. common stock, up to a
total of 2.0 million shares. As of December 31, 1999, the
Company has repurchased 0.7 million shares leaving 0.3 million
shares authorized to be repurchased. Harleysville Group has no
other material commitments for capital expenditures as of
December 31, 1999.
8
<PAGE>
HARLEYSVILLE GROUP
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
As a holding company, 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, 1999, $50.3 million would be available for distribution to
the Company by its subsidiaries without prior regulatory approval
during 2000. In 1999, the Company's insurance subsidiaries
declared dividends of $35.0 million to the Company, of which
$15.0 million was paid prior to December 31, 1999. See the
Business-Regulation section of the Company's 1999 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 11 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.
Harleysville Group had off-balance-sheet credit risk related
to $64.0 million of premium balances due to Mutual from agents at
December 31, 1999.
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
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE RISK
Harleysville Group's exposure to market risk for changes in
interest rates is concentrated in the investment portfolio and,
to a lesser extent, the debt obligations. Harleysville Group
monitors this exposure through periodic reviews of asset and
liability positions. Estimates of cash flows and the impact of
interest rate fluctuations relating to the investment portfolio
are modeled regularly.
Principal cash flows and related weighted-average interest
rates by expected maturity dates for financial instruments
sensitive to interest rates are as follows:
DECEMBER 31, 1999
--------------------------------
PRINCIPAL WEIGHTED-AVERAGE
CASH FLOWS INTEREST RATE
---------- ----------------
Fixed maturities and short-
term investments:
2000 $ 154,829 6.46%
2001 91,035 6.99%
2002 105,511 6.70%
2003 119,828 6.31%
2004 80,573 6.73%
Thereafter 869,491 5.70%
----------
Total $1,421,267
==========
Market value $1,405,960
==========
Debt
2000 $ 360 4.10%
2001 395 4.10%
2002 435 4.10%
2003 75,475 6.73%
2004 520 4.10%
Thereafter 19,625 6.95%
----------
Total $ 96,810
==========
Fair value $ 92,925
==========
Actual cash flows may differ from those stated as a result
of calls and prepayments.
10
<PAGE>
HARLEYSVILLE GROUP
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(Continued)
EQUITY PRICE RISK
Harleysville Group's portfolio of equity securities, which
is carried on the balance sheet at market value, has exposure to
price risk. Price risk is defined as the potential loss in
market value resulting from an adverse change in prices.
Portfolio characteristics are analyzed regularly and market risk
is actively managed through a variety of techniques. The
portfolio is diversified across industries, and concentrations in
any one company or industry are limited by parameters established
by senior management.
The combined total of realized and unrealized equity
investment gains and losses was $27.8 million, $51.5 million and
$33.4 million in 1999, 1998 and 1997, respectively. During these
three years, the largest total equity investment gain and loss in
a quarter was $32.6 million and $12.1 million, respectively.
11
<PAGE>
EXHIBIT 13(D)
HARLEYSVILLE GROUP
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31,
------------------------
1999 1998
---------- ---------
ASSETS
------
Investments:
Fixed maturities:
Held to maturity, at amortized
cost (fair value $597,367
and $680,371) $ 597,232 $ 638,319
Available for sale, at fair value
(cost $761,830 and $716,325) 749,370 751,293
Equity securities, at fair value
(cost $106,225 and $95,797) 198,197 174,932
Short-term investments, at cost,
which approximates fair value 59,223 15,022
---------- ---------
Total investments 1,604,022 1,579,566
Cash 20,273 3,799
Receivables:
Premiums 91,931 91,256
Reinsurance 81,884 84,179
Accrued investment income 22,478 22,134
---------- ---------
Total receivables 196,293 197,569
Deferred policy acquisition costs 83,541 78,984
Prepaid reinsurance premiums 28,907 12,108
Property and equipment, net 27,368 25,051
Deferred income taxes 20,478 3,604
Other assets 39,174 33,816
---------- ----------
Total assets $2,020,056 $1,934,497
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Liabilities:
Unpaid losses and loss
settlement expenses $ 901,352 $ 893,420
Unearned premiums 351,710 317,772
Accounts payable and
accrued expenses 113,369 83,735
Debt 96,810 97,140
Due to affiliate 29,921 12,772
---------- ----------
Total liabilities 1,493,162 1,404,839
----------- ----------
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 1999, 29,498,651
and 1998, 29,150,518 shares;
outstanding 1999, 28,812,086
and 1998, 29,150,518 shares 29,499 29,151
Additional paid-in capital 124,798 119,302
Accumulated other comprehensive
income 51,682 74,167
Retained earnings 331,769 307,038
Treasury stock, at cost,
686,565 shares (10,854)
---------- ---------
Total shareholders' equity 526,894 529,658
---------- ---------
Total liabilities and
shareholders' equity $2,020,056 $1,934,497
========== ==========
See accompanying notes to consolidated financial statements.
12
<PAGE>
HARLEYSVILLE GROUP
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
YEAR ENDED DECEMBER 31,
1999 1998 1997
--------- --------- --------
- -
Revenues:
Premiums earned $707,200 $664,604 $624,905
Investment income, net
of investment expense 85,894 86,025 81,783
Realized investment gains 16,222 16,085 6,541
Other income 15,440 12,597 10,950
-------- -------- --------
Total revenues 824,756 779,311 724,179
-------- -------- --------
Losses and expenses:
Losses and loss settlement
expenses 523,002 464,480 439,488
Amortization of deferred
policy acquisition costs 182,337 169,567 157,591
Other underwriting expenses 60,226 54,154 50,108
Interest expense 6,390 6,470 6,597
Other expenses 5,049 4,199 3,114
-------- -------- --------
Total expenses 777,004 698,870 656,898
-------- -------- --------
Income before income taxes
and cumulative effect of
accounting change 47,752 80,441 67,281
Income taxes 4,935 17,028 13,209
-------- -------- --------
Income before cumulative
effect of accounting
change 42,817 63,413 54,072
Cumulative effect of accounting
change, net of income tax (2,904)
-------- -------- --------
Net income $ 39,913 $ 63,413 $ 54,072
======== ======== ========
Per common share:
Basic:
Income before cumulative
effect of accounting
change $ 1.47 $ 2.18 $ 1.89
Cumulative effect of
accounting change,
net of income tax (.10)
-------- -------- --------
Net income $ 1.37 $ 2.18 $ 1.89
======== ======== ========
Diluted:
Income before cumulative
effect of accounting
change $ 1.45 $ 2.15 $ 1.86
Cumulative effect of
accounting change, net
of income tax (.10)
-------- -------- --------
Net income $ 1.35 $ 2.15 $ 1.86
======== ======== ========
Cash dividends $ .52 $ .48 $ .44
======== ======== ========
See accompanying notes to consolidated financial statements.
13
<PAGE>
HARLEYSVILLE GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended December 31, 1999, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS STOCK TOTAL
---------- ------- ---------- ------------- -------- -------- --------
Balance,
December 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1996 14,139,862 $14,140 $121,033 $ 18,982 $216,090 $ $370,245
Net
income 54,072 54,072
Other compre-
hensive
income,
net of tax:
Unrealized
investment
gains, net
of reclassi-
fication
adjustment 27,496 27,496
Comprehensive
income 81,568
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)
---------- ------- -------- -------- -------- -------- --------
Balance at
December 31,
1997 28,821,973 28,822 113,646 46,478 257,569 446,515
Net income 63,413 63,413
Other compre-
hensive income,
net of tax:
Unrealized
investment
gains, net
of reclassi-
fication
adjustment 27,689 27,689
--------
Comprehensive
income 91,102
--------
Issuance of
common stock:
Incentive
plans 303,912 304 4,445 4,749
Dividend
Reinvestment
Plan 24,633 25 541 566
Tax benefit
from stock
options
exercised 670 670
Cash dividends
paid (13,944) (13,944)
---------- ------- -------- -------- -------- ------- --------
Balance at
December 31,
1998 29,150,518 29,151 119,302 74,167 307,038 529,658
</TABLE>
(Continued)
14
<PAGE>
HARLEYSVILLE GROUP
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Continued)
For the years ended December 31, 1999, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS STOCK TOTAL
---------- ------- ---------- ------------- -------- -------- --------
<S> <C> <C>
Net income 39,913 39,913
Other compre-
hensive
income, net
of tax:
Unrealized
investment
losses, net
of reclassi-
fication
<S> <C> <C>
adjustment (22,485) (22,485)
--------
Comprehensive
income 17,428
--------
Issuance of
common stock:
Incentive
<S> <C> <C> <C> <C>
plans 309,872 310 4,464 4,774
Dividend
Reinvestment
Plan 38,261 38 613 651
Tax benefit
from stock
options
exercised 419 419
Cash dividends
<S> <C> <C>
paid (15,182) (15,182)
Purchase of
treasury
stock,
686,565
shares (10,854) (10,854)
---------- ------- -------- -------- -------- -------- --------
Balance at
December 31,
1999 29,498,651 $29,499 $124,798 $ 51,682 $331,769 $(10,854) $526,894
========== ======= ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
HARLEYSVILLE GROUP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
---------- ---------- ---------
Cash flows from operating activities:
Net income $ 39,913 $ 63,413 $ 54,072
Adjustments to reconcile net
income to net cash provided by
operating activities:
Cumulative effect of
accounting change,
net of income tax 2,904
Change in receivables,
unearned premiums, prepaid
reinsurance and due
affiliate 35,564 (23) (132)
Increase in unpaid losses
and loss settlement
expenses 7,932 12,635 2,502
Deferred income taxes (2,583) 392 (159)
(Increase) decrease in
deferred policy
acquisition costs (4,557) (6,908) 841
Amortization and
depreciation 3,630 2,598 1,794
Gain on sale of investments (16,222) (16,085) (6,541)
Other, net 18,283 10,874 8,430
Cash from change in pooling
agreement 14,962 29,002
--------- --------- ---------
Net cash provided by
operating activities 84,864 81,858 89,809
--------- --------- ---------
Cash flows from investing activities:
Held to maturity investments:
Purchases (11) (49,037) (36,419)
Maturities 41,586 22,432 28,630
Available for sale investments:
Purchases (176,297) (183,793) (139,859)
Maturities 71,280 69,001 28,970
Sales 65,381 59,334 57,427
Net (purchases) sales or
maturities of short-term
investments (44,201) 13,328 11,042
Acquisition, net of cash (32,920)
Purchases of property and
equipment (5,606) (2,525) (1,767)
--------- --------- ---------
Net cash used by
investing activities (47,868) (71,260) (84,896)
--------- --------- ---------
Cash flows from financing activities:
Issuance of common stock 5,844 5,985 7,295
Repayment of debt (330) (300) (275)
Dividends paid (15,182) (13,944) (12,593)
Purchase of treasury stock (10,854)
--------- --------- ---------
Net cash used by
financing activities (20,522) (8,259) (5,573)
--------- --------- ---------
Increase (decrease) in cash 16,474 2,339 (660)
Cash at beginning of year 3,799 1,460 2,120
--------- --------- ---------
Cash at end of year $ 20,273 $ 3,799 $ 1,460
========= ========= =========
See accompanying notes to consolidated financial statements.
16
<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 57% owned by
Harleysville Mutual Insurance Company (Mutual).
Harleysville Group underwrites property and casualty
insurance in both the personal and commercial lines of insurance.
The personal lines of insurance include both auto and homeowners,
and the commercial lines include auto, commercial multi-peril and
workers compensation. The business 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.
17
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
INVESTMENTS
Accounting for fixed maturities depends on their
classification as held to maturity, available for sale or
trading. Fixed maturities classified as held to maturity are
carried at amortized cost. Fixed maturities classified as
available for sale are carried at fair value. There were no
investments classified as trading. Equity securities are carried
at fair value. 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. A
decline in the fair value of an investment below its cost that is
deemed other than temporary is charged to earnings. Unrealized
investment gains or losses on investments carried at fair value,
net of applicable income taxes, are reflected directly in
shareholders' equity as a component of comprehensive income 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.
18
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
1 - DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (Continued)
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.
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
Basic earnings per share is computed by dividing earnings by
the weighted-average number of common shares outstanding during
the year. Diluted earnings per share includes the dilutive
effect of the stock option and stock purchase plans described in
Note 13.
19
<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 $32,920,000 in cash, which is net of cash acquired of
$1,066,000. 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.
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. Beginning January 1, 1997, Harleysville Group's
participation in the pooling agreement increased from 65% 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
and $29,002,000, which related to the various insurance
liabilities assumed on January 1, 1998 and 1997, respectively.
These liabilities consist of the following at January 1:
1998 1997
-------- --------
(in thousands)
Unpaid losses and loss
settlement expenses $12,392 $28,318
Unearned premiums 2,271 441
Other liabilities 299 243
------- -------
$14,962 $29,002
======= =======
20
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3 - TRANSACTIONS WITH AFFILIATES (Continued)
(a) UNDERWRITING (Continued)
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, 1999 and 1998. Mutual has an A. M.
Best rating of "A" (Excellent) and, in accordance with certain
state regulatory requirements, maintained $373.4 million (fair
value) of investments in a trust account to secure liabilities
under the reinsurance pooling agreement at December 31, 1999.
The following amounts represent reinsurance transactions
between Harleysville Group and Mutual under the pooling
arrangement:
1999 1998 1997
-------- -------- --------
(in thousands)
Ceded:
Premiums written $636,476 $604,196 $533,311
======== ======== ========
Premiums earned $623,353 $587,980 $532,456
======== ======== ========
Losses incurred $467,636 $471,155 $381,650
======== ======== ========
Assumed:
Premiums written $731,273 $689,171 $609,270
======== ======== ========
Premiums earned $714,135 $667,629 $617,899
======== ======== ========
Losses incurred $528,030 $494,015 $433,886
======== ======== ========
Net assumed from Mutual:
Unearned premiums $ 34,795 $ 30,780 $ 25,453
======== ======== ========
Unpaid losses and loss
settlement expenses $160,040 $173,951 $205,756
======== ======== ========
Effective January 1, 1997, Harleysville Group entered into a
reinsurance agreement with Mutual whereby Mutual, in return for a
reinsurance premium, reinsured accumulated catastrophe losses in
a quarter up to $14,400,000, $16,200,000 and $15,750,000 for
1999, 1998 and 1997, respectively. This reinsurance coverage was
in excess of a retention of $3,600,000, $1,800,000 and $1,750,000
for 1999, 1998 and 1997, respectively. 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 $6,935,000, $3,025,000 and $2,615,000, and
losses incurred of $5,028,000, $29,535,000 and $1,616,000 for
1999, 1998 and 1997, respectively.
21
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3 - TRANSACTIONS WITH AFFILIATES (Continued)
(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 $2,816,000 for 1999 and $2,754,000 for
1998 and 1997, and is included in other income after elimination
of intercompany amounts of $1,723,000, $1,685,000 and $1,639,000
in 1999, 1998 and 1997, respectively.
(c) MANAGEMENT AGREEMENTS
Harleysville Group Inc. received $7,298,000, $6,293,000 and
$5,992,000 of management fee income in 1999, 1998 and 1997,
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 $1,108,000, $1,157,000 and $1,275,000 in 1999, 1998
and 1997, respectively.
Harleysville Group had off-balance-sheet credit risk related
to approximately $64,000,000 and $62,000,000 of premium balances
due to Mutual from agents and insureds at December 31, 1999 and
1998, respectively.
22
<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, 1999
------------------------------------------------
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 $ 9,904 $ 215 $ (97) $ 10,022
Obligations of states
and political
subdivisions 328,501 5,456 (1,669) 332,288
Corporate securities 258,789 2,356 (6,126) 255,019
Mortgage-backed
securities 38 38
---------- ------- -------- ----------
Total held to maturity 597,232 8,027 (7,892) 597,367
---------- ------- -------- ----------
Available for sale:
US Treasury securities
and obligations of
US government corpora-
tions and agencies 64,335 565 (1,625) 63,275
Obligations of states
and political
subdivisions 382,281 4,425 (8,140) 378,566
Corporate securities 198,216 123 (8,103) 190,236
Mortgage-backed
securities 116,998 1,666 (1,371) 117,293
---------- ------- -------- ----------
Total available for sale 761,830 6,779 (19,239) 749,370
---------- ------- -------- ----------
Total fixed maturities $1,359,062 $14,806 $(27,131) $1,346,737
========== ======= ======== ==========
Total equity securities $ 106,225 $94,261 $ (2,289) $ 198,197
========== ======= ======== ==========
23
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - INVESTMENTS (Continued)
DECEMBER 31, 1998
------------------------------------------------
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 $ 9,949 $ 729 $ $ 10,678
Obligations of states
and political
subdivisions 354,046 22,216 (89) 376,173
Corporate securities 274,221 19,200 (4) 293,417
Mortgage-backed
securities 103 103
---------- ------- ------- ----------
Total held to maturity 638,319 42,145 (93) 680,371
---------- ------- ------- ----------
Available for sale:
US Treasury securities
and obligations of
US government corpora-
tions and agencies 75,415 4,179 (79) 79,515
Obligations of states
and political
subdivisions 360,525 20,951 (116) 381,360
Corporate securities 143,585 4,486 (298) 147,773
Mortgage-backed
securities 136,800 6,206 (361) 142,645
---------- ------- ------- ----------
Total available for sale 716,325 35,822 (854) 751,293
---------- ------- ------- ----------
Total fixed maturities $1,354,644 $77,967 $ (947) $1,431,664
========== ======= ======= ==========
Total equity securities $ 95,797 $80,161 $(1,026) $ 174,932
========== ======= ======= ==========
The amortized cost and estimated fair value of fixed
maturity securities at December 31, 1999, 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.
24
<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 $ 32,905 $ 33,207
Due after one year
through five years 170,580 172,124
Due after five years
through ten years 318,617 316,828
Due after ten years 75,092 75,170
---------- ----------
597,194 597,329
Mortgage-backed
securities 38 38
---------- ----------
597,232 597,367
---------- ----------
Available for sale:
Due in one year or less 30,515 30,536
Due after one year
through five years 135,120 134,825
Due after five years
through ten years 296,716 289,581
Due after ten years 182,481 177,135
---------- ----------
644,832 632,077
Mortgage-backed
securities 116,998 117,293
---------- ----------
761,830 749,370
---------- ----------
Total fixed maturities $1,359,062 $1,346,737
========== ==========
The amortized cost of fixed maturities on deposit with
various regulatory authorities at December 31, 1999 and 1998
amounted to $21,509,000 and $19,848,000, respectively.
25
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - INVESTMENTS (Continued)
A summary of net investment income is as follows:
1999 1998 1997
-------- -------- --------
(in thousands)
Interest on fixed maturities $83,457 $83,689 $79,765
Dividends on equity securities 1,925 1,560 1,345
Interest on short-term
investments 1,885 1,780 1,626
------- ------- -------
Total investment income 87,267 87,029 82,736
Investment expense 1,373 1,004 953
------- ------- -------
Net investment income $85,894 $86,025 $81,783
======= ======= =======
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:
1999 1998 1997
--------- -------- ---------
(in thousands)
Fixed maturity securities:
Held to maturity:
Gross gains $ 393 $ 273 $ 255
Gross losses (7) (17) (3)
Available for sale:
Gross gains 1,341 1,109 1,263
Gross losses (475) (240) (223)
Equity securities:
Gross gains 18,459 16,483 6,934
Gross losses (3,489) (1,523) (1,685)
-------- ------- -------
Net realized investment gains $ 16,222 $16,085 $ 6,541
======== ======= =======
Change in difference between
fair value and cost of
investments<F1>:
Fixed maturity securities $(89,345) $15,778 $27,707
Equity securities 12,837 36,526 28,150
-------- ------- -------
Total $(76,508) $52,304 $55,857
======== ======= =======
[FN]
<F1> Parentheses indicate a net unrealized decline in fair
value.
26
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - INVESTMENTS (Continued)
During 1999, an equity investment trading below cost had
declined on an other-than-temporary basis. A loss of $2,084,000
was included in realized gains for this investment.
Income taxes on realized investment gains were $5,480,000,
$5,630,000 and $2,289,000 for 1999, 1998 and 1997, respectively.
Deferred income taxes applicable to net unrealized investment
gains included in shareholders' equity were $27,830,000 and
$39,936,000 at December 31, 1999 and 1998, respectively.
At December 31, 1999, Harleysville Group held cash
collateral of $18,752,000 related to security lending
transactions. Harleysville Group's policy is to require
collateral of 102% of the then-current market value of loaned
securities as of the close of trading on the preceding business
day. Acceptable collateral includes government securities,
letters of credit or cash.
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:
1999 1998 1997
---------- ---------- ----------
(in thousands)
Premiums written:
Direct $762,866 $689,865 $620,330
Assumed 25,588 25,136 28,871
Ceded (64,115) (28,855) (32,264)
-------- -------- --------
Net premiums written $724,339 $686,146 $616,937
======== ======== ========
Premiums earned:
Direct $729,386 $669,605 $628,330
Assumed 25,130 26,249 30,559
Ceded (47,316) (31,250) (33,984)
-------- -------- --------
Net premiums earned $707,200 $664,604 $624,905
======== ======== ========
27
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
5 - REINSURANCE (Continued)
Losses and loss settlement expenses are net of reinsurance
recoveries of $32,719,000, $59,474,000 and $18,401,000 for 1999,
1998 and 1997, respectively.
6 - PROPERTY AND EQUIPMENT
Property and equipment consisted of land and buildings with
a cost of $29,087,000 and $28,219,000, and equipment, including
software, with a cost of $11,498,000 and $9,318,000 at December
31, 1999 and 1998, respectively. Accumulated depreciation
related to such assets was $13,217,000 and $12,486,000 at
December 31, 1999 and 1998, respectively.
In March 1998, the American Institute of Certified Public
Accountants (AICPA) issued Statement of Position (SOP) 98-1,
"Accounting for Costs of Computer Software Developed or Obtained
for Internal Use." The 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. Effective January 1, 1999, Harleysville
Group adopted SOP 98-1 and accordingly has capitalized costs of
$2,256,000 in 1999. As required, prior period financial
statements have not been restated.
Rental expense under leases with non-affiliates amounted to
$3,704,000, $3,770,000 and $2,941,000 for 1999, 1998 and 1997,
respectively. Operating lease commitments were not material at
December 31, 1999.
28
<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:
1999 1998 1997
-------- -------- --------
(in thousands)
Liability at January 1 $893,420 $868,393 $796,820
Less reinsurance recoverables 79,901 74,830 78,120
-------- -------- --------
Net liability at January 1 813,519 793,563 718,700
Net liability of acquired company 34,836
--------
Incurred related to:
Current year 582,534 507,087 469,216
Prior years (59,532) (42,607) (29,728)
-------- -------- --------
Total incurred 523,002 464,480 439,488
-------- -------- --------
Paid related to:
Current year 259,635 215,902 198,554
Prior years 252,972 241,014 229,225
Adjustments to beginning
reserves resulting from
change in pool
participation percentage (12,392) (28,318)
-------- -------- --------
Total paid 512,607 444,524 399,461
-------- -------- --------
Net liability at December 31 823,914 813,519 793,563
Plus reinsurance recoverables 77,438 79,901 74,830
-------- -------- --------
Liability at December 31 $901,352 $893,420 $868,393
======== ======== ========
Harleysville Group recognized favorable development in the
provision for insured events of prior years of $59,532,000,
$42,607,000 and $29,728,000 in 1999, 1998 and 1997, respectively.
The favorable development relates to lower-than-expected claim
severity in the workers compensation and automobile lines of
business.
29
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7 - LIABILITY FOR UNPAID LOSSES AND LOSS SETTLEMENT EXPENSES
(Continued)
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 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,
-------------------
1999 1998
-------- -------
(in thousands)
Notes, 6.75%, due 2003 $75,000 $75,000
Demand term-loan payable
to Mutual, LIBOR plus
0.65%, due 2005 18,500 18,500
Economic Development
Corporation (EDC)
Revenue Bond obligation 3,310 3,640
------- -------
$96,810 $97,140
======= =======
The fair value of the notes was $71,115,000 and $76,192,000
at December 31, 1999 and 1998, respectively, based on quoted
market prices for the same or similar debt. The carrying value
of the remaining debt approximates fair value.
30
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
8 - DEBT (Continued)
The EDC obligation is secured by Lake States' building.
Interest is payable semiannually at a variable rate (4.1% at
December 31, 1999) 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.
Interest paid was $6,278,000, $6,379,000 and $6,493,000 in
1999, 1998 and 1997, respectively.
9 - RESTRUCTURING CHARGE
On July 29, 1999, Harleysville Group announced a plan to
consolidate its claims operations from 23 general claims offices
into a centralized direct reporting center and four specialized
regional claims centers. As a result of this consolidation,
Harleysville Group recorded a restructuring charge for employee
termination benefits and occupancy charges which is included in
losses and loss settlement expenses. The consolidation is
expected to be completed by the end of the second quarter of
2000.
Employee termination benefits of $1,975,000 include
severance payments and related benefits and outplacement services
for approximately 200 employees.
Included in occupancy charges of $537,000 are future lease
obligations, less anticipated sublease benefits, for leased
premises that will no longer be used by the claims operations.
No severance or occupancy payments had been made as of
December 31, 1999. Activity in the restructuring accrual is as
follows:
EMPLOYEE
TERMINATION
BENEFIT OCCUPANCY TOTAL
----------- --------- -------
(in thousands)
Restructuring charge $2,017 $594 $2,611
Reversal of prior accrual
due to voluntary
terminations and
additional sublease
benefits (42) (57) (99)
------ ---- ------
Balance at December 31, 1999 $1,975 $537 $2,512
====== ==== ======
31
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
10 - GUARANTY FUND AND OTHER INSURANCE-RELATED ASSESSMENTS
In 1997, the AICPA issued SOP 97-3, "Accounting by Insurance
and Other Enterprises for Insurance-Related Assessments," which
provides guidance for determining when to recognize, and how to
determine, a liability for guaranty-fund and other insurance-
related assessments. Effective January 1, 1999, Harleysville
Group adopted SOP 97-3 and recorded a charge of $2,904,000, net
of a tax benefit of $1,564,000, as the cumulative effect of the
accounting change. Prior period financial statements have not
been restated and pro forma effects of retroactive application
are not material.
11 - SHAREHOLDERS' EQUITY
Comprehensive income consisted of the following:
1999 1998 1997
-------- -------- --------
(in thousands)
Net income $ 39,913 $ 63,413 $54,072
-------- -------- -------
Other comprehensive
income:
Unrealized investment
holding gains (losses)
arising during period,
net of taxes (benefits)
of $(6,565), $20,450
and $17,006 (12,192) 37,978 31,584
Less:
Reclassification
adjustment for gains
included in net income,
net of taxes of $5,543,
$5,540 and $2,201 (10,293) (10,289) (4,088)
-------- -------- -------
Net unrealized
investment gains (losses) (22,485) 27,689 27,496
-------- -------- -------
Comprehensive income $ 17,428 $ 91,102 $81,568
======== ======== =======
32
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
11 - SHAREHOLDERS' EQUITY (CONTINUED)
A source of cash for the payment of dividends is dividends
from subsidiaries. Harleysville Inc. Inc.'s insurance
subsidiaries are required bylaw to maintain certain minimum
surplus on a statutory bassi, and are subject to risk-based
capital requirements and to regulations under whichpayment 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, 1999, $50,286,000 would
be available for distribution to Harleysville Group Inc. during
2000 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,
-------------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
Statutory capital and surplus $502,863 $489,665 $398,468
======== ======== ========
Statutory unassigned surplus $368,594 $355,396 $264,199
======== ======== ========
Statutory net income $ 38,710 $ 62,133 $ 59,658
======== ======== ========
33
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
12 - INCOME TAXES
The components of income tax expense (benefit) are as
follows:
1999 1998 1997
-------- -------- -------
(in thousands)
Current $ 7,518 $16,636 $13,368
Deferred (2,583) 392 (159)
------- ------- -------
$ 4,935 $17,028 $13,209
======= ======= =======
Cash paid for federal income taxes in 1999, 1998 and 1997
was $9,820,000, $14,350,000 and $11,564,000, respectively.
The actual income tax rate differed from the statutory
federal income tax rate applicable to income before income taxes
as follows:
1999 1998 1997
-------- ------- -------
Statutory federal income
tax rate 35.0 % 35.0 % 35.0 %
Tax-exempt interest (24.8) (14.0) (15.6)
Other, net 0.1 0.2 0.2
------ ------ ------
10.3 % 21.2 % 19.6 %
====== ====== ======
34
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
12 - 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,
-----------------------------
1999 1998
-------- --------
(in thousands)
Deferred tax liabilities:
Deferred policy acquisition
costs $29,239 $27,644
Unrealized investment gains 27,830 39,936
Other 5,456 4,229
------- -------
Total deferred tax
liabilities 62,525 71,809
------- -------
Deferred tax assets:
Unearned premiums 22,596 21,396
Losses incurred 44,192 44,879
AMT credit carryforward 3,612
Other 12,603 9,138
------- -------
Total deferred tax
assets 83,003 75,413
------- -------
Net deferred tax asset $20,478 $ 3,604
======= =======
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.
35
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13 - 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:
1999 1998 1997
-------- -------- --------
(in thousands, except per share data)
Net income:
As reported $39,913 $63,413 $54,072
Pro forma $38,094 $61,843 $52,726
Basic earnings
per share:
As reported $ 1.37 $ 2.18 $ 1.89
Pro forma $ 1.30 $ 2.13 $ 1.85
Diluted earnings
per share:
As reported $ 1.35 $ 2.15 $ 1.86
Pro forma $ 1.29 $ 2.10 $ 1.82
The per share weighted-average fair value of options granted
during 1999, 1998 and 1997 was $5.71, $7.23 and $5.36,
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 1999, 1998 and 1997, respectively: dividend yield of 2.55%,
1.88% and 2.34%; expected volatility of 30.42%, 27.53% and
26.06%; risk-free interest rate of 5.65%, 5.62% and 6.65%; and an
expected life of 5.25 years, 5.32 years and 5.75 years.
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.
36
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13 - INCENTIVE PLANS (continued)
The Harleysville Group Inc. Year 2000 Directors' Stock
Option Program provides for the granting of options to eligible
directors to purchase a maximum of 123,500 shares of common
stock. Options are granted at exercise prices equal to fair
market value on the date of grant. The options vest immediately,
although no option is exercisable until six months after the date
of grant. 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, 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
Granted--1998 334,870 24.49
Exercised--1998 (147,557) 11.86
Forfeited--1998 (25,296) 16.25
--------- ------
Outstanding at
December 31, 1998 1,950,229 15.42
Granted--1999 367,293 19.40
Exercised--1999 (139,391) 11.22
Forfeited--1999 (62,187) 19.07
--------- ------
Outstanding at
December 31, 1999 2,115,944 $16.30
========= ======
Exercisable at:
December 31, 1997 1,292,018 $12.39
========= ======
December 31, 1998 1,445,877 $13.10
========= ======
December 31, 1999 1,614,632 $14.84
========= ======
37
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13 - INCENTIVE PLANS (continued)
The following table summarizes information about fixed stock
options at December 31, 1999:
RANGE OF EXERCISE PRICES
----------------------------------------
$7.50-11.13 $12.50-16.69 $17.94-24.50
----------- ------------ ------------
Options outstanding at
December 31, 1999:
Number of options 209,745 969,141 937,058
========== ========== ==========
Weighted-average
remaining contractual
life 3.3 years 4.5 years 8.5 years
========== ========== ==========
Weighted-average
exercise price $10.23 $13.31 $20.75
========== ========== ==========
Options exercisable at
December 31, 1999:
Number of options 209,745 959,141 445,746
========== ========== ==========
Weighted-average
exercise price $10.23 $13.28 $20.36
========== ========== ==========
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 15% of 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 114,948, 93,991 and 97,424 shares
to employees in 1999, 1998 and 1997, respectively.
38
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
13 - 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 57,186, 53,706 and 38,671 shares issued under the plan for
which $88,000, $84,000 and $45,000 of expense was recognized in
1999, 1998 and 1997, respectively.
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 1999, 1998 and 1997
respectively, there were 7,940, 17,880 and 32,538 shares issued
under the plan for which $23,000, $67,000 and $126,000 of expense
was recognized.
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 $23,000,
$41,000 and $56,000 associated with this award program was
recognized in 1999, 1998 and 1997, 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 $1,419,000,
$1,230,000 and $842,000 for 1999, 1998 and 1997, respectively.
14 - 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.
39
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14 - PENSION AND OTHER BENEFIT PLANS (Continued)
The following table sets forth the year-end status of the
plan including Mutual:
1999 1998
-------- --------
(in thousands)
Change in benefit obligation
Benefit obligation at January 1 $ 98,204 $ 86,648
Service cost 5,213 4,325
Interest cost 6,860 6,277
Net actuarial (gain) loss (10,965) 3,722
Benefits paid (2,927) (2,768)
Curtailment (272)
-------- --------
Benefit obligation at
December 31 $ 96,113 $ 98,204
======== ========
Change in plan assets
Fair value of plan assets at
January 1 $113,257 $ 87,154
Actual return on plan assets 13,108 27,781
Employer contributions 925
Benefits paid (2,801) (2,603)
-------- --------
Fair value of plan assets
at December 31 $123,564 $113,257
======== ========
Funded status $ 27,451 $ 15,053
Unrecognized net actuarial gain (49,273) (32,073)
Unrecognized prior service cost 2,748 3,438
Unrecognized transition obligation 168 51
-------- --------
Accrued pension cost:
Entire plan $(18,906) $(13,531)
======== ========
Harleysville Group portion $(12,913) $ (9,267)
======== ========
40
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14 - PENSION AND OTHER BENEFIT PLANS (Continued)
The net periodic pension cost for the plan including Mutual
includes the following components:
1999 1998 1997
-------- -------- --------
(in thousands)
Components of net periodic
pension cost:
Service cost $ 5,213 $ 4,325 $ 3,913
Interest cost 6,860 6,277 5,465
Expected return on
plan assets (6,873) (5,683) (4,464)
Recognized net
actuarial loss 257 346
Amortization of prior
service cost 637 637 457
Net transition
amortization (117) (117) (117)
Curtailment (218)
------- ------- -------
Net periodic pension cost:
Entire plan $ 5,502 $ 5,696 $ 5,600
======= ======= =======
Harleysville Group
portion $ 3,647 $ 3,754 $ 3,601
======= ======= =======
1999 1998 1997
-------- -------- --------
Weighted-average assumptions
as of December 31
Discount rate 7.75% 7.00% 7.25%
Expected long-term rate
of return on plan
assets 9.00% 9.00% 8.50%
Rate of compensation
increase 4.50% 4.50% 4.50%
Harleysville Group has profit-sharing plans covering
qualified employees. Harleysville Group's expense under the plans
was $3,220,000, $2,869,000 and $2,450,000 for 1999, 1998 and
1997, respectively.
15 - SEGMENT INFORMATION
In 1998, Harleysville Group adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related
Information," which establishes standards for reporting
information about operating segments. As an underwriter of
property and casualty insurance, Harleysville Group has three
reportable segments, which consist of the investment function,
the personal lines of insurance and the commercial lines of
insurance. Using independent agents, Harleysville Group markets
personal lines of insurance to individuals, and commercial lines
of insurance to small and medium-sized businesses.
41
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
15 - SEGMENT INFORMATION (Continued)
Harleysville Group evaluates the performance of the personal
lines and commercial lines primarily based upon underwriting
results as determined under statutory accounting practices (SAP)
for the total pooled business of Harleysville Group and Mutual.
The following tables reflect the total pooled business plus the
business of Minnesota Fire before it began participation in the
pool on January 1, 1998. The eliminations reflect the share of
the total pooled business not retained by Harleysville Group and
the effect of the catastrophe reinsurance agreement between
Harleysville Group and Mutual. Assets are not allocated to the
personal and commercial lines, and are reviewed in total by
management for purposes of decision making. Harleysville Group
operates only in the United States, and no single customer or
agent provides 10 percent or more of revenues.
Financial data by segment is as follows:
1999 1998 1997
--------- --------- ---------
(in thousands)
Revenues:
Premiums earned:
Commercial lines $ 614,431 $ 560,551 $ 542,632
Personal lines 377,422 366,712 349,701
Eliminations (284,653) (262,659) (267,428)
--------- --------- ---------
Total premiums earned 707,200 664,604 624,905
Net investment income 85,894 86,025 81,783
Realized investment
gains 16,222 16,085 6,541
Other 15,440 12,597 10,950
--------- --------- ---------
Total revenues $ 824,756 $ 779,311 $ 724,179
========= ========= =========
Income before income taxes
and cumulative effect of
accounting change:
Underwriting income (loss):
Commercial lines $ (60,949) $ (55,873) $ (32,088)
Personal lines (23,094) (22,424) 2,132
Eliminations 22,893 49,750 10,793
--------- --------- ---------
SAP underwriting
loss (61,150) (28,547) (19,163)
GAAP adjustments 2,785 4,950 (3,119)
--------- --------- ---------
GAAP underwriting
loss (58,365) (23,597) (22,282)
Net investment income 85,894 86,025 81,783
Realized investment gains 16,222 16,085 6,541
Other 4,001 1,928 1,239
--------- --------- ---------
Income before income taxes and
cumulative effect of
accounting change $ 47,752 $ 80,441 $ 67,281
========= ========= =========
42
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
16 - EARNINGS PER SHARE
The computation of basic and diluted earnings per share is
as follows:
1999 1998 1997
--------- -------- --------
(dollars in thousands, except per share data)
Numerator for basic
and diluted earnings
per share:
Net income $39,913 $63,413 $54,072
======= ======= =======
Denominator for basic
earnings per share --
weighted-average
shares outstanding 29,238,372 29,029,410 28,573,192
Effect of stock
incentive plans 327,006 490,545 458,846
-------- -------- --------
Denominator for
diluted earnings
per share 29,565,378 29,519,955 29,032,038
========== ========== ==========
Basic earnings
per share $ 1.37 $ 2.18 $ 1.89
======= ======= =======
Diluted earnings
per share $ 1.35 $ 2.15 $ 1.86
======= ======= =======
The following options to purchase shares of common stock
were not included in the computation of diluted earnings per
share because the exercise price of the options was greater than
the average market price:
1999 1998 1997
---- ---- ----
(in thousands)
Number of options 521 193 -
=== === ===
43
<PAGE>
HARLEYSVILLE GROUP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
17 - QUARTERLY RESULTS OF OPERATIONS (Unaudited)
1999
--------------------------------------------------
(in thousands, except per share data)
FIRST SECOND THIRD FOURTH TOTAL
--------- -------- -------- -------- ---------
Revenues $199,676 $201,310 $207,453 $216,317 $824,756
Losses and
expenses 181,465 181,928 212,393 201,218 777,004
Income (loss)
before cumula-
tive effect of
accounting
change 14,765 15,511 (307) 12,848 42,817
Net income
(loss) 11,861 15,511 (307) 12,848 39,913
Per common
share:
Basic:
Income (loss)
before cumula-
tive effect of
accounting
change $ .51 $ .53 $ (.01) $ .44 $ 1.47
Net income
(loss) $ .41 $ .53 $ (.01) $ .44 $ 1.37
Diluted:
Income (loss)
before cumula-
tive effect of
accounting
change $ .50 $ .52 $ (.01) $ .44 $ 1.45
Net income
(loss) $ .40 $ .52 $ (.01) $ .44 $ 1.35
1998
-------------------------------------------------
(in thousands, except per share data)
FIRST SECOND THIRD FOURTH TOTAL
--------- -------- -------- -------- ---------
Revenues $190,505 $194,022 $192,645 $202,139 $779,311
Losses and
expenses 173,226 172,810 175,201 177,633 698,870
Net income 13,902 16,552 14,153 18,806 63,413
Earnings per
common share:
Basic $ .48 $ .57 $ .49 $ .65 $ 2.18
Diluted $ .47 $ .56 $ .48 $ .64 $ 2.15
44
<PAGE>
Independent Auditors' Report
The Board of Directors
and Shareholders
Harleysville Group Inc.:
We have audited the accompanying consolidated balance sheets of
Harleysville Group as of December 31, 1999 and 1998, 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, 1999. 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, 1999 and 1998,
and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
As discussed in Note 10, Harleysville Group adopted the
provisions of Statement of Position No. 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related
Assessments," effective January 1, 1999.
/s/KPMG LLP
Philadelphia, Pennsylvania
February 14, 2000
45
<PAGE>
EXHIBIT (13)(E)
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 1, 2000, the approximate number of
holders of record of Harleysville Group Inc.'s common stock was
2,247 (counting all shares held in single 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
$0.135 per share paid in each of the third and fourth quarters of
1999 is expected to continue during 2000. 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 11
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
1999 HIGH LOW DECLARED
------------------------------------------------------
First Quarter $25.75 $18.75 $.125
Second Quarter 20.69 17.00 .125
Third Quarter 20.63 13.81 .135
Fourth Quarter 17.38 12.75 .135
------------------------------------------------------
CASH
DIVIDENDS
1998 HIGH LOW DECLARED
------------------------------------------------------
First Quarter $26.88 $21.13 $.115
Second Quarter 28.13 20.38 .115
Third Quarter 27.00 19.00 .125
Fourth Quarter 25.81 17.25 .125
------------------------------------------------------
46
<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
<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 14, 2000
include the related financial statement schedules as of December
31, 1999, and for each of the years in the three-year period
ended December 31, 1999, 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. 333-03127, 33-84348, 33-43494, 33-91718, 33-
91726, 33-43532, 333-85941) on Form S-8 and registration
statements (Nos. 33-78372, 33-90810, 33-91720) on Form S-3 of
Harleysville Group Inc. of our reports dated February 14, 2000,
relating to the consolidated balance sheets of Harleysville Group
Inc. as of December 31, 1999 and 1998, 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, 1999, which
reports appear in the December 31, 1999 annual report on Form 10-
K of Harleysville Group Inc., and of our report dated March 10,
2000 relating to the statements of financial condition of the
Harleysville Group Inc. Employee Stock Purchase Plan as of
December 31, 1999 and 1998, and the related statements of income
and changes in plan equity for each of the years in the three-
year period ended December 31, 1999, which report appears in the
Harleysville Group Inc. Employee Stock Purchase Plan annual
report on Form 11-K.
/s/KPMG LLP
Philadelphia, Pennsylvania
March 24, 2000
<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, 1999
---------------------------------------
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
<PAGE>
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
FORM 11-K
DECEMBER 31, 1999
Financial Statements
- --------------------
Page
----
Independent Auditors' Report 3
Statements of Financial Condition
as of December 31, 1999 and 1998 4
Statements of Income and Changes in
Plan Equity for each of the years
in the three-year period ended
December 31, 1999 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, 1999 and 1998, and the related statements of
income and changes in plan equity for each of the years in the
three-year period ended December 31, 1999. 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, 1999 and 1998, and the income and changes in its
plan equity for each of the years in the three-year period ended
December 31, 1999, in conformity with generally accepted
accounting principles.
/s/KPMG LLP
Philadelphia, Pennsylvania
March 10, 2000
3
<PAGE>
HARLEYSVILLE GROUP INC.
EMPLOYEE STOCK PURCHASE PLAN
STATEMENTS OF FINANCIAL CONDITION
AS OF
DECEMBER 31,
---------------------
1999 1998
-------- --------
Assets
- ------
Receivable from affiliate $931,899 $946,560
======== ========
Plan Equity
- -----------
Net assets available for
plan participants $931,899 $946,560
======== ========
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,
----------------------------------------
1999 1998 1997
----------- ------------ -----------
Contributions - Employees $ 2,130,399 $ 1,942,663 $ 1,355,248
Purchase and distribution
of Harleysville Group Inc.
stock to employees (2,037,367) (1,616,818) (1,174,483)
Employee withdrawals and
terminations (107,693) (56,007) (46,810)
----------- ----------- -----------
Net increase (decrease) (14,661) 269,838 133,955
Plan equity beginning of
year 946,560 676,722 542,767
----------- ----------- -----------
Plan equity end of year $ 931,899 $ 946,560 $ 676,722
=========== =========== ===========
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, 1999, there were 863 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 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, 1999, there are approximately 480,637 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 17, 2000, 86,070 shares of stock were purchased
at a subscription price of $11.37 per share on behalf of the plan
participants for the subscription period ended January 14, 2000.
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 28, 2000 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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<S> <C>
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