SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2000.
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------- --------
Commission file number 0-14697
---------
HARLEYSVILLE GROUP INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0241172
------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
355 MAPLE AVENUE, HARLEYSVILLE, PENNSYLVANIA 19438-2297
----------------------------------------------------------
(Address of principal executive offices, including zip code)
(215) 256-5000
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
---- ----
At November 2, 2000 28,870,196 shares of common stock of
Harleysville Group Inc. were outstanding.
1
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
INDEX
PAGE NUMBER
-----------
Part I - Financial Information
Consolidated Balance Sheets - September 30, 2000
and December 31, 1999 3
Consolidated Statements of Income - For the three
months ended September 30, 2000 and 1999 4
Consolidated Statements of Income - For the nine
months ended September 30, 2000 and 1999 5
Consolidated Statement of Shareholders' Equity -
For the nine months ended September 30, 2000 6
Consolidated Statements of Cash Flows - For the
nine months ended September 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Results
of Operations and Financial Condition 14
Quantitative and Qualitative Disclosure About
Market Risk 18
Part II - Other Information 19
2
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
2000 1999
-------------- ------------
(Unaudited)
ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized
cost (fair value $572,981
and $597,367) $ 566,548 $ 597,232
Available for sale, at fair value
(amortized cost $799,193
and $761,830) 799,710 749,370
Equity securities, at fair value
(cost $117,861 and $106,225) 216,230 198,197
Short-term investments, at cost,
which approximates fair value 21,371 59,223
---------- ----------
Total investments 1,603,859 1,604,022
Cash 31,098 20,273
Receivables:
Premiums 96,087 91,931
Reinsurance 86,503 81,884
Accrued investment income 21,086 22,478
---------- ----------
Total receivables 203,676 196,293
Deferred policy acquisition costs 85,958 83,541
Prepaid reinsurance premiums 18,728 28,907
Property and equipment, net 27,928 27,368
Deferred income taxes 15,956 20,478
Due from affiliate 1,184
Other assets 35,002 39,174
---------- ----------
Total assets $2,023,389 $2,020,056
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unpaid losses and loss settlement
expenses $ 898,554 $ 901,352
Unearned premiums 356,879 351,710
Accounts payable and accrued expenses 113,049 113,369
Debt 96,450 96,810
Due to affiliate 29,921
---------- ----------
Total liabilities 1,464,932 1,493,162
---------- ----------
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 29,845,112
and 29,498,651 shares; outstanding
28,845,112 and 28,812,086 shares 29,845 29,499
Additional paid-in capital 128,950 124,798
Accumulated other comprehensive income 64,276 51,682
Retained earnings 350,951 331,769
Treasury stock, at cost, 1,000,000 and
686,565 shares (15,565) (10,854)
---------- ----------
Total shareholders' equity 558,457 526,894
---------- ----------
Total liabilities and
shareholders' equity $2,023,389 $2,020,056
========== ==========
See accompanying notes to consolidated financial statements.
3
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(dollars in thousands, except per share data)
2000 1999
-------- --------
Revenues:
Premiums earned $171,938 $179,503
Investment income, net of
investment expenses 21,590 21,517
Realized investment gains 2,587 2,263
Other income 4,037 4,170
-------- --------
Total revenues 200,152 207,453
-------- --------
Losses and expenses:
Losses and loss settlement expenses 121,890 147,681
Amortization of deferred policy
acquisition costs 44,369 46,383
Other underwriting expenses 14,787 15,344
Interest expense 1,668 1,624
Other expenses 1,702 1,361
-------- --------
Total expenses 184,416 212,393
-------- --------
Income (loss) before income taxes 15,736 (4,940)
Income taxes (benefit) 2,696 (4,633)
-------- --------
Net income (loss) $ 13,040 $ (307)
======== ========
Per common share:
Basic earnings (loss) $ .45 $ (.01)
======== ========
Diluted earnings (loss) $ .45 $ (.01)
======== ========
Cash dividend $ .14 $ .135
======== ========
See accompanying notes to consolidated financial statements.
4
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(dollars in thousands, except per share data)
2000 1999
-------- --------
Revenues:
Premiums earned $513,872 $524,429
Investment income, net of
investment expenses 64,874 64,274
Realized investment gains 5,226 8,283
Other income 12,533 11,453
-------- --------
Total revenues 596,505 608,439
-------- --------
Losses and expenses:
Losses and loss settlement expenses 374,409 387,326
Amortization of deferred policy
acquisition costs 132,913 135,198
Other underwriting expenses 44,715 44,818
Interest expense 4,946 4,741
Other expenses 4,889 3,703
-------- --------
Total expenses 561,872 575,786
-------- --------
Income before income taxes and
cumulative effect of accounting
change 34,633 32,653
Income taxes 3,647 2,684
-------- --------
Income before cumulative effect
of accounting change 30,986 29,969
Cumulative effect of accounting change,
net of income tax (2,904)
-------- --------
Net income $ 30,986 $ 27,065
======== ========
Per common share:
Basic:
Income before cumulative effect of
accounting change $ 1.08 $ 1.02
Cumulative effect of accounting
change, net of income tax (.10)
-------- --------
Net income $ 1.08 $ .92
======== ========
Diluted:
Income before cumulative effect of
accounting change $ 1.07 $ 1.01
Cumulative effect of accounting
change, net of income tax (.10)
-------- --------
Net income $ 1.07 $ .91
======== ========
Cash dividend $ .41 $ .385
======== ========
See accompanying notes to consolidated financial statements.
5
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(dollars in thousands)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL INCOME EARNINGS STOCK TOTAL
---------- ------- ---------- ------------- -------- -------- --------
Balance,
Dec. 31,
<S> <C> <C> <C> <C> <C> <C> <C>
1999 29,498,651 $29,499 $124,798 $51,682 $331,769 $(10,854) $526,894
--------
Net
income 30,986 30,986
Other compre-
hensive
income,
net of tax:
Unrealized
investment
gains, net of
reclassifi-
cation
adjustment 12,594 12,594
--------
Comprehensive
income 43,580
--------
Issuance of
of common
stock 346,461 346 4,152 4,498
Cash dividend
paid (11,804) (11,804)
Purchase of
treasury
stock,
313,435
shares (4,711) (4,711)
---------- ------- -------- ------- -------- -------- --------
Balance,
Sept. 30,
2000 29,845,112 $29,845 $128,950 $64,276 $350,951 $(15,565) $558,457
========== ======= ======== ======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(in thousands)
2000 1999
---------- ----------
Cash flows from operating activities:
Net income $ 30,986 $ 27,065
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 to affiliate (23,140) 25,995
Increase (decrease) in unpaid losses
and loss settlement expenses (2,798) 10,453
Deferred income taxes (2,259) (2,607)
Increase in deferred policy
acquisition costs (2,417) (10,449)
Amortization and depreciation 2,567 2,375
Gain on sale of investments (5,226) (8,283)
Other, net 3,080 11,546
-------- ---------
Net cash provided by operating
activities 793 58,999
-------- ---------
Cash flows from investing activities:
Fixed maturity investments:
Purchases (87,540) (155,911)
Sales or maturities 81,164 138,854
Equity securities:
Purchases (22,686) (20,669)
Sales 16,152 19,017
Net (purchases) sales of short-term
investments 37,852 (18,158)
Purchase of property and equipment (2,533) (3,714)
-------- ---------
Net cash provided (used) by
investing activities 22,409 (40,581)
-------- ---------
Cash flows from financing activities:
Issuance of common stock 4,498 5,625
Payment of debt obligations (360) (330)
Dividends paid (11,804) (11,292)
Purchase of treasury stock (4,711) (1,392)
-------- ---------
Net cash used by
financing activities (12,377) (7,389)
-------- ---------
Increase in cash 10,825 11,029
Cash at beginning of period 20,273 3,799
-------- ---------
Cash at end of period $ 31,098 $ 14,828
======== =========
See accompanying notes to consolidated financial statements.
7
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - Basis of Presentation
The financial information for the interim periods included
herein is unaudited; however, such information reflects all
adjustments, consisting of normal recurring adjustments, which
are, in the opinion of management, necessary to a fair
presentation of the financial position, results of operations,
and cash flows for the interim periods. The results of
operations for interim periods are not necessarily indicative of
results to be expected for the full year.
These financial statements should be read in conjunction
with the financial statements and notes for the year ended
December 31, 1999 included in the Company's 1999 Annual Report
filed with the Securities and Exchange Commission on Form 10-K.
2 - Earnings Per Share
The computation of basic and diluted earnings (loss) per
share is as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2000 1999 2000 1999
--------- --------- --------- --------
(in thousands, except per share data)
Numerator for basic
and diluted earnings
(loss) per share:
Net income (loss) $13,040 $ (307) $30,986 $27,065
======= ======= ======= =======
Denominator for basic
earnings (loss) per
share -- weighted
average shares
outstanding 28,787 29,395 28,817 29,311
Effect of stock
incentive plans 252 211 356
------- ------- ------- -------
Denominator for
diluted earnings
(loss) per share 29,039 29,395 29,028 29,667
======= ======= ======= =======
Basic earnings
(loss) per share $ .45 $ (.01) $ 1.08 $ .92
======= ======= ======= =======
Diluted earnings
(loss) per share $ .45 $ (.01) $ 1.07 $ .91
======= ======= ======= =======
8
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands)
Number of options 582 662 1,252 318
=== === ===== ===
For the three months ended September 30, 1999, an additional
1,465,175 options to purchase shares of common stock were not
included in the computation of diluted earnings per share because
their inclusion would have had an antidilutive effect.
3 - Reinsurance
Premiums earned are net of amounts ceded of $18,825,000 and
$59,659,000 for the three and nine months ended September 30,
2000, respectively, and $11,980,000 and $34,997,000 for the three
and nine months ended September 30, 1999, respectively. Losses
and loss settlement expenses are net of amounts ceded of
$16,278,000 and $43,046,000 for the three and nine months ended
September 30, 2000, respectively, and $5,044,000 and $20,691,000
for the three and nine months ended September 30, 1999,
respectively. Such amounts do not include the reinsurance
transactions with Mutual under the pooling arrangement, but do
include the reinsurance described in the following paragraph.
Harleysville Group has a reinsurance agreement with
Harleysville Mutual Insurance Company (Mutual) whereby Mutual
reinsures accumulated catastrophe losses in a quarter up to
$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, and supplements the existing
external catastrophe reinsurance program. Harleysville Group
ceded to Mutual premiums earned of $1,751,000 and $1,775,000 and
losses incurred of $2,570,000 and $(447,000) for the three months
ended September 30, 2000 and 1999, respectively. Harleysville
Group ceded to Mutual premiums earned of $5,125,000 and
$5,330,000 and losses incurred of $4,281,000 and $5,001,000 for
the nine months ended September 30, 2000 and 1999, respectively.
9
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Harleysville Group cedes business to and assumes business
from Mutual under a reinsurance pooling agreement. Because this
agreement does not relieve Harleysville Group of primary
liability as the originating insurer, there is a concentration of
credit risk arising from business ceded to Mutual. However, the
reinsurance pooling agreement provides for the right of offset
and the net balance with Mutual is a liability at September 30,
2000 and December 31, 1999. Mutual has an A. M. Best rating of
"A" (Excellent) and, in accordance with certain state regulatory
requirements, maintained $359.3 million (fair value) of
investments in a trust account to secure liabilities under the
reinsurance pooling agreement at September 30, 2000.
4 - Cash Flows
Net cash tax payments of $2,466,000 and $9,820,000 were made
in the first nine months of 2000 and 1999, respectively. Cash
interest payments of $3,566,000 and $3,371,000 were made in the
first nine months of 2000 and 1999, respectively.
5 - Restructuring Charges
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, the
Company recorded a restructuring charge in 1999 of $2,512,000 for
employee termination benefits to be paid and occupancy charges.
Employee termination benefits include severance payments and
related benefits and outplacement services for 173 employees.
Severance payments totaling $1,793,000 have been made to 172
employees, and the remaining accrual for employee termination
benefits is $10,000 at September 30, 2000. Included in occupancy
charges are future lease obligations, less anticipated sublease
benefits, for leased premises which will no longer be used by the
claims operation. Through September 30, 2000, operations in the
23 general claims offices have been closed. Payments totaling
$298,000 have been made, and the remaining accrual for occupancy
charges is $252,000 at September 30, 2000.
10
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On February 7, 2000, Harleysville Group announced a plan to
consolidate selected support services and office functions
throughout its field operations. As a result of this
consolidation, the Company recorded a restructuring charge of
$1,143,000 in the first quarter of 2000 for employee termination
benefits to be paid, occupancy charges and a write-down of
equipment to fair value. This charge was included in other
underwriting expenses.
Employee termination benefits include severance payments and
related benefits and outplacement services for 113 field
employees. Severance payments totaling $883,000 have been made
to 109 employees, and the remaining accrual for employee
termination benefits is $12,000 at September 30, 2000. Included
in occupancy charges is a lease obligation, less anticipated
sublease benefits, for a leased premise which will no longer be
used. Payments totaling $33,000 have been made against the
accrual for occupancy charges. Also, as a direct result of the
consolidation, a loss of $52,000 was realized on the disposal of
equipment.
Both consolidations were completed in the second quarter.
Activity in the Restructuring Accruals
--------------------------------------
(in thousands)
Claims Field
Restructuring Restructuring
----------------------------- -----------------------------
Employee Employee
Termination Termination
Benefits Occupancy Total Benefits Occupancy Total
----------- --------- ------- ----------- --------- ------
Balance
December 31,
1999 $ 1,975 $ 537 $ 2,512
Restructuring
charges $ 899 $188 $1,087
Cash payments (1,793) (298) (2,091) (883) (33) (916)
Change in
prior accrual
due to
voluntary
terminations
greater than
anticipated
and reduced
sublease
benefits (172) 13 (159) (4) (4)
------- ----- ------- ----- ---- ------
Balance at
September 30,
2000 $ 10 $ 252 $ 262 $ 12 $155 $ 167
======= ===== ======= ===== ==== ======
11
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6 - Segment Information
The performance of the personal lines and commercial lines
is evaluated 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. 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.
Financial data by segment is as follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2000 1999 2000 1999
-------- --------- --------- ---------
(in thousands)
Revenues:
Premiums earned:
Commercial lines $153,216 $155,870 $ 456,275 $ 457,388
Personal lines 88,022 95,904 264,555 278,388
Eliminations (69,300) (72,271) (206,958) (211,347)
-------- -------- --------- ---------
Total premiums earned 171,938 179,503 513,872 524,429
Net investment income 21,590 21,517 64,874 64,274
Realized investment gains 2,587 2,263 5,226 8,283
Other 4,037 4,170 12,533 11,453
-------- -------- --------- ---------
Total revenues $200,152 $207,453 $ 596,505 $ 608,439
======== ======== ========= =========
Income (loss) before income
taxes and cumulative
effect of accounting
change:
Underwriting loss:
Commercial lines $ (9,116) $(25,273) $(32,552) $(51,551)
Personal lines (6,786) (17,099) (27,157) (22,312)
Eliminations 5,587 9,985 17,286 21,362
-------- -------- -------- --------
SAP underwriting loss (10,315) (32,387) (42,423) (52,501)
GAAP adjustments 1,207 2,482 4,258 9,588
-------- -------- -------- --------
GAAP underwriting loss (9,108) (29,905) (38,165) (42,913)
Net investment income 21,590 21,517 64,874 64,274
Realized investment gains 2,587 2,263 5,226 8,283
Other 667 1,185 2,698 3,009
-------- -------- -------- --------
Income (loss) before income
taxes and cumulative
effect of accounting
change $ 15,736 $ (4,940) $ 34,633 $ 32,653
======== ======== ======== ========
12
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7 - Comprehensive Income
Comprehensive income (loss) consisted of the following (all
amounts are net of taxes):
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2000 1999 2000 1999
---------- ---------- ---------- ---------
(in thousands)
Net income (loss) $13,040 $ (307) $30,986 $ 27,065
Other comprehensive
income (loss):
Unrealized investment
holding gains
(losses) arising
during period 6,706 (12,843) 15,986 (19,868)
Less:
Reclassification
adjustment for
gains included
in net income (1,677) (1,466) (3,392) (5,170)
------- -------- ------- --------
Net unrealized
investment gains
(losses) 5,029 (14,309) 12,594 (25,038)
------- -------- ------- --------
Comprehensive income
(loss) $18,069 $(14,616) $43,580 $ 2,027
======= ======== ======= ========
13
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Premiums earned decreased $7.6 million and $10.5 million
during the three and nine months ended September 30, 2000,
respectively. The decreases are primarily due to decreases in
premiums earned for personal lines of $5.7 million and $9.9
million for the three and nine months ended September 30, 2000,
respectively. There was $3.0 million of premiums earned in the
prior year periods for personal automobile business written
through a managing general agent while there was no premiums
earned for such business in 2000. Commercial lines premiums
earned declined $1.9 million and $0.8 million for the three and
nine months ended September 30, 2000, respectively. Premiums
ceded under the catastrophe reinsurance agreement with Mutual
declined $0.2 million for the nine months ended September 30,
2000.
Investment income increased $0.1 million and $0.6 million
for the three and nine months ended September 30, 2000 as an
increase in invested assets was offset by a lower yield on the
investment portfolio.
Realized investment gains were essentially unchanged for the
three months ended September 30, 2000 as sales of equity
securities at greater gains were offset by the recognition of a
$2.3 million loss on an equity investment that declined in value
on an other-than-temporary basis. Realized investment gains
decreased $3.1 million for the nine months ended September 30,
2000 primarily due to the recognition of losses of $3.3 million
on equity investments that declined in value on an other-than-
temporary basis.
Income (loss) before income taxes and cumulative effect of
accounting change increased $20.7 million and $2.0 million for
the three and nine months ended September 30, 2000, respectively.
The increases primarily were due to lower underwriting losses.
Harleysville Group's statutory combined ratio decreased to 104.6%
for the three months ended September 30, 2000 from 116.0% for the
three months ended September 30, 1999 and to 107.3% for the nine
months ended September 30, 2000 from 107.4% for the nine months
ended September 30, 1999.
The nine months ended September 30, 2000 included a pre-tax
charge of $1.1 million ($.03 per basic share after taxes) related
to the consolidation of selected non-claims support services and
office functions throughout the field operations. This
14
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
restructuring charge adversely affected the statutory combined
ratio by 0.2 points for the nine months ended September 30, 2000.
Income before income taxes and cumulative effect of accounting
change for the nine months ended September 30, 2000 also was
reduced by $1.9 million ($0.04 per basic share after taxes) to
reflect the effect of a settlement of litigation between the
North Carolina Rate Bureau and the Commissioner of Insurance over
personal automobile insurance rate levels dating back to 1994.
The settlement, which mandates a refund of premium be made to
policyholders, adversely affected the combined ratio by 0.5
points. Hurricane Floyd struck the east coast of the United
States during the third quarter of 1999 and caused losses of
$12.2 million ($.27 per basic share after taxes) and adversely
affected the statutory combined ratio by 6.8 points and 2.3
points for the three and nine months ended September 30, 1999,
respectively. Hurricane losses are not covered under the
aggregate catastrophe reinsurance agreement with Mutual.
The third quarter of 1999 included a pre-tax charge of $2.6
million ($.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. This claims restructuring charge adversely affected the
statutory combined ratio by 1.4 points and 0.5 points for the
three and nine months ended September 30, 1999, respectively.
Excluding the impacts of Hurricane Floyd and the claims
restructuring charge, the statutory combined ratio decreased 3.2
points for the three months ended September 30, 2000, primarily
due to improved results in the commercial automobile and
commercial multi-peril lines of business. Excluding the impacts
of the field and claims restructuring charges, the North Carolina
Rate Bureau Settlement and Hurricane Floyd, the statutory
combined ratio increased 2.0 points for the nine months ended
September 30, 2000 primarily due to worse results in personal
lines, particularly personal automobile, partially offset by
better results in commercial lines.
Losses ceded under the aggregate catastrophe reinsurance
agreement with Mutual increased by $3.0 million for the three
months ended September 30, 2000 and decreased $0.7 million for
the nine months ended September 30, 2000 as there were more
severe spring and summer storms and less severe winter storms
than in the prior year periods.
The income tax provision for the three and nine months ended
September 30, 2000 includes the tax benefit of $2.9 million and
$8.6 million associated with tax-exempt investment income,
compared to $3.0 million and $8.9 million in the same prior year
periods.
15
<PAGE>
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Liquidity and Capital Resources
Net cash provided by operating activities was $0.8 million
and $59.0 million for the nine months ended September 30, 2000
and 1999. The decrease primarily resulted from an increase in
cash used by underwriting activities partially offset by an
increase of $10.5 million in cash held as collateral for security
lending transactions.
Net cash provided by investing activities was $22.4 million
for the nine months ended September 30, 2000 and net cash of
$40.6 million was used by investing activities for the nine
months ended September 30, 1999. The change is primarily due to
the decline in cash provided by operating activities and
increased cash used in financing activities.
Net cash used by financing activities increased $5.0 million
for the nine months ended September 30, 2000 primarily due to the
purchase of treasury stock and an increase in dividends paid.
Harleysville Group Inc. maintained $4.2 million of cash and
marketable securities and $4.9 million of dividends receivable
from its subsidiaries at September 30, 2000 which is available
for general corporate business 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 each was
permitted to purchase up to 1.0 million shares of Harleysville
Group common stock, up to a total of 2.0 million shares. As of
September 30, 2000, the Company has repurchased all of the shares
authorized to be repurchased. The Company had no material
commitments for capital expenditures as of September 30, 2000.
Certain of the statements contained herein (other than
statements of historical facts) are forward looking statements.
Such forward looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act
of 1995 and include estimates and assumptions related to
economic, competitive and legislative developments. These
forward looking statements are subject to change and uncertainty
which are, in many instances, beyond the Company's control and
have been made based upon management's expectations and beliefs
concerning future developments and their potential effect on
Harleysville Group. There can be no assurance that future
developments will be in accordance with management's expectations
so that the effect of future developments on Harleysville Group
will be those
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HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
anticipated by management. Actual financial results including
premium growth and underwriting results could differ materially
from those anticipated by Harleysville Group depending on the
outcome of certain factors, which may include changes in property
and casualty loss trends and reserves; natural catastrophe
losses; competition in insurance product pricing; government
regulation and changes therein which may impede the ability to
charge adequate rates; performance of the financial markets;
fluctuations in interest rates; availability and price of
reinsurance; and the status of labor markets in which the Company
operates.
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HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
Harleysville Group's market risk generally represents the
risk of gain or loss that may result from the potential change in
the fair value of Harleysville Group's investment portfolio as a
result of fluctuations in prices and interest rates.
Harleysville Group attempts to manage its interest rate risk by
maintaining an appropriate relationship between the average
duration of the investment portfolio and the approximate duration
of its liabilities.
Harleysville Group has maintained approximately the same
duration of its investment portfolio to its liabilities from
December 31, 1999 to September 30, 2000. In addition, the
Company has maintained approximately the same investment mix
during this period.
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HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders -
None
ITEM 5. Other Information - None
ITEM 6. a. Exhibits - None
b. Reports on Form 8-K - None
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
HARLEYSVILLE GROUP INC.
Date: November 6, 2000 /s/BRUCE J. MAGEE
------------------ -------------------------------
Bruce J. Magee
Senior Vice President and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
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