SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
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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 August 2, 2000, 28,797,607 shares of common stock of
Harleysville Group Inc. were outstanding.
1
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
INDEX
PAGE NUMBER
-----------
Part I - Financial Information
Consolidated Balance Sheets - June 30, 2000
and December 31, 1999 3
Consolidated Statements of Income - For the
three months ended June 30, 2000 and 1999 4
Consolidated Statements of Income - For the
six months ended June 30, 2000 and 1999 5
Consolidated Statement of Shareholders' Equity -
For the six months ended June 30, 2000 6
Consolidated Statements of Cash Flows -
For the six months ended June 30, 2000
and 1999 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Results
of Operations and Financial Condition 13
Quantitative and Qualitative Disclosure About
Market Risk 18
Part II - Other Information 19
2
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JUNE 30, DECEMBER 31,
2000 1999
------------ -----------
(unaudited)
ASSETS
------
Investments:
Fixed maturities:
Held to maturity, at amortized
cost (fair value $572,918
and $597,367) $ 571,983 $ 597,232
Available for sale, at fair value
(amortized cost $771,096 and
$761,830) 762,838 749,370
Equity securities, at fair value
(cost $114,986 and $106,225) 214,393 198,197
Short-term investments, at cost,
which approximates fair value 38,780 59,223
---------- ----------
Total investments 1,587,994 1,604,022
Cash 26,035 20,273
Receivables:
Premiums 98,296 91,931
Reinsurance 87,979 81,884
Accrued investment income 22,332 22,478
---------- ----------
Total receivables 208,607 196,293
Deferred policy acquisition costs 85,300 83,541
Prepaid reinsurance premiums 24,451 28,907
Property and equipment, net 27,877 27,368
Deferred income taxes 18,158 20,478
Other assets 37,869 39,174
---------- ----------
Total assets $2,016,291 $2,020,056
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unpaid losses and loss settlement
expenses $ 900,459 $ 901,352
Unearned premiums 355,199 351,710
Accounts payable and accrued expenses 108,464 113,369
Debt 96,450 96,810
Due to affiliate 13,324 29,921
---------- ----------
Total liabilities 1,473,896 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 29,700,426
and 29,498,651 shares; outstanding
28,700,426 and 28,812,086 shares 29,700 29,499
Additional paid-in capital 127,070 124,798
Accumulated other comprehensive income 59,247 51,682
Retained earnings 341,943 331,769
Treasury stock, at cost, 1,000,000 and
686,565 shares (15,565) (10,854)
---------- ----------
Total shareholders' equity 542,395 526,894
---------- ----------
Total liabilities and
shareholders' equity $2,016,291 $2,020,056
========== ==========
See accompanying notes to consolidated financial statements.
3
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
(dollars in thousands, except per share data)
2000 1999
--------- ---------
Revenues:
Premiums earned $171,693 $175,099
Investment income, net of
investment expenses 21,514 21,231
Realized investment gains 1,365 1,210
Other income 4,362 3,770
-------- --------
Total revenues 198,934 201,310
-------- --------
Losses and expenses:
Losses and loss settlement expenses 125,028 119,799
Amortization of deferred policy
acquisition costs 44,557 45,264
Other underwriting expenses 14,088 14,116
Interest expense 1,618 1,556
Other expenses 1,521 1,193
-------- --------
Total expenses 186,812 181,928
-------- --------
Income before income taxes 12,122 19,382
Income taxes 1,417 3,871
-------- --------
Net income $ 10,705 $ 15,511
======== ========
Per common share:
Basic earnings $ .37 $ .53
======== ========
Diluted earnings $ .37 $ .52
======== ========
Cash dividend $ .135 $ .125
======== ========
See accompanying notes to consolidated financial statements.
4
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(dollars in thousands, except per share data)
2000 1999
--------- ---------
Revenues:
Premiums earned $341,934 $344,926
Investment income, net of
investment expenses 43,284 42,757
Realized investment gains 2,639 6,020
Other income 8,496 7,283
-------- --------
Total revenues 396,353 400,986
-------- --------
Losses and expenses:
Losses and loss settlement expenses 252,519 239,645
Amortization of deferred policy
acquisition costs 88,544 88,815
Other underwriting expenses 29,928 29,474
Interest expense 3,278 3,117
Other expenses 3,187 2,342
-------- --------
Total expenses 377,456 363,393
-------- --------
Income before income taxes and
cumulative effect of accounting
change 18,897 37,593
Income taxes 951 7,317
-------- --------
Income before cumulative effect
of accounting change 17,946 30,276
Cumulative effect of accounting change,
net of income tax (2,904)
-------- --------
Net income $ 17,946 $ 27,372
======== ========
Per common share:
Basic:
Income before cumulative effect of
accounting change $ .62 $ 1.04
Cumulative effect of accounting
change, net of income tax (.10)
-------- --------
Net income $ .62 $ .94
======== ========
Diluted:
Income before cumulative effect of
accounting change $ .62 $ 1.02
Cumulative effect of accounting
change, net of income tax (.10)
-------- --------
Net income $ .62 $ .92
======== ========
Cash dividend $ .27 $ .25
======== ========
See accompanying notes to consolidated financial statements.
5
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(dollars in thousands)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------ PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL INCOME EARNINGS STOCK TOTAL
---------- ------- ---------- ------------- -------- --------- --------
Balance,
Dec. 31,
1999 29,498,651 $29,499 $124,798 $51,682 $331,769 $(10,854) $526,894
--------
Net income 17,946 17,946
Other compre-
hensive income,
net of tax:
Unrealized
investment
gains, net of
reclassifi-
cation
adjustment 7,565 7,565
--------
Comprehensive
income 25,511
--------
Issuance
of common
stock 201,775 201 2,272 2,473
Cash dividend
paid (7,772) (7,772)
Purchase of
treasury
stock,
313,435
shares (4,711) (4,711)
---------- ------- -------- ------- -------- -------- --------
Balance at
June 30,
2000 29,700,426 $29,700 $127,070 $59,247 $341,943 $(15,565) $542,395
========== ======= ======== ======= ======== ======== ========
See accompanying notes to consolidated financial statements.
6
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(in thousands)
2000 1999
---------- ----------
Cash flows from operating activities:
Net income $ 17,946 $ 27,372
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 (20,966) 11,366
Decrease in unpaid losses and
loss settlement expenses (893) (10,986)
Deferred income taxes (1,753) 1,281
Increase in deferred policy
acquisition costs (1,759) (7,638)
Amortization and depreciation 1,761 1,539
Gain on sale of investments (2,639) (6,020)
Other, net (4,145) (5,213)
-------- ---------
Net cash provided (used) by
operating activities (12,448) 14,605
-------- ---------
Cash flows from investing activities:
Fixed maturity investments:
Purchases (48,613) (103,751)
Sales or maturities 64,764 102,253
Equity securities:
Purchases (17,134) (10,246)
Sales 11,088 8,947
Net (purchases) sales of short-term
investments 20,443 (5,486)
Purchase of property and equipment (1,968) (2,015)
-------- ---------
Net cash provided (used)
by investing activities 28,580 (10,298)
-------- ---------
Cash flows from financing activities:
Issuance of common stock 2,473 2,930
Repayment of debt obligations (360) (330)
Dividend paid (7,772) (7,322)
Purchase of treasury stock (4,711)
-------- ---------
Net cash used by
financing activities (10,370) (4,722)
-------- ---------
Increase (decrease) in cash 5,762 (415)
Cash at beginning of period 20,273 3,799
-------- ---------
Cash at end of period $ 26,035 $ 3,384
======== =========
See accompanying notes to consolidated financial statements.
7
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - Basis of Presentation
The financial information for the interim periods
included herein is unaudited; however, such information
reflects all adjustments (consisting of only normal
recurring adjustments) which are, in the opinion of
management, necessary to a fair presentation of the
financial position, results of operations, and cash flows
for the interim periods. The results of operations for
interim periods are not necessarily indicative of results
to be expected for the full year.
These financial statements should be read in
conjunction with the financial statements and notes for
the year ended December 31, 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 per share is
as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
--------- ---------- --------- --------
(in thousands,
except per share data)
Numerator for basic
and diluted earnings
earnings per share:
Net income $10,705 $15,511 $17,946 $27,372
======= ======= ======= =======
Denominator for basic
earnings per share --
weighted average
shares outstanding 28,763 29,299 28,832 29,268
Effect of stock
incentive plans 174 305 171 372
------- ------- ------- -------
Denominator for
diluted earnings
per share 28,937 29,604 29,003 29,640
======= ======= ======= =======
Basic earnings
per share $ .37 $ .53 $ .62 $ .94
======= ======= ======= =======
Diluted earnings
per share $ .37 $ .52 $ .62 $ .92
======= ======= ======= =======
8
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
-------- -------- --------- --------
(in thousands)
Number of options 1,270 684 1,270 330
===== === ===== ===
3 - Reinsurance
Premiums earned are net of amounts ceded of
$21,145,000 and $40,834,000 for the three and six months
ended June 30, 2000, respectively, and $11,784,000 and
$23,017,000 for the three and six months ended June 30,
1999, respectively. Losses and loss settlement expenses
are net of amounts ceded of $14,647,000 and $26,768,000
for the three and six months ended June 30, 2000,
respectively, and $5,058,000 and $15,647,000 for the
three and six months ended June 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 $1,826,000 and
$1,959,000 and losses incurred of $1,655,000 and
$(644,000), for the three months ended June 30, 2000 and
1999, respectively. Harleysville Group ceded to Mutual
premiums earned of $3,374,000 and $3,555,000 and loss
incurred of $1,711,000 and $5,448,000 for the six months
ended June 30, 2000 and 1999, respectively.
Harleysville Group cedes business to and assumes
business from Mutual under a reinsurance pooling
agreement. Because this agreement does not relieve
Harleysville Group of primary liability as the
originating insurer, there is a concentration of credit
risk arising from business ceded to Mutual. However, the
reinsurance pooling agreement provides for the right of
offset and the net balance with Mutual is a liability at
June 30, 2000 and December 31, 1999. Mutual has an A. M.
Best rating of "A"
9
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Excellent) and, in accordance with certain state
regulatory requirements, maintained $366.6 million (fair
value) of investments in a trust account to secure
liabilities under the reinsurance pooling agreement at
June 30, 2000.
4 - Cash Flows
There were cash tax payments of $866,000 and
$6,773,000 and cash interest payments of $3,228,000 and
$3,063,000 in the first six 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 $1,768,000
have been made to 170 employees, and the remaining
accrual for employee termination benefits is $73,000 at
June 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 June 30, 2000, operations in
the 23 general claims offices have been closed. Payments
totaling $149,000 have been made, and the remaining
accrual for occupancy charges is $457,000 at June 30,
2000.
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
$831,000 have been made to 105 employees, and the
remaining accrual for employee termination benefits is
$55,000 at June 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 $17,000 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.
10
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 (1,768) (149) (1,917) (831) (17) (848)
Change in
prior accrual
due to
voluntary
terminations
greater than
anticipated
and reduced
sublease
benefits (134) 69 (65) (13) (13)
------- ----- ------- ----- ---- ------
Balance at
June 30,
2000 $ 73 $ 457 $ 530 $ 55 $171 $ 226
======= ===== ======= ===== ==== ======
11
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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
-------- --------- --------- ---------
(in thousands)
Revenues:
Premiums earned:
Commercial lines $151,644 $154,040 $ 303,059 $ 301,517
Personal lines 89,353 91,874 176,533 182,484
Eliminations (69,304) (70,815) (137,658) (139,075)
-------- -------- --------- ---------
Total premiums earned 171,693 175,099 341,934 344,926
Net investment income 21,514 21,231 43,284 42,757
Realized investment
gains 1,365 1,210 2,639 6,020
Other 4,362 3,770 8,496 7,283
-------- -------- --------- ---------
Total revenues $198,934 $201,310 $ 396,353 $ 400,986
======== ======== ========= =========
Income before income
taxes and cumulative
effect of accounting
change:
Underwriting loss:
Commercial lines $(13,118) $ (8,002) $ (23,436) $ (26,278)
Personal lines (7,999) (1,383) (20,371) (5,212)
Eliminations 6,128 386 11,699 11,377
-------- -------- --------- ---------
SAP underwriting
loss (14,989) (8,999) (32,108) (20,113)
GAAP adjustments 3,009 4,919 3,051 7,105
-------- -------- --------- --------
GAAP underwriting
loss (11,980) (4,080) (29,057) (13,008)
Net investment income 21,514 21,231 43,284 42,757
Realized investment
gains 1,365 1,210 2,639 6,020
Other 1,223 1,021 2,031 1,824
-------- -------- --------- ---------
Income before income
taxes and cumulative
effect of accounting
change $ 12,122 $ 19,382 $ 18,897 $ 37,593
======== ======== ========= =========
12
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
7 - Comprehensive Income
Comprehensive income consisted of the following (all
amounts are net of taxes):
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands)
Net income $10,705 $ 15,511 $17,946 $ 27,372
Other comprehensive
income:
Unrealized
investment
holding gains
(losses) arising
during period (2,391) (10,062) 9,280 (7,025)
Less:
Reclassification
adjustment for
gains included
in net income (889) (596) (1,715) (3,704)
------- -------- ------- --------
Net unrealized
investment
gains (losses) (3,280) (10,658) 7,565 (10,729)
------- -------- ------- --------
Comprehensive income $ 7,425 $ 4,853 $25,511 $ 16,643
======= ======== ======= ========
13
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Premiums earned decreased $3.4 million and $3.0 million
during the three and six months ended June 30, 2000,
respectively. The decreases are primarily due to decreases in
premiums earned for personal lines partially offset by decreases
of $0.1 million and $0.2 million in premiums ceded under the
catastrophe reinsurance agreement with Mutual for the three and
six months ended June 30, 2000, respectively.
Investment income increased $0.3 million and $0.5 million
for the three and six months ended June 30, 2000 as an increase
in invested assets was partially offset by a lower yield on the
investment portfolio.
Realized investment gains were essentially unchanged for the
three months ended June 30, 2000. Realized investment gains
decreased $3.4 million for the six months ended June 30, 2000
primarily resulting from fewer sales of equity securities and
from the recognition of a $1.0 million loss on an equity
investment that was trading below cost on an other-than-temporary
basis.
Income before income taxes and cumulative effect of
accounting change decreased $7.3 million and $18.7 million for
the three and six months ended June 30, 2000, respectively. The
decreases primarily were due to a higher underwriting loss,
partially offset by the higher investment income. Lower realized
gains also contributed to the decrease in income before income
taxes and cumulative effect of accounting change for the six
months ended June 30, 2000. Harleysville Group's statutory
combined ratio increased to 105.9% and 108.6% for the three and
six months ended June 30, 2000, respectively, from 101.3% and
102.9% for the three and six months ended June 30, 1999,
respectively. The six months ended June 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.
The restructuring resulted in a net staff reduction of about 115
people and was completed by the end of the second quarter of
2000. The consolidation is expected to result in annual after-tax
savings of approximately $2.7 million, based on a preliminary
analysis of achievable cost savings. This restructuring charge
adversely affected the statutory combined ratio by 0.3 points for
the six months ended June 30, 2000. Income before income taxes
and cumulative effect of accounting change for the six months
ended June 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 0.6 points. Excluding the impacts of the
field
14
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
restructuring and North Carolina Rate Bureau settlement, the
statutory combined ratio increased 4.8 points for the six months
ended June 30, 2000. Such increase, and the 4.6 point increase
in the statutory combined ratio for the three months ended June
30, 2000, is primarily due to worse results in personal lines,
particularly personal automobile, and in workers compensation.
Losses ceded under the aggregate catastrophe reinsurance
agreement with Mutual increased by $2.3 million for the three
months ended June 30, 2000, primarily due to a greater frequency
of catastrophes and decreased $3.7 million for the six months
ended June 30, 2000 due to fewer catastrophes in the first
quarter.
The income tax expense for the three and six months ended
June 30, 2000 includes the tax benefit of $2.8 million and $5.7
million associated with tax-exempt interest compared to $2.9
million and $5.9 million in the same prior year periods.
The cumulative effect of accounting change reflects the
effect of adopting a new accounting standard in 1999 related to
the treatment of insurance-related assessments.
Effective for one year from July 1, 2000, the Company's
subsidiaries and Mutual and its wholly-owned subsidiaries renewed
its catastrophe reinsurance treaty which provides coverage for
85.5% of up to $147 million in excess of a retention of $20
million for any given catastrophe. Harleysville Group's 2000
pooling share of this coverage would be 85.5% of up to $106
million in excess of a retention of $14.4 million for any given
catastrophe. Accordingly, pursuant to the terms of the treaty,
the maximum recovery would be $126 million for any catastrophe
involving an insured loss equal to or greater than $167 million.
Harleysville Group's 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 providing for coverage for a second
catastrophe and requiring payment of an additional premium in the
event of a first catastrophe occurring.
Liquidity and Capital Resources
Net cash used by operating activities was $12.4 million for
the six months ended June 30, 2000 and net cash of $14.6 million
was provided by operating activities for the six months ended
June 30, 1999. The change primarily is from an increase in cash
used by underwriting activities partially offset by an increase
of $6.7 million in cash held as collateral for security lending
transactions.
15
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Net cash provided by investing activities was $28.6 million
for the six months ended June 30, 2000 and net cash of $10.3
million was used by investing activities for the six months ended
June 30, 1999. The change is primarily due to the change in cash
used by operating activities and increased cash used in financing
activities.
Net cash used by financing activities increased $5.6 million
for the six months ended June 30, 2000 primarily due to the
purchase of treasury stock.
Harleysville Group Inc. maintained $2.0 million of cash and
marketable securities and $9.1 million of dividends receivable
from its subsidiaries at June 30, 2000 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 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
June 30, 2000, the Company has repurchased all of the shares
authorized to be repurchased. The Company has no material
commitments for capital expenditures as of June 30, 2000.
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 problem.
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.
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
16
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
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 instance, 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 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.
17
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 June 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 -
ITEM 6. a. Exhibits - None
m 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: August 10, 2000 BRUCE J. MAGEE
--------------------- -------------------------------
Bruce J. Magee
Senior Vice President and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
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