SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 26, 2002
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HARLEYSVILLE GROUP INC.
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(Exact name of registrant as specified in its charter)
Delaware 0-14697 51-0241172
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(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
355 Maple Avenue, Harleysville, Pennsylvania 19438
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(Address of principal executive offices) (Zip Code)
(215) 256-5000
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Registrant's telephone number, including area code
N/A
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(Former name or former address, if changed since last report.)
Item 5. Other Events
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On September 25, 2002 at 8:00 PM, Walter R. Bateman, Chairman and CEO of
Harleysville Group Inc., presented the remarks that follow to attendees of
Harleysville Group's Investors and Analysts Forum. The Forum continues on
September 26, 2002 and will be Webcast in its entirety. It can be found on the
"financial" page of the Company's Web site www.harleysvillegroup.com.
WALTER R. BATEMAN
CHAIRMAN & CEO
HARLEYSVILLE GROUP INC.
2002 INVESTORS' AND ANALYSTS' FORUM
SEPTEMBER 25, 2002
Good evening and welcome. We appreciate you investing your precious time with us
tonight and tomorrow. We trust your investment return is attractive in the form
of greater insight into the Harleysville companies and our senior leadership
team.
Because we'll be going into great detail tomorrow, I won't turn this evening
into a tutorial about Harleysville. But because this is my only solo time on the
agenda, I want to take a couple of minutes to offer my perspective on what is a
very compelling business story.
Everyone here very likely knows our basics. On a consolidated basis, including
Harleysville Mutual, we're a $1.1 billion regional insurer writing small
commercial accounts and personal lines in 32 eastern and Midwestern states. We
don't compete for national accounts; that's not our strategy.
We don't compete for special risk business or cash flow programs either.
Instead, we underwrite the "Main Streets," industrial parks, and suburbs of
America, and we do it with underwriting discipline at that, with the right per
risk price adequacy.
If you had to describe the Harleysville franchise on a cocktail napkin,
(Insurance people tend to see cocktail napkins as a tool of the trade!) I
suppose what I just said would do. But our story goes deeper than our
statistical profile or our position in the market.
We essentially operate under the radar screen of the "big guys." (You won't see
us regularly featured on the front page of the Wall Street Journal--Fortunately
in the latest context of front page articles.) Instead, we are known where it
counts: in the markets we serve. Harleysville is one of America's best regional
insurance companies, and, for my money, we're in just about our best shape ever.
I'm very proud of this company, and I think I have many reasons to be.
Many of those reasons are seated with you tonight--our senior leaders. They,
individually and collectively, are responsible for moving Harleysville numbers
from where we were two years ago, to numbers that many companies in the property
and casualty industry would be proud to post.
You'll learn more about how they did it tomorrow, but tonight I simply wanted to
acknowledge that fact.
Last month, Lee Patkus was elected president and chief operating officer of
Harleysville Group Lee, if you would stand please
All of the key members of our senior team here tonight are very capable people
and you'll witness that first hand for yourself tomorrow.
Tomorrow you'll also be taking an in-depth look at our core small commercial
strategy and the results we've produced. And, as you hear our story, you'll see
another reason I'm proud of Harleysville and that is, we keep our word.
Those of you who were with us two years ago at our last Investors and Analysts
Forum remember that we made promises of corrective action and future
performance.
Example: We said we would pursue a triangular discipline of reunderwriting our
risk portfolio, repricing it, and accompany those actions with the tough-nosed
management of our distribution outlets, and we have
- - Please note that we've reunderwritten and repriced our entire risk
portfolio--both commercial lines and personal lines--and even though we were
well ahead of the market with our corrective actions, our timing was absolutely
perfect and our judgment was right-on because our pricing stuck. You may
remember that we had a slogan that time--"Mission Possible"--and that phase is
now "mission accomplished."
- - Our triangle points now read underwriting, not re-underwriting it now
reads pricing, not re-pricing and that discipline continues day in and day out
to keep every one of our folks focused on the right issues. (The main thing is
to keep the main thing the main thing-and that's our main thing.)
- - Two years ago, we said we'd reduce our expense ratio, and we have--with
organizational simplifications, staff reductions, the application of best
practices and adherence to industry benchmarks, with new productivity programs,
and plain old grind-it-out expense management.
- - Since we last convened, we've refreshed and revitalized the Harleysville
brand with our new logo and new positioning statement: "Good people to
know"--which was done to singularize the projection and impact of our brand, our
value proposition, our A.M. Best "A" rating, and importantly our balance sheet
strength (to the markets we serve in 32 states.)
- - Since 1999, we've made the Harleysville franchise a lot more valuable and,
importantly, a lot harder for agents to get. A Harleysville Insurance plaque on
an agent's wall is now more representative of a valid franchise agreement
between the "franchisor" underwriter (Harleysville) and the franchisee
(independent agent). That relationship now is based on longer-term commitments
and a value proposition that is highly rewarding to those agents who manage and
exploit their Harleysville franchise the way we want it done!
- - The last time we met, we said we were going to launch a refined small
commercial strategy, and we have--very successfully. And that success is
building, our vision for the future is being realized, day after day, in all our
profit centers--and I'm naturally pleased with that. Tomorrow you'll see the
actions we're taking to undergird that success.
- - Two years ago we said we'd lower our combined ratio, and we have--with
hands-on underwriting management. In 1999 we were running a 107.8 overall
combined ratio. In 2000, it was 106.1. In 2001 we ended the year with a 104.2
and our combined ratio for commercial lines hit 100 even. For the first six
months of this year, HGI is running below 100 in commercial lines, and we have
an overall year-to-date combined ratio of 101.9.
Having said all of the above, we know we still have issues to resolve. In the
property/casualty world, it's never going to be a perfect world; we still must
deal with negative as well as positive external factors.
For instance, we continue the upstream swim against medical inflation in workers
compensation and the consumeristic and protectionist regulatory environment in
private passenger auto. I'd be hard pressed to name a company underwriting our
type of portfolio that isn't in that same boat, and tomorrow Doug Gaudet will
take you through the corrective underwriting actions we've engaged to improve
profitability and minimize our exposure in those lines, along with the splendid
successes we've had in commercial lines overall.
On the financial reporting front, in this world of ethically challenged and
failing businesses, I'm proud to say that our balance sheet is strong and
"clearly" presented. And tomorrow you'll get to go one-on-one with our CFO,
Bruce Magee, in a balance sheet discussion. As you will see reinforced in
Bruce's remarks, we truly covet our reputation for financial integrity and don't
intend to spoil it.
Also (on the financial front), I'm pleased to tell you that our cash flow has
turned strongly positive for the first quarter and for the first half of this
year, and now stands at $46 million. Operating earnings for six months are at 89
cents a share, up 16%.
Finally, HGI's balance sheet is only modestly leveraged and, as Mark Cummins,
our CIO, will outline for you tomorrow, the credit quality of our investment
portfolio is "pristine."
We're also outperforming the industry in terms of ROE. That's certainly nothing
new--we've done that for 15 of the 16 years we've been a public company.
Having said that, our ROE performance currently resides below our long-term
target level--despite our excellent operating results. The reason's no secret
because like many other insurers, we've had to take investment write downs,
especially in our equities portfolio, and they've negatively impacted net income
and return on equity.
I'm not making excuses though, and improving ROE performance is at the top of
our list of objectives. But in addition to ROE, we have other important core
corporate objectives, five more in fact:
- - growing our commercial book of business, especially in preferred customer
groups
- - advancing our personal lines strategy
- - strengthening customer retention
- - continuing to strengthen the quality and skills of our workforce
- - and improving our expense ratio.
All of those objectives are very important, but none trumps the primary
objective: producing superior earnings growth and a return on equity for our
shareholders.
We intend to do that even when external conditions are difficult. In fact, one
reason we are confident Harleysville can produce results superior to the
industry is that we are not captive to marketplace conditions.
It's quite difficult for the big national underwriters to consistently
outperform the market because many of them reflect the overall market--and some
are the market. I'm not suggesting it can't be done, and we can all think of
large insurance competitors that have outstanding track records of
profitability.
Even so, being nimble enough and selective enough to work around many
marketplace problems gives us an advantage that shows in our earnings.
We are, at heart, a local company operating under the radar screens of the
nationals, with a great deal of hands-on control of our underwriting activities
and high-touch service for agents and policyholders. I assert to you that we're
a destroyer, not an aircraft carrier. Our organization's goal is to be quick to
the helm and responsive to a sea change. The extreme mass of the biggest
national underwriters means they simply can't turn the ship as fast as we can.
Just the other day I saw that Conning has released a new property and casualty
industry study, "Small Insurers --Thriving in the Land of Giants" (I love that
title.)
It points out that factors like consolidation in the financial services sector,
globalization, and technology demands were expected to overwhelm small insurance
companies. The large insurers, it says, appeared poised to use their massive
capital resources and powerful economies of scale to extend their marketplace
domination.
That didn't happen. The co-author of the study stated that "small insurers are
not only surviving but many seem to be thriving " In other words, small insurers
grew faster than large insurers and achieved better underwriting results, at
least through the study period from 1996 through 2000.
Conning went on to say that "small insurers remain a nebulous, little understood
and frequently ignored force in the P&C marketplace." (Translate: operating
under the radar screen.)
The study defined small insurers as having annual written premium of less than
$1 billion. That definition automatically put us in the "large insurer" category
along with some other very fine regional competitors, like Erie and Cincinnati.
But it also put us in the pond with the real giants ACE, AIG, Allianz, Allstate,
Zurich American and so on.
From my point of view, we belong neither to the small company category nor to
the very large. Let's call ours the Goldilocks size category-not too big, not
too small, but just the right size to enjoy the advantages of each group.
I find one quote from the study to be particularly apt. It says: "These results
appear to indicate that the benefit of market focus can overcome scale
advantages Market focus can overcome scale advantages." As you listen to our
leaders tomorrow, you'll hear that this sounds just like Harleysville's
strategy.
Well, you don't have to buy the study to learn the answer as to why smaller
companies - or mid-size companies like Harleysville - can yield superior
performance, you can just ask us We'll be happy to tell you what gives us
certain advantages over any competitor of any size.
There are six items on my list
The first is a clear strategic focus on a definitive segment of the
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market-in our case, small commercial customers.
The reason small commercial accounts are so important to Harleysville is not
only the intrinsic profitability of that market-although we certainly like
that-but also because of that market's fit with our capabilities and our
marketing reach.
It's a market we know well, it's a market our agents can access easily, and it's
a market where we can create added value for the customer.
Number two: the Harleysville franchise. We have extremely good
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relationships with extremely good agencies. They want our franchise, we want
their best customers, and we both get what we want because our individual
interests are closely aligned and we have the right rewards in place to under
gird our value proposition.
Number three: our localness. You can't make money underwriting by
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remote control. You must have feet on the street where your customers and agents
are. And we do. It's one of Harleysville's important and sustainable market
differentiators. Tomorrow you'll meet Tom Clark, the RVP of our $120 million New
Jersey profit center (consistently one of our most profitable), who will tell
you how local execution yields the growth and profit results we want.
Number four: Our underwriting culture. We are underwriters and we
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believe we should be able to make money from the business of underwriting. And
we are making an underwriting profit in commercial lines. We believe we will do
the same in personal lines in due course.
We apply the triangle discipline every day in every way. We select and price our
business with a disciplined approach. We set our reserves with a disciplined
approach. We reinsure with a disciplined approach. That discipline doesn't
remove risk from the process, but it does build margins and it does lead to a
more predictable, less volatile range of outcomes.
Reason five: Information technology. We've made a significant strategic
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investment in IT to increase our service quality and productivity, particularly
in support of small commercial business. That investment has been large, but so
has our progress. Wayne Ratz, our chief information officer, will speak to you
tomorrow about the IT revolution at Harleysville.
Reason six is our service, particularly our claims service (which is
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why the average person buys insurance). Our claim checks aren't any bigger than
those of other companies, but our customers love our claim service because it
works so quickly and so well and that we actually treat them like human beings.
Bob Lockwood, head of our claims operations will tell you why we have other
insurance companies coming in to look at how our claim centers work-and why they
work so well.
Those six factors make Harleysville different from our competitors and give us
an edge in the marketplace even against the largest companies, in fact,
especially against the largest companies.
Of course, we have advantages over many other regionals, too.
First of all, we're larger and better capitalized than companies at the small
end of the regional spectrum We are "A" rated by A.M. Best We have an excellent
surplus position We utilize reinsurance for God's intended purposes, that is,
for truly catastrophic situations, therefore we're not reinsurance dependent
And we have enough scale to make sizeable investments in process improvements
like information technology.
Because we manage with discipline, we also have the capacity to grow.
In short, Harleysville's size confers a set of advantages over competitors at
both ends of the spectrum.
As I said earlier, we're in the Goldilocks category, not too big, not too small,
but well capitalized and just the right size for profit, growth and durability
while still being nimble enough to steer around the hidden shoals the largest
companies may find difficult to avoid.
Harleysville is on a roll. We're not perfect. Our earnings performance is still
below target. But I think our operating results point the way to the future and
they have been gratifying. Equally important, the improvements we've made over
the past two years are not once and done events, we've built them into the
structure and culture of the company.
The success you see is deep down.
When you see our operating numbers, you see the result of discipline applied
over years, and when you examine our balance sheet, you can believe what you
see. It's not some Enron souffle cooked up to look good, but ready to
collapse at the first sneeze. Our numbers have integrity, they are the real
thing. You get what you see and they're good all the way through because that's
the culture of Harleysville. And that's our opinion on the way to build
things to last!
Thank you.
SIGNATURES
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 hereunto duly authorized.
HARLEYSVILLE GROUP INC.
Registrant
September 26, 2002 /s/ Mark R. Cummins
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Mark R. Cummins
Executive Vice President,
Chief Investment Officer &
Treasurer