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, 2003.
---------------
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 .
---- ----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X . No .
---- ----
At July 31, 2003, 30,062,009 shares of common stock of Harleysville Group
Inc. were outstanding.
Page 1
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
INDEX
PAGE NUMBER
------------
Part I - Financial Information
Consolidated Balance Sheets - June 30, 2003
and December 31, 2002 3
Consolidated Statements of Income - For the
three months ended June 30, 2003 and 2002 4
Consolidated Statements of Income - For the
six months ended June 30, 2003 and 2002 5
Consolidated Statement of Shareholders' Equity -
For the six months ended June 30, 2003 6
Consolidated Statements of Cash Flows -
For the six months ended June 30, 2003
and 2002 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 26
Controls and Procedures 27
Part II - Other Information 28
Page 2
ITEM 1. FINANCIAL STATEMENTS
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
JUNE 30, DECEMBER 31,
2003 2002
----------- -----------
(unaudited)
ASSETS
- ------
Investments:
Fixed maturities:
Held to maturity, at amortized cost
(fair value $358,904 and $411,235) $ 326,931 $ 379,940
Available for sale, at fair value
(amortized cost $1,061,064 and
$932,889) 1,138,019 995,032
Equity securities, at fair value
(cost $97,795 and $96,849) 119,779 107,177
Short-term investments, at cost,
which approximates fair value 63,140 89,692
Fixed maturity securities on loan:
Held to maturity, at amortized
cost (fair value $5,618 and $5,707) 4,809 5,222
Available for sale, at fair value
(amortized cost $132,664 and $118,991) 143,738 129,837
---------- ----------
Total investments 1,796,416 1,706,900
Cash 1,462 2,944
Receivables
Premiums 153,249 138,905
Reinsurance (affiliate $2,815 and $55) 99,644 75,488
Accrued investment income 21,844 21,552
---------- ----------
Total receivables 274,737 235,945
Deferred policy acquisition costs 104,305 94,896
Prepaid reinsurance premiums 20,540 19,421
Property and equipment, net 25,499 27,556
Deferred income taxes 21,439 25,784
Security lending collateral 154,609 139,215
Due from affiliate 12,854 10,709
Other assets 44,381 48,154
---------- ----------
Total assets $2,456,242 $2,311,524
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unpaid losses and loss settlement expenses
(affiliate $182,143 and $166,188) $1,008,969 $ 928,335
Unearned premiums (affiliate $61,720 and $54,035) 442,659 406,277
Accounts payable and accrued expenses 105,922 109,965
Security lending obligation 154,609 139,215
Debt (affiliate $18,500 and $18,500) 95,145 95,620
---------- ----------
Total liabilities 1,807,304 1,679,412
---------- ----------
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 31,194,664
and 30,917,575 shares; outstanding
30,114,185 and 29,917,575 shares 31,195 30,918
Additional paid-in capital 155,633 149,091
Accumulated other comprehensive income 66,438 49,086
Retained earnings 415,470 418,582
Deferred compensation (2,356)
Treasury stock, at cost, 1,080,479 and
1,000,000 shares (17,442) (15,565)
---------- ----------
Total shareholders' equity 648,938 632,112
---------- ----------
Total liabilities and shareholders' equity $2,456,242 $2,311,524
========== ==========
See accompanying notes to consolidated financial statements.
Page 3
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
(dollars in thousands, except per share data)
2003 2002
--------- ---------
Revenues:
Premiums earned from affiliate (ceded
to affiliate, $176,376 and $165,846) $203,755 $187,708
Investment income, net of
investment expenses 21,649 21,526
Realized investment gains
(losses), net 67 (20,983)
Other income (affiliate $1,821 and
$1,755) 4,073 3,898
-------- --------
Total revenues 229,544 192,149
-------- --------
Losses and expenses:
Losses and loss settlement expenses
from affiliate (ceded to affiliate,
$125,308 and $110,000) 147,426 127,809
Amortization of deferred policy
acquisition costs 49,898 45,573
Other underwriting expenses 18,121 19,495
Interest expense (affiliate $92
and $121) 1,393 1,434
Other expenses 1,176 1,042
-------- --------
Total expenses 218,014 195,353
-------- --------
Income (loss) before income taxes 11,530 (3,204)
Income taxes (benefit) 1,462 (3,500)
-------- --------
Net income $ 10,068 $ 296
======== ========
Per common share:
Basic earnings $ .33 $ .01
======== ========
Diluted earnings $ .33 $ .01
======== ========
Cash dividend $ .165 $ .15
======== ========
See accompanying notes to consolidated financial statements.
Page 4
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(dollars in thousands, except per share data)
2003 2002
--------- ---------
Revenues:
Premiums earned from affiliate (ceded
to affiliate, $348,681 and $326,117) $402,584 $370,213
Investment income, net of
investment expenses 43,096 43,008
Realized investment losses, net (366) (20,505)
Other income (affiliate $3,831 and
$3,509) 8,593 7,643
-------- --------
Total revenues 453,907 400,359
-------- --------
Losses and expenses:
Losses and loss settlement expenses
from affiliate (ceded to affiliate,
$268,190 and $223,667) 311,185 255,081
Amortization of deferred policy
acquisition costs 98,215 90,195
Other underwriting expenses 36,678 36,417
Interest expense 2,787 2,855
Other expenses (affiliate $186 and
$241) 2,387 2,092
-------- --------
Total expenses 451,252 386,640
-------- --------
Income before income taxes 2,655 13,719
Income taxes (benefit) (4,173) 83
-------- --------
Net income $ 6,828 $ 13,636
======== ========
Per common share:
Basic earnings $ .23 $ .46
======== ========
Diluted earnings $ .23 $ .45
======== ========
Cash dividend $ .33 $ .30
======== ========
See accompanying notes to consolidated financial statements.
PAGE 5
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
(dollars in thousands)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID-IN COMPREHENSIVE RETAINED DEFERRED TREASURY
SHARES AMOUNT CAPITAL INCOME EARNINGS COMPENSATION STOCK TOTAL
---------- ------- ---------- ------------- -------- ------------ -------- --------
Balance,
December 31,
2002 30,917,575 $30,918 $149,091 $49,086 $418,582 $ $(15,565) $632,112
--------
Net income 6,828 6,828
Other compre-
hensive income,
net of tax:
Unrealized
investment
gains, net of
reclassification
adjustment 17,352 17,352
--------
Comprehensive
income 24,180
Issuance
of commons
stock 277,089 277 6,444 6,721
Tax benefit
from stock
options
exercised 98 98
Deferred
compensation (2,356) (2,356)
Cash
dividend
paid (9,940) (9,940)
Purchase of
treasury
stock,
80,479
shares (1,877) (1,877)
---------- ------- -------- ------- -------- ------- -------- --------
Balance at
June 30,
2003 31,194,664 $31,195 $155,633 $66,438 $415,470 $(2,356) $(17,442) $648,938
========== ======= ======== ======= ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
Page 6
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
(in thousands)
2003 2002
---------- ----------
Cash flows from operating activities:
Net income $ 6,828 $ 13,636
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in receivables, unearned
premiums, prepaid reinsurance
and due to affiliate (5,674) 9,966
Increase in unpaid losses and
loss settlement expenses 80,634 14,195
Deferred income taxes (4,999) (8,057)
Increase in deferred policy
acquisition costs (9,409) (6,601)
Amortization and depreciation 2,069 1,372
Realized investment losses 366 20,505
Other, net (10,584) 1,833
--------- ---------
Net cash provided by
operating activities 59,231 46,849
--------- ---------
Cash flows from investing activities:
Fixed maturity investments:
Purchases (199,021) (106,013)
Sales or maturities 119,118 76,347
Equity securities:
Purchases (4,162) (12,745)
Sales 1,923 7,212
Net sales (purchases) of short-term investments 26,552 (5,092)
Sale (purchase) of property and equipment 448 (1,728)
--------- ---------
Net cash used by investing
activities (55,142) (42,019)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 6,721 5,063
Repayment of debt obligations (475) (435)
Dividend paid (to affiliate, $5,496
and $4,983) (9,940) (8,894)
Purchase of treasury stock (1,877)
--------- ---------
Net cash used by
financing activities (5,571) (4,266)
--------- ---------
Increase (decrease) in cash (1,482) 564
Cash at beginning of period 2,944 1,839
--------- ---------
Cash at end of period $ 1,462 $ 2,403
========= =========
See accompanying notes to consolidated financial statements.
Page 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, 2002 included in the
Company's 2002 Annual Report filed with the Securities and Exchange Commission
on Form 10-K.
The affiliate transaction disclosures on the face of the financial
statements are in regards to transactions with Harleysville Mutual Insurance
Company (Mutual). Mutual owns approximately 55% of the outstanding common stock
of Harleysville Group Inc.
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 and in proportion to the premiums
earned. The method followed in computing deferred policy acquisition costs
limits the amount of such deferred costs to their estimated realizable value.
The estimation of net realizable value takes into account the premium to be
earned, related investment income over the claim paying period, losses and loss
settlement expenses, and certain other costs expected to be incurred as the
premium is earned. Future changes in estimates, the most significant of which
is expected losses and loss settlement expenses, may require adjustments to
deferred policy acquisition costs. If the estimation of net realizable value
indicate that the acquisition costs are unrecoverable, further analyses are
completed to determine if a reserve is required to provide for losses that may
exceed the related unearned premiums.
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. Accordingly, no compensation
expense is recognized for fixed stock option grants and an employee stock
purchase plan. Compensation expense would be recorded on the date of a stock
option
Page 8
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
grant only if the current market price of the underlying stock exceeded the
exercise price. The following table illustrates the effect on net income and
earnings per share as if the provisions of statement of Financial Accounting
Standards (SFAS) No. 123 (as amended by SFAS No. 148), "Accounting for
Stock-Based Compensation," had been applied for the three and six months ended
June 30, 2003 and 2002:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands,
except per share data)
Net income, as reported $10,068 $ 296 $ 6,828 $13,636
Plus:
Stock-based employee
compensation expense
(benefit) included
in reported net
income, net of
related tax effects (657) 941 (456) 1,697
Less:
Total stock-based
employee compensation
benefit (expense)
determined under
fair value based
method for all
awards, net of
related tax effects 3 (1,568) (1,085) (2,842)
------- ------- ------- -------
Pro forma net income
(loss) $ 9,414 $ (331) $ 5,287 $12,491
======= ======= ======= =======
Basic earnings (loss)
per share:
As reported $ .33 $ .01 $ .23 $ .46
Pro forma $ .31 $ (.01) $ .18 $ .42
Diluted earnings (loss)
per share:
As reported $ .33 $ .01 $ .23 $ .45
Pro forma $ .31 $ (.01) $ .17 $ .41
Page 9
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
2003 2002 2003 2002
-------- -------- -------- -------
(in thousands,
except per share data)
Numerator for basic
and diluted earnings
earnings per share:
Net income $10,068 $ 296 $ 6,828 $13,636
======= ======= ======= =======
Denominator for basic
earnings per share --
weighted average
shares outstanding 30,077 29,638 30,032 29,574
Effect of stock
incentive plans 271 656 274 617
------- ------- ------- -------
Denominator for
diluted earnings
per share 30,348 30,294 30,306 30,191
======= ======= ======= =======
Basic earnings
per share $ .33 $ .01 $ .23 $ .46
======= ======= ======= =======
Diluted earnings
per share $ .33 $ .01 $ .23 $ .45
======= ======= ======= =======
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,
2003 2002 2003 2002
-------- -------- ------ ------
(in thousands)
Number of options 1,129 - 1,129 473
===== === ===== ===
Page 10
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
3 - Reinsurance
Premiums earned are net of amounts ceded of $18,060,000 and $34,460,000 for
the three and six months ended June 30, 2003, respectively, and $17,014,000 and
$33,462,000 for the three and six months ended June 30, 2002, respectively.
Losses and loss settlement expenses are net of amounts ceded of $19,641,000 and
$37,506,000 for the three and six months ended June 30, 2003, respectively, and
$10,265,000 and $16,046,000 for the three and six months ended June 30, 2002,
respectively. Such amounts ceded do not include the reinsurance transactions
with Mutual under the pooling arrangement (described below) which are reflected
on the face of the income statements, but do include reinsurance with
unaffiliated reinsurers and the reinsurance described in the following
paragraph.
Harleysville Group has a reinsurance agreement with 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, terrorism or hurricanes,
and supplements the existing external catastrophe reinsurance program.
Harleysville Group ceded to Mutual premiums earned of $2,216,000 and $2,072,000
and losses incurred of $1,018,000 and $38,000, for the three months ended June
30, 2003 and 2002, respectively. Harleysville Group ceded to Mutual premiums
earned of $4,240,000 and $3,863,000 and losses incurred of $4,774,000 and
$66,000 for the six months ended June 30, 2003 and 2002, respectively.
Pursuant to the terms of a reinsurance pooling agreement with Mutual, each
of the insurance subsidiaries of Harleysville Group Inc. cedes premiums, losses
and expenses on all of their respective business to Mutual which, in turn,
retrocedes to such subsidiaries a specified portion of premiums, losses and
expenses of Mutual and such subsidiaries. Because this agreement does not
relieve Harleysville Group Inc.'s insurance subsidiaries of primary liability as
originating insurers, there is a concentration of credit risk arising from
business ceded to Mutual. However, the reinsurance pooling agreement provides
for the right of offset. Mutual has an A. M. Best rating of "A" (Excellent).
Page 11
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - Cash Flows
There were cash tax payments of $500,000 and $7,250,000 and cash interest
payments of $2,740,000 and $2,804,000 in the first six months of 2003 and 2002,
respectively.
5 - Segment Information
The performance of the personal lines and commercial lines is evaluated
based upon underwriting results as determined under statutory accounting
practices (SAP).
Financial data by segment is as follows:
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
-------- -------- --------- --------
(in thousands)
Revenues:
Premiums earned:
Commercial lines $154,118 $134,384 $302,867 $262,689
Personal lines 49,637 53,324 99,717 107,524
-------- -------- -------- --------
Total premiums earned 203,755 187,708 402,584 370,213
Net investment income 21,649 21,526 43,096 43,008
Realized investment
gains (losses) 67 (20,983) (366) (20,505)
Other 4,073 3,898 8,593 7,643
-------- -------- -------- --------
Total revenues $229,544 $192,149 $453,907 $400,359
======== ======== ======== ========
Income (loss) before
income taxes:
Underwriting loss:
Commercial lines $ (8,767) $ (2,989) $(36,773) $(13,153)
Personal lines (7,848) (5,797) (15,742) (4,373)
-------- -------- -------- --------
SAP underwriting loss (16,615) (8,786) (52,515) (17,526)
GAAP adjustments 4,925 3,617 9,021 6,046
-------- -------- -------- --------
GAAP underwriting loss (11,690) (5,169) (43,494) (11,480)
Net investment income 21,649 21,526 43,096 43,008
Realized investment
gains (losses) 67 (20,983) (366) (20,505)
Other 1,504 1,422 3,419 2,696
-------- -------- -------- --------
Income (loss) before
income taxes $ 11,530 $ (3,204) $ 2,655 $ 13,719
======== ======== ======== ========
Page 12
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6 - 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,
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands)
Net income $10,068 $ 296 $ 6,828 $ 13,636
Other comprehensive
income:
Unrealized investment
holding gains
(losses) arising
during period 21,042 (1,654) 16,922 (12,336)
Less:
Reclassification
adjustment for
(gains) losses
included in net
income (10) 13,652 430 13,494
------- ------- ------- --------
Net unrealized
investment gains 21,032 11,998 17,352 1,158
------- ------- ------- --------
Comprehensive income $31,100 $12,294 $24,180 $ 14,794
======= ======= ======= ========
7 - Shareholders' Equity
Various states have adopted the National Association of Insurance
Commissioners (NAIC) 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.
These RBC standards require the calculation of a ratio of total adjusted
capital to Authorized Control Level. Insurers with a ratio below 200% are
subject to different levels of regulatory intervention and action. Based upon
their 2002 statutory financial statements, the ratio of total adjusted capital
to the Authorized Control Level for the Company's nine insurance subsidiaries at
December 31, 2002 ranged from 642% to 812%.
8 - Subsequent Event
In July 2003, the Company issued $100 million of 5.75% notes payable due
July 2013. A portion of the proceeds of the sale of the notes will be used to
repay $75 million of notes payable due in November 2003.
Page 13
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
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 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; 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.
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
require Harleysville Group to make estimates and assumptions (see Note 1 of the
Notes to Consolidated Financial Statements for the year ended December 31, 2002
included in the Company's 2002 Annual Report filed with the Securities and
Exchange Commission on Form 10-K). Harleysville Group believes that of its
significant accounting policies, the following may involve a higher degree of
judgment and estimation.
Liabilities for Losses and Loss Settlement Expenses. The liability for
losses and loss settlement expenses represents estimates of the ultimate unpaid
cost of all losses incurred, including losses for claims which have not yet been
reported to Harleysville Group. The amount of loss reserves for reported claims
is based primarily upon a case-by-case evaluation of the type of risk involved,
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 utilizing
Page 14
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
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 using the most recent
information on reported claims and a variety of statistical techniques. It is
expected that such estimates will be more or less than the amounts ultimately
paid when the claims are settled. Changes in these estimates are reflected in
current operations.
Investments. Generally, 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. However, if the fair value of an
investment declines below its cost and that decline is deemed other than
temporary, the amount of the decline below cost is charged to earnings.
Harleysville Group monitors its investment portfolio and quarterly reviews
investments that have experienced a decline in fair value below cost to evaluate
whether the decline is other than temporary. Such evaluations consider, among
other things, the magnitude and reasons for a decline and the prospects for the
fair value to recover in the near term. Future adverse investment market
conditions, or poor operating results of underlying investments, could result in
an impairment charge in the future.
Harleysville Group evaluates its investment portfolio quarterly to
determine if a decline in fair value below cost is other than temporary.
Harleysville Group has written down to fair value, without exception, any equity
security that has declined below cost by more than 20% and maintained such
decline for six months, or by 50% or more, in the quarter in which either such
decline occurred. In some cases, securities that have declined by a lesser
amount or for a shorter period of time are written down if the evaluation
indicates the decline is other-than-temporary. For example, one equity security
had declined for a short period of time but was written down in the fourth
quarter of 2002 when the sale of the company at a value less than our cost was
announced. Fair value of equity securities is based on the closing market value
as reported by a national stock exchange or Nasdaq. The fair value of fixed
maturities is based upon data supplied by an independent pricing service. It
can be difficult to determine the fair value of non-traded securities but
Harleysville Group does not own a material amount of non-traded securities.
Page 15
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
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 and in
proportion to the premiums earned. The method followed in computing deferred
policy acquisition costs limits the amount of such deferred costs to their
estimated realizable value. The estimation of net realizable value takes into
account the premium to be earned, related investment income over the claim
paying period, losses and loss settlement expenses, and certain other costs
expected to be incurred as the premium is earned. Future changes in estimates,
the most significant of which is expected losses and loss settlement expenses,
may require adjustments to deferred policy acquisition costs. If the estimation
of net realizable value indicates that the acquisition costs are unrecoverable,
further analyses are completed to determine if a reserve is required to provide
for losses that may exceed the related unearned premiums.
Contingencies. Besides claims related to its insurance products,
Harleysville Group is subject to proceedings, lawsuits and claims in the normal
course of business. Harleysville Group assesses the likelihood of any adverse
outcomes to these matters as well as potential ranges of probable losses. There
can be no assurance that actual outcomes will not differ from those assessments.
The application of certain of these critical accounting policies to the
periods ended June 30, 2003 and 2002 is discussed in greater detail below.
Results of Operations
Premiums earned increased $16.0 million and $32.4 million during the three
and six months ended June 30, 2003, respectively. The increases are primarily
due to increases in premiums earned for commercial lines of $19.7 million and
$40.2 million partially offset by decreases of $3.7 million and $7.8 million in
personal lines premiums earned for the three and six months ended June 30, 2003,
respectively. The increases in premiums earned for commercial lines were 14.7%
and 15.3% for the three and six months ended June 30, 2003, respectively,
primarily due to higher rates. Premiums earned for commercial lines are expected
to continue to increase throughout 2003. The decline in premiums earned for
personal lines was 6.9% and 7.3% for the three and six months ended June 30,
2003, respectively, primarily due to fewer policy counts partially offset by
higher rates. The reduction in
Page 16
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
personal lines volume was driven primarily by a planned reduction of business in
certain less profitable states and the implementation of other more stringent
underwriting processes.
Investment income increased $0.1 million for both the three and six months
ended June 30, 2003 resulting from an increase in invested assets, partially
offset by a lower yield on the fixed maturity investment portfolio.
Realized investment gains (losses) improved $21.1 and $20.1 million for the
three and six months ended June 30, 2003, respectively, primarily resulting from
lesser losses recognized on investments that were trading below cost on an
other-than-temporary basis.
There were no impairment charges in 2003 and $21.2 million and $23.7
million of impairment charges in the three and six months ended June 30, 2002,
respectively. Harleysville Group had a gross realized loss of $1.3 million in
the first quarter of 2003 which was from the sale of an equity security which
had not declined by more than 20% below its cost for more than six months at the
time of its sale.
Harleysville Group holds securities with unrealized losses at June 30, 2003
as follows:
LENGTH OF UNREALIZED LOSS
-------------------------------
UNREALIZED LESS THAN 6 TO 12 OVER 12
FAIR VALUE LOSS 6 MONTHS MONTHS MONTHS
---------- ---------- --------- -------- -------
(in thousands)
Equity securities $40,459 $5,883 $121 $1,492 $4,270
======= ====== ==== ====== ======
Fixed maturities:
Obligations of state
and political
subdivisions $27,572 $ 407 $407
Corporate bonds 18,521 3,800 $3,800
------- ------ ---- ------
Total bonds $46,093 $4,207 $407 $3,800
======= ====== ==== ======
PAGE 17
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
All of the fixed maturity securities are classified as available for sale
and are carried at fair value on the balance sheet.
There are 18 positions that comprise the unrealized loss in equity
investments at June 30, 2003. While 16 of these positions have been below cost
for more than six months, they have had volatile price movements and have not
been significantly below cost for significant continuous amounts of time.
Harleysville Group has been monitoring these securities and it is possible that
some may be written down in the income statement in 2003.
There are $22.3 million in fixed maturity securities, at amortized cost,
that at June 30, 2003, had been below amortized cost for over 12 months. These
are comprised of airline enhanced equipment trust certificates (EETC) as
follows:
FAIR MATURITY
COST VALUE DATES
------- ------- ----------
(in thousands)
American Airlines $14,491 $12,273 2011
United Airlines 7,019 5,457 2010-2012
Other airlines 811 791 2015
------- -------
$22,321 $18,521
======= =======
After the events of September 11, 2001, air travel and the value of these
airlines' EETC securities declined. The EETCs are all "A tranche" holdings,
which means they are in a senior credit position to the underlying airplane
collateral value as compared to B and C tranche holders. At the time of
issuance, the collateral was appraised at approximately twice the value of the A
tranche EETCs. Recent estimates indicate that in a distressed sale scenario,
the value of the collateral would be approximately the same as the EETCs' cost.
During the fourth quarter of 2002, United Airlines declared bankruptcy. At June
30, 2003, the United Airlines EETCs continued to carry an investment grade
rating. In the first quarter of 2003, the debt ratings of American Airlines
were downgraded to non-investment grade. In the second quarter of 2003, one of
the rating agencies upgraded this debt to investment grade. Harleysville Group
is participating in certain EETC creditor committees and is monitoring
developments. It is possible that these EETCs may be written down in the income
statement in 2003, depending upon developments involving both the issuers and
world events which impact the level of air travel.
Page 18
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Income (loss) before income taxes increased $14.7 million for the three
months ended June 30, 2003 compared to the same prior year period. The increase
was primarily due to the change in realized investment gains (losses), partially
offset by a greater underwriting loss. The greater second quarter underwriting
loss was primarily due to greater loss severity and greater catastrophe losses.
Income before income taxes decreased $11.1 million for the six months ended June
30, 2003 compared to the same prior year period. The decrease was primarily due
to a greater underwriting loss, partially offset by lesser realized investment
losses. The greater six months underwriting loss was primarily due to higher
catastrophe losses, greater loss severity and an increase in the provision for
insured events in prior years. The provision for insured events in prior years
consists of $22.1 million of adverse development ($19.9 million in the workers
compensation line) and $8.3 million of favorable development for the six months
ended June 30, 2003 and 2002, respectively.
An insurance company's statutory combined ratio is a standard measure of
underwriting profitability. This ratio is the sum of (1) the ratio of incurred
losses and loss settlement expenses to net earned premium; (2) the ratio of
expenses incurred for commissions, premium taxes, administrative and other
underwriting expenses to net written premium; and (3) the ratio of dividends to
policyholders to net earned premium. The combined ratio does not reflect
investment income, federal income taxes or other non-operating income or
expense. A ratio of less than 100 percent generally indicates underwriting
profitability. Harleysville Group's statutory combined ratio increased to
105.2% and 110.2% for the three and six months ended June 30, 2003,
respectively, from 100.6% and 101.9% for the three and six months ended June 30,
2002, respectively. Such increase was due to a higher underwriting loss in both
commercial lines (including the adverse development in the workers compensation
line) and personal lines.
The statutory combined ratios by line of business for the three and six
months ended June 30, 2003, as compared to the three and six months ended June
30, 2002, were as follows:
Page 19
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2003 2002 2003 2002
-------- -------- -------- -------
Commercial:
Automobile 94.4% 87.8% 95.1% 92.5%
Workers compensation 120.9% 125.4% 157.1% 123.7%
Commercial multi-peril 105.1% 92.0% 102.0% 95.9%
Other commercial 78.4% 78.1% 81.0% 83.6%
Total commercial 101.7% 96.6% 107.8% 99.8%
Personal:
Automobile 116.1% 116.5% 116.8% 115.0%
Homeowners 113.9% 102.8% 118.7% 95.8%
Other personal 123.8% 81.9% 118.8% 71.6%
Total personal 115.8% 110.7% 117.5% 106.9%
Total personal and
commercial 105.2% 100.6% 110.2% 101.9%
The following table presents the liability for unpaid losses and loss
settlement expenses by major line of business:
JUNE 30, DECEMBER 31,
2003 2002
---------- ------------
(in thousands)
Commercial:
Automobile $ 190,579 $181,537
Workers compensation 252,433 230,705
Commercial multi-peril 264,655 243,312
Other commercial 50,234 47,109
---------- --------
Total commercial 757,901 702,663
---------- --------
Personal:
Automobile 111,639 115,025
Homeowners 41,641 37,768
Other personal 2,814 1,726
---------- --------
Total personal 156,094 154,519
---------- --------
Total personal and commercial 913,995 857,182
Plus reinsurance recoverables 94,974 71,153
---------- --------
Total liability $1,008,969 $928,335
========== ========
Page 20
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
The commercial lines statutory combined ratio increased to 101.7% and
107.8% for the three and six months ended June 30, 2003 from 96.6% and 99.8% for
the three and six months ended June 30, 2002. The increases are primarily due
to the first quarter adverse development in the provision for insured events in
prior years and for both the three and six month periods, greater loss severity
and greater catastrophe losses, particularly in commercial multi-peril
insurance.
Of the $19.9 million of first quarter adverse development in the provision
for insured events in prior years in workers compensation, $16.7 million was
attributable to the 1998 to 2001 accident years and the balance was attributable
to other accident years. Such adverse development represented 8.6% of the
December 31, 2002 workers compensation net liability for unpaid losses and loss
settlement expenses. Harleysville Group had publicly noted adverse loss trends
in its workers compensation line for several quarters. These trends are
consistent with the experience of other companies writing this coverage, many of
which have, during the past twelve months, made substantial additions to their
reserves for insured events in prior years in this line of insurance. The
change in loss development patterns in the first quarter of 2003 was influenced
by a number of factors. The reorganization of Harleysville Group's claims
operations resulted in more proactive claims management which, in turn, provided
more contemporaneous loss estimates. In addition, weak economic conditions have
hampered the ability to return injured workers to employment thus extending the
estimated length of disabilities and medical loss cost trends have increased.
The following table presents workers compensation claim count information
for the total pooled business in which Harleysville Group participates and
payment amounts which are Harleysville Group's pooling share of the total pooled
amounts.
FOR THE SIX MONTHS FOR THE YEAR ENDED
ENDED JUNE 30, 2003 DECEMBER 31, 2002
------------------- ------------------
(dollars in thousands)
Number of claims pending,
beginning period 8,900 10,819
Number of claims reported 6,662 16,053
Number of claims settled or
dismissed (7,365) (17,972)
------- -------
Number of claims pending,
end of period 8,197 8,900
======= =======
Losses paid $41,525 $80,578
Loss settlement expenses paid $ 7,999 $12,494
Page 21
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Workers compensation losses primarily consist of indemnity and medical
costs for injured workers. The reduction in claim counts reflects the impact of
a reduction in workers compensation exposure as policy counts have declined.
Harleysville Group records the actuarial best estimate of the ultimate unpaid
losses and loss settlement expenses incurred and does not determine an estimated
possible range of loss.
Actuarial loss reserving techniques and assumptions, which rely on
historical information as adjusted to reflect current conditions, have been
consistently applied during the periods presented. Changes in the estimate of
the liability for unpaid losses and loss settlement expenses reflect actual
payments and evaluations of new information and data since the last reporting
date. These changes correlate with actuarial trends. The loss reserve
development in other lines of business was not significant and the total $22.1
million of adverse development in all lines represented 2.6% of the December 31,
2002 net liability for unpaid losses and loss settlement expenses.
Because of the nature of insurance claims, there are uncertainties inherent
in the estimates of ultimate losses. The aforementioned reorganization of the
claims operation has resulted in new people and processes involved in settling
claims. As a result, more recent statistical data reflects different patterns
than in the past and give rise to uncertainty as to the pattern of future loss
settlements. Litigation on bodily injury liability cases has increased during
the past two years while the rate of settlement has slowed. These changed
patterns give rise to greater uncertainty as to the pattern of future loss
settlements on bodily injury liability claims. There are uncertainties
regarding future loss cost trends particularly related to medical treatments and
automobile repair. Court decisions, regulatory changes and economic conditions
can affect the ultimate cost of claims that occurred in the past. Accordingly,
the ultimate liability for unpaid losses and loss settlement expenses will
likely differ from the amount recorded at June 30, 2003. For every 1% change in
the estimate, the effect on pre-tax income would be $9.1 million.
The property and casualty industry has had substantial aggregate loss
experience from claims related to asbestos-related illnesses, environmental
remediation, product and construction defect liability, mold, and other
uncertain exposures. Harleysville Group has not experienced significant losses
from such claims.
Page 22
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
The personal lines statutory combined ratio increased to 115.8% and 117.5%
for the three and six months ended June 30, 2003 from 110.7% and 106.9% for the
three and six months ended June 30, 2002. The increases primarily were due to
higher catastrophe losses which affected the homeowners line and higher loss
severity which affected each of the personal lines.
Net catastrophe losses increased $1.0 million and $3.9 million and losses
ceded under the aggregate catastrophe reinsurance agreement with Mutual
increased $1.0 million and $4.7 million for the three and six months ended June
30, 2003, respectively, due to a greater number and more severe catastrophes in
the 2003 periods.
Other underwriting expenses decreased $1.4 million, or 7.0%, for the three
months ended June 30, 2003 as compared to the same prior year period. The
decline primarily is due to a $1.7 million decrease in accrued long-term
incentive-based compensation that is a function of the Company's stock price and
its performance relative to peers, partially offset by an increase of $0.7
million in charges for estimated guaranty fund assessments for companies that
were declared insolvent in the quarter.
The income tax expense for the three and six months ended June 30, 2003
includes the tax benefit of $2.6 million and $5.1 million associated with
tax-exempt interest compared to $2.4 million and $4.7 million in the same prior
year periods.
Effective for one year from July 1, 2003, the Company's subsidiaries and
Mutual and its wholly-owned subsidiaries renewed its catastrophe reinsurance
which provides coverage ranging from 85.5% to 95.0% of up to $140 million in
excess of a retention of $30 million for any given catastrophe excluding
terrorism for commercial lines. Harleysville Group's 2003 pooling share of this
coverage would range from 85.5% to 95.0% of up to $100.8 million in excess of a
retention of $21.6 million for any given catastrophe. Pursuant to the terms of
the treaty, the maximum recovery would be $129 million for any catastrophe
involving an insured loss equal to or greater than $170 million. Harleysville
Group's 2003 pooling share of this maximum recovery would be $93 million for any
catastrophe involving an insured loss of $122 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 and Mutual have
Page 23
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
purchased property per risk excess of loss reinsurance which covers certain
terrorism losses and provides for recovery of up to $8.5 million in excess of
$1.5 million of terrorism losses for any one risk under certain circumstances.
The maximum recovery by Harleysville Group on a terrorism loss occurrence is
$8.6 million.
Liquidity and Capital Resources
Operating activities provided $59.2 million and $46.8 million of net cash
for the six months ended June 30, 2003 and 2002, respectively. The change
primarily is from improved underwriting cash flow, a change in the amount of
realized losses and a change in the amount of accounts payable and accrued
expenses.
Investing activities used $55.1 million and $42.0 million of net cash for
the six months ended June 30, 2003 and 2002, respectively. The increase is
primarily due to an increase in net purchases of fixed maturity investments due
to the increase in cash provided by operations and by net sales of short-term
investments in the 2003 period.
Net cash used by financing activities increased $1.3 million for the six
months ended June 30, 2003 compared to the six months ended June 30, 2002
primarily due to an increase in dividends paid and by the purchase of treasury
stock, partially offset by an increase in the issuance of common stock.
Harleysville Group participates in a securities lending program whereby
certain fixed maturity securities from the investment portfolio are loaned to
other institutions for a short period of time in return for a fee. At June 30,
2003, Harleysville Group held cash collateral of $154.6 million related to
securities on loan with a market value of $149.4 million. Harleysville Group's
policy is to require initial collateral of 102% of the market value of loaned
securities plus accrued interest, which is required to be maintained daily by
the borrower at no less than 100% of such market value plus accrued interest
over the life of the loan. Acceptable collateral includes cash and money market
instruments, government securities, A-rated corporate obligations, AAA-rated
asset-backed securities or GIC's and Funding Agreements from issuers rated A or
better. The securities on loan to others have been segregated from the other
invested assets on the balance sheet. In addition, the assets and liabilities
have been grossed up to reflect the collateral held under the securities lending
program and the obligation to return this collateral upon the return of the
loaned securities.
Page 24
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Harleysville Group Inc. maintained $3.3 million of cash and marketable
securities and $42.0 million of dividends receivable from its subsidiaries at
June 30, 2003 which is available for general corporate purposes including
dividends, debt service, capital contributions to subsidiaries, acquisitions and
the repurchase of stock. The Company's $75.0 million of notes payable are due
November 2003 and the Company will repay this indebtedness from the proceeds of
$100.0 million of notes payable due July 2013 which were issued in July 2003.
The Company has adopted a stock purchase plan under which the Company and Mutual
may each purchase up to 500,000 shares of Harleysville Group Inc. common stock
up to a total of 1.0 million shares. As of June 30, 2003, the Company had
repurchased 80,479 shares leaving 419,521 shares authorized to be repurchased.
The Company has no other material commitments for capital expenditures as of
June 30, 2003.
RISK FACTORS
The business, results of operations and financial condition, and therefore
the value of the Harleysville Group's securities, are subject to a number of
risks. Some of those risks are set forth in Exhibit 13(B) to the Company's
annual report on Form 10-K for fiscal year 2002, filed with the Securities and
Exchange Commission on March 26, 2003.
Page 25
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
ITEM 3. 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, 2002 to June 30, 2003.
In addition, the Company has maintained approximately the same investment mix
during this period.
Page 26
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's chief
executive officer and its chief financial officer, based on their evaluation of
the Company's disclosure controls and procedures (as defined in Exchange Act
Rule 13a-15(e)) have concluded that the Company's disclosure controls and
procedures are adequate and effective for the purposes set forth in the
definition thereof in Exchange Act Rule 13a-15(e) as of June 30, 2003.
(b) Change in internal control over financial reporting. There was no
change in the Company's internal control over financial reporting that occurred
during the second quarter of 2003 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Page 27
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of Harleysville Group Inc. was held on
April 23, 2003 (the "Annual Meeting" or "Meeting"), with the following result:
The total number of shares represented at the Annual Meeting in person or
by proxy was 28,345,846 of the 30,064,517 shares of common stock outstanding and
entitled to vote at the Meeting.
On the resolution to elect Michael L. Browne, Frank E. Reed and Jerry S.
Rosenbloom as class "B" Directors to serve until the expiration of their
respective terms and until their successors are duly elected, the nominees for
Director received the number of votes set forth opposite their respective names:
Number of Votes
-----------------------
For Withheld
---------- --------
Michael L. Browne 28,303,410 42,436
Frank E. Reed 28,303,961 41,885
Jerry S. Rosenbloom 28,303,365 42,481
There were no abstentions or broker non-votes recorded. On the basis of the
above vote, Michael L. Browne, Frank E. Reed and Jerry S. Rosenbloom were
elected as class "B" Directors to serve until the expiration of their respective
terms and until their successors are duly elected.
The resolution to approve the Amended and Restated Employee Stock Purchase
Plan was adopted, 28,138,811 votes for the resolution, 182,000 votes against the
resolution and 25,026 abstentions.
ITEM 5. Other Information - None
Page 28
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
(Continued)
ITEM 6. a. Exhibits
31.1 Certification of Walter R. Bateman pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Bruce J. Magee pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Walter R. Bateman pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Bruce J. Magee pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
A Form 8-K dated April 16, 2003 was filed commenting on
first quarter of 2003 earnings.
A Form 8-K dated April 23, 2003 was filed commenting on
first quarter of 2003 earnings.
A Form 8-K dated April 25, 2003 was filed reporting
financial results for the first quarter of 2003.
A Form 8-K dated May 20, 2003 was filed disclosing a
change in a debt rating.
A Form 8-K dated June 18, 2003 was filed commenting
on second quarter of 2003 earnings.
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 12, 2003 /s/ BRUCE J. MAGEE
---------------- -----------------------------------
Bruce J. Magee
Senior Vice President and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
Page 29
HARLEYSVILLE GROUP INC AND SUBSIDIARIES
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
FORM 10-Q
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
31.1 Certification of Walter R. Bateman pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Bruce J. Magee pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Walter R. Bateman pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Bruce J. Magee pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.