SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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 November 3, 2003, 29,920,403 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 - September 30, 2003
and December 31, 2002 3
Consolidated Statements of Income - For the
three months ended September 30, 2003
and 2002. 4
Consolidated Statements of Income - For the
nine months ended September 30, 2003
and 2002. 5
Consolidated Statement of Shareholders'
Equity - For the nine months ended
September 30, 2003 6
Consolidated Statements of Cash Flows -
For the nine months ended September 30,
2003 and 2002 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of
Results of Operations and Financial Condition 15
Quantitative and Qualitative Disclosure About
Market Risk 27
Controls and Procedures 28
Part II - Other Information 29
Page 2
ITEM 1. FINANCIAL STATEMENTS
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
------
Investments:
Fixed maturities:
Held to maturity, at amortized cost
(fair value $407,310 and $411,235) $ 376,695 $ 379,940
Available for sale, at fair value
(amortized cost $980,643 and $932,889) 1,041,616 995,032
Equity securities, at fair value
(cost $96,348 and $96,849) 122,472 107,177
Short-term investments, at cost,
which approximates fair value 154,097 89,692
Fixed maturity securities on loan
Held to maturity, at amortized
cost (fair value $4,541 and $5,707) 3,891 5,222
Available for sale, at fair value
(amortized cost $208,087 and $118,991) 220,129 129,837
---------- ----------
Total investments 1,918,900 1,706,900
Cash 4,528 2,944
Receivables:
Premiums 140,335 138,905
Reinsurance (affiliate $1,717 and $55) 152,277 75,488
Accrued investment income 21,419 21,552
---------- ----------
Total receivables 314,031 235,945
Deferred policy acquisition costs 102,934 94,896
Prepaid reinsurance premiums 21,010 19,421
Property and equipment, net 24,642 27,556
Deferred income taxes 39,072 25,784
Securities lending collateral 230,348 139,215
Due from affiliate 7,909 10,709
Other assets 58,141 48,154
---------- ----------
Total assets $2,721,515 $2,311,524
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unpaid losses and loss settlement expenses
(affiliate $190,534 and $166,188) $1,154,348 $ 928,335
Unearned premiums (affiliate $61,890 and $54,035) 442,049 406,277
Accounts payable and accrued expenses 101,135 109,965
Securities lending obligation 230,348 139,215
Debt (affiliate $18,500 and $18,500) 195,145 95,620
---------- ----------
Total liabilities 2,123,025 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 31,318,312
and 30,917,575 shares; outstanding
29,985,039 and 29,917,575 shares 31,318 30,918
Additional paid-in capital 157,487 149,091
Accumulated other comprehensive income 59,370 49,086
Retained earnings 375,733 418,582
Deferred compensation (2,356)
Treasury stock, at cost, 1,333,273 and
1,000,000 shares (23,062) (15,565)
---------- ----------
Total shareholders' equity 598,490 632,112
---------- ----------
Total liabilities and
shareholders' equity $2,721,515 $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 SEPTEMBER 30, 2003 AND 2002
(dollars in thousands, except per share data)
2003 2002
-------- --------
Revenues:
Premiums earned from affiliate (ceded
to affiliate, $182,808 and $173,232) $209,177 $196,524
Investment income, net of
investment expenses 21,638 21,739
Realized investment gains (losses), net (531) 57
Other income (affiliate $1,844 and
$1,720) 3,838 3,967
-------- --------
Total revenues 234,122 222,287
-------- --------
Losses and expenses:
Losses and loss settlement expenses
from affiliate (ceded to affiliate,
$188,437 and $115,296) 217,456 134,708
Amortization of deferred policy
acquisition costs 51,838 47,375
Other underwriting expenses 18,214 17,878
Interest expense (affiliate $77
and $123) 2,609 1,423
Other expenses 1,596 1,178
-------- --------
Total expenses 291,713 202,562
-------- --------
Income (loss) before income taxes (57,591) 19,725
Income taxes (benefit) (22,937) 4,509
-------- --------
Net income (loss) $(34,654) $ 15,216
======== ========
Per common share:
Basic earnings (loss) $ (1.16) $ .51
======== ========
Diluted earnings (loss) $ (1.16) $ .50
======== ========
Cash dividend $ .17 $ .165
======== ========
See accompanying notes to consolidated financial statements.
Page 4
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(dollars in thousands, except per share data)
2003 2002
-------- --------
Revenues:
Premiums earned from affiliate (ceded
to affiliate, $531,489 and $499,349) $611,761 $566,737
Investment income, net of
investment expenses 64,734 64,747
Realized investment losses, net (897) (20,448)
Other income (affiliate $5,675 and
$5,229) 12,431 11,610
-------- --------
Total revenues 688,029 622,646
-------- --------
Losses and expenses:
Losses and loss settlement expenses
from affiliate (ceded to affiliate,
$456,627 and $338,963) 528,641 389,789
Amortization of deferred policy
acquisition costs 150,053 137,570
Other underwriting expenses 54,892 54,295
Interest expense (affiliate $263 and $364) 5,396 4,278
Other expenses 3,983 3,270
-------- --------
Total expenses 742,965 589,202
-------- --------
Income (loss) before income taxes (54,936) 33,444
Income taxes (benefit) (27,110) 4,592
-------- --------
Net income (loss) $(27,826) $ 28,852
======== ========
Per common share:
Basic earnings (loss) $ (.93) $ .97
======== ========
Diluted earnings (loss) $ (.93) $ .95
======== ========
Cash dividend $ .50 $ .465
======== ========
See accompanying notes to consolidated financial statements.
Page 5
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(dollars in thousands)
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 loss (27,826) (27,826)
Other compre-
hensive income,
net of tax:
Unrealized
investment
gains, net of
reclassification
adjustment 10,284 10,284
--------
Comprehensive
loss (17,542)
Issuance of
common stock 400,737 400 7,814 8,214
Tax benefit from
stock options
exercised 582 582
Deferred
compensation (2,356) (2,356)
Cash dividend
paid (15,023) (15,023)
Purchase of
treasury stock,
333,273 (7,497) (7,497)
shares ---------- ------- -------- ------- -------- ------- -------- --------
Balance at
Sept. 30,
2003 31,318,312 $31,318 $157,487 $59,370 $375,733 $(2,356) $(23,062) $598,490
========== ======= ======== ======= ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
Page 6
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(in thousands)
2003 2002
--------- ---------
Cash flows from operating activities:
Net income (loss) $ (27,826) $ 28,852
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Change in receivables, unearned
premiums, prepaid reinsurance
and due to affiliate (41,104) 2,160
Increase in unpaid losses and
loss settlement expenses 226,013 37,114
Deferred income taxes (18,745) (1,656)
Increase in deferred policy
acquisition costs (8,038) (8,671)
Amortization and depreciation 3,383 2,238
Realized investment losses, net 897 20,448
Other, net (21,269) (6,148)
---------- ---------
Net cash provided by operating
activities 113,311 74,337
---------- ---------
Cash flows from investing activities:
Fixed maturity investments:
Purchases (329,352) (143,125)
Sales or maturities 197,253 113,945
Equity securities:
Purchases (14,674) (28,470)
Sales 13,616 28,074
Net purchases of short-term investments (64,405) (35,357)
Sale (purchase) of property and equipment 616 (1,778)
---------- ---------
Net cash used by
investing activities (196,946) (66,711)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 8,214 7,460
Issuance of debt 100,000
Repayment of debt obligation (475) (435)
Dividend paid (to affiliate, $8,375
and $7,723) (15,023) (13,825)
Purchase of treasury stock (7,497)
--------- ---------
Net cash provided (used) by
financing activities 85,219 (6,800)
--------- ---------
Increase in cash 1,584 826
Cash at beginning of period 2,944 1,839
--------- ---------
Cash at end of period $ 4,528 $ 2,665
========= =========
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
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 56% of the outstanding common stock
of Harleysville Group Inc. As used herein, "Harleysville Group" refers to
Harleysville Group Inc. and its subsidiaries.
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 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 claims 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.
Stock-Based Compensation
Stock-based compensation plans are accounted for under the provisions of
Accounting Principles Board (APB) Opinion No. 25,
Page 8
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
"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 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 nine months ended September 30, 2003 and 2002:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2003 2002 2003 2002
-------- -------- -------- -------
(in thousands,
except per share data)
Net income (loss), as reported $(34,654) $15,216 $(27,826) $28,852
Plus:
Stock-based employee
compensation expense
(benefit) included
in reported net
income (loss), net of
related tax effects 155 363 (301) 2,060
Less:
Total stock-based
employee compensation
expense determined
under fair value
based method for
all awards, net of
related tax effects (855) (1,150) (1,940) (3,992)
-------- ------- -------- -------
Pro forma net income
(loss) $(35,354) $14,429 $(30,067) $26,920
======== ======= ======== =======
Basic earnings (loss)
per share:
As reported $ (1.16) $ .51 $ (.93) $ .97
Pro forma $ (1.18) $ .48 $ (1.00) $ .91
Diluted earnings (loss)
per share:
As reported $ (1.16) $ .50 $ (.93) $ .95
Pro forma $ (1.18) $ .47 $ (1.00) $ .89
Page 9
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2 - Earnings Per Share
The computation of basic and diluted earnings (loss) per share is as
follows:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2003 2002 2003 2002
-------- -------- -------- -------
(in thousands, except per share data)
Numerator for basic
and diluted earnings
(loss) per share:
Net income (loss) $(34,654) $15,216 $(27,826) $28,852
======== ======= ======== =======
Denominator for basic
earnings per share --
weighted average
shares outstanding 29,986 29,790 30,017 29,647
Effect of stock
incentive plans 595 611
-------- ------- -------- -------
Denominator for
diluted earnings
(loss) per share 29,986 30,385 30,017 30,258
======== ======= ======== =======
Basic earnings (loss)
per share $ (1.16) $ .51 $ (.93) $ .97
======== ======= ======== =======
Diluted earnings
(loss) per share $ (1.16) $ .50 $ (.93) $ .95
======== ======= ======== =======
The following options to purchase shares of common stock were not included
in the computation of diluted earnings per share because the exercise price of
the options was greater than the average market price:
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands)
Number of options 1,510 898 1,111 898
===== === ===== ===
An additional 803,223 and 1,203,004 options to purchase shares of common
stock were not included in the computation of
Page 10
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
diluted earnings per share for the three and nine months ended September 30,
2003, respectively, because their inclusion would have had an antidilutive
effect.
3 - Reinsurance
Premiums earned are net of amounts ceded of $17,129,000 and $51,589,000 for
the three and nine months ended September 30, 2003, respectively, and
$17,139,000 and $50,601,000 for the three and nine months ended September 30,
2002, respectively. Losses and loss settlement expenses are net of amounts
ceded of $57,228,000 and $94,734,000 for the three and nine months ended
September 30, 2003, respectively, and $10,008,000 and $26,054,000 for the three
and nine months ended September 30, 2002, respectively. Such amounts do not
include the reinsurance transactions with Harleysville Mutual Insurance Company
(Mutual) under the pooling arrangement, but do include the reinsurance described
in the following paragraph. Of the losses and loss settlement expenses ceded
for the three months ended September 30, 2003, $53.7 million is for losses ceded
to involuntary reinsurance mechanisms and reflect increased estimates of losses
on lifetime medical cases. Of this $53.7 million, $48.7 million is ceded to the
Michigan Catastrophic Claims Association (MCCA) which covers no-fault first
party medical losses in excess of a retention ranging from $250,000 to $325,000.
Since these ceded losses are above the retention, the increased estimates had no
net impact on results of operations.
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 $2,108,000 and $1,996,000
and losses incurred of $(140,000) and $213,000 for the three months ended
September 30, 2003 and 2002, respectively. Harleysville Group ceded to Mutual
premiums earned of $6,348,000 and $5,859,000 and losses incurred of $4,634,000
and $279,000 for the nine months ended September 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
Page 11
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Mutual. However, the reinsurance pooling agreement provides for the right of
offset. Mutual has an A. M. Best rating of "A" (Excellent).
4 - Cash Flows
Net cash tax payments of $1,096,000 and $8,750,000 were made in the first
nine months of 2003 and 2002, respectively. Cash interest payments of $2,817,000
and $2,927,000 were made in the first nine 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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2003 2002 2003 2002
-------- -------- --------- --------
(in thousands)
Revenues:
Premiums earned:
Commercial lines $161,412 $143,725 $ 464,279 $406,414
Personal lines 47,765 52,799 147,482 160,323
-------- -------- --------- --------
Total premiums earned 209,177 196,524 611,761 566,737
Net investment income 21,638 21,739 64,734 64,747
Realized investment gains
(losses) (531) 57 (897) (20,448)
Other 3,838 3,967 12,431 11,610
-------- -------- --------- --------
Total revenues $234,122 $222,287 $ 688,029 $622,646
======== ======== ========= ========
Income (loss) before
income taxes:
Underwriting loss:
Commercial lines $(63,953) $ (2,459) $(100,726) $(15,612)
Personal lines (13,439) (3,628) (29,181) (8,001)
-------- -------- --------- --------
SAP underwriting loss (77,392) (6,087) (129,907) (23,613)
GAAP adjustments (939) 2,650 8,082 8,696
-------- -------- --------- --------
GAAP underwriting loss (78,331) (3,437) (121,825) (14,917)
Net investment income 21,638 21,739 64,734 64,747
Realized investment
gains (losses) (531) 57 (897) (20,448)
Other (367) 1,366 3,052 4,062
-------- -------- --------- --------
Income (loss) before income
taxes $(57,591) $ 19,725 $ (54,936) $ 33,444
======== ======== ========= ========
Page 12
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6 - Comprehensive Income (Loss)
Comprehensive income (loss) consisted of the following (all amounts are net
of taxes):
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2003 2002 2003 2002
-------- -------- -------- --------
(in thousands)
Net income (loss) $(34,654) $15,216 $(27,826) $28,852
Other comprehensive
income (loss):
Unrealized investment
holding gains
(losses) arising
during period (7,510) 7,298 9,412 (5,038)
Less:
Reclassification
adjustment for
(gains) losses
included in net
income (loss) 442 (28) 872 13,466
-------- ------- -------- -------
Net unrealized
investment gains
(losses) (7,068) 7,270 10,284 8,428
-------- ------- -------- -------
Comprehensive income
(loss) $(41,722) $22,486 $(17,542) $37,280
======== ======= ======== =======
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.
Page 13
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 - Debt
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 14
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
Page 15
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
type of loss. The amounts of loss reserves for unreported claims and loss
settlement expense reserves are determined utilizing 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 16
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 September 30, 2003 and 2002 is discussed in greater detail below.
Results of Operations
Premiums earned increased $12.7 million and $45.0 million during the three
and nine months ended September 30, 2003, respectively. The increases are
primarily due to increases in premiums earned for commercial lines of $17.7
million and $57.9 million partially offset by decreases of $5.0 million and
$12.9 million in personal lines premiums earned for the three and nine months
ended September 30, 2003, respectively. The increases in premiums earned for
commercial lines were 12.3% and 14.2% for the three and nine months ended
September 30, 2003, respectively, primarily due to higher rates. The decline in
premiums earned for
Page 17
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
personal lines was 9.5% and 8.0% for the three and nine months ended September
30, 2003, respectively, primarily due to fewer policy counts partially offset by
higher rates. The reduction in 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 decreased $0.1 million for the three months ended
September 30, 2003 and was essentially unchanged for the nine months ended
September 30, 2003 resulting from a lower yield on the fixed maturity investment
portfolio partially offset by an increase in invested assets.
Realized investment gains (losses) worsened by $0.6 million for the three
months ended September 30, 2003 due to greater losses on the sale of equity
investments, partially offset by greater gains on the sale of fixed maturity
investments. Realized investment losses improved $19.6 million for the nine
months ended September 30, 2003, 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 $4.5 million and $28.2 million
of impairment charges in the three and nine months ended September 30, 2002,
respectively. Harleysville Group had gross realized losses of $3.0 million in
the nine months ended September 30, 2003, which were from the sales of
securities which had not declined by more than 20% below their cost for more
than six months at the time of their sale.
Harleysville Group holds securities with unrealized losses at September 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 $43,911 $4,370 $1,025 $ - $3,345
======= ====== ====== ==== ======
Fixed maturities:
Obligations of state
and political
subdivisions $35,593 $ 678 $ 678
Corporate bonds 46,537 3,988 245 - $3,743
------- ------ ------ ---- ------
Total bonds $82,130 $4,666 $ 923 $ - $3,743
======= ====== ====== ==== ======
Page 18
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Substantially all of the fixed maturity securities are classified as
available for sale and are carried at fair value on the balance sheet.
There are 20 positions that comprise the unrealized loss in equity
investments at September 30, 2003. While eight 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 future.
There are $22.3 million in fixed maturity securities, at amortized cost,
that at September 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 $14,472 $12,356 2011
United Airlines 7,007 5,394 2010-2012
Other airlines 811 797 2015
------- -------
$22,290 $18,547
======= =======
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. During
the third quarter of 2003, the United Airlines EETCs were downgraded to
non-investment grade by one rating agency but continued to carry an investment
grade rating by the other rating agency. In the first quarter of 2003, the debt
ratings of American Airlines were downgraded to
Page 19
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
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 the future,
depending upon developments involving both the issuers and world events which
impact the level of air travel.
Income (loss) before income taxes decreased $77.3 million for the three
months ended September 30, 2003 compared to the same prior year period. The
decrease was primarily due to a greater underwriting loss. Income (loss) before
income taxes decreased $88.4 million for the nine months ended September 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 three and nine 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 $55.1 million and $76.8 million of adverse
development for the three and nine months ended September 30, 2003 compared to
$3.3 million and $(5.3) million of adverse (favorable) development for the three
and nine months ended September 30, 2002.
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
137.2% and 119.4% for the three and nine months ended September 30, 2003,
respectively, from 101.7% and 101.9% for the three and nine months ended
September 30, 2002, respectively. Such increase was due to a higher
underwriting loss in both commercial lines and personal lines, primarily
resulting from the adverse loss development and catastrophe losses.
The statutory combined ratios by line of business for the three and nine
months ended September 30, 2003, as compared to the three and nine months ended
September 30, 2002, were as follows:
Page 20
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2003 2002 2003 2002
-------- -------- -------- --------
Commercial:
Automobile 131.2% 93.2% 107.8% 92.8%
Workers compensation 203.1% 130.9% 172.4% 126.1%
Commercial multi-peril 134.6% 91.6% 113.3% 94.4%
Other commercial 84.7% 89.7% 82.4% 85.8%
Total commercial 140.1% 100.0% 119.0% 99.9%
Personal:
Automobile 129.2% 111.4% 120.7% 113.8%
Homeowners 129.8% 100.0% 122.2% 97.2%
Other personal 85.5% 79.2% 107.2% 74.0%
Total personal 127.3% 106.4% 120.7% 106.7%
Total personal and
commercial 137.2% 101.7% 119.4% 101.9%
The following table presents the liability for unpaid losses and loss
settlement expenses by major line of business:
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------ -----------
(in thousands)
Commercial:
Automobile $ 214,410 $ 181,537
Workers compensation 277,516 230,705
Commercial multi-peril 296,643 243,312
Other commercial 54,148 47,109
---------- ----------
Total commercial 842,717 702,663
---------- ----------
Personal:
Automobile 116,416 115,025
Homeowners 46,346 37,768
Other personal 2,296 1,726
---------- ----------
Total personal 165,058 154,519
---------- ----------
Total personal and commercial 1,007,775 857,182
Plus reinsurance recoverables 146,573 71,153
---------- ----------
Total liability $1,154,348 $ 928,335
========== ==========
Page 21
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 140.1% and
119.0% for the three and nine months ended September 30, 2003 from 100.0% and
99.9% for the three and nine months ended September 30, 2002. The increases are
primarily due to the adverse development in the provision for insured events in
prior years, greater loss severity and greater catastrophe losses, particularly
in commercial multi-peril insurance.
The $55.1 million of third quarter adverse development in the provision for
insured events in prior years was primarily in the following lines: commercial
automobile ($19.1 million), workers compensation ($17.1 million), commercial
multi-peril ($13.5 million) and personal automobile ($4.5 million). The
remaining $21.7 million of adverse development in the nine months ended
September 30, 2003 was primarily from $19.9 million of workers compensation
adverse development in the first quarter of 2003. Of the nine month adverse
development, $67.2 million was attributable to the 1998 to 2002 accident years
and the balance was attributable to other accident years. The 2003 adverse
development represented 9.0% of the December 31, 2002 net liability for unpaid
losses and loss settlement expenses.
The adverse development in workers compensation for the nine months ended
September 30, 2003 was $37.0 million. Harleysville Group had publicly noted
adverse loss trends in its workers compensation line for several quarters and
the trends were again worse than expected in the third quarter of 2003. 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 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:
Page 22
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
FOR THE NINE MONTHS FOR THE YEAR ENDED
ENDED SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------ ------------------
(dollars in thousands)
Number of claims pending,
beginning of period 8,900 10,819
Number of claims reported 9,990 16,053
Number of claims settled or
dismissed (10,285) (17,972)
-------- -------
Number of claims pending,
end of period 8,605 8,900
======== =======
Losses paid $ 60,529 $80,578
Loss settlement expenses paid $ 11,659 $12,494
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.
The adverse development in commercial and personal automobile primarily was
due to higher loss severity trends that became evident in the third quarter when
case reserve increases were recognized. The case reserve increases for
commercial automobile primarily related to adverse legal judgements.
Harleysville Group had previously publicly noted an increase in litigation on
bodily injury cases and a slowing of the rate of settlement. The combination of
all of these factors resulted in the increased estimate of ultimate losses.
The adverse development in commercial multi-peril primarily was due to
higher loss severity trends that became evident in the third quarter when case
reserve increases were recognized. Like commercial auto, the trend of increased
litigation and a slowing rate of settlement resulted in the increased estimate
of ultimate losses. While Harleysville Group had only incurred $1.5 million of
construction defect liability losses over the past 10 years, it increased its
provision for insured events prior years by an additional $1.4 million for
estimated losses on construction defect liability claims because of increased
case activity in the third quarter of 2003.
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
Page 23
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
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.
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 September 30, 2003. For every 1%
change in the estimate, the effect on pre-tax income would be $10.1 million.
The property and casualty industry has had substantial aggregate loss
experience from claims related to asbestos-related illnesses, environmental
remediation, product liability, mold, and other uncertain exposures.
Harleysville Group has not incurred significant losses from such claims.
The personal lines statutory combined ratio increased to 127.3% and 120.7%
for the three and nine months ended September 30, 2003 from 106.4% and 106.7%
for the three and nine months ended September 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.
Page 24
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Net catastrophe losses increased $10.0 million and $13.8 million and losses
ceded under the aggregate catastrophe reinsurance agreement with Mutual
decreased $0.4 million and increased $4.4 million for the three and nine months
ended September 30, 2003, respectively. The increase in the nine month period
was due to a greater number and more severe catastrophes in the 2003 period,
including $9.4 million of losses from Hurricane Isabel.
The income tax expense for the three and nine months ended September 30,
2003 includes the tax benefit of $2.6 million and $7.7 million associated with
tax-exempt income compared to $2.4 million and $7.6 million in the same prior
year periods.
Liquidity and Capital Resources
Operating activities provided $113.3 million and $74.3 million of net cash
for the nine months ended September 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 $196.9 million and $66.7 million of net cash for
the nine months ended September 30, 2003 and 2002, respectively. The increase
is primarily due to an increase in net purchases of fixed maturity investments
and an increase in net purchases of short-term investments due to the increase
in cash provided by operations and by the increase in cash provided by financing
activities.
Financing activities provided $85.2 million of net cash for the nine months
ended September 30, 2003, compared to the use of $6.8 million of net cash in the
same prior year period. The change is primarily due to the issuance of debt,
partially offset by an increase in dividends paid and by the purchase of
treasury stock in the 2003 period.
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 September
30, 2003, Harleysville Group held cash collateral of $230.3 million related to
securities on loan with a market value of $224.7 million.
Page 25
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
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.
Harleysville Group Inc. maintained $94.6 million of cash and marketable
securities and $11.6 million of dividends receivable from its subsidiaries at
September 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 September 30, 2003, the Company had
repurchased 333,273 shares leaving 166,727 shares authorized to be repurchased.
The Company has no other material commitments for capital expenditures as of
September 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 26
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 September 30,
2003. In addition, the Company has not significantly changed its investment mix
or market risk during this period.
Page 27
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's chief
operating officer (principal 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
September 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 third quarter of 2003 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
Page 28
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
ITEM 6. a. Exhibits
31.1 Certification of M. Lee Patkus 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 M. Lee Patkus 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 July 10, 2003 was filed disclosing
certain events associated with the Company's debt
offering.
A Form 8-K dated July 25, 2003 was filed reporting
financial results for the second quarter of 2003.
A Form 8-K dated September 30, 2003 was filed reporting
the retirement of the Chairman of the Board and
Chief Executive Officer.
Page 29
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
(Continued)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARLEYSVILLE GROUP INC.
Date: November 12, 2003 /s/ BRUCE J. MAGEE
-------------------- -----------------------------------
Bruce J. Magee
Senior Vice President and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
Page 30
HARLEYSVILLE GROUP INC AND SUBSIDIARIES
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
FORM 10-Q
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
31.1 Certification of M. Lee Patkus 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 M. Lee Patkus 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.