UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2005
----------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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, PA 19438-2297
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 256-5000
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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 May 2, 2005 30,320,636 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 - March 31, 2005
and December 31, 2004 3
Consolidated Statements of Income - For the
three months ended March 31, 2005 and 2004 4
Consolidated Statement of Shareholders' Equity -
For the three months ended March 31, 2005 5
Consolidated Statements of Cash Flows -
For the three months ended March 31, 2005 and 2004 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Quantitative and Qualitative Disclosure About
Market Risk 24
Controls and Procedures 25
Part II - Other Information 26
Page 2
ITEM 1. FINANCIAL STATEMENTS
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, DECEMBER
2005 2004
---------- ----------
(Unaudited)
ASSETS
------
Investments:
Fixed maturities:
Held to maturity, at amortized cost
(fair value $501,188 and $517,434) $ 492,260 $ 499,487
Available for sale, at fair value
(cost $1,086,565 and $1,028,457) 1,106,630 1,067,504
Equity securities, at fair value
(cost $112,034 and $110,495) 148,975 150,249
Short-term investments, at cost,
which approximates fair value 75,347 113,822
Fixed maturity securities on loan:
Held to maturity, at amortized cost
(fair value $967 and $1,966) 917 1,835
Available for sale, at fair value
(amortized cost $130,837 and $128,183) 134,761 134,020
---------- ----------
Total investments 1,958,890 1,966,917
Cash 2,893 328
Receivables:
Premiums 139,335 141,601
Reinsurance (affiliate $372 and $390) 182,872 193,209
Accrued investment income 21,990 23,236
---------- ----------
Total receivables 344,197 358,046
Deferred policy acquisition costs 102,271 100,755
Prepaid reinsurance premiums 32,331 32,675
Property and equipment, net 18,488 20,891
Deferred income taxes 62,065 53,137
Securities lending collateral 139,226 139,486
Other assets 44,740 45,828
---------- ----------
Total assets $2,705,101 $2,718,063
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unpaid losses and loss settlement expenses
(affiliate $184,464 and $187,172) $1,343,517 $1,317,735
Unearned premiums (affiliate $52,705 and $47,038) 445,088 441,697
Accounts payable and accrued expenses 76,481 99,098
Securities lending obligation 139,226 139,486
Debt (affiliate $18,500 and $18,500) 119,625 119,625
Due to affiliate 277 12,498
---------- ----------
Total liabilities 2,124,214 2,130,139
---------- ----------
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 31,704,753
and 31,589,474 shares; outstanding
30,306,844 and 30,19,565 shares 31,705 31,589
Additional paid-in capital 163,608 161,689
Accumulated other comprehensive income 26,641 42,051
Retained earnings 384,113 377,282
Deferred compensation (693) (200)
Treasury stock, at cost, 1,397,909 shares (24,487) (24,487)
---------- ----------
Total shareholders' equity 580,887 587,924
---------- ----------
Total liabilities and shareholders' equity $2,705,101 $2,718,063
========== ==========
See accompanying notes to consolidated financial statements.
Page 3
HARLEYSVILLE GROUP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(dollars in thousands, except per share data)
2005 2004
-------- --------
Revenues:
Premiums earned from affiliate, (ceded to affiliate, $183,450 and $181,176) $206,680 $206,948
Investment income, net of investment expense 21,761 21,642
Realized investment gains 12,488
Other income (affiliate $1,793 and $1,775) 4,283 4,564
-------- --------
Total revenues 232,724 245,642
-------- --------
Losses and expenses:
Losses and loss settlement expenses (ceded to affiliate, $132,020 and $139,685) 147,868 151,110
Amortization of deferred policy acquisition costs 50,918 50,688
Other underwriting expenses 16,355 19,638
Interest expense (affiliate $131 and $84) 1,620 1,577
Other expenses 1,507 1,419
-------- --------
Total expenses 218,268 224,432
-------- --------
Income before income taxes 14,456 21,210
Income taxes 2,474 4,717
-------- --------
Net income $ 11,982 $ 16,493
-------- --------
Per common share:
Basic earnings $ .40 $ .55
======== ========
Diluted earnings $ .39 $ .55
======== ========
Cash dividend $ .17 $ .17
======== ========
See accompanying notes to consolidated financial statements.
Page 4
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(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,
2004 31,589,474 $31,589 $161,689 $ 42,051 $377,282 $ (200) $(24,487) $587,924
--------
Net income 11,982 11,982
Other compre-
hensive income,
net of tax:
Unrealized
investment
losses, net of
reclassification
adjustment (15,410) (15,410)
--------
Comprehensive
loss (3,428)
Issuance of
common stock 115,279 116 1,838 1,954
Tax benefit
from stock
options
exercised 81 81
Deferred
compensation (493) (493)
Cash dividend
paid (5,151) (5,151)
---------- ------- -------- ------- -------- ------- -------- --------
Balance at
March 31,
2005 31,704,753 $31,705 $163,608 $26,641 $384,113 $ (693) $(24,487) $590,887
========== ======= ======== ======= ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
Page 5
HARLEYSVILLE GROUP INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(in thousands)
2005 2004
--------- ---------
Cash flows from operating activities:
Net income $ 11,982 $ 16,493
Adjustments to reconcile net income
to net cash provided by operating activities:
Change in receivables, unearned premiums,
prepaid reinsurance balances 17,584 (9,820)
Change in affiliate balance (12,221) (12,857)
Increase in unpaid losses and loss settlement expenses 25,782 31,900
Deferred income taxes (631) 804
(Increase) decrease in deferred policy acquisition cost (1,516) 149
Amortization and depreciation 1,401 1,406
Gain on sale of investments (12,488)
Other, net (12,748) (4,393)
--------- ---------
Net cash provided by operating activities 29,633 11,194
--------- ---------
Cash flows from investing activities:
Fixed maturity investments:
Purchases (98,560) (43,304)
Sales or maturities 36,074 54,690
Equity securities:
Purchases (1,539) (7,096)
Sales 14,183
Net sales (purchases) of short-term investments 38,475 (37,280)
Sale (purchase) of property and equipment 1,851 (195)
--------- ---------
Net cash used by investing activities (23,699) (19,002)
--------- ---------
Cash flows from financing activities:
Issuance of common stock 1,782 1,259
Dividends paid (to affiliate, $2,890 and $2,890) (5,151) (5,099)
--------- ---------
Net cash used by financing activities (3,369) (3,840)
--------- ---------
Increase (decrease) in cash 2,565 (11,648)
Cash at beginning of period 328 13,430
--------- ---------
Cash at end of period $ 2,893 $ 1,782
======== ========
See accompanying notes to consolidated financial statements.
Page 6
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 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, 2004 included in the
Company's 2004 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 primarily 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.
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 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 months ended March 31,
2005 and 2004:
Page 7
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE THREE MONTHS
ENDED MARCH 31,
2005 2004
------- -------
(in thousands, except
per share data)
Net income, as reported $11,982 $16,493
Plus:
Stock-based employee compensation expense (benefit)
included in reported net income, net of related
tax effects (270) 43
Less:
Total stock-based employee compensation expense determined
under fair value based method for all awards, net of
related tax effects (212) (749)
------- -------
Pro forma net income $11,500 $15,787
======= =======
Basic earnings per share:
As reported $ .40 $ .55
Pro forma $ .38 $ .53
Diluted earnings per share:
As reported $ .39 $ .55
Pro forma $ .38 $ .53
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(R), "Share-Based Payment," which is a revision of SFAS No. 123, "Accounting
for Stock-Based Compensation." SFAS 123(R) requires that the compensation cost
related to share-based payment transactions be recognized in financial
statements. The compensation cost will be measured based on the fair value of
the equity or liability instruments issued. The Statement is effective as of
the beginning of the first fiscal year beginning after June 15, 2005. The
impact of adopting SFAS No. 123(R) on net income and earnings per share is not
currently expected to be materially different from the pro forma amounts
disclosed above which includes all share-based payment transactions through
March 31, 2005. The impact that any future share-based payment transactions
will have on our financial position or results of operations is not yet known.
Page 8
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
2 - Earnings Per Share
The computation of basic and diluted earnings per share is as follows:
FOR THE THREE MONTHS ENDED
MARCH 31,
2005 2004
---------- ------------
(in thousands, except
per share data)
Numerator for basic and diluted earnings per share:
Net income $11,982 $16,493
======= =======
Denominator for basic earnings per share--weighted
average shares outstanding 30,253,967 29,960,760
Effect of stock incentive plans 145,379 87,375
----------- -----------
Denominator for diluted earnings per share 30,399,346 30,048,135
========== ==========
Basic earnings per share: $ .40 $ .55
======== ========
Diluted earnings per share: $ .39 $ .55
======== ========
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
ENDED MARCH 31,
2005 2004
----- -----
(in thousands)
Number of options 1,298 1,413
===== =====
3 - Reinsurance
Premiums earned are net of amounts ceded of $21,909,000 and $21,578,000 for
the three months ended March 31, 2005 and 2004, respectively. Losses and loss
settlement expenses are net of amounts ceded of $7,674,000 and $34,154,000 for
the three months ended March 31, 2005 and 2004, respectively. Such amounts do
not include the reinsurance transactions with Mutual under the pooling
arrangement.
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
Page 9
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
earthquakes, terrorism or hurricanes, and supplements the existing external
catastrophe reinsurance program. Under the agreement, Harleysville Group ceded
premiums earned of $2,075,000 and $1,997,000 and losses incurred of $61,000 and
$1,800,000 to Mutual for the three months ended March 31, 2005 and 2004,
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).
4 - Cash Flows
There were no cash tax payments in the first quarter of 2005. Cash tax
refunds of $3,798,000 were received in the first quarter of 2004. Cash interest
payments of $3,006,000 and $2,974,000 were made in the first quarter of 2005 and
2004, 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).
Page 10
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Financial data by segment is as follows:
FOR THE THREE MONTHS
ENDED MARCH 31,
2005 2004
-------- --------
(in thousands)
Revenues:
Premiums earned:
Commercial lines $167,313 $162,320
Personal lines 39,367 44,628
-------- --------
Total premiums earned 206,680 206,948
Net investment income 21,761 21,642
Realized investment gains 12,488
Other 4,283 4,564
-------- --------
Total revenues $232,724 $245,642
======== ========
Income before income taxes:
Underwriting income (loss):
Commercial lines $(10,238) $ (9,648)
Personal lines 417 (4,860)
-------- --------
SAP underwriting loss (9,821) (14,508)
GAAP adjustments 1,360 20
-------- --------
GAAP underwriting loss (8,461) (14,488)
Net investment income 21,761 21,642
Realized investment gains 12,488
Other 1,156 1,568
Income before income taxes $ 14,456 $ 21,210
======== ========
6 - Comprehensive Income
Comprehensive income for the three months ended March 31, 2005 and 2004
consisted of the following (all amounts are net of taxes):
Page 11
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
FOR THE THREE MONTHS
ENDED MARCH 31,
2005 2004
--------- -------
(in thousands)
Net income $ 11,982 $16,493
Other comprehensive income (loss):
Unrealized investment holding gains (losses)
arising during period (15,410) 10,721
Less:
Reclassification adjustment for gains included
in net income (8,093)
-------- -------
Net unrealized investment gains (losses) (15,410) 2,628
-------- -------
Comprehensive income (loss) $ (3,428) $19,121
======== =======
7 - Pension
Harleysville Group Inc. has a pension plan that covers substantially all
full-time employees. The net periodic pension cost for the plan including Mutual
consists of the following components:
FOR THE THREE MONTHS
ENDED MARCH 31,
2005 2004
------ -------
(in thousands)
Components of net periodic pension cost:
Service cost $ 2,209 $ 1,993
Interest cost 2,988 2,770
Expected return on plan assets (2,790) (3,020)
Recognized net actuarial loss 1,112 518
Amortization of prior service cost 52 52
Net transition amortization 13 12
------- -------
Net periodic pension cost:
Entire plan $ 3,584 $ 2,325
======= =======
Harleysville Group portion $ 2,375 $ 1,533
======= =======
Harleysville Group's expected portion of the 2005 contribution to the
pension plan is $8,015,000. Contributions of $1,999,000 were made in the quarter
ended March 31, 2005.
8 - 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
Page 12
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 2004 statutory financial statements, the ratio of total adjusted capital
to the Authorized Control Level for the Company's nine insurance subsidiaries at
December 31, 2004 ranged from 498% to 609%.
Page 13
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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;
the Best's rating of Harleysville Group; and the status of labor markets in
which the Company operates.
Overview
The Company's net income is primarily determined by three elements:
- net premium income
- investment income
- amounts paid or reserved to settle insured claims
A number of factors may affect the level of premium income, including:
- limitations on rates arising from the competitive market place
or regulation
- limitation on available business arising from a need to maintain
the quality of underwritten risks
- the Company's ability to maintain its A- ("excellent") rating by
A.M. Best
- the ability of the Company to maintain a reputation for efficiency
and fairness in claims administration
Page 14
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
A number of factors may affect the level of investment income, including:
- general interest rate levels
- specific adverse events affecting the issuers of debt obligations
held by the Company
- changes in the prices of equity securities generally and those held
by the Company specifically
Loss and loss settlement expenses are affected by a number of factors,
including:
- the quality of the risks underwritten by the Company
- the nature and severity of catastrophe losses
- the availability, cost and terms of reinsurance
- underlying settlement costs, including medical and legal costs
The Company seeks to manage each of the foregoing to the extent within its
control. Many of the foregoing factors are partially, or entirely, outside of
the control of the Company.
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in conformity with U.S.
generally accepted accounting principles, 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, 2004 included in the
Company's 2004 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.
The judgments, or the methodology on which the judgments are made, are reviewed
quarterly with the Audit Committee.
Liability 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
Page 15
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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 has written down to fair value, 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. 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.
Policy Acquisition Costs. Policy acquisition costs, such as commissions,
premium taxes and certain other underwriting and agency expenses that vary with
and are primarily 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
Page 16
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
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 March 31, 2005 and 2004 is discussed in greater detail below.
Results of Operations
Premiums earned decreased $0.3 million during the three months ended March
31, 2005 as compared to the three months ended March 31, 2004. The decrease is
primarily due to a decrease of $5.3 million in premiums earned for personal
lines partially offset by an increase of $5.0 million in commercial lines
premiums earned. The decline in premiums earned for personal lines was 11.8%,
primarily due to fewer policy counts. The reduction in personal lines volume
was driven primarily by a reduction in personal automobile business from the
continued implementation of more stringent underwriting processes. The increase
in premiums earned for commercial lines was 3.1%, primarily due to higher rates.
Investment income increased $0.1 million for the three months ended March
31, 2005 primarily due to a higher level of invested assets partially offset by
a lower yield on the fixed maturity investment portfolio.
Realized investment gains decreased $12.5 million for the three months
ended March 31, 2005 compared to the same prior year quarter. There were no
sales of investment securities in the first quarter of 2005. The decrease
primarily resulted from gains on the sale of two equity securities in the first
quarter of 2004.
Page 17
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Harleysville Group holds securities with unrealized losses at March 31,
2005 as follows:
LENGTH OF UNREALIZED LOSS
-------------------------
UNREALIZED LESS THAN OVER 12
FAIR VALUE LOSS 12 MONTHS MONTHS
---------- ---------- --------- -------
(in thousands)
Fixed maturities:
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $137,221 $ 2,244 $2,127 $ 117
Obligations of states and
political subdivisions 169,601 3,244 2,042 1,202
Corporate securities 228,423 6,085 3,832 2,253
Mortgage-backed securities 43,212 447 447
-------- ------- ------ ------
Total fixed maturities $578,457 $12,020 $8,448 $3,572
======== ======= ====== ======
Equity securities $ 18,495 $ 2,021 $2,021 $
======== ======= ====== ======
There are eleven positions that comprise the unrealized loss in equity
investments at March 31, 2005. All 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 the future.
Of the total fixed maturity securities with an unrealized loss at March 31,
2005, securities with a fair value of $412.3 million and an unrealized loss of
$8.6 million are classified as available for sale and are carried at fair value
on the balance sheet while securities with a fair value of $166.2 million and an
unrealized loss of $3.4 million are classified as held to maturity on the
balance sheet and are carried at amortized cost.
The fixed maturity investments with continuous unrealized losses for less
than twelve months were primarily due to the impact of higher market interest
rates rather than a decline in credit quality. There are $69.6 million in fixed
maturity securities, at fair value, that at March 31, 2005, had been below
amortized cost for over twelve months. Of the $3.6 million of unrealized losses
on such securities, $1.9 million relates to securities which carry A or higher
debt ratings and have declined in fair value roughly in line with market
interest rate changes. The remaining $1.7 million of unrealized losses are
comprised of airline enhanced equipment trust certificates (EETC) as follows:
Page 18
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
FAIR MATURITY
COST VALUE DATES
-------- ------- ---------
(in thousands)
American Airlines $14,367 $13,385 2011
United Airlines 6,933 6,344 2010-2012
Other airlines 2,000 1,892 2011
------- -------
$23,300 $21,621
======= =======
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.
The EETCs' market value has improved over the past year. 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.
In the first quarter of 2005, Harleysville Group had income before income
taxes of $14.5 million, compared to $21.2 million in the first quarter of 2004.
The decrease in income before income taxes of $6.8 million for the three months
ended March 31, 2005, as compared to the same period in 2004, was primarily due
to the decreased realized investment gains, partially offset by improved
underwriting results. The improved underwriting results in 2005 primarily were
due to lesser loss severity, lesser catastrophe losses and lower expenses.
Other underwriting expenses declined $3.3 million primarily due to a lower
number of employees. Catastrophe losses were $ 1.0 million and $2.6 million for
the three months ended March 31, 2005 and 2004, 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 decreased to
104.2% for the three months ended March 31, 2005 from 107.2% for the three
months ended March 31, 2004. Such decrease was due to better underwriting
results in both commercial lines and personal lines.
Page 19
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
The statutory combined ratios by line of business for the three months
ended March 31, 2005, as compared to the three months ended March 31, 2004, were
as follows:
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
2005 2004
------ ------
Commercial:
Automobile 100.1% 103.1%
Workers compensation 125.7% 122.9%
Commercial multi-peril 105.2% 105.1%
Other commercial 84.9% 81.7%
Total commercial 104.3% 104.7%
Personal:
Automobile 106.1% 118.3%
Homeowners 102.9% 109.3%
Other personal 87.8% 147.6%
Total personal 103.7% 116.2%
Total personal and commercial 104.2% 107.2%
The following table presents the liability for unpaid losses and loss
settlement expenses by major line of business:
MARCH 31, DECEMBER 31,
2005 2004
---------- ------------
(in thousands)
Commercial:
Automobile $ 258,322 $ 249,044
Workers compensation 302,314 298,994
Commercial multi-peril 392,343 371,247
Other commercial 74,194 70,535
---------- ----------
Total commercial 1,027,173 989,820
---------- ----------
Personal:
Automobile 100,836 103,050
Homeowners 38,312 37,026
Other personal 1,754 1,713
---------- ----------
Total personal 140,902 141,789
---------- ----------
Total personal and commercial 1,168,075 1,131,609
Plus reinsurance recoverables 175,442 186,126
--------- ----------
Total liability $1,343,517 $1,317,735
========== ==========
Page 20
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
The commercial lines statutory combined ratio decreased to 104.3% for the
three months ended March 31, 2005 from 104.7% for the three months ended March
31, 2004. The decrease is primarily due to a decrease in the combined ratio for
commercial automobile primarily due to lower loss severity.
There was $6.0 million of net favorable development in the provision for
insured events in prior years for the three months ended March 31, 2005 of which
$3.7 million was in commercial lines and $2.3 million was in personal lines.
Approximately half of the favorable development related to the liability for
loss adjusting expenses. The remaining favorable development primarily related
to the 2004 accident year in the property lines partially offset by adverse
development in prior accident years.
There was $0.6 million of net favorable development in the provision for
insured events in prior years for the three months ended March 31, 2004. This
was net of $3.1 million of adverse development in commercial automobile which
was more than offset by favorable development in other lines.
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 THREE MONTHS FOR THE YEAR ENDED
ENDED MARCH 31, 2005 DECEMBER 31, 2004
(dollars in thousands)
-------------------- ------------------
Number of claims pending,
beginning of period 6,832 8,005
Number of claims reported 2,213 10,632
Number of claims settled or dismissed (2,354) (11,805)
Number of claims pending, end of period 6,691 6,832
======= ========
Losses paid $16,470 $ 73,548
Loss settlement expenses paid $ 3,738 $ 15,831
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. Actuarial loss reserving
techniques and assumptions, which rely on historical information as adjusted to
reflect current conditions, have been consistently applied, after including
consideration of recent case reserve activity, 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.
Page 21
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Because of the nature of insurance claims, there are uncertainties inherent
in the estimates of ultimate losses. Reorganization of the claims operation in
recent years 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 gives rise to uncertainty as to the pattern of future loss
settlements. Litigation on bodily injury liability cases is higher for the past
three years while the rate of settlement is slower. The slowing rate of
settlement began to stabilize in 2004. 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 March 31, 2005. For every 1% change in the estimate, the
effect on pre-tax income would be $11.7 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 experienced significant losses from such claims.
The personal lines statutory combined ratio decreased to 103.7% for the
three months ended March 31, 2005 from 116.2% for the three months ended March
31, 2004. The decrease primarily was due to lesser catastrophe losses which
affected the homeowners line, and lower loss severity in personal automobile.
Net catastrophe losses decreased $1.6 million and losses ceded under the
aggregate catastrophe reinsurance agreement with Mutual decreased $1.7 million
for the three months ended March 31, 2005, due to less severe catastrophes in
the 2005 period.
The income tax expense for each of the three month periods ended March 31,
2005 and 2004 includes a tax benefit of $2.6 million and $2.7 million,
respectively, related to tax-exempt investment income.
Page 22
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Continued)
Liquidity and Capital Resources
Operating activities provided $29.6 million and $11.2 million of net cash
for the three months ended March 31, 2005 and 2004, respectively. The change
primarily is from an increase in net cash provided by underwriting activities.
Investing activities used $23.7 million and $19.0 million of net cash for
the three months ended March 31, 2005 and 2004, respectively. The increase is
primarily due to an increase in net purchases of fixed maturity investments,
partially offset by a decrease in the purchase of short-term investments.
Financing activities used $3.4 million and $3.8 million of net cash for the
three months ended March 31, 2005 and 2004, respectively. The change is
primarily due to 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 March 31,
2005, Harleysville Group held cash collateral of $139.2 million related to
securities on loan with a market value of $135.7 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.
Harleysville Group Inc. had $17.5 million of cash and marketable securities
at March 31, 2005 which is available for general corporate purposes including
dividends, debt service, capital contributions to subsidiaries, acquisitions and
the repurchase of stock. The Company has no material commitments for capital
expenditures as of March 31, 2005.
RISK FACTORS
The business, results of operations and financial condition, and therefore
the value of Harleysville Group's securities, are subject to a number of risks.
Some of those risks are set forth in the Company's annual report on Form 10-K
for fiscal year 2004, filed with the Securities and Exchange Commission on March
14, 2005.
Page 23
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, 2004 to March 31,
2005. In addition, the Company has maintained approximately the same investment
mix during this period.
Page 24
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our management, under
the supervision and with the participation of the chief executive officer
and the chief financial officer, has evaluated the effectiveness of our
controls and procedures related to our reporting and disclosure obligations
as of March 31, 2005, which is the end of the period covered by this
quarterly report on Form 10-Q. Based on that evaluation, the chief executiv
officer and chief financial officer have concluded that these disclosure
controls and procedures are sufficient to provide that (a) material
information relating to us, including our consolidated subsidiaries, is
made known to these officers by other employees of us and our consolidated
subsidiaries, particularly material information related to the period
for which this periodic report is being prepared; and (b) this information
is recorded, processed, summarized, evaluated and reported, as applicable,
within the time periods specified in the rules and forms of the Securities
and Exchange Commission.
(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 first quarter of 2005 that has materially affected, or
is reasonably likely to materially affect, the Company's internal control
over financial reporting.
Page 25
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. a. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) of the Exchange Act.
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) of the Exchange Act.
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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: May 4, 2005 By: /s/ ARTHUR E. CHANDLER
------------- ------------------------------
Arthur E. Chandler
Senior Vice President and
Chief Financial Officer
(principal financial officer)
Page 26
EXHIBIT (31.1)
CERTIFICATION PURSUANT TO THE SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Michael L. Browne, certify that:
1. I have reviewed the quarterly report on Form 10-Q of Harleysville Group
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial conditions, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period
in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on
such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 4, 2005 /s/ MICHAEL L. BROWNE
----------------- -------------------------------------------
Michael L. Browne
Chief Executive Officer and a Director
Page 27
EXHIBIT (31.2)
CERTIFICATION PURSUANT TO THE SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Arthur E. Chandler, certify that:
1. I have reviewed the quarterly report on Form 10-Q of Harleysville Group
Inc.;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial conditions, results of operations and cash flows
of the registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period
in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on
such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 4, 2005 /s/ ARTHUR E. CHANDLER
----------------- ----------------------------
Arthur E. Chandler
Senior Vice President and
Chief Financial Officer
Page 28
EXHIBIT (32.1)
HARLEYSVILLE GROUP INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Harleysville Group Inc. (the
"Company") on Form 10-Q for the period ended March 31, 2005, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Michael
L. Browne, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002, that based on my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Date: May 4, 2005 /s/ MICHAEL L. BROWNE
----------------- -------------------------------------------
Michael L. Browne
Chief Executive Officer and a Director
Page 29
EXHIBIT (32.2)
HARLEYSVILLE GROUP INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Harleysville Group Inc. (the
"Company") on Form 10-Q for the period ended March 31, 2005, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Arthur
E. Chandler, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002, that based on my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Date: May 4, 2005 /s/ ARTHUR E. CHANDLER
----------------- -----------------------------
Arthur E. Chandler
Senior Vice President and
Chief Financial Officer
Page 30