JUSTIN P. KLEIN
Direct Dial: (215) 864-8606
Personal Fax: (215) 864-9166
E-Mail: KLEINJ@ballardspahr.com
February 10, 2006
BY OVERNIGHT DELIVERY AND FACSIMILE
- -----------------------------------
United States Securities and Exchange
Commission
Division of Corporation Finance
100 F Street, NE
Washington, DC 20549
Attention: Jim B. Rosenberg, Senior Assistant Chief Accountant
Re: Harleysville Group Inc.
Form 10-K for the fiscal year ended December 31, 2004
File No. 0-14697
----------------
Ladies and Gentlemen:
We are pleased to provide this response letter on behalf of Harleysville
Group Inc. ("Registrant"). This letter is a follow-up to the telephone
conversation between Registrant's representatives and the Staff on February 2,
2006, and the response letters dated January 6, 2006 and January 20, 2006 ("1/20
Response Letter"), filed by Registrant in response to the Staff's comment letter
dated December 21, 2005, regarding the above captioned Form 10-K for the fiscal
year ended December 31, 2004, filed by Registrant.
Consistent with the above-referenced conversation, Registrant hereby amends
and supplements its response to comments 2 through 5 of the Staff's comment
letter provided by Registrant in the 1/20 Response Letter and advises the Staff
that it will include the following disclosures prospectively, beginning with
Registrant's Annual Report on Form 10-K for the year ended December 31, 2005
(the "2005 Form 10-K"). For your convenience, the substance of the Staff's oral
comments with respect to Registrant's response to comments 2 through 5 have been
reproduced below and are followed by Registrant's supplemental responses.
United States Securities and
Exchange Commission
February 10, 2006
Page 2
Form 10-K for the fiscal year ended December 31, 2004
- -----------------------------------------------------
Item 7. Management's Discussion and Analysis of Financial Condition and ,
- ---------------------------------------------------------------------------
page 21
-------
Critical Accounting Policies, page 22
- -------------------------------------
2. The Staff advises Registrant that in future filings Registrant should
provide the same information provided by Registrant in the 1/20 Response Letter
with respect to unrealized losses on airline enhanced equipment trust
certificates (EETCs), including a statement that Registrant intends to hold
these securities until maturity. Further, the Staff advises that Registrant
should clarify its inference that the collateral securing the airline EETCs is
in excess of the security value.
Supplemental Response:
- ---------------------
Registrant supplementally confirms that on the 2005 Form 10-K and in future
filings, Registrant will provide disclosure consistent with the disclosure set
forth in its response to comment 2 in the 1/20 Response Letter, including, a
statement that Registrant has the ability and intends to continue to maintain
holdings in the EETC investments until maturity. Further, as a supplement to
Registrant's statement that Registrant considers the loan to collateral value to
provide protection in the event of an adverse economic environment, Registrant
provides the following additional disclosure:
According to the most recent (August 2005) report provided to Registrant by JP
Morgan, the market value of aircraft collateral underlying Registrant's EETC
holdings exceeds Registrant's outstanding A Tranche cost and therefore provides
additional security for such EETCs. The report was prepared by JP Morgan based
on its own research on collateral values as well as research from Aviation
Specialists Group. A recent transaction involving one of Registrant's EETCs is
indicative of the current strength in the collateral value of the collateral
underlying Registrant's EETCs. In that transaction, which was completed on
February 6, 2006, holders of Subordinate B Tranche in the UAL 2000-1 EETC
exercised their right to invoke a mandatory purchase of all outstanding A
Tranche bonds with respect to the UAL 2000-1 EETCs at par value plus interest
due and accrued. Registrant thereby recovered its investment in the UAL 2000-1
EETCs plus interest due and accrued.
Liabilities and Loss Settlement Expenses, page 22
- -------------------------------------------------
3. The Staff advises that Registrant should (a) provide the table provided in
response to comment 3 in the 1/20 Response Letter in future filings, (b) clarify
the disclosure made by Registrant in response to comment 3 in the 1/20 Response
Letter with respect to prior disclosure by Registrant of a 1% change in
estimated loss reserves, and (c) tie the loss reserve information set forth in
the table provided by Registrant in response to comment 3 in the 1/20 Response
Letter back to the loss reserve number on Registrant's balance sheet.
United States Securities and
Exchange Commission
February 10, 2006
Page 3
Supplemental Response:
- ----------------------
(a) Registrant supplementally confirms that on the 2005 Form 10-K and in
future filings, Registrant will provide additional information on unpaid
losses and loss settlement expenses net of reinsurance by line of business
in tabular format consistent with the tabular disclosure set forth in
item (c) below.
(b) Registrant supplementally advises that Registrant believes that the 90%
confidence interval produced through its statistical analysis reflects a
reasonably likely effect on operations and financial position resulting
from evaluations of new information and data since the last reporting date.
On the 2005 Form 10-K and in future filings, Registrant will no longer
cite the impact of a 1% change in estimated loss reserves and instead
Registrant will provide a disclosure consistent with the disclosure set
forth herein and in Registrant's response to comment 3 in the 1/20
Response Letter.
(c) Below is a revised table which ties the loss reserve information reflected
therein back to the loss reserve number reflected on Registrant's balance
sheet.
NET LOSS AND LAE RESERVES AT 12/31/2004
(DOLLARS IN THOUSANDS)
Statistically Determined
Net Net IBNR Range of Estimates
Net Net LAE Reserves Net Total ------------------------
Case IBNR Reserves (Incl. LAE) Reserves High Low
-------- -------- --------- ---------- ---------- -------- --------
Line of Business
Commercial:
Automobile $106,704 $101,586 $ 40,754 $142,340 $ 249,044 $303,971 $187,842
Workers compensation 171,246 87,796 39,952 127,748 298,994 376,386 256,796
Commercial multi-peril 128,117 148,087 95,043 243,130 371,247 406,936 269,359
Other commercial 15,700 35,910 18,925 54,835 70,535 106,682 46,594
-------- -------- -------- -------- ----------
Total commercial 421,767 373,379 194,674 568,053 989,820
-------- -------- -------- -------- ----------
Personal:
Automobile 60,346 24,571 18,133 42,704 103,050 117,965 88,829
Homeowners 14,169 15,776 7,081 22,857 37,026 37,294 24,506
Other personal 841 726 146 872 1,713 2,097 1,061
-------- -------- -------- -------- ----------
Total personal 75,356 41,073 25,360 66,433 141,789
-------- -------- -------- -------- ----------
Total net reserves 497,123 414,452 220,034 634,486 1,131,609
-------- -------- -------- -------- ----------
Reinsurance recoverables 165,495 18,374 2,257 20,631 186,126
-------- -------- -------- -------- ----------
Gross reserves $662,618 $432,826 $222,291 $655,117 $1,317,735
======== ======== ======== ======== ==========
United States Securities and
Exchange Commission
February 10, 2006
Page 4
4. The Staff advises Registrant that Registrant should acknowledge that the
benchmark for materiality is effect on net income and earnings per share as set
forth in Topic 1.M of SAB 103, and that Registrant should confirm that it will
include the tabular disclosure provided by Registrant in response to comment 4
in the 1/20 Response Letter in future filings.
Supplemental Response:
---------------------
Registrant acknowledges that an accepted benchmark for materiality is
effect on net income and earnings per share as set forth in Topic 1.M of
SAB 103. Registrant supplementally advises that it will include the
tubular disclosure set forth in its response to comment 4 in the 1/20
Response Letter on the 2005 Form 10-K and in its future filings.
Liquidity and Capital Resources, page 32
- ----------------------------------------
Contractual Obligations table, page 33
- --------------------------------------
5. The Staff advises Registrant that Registrant should provide the information
provided by Registrant in response to comment 5 in the 1/20 Response Letter in
its future filings.
Supplemental Response:
---------------------
Registrant supplementally advises that it will include disclosure
consistent with the disclosure provided by Registrant in its response to
comment 5 in the 1/20 Response Letter on the 2005 Form 10-K and in its
future filings, including the tabular disclosure set forth therein.
Registrant acknowledges that (i) Registrant is responsible for the adequacy and
accuracy of the disclosure in its filings with the Securities and Exchange
Commission (the "Commission"); (ii) Staff comments or changes to disclosure in
response to Staff comments do not foreclose the Commission from taking any
action with respect to such filings; and (iii) Registrant may not assert Staff
comments as a defense in any proceeding initiated by the Commission or any
person under the federal securities laws of the United States.
Please contact me at (215) 864-8606, if you have any comments or questions.
Sincerely,
/s/ JUSTIN P. KLEIN
-------------------
Justin P. Klein
cc: Ibolya Ignat, Staff Accountant
Lisa Vanjoske, Assistant Chief Accountant
Michael L. Browne, President and Chief Executive Officer
Robert A. Kauffman, Senior Vice President, Secretary, General Counsel
and Chief Governance Officer