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, 1996 .
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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.
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(Exact name of registrant as specified in its charter)
DELAWARE 51-0241172
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
355 MAPLE AVENUE, HARLEYSVILLE, PENNSYLVANIA 19438-2297
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(Address of principal executive offices, including zip code)
(215) 256-5000
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(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 .
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At October 31, 1996, 14,075,399 shares of common stock of
Harleysville Group Inc. were outstanding.
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
INDEX
PAGE NUMBER
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Part I - Financial Information
Consolidated Balance Sheets - September 30, 1996
and December 31, 1995 3
Consolidated Statements of Income - For the three
months ended September 30, 1996 and 1995 4
Consolidated Statements of Income - For the nine
months ended September 30, 1996 and 1995 5
Consolidated Statement of Shareholders' Equity -
For the nine months ended September 30, 1996 6
Consolidated Statements of Cash Flows - For the
nine months ended September 30, 1996 and 1995 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Part II - Other Information 12
Page 2
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
1996 1995
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ASSETS
------
Investments:
Fixed maturities:
Held to maturity, at amortized
cost (fair value $593,683
and $542,895) $ 581,892 $ 509,846
Available for sale, at fair value
(amortized cost $578,415
and $468,206) 586,641 496,595
Equity securities, at fair value
(cost $50,455 and $30,347) 60,691 34,584
Short-term investments, at cost,
which approximates fair value 24,094 4,126
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Total investments 1,253,318 1,085,151
Cash 2,956 3,256
Receivables:
Premiums 73,496 62,233
Reinsurance 80,291 70,366
Accrued investment income 19,613 16,496
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Total receivables 173,400 149,095
Deferred policy acquisition costs 70,989 59,109
Prepaid reinsurance premiums 5,943 8,334
Property and equipment, net 22,224 22,578
Deferred income taxes 34,502 23,109
Due from affiliate 1,013
Other assets 29,546 27,709
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Total assets $1,593,891 $1,378,341
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unpaid losses and loss settlement
expenses $ 799,581 $ 645,941
Unearned premiums 289,014 238,710
Accounts payable and accrued expenses 55,437 48,478
Debt and capitalized lease obligations 97,715 97,965
Due to affiliate 2,238
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Total liabilities 1,241,747 1,033,332
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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 and
outstanding 14,070,517 and
13,718,086 shares 14,071 13,718
Additional paid-in capital 119,580 111,519
Net unrealized investment gains,
net of deferred income taxes 12,000 21,207
Retained earnings 206,493 198,565
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Total shareholders' equity 352,144 345,009
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Total liabilities and
shareholders' equity $1,593,891 $1,378,341
========== ==========
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, 1996 AND 1995
(dollars in thousands, except per share data)
1996 1995
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Revenues:
Premiums earned $157,707 $120,785
Investment income, net of
investment expenses 19,580 17,185
Realized investment gains 218 56
Other income 2,802 2,762
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Total revenues 180,307 140,788
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Losses and expenses:
Losses and loss settlement expenses 125,209 83,395
Amortization of deferred policy
acquisition costs 39,459 31,065
Other underwriting expenses 11,341 10,546
Interest expense 1,634 1,662
Other expenses 636 600
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Total expenses 178,279 127,268
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Income before income taxes 2,028 13,520
Income taxes (benefit) (1,480) 3,053
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Net income $ 3,508 $ 10,467
======== ========
Weighted average number of shares
outstanding 13,974,261 13,583,071
Earnings per common share $ .25 $ .77
======== ========
Cash dividends per common share $ .21 $ .19
======== ========
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, 1996 AND 1995
(dollars in thousands, except per share data)
1996 1995
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Revenues:
Premiums earned $457,564 $353,046
Investment income, net of
investment expenses 58,127 50,916
Realized investment gains 2,744 566
Other income 8,399 8,165
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Total revenues 526,834 412,693
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Losses and expenses:
Losses and loss settlement expenses 356,293 249,237
Amortization of deferred policy
acquisition costs 115,123 91,273
Other underwriting expenses 32,884 27,699
Interest expense 4,902 5,151
Other expenses 2,028 2,156
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Total expenses 511,230 375,516
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Income before income taxes 15,604 37,177
Income taxes (benefit) (512) 7,555
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Net income $ 16,116 $ 29,622
======== ========
Weighted average number of shares
outstanding 13,864,748 13,491,078
Earnings per common share $ 1.16 $ 2.20
======== ========
Cash dividends per common share $ .59 $ .53
======== ========
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, 1996
(dollars in thousands)
NET
UNREALIZED
COMMON STOCK ADDITIONAL INVESTMENT
PAID-IN GAINS RETAINED
SHARES AMOUNT CAPITAL (LOSSES) EARNINGS TOTAL
--------- ------- --------- ---------- -------- --------
Balance,
December 31,
1995 13,718,086 $13,718 $111,519 $21,207 $198,565 $345,009
Net income 16,116 16,116
Issuance of
common stock 352,431 353 8,061 8,414
Cash dividends
paid (8,188) (8,188)
Change in
unrealized
investment
gains (losses),
net (9,207) (9,207)
---------- ------- -------- ------- -------- --------
Balance,
September 30,
1996 14,070,517 $14,071 $119,580 $12,000 $206,493 $352,144
========== ======= ======== ======= ======== ========
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, 1996 AND 1995
(in thousands)
1996 1995
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Cash flows from operating activities:
Net income $ 16,116 $ 29,622
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in receivables, unearned
premiums, prepaid reinsurance
and due to affiliate (2,832) 2,054
Increase in unpaid losses and
loss settlement expenses 59,675 33,438
Deferred income taxes (6,435) 161
Increase in deferred policy
acquisition costs (11,880) (6,311)
Amortization and depreciation 1,078 795
Gain on sale of investments (2,744) (566)
Other, net 8,704 (121)
Cash provided from the change in the
intercompany pooling agreement
participation 117,800
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Net cash provided by operating
activities 179,482 59,072
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Cash flows from investing activities:
Fixed maturity investments:
Purchases (245,797) (116,628)
Sales or maturities 64,337 78,617
Equity securities:
Purchases (38,618) (19,907)
Sales 21,106 4,456
Net (purchases) sales of short-term
investments 20,032 (340)
Purchase of property and equipment (818) (1,489)
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Net cash used by investing
activities (179,758) (55,291)
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Cash flows from financing activities:
Issuance of common stock 8,414 6,127
Payment of debt and lease
obligations (250) (2,230)
Dividends paid (8,188) (7,154)
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Net cash used by
financing activities (24) (3,257)
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Increase (decrease) in cash (300) 524
Cash at beginning of period 3,256 1,584
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Cash at end of period $ 2,956 $ 2,108
========= =========
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,
1995 included in the Company's 1995 Annual Report filed with the
Securities and Exchange Commission on Form 10-K.
2 - Earnings Per Share
Net income per common share is based on the weighted average
number of shares outstanding during each of the respective periods.
Additional shares arising from the assumed exercise of stock
options, which are considered common stock equivalents, were not
included in the computations because the assumed additional
dilutive effect was not material.
3 - Reinsurance
Premiums earned are net of amounts ceded to unrelated insurers
of $9,104,000 and $28,989,000 for the three and nine months ended
September 30, 1996, respectively, and $10,570,000 and $28,945,000
for the three and nine months ended September 30, 1995,
respectively. Losses and loss settlement expenses are net of
amounts ceded to unrelated insurers of $3,721,000 and $22,552,000
for the three and nine months ended September 30, 1996,
respectively, and $3,916,000 and $13,685,000 for the three and nine
months ended September 30, 1995, respectively.
The Company cedes business to and assumes business from
Harleysville Mutual Insurance Company (Mutual Company) under a
reinsurance pooling agreement. Because this agreement does not
relieve the Company of primary liability as the originating
insurer, there is a concentration of credit risk arising from
business ceded to the Mutual Company. At September 30, 1996,
unearned premiums of $192.7 million and unpaid losses and loss
settlement expenses of $447.2 million were ceded to the Mutual
Company under the reinsurance pooling agreement. The reinsurance
pooling agreement provides for the right of offset and in
accordance with certain state regulatory requirements, the Mutual
Company maintained $292.6 million (market value) of investments in
a trust account to secure liabilities under the reinsurance pooling
agreement at September 30, 1996.
Page 8
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
4 - Cash Flows
Net cash tax payments of $10,100,000 and $8,750,000 were made
in the first nine months of 1996 and 1995, respectively. Cash
interest payments of $3,523,000 and $3,771,000 were made in the
first nine months of 1996 and 1995, respectively.
Page 9
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Effective January 1, 1996, Harleysville Group's pooling
agreement with Harleysville Mutual Insurance Company (Mutual) was
amended to include Pennland Insurance Company (Pennland), a wholly-
owned subsidiary of Mutual that writes Pennsylvania personal
automobile insurance policies. In addition, Harleysville Group's
participation increased from 60% to 65%.
Premiums earned increased $36.9 million and $104.5 million
during the three and nine months ended September 30, 1996. Of such
increases, $19.4 million and $57.6 million are due to the increased
pooling participation. Excluding the effect of this change, the
premiums earned from pooled business increased $8.6 million and
$26.4 million for the three and nine months ended September 30,
1996 due to an increase in commercial lines business. The
remaining increases of $8.9 million and $20.5 million are due to
growth in Lake States', primarily from its expansion into the
neighboring states of Indiana, Illinois and Wisconsin.
Investment income increased $2.4 million and $7.2 million for
the three and nine months ended September 30, 1996 resulting from
an increase in invested assets. Such increase was primarily
provided by a $117.8 million cash transfer received for various
insurance liabilities assumed January 1, 1996 in connection with
the increase in Harleysville Group's pool participation.
Realized investment gains increased $0.2 million and $2.2
million for the three and nine months ended September 30, 1996
primarily resulting from sales of equity securities.
Income before income taxes decreased $11.5 million for the
three months ended September 30, 1996 primarily due to the impact
of Hurricanes Fran and Bertha, partially offset by the higher
investment income. The hurricanes both struck the North Carolina
coast and resulted in losses of $13.0 million, or $8.5 million
after-tax ($.61 per share). Harleysville Group's statutory
combined ratio increased to 111.1% for the three months ended
September 30, 1996 from 102.5% for the three months ended September
30, 1995. Of such increase, 8.2 points was due to the hurricanes.
Income before income taxes decreased $21.6 million for the
nine months ended September 30, 1996 primarily due to the impacts
of the third quarter hurricanes and a blizzard and related storms
that occurred in January 1996, partially offset by the higher
Page 10
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
investment income and realized gains. The blizzard and related
January 1996 storms resulted in losses of $15.1 million, or $9.8
million after-tax ($.71 per share). Harleysville Group's statutory
combined ratio increased to 109.1% for the nine months ended
September 30, 1996 from 103.6% for the nine months ended September
30, 1995. Of the increase, 6.2 points was due to the
aforementioned weather events.
The income tax expense for the three and nine months ended
September 30, 1996 includes the tax benefit of $2.2 million and
$6.1 million, compared to $1.7 million and $5.2 million in the same
prior year periods, associated with tax-exempt investment income.
Liquidity and Capital Resources
Net cash provided by operating activities was $179.5 million
and $59.1 million for the nine months ended September 30, 1996 and
1995. The increase primarily reflects the effect of the January 1,
1996 amendment to the pooling agreement with Mutual. A $117.8
million cash transfer was received by Harleysville Group related to
the various liabilities assumed (loss and loss expense reserves of
$94.0 million, net unearned premiums of $22.2 million and other
liabilities of $1.6 million) in connection with such amendment.
Net cash used by investing activities was $179.8 million and
$55.3 million for the nine months ended September 30, 1996 and
1995. The increase is primarily due to the higher amount of cash
provided by operating activities.
Net cash used by financing activities was $3.2 million lower
for the nine months ended September 30, 1996 primarily due to the
prepayment of a $2.0 million capitalized lease obligation during
the first nine months of 1995.
Harleysville Group Inc. maintained $14.8 million of cash and
marketable investments at the holding company level at September
30, 1996 which is available for general corporate business purposes
including dividends, debt service, capital contributions to
subsidiaries and acquisitions. The Company has no material
commitments for capital expenditures as of September 30, 1996.
Page 11
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
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 13, 1996 /s/BRUCE J. MAGEE
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Bruce J. Magee
Senior Vice President and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
Page 12