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 MARCH 31, 1997 .
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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 .
----- -----
At May 1, 1997 14,227,925 shares of common stock of
Harleysville Group Inc. were outstanding.
1
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
INDEX
Page Number
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Part I - Financial Information
Consolidated Balance Sheets - March 31, 1997
and December 31, 1996 3
Consolidated Statements of Income - For the
three months ended March 31, 1997 and 1996 4
Consolidated Statement of Shareholders' Equity -
For the three months ended March 31, 1997 5
Consolidated Statements of Cash Flows -
For the three months ended March 31, 1997
and 1996 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Results
of Operations and Financial Condition 9
Part II - Other Information 11
2
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited)
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
ASSETS
------
Investments:
Fixed maturities:
Held to maturity, at amortized
cost (fair value $604,698
and $606,770) $ 599,565 $ 587,979
Available for sale, at fair value
(amortized cost $621,325 and
$583,449) 623,540 598,193
Equity securities, at fair value
(cost $67,772 and $55,473) 84,001 69,932
Short-term investments, at cost,
which approximates fair value 12,317 35,175
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Total investments 1,319,423 1,291,279
Cash 3,400 2,120
Receivables:
Premiums 72,860 73,963
Reinsurance 73,721 80,163
Accrued investment income 20,253 19,527
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Total receivables 166,834 173,653
Deferred policy acquisition costs 69,137 68,779
Prepaid reinsurance premiums 5,010 5,444
Property and equipment, net 21,904 22,157
Deferred income taxes 35,844 30,963
Other assets 27,305 28,217
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Total assets $1,648,857 $1,622,612
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unpaid losses and loss
settlement expenses $ 827,056 $ 796,820
Unearned premiums 279,801 281,366
Accounts payable and accrued expenses 51,648 60,966
Debt 97,715 97,715
Due to affiliate 19,667 15,500
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Total liabilities 1,275,887 1,252,367
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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 14,217,978 and
14,139,862 shares 14,218 14,140
Additional paid-in capital 122,826 121,033
Net unrealized investment gains,
net of deferred income taxes 11,988 18,982
Retained earnings 223,938 216,090
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Total shareholders' equity 372,970 370,245
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Total liabilities and
shareholders' equity $1,648,857 $1,622,612
========== ==========
See accompanying notes to consolidated financial statements.
3
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(dollars in thousands, except per share data)
1997 1996
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Revenues:
Premiums earned $156,381 $148,019
Investment income, net of
investment expense 20,591 19,232
Realized investment gains 466 2,199
Other income 2,744 2,781
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Total revenues 180,182 172,231
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Losses and expenses:
Losses and loss settlement expenses 114,783 124,225
Amortization of deferred policy
acquisition costs 39,455 37,488
Other underwriting expenses 10,800 9,579
Interest expense 1,641 1,636
Other expenses 689 649
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Total expenses 167,368 173,577
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Income (loss) before income taxes 12,814 (1,346)
Income taxes (benefit) 1,982 (2,219)
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Net income $ 10,832 $ 873
======== ========
Weighted average number of shares
outstanding 14,191,136 13,763,239
Earnings per common share $ .76 $ .06
======== ========
Cash dividend per common share $ .21 $ .19
======== ========
See accompanying notes to consolidated financial statements.
4
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(dollars in thousands)
NET
UNREALIZED
COMMON STOCK ADDITIONAL INVESTMENT
PAID-IN GAINS RETAINED
SHARES AMOUNT CAPITAL (LOSSES) EARNINGS TOTAL
---------- ------- ---------- ---------- -------- -------
Balance,
December 31,
1996 14,139,862 $14,140 $121,033 $18,982 $216,090 $370,245
Net income 10,832 10,832
Issuance of
common stock 78,116 78 1,793 1,871
Cash dividend
paid (2,984) (2,984)
Change in
unrealized
investment
gains
(losses),
net (6,994) (6,994)
---------- ------- -------- ------- -------- --------
Balance,
March 31,
1997 14,217,978 $14,218 $122,826 $11,988 $223,938 $372,970
========== ======= ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
5
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(in thousands)
1997 1996
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Cash flows from operating activities:
Net income $ 10,832 $ 873
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in receivables, unearned
premiums, prepaid reinsurance
and due to affiliate 8,940 1,648
Increase in unpaid losses and
loss settlement expenses 1,917 28,608
Deferred income taxes (1,115) (6,002)
Increase in deferred policy
acquisition costs (358) (7,730)
Amortization and depreciation 366 370
Gain on sale of investments (466) (2,199)
Other, net (8,360) (1,323)
Cash provided from the change in the
pooling agreement participation 29,002 117,800
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Net cash provided by operating
activities 40,758 132,045
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Cash flows from investing activities:
Fixed maturity investments:
Purchases (80,266) (156,146)
Sales or maturities 31,905 4,966
Equity securities:
Purchases (16,560) (23,550)
Sales 3,847 16,023
Net sales of short-term investments 22,858 25,491
Purchase of property and equipment (149) (290)
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Net cash used by investing
activities (38,365) (133,506)
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Cash flows from financing activities:
Issuance of common stock 1,871 2,928
Dividend paid (2,984) (2,616)
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Net cash provided (used) by
financing activities (1,113) 312
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Increase (decrease) in cash 1,280 (1,149)
Cash at beginning of period 2,120 3,256
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Cash at end of period $ 3,400 $ 2,107
======== =========
See accompanying notes to consolidated financial statements.
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,
1996 included in the Company's 1996 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 they were either antidilutive
or the assumed additional dilutive effect was not material.
3 - Reinsurance
Premiums earned are net of amounts ceded to unrelated insurers
of $6,535,000 and $9,498,000 for the three months ended March 31,
1997 and 1996, respectively. Losses and loss settlement expenses
are net of amounts ceded to unrelated insurers of $3,700,000 and
$8,741,000 for the three months ended March 31, 1997 and 1996,
respectively.
Effective January 1, 1997, Harleysville Group entered into a
reinsurance agreement with Harleysville Mutual Insurance Company
(Mutual) whereby Mutual reinsures accumulated catastrophe losses in
a quarter up to $15,750,000 in excess of $1,750,000 in return for
a reinsurance premium. The agreement excludes catastrophe losses
resulting from earthquakes or hurricanes, and supplements the
existing external catastrophe reinsurance program. Harleysville
Group ceded premiums earned and losses incurred of $612,000 and
$490,000, respectively, to Mutual for the three months ended March
31, 1997.
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HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(Unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Harleysville Group cedes business to and assumes business from
Mutual under a reinsurance pooling agreement. Because this
agreement does not relieve Harleysville Group of primary liability
as the originating insurer, there is a concentration of credit risk
arising from business ceded to Mutual. However, the reinsurance
pooling agreement provides for the right of offset and the net
balance with Mutual is a liability at March 31, 1997 and December
31, 1996. Mutual has an A. M. Best rating of "A" (Excellent) and,
in accordance with certain state regulatory requirements,
maintained $293.4 million (fair value) of investments in a trust
account to secure liabilities under the reinsurance pooling
agreement at March 31, 1997.
4 - Cash Flows
There was no cash tax payment in the first quarter of 1997 and
there was a $500,000 cash tax payment in the first quarter of 1996.
Cash interest payments of $308,000 and $304,000 were made in the
first quarter of 1997 and 1996, respectively.
8
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Effective January 1, 1997 Harleysville Group's pooling
agreement with Harleysville Mutual Insurance Company (Mutual) was
amended to include Lake States Insurance Company (Lake States), a
wholly-owned subsidiary of Harleysville Group Inc. that writes
insurance in Michigan, Illinois, Indiana and Wisconsin. In
addition, Harleysville Group's participation increased from 65% to
70%.
Premiums earned increased $8.4 million during the three months
ended March 31, 1997 as compared to the three months ended March
31, 1996. The increase is primarily due to an increase in the
automobile lines of business. The change in pool participation did
not materially effect the premium growth. However, the mix of
business changed as, effective January 1, 1997, 30% of Lake States'
business is ceded to and retained by Mutual and an additional 5% of
the pooled business is assumed from Mutual.
Investment income increased $1.4 million for the three months
ended March 31, 1997 resulting from an increase in invested assets.
Such increase was primarily provided by cash flow from operations
including a $29.0 million cash transfer received for various
insurance liabilities assumed January 1, 1997 in connection with
the change in Harleysville Group's pool participation.
Realized investment gains were $1.7 million lower for the
three months ended March 31, 1997 compared to the same prior year
quarter primarily resulting from fewer sales of equity securities.
Income (loss) before income taxes increased $14.2 million for
the three months ended March 31, 1997, primarily due to improved
underwriting results and higher investment income partially offset
by the lower realized gains. Harleysville Group's statutory
combined ratio decreased to 106.4% for the three months ended March
31, 1997 from 114.1% for the three months ended March 31, 1996.
The 1996 period was adversely affected by a blizzard and related
storms that occurred in January 1996 and resulted in losses of
$15.0 million.
The income tax expense for each of the three month periods
ended March 31, 1997 and 1996 includes the tax benefit of tax-
exempt investment income of $2.5 million and $1.8 million,
respectively.
9
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Liquidity and Capital Resources
Net cash provided by operating activities for the first
quarter was $40.8 million and $132.0 million in 1997 and 1996,
respectively. The decrease primarily reflects the effect of the
amendments to the pooling agreement with Mutual. Cash transfers of
$29.0 million and $117.8 million were received, effective January
1, 1997 and 1996, respectively, by Harleysville Group related to
the various liabilities assumed in connection with such amendments.
Net cash used by investing activities was $38.4 million and
$133.5 million for the three months ended March 31, 1997 and 1996,
respectively. The decrease is primarily due to the lower amount of
cash provided by operating activities.
Net cash used by financing activities increased $1.4 million
for the three months ended March 31, 1997 primarily due a decline
in the issuance of common stock as Mutual did not reinvest its
dividend from the Company.
Harleysville Group Inc. maintained $12.1 million of cash and
investments at the holding company level at March 31, 1997 which
are available for general corporate purposes including dividends,
debt service, capital contributions to subsidiaries and
acquisitions. The Company has no material commitments for capital
expenditures as of March 31, 1997.
New Accounting Standards
Statement of Financial Accounting Standards No. 128, "Earnings
Per Share," was issued in February 1997 and is effective for
periods ending after December 15, 1997. It specifies the
computation, presentation and disclosure requirements for earnings
per share (EPS). It requires dual presentation of basic EPS and
diluted EPS on the face of the income statement. Harleysville
Group's diluted EPS and basic EPS are not expected to be materially
different from EPS as currently calculated.
10
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities - None
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of Harleysville Group
Inc. was held on April 23, 1997 (the ("Annual Meeting" or
"Meeting"), with the following result:
The total number of shares represented at the Annual
Meeting in person or by proxy was 13,136,137 of the
14,202,394 shares of common stock outstanding and entitled
to vote at the Meeting.
On the resolution to elect Michael L. Browne and Frank E.
Reed as class "B" Directors to serve until the expiration
of their respective terms and until their successors are
duly elected, the nominees for Director received the
number of votes set forth opposite their respective names:
Number of Votes
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For Withheld
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Michael L. Browne 12,709,192 426,945
Frank E. Reed 12,709,900 426,237
There were no abstentions or broker non-votes recorded.
On the basis of the above vote, Michael L. Browne and
Frank E. Reed were elected as class "B" Directors to serve
until the expiration of their respective terms and until
their successors are duly elected.
On the resolution to approve the adoption of the Amended
and Restated Harleysville Group Inc. Equity Incentive Plan
there were 11,178,499 votes for, 1,392,434 votes against,
34,710 abstentions and 530,494 broker non-votes. On the
basis of the vote, the adoption of the Amended and
Restated Harleysville Group Inc. Equity Incentive Plan was
approved.
11
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
(Continued)
On the resolution to approve an amendment to the
Harleysville Group Inc. 1995 Employee Stock Purchase Plan,
there were 12,132,316 votes for, 431,660 votes against,
21,879 abstentions and 550,282 broker non-votes. On the
basis of the vote, the amendment to the Harleysville Group
Inc. 1995 Employee Stock Purchase Plan was approved.
ITEM 5. Other Information - None
ITEM 6. a. Exhibits - None
b. Reports on Form 8-K - 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: May 6, 1997 /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)
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