Exhibit 99.1
Harleysville Group Reports Third Quarter Results
HARLEYSVILLE, Pa., Oct. 24 /PRNewswire-FirstCall/ -- Harleysville Group
Inc. (Nasdaq: HGIC) today reported a diluted net loss of $1.16 per share in
the third quarter of 2003, reflecting the previously announced loss reserve
increases in several business lines and the cost of claims resulting from
Hurricane Isabel. The net loss includes net realized after-tax investment
losses of $0.01 per share. The company had diluted net income of $0.50 per
share in the third quarter of 2002. For the nine months, the company reported
a diluted net loss per share of $0.93, compared to diluted net income per
share of $0.95 in 2002. The 2003 result includes realized investment losses of
$0.02 per share, compared to $0.44 per share of realized losses in 2002.
The company reported a diluted operating loss of $1.15 per share for the
third quarter ended September 30, 2003, compared to diluted operating income
of $0.50 per share in the same period of 2002. For the nine months ended
September 30, 2003 the diluted operating loss was $0.91 per share, compared to
diluted operating income of $1.39 per share in the same period of 2002.
Operating income is a non-GAAP financial measure defined by the company as net
income excluding after-tax realized gains and losses on investments.
"As I stated in our preliminary earnings announcement last week, our third
quarter results are not acceptable," commented Michael L. Browne, Harleysville
Group's chairman of the board. "We have moved quickly to bolster our reserves
to assure the continued strength and integrity of our balance sheet, and we
are taking the steps necessary to improve operating results."
The company's third quarter and nine-month results were reduced by the
previously announced addition of $55 million pretax, or $1.19 per share after
tax, to the company's loss and loss adjustment reserves for prior accident
years, specifically in its workers compensation ($17 million), commercial
automobile liability ($19 million), commercial multi-peril liability ($14
million) and personal automobile liability ($5 million) lines of business.
Harleysville Group's end-of-the-quarter reserve analysis showed higher-than-
expected development in the casualty lines of business in accident years prior
to 2003, which caused the company to make the reserve adjustment. Of the
reserve development, 87 percent relates to the 1998 to 2002 accident years.
Harleysville Group's nine-month earnings were reduced by an additional $20
million pretax, or $0.43 per share after tax, due to a first quarter workers
compensation reserve adjustment. In light of the higher-than-expected
development in prior accident years, the company raised its loss estimates for
the 2003 accident year, which also impacted the company's third quarter and
nine-month results.
The third quarter results also reflect claims costs of $9.4 million
pretax, or $0.20 per share after tax, from Hurricane Isabel in September. In
the first nine months of 2003, Harleysville Group's property catastrophe
losses were $17.7 million pretax, or $0.38 per share after tax. That compares
to property catastrophe losses of $3.9 million pretax, or $0.08 per share
after tax, for the first nine months of 2002.
Harleysville Group's overall statutory combined ratio* was 137.2 percent
in the third quarter of 2003, compared to 101.7 percent in the third quarter
of 2002. For the nine months, the statutory combined ratio was 119.4 percent
in 2003, versus 101.9 percent in 2002. Reserve development added 26.4 points
and 12.5 points to the 2003 third quarter and nine-month statutory combined
ratios, respectively. In addition, property catastrophe losses added 5.0
points and 2.9 points to the 2003 third quarter and nine-month statutory
combined ratios, respectively. In 2002, catastrophe losses amounted to 0.3
points and 0.7 points for the third quarter and nine months, respectively.
Third quarter net written premiums rose 2 percent to $208.1 million in
2003, while net written premiums through nine months increased by 6 percent to
$645.9 million in 2003.
Pretax investment income was virtually unchanged in the third quarter and
through nine months at $21.6 million and $64.7 million, respectively. After-
tax investment income rose 1 percent in both the third quarter and the year to
date at $16.7 million and $49.8 million, respectively. Operating cash flow for
the nine months was $113.3 million, or $39.0 million higher than the prior
year's nine months.
Commercial lines
Net written premiums climbed 5 percent to $159.1 million in the third
quarter of 2003 and 10 percent to $502.5 million during the first nine months
of this year. The increase in written premiums is primarily due to higher
pricing. The commercial lines statutory combined ratio was 140.1 percent in
the third quarter of 2003, versus 100.0 percent in the third quarter of 2002.
For the nine months, the statutory combined ratio was 119.0 percent in 2003,
compared to 99.9 percent in 2002. In 2003, the third quarter reserve
development added 31.2 points to the quarter's commercial lines statutory
combined ratio, while reserve development added 15.1 points to the nine-month
commercial lines statutory combined ratio.
Personal lines
Harleysville Group's personal lines statutory combined ratio was 127.3
percent in the third quarter of 2003, versus 106.4 percent during the third
quarter of 2002. For the nine months, the statutory combined ratio was 120.7
percent in 2003, compared to 106.7 percent in 2002. In 2003, reserve
development added 9.7 points to the third quarter personal lines statutory
combined ratio and 4.7 points to the nine-month personal lines statutory
combined ratio. The higher catastrophe losses also contributed to the higher
statutory combined ratio. Net written premiums declined 9 percent to $49.0
million in the third quarter of 2003 and were down 5 percent to $143.4 million
during the first nine months of this year.
Outlook
"Our strong balance sheet, productive partnerships with our agents and
focused strategy position us as one of the country's premier regional
insurance companies and enable us to succeed in the marketplace," stated M.
Lee Patkus, Harleysville Group's president and chief operating officer. "We
see plenty of opportunity in front of us. We're confident that with better and
more consistent execution we can produce the superior results our shareholders
expect."
Webcast
The company will host a live Webcast today, Friday, October 24, 2003, at
9:00 a.m. (ET) to discuss its third quarter results. The Webcast will be
available from the Investors section of the company's Web site
(www.harleysvillegroup.com). The presentation will be archived on the Web site
until October 24, 2004.
GAAP and non-GAAP financial measures
The company uses a non-GAAP financial measure called "operating income"
that management believes is useful to investors because it illustrates the
performance of normal, ongoing operations, which is important in understanding
and evaluating the company's financial condition and results of operations.
While this measure is utilized by investors to evaluate performance, it is not
a substitute for the U.S. GAAP financial measure of net income. Therefore, a
reconciliation of this non-GAAP financial measure to the U.S. GAAP financial
measure of net income is provided following the Consolidated Statements of
Income contained in this release. Management also uses operating income for
goal setting, determining employee and senior management compensation, and
evaluating performance.
Corporate profile
Harleysville Insurance, "Good people to know," is a premier provider of
insurance products and services for small businesses and individuals, and
ranks among the top 60 U.S. property/casualty insurance groups based on total
net written premium. Harleysville Group Inc. (Nasdaq: HGIC) is a publicly
traded holding company for nine regional property/casualty insurance companies
collectively rated A (Excellent) by A.M. Best Company. Harleysville Insurance,
which distributes its products through independent insurance agents, operates
in 32 Eastern and Midwestern states. Further information can be found on the
company's Web site.
* "Statutory combined ratio" is a non-GAAP measure of underwriting
profitability and is based on numbers determined under statutory accounting
practices as filed with state insurance regulators. It is the sum of the ratio
of losses to premiums earned plus the ratio of underwriting expenses to
premiums written. A ratio of less than 100 percent indicates underwriting
profitability.
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 that 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 Inc. 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; the insurance product pricing environment; changes in applicable law;
government regulation and changes therein that may impede the ability to
charge adequate rates; changes in accounting principles; performance of the
financial markets; fluctuations in interest rates; availability and price of
reinsurance; and the status of the labor markets in which the company
operates.
Harleysville Group Inc. and Subsidiaries
Nine months
Quarter ended ended
FINANCIAL HIGHLIGHTS September 30 September 30
(in thousands, except per share
data) 2003 2002 2003 2002
OPERATING RESULTS
Diluted earnings (loss) per common
share:
Operating income (loss)* ($1.15) $0.50 ($0.91) $1.39
Realized gains (losses),
net of tax (0.01) 0.00 (0.02) (0.44)
Net income (loss) ($1.16) $0.50 ($0.93) $0.95
Cash dividends per common share $0.17 $0.165 $0.50 $0.465
FINANCIAL CONDITION September 30, 2003 December 31, 2002
Assets $2,721,515 $2,311,524
Shareholders' equity $598,490 $632,112
Per common share $19.96 $21.13
Nine months
Quarter ended ended
CONSOLIDATED STATEMENTS OF September 30 September 30
INCOME (LOSS)
(in thousands, except per
share data) 2003 2002 2003 2002
REVENUES:
Premiums earned $209,177 $196,524 $611,761 $566,737
Investment income, net of
investment expense 21,638 21,739 64,734 64,747
Realized investment gains
(losses) (531) 57 (897) (20,448)
Other income 3,838 3,967 12,431 11,610
Total revenues 234,122 222,287 688,029 622,646
LOSSES AND EXPENSES:
Losses and loss settlement
expenses 217,456 134,708 528,641 389,789
Amortization of deferred
policy acquisition costs 51,838 47,375 150,053 137,570
Other underwriting
expenses 18,214 17,878 54,892 54,295
Interest expense 2,609 1,423 5,396 4,278
Other expenses 1,596 1,178 3,983 3,270
Total expenses 291,713 202,562 742,965 589,202
Income (loss) before
income taxes (57,591) 19,725 (54,936) 33,444
Income taxes
(benefit) (22,937) 4,509 (27,110) 4,592
Net income (loss) ($34,654) $15,216 ($27,826) $28,852
Weighted average number of
shares outstanding:
Basic 29,986,285 29,790,105 30,016,861 29,647,135
Diluted 29,986,285 30,384,932 30,016,861 30,257,720
Per common share:
Basic earnings
(loss) ($1.16) $0.51 ($0.93) $0.97
Diluted earnings
(loss) ($1.16) $0.50 ($0.93) $0.95
RECONCILIATION TO
OPERATING INCOME (LOSS):
Net income (loss) ($34,654) $15,216 ($27,826) $28,852
Less realized investment
gains (losses), net of
taxes (345) 21 (583) (13,307)
Operating income (loss) ($34,309) $15,195 ($27,243) $42,159
These financial figures are unaudited.
* Operating income is a non-GAAP financial measure defined by the
company as net income excluding after-tax realized gains and losses on
investments.
Harleysville Group Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) September 30, 2003* December 31, 2002
ASSETS
Investments:
Fixed maturities:
Held to maturity, at
amortized cost (fair
value $411,851 $380,586 $385,162
and $416,942)
Available for sale, at
fair value (amortized
cost $1,188,730 1,261,745 1,124,869
and $1,051,880)
Equity securities, at fair
value (cost $96,348 and
$96,849) 122,472 107,177
Short-term investments, at
cost, which approximates
fair value 154,097 89,692
Total investments 1,918,900 1,706,900
Cash 4,528 2,944
Premiums in course of collection 140,335 138,905
Reinsurance receivable 152,277 75,488
Accrued investment income 21,419 21,552
Deferred policy acquisition costs 102,934 94,896
Prepaid reinsurance premiums 21,010 19,421
Property and equipment, net 24,642 27,556
Deferred income taxes 39,072 25,784
Securities lending collateral 230,348 139,215
Due from affiliate 7,909 10,709
Other assets 58,141 48,154
Total assets $2,721,515 $2,311,524
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss
settlement expenses $1,154,348 $928,335
Unearned premiums 442,049 406,277
Accounts payable and accrued
expenses 101,135 109,965
Securities lending
obligation 230,348 139,215
Debt 195,145 95,620
Total liabilities 2,123,025 1,679,412
Shareholders' equity:
Preferred stock, $1 par
value; authorized 1,000,000
shares; none issued
Common stock, $1 par value,
authorized 80,000,000
shares; issued 31,318,312 and
30,917,575 shares;
outstanding 29,985,039
and 29,917,575 shares 31,318 30,918
Additional paid-in capital 157,487 149,091
Accumulated other comprehensive
income 59,370 49,086
Retained earnings 375,733 418,582
Deferred compensation (2,356)
Treasury stock, at cost, 1,333,273
and 1,000,000 shares (23,062) (15,565)
Total shareholders'
equity 598,490 632,112
Total liabilities and shareholders'
equity $2,721,515 $2,311,524
* These financial figures are unaudited.
Harleysville Group Inc. and Subsidiaries
SUPPLEMENTARY FINANCIAL ANALYSTS' DATA
Quarter ended Nine months ended
September 30 September 30
(dollars in thousands) 2003 2002 2003 2002
Net premiums written* $208,096 $204,646 $645,943 $606,728
Statutory surplus * $501,331 $519,039
Pretax investment income $21,638 $21,739 $64,734 $64,747
Related federal income taxes 4,939 5,239 14,912 15,606
After-tax investment income $16,699 $16,500 $49,822 $49,141
SEGMENT INFORMATION
Quarter ended Nine months ended
September 30 September 30
(dollars in thousands) 2003 2002 2003 2002
Revenues:
Premiums earned:
Commercial lines $161,412 $143,725 $464,279 $406,414
Personal lines 47,765 52,799 147,482 160,323
Total premiums earned 209,177 196,524 611,761 566,737
Net investment income 21,638 21,739 64,734 64,747
Realized investment gains
(losses) (531) 57 (897) (20,448)
Other 3,838 3,967 12,431 11,610
Total revenues $234,122 $222,287 $688,029 $622,646
Income (loss) before income
taxes:
Underwriting loss:
Commercial lines ($63,953) ($2,459) ($100,726) ($15,612)
Personal lines (13,439) (3,628) (29,181) (8,001)
SAP underwriting loss (77,392) (6,087) (129,907) (23,613)
GAAP adjustments (939) 2,650 8,082 8,696
GAAP underwriting loss (78,331) (3,437) (121,825) (14,917)
Net investment income 21,638 21,739 64,734 64,747
Realized investment gains
(losses) (531) 57 (897) (20,448)
Other (367) 1,366 3,052 4,062
Income (loss) before
income taxes ($57,591) $19,725 ($54,936) $33,444
Income taxes on net investment
income $4,939 $5,239 $14,912 $15,606
Income tax on remaining loss (27,876) (730) (42,022) (11,014)
Total income taxes
(benefit) ($22,937) $4,509 ($27,110) $4,592
Effective tax rate on:
Net investment income 22.8% 24.1% 23.0% 24.1%
Net income 39.8% 22.9% 49.3% 13.7%
These financial figures are unaudited.
* Statutory data is prepared in accordance with statutory accounting rules
as defined by the National Association of Insurance Commissioners'
Accounting Practices and Procedures Manual and therefore is not
reconciled to GAAP.
Harleysville Group Inc. and Subsidiaries
STATUTORY DATA BY LINE OF BUSINESS*
Quarter ended Nine months ended
September 30 September 30
(dollars in thousands) 2003 2002 2003 2002
Net premiums written:
Commercial:
Automobile $56,614 $52,683 $170,898 $151,792
Workers' compensation 25,068 28,290 85,379 90,819
Commercial multi-peril 60,286 55,485 194,042 169,293
Other commercial 17,113 14,553 52,192 43,354
Total commercial $159,081 $151,011 $502,511 $455,258
Personal:
Automobile $28,133 $32,494 $86,728 $93,806
Homeowners 18,578 19,082 50,045 51,197
Other personal 2,304 2,059 6,659 6,467
Total personal $49,015 $53,635 $143,432 $151,470
Total personal and commercial $208,096 $204,646 $645,943 $606,728
Combined ratios:
Commercial:
Automobile 131.2% 93.2% 107.8% 92.8%
Workers' compensation 203.1% 130.9% 172.4% 126.1%
Commercial multi-peril 134.6% 91.6% 113.3% 94.4%
Other commercial 84.7% 89.7% 82.4% 85.8%
Total commercial 140.1% 100.0% 119.0% 99.9%
Personal:
Automobile 129.2% 111.4% 120.7% 113.8%
Homeowners 129.8% 100.0% 122.2% 97.2%
Other personal 85.5% 79.2% 107.2% 74.0%
Total personal 127.3% 106.4% 120.7% 106.7%
Total personal and commercial 137.2% 101.7% 119.4% 101.9%
Losses paid $123,677 $111,955 $378,048 $350,564
Net catastrophe losses incurred $10,469 $494 $17,704 $3,867
These financial figures are unaudited.
* Statutory data is prepared in accordance with statutory accounting
rules as defined by the National Association of Insurance
Commissioners' Accounting Practices and Procedures Manual and therefore
is not reconciled to GAAP.