Exhibit 99.1
Harleysville Group Reports Third Quarter 2006 Results
Third quarter highlights:
-- Operating earnings rise 28 percent to $0.69 per share
-- Statutory combined ratio improves by 4 points to 98.5 percent
-- Strong cash flow drives 14 percent net investment income
growth
-- Annual dividend increases by 9 percent
HARLEYSVILLE, Pa.--(BUSINESS WIRE)--Oct. 26, 2006--Harleysville
Group Inc. (NASDAQ: HGIC) today reported diluted operating income of
$0.69 per share for the third quarter of 2006, compared to $0.54 per
share in the third quarter of 2005. For the nine-month periods, the
company reported diluted operating income of $1.94 per share in 2006
and $1.41 per share in 2005. Operating income is a non-GAAP financial
measure defined by the company as net income excluding after-tax
realized gains and losses on investments, and the cumulative effect of
an accounting change, net of income tax.
"We're pleased that our third quarter results continue to reflect
the ongoing, steady improvement in our operating performance,"
commented Michael L. Browne, Harleysville Group's president and chief
executive officer. "Our statutory combined ratio for the quarter was
98.5 percent--which is 4 points better than a year ago--and we
produced an operating return on equity of 12.8 percent. In addition,
our operating earnings for the third quarter were $0.69 per share,
which is much improved from the $0.54 a share we reported in the third
quarter of 2005, and we increased our annual dividend by 9 percent. We
continue to maintain our solid capital base and a strong balance
sheet, a modest debt-to-capital ratio of 15 percent(1),a high-quality
investment portfolio, and a premium-to-surplus ratio of 1.3 to 1--all
of which provide the sound financial position necessary for us to
write our agents' best business."
The company reported diluted net income of $0.69 per share in the
third quarter of 2006, compared to $0.54 per share in the third
quarter of 2005. There were essentially no realized investment gains
in the third quarter of either year. For the nine-month periods,
diluted net income was $2.81 per share in 2006 and $1.41 per share in
2005. For the nine months, the company reported $0.84 per share of
realized investment gains in 2006, compared to none in 2005. The
majority of the realized gains in the nine months of 2006 are the
result of actions taken by the company in the second quarter of this
year to reduce its holding of equity investments by approximately $120
million as part of its efforts to manage enterprise-wide risk. The
first nine months of 2006 also includes an after-tax benefit of $0.03
per share for the cumulative effect of a change in accounting
principle resulting from the adoption of Statement of Financial
Accounting Standards No. 123R, "Share-Based Payment." This statement
requires that the cost resulting from all share-based payment
transactions be recognized in the financial statements.
Harleysville Group's overall statutory combined ratio(2) was 98.5
percent in the third quarter of 2006, compared to 102.5 percent in the
third quarter of 2005. For the nine months, the statutory combined
ratio was 98.8 percent in 2006, versus 102.8 percent in 2005.
Third quarter net written premiums were $207.3 million in 2006,
compared to $206.6 million in the same period in 2005. Net written
premiums through nine months were $635.2 million in 2006 and $640.6
million in 2005.
Third quarter pretax investment income increased 14 percent to
$26.4 million, while after-tax investment income grew 9 percent in the
third quarter to $19.2 million. For the nine months, pretax investment
income was up 12 percent to $75.3 million, while after-tax investment
income rose 8 percent to $55.6 million. Operating cash flow through
nine months was $114.0 million in 2006, compared to $115.9 million in
2005.
Commercial lines -- Net written premiums in commercial lines were
$168.5 million in the third quarter of 2006, up 1 percent from the
same period in 2005. For the nine months, net written premiums were
essentially unchanged at $526.4 million. The commercial lines
statutory combined ratio was 99.5 percent in the third quarter of
2006, versus 104.7 percent in the third quarter of 2005. For the nine
months, the statutory combined ratio was 100.4 percent in 2006,
compared to 103.9 percent in 2005.
Personal lines -- Harleysville Group's personal lines statutory
combined ratio was 93.6 percent in the third quarter of 2006, versus
92.8 percent during the third quarter of 2005. For the nine months,
the statutory combined ratio was 91.2 percent in 2006, compared to
97.9 percent in 2005. Net written premiums decreased 1 percent to
$38.8 million in the third quarter of 2006, and were down 3 percent to
$108.7 million through nine months.
Outlook -- "Through the balance of 2006, and longer term, we will
remain focused on the basics of our business as we seek to
consistently produce the quality results we are reporting
today--improving earnings, profitable underwriting, operating return
on equity over 12 percent and smart growth for the long term--while
always maintaining a healthy balance sheet," Browne said. "At the same
time, we will not compromise underwriting quality to chase a near-term
growth goal. That's especially important in light of current market
conditions. Instead, we will remain focused on maintaining our
discipline as we seek a sustained overall underwriting profit and
long-term improvement in our performance. And, we will continue to
work closely with our agency force and rely heavily on them for their
assistance in order to position us for further success in 2007 and
beyond."
Webcast -- The company will host a live Webcast today, October 26,
2006, at 8 a.m. (ET) to discuss its third quarter results. The Webcast
and a replay will be available from the Investors section of the
company's Web site (www.harleysvillegroup.com).
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, among other
things, goal setting, determining employee and senior management
compensation, and evaluating performance.
Corporate profile -- Harleysville Insurance is a leading regional
provider of insurance products and services for small and mid-sized
businesses, as well as for individuals, and ranks among the top 60
U.S. property/casualty insurance groups based on net written premiums.
Harleysville Mutual Insurance Company owns 54 percent of Harleysville
Group Inc. (NASDAQ: HGIC), a publicly traded holding company for nine
regional property/casualty insurance companies collectively rated A-
(Excellent) by A.M. Best Company. Harleysville Group is a member of
the NASDAQ Global Select Market, which represents the top third of all
NASDAQ-listed companies and has the highest initial listing standards
of any exchange in the world based on financial and liquidity
requirements. Harleysville Group has paid a dividend every quarter
since the company went public in 1986, and was one of 3 percent of
public companies recently recognized with a 2006 Mergent Dividend
Achiever Award for its long-term history of dividend increases.
Harleysville Insurance--which distributes its products exclusively
through independent insurance agencies and reflects that commitment to
its agency force by being a Trusted Choice(R) company
partner--currently operates in 32 eastern and midwestern states.
Further information can be found on the company's Web site at
www.harleysvillegroup.com.
(1) Excludes the effects of SFAS No. 115.
(2) "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 operating return on equity, 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
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FINANCIAL Quarter ended Nine months ended
HIGHLIGHTS September 30 September 30
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(in thousands,
except per share
data) 2006 2005 2006 2005
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OPERATING RESULTS
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Diluted earnings
per common share:
Operating income* $0.69 $0.54 $1.94 $1.41
Realized gains,
net of income
taxes 0.84
Cumulative effect
of accounting
change, net of
income taxes 0.03
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Net income $0.69 $0.54 $2.81 $1.41
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Cash dividends per
common share $0.19 $0.175 $0.54 $0.515
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FINANCIAL CONDITION September 30, 2006 December 31, 2005
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Assets $2,945,630 $2,905,266
Shareholders'
equity $683,161 $614,383
Per common share $21.73 $20.07
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CONSOLIDATED
STATEMENTS OF Quarter ended Nine months ended
INCOME September 30 September 30
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(in thousands,
except per share
data) 2006 2005 2006 2005
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REVENUES:
Premiums earned $210,409 $212,327 $628,074 $628,872
Investment income,
net of investment
expense 26,388 23,064 75,330 67,403
Realized investment
gains (losses) 138 (1) 40,420 67
Other income 4,188 3,811 13,374 12,252
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Total revenues 241,123 239,201 757,198 708,594
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LOSSES AND
EXPENSES:
Losses and loss
settlement
expenses 133,324 139,078 404,362 430,943
Amortization of
deferred policy
acquisition costs 53,735 53,163 159,806 156,124
Other underwriting
expenses 20,431 22,851 59,986 57,984
Interest expense 1,749 1,660 5,190 4,945
Other expenses 1,407 1,036 3,762 4,306
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Total expenses 210,646 217,788 633,106 654,302
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Income before
income taxes and
cumulative effect
of accounting
change 30,477 21,413 124,092 54,292
Income taxes 8,685 4,972 36,862 11,342
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Income before
cumulative effect
of accounting
change 21,792 16,441 87,230 42,950
Cumulative effect
of accounting
change, net of
income taxes 942
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Net income $21,792 $16,441 $88,172 $42,950
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Weighted average
number of shares
outstanding:
Basic 31,116,039 30,428,342 30,864,293 30,329,666
Diluted 31,714,104 30,588,573 31,323,368 30,486,164
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Per common share:
Basic earnings
before
cumulative
effect of
accounting
change $0.70 $0.54 $2.83 $1.42
Basic cumulative
effect of
accounting
change $0.03
Basic earnings $0.70 $0.54 $2.86 $1.42
Diluted earnings
before
cumulative
effect of
accounting
change $0.69 $0.54 $2.78 $1.41
Diluted
cumulative
effect of
accounting
change $0.03
Diluted earnings $0.69 $0.54 $2.81 $1.41
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RECONCILIATION TO
OPERATING INCOME :
Net income $21,792 $16,441 $88,172 $42,950
Less cumulative
effect of
accounting change,
net of income
taxes 942
Less realized
investment gains
(losses), net of
income taxes 90 (1) 26,274 43
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Operating income $21,702 $16,442 $60,956 $42,907
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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 and the cumulative effect of accounting change, net of
income taxes.
Harleysville Group Inc. and Subsidiaries
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CONSOLIDATED BALANCE SHEETS
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(in thousands, except share data) September 30, December 31,
2006* 2005
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ASSETS
Investments:
Fixed maturities:
Held to maturity, at amortized cost
(fair value $392,782 and $437,887) $392,091 $433,649
Available for sale, at fair value
(amortized cost $1,611,510 and
$1,374,559) 1,620,439 1,386,440
Equity securities, at fair value (cost
$62,293 and $139,371) 66,780 179,980
Short-term investments, at cost, which
approximates fair value 108,741 64,319
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Total investments 2,188,051 2,064,388
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Cash 142 466
Premiums in course of collection 144,095 141,882
Reinsurance receivable 167,194 249,020
Accrued investment income 23,763 24,016
Deferred policy acquisition costs 104,505 104,173
Prepaid reinsurance premiums 37,345 34,256
Property and equipment, net 17,040 18,038
Deferred income taxes 67,526 63,357
Securities lending collateral 132,209 150,938
Due from affiliate 13,562 1,022
Other assets 50,198 53,710
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Total assets $2,945,630 $2,905,266
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LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss settlement
expenses $1,473,017 $1,480,802
Unearned premiums 450,920 440,755
Accounts payable and accrued expenses 87,823 99,888
Securities lending obligation 132,209 150,938
Debt 118,500 118,500
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Total liabilities 2,262,469 2,290,883
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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 32,830,625 and
32,008,142 shares; outstanding
31,432,716 and 30,610,233 shares 32,831 32,008
Additional paid-in capital 190,837 169,881
Accumulated other comprehensive income
(loss) (5,110) 20,288
Retained earnings 489,090 417,705
Deferred compensation (1,012)
Treasury stock, at cost, 1,397,909 shares (24,487) (24,487)
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Total shareholders' equity 683,161 614,383
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Total liabilities and shareholders' equity $2,945,630 $2,905,266
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* These financial figures are unaudited.
Harleysville Group Inc. and Subsidiaries
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SUPPLEMENTARY FINANCIAL ANALYSTS' DATA
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Quarter ended Nine months ended
September 30 September 30
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(dollars in thousands) 2006 2005 2006 2005
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Net premiums written* $207,324 $206,594 $635,150 $640,610
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Statutory surplus* $631,541 $549,049
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Pretax investment income $26,388 $23,064 $75,330 $67,403
Related federal income
taxes 7,219 5,553 19,681 15,940
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After-tax investment
income $19,169 $17,511 $55,649 $51,463
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SEGMENT INFORMATION
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Quarter ended Nine months ended
September 30 September 30
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(dollars in thousands) 2006 2005 2006 2005
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Revenues:
Premiums earned:
Commercial lines $173,941 $173,948 $518,753 $512,119
Personal lines 36,468 38,379 109,321 116,753
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Total premiums earned 210,409 212,327 628,074 628,872
Net investment income 26,388 23,064 75,330 67,403
Realized investment
gains (losses) 138 (1) 40,420 67
Other 4,188 3,811 13,374 12,252
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Total revenues $241,123 $239,201 $757,198 $708,594
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Income before income taxes
and cumulative effect of
accounting change:
Underwriting gain
(loss):
Commercial lines $2,793 ($5,742) ($4,743) ($25,740)
Personal lines 1,540 2,497 9,799 4,028
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SAP underwriting gain
(loss) 4,333 (3,245) 5,056 (21,712)
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GAAP adjustments (1,414) 480 (1,136) 5,533
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GAAP underwriting gain
(loss) 2,919 (2,765) 3,920 (16,179)
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Net investment income 26,388 23,064 75,330 67,403
Realized investment
gains (losses) 138 (1) 40,420 67
Other 1,032 1,115 4,422 3,001
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Income before income
taxes and cumulative
effect of accounting
change $30,477 $21,413 $124,092 $54,292
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Income taxes on net
investment income $7,219 $5,553 $19,681 $15,940
Income taxes (benefit) on
remaining gain (loss)
before cumulative effect
of accounting change 1,466 (581) 17,181 (4,598)
Total income taxes on
income before
cumulative effect of
accounting change $8,685 $4,972 $36,862 $11,342
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Effective tax rate on:
Net investment income 27.4% 24.1% 26.1% 23.6%
Income before cumulative
effect of accounting
change 28.5% 23.2% 29.7% 20.9%
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These financial figures are unaudited.
*Statutory data is a non-GAAP measure. Because it is prepared in
accordance with statutory accounting rules as defined by the National
Association of Insurance Commissioners' Accounting Practices and
Procedures Manual, a reconciliation to GAAP is not required.
Harleysville Group Inc. and Subsidiaries
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STATUTORY DATA BY LINE OF BUSINESS*
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Quarter ended Nine months ended
September 30 September 30
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(dollars in thousands) 2006 2005 2006 2005
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Net premiums written:
Commercial:
Automobile $48,736 $54,109 $157,828 $171,873
Workers' compensation 24,910 24,622 74,020 74,534
Commercial multi-peril 77,357 73,285 240,574 230,816
Other commercial 17,480 15,375 53,994 51,465
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Total commercial $168,483 $167,391 $526,416 $528,688
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Personal:
Automobile $18,698 $20,544 $54,853 $60,670
Homeowners 17,941 16,473 47,370 44,603
Other personal 2,202 2,186 6,511 6,649
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Total personal $38,841 $39,203 $108,734 $111,922
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Total personal and
commercial $207,324 $206,594 $635,150 $640,610
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Combined ratios:
Commercial:
Automobile 100.2% 104.5% 99.5% 100.8%
Workers' compensation 116.1% 118.6% 117.3% 122.6%
Commercial multi-peril 98.3% 101.0% 99.8% 102.0%
Other commercial 80.8% 102.5% 83.3% 95.9%
Total commercial 99.5% 104.7% 100.4% 103.9%
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Personal:
Automobile 99.5% 98.1% 99.9% 102.8%
Homeowners 90.3% 88.8% 83.5% 94.5%
Other personal 65.4% 67.5% 68.0% 73.1%
Total personal 93.6% 92.8% 91.2% 97.9%
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Total personal and
commercial 98.5% 102.5% 98.8% 102.8%
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Losses paid $113,732 $108,074 $331,880 $338,407
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Net catastrophe losses
incurred $4,019 $2,414 $11,074 $4,038
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These financial figures are unaudited.
*Statutory data is a non-GAAP measure. Because it is prepared in
accordance with statutory accounting rules as defined by the National
Association of Insurance Commissioners' Accounting Practices and
Procedures Manual, a reconciliation to GAAP is not required.
CONTACT: Harleysville Group Inc.
Investors:
Mark Cummins, 215-256-5025
mcummins@harleysvillegroup.com
or
Media:
Randy Buckwalter, 215-256-5288
rbuckwalter@harleysvillegroup.com