ITEM 1. BUSINESS. - ------- ---------
(a) GENERAL DEVELOPMENT OF BUSINESS.
Harleysville Group Inc. (the "Company") is a regional insurance holding company headquartered in Pennsylvania which engages, through its subsidiaries, in the property and casualty insurance business. As used herein, "Harleysville Group" refers to Harleysville Group Inc. and its subsidiaries. Harleysville Group is approximately 55% owned by Harleysville Mutual Insurance Company (the "Mutual Company").
Harleysville Group and the Mutual Company operate together as a network of regional insurance companies that underwrite a broad line of personal and commercial coverages. These insurance coverages are marketed primarily in the eastern half of the United States through approximately 15,700 independent insurance agents associated with approximately 2,500 insurance agencies. Regional offices are maintained in Georgia, Illinois, Indiana, Maryland, Massachusetts, Michigan, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia and Wisconsin. The Company's property and casualty insurance subsidiaries are: Great Oaks Insurance Company ("Great Oaks"), Harleysville-Atlantic Insurance Company ("Atlantic"), Harleysville Insurance Company of New Jersey ("HNJ"), Huron Insurance Company ("Huron"), Lake States Insurance Company ("Lake States"), Mid-America Insurance Company ("Mid-America"), New York Casualty Insurance Company ("New York Casualty") and Worcester Insurance Company ("Worcester").
The Company is pursuing a strategy of building a national network of regional insurance companies. Management believes that the Company's regional organization permits each regional operation to benefit from economies of scale provided by centralized support while encouraging local marketing autonomy and managerial entrepreneurship. Services which directly involve the insured or the agent (i.e., underwriting, claims and marketing) generally are performed locally in accordance with Company-wide standards to promote high quality service, while actuarial, investment, legal, data processing and similar services are performed centrally. The Company's network of regional insurance companies has expanded significantly in the last fourteen years. In 1983, the Company acquired Worcester, a property and casualty insurer which has conducted business in New England since 1823. In 1984, HNJ was formed by the Company and began underwriting property and casualty insurance in New Jersey. In 1987, the Company acquired Atlantic, a property and casualty insurer which has conducted business in the southeastern United States since 1905. In 1991, the Company acquired Mid-America, (formerly named Connecticut Union Insurance Company) which conducted business in Connecticut, and New York Casualty, which conducts business in upstate New York. In 1993, the Company acquired Lake States, which primarily conducts business in Michigan. In 1994, the Company formed Great Oaks which began underwriting property and casualty insurance in Ohio.
The Company's property and casualty subsidiaries participate in an intercompany pooling arrangement whereby these subsidiaries cede to the Mutual Company all of their net premiums written and assume from the Mutual Company a portion of the pooled business, which included all of the Mutual Company's property and casualty insurance business except for new and renewal Pennsylvania personal automobile insurance insured after January 1, 1991 by a subsidiary of the Mutual Company, Pennland Insurance Company ("Pennland") and new and renewal New Jersey personal automobile insurance insured after January 1, 1992 by another subsidiary of the Mutual Company, Harleysville-Garden State Insurance Company ("Garden State"). Beginning January 1, 1996, Harleysville Group's participation in the pooling arrangement increased from 60% to 65% and Pennland became a participant in the pooling arrangement. Beginning January 1, 1997, Harleysville Group's participation in the pooling arrangement increased from 65% to 70% and Lake States became a participant in the pooling arrangement. See "Business - Narrative Description of Business - Pooling Arrangement."
The Company is a Delaware corporation formed in 1979 as a wholly-owned subsidiary of the Mutual Company. In May 1986, the Company completed an initial public offering of its common stock, reducing the percentage of outstanding shares owned by the Mutual Company to approximately 70%. In April 1992, the Mutual Company completed a secondary public offering further reducing the percentage of outstanding shares owned by the Mutual Company to approximately 55%.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS.
The Company is of the opinion that all of its operations are within one industry segment and that no information as to industry segments is required pursuant to Statement of Financial Accounting Standards No. 14 or Regulation S-K.
(c) NARRATIVE DESCRIPTION OF BUSINESS.
PROPERTY AND CASUALTY UNDERWRITING
Harleysville Group and the Mutual Company together underwrite a broad line of personal and commercial property and casualty coverages, including automobile, homeowners, commercial multi-peril and workers compensation. The Mutual Company and the Company's insurance subsidiaries participate in an intercompany pooling arrangement under which such subsidiaries and the Mutual Company combine their property and casualty business. Garden State has not participated in the pooling arrangement. On January 1, 1996, Pennland began participation in the pooling arrangement and Harleysville Group's participation increased to 65%. Beginning January 1, 1997, Harleysville Group's participation in the pooling arrangement increased from 65% to 70% and Lake States became a participant in the pooling arrangement.
Harleysville Group and the Mutual Company have a pooled rating of "A" (excellent) by A.M. Best Company, Inc. ("Best's") based upon
1996 statutory results and operating performance. Best's ratings are based upon factors relevant to policyholders and are not directed toward the protection of investors. Management believes that the Best's rating is an important factor in marketing Harleysville Group's products to its agents and customers.
The following table sets forth the premiums earned, by line of insurance, for Harleysville Group for the periods indicated:
HARLEYSVILLE GROUP BUSINESS ONLY
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 -------- --------- --------- (in thousands) PREMIUMS EARNED - --------------- Commercial: Automobile $103,445 $ 85,210 $ 81,052 Workers compensation 128,563 103,794 91,684 Commercial multi-peril 123,393 100,375 90,303 Other 28,394 24,767 23,021 -------- -------- -------- Total commercial 383,795 314,146 286,060 -------- -------- -------- Personal: Automobile 151,766 92,315 92,631 Homeowners 70,330 62,599 61,197 Other 9,306 7,982 7,843 -------- -------- -------- Total personal 231,402 162,896 161,671 -------- -------- --------
Total Harleysville Group Business $615,197 $477,042 $447,731 ======== ======== ========
The following table sets forth ratios for the Company's property and casualty subsidiaries, prepared in accordance with generally accepted accounting principles ("GAAP") and with statutory accounting practices ("SAP") prescribed or permitted by state insurance authorities. The statutory combined ratio is a standard measure of underwriting profitability. This ratio is the sum of (i) the ratio of incurred losses and loss settlement expenses to net earned premium ("loss ratio"); (ii) the ratio of expenses incurred for commissions, premium taxes, administrative and other underwriting expenses to net written premium ("expense ratio"); and (iii) the ratio of dividends to policyholders to net earned premium ("dividend ratio"). The GAAP combined ratio is calculated in the same manner except that it is based on GAAP amounts and the denominator for each component is net earned premium. When the combined ratio is under 100%, underwriting results are generally considered profitable. Conversely, when the combined ratio is over 100%, underwriting results are generally considered unprofitable. The combined ratio does not reflect investment income, federal income taxes or other non-operating income or expense. Harleysville Group's operating income is a function of both underwriting results and investment income.
HARLEYSVILLE GROUP BUSINESS ONLY
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 ------ ------ ------
GAAP combined ratio 108.4% 104.0% 111.5% ===== ===== ===== Statutory operating ratios: Loss ratio 76.1% 70.3% 77.9% Expense and dividend ratios 31.2% 33.1% 33.5% ----- ----- -----
Statutory combined ratio 107.3% 103.4% 111.4% ===== ===== =====
Industry statutory combined ratio 107.0% 106.5% 108.5% ===== ===== =====
- --------------- [FN] Source: Best's Review, Property/Casualty Edition, January, 1997.
POOLING ARRANGEMENT
The Company's property and casualty subsidiaries participate in an intercompany pooling arrangement with the Mutual Company. The underwriting pool is intended to produce a more uniform and stable underwriting result from year to year for all companies in the pool than they would experience individually and to reduce the risk of loss of any of the pool participants by spreading the risk among all the participants. Each company participating in the pool has at its disposal the capacity of the entire pool, rather than being limited to policy exposures of a size commensurate with its own capital and surplus. The additional capacity exists because such policy exposures are spread among all the pool participants which each have their own capital and surplus. Regulation is applied to the individual companies rather than to the pool.
Pursuant to the terms of the pooling agreement with the Mutual Company, each of the Company's subsidiary participants cedes premiums, losses and expenses on all of their business to the Mutual Company which, in turn, retrocedes to such subsidiaries a specified portion of premiums, losses and expenses of the Mutual Company and such subsidiaries. Under the terms of the intercompany pooling agreement which became effective January 1, 1986, Huron and HNJ ceded to the Mutual Company all of their insurance business written on or after January 1, 1986. All of the Mutual Company's property and casualty insurance business written or in force on or after January 1, 1986, was also included in the pooled business. The pooling agreement provides, however, that Harleysville Group is not liable for any losses occurring prior to January 1, 1986. The pooling agreement does not legally discharge Harleysville Group from its primary liability for the full amount of the policies ceded. However, it makes the Mutual Company liable to Harleysville Group to the extent of the business ceded.
The following table sets forth a chronology of the changes that have occurred in the pooling agreement since it became effective on January 1, 1986.
CHRONOLOGY OF CHANGES IN POOLING AGREEMENT
HARLEYSVILLE MUTUAL GROUP COMPANY DATE PERCENTAGE PERCENTAGE EVENT - ------ ----------- ---------- ---------
January 1, 1986 30% 70% Current pooling agreement began with Huron and HNJ as participants with the Mutual Company.
July 1, 1987 35% 65% Atlantic acquired and included in the pool.
January 1, 1989 50% 50% Worcester included in the pool.
January 1, 1991 60% 40% New York Casualty and Mid-America acquired and included in the pool and the Mutual Company formed Pennland (not a pool participant) to write Pennsylvania personal automobile personal automobile business.
January 1, 1996 65% 35% Pennland included in the pool.
January 1, 1997 70% 30% Lake States included in the pool.
Effective as of January 1, 1992, Garden State began insuring new and renewal New Jersey personal automobile insurance policies that had been included in the pooling arrangement.
When pool participation percentages increased as described above, cash and investments equal to the net increase in liabilities assumed less a ceding commission related to the net increase in the liability for unearned premiums, was transferred from the Mutual Company to Harleysville Group. See Note 2(a) of the Notes to Consolidated Financial Statements.
All premiums, losses, loss settlement expenses and other underwriting expenses are prorated among the parties to the pooling arrangement on the basis of their participation in the pool. The method of establishing reserves is set forth under "Business - Reserves." The pooling agreement may be amended or terminated by agreement of the parties. Termination may occur only at the end of a calendar year. The Company and the Mutual Company maintain a coordinating committee which reviews and evaluates the pooling arrangements between the Company and the Mutual Company. See "Business-Relationship with the Mutual Company." In evaluating pool participation changes, the coordinating committee considers current and proposed acquisitions, the relative capital positions and revenue contributions of the pool participants, and growth prospects and ability to access capital markets to support that growth. Harleysville Group does not intend to terminate its participation in the pooling agreement.
The following table sets forth the net written premiums and combined ratios by line of insurance for the total pooled business after elimination of management fees, prepared in accordance with statutory accounting practices prescribed or permitted by state insurance authorities, for the periods indicated.
TOTAL POOLED BUSINESS
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 -------- --------- -------- (dollars in thousands)
PREMIUMS WRITTEN - ---------------- Commercial: Automobile $146,987 $136,197 $122,807 Workers compensation 161,539 154,812 125,881 Commercial multi-peril 150,008 144,742 122,964 Other 39,503 39,703 36,007 -------- -------- -------- Total commercial 498,037 475,454 407,659 -------- -------- --------
Personal: Automobile 178,166 113,440 110,900 Homeowners 93,513 93,141 88,864 Other 14,405 13,751 13,088 -------- -------- -------- Total personal 286,084 220,332 212,852 -------- -------- --------
Total pooled business $784,121 $695,786 $620,511 ======== ======== ========
COMBINED RATIOS - ----------------- Commercial: Automobile 106.8% 107.5% 105.2% Workers compensation 92.2% 87.5% 110.6% Commercial multi-peril 118.1% 111.3% 110.3% Other 108.2% 110.6% 109.7% Total commercial 105.5% 102.4% 109.0%
Personal: Automobile 107.5% 112.2% 107.6% Homeowners 132.2% 104.8% 140.2% Other 115.0% 88.6% 108.1% Total personal 116.0% 107.7% 121.0%
Total pooled business 109.4% 104.1% 113.2%
- ---------------- [FN] See the definition of combined ratio in "Business-Property and Casualty Underwriting".
The following table sets forth the net written premiums and statutory combined ratios by line of insurance for Lake States:
LAKE STATES
YEAR ENDED DECEMBER 31, ---------------------------------
1996 1995 1994 -------- -------- -------- (dollars in thousands)
PREMIUMS WRITTEN - ---------------- Commercial: Automobile $ 12,982 $ 8,024 $ 7,622 Workers compensation 24,875 21,381 16,157 Commercial multi-peril 31,510 21,799 18,744 Other 2,820 2,785 1,365 ------- ------- ------- Total commercial 72,187 53,989 43,888 ------- ------- -------
Personal: Automobile 40,288 26,030 24,642 Homeowners 10,621 7,985 8,521 ------- ------- ------- Total personal 50,909 34,015 33,163 ------- ------- -------
Total Lake States $123,096 $88,004 $77,051 ======== ======= =======
COMBINED RATIOS - ------------------ Commercial: Automobile 89.3% 145.4% 107.8% Workers compensation 74.8% 81.0% 100.9% Commercial multi-peri 116.4% 101.9% 95.6% Other 93.4% 43.2% 52.1% Total commercial 95.7% 97.6% 97.0%
Personal: Automobile 108.6% 112.7% 105.5% Homeowners 138.8% 102.4% 136.7% Total personal 114.9% 110.1% 113.2%
Total Lake States 103.6% 102.7% 104.0%
- ------------------- [FN] >F1> See the definition of combined ratio in "Business-Property and Casualty Underwriting".
RESERVES. Loss reserves are estimates at a given point in time of what the insurer expects to pay to claimants for claims occurring on or before such point in time, including claims which have not yet been reported to the insurer. These are estimates, and it can be expected that the ultimate liability will exceed or be less than such estimates. During the loss settlement period, additional facts regarding individual claims may become known, and consequently it often becomes necessary to refine and adjust the estimates of liability.
Harleysville Group maintains reserves for the eventual payment of losses and loss settlement expenses with respect to both reported and unreported claims. Loss settlement expense reserves are intended to cover the ultimate costs of settling all claims, including investigation and litigation costs relating to such claims. The amount of loss reserves for reported claims is based primarily upon a case-by-case evaluation of the type of risk involved and knowledge of the circumstances surrounding each claim and the insurance policy provisions relating to the type of loss. The amounts of loss reserves for unreported claims and loss settlement expense reserves are determined on the basis of historical information by line of insurance as adjusted to current conditions. Inflation is implicitly provided for in the reserving function through analysis of costs, trends and reviews of historical reserving results. Reserves are closely monitored and are recomputed periodically by Harleysville Group and the Mutual Company using new information on reported claims and a variety of statistical techniques. With the exception of reserves relating to some workers compensation long-term disability cases, loss reserves are not discounted.
The following table sets forth a reconciliation of beginning and ending net reserves for unpaid losses and loss settlement expenses for the years indicated for the total pooled business on a statutory basis.
TOTAL POOLED BUSINESS
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 --------- --------- --------- (in thousands) Reserves for losses and loss settlement expenses, beginning of the year $ 900,336 $855,305 $825,028 ---------- -------- --------
Adjustment to beginning of the year reserves for the addition of Pennland 78,205 ---------- -------- --------
Incurred losses and loss settlement expenses: Provision for insured events of the current year 642,448 483,560 497,983 Decrease in provision for insured events of prior years (43,843) (18,050) (5,534) ---------- -------- --------
Total incurred losses and loss settlement expenses 598,605 465,510 492,449 ---------- -------- --------
Payments: Losses and loss settlement expenses attributable to insured events of the current year 270,026 173,544 207,094 Losses and loss settlement expenses attributable to insured events of prior years 273,744 246,935 255,078 ---------- -------- --------
Total payments 543,770 420,479 462,172 ---------- -------- --------
Reserves for losses and loss settlement expenses, end of the year $1,033,376 $900,336 $855,305 ========== ======== ========
The following table sets forth the development of net reserves for unpaid losses and loss settlement expenses from 1986 through 1996 for the pooled business of the Mutual Company and Harleysville Group. "Reserve for losses and loss settlement expenses" sets forth the estimated liability for unpaid losses and loss settlement expenses recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and loss settlement expenses for claims arising in the current and all prior years that are unpaid at the balance sheet date, including losses incurred but not reported.
The "Reserves reestimated" portion of the table shows the reestimated amount of the previously recorded liability based on experience of each succeeding year. The estimate is increased or decreased as payments are made and more information becomes known about the severity of remaining unpaid claims. For example, the 1990 liability has developed a deficiency after six years, in that reestimated losses and loss settlement expenses are expected to exceed the initial estimated liability established in 1990 of $676.5 million by $9.6 million, or 1.4%.
The "Cumulative amount of reserves paid" portion of the table shows the cumulative losses and loss settlement expense payments made in succeeding years for losses incurred prior to the balance sheet date. For example, the 1990 column indicates that as of December 31, 1996, payments of $589.5 million of the currently reestimated ultimate liability for losses and loss settlement expenses had been made.
The "Redundancy (deficiency)" portion of the table shows the cumulative redundancy or deficiency at December 31, 1996 of the reserve estimate shown on the top line of the corresponding column. A redundancy in reserves means that reserves established in prior years exceeded actual losses and loss settlement expenses or were reevaluated at less than the original reserved amount. A deficiency in reserves means that the reserves established in prior years were less than actual losses and loss settlement expenses or were reevaluated at more than the originally reserved amount.
The following table includes all 1996 pool participants as if they had participated in the pooling arrangement in all years indicated except for acquired pool participant companies, which are included from their date of acquisition. Under the terms of the pooling arrangement, Harleysville Group is not responsible for losses on the pooled business occurring prior to January 1, 1986.
Harleysville Group's reserves primarily are derived from those established for the total pooled business. The terms of the pooling agreement provide that Harleysville Group is responsible only for pooled losses incurred on or after the effective date, January 1, 1986. The GAAP loss reserve experience of Harleysville Group, as reflected in its financial statements, is shown in the following table which sets forth a reconciliation of beginning and ending net reserves for unpaid losses and loss settlement expenses for the years indicated for the business of Harleysville Group only.
HARLEYSVILLE GROUP BUSINESS ONLY
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 --------- --------- --------- (in thousands) Reserves for losses and loss settlement expenses, beginning of the year $576,653 $535,452 $499,272 -------- -------- --------
Incurred losses and loss settlement expenses: Provision for insured events of the current year 503,489 346,383 352,085 Decrease in provision for insured events of prior years (34,999) (10,887) (3,215) -------- -------- --------
Total incurred losses and loss settlement expenses 468,490 335,496 348,870 -------- -------- --------
Payments: Losses and loss settlement expenses attributable to insured events of the current year 220,669 129,446 151,133 Losses and loss settlement expenses attributable to insured events of prior years 199,740 164,849 161,557 Adjustment to beginning of the year reserves resulting from the change in the pool participation percentage (93,966) -------- -------- --------
Total payments 326,443 294,295 312,690 -------- -------- --------
Reserves for losses and loss settlement expenses, end of the year $718,700 $576,653 $535,452 ======== ======== ========
Harleysville Group recognized a decrease in the provision for insured events of prior years (favorable development) of $35.0, $10.9 and $3.2 million in 1996, 1995 and 1994, respectively. The favorable development in 1996 primarily related to lower than expected claim severity in the workers compensation and automobile lines of business. The 1995 and 1994 favorable development primarily related to lower than expected claim severity in workers compensation.
The following table sets forth the development of net reserves for unpaid losses and loss settlement expenses for Harleysville Group. The effect of changes to the pooling agreement participation is reflected in this table. For example, the January 1, 1989 increase in Harleysville Group's pooling participation from 35% to 50% is reflected in the first line of the 1989 column. Amounts of assets equal to increases in net liabilities was transferred to Harleysville Group from the Mutual Company in conjunction with each respective pooling change. The amount of the assets transferred has been netted against and has reduced the cumulative amounts paid for years prior to the pooling changes. For example, the 1988 column of the "Cumulative amount of reserves paid" portion of the table reflects the assets transferred in conjunction with the 1989 increase in the pooling percentage from 35% to 50% as a decrease netted in the "one year later" line. The cumulative amounts paid are reflected in this manner to maintain comparability. This is because when Harleysville Group pays claims subsequent to the date of a pool participation increase, the amounts paid are greater, however, the prior year's reserve amounts are reflective of a lower pool participation percentage. By reflecting pooling participation increases in this manner, loss development is not obscured. Loss development reflects Harleysville Group's share of the total pooled business loss development since January 1, 1986 when Harleysville Group began participation, plus loss development of any subsidiary not participating in the pooling agreement.
Loss development information for the total pooled business is presented on pages 11 to 13 to provide greater analysis of underlying claims development.
REINSURANCE. Harleysville Group follows the customary industry practice of reinsuring a portion of its exposures and paying to the reinsurers a portion of the premiums received on all policies. Insurance is ceded principally to reduce the net liability on individual risks and to protect against catastrophic losses. Reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policies, although it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. Therefore, a ceding company is subject to credit risk with respect to its reinsurers.
The reinsurance described below is maintained for the Company's subsidiaries and the Mutual Company and its wholly-owned subsidiaries. Reinsurance premiums and recoveries are allocated to participants in the pooling agreement according to pooling percentages.
Reinsurance for property and auto physical damage losses is currently maintained under a per risk excess of loss treaty affording recovery to $4,250,000, above a retention of $750,000. Harleysville Group's 1997 pooling share of such recovery would be $2,975,000 above a retention of $525,000. In addition, the Company's subsidiaries and the Mutual Company and its wholly-owned subsidiaries are reinsured under a catastrophe reinsurance treaty effective for one year from July 1, 1996 which provides coverage for 85% of up to $127 million in excess of a retention of $20 million for any given catastrophe. Harleysville Group's 1997 pooling share of this coverage would be 85% of up to $89 million in excess of a retention of $14 million for any given catastrophe. Pursuant to the terms of the treaty, the maximum recovery would be $108 million for any catastrophe involving an insured loss equal to or greater than $147 million. Harleysville Group's 1997 pooling share of this maximum recovery would be $76 million for any catastrophe involving an insured loss of $103 million or greater. The treaty includes reinstatement provisions providing for coverage for a second catastrophe and requiring payment of an additional premium in the event of a first catastrophe occurring. Harleysville Group has not purchased funded catastrophe covers.
Casualty reinsurance (including liability and workers compensation) is currently maintained under an excess of loss treaty affording recovery to $19,000,000 above a retention of $1,000,000 each loss occurrence. Harleysville Group's 1997 pooling share of such recovery would be $13,300,000 above a retention of $700,000. In addition, there is reinsurance to protect Harleysville Group from large workers compensation losses. For umbrella liability coverages, reinsurance protection up to $4,000,000 is provided over a retention of $1,000,000. Harleysville Group's 1997 pooling share would provide for recovery of $2,800,000 over a retention of $700,000.
Effective January 1, 1997, Harleysville Group entered into a reinsurance agreement with 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.
The terms and charges for reinsurance coverage are typically negotiated annually. The reinsurance market is subject to conditions which are similar to those in the direct property and casualty insurance market, and there can be no assurance that reinsurance will remain available to the Company to the same extent and at the same cost currently maintained by the Company.
The Company considers numerous factors in choosing reinsurers, the most important of which is the financial stability of the reinsurer. The Company has not experienced any material collectibility problems for its reinsurance recoverables.
COMPETITION. The property and casualty insurance industry is highly competitive on the basis of both price and service. There are numerous companies competing for this business in the geographic areas where the Harleysville Group operates, many of which are substantially larger and have considerably greater financial resources than Harleysville Group. In addition, because the insurance products of Harleysville Group and the Mutual Company are marketed exclusively through independent insurance agencies, most of which represent more than one company, Harleysville Group faces competition within each agency.
INVESTMENTS
An important element of the financial results of Harleysville Group is the return on invested assets. An investment objective of Harleysville Group is to maintain a widely diversified fixed maturities portfolio structured to maximize after-tax investment income while minimizing credit risk through investments in high quality instruments. An objective also is to provide adequate funds to pay claims without forced sales of investments. From 1994 to 1996, Harleysville Group invested $52 million in equity securities with the objective of capital appreciation and expects to gradually increase this investment to $70 million during 1997. At December 31, 1996, the investment portfolio did not contain any securities that were rated at less than investment grade, and it did not contain any real estate or mortgage loans.
Harleysville Group has adopted and follows an investment philosophy which precludes the purchase of non-investment grade securities. However, due to uncertainties in the economic environment, it is possible that the quality of investments held in Harleysville Group's portfolio may change.
The following table shows the composition of Harleysville Group's fixed maturity investment portfolio at amortized cost, excluding short-term investments, by rating as of December 31, 1996:
DECEMBER 31, 1996 ---------------------- Amount Percent ---------- ------- (dollars in thousands) RATING - ---------
U.S. Treasury and U.S. agency bonds $ 232,029 19.8% Aaa 310,114 26.5 Aa 358,503 30.6 A 263,629 22.5 Baa 7,153 0.6 ---------- -----
Total $1,171,428 100.0% ========== =====
- ----------------- [FN] Ratings assigned by Moody's Investors Services, Inc. Includes GNMA pass-through obligations and collateralized mortgage obligations.
Harleysville Group invests in both taxable and tax-exempt securities as part of its strategy to maximize after-tax income. Such strategy considers, among other factors, the impact of the alternative minimum tax. Tax-exempt bonds made up approximately 45%, 37% and 42% of the total investment portfolio at December 31, 1996, 1995 and 1994, respectively.
The following table shows the composition of Harleysville Group's investment portfolio at carrying value, excluding short- term investments, by type of security as of December 31, 1996:
DECEMBER 31, 1996 ----------------------- Amount Percent ---------- ------- (dollars in thousands)
Fixed maturities: U.S. Treasury obligations $ 44,794 3.5% U.S. agency obligations 65,492 5.2 GNMA pass-through obligations 2,224 0.2 Collateralized mortgage obligations 125,660 10.0 Obligations of states and political subdivisions 562,378 44.8 Corporate securities 385,624 30.7 ---------- -----
Total fixed maturities 1,186,172 94.4 ---------- -----
Equity securities 69,932 5.6 ---------- -----
Total $1,256,104 100.0% ========== =====
Investment results of Harleysville Group's fixed maturity investment portfolio for the three years ended December 31, 1996 are shown in the following table:
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 --------- --------- --------- (dollars in thousands)
Invested assets $1,133,640 $960,114 $917,368 Investment income $ 75,204 $ 67,428 $ 63,293 Average yield 6.6% 7.0% 6.9%
- ----------------- [FN] Average of the aggregate invested amounts at amortized cost at the beginning and end of the period, adjusted for the 1996 pooling agreement amendment. Investment income does not include investment expenses, realized investment gains or losses or provision for income taxes.
The following table indicates the composition of Harleysville Group's fixed maturity investment portfolio at carrying value, excluding short-term investments, by time to maturity as of December 31, 1996:
DECEMBER 31, 1996 --------------------- AMOUNT PERCENT -------- ------- (dollars in thousands) DUE IN ----------
1 year or less $ 39,385 3.3% Over 1 year through 5 years 228,437 19.3 Over 5 years through 10 years 368,723 31.1 Over 10 years 421,743 35.5 ---------- ----- 1,058,288 89.2
Mortgage-backed securities 127,884 10.8 ---------- -----
Total $1,186,172 100.0% ========== =====
- ------------------ [FN] Based on stated maturity dates with no prepayment assumptions. Actual maturities may differ because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
The average life of Harleysville Group's investment portfolio as of December 31, 1996 was approximately 7 years.
REGULATION
Insurance companies are subject to supervision and regulation in the states in which they transact business. Such supervision and regulation relate to numerous aspects of an insurance company's business and financial condition. The primary purpose of such supervision and regulation is the protection of policyholders. The extent of such regulation varies, but generally derives from state statutes which delegate regulatory, supervisory and administrative authority to state insurance departments. Accordingly, the authority of the state insurance departments includes the establishment of standards of solvency which must be met and maintained by insurers, the licensing to do business of insurers and agents, the nature of and limitations on investments, premium rates for property and casualty insurance, the provisions which insurers must make for current losses and future liabilities, the deposit of securities for the benefit of policyholders and the approval of policy forms. Such insurance departments also conduct periodic examinations of the affairs of insurance companies and require the filing of annual and other reports relating to the financial condition of insurance companies.
All of the states in which Harleysville Group and the Mutual Company do business have guaranty fund laws under which insurers doing business in such states can be assessed up to 2% of annual written premiums earned by the insurer in that state in order to fund policyholder liabilities of insolvent insurance companies. Under these laws in general, an insurer is subject to assessment, depending upon its market share of a given line of business, to assist in the payment of policyholder and third party claims against insolvent insurers. Since the likelihood and amount of any particular assessment cannot be determined until an insolvency has occurred, potential liabilities for assessments are not reflected in the reserves of insurers. During the five years ended December 31, 1996, the amount of such insolvency assessments paid by Harleysville Group and the Mutual Company was not material.
State laws also require Harleysville Group to participate in involuntary insurance programs for automobile insurance, as well as other property and casualty lines, in states in which Harleysville Group operates. These programs include joint underwriting associations, assigned risk plans, fair access to insurance requirements ("FAIR") plans, reinsurance facilities and wind storm plans. These state laws generally require all companies that write lines covered by these programs to provide coverage (either directly or through reinsurance) for insureds who cannot obtain insurance in the voluntary market. The legislation creating these programs usually allocates a pro rata portion of risks attributable to such insureds to each company on the basis of direct written premiums or the number of automobiles insured. Generally, state law requires participation in such programs as a condition to doing business. The loss ratio on insurance written under involuntary programs generally has been greater than the loss ratio on insurance in the voluntary market.
State insurance holding company acts regulate insurance holding company systems. Each insurance company in the holding company system is required to register with the insurance supervisory agency of its state of domicile and furnish certain information concerning the operations of companies within the holding company system that may materially affect the operations, management or financial condition of the insurer within the system. Such laws further require disclosure of material transactions including the payment of "extraordinary dividends" from the insurance subsidiaries to the Company.
Insurance holding company acts require that all transactions within the holding company system affecting the Mutual Company and the Company's insurance subsidiaries must be fair and equitable. Further, approval of the applicable insurance commissioner is required prior to the consummation of transactions affecting the control of an insurer.
The property and casualty insurance industry has been subject to significant public scrutiny and comment primarily due to concerns regarding solvency issues, rising insurance costs, and the industry's methods of operations. Accordingly, new regulations and legislation are being proposed to bring the insurance industry under federal control; to strengthen state oversight, particularly in the field of solvency and investments; to further restrict an insurer's ability to underwrite and price risks; and to impose new taxes and assessments. It is not possible to predict whether, in what form or in what jurisdictions any of these proposals might be adopted or the effect, if any, on the Company.
The Company's insurance subsidiaries are restricted by the insurance laws of their respective states of domicile as to the amount of dividends they may pay to the Company without the prior approval of the respective state regulatory authorities. Generally, the maximum dividend that may be paid by an insurance subsidiary during any year without prior regulatory approval is limited to a stated percentage of that subsidiary's statutory surplus as of a certain date, or adjusted net income of the subsidiary, for the preceding year. Applying current regulatory restrictions as of December 31, 1996, the Company's insurance subsidiaries would have been able to pay, without prior regulatory approval, approximately $32.1 million in dividends to the Company. The Company's insurance subsidiaries have not paid any dividends to Harleysville Group Inc. in 1996, 1995 or 1994.
The National Association of Insurance Commissioners has adopted risk-based capital (RBC) standards that require insurance companies to calculate and report statutory capital and surplus needs based on a formula measuring underwriting, investment and other business risks inherent in an individual company's operations. These RBC standards have not affected the operations of Harleysville Group since each of the Company's insurance subsidiaries have statutory capital and surplus in excess of RBC requirements.
Harleysville Group is required to file financial statements for its subsidiaries, prepared by using statutory accounting practices, with state regulatory authorities. SAP differs from GAAP primarily in the recognition of revenue and expense. The adjustments necessary to reconcile net income and shareholders' equity determined by using SAP to net income and shareholders' equity determined in accordance with GAAP are as follows:
NET INCOME SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, DECEMBER 31, -------------------------- -------------------- 1996 1995 1994 1996 1995 -------- -------- -------- --------- --------- (in thousands) SAP amounts $15,332 $36,063 $16,674 $326,455 $303,675 Adjustments: Deferred policy acquisition costs 9,670 6,619 143 68,779 59,109 Deferred income taxes 7,118 (502) 5,647 32,086 23,875 Unrealized investment gains 14,532 27,834 Other, net (3,505) (608) (4,579) 7,735 8,322 Holding company 65 (241) 569 (79,342) (77,806) ------- ------- ------- -------- --------
GAAP amounts $28,680 $41,331 $18,454 $370,245 $345,009 ======= ======= ======= ======== ========
[FN] Represents the GAAP income and equity amounts for Harleysville Group Inc., excluding the earnings of and investment in subsidiaries.
RELATIONSHIP WITH THE MUTUAL COMPANY
Harleysville Group's operations are interrelated with the operations of the Mutual Company due to the pooling arrangement and other factors. The Mutual Company owns approximately 55% of Harleysville Group. Harleysville Group employees provide a variety of services to the Mutual Company and its wholly-owned subsidiaries. The cost of facilities and employees required to conduct the business of both companies is charged on a cost- allocated basis. Harleysville Group also manages the operations of the Mutual Company and its wholly owned subsidiaries pursuant to a management agreement which commenced January 1, 1993 under which Harleysville Group receives a management fee. Harleysville Group also manages the operations of Berkshire Mutual Insurance Company,
a small property and casualty insurance company, pursuant to a management services agreement. Harleysville Group received $6.6 million, $6.9 million and $6.6 million for the years ended December 31, 1996, and 1995 and 1994, respectively, for all such management services.
All of the Company's officers are officers of the Mutual Company, and six of the Company's nine directors are directors of the Mutual Company. A coordinating committee exists to review and evaluate the pooling agreement and is responsible for matters involving actual or potential conflicts of interest between the two companies. The decisions of the coordinating committee are binding on the two companies. No intercompany transaction can be authorized by the coordinating committee unless the Company's committee members conclude that such transaction is fair and equitable to Harleysville Group. The coordinating committee consists of seven non-employee directors, three from Harleysville Group Inc. and three from the Mutual Company all of whom are not members of both Boards and one, the Chairman, who is a member of both Boards. For information concerning the members of the coordinating committee, see "The Board of Directors and its Committees" section on pages 6 to 8 of the Company's proxy statement relating to the annual meeting of the stockholders to be held April 23, 1997 which is incorporated by reference in this Form 10-K Report.
The Mutual Company leases the home office from Harleysville Group with which it shares most of the facility. Rental income under the lease was $2,754,000, $2,750,000 and $2,668,000 for 1996, 1995 and 1994, respectively. Harleysville Group believes that the lease terms are no less favorable to it than if the property were leased to a non-affiliate.
In connection with the acquisition of Mid-America and New York Casualty, the Company borrowed approximately $18.5 million from the Mutual Company. See Note 7 of the Notes to Consolidated Financial Statements. For additional information with respect to transactions with the Mutual Company, see Note 2 of the Notes to Consolidated Financial Statements.
EMPLOYEES
All employees are paid by Harleysville Group and, accordingly, are considered to be employees of Harleysville Group. As of December 31, 1996, there were 2,514 employees. They provide a variety of services to the Mutual Company and its wholly-owned subsidiaries. See "Business-Relationship with the Mutual Company" and Note 2(c) of the Notes to Consolidated Financial Statements.
ITEM 2.
ITEM 2. PROPERTIES. - ------- -----------
The buildings which house the headquarters of Harleysville Group and the Mutual Company are leased by the Mutual Company from a subsidiary of Harleysville Group. See "Business-Relationship with the Mutual Company." The Mutual Company charges Harleysville Group for an appropriate portion of the rent under an intercompany allocation agreement. The buildings containing the headquarters of Harleysville Group and the Mutual Company have approximately 220,000 square feet of office space. Harleysville Group also rents office facilities in certain of the states in which it does business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS. - ------- ------------------
Harleysville Group is a party to numerous lawsuits arising in the ordinary course of its insurance business. Harleysville Group believes that the resolution of these lawsuits will not have a material adverse effect on its financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. - ------- ----------------------------------------------------
No matter was submitted during the fourth quarter of 1996 to a vote of holders of the Company's Common Stock.
EXECUTIVE OFFICERS OF THE COMPANY
All of the persons listed below are executive officers of Harleysville Group or its affiliates. There are no family relationships between any of the Company's executive officers and directors, and there are no arrangements or understandings between any of these officers and any other person pursuant to which the officer was selected as an officer.
Name Age Position - --------------------- --- ---------------------------------- Walter R. Bateman, II 49 President, Chief Executive Officer and Director Thomas E. Roden 61 Executive Vice President Roger A. Brown 48 Senior Vice President, Secretary and General Counsel Mark R. Cummins 40 Senior Vice President, Chief Investment Officer and Treasurer Bruce J. Magee 42 Senior Vice President and Chief Financial Officer Spencer M. Roman 48 Senior Vice President Robert G. Whitlock, Jr. 40 Senior Vice President and Chief Actuary Roger J. Beekley 54 Vice President and Controller
Walter R. Bateman, II has been Chief Executive Officer since January 1, 1994 and has been President, Chief Operating Officer and Director of Harleysville Group and the Mutual Company since 1992.
Thomas E. Roden is Executive Vice President of Harleysville Group and the Mutual Company. He is in charge of field and subsidiary operations for both companies and was previously in charge of underwriting for both companies since 1983.
Roger A. Brown has been Senior Vice President, Secretary and General Counsel of Harleysville Group and the Mutual Company since April 1995. He was Assistant General Counsel from 1986 until assuming his present position.
Mark R. Cummins has been Senior Vice President, Chief Investment Officer and Treasurer of Harleysville Group and the Mutual Company since 1992. Since January 1, 1996, he also has been in charge of various administrative areas.
Bruce J. Magee has been Senior Vice President and Chief Financial Officer of Harleysville Group and the Mutual Company since January 1, 1994. From 1986 to 1993 he was Vice President and Controller of Harleysville Group.
Spencer M. Roman has been Senior Vice President since 1993. Since January 1, 1996, he has been in charge of marketing, claims, underwriting and policy and information services. He was in charge of marketing for the three preceding years. From 1970 to 1993 he was employed by General Accident Insurance Company, most recently as Vice President of Marketing/Planning.
Robert G. Whitlock, Jr. has been Senior Vice President and Chief Actuary of Harleysville Group and the Mutual Company since February 1995. He was Vice President and Actuary before assuming his present position and was in charge of various actuarial functions since 1991.
Roger J. Beekley has been Vice President and Controller of Harleysville Group since January 1, 1994 and is Vice President and Controller of the Mutual Company, a position he has held since 1982.
PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED - ------- ---------------------------------------------------- STOCKHOLDER MATTERS. - ------------------- The "Market for Common Stock and Related Security Holder Matters" section from the Company's annual report to stockholders for the year ended December 31, 1996, which is included as Exhibit (13)(D) to this Form 10-K Report, is incorporated herein by reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA. - ------- ------------------------ The "Selected Consolidated Financial Data" section from the Company's annual report to stockholders for the year ended December 31, 1996, which is included as Exhibit (13)(A) to this Form 10-K Report, is incorporated herein by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION - ------- ----------------------------------------------------------- AND RESULTS OF OPERATIONS. - -------------------------- The "Management's Discussion and Analysis of Results of Operations and Financial Condition" section from the Company's annual report to stockholders for the year ended December 31, 1996, which is included as Exhibit (13)(B) to this Form 10-K Report, is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. - ------- -------------------------------------------- The consolidated financial statements from the Company's annual report to stockholders for the year ended December 31, 1996, which is included as Exhibit (13)(C) to this Form 10-K Report, are incorporated herein by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING - ------- ----------------------------------------------------------- AND FINANCIAL DISCLOSURE. - -------------------------- None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. - -------- --------------------------------------------------- The "Election of Directors" section, which provides information regarding the Company's directors, on pages 3 to 5 of the Company's proxy statement relating to the annual meeting of stockholders to be held April 23, 1997, is incorporated herein by reference.
The information concerning executive officers called for by Item 10 of Form 10-K is set forth in Part I of this Annual Report on Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION. - -------- ----------------------- The "Executive Compensation and Other Information" section on pages 9 to 15 and the "Compensation of Directors" section on pages 6 to 7 of the Company's proxy statement relating to the annual meeting of stockholders to be held April 23, 1997, are incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND - -------- --------------------------------------------------- MANAGEMENT. - ---------- The "Beneficial Ownership of Common Stock" section on pages 2 to 3 of the Company's proxy statement relating to the annual meeting of stockholders to be held April 23, 1997, are incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. - -------- ----------------------------------------------- The "Certain Transactions" section on pages 25 to 26 of the Company's proxy statement relating to the annual meeting of stockholders to be held April 23, 1997, is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON - -------- ------------------------------------------------------ FORM 8-K. - ---------- (a) (1) The following consolidated financial statements are filed as a part of this report:
Consolidated Financial Statements Page ------ Consolidated Balance Sheets as of December 31, 1996 and 1995 25* Consolidated Statements of Income for Each of the Years in the Three-year Period Ended December 31, 1996 26* Consolidated Statements of Stockholders' Equity for Each of the Years in the Three- year Period Ended December 31, 1996 27* Consolidated Statements of Cash Flows for Each of the Years in the Three-year Period Ended December 31, 1996 28* Notes to Consolidated Financial Statements 29* Independent Auditors' Report 41*
(2) The following consolidated financial statement schedules for the years 1996, 1995 and 1994 are submitted herewith:
Financial Statement Schedules Schedule I. Summary of Investments - Other Than Investments in Related Parties 37 Schedule II. Condensed Financial Information of Parent Company 38 Schedule III. Supplementary Insurance Information 41 Schedule IV. Reinsurance 42 Schedule VI. Supplemental Insurance Information Concerning Property and Casualty Subsidiaries 43 Independent Auditors' Consent and Report on Schedules (filed as Exhibit 23)
All other schedules are omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
- -------------------- *Refers to the respective page of Harleysville Group Inc.'s 1996 Annual Report to Stockholders. The Consolidated Financial Statements and Independent Auditors' Report, which are included as Exhibit (13)(C), are incorporated herein by reference. With the exception of the portions of such Annual Report specifically incorporated by reference in this Item and Items 5, 6, 7 and 8, such Annual Report shall not be deemed filed as part of this Form 10-K or otherwise subject to the liabilities of Section 18 of the Securities Exchange Act of 1934.
(3) Exhibits
EXHIBIT NO. DESCRIPTION OF EXHIBITS - -------- -----------------------------------------------
( 3)(A) Amended and restated Certificate of Incor- poration of Registrant - incorporated herein by reference to Exhibit (4)(A) to the Registrant's Form S-8 Registration Statement No. 333-03127 filed May 3, 1996.
( 3)(B) Amended and Restated By-laws of Registrant - incorporated herein by reference to Exhibit 4(B) to the Post-Effective Amendment No. 12 of Registrant's Form S-3 Registration Statement No. 33-90810 filed October 10, 1995.
( 4) Indenture between the Registrant and CoreStates Bank, N.A., dated as of November 15, 1993 - incorporated herein by reference to Exhibit (4) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.
*(10)(A) Deferred Compensation Plan, as amended, for Directors of Harleysville Mutual Insurance Company, Harleysville Group Inc. and Harleysville Life Insurance Company - incorporated herein by reference to Exhibit 10(A) to the Registrant's Form S-3 Registration Statement No. 33-28948 filed May 25, 1989.
*(10)(B) Harleysville Insurance Companies Director Deferred Compensation Plan Approved by the Board of Directors November 25, 1987 - incorporated herein by reference to Exhibit 10(B) to the Registrant's Form S-3 Registration Statement No. 33-28948 filed May 25, 1989.
*(10)(C) Harleysville Group Inc. Non-qualified Deferred Compensation Plan - incorporated herein by reference to Exhibit 10(C) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.
*(10)(D) Pension Plan of Harleysville Group Inc. and Associated Employers dated December 1, 1994 and amendment dated February 6, 1995 - incorporated herein by reference to Exhibit 10(D) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
*(10)(E) Harleysville Insurance Companies Senior Executive Supplemental Retirement Plan dated May 25, 1982 - incorporated herein by reference to Exhibit 10(E) to the Registrant's Form S-1 Registration Statement No. 33-4885 declared effective May 23, 1986.
EXHIBIT NO. DESCRIPTION OF EXHIBITS - -------- -----------------------------------------------
*(10)(F) Harleysville Mutual Insurance Company/ Harleysville Group Inc. Senior Management Incentive Bonus Plan As Amended and Restated November 20, 1996.
(10)(G) Proportional Reinsurance Agreement effective as of January 1, 1986 among Harleysville Mutual Insurance Company, Huron Insurance Company and Harleysville Insurance Company of New Jersey - incorporated herein by reference to Exhibit 10(N) to the Registrant's Form S-1 Registration Statement No. 33-4885 declared effective May 23, 1986.
*(10)(H) Equity Incentive Plan of Registrant, as amended - incorporated herein by reference to Exhibit (10)(I) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990.
(10)(I) Tax Allocation Agreement dated December 24, 1986 among Harleysville Insurance Company of New Jersey, Huron Insurance Company, Worcester Insurance Company, McAlear Associates, Inc. and the Registrant - incorporated herein by reference to Exhibit 10(Q) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1986.
(10)(J) Amended and Restated Financial Tax Sharing Agreement dated March 20, 1995 among Huron Insurance Company, Harleysville Insurance Company of New Jersey, Worcester Insurance Company, Harleysville-Atlantic Insurance Company, New York Casualty Insurance Company, Connecticut Union Insurance Company, Great Oaks Insurance Company, Lakes States Insurance Company and the Registrant - incorporated herein by reference to Exhibit (10)(L) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
(10)(K) Amendment, effective July 1, 1987, to the Proportional Reinsurance Agreement effective January 1, 1986 among Harleysville Mutual Insurance Company, Huron Insurance Company, Harleysville Insurance Company of New Jersey and Atlantic Insurance Company of Savannah - incorporated herein by reference to the Registrant's Form 8-K Report dated July 1, 1987.
EXHIBIT NO. DESCRIPTION OF EXHIBITS - -------- -----------------------------------------------
(10)(L) Amendment, effective January 1, 1989, to the Proportional Reinsurance Agreement effective January 1, 1986 among Harleysville Mutual Insurance Company, Huron Insurance Company, Harleysville Insurance Company of New Jersey, Atlantic Insurance Company of Savannah and Worcester Insurance Company - incorporated herein by reference to Exhibit 10(U) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988.
(10)(M) Amendment, effective January 1, 1991, to the Proportional Reinsurance Agreement effective January 1, 1986 among Harleysville Mutual Insurance Company, Huron Insurance Company, Harleysville Insurance Company of New Jersey, Atlantic Insurance Company of Savannah, Worcester Insurance Company, Phoenix General Insurance Company and New York Casualty Insurance Company - incorporated herein by reference to Exhibit (10)(O) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990.
(10)(N) Amendments, effective January 1, 1995 and 1993, respectively, to the Proportional Reinsurance Agreement effective January 1, 1986 among Harleysville Mutual Insurance Company, Huron Insurance Company, Harleysville Insurance Company of New Jersey, Harleysville-Atlantic Insurance Company, Worcester Insurance Company, Connecticut Union Insurance Company, New York Casualty Insurance Company and Great Oaks Insurance Company - incorporated herein by reference to Exhibit (10)(P) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
(10)(0) Amendment, effective January 1, 1996 to the Proportional Reinsurance Agreement effective January 1, 1986 among Harleysville Mutual Insurance Company, Huron Insurance Company, Harleysville Insurance Company of New Jersey, Harleysville-Atlantic Insurance Company, Worcester Insurance Company, Connecticut Union Insurance Company, New York Casualty Insurance Company, Great Oaks Insurance Company and Pennland Insurance Company - incorporated herein by reference to Exhibit (10)(O) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.
EXHIBIT NO. DESCRIPTION OF EXHIBITS - -------- -----------------------------------------------
(10)(P) Amendment, effective January 1, 1997 to the Proportional Reinsurance Agreement effective January 1, 1986 among Harleysville Mutual Insurance Company, Huron Insurance Company, Harleysville Insurance Company of New Jersey, Harleysville-Atlantic Insurance Company, Worcester Insurance Company, Mid-America Insurance Company, New York Casualty Insurance Company, Great Oaks Insurance Company, Pennland Insurance Company and Lake States Insurance Company.
*(10)(Q) Long-Term Incentive Plan for senior officers of Harleysville Mutual Insurance Company and Registrant - incorporated herein by reference to Exhibit 10(V) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988.
(10)(R) Lease effective January 1, 1995 between Harleys- ville, Ltd. and Harleysville Mutual Insurance Company - incorporated herein by reference to Exhibit (10)(R) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
*(10)(S) 1990 Directors' Stock Option Program of Registrant - incorporated herein by reference to Exhibit (10)(R) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1990.
*(10)(T) 1995 Directors' Stock Option Program of Registrant - incorporated herein by reference to Exhibit (10)(S) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.
(10)(U) Loan Agreement dated as of March 19, 1991 by and between Harleysville Group Inc. and Harleysville Mutual Insurance Company - incorporated herein by reference to Exhibit 10.5 to the Registrant's Form S-3 Registration Statement No. 33-41845 filed September 17, 1991.
EXHIBIT NO. DESCRIPTION OF EXHIBITS - -------- -------------------------------------------------
(10)(V) Form of Management Agreements dated January 1, 1994 between Harleysville Group Inc. and Harleysville Mutual Insurance Company, Harleysville-Garden State Insurance Company, Pennland Insurance Company, Berkshire Mutual Insurance Company and Harleysville Life Insurance Company - incorporated herein by reference to Exhibit (10)(U) to the Registrant's Annual Statement on Form 10-K for the year ended December 31, 1993.
(10)(W) Form of Salary Allocation Agreements dated January 1, 1993 between Harleysville Group Inc. and Harleysville Mutual Insurance Company, Harleysville-Garden State Insurance Company, Pennland Insurance Company, Berkshire Mutual Insurance Company and Harleysville Life Insurance Company - incorporated herein by reference to Exhibit (10)(U) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.
(10)(X) Equipment and Supplies Allocation Agreement dated January 1, 1993 between Harleysville Mutual Insurance Company and Harleysville Group Inc. - incorporated herein by reference to Exhibit (10)(V) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.
*(10)(Y) 1992 Incentive Stock Option Plan for Employees Amended and Restated August 26, 1992 - incorporated herein by reference to Exhibit (10)(W) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.
*(10)(Z) Harleysville Group Inc. Supplemental Pension Plan dated May 25, 1994 - incorporated herein by reference to Exhibit (10)(AA) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
*(10)(AA) 1996 Directors' Stock Purchase Plan of Registrant - incorporated herein by reference to Exhibit (4)(C) to the Registrant's From S-8 Registration Statement No. 333-03127 filed May 3, 1996.
*(10)(AB) Directors Equity Award Program of Registrant - incorporated herein by reference to Exhibit (4)(C) to the Registrant's Form S-8 Registration Statement No. 333-09701 filed August 7, 1996.
EXHIBIT NO. DESCRIPTION OF EXHIBITS - -------- -----------------------------------------------
(13)(A) Selected Consolidated Financial Data from the Company's 1996 annual report to stockholders.
(13)(B) Management's Discussion and Analysis of Results of Operations and Financial Condition from the Company's 1996 annual report to stockholders.
(13)(C) Consolidated financial statements from the Company's 1996 annual report to stockholders.
(13)(D) Market for Common Stock and Related Security Holder Matters from the Company's 1996 annual report to stockholders.
(21) Subsidiaries of Registrant.
(23) Independent Auditors' Consent and Report on Schedules.
(27) Financial Data Schedule
(28) Statement re Registrant.
P(28)(A) Schedule P, of the 1996 statutory annual statement, for the total pooled business of Harleysville Mutual Insurance Company and the pool participant property and casualty insur- ance subsidiaries of Harleysville Group Inc.
P(28)(B) Schedule P, of the 1996 statutory annual statement of Lake States Insurance Company.
(99) Form 11-K Annual Report for the Harleysville Group Inc. Employee Stock Purchase Plan for the year ended December 31, 1996.
- --------------- * Management contract or compensatory plan, contract or arrangement filed pursuant to Item 14(c) of this report. P - Filed in paper format pursuant to Rule 311, paragraph (c).
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the last quarter of the period covered by this report.
HARLEYSVILLE GROUP SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1996 (in thousands)
AMOUNT AT WHICH SHOWN IN THE BALANCE TYPE OF INVESTMENT COST VALUE SHEET - ------------------------- ---------- ---------- -----------
Fixed maturities:
United States government and government agencies and authorities $ 108,623 $ 110,732 $ 110,286
States, municipalities and political subdivisions 552,027 574,226 562,378
Mortgage-backed securities 125,473 127,884 127,884
All other corporate bonds 385,305 392,121 385,624 ---------- ---------- ----------
Total fixed maturities 1,171,428 1,204,963 1,186,172 ---------- ---------- ----------
Equity securities:
Common stocks Banks, trust and insurance companies 9,084 11,792 11,792 Industrial, miscellaneous and all other 46,389 58,140 58,140 ---------- ---------- ----------
Total equities 55,473 69,932 69,932 ---------- ---------- ----------
Short-term investments 35,175 35,175 ---------- ----------
Total investments $1,262,076 $1,291,279 ========== ==========
HARLEYSVILLE GROUP INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY CONDENSED BALANCE SHEETS (in thousands, except share data)
DECEMBER 31, ------------------------ 1996 1995 --------- ---------
ASSETS
Cash $ 525 Short-term investments $ 1,440 1,860 Fixed maturities: Available for sale, at fair value (cost $10,811 and $12,299) 10,989 12,780 Investments in common stock of subsidiaries (equity method) 449,586 422,815 Accrued investment income 119 165 Due from affiliate 2,880 3,109 Other assets 4,370 3,128 -------- --------
Total assets $469,384 $444,382 ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $ 93,500 $ 93,500 Accounts payable and accrued expenses 5,187 4,419 Federal income taxes payable 452 1,454 -------- --------
Total liabilities 99,139 99,373 -------- --------
Shareholders' equity: Preferred stock, $1 par value; authorized 1,000,000 shares, none issued Common stock, $1 par value; authorized 80,000,000 shares; shares issued and outstanding 1996, 14,139,862 and 1995, 13,718,086 14,140 13,718 Additional paid-in capital 121,033 111,519 Net unrealized investment gains, net of deferred income taxes 18,982 21,207 Retained earnings 216,090 198,565 -------- --------
Total shareholders' equity 370,245 345,009 -------- --------
Total liabilities and shareholders' equity $469,384 $444,382 ======== ========
HARLEYSVILLE GROUP INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY CONDENSED STATEMENTS OF INCOME (in thousands)
YEAR ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 -------- -------- --------
Revenues $ 7,603 $ 7,528 $ 8,491 Expenses: Interest 6,378 6,526 6,143 Expenses other than interest 1,116 1,386 1,472 ------- ------- -------
109 (384) 876 Income tax expense (benefit) 44 (143) 307 ------- ------- -------
Income (loss) before equity in undistributed net income of subsidiaries 65 (241) 569
Equity in undistributed income of subsidiaries 28,615 41,572 17,885 ------- ------- -------
Net income $28,680 $41,331 $18,454 ======= ======= =======
HARLEYSVILLE GROUP INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY CONDENSED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31, --------------------------------- 1996 1995 1994 --------- --------- --------- Cash flows from operating activities: Net income $ 28,680 $ 41,331 $ 18,454 Adjustments to reconcile net income to net cash provided (used) by operating activities: Equity in undistributed earnings of subsidiaries (28,615) (41,572) (17,885) Decrease in accrued investment income 46 168 88 Increase (decrease) in accrued income taxes (896) (883) 1,260 (Gain) loss on sale of investments 667 (70) Other, net (464) (737) (1,236) -------- -------- -------- Net cash provided (used) by operating activities (1,249) (1,026) 611 -------- -------- --------
Cash flows from investing activities: Fixed maturity investments: Purchases (5,964) (499) Sales 1,500 15,616 7,937
Net sales (purchases) or maturities of short-term investments 420 (1,396) (70) Contributions to subsidiaries (5,000) (6,000) -------- -------- -------- Net cash provided by investing activities 1,920 3,256 1,368 -------- -------- --------
Cash flows from financing activities: Issuance of common stock 9,936 8,022 6,712 Dividends from subsidiaries 23 24 24 Dividends paid (11,155) (9,751) (8,715) -------- -------- -------- Net cash used by financing activities (1,196) (1,705) (1,979) -------- -------- --------
Change in cash (525) 525 -
Cash at beginning of year 525 - - -------- -------- --------
Cash at end of year $ - $ 525 $ - ======== ======== ========
HARLEYSVILLE GROUP SCHEDULE IV - REINSURANCE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (in thousands)
ASSUMED PERCENTAGE CEDED FROM OF AMOUNT GROSS TO OTHER OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET -------- --------- --------- -------- ---------- Year ended December 31, 1996 Property and casualty premiums $493,755 $422,163 $543,605 $615,197 88.4% ======== ======== ======== ======== ======
Year ended December 31, 1995 Property and casualty premiums $426,486 $388,950 $439,506 $477,042 92.1% ======== ======== ======== ======== ======
Year ended December 31, 1994 Property and casualty premiums $401,495 $373,778 $420,014 $447,731 93.8% ======== ======== ======== ======== ======
Note: The amounts ceded and assumed include the amounts ceded and assumed under the terms of the pooling arrangement.
HARLEYSVILLE GROUP SCHEDULE VI - SUPPLEMENTAL INSURANCE INFORMATION CONCERNING PROPERTY AND CASUALTY SUBSIDIARIES YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (in thousands)
LOSSES AND LOSS SETTLEMENT EXPENSES LIABILITY (BENEFITS) INCURRED FOR UNPAID DISCOUNT, RELATED TO LOSSES AND IF ANY ------------------- PAID LOSSES LOSS DEDUCTED AND LOSS SETTLEMENT FROM CURRENT PRIOR SETTLEMENT EXPENSES RESERVES YEAR YEARS EXPENSES ---------- -------- -------- ------- -----------
Year ended:
December 31, 1996 $796,820 $9,185 $503,489 $(34,999) $326,443 ======== ====== ======== ======== ========
December 31, 1995 $645,941 $5,271 $346,383 $(10,887) $294,295 ======== ====== ======== ======== ========
December 31, 1994 $603,088 $5,464 $352,085 $ (3,215) $312,690 ======== ====== ======== ======== ========
Notes: (1) The amount of discount relates to certain long-term disability workers' compensation cases. A discount rate of 3.5% (5% on New Jersey cases) was used.
(2) Information required by remaining columns is contained in Schedule III.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 24, 1997 By: /s/WALTER R. BATEMAN -------------------------------- Walter R. Bateman President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ----------------------- ------------------------- -------------
Chairman of the Board /s/BRADFORD W. MITCHELL and a Director March 24, 1997 - ----------------------- Bradford W. Mitchell
President, Chief Executive Officer /s/WALTER R. BATEMAN and a Director March 24, 1997 - ---------------------- Walter R. Bateman
Senior Vice President and Chief Financial Officer (principal financial officer and principal /s/BRUCE J. MAGEE accounting officer) March 24, 1997 - ---------------------- Bruce J. Magee
SIGNATURES (Continued)
SIGNATURE TITLE DATE - ----------------------- ------------------------- --------------
/s/LOWELL R. BECK Director March 24, 1997 - ---------------------- Lowell R. Beck
/s/MICHAEL L. BROWNE Director March 24, 1997 - ---------------------- Michael L. Browne
/s/ROBERT D. BUZZELL Director March 24, 1997 - ---------------------- Robert D. Buzzell
/s/GERARD G. JOHNSON Director March 24, 1997 - ---------------------- Gerard G. Johnson
/s/H. BRYCE JORDAN Director March 24, 1997 - ---------------------- H. Bryce Jordan
/s/FRANK E. REED Director March 24, 1997 - ---------------------- Frank E. Reed
/s/WILLIAM E. STRASBURG Director March 24, 1997 - ----------------------- William E. Strasburg
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBITS - -------- -----------------------------------------------
*(10)(F) Harleysville Mutual Insurance Company/ Harleysville Group Inc. Senior Management Incentive Bonus Plan as Amended and Restated November 20, 1996.
(10)(P) Amendment, effective January 1, 1997 to the Proportional Reinsurance Agreement effective January 1, 1986 among Harleysville Mutual Insurance Company, Huron Insurance Company, Harleysville Insurance Company of New Jersey Harleysville-Atlantic Insurance Company, Worcester Insurance Company, Mid-America Insurance Company, New York Casualty Insurance Company, Great Oaks Insurance Company, Pennland Insurance Company and Lake States Insurance Company.
(13)(A) Selected Consolidated Financial Data from the Company's 1996 annual report to stockholders.
(13)(B) Management's Discussion and Analysis of Results of Operations and Financial Condition from the Company's 1996 annual report to stockholders.
(13)(C) Consolidated financial statements from the Company's 1996 annual report to stockholders.
(13)(D) Market for Common Stock and Related Security Holder Matters from the Company's 1996 annual report to stockholders.
(21) Subsidiaries of Registrant.
(23) Independent Auditors' Consent and Report on Schedules.
(27) Financial Data Schedule
(28) Statement re Registrant.
(99) Form 11-K Annual Report for the Harleysville Group Inc. Employee Stock Purchase Plan for the year ended December 31, 1996.