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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission file number 0-14697
HARLEYSVILLE GROUP INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 51-0241172
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
355 Maple Avenue, Harleysville, PA 19438-2297
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 256-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1 par value
------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X. No .
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X. No .
----- ------
On June 28, 2002, the last business day of the Registrant's most recently
completed second fiscal quarter, the aggregate market value (based on the
closing sales price on that date) of the voting stock held by non-affiliates of
the Registrant was $378,044,925.
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 30,064,517 shares of Common
Stock outstanding on March 5, 2003.
DOCUMENTS INCORPORATED BY REFERENCE:
1. Portions of the Registrant's annual report to stockholders for the fiscal
year ended December 31, 2002 are incorporated by reference in Parts I, II and IV
of this report.
2. Portions of the Registrant's proxy statement relating to the annual
meeting of stockholders to be held April 23, 2003 are incorporated by reference
in Parts I and III of this report.
Page
HARLEYSVILLE GROUP INC.
ANNUAL REPORT ON FORM 10-K
DECEMBER 31, 2002
PART I Page
------ ----
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 27
ITEM 3. LEGAL PROCEEDINGS 27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 27
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCKD
AND RELATED STOCKHOLDER MATTERS 28
ITEM 6. SELECTED FINANCIAL DATA 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS 28
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA 28
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 28
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF
THE REGISTRANT 29
ITEM 11. EXECUTIVE COMPENSATION 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT 29
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 29
ITEM 14. CONTROLS AND PROCEDURES 29
PART IV
-------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K 31
Page 2
PART I
ITEM 1. BUSINESS.
- ------- --------
General
Harleysville Group Inc. (the "Company") is an insurance holding company
headquartered in Pennsylvania which engages, through its subsidiaries, in the
property and casualty insurance business on a regional basis. As used herein,
"Harleysville Group" refers to Harleysville Group Inc. and its subsidiaries.
The Company is a Delaware corporation formed by Harleysville Mutual
Insurance Company (the "Mutual Company") in 1979 as a wholly-owned subsidiary.
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 of a portion of the Company's common stock then owned by it,
further reducing the percentage of outstanding shares owned by the Mutual
Company. At December 31, 2002, the Mutual Company owned approximately 56% of
the Company's outstanding shares.
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 and midwestern United States through approximately 1,700 insurance
agencies. Regional offices are maintained in Georgia, Indiana, Maryland,
Massachusetts, Michigan, Minnesota, New Jersey, New York, North Carolina,
Pennsylvania, Tennessee, and Virginia. The Company's property and casualty
insurance subsidiaries are: Harleysville-Atlantic Insurance Company
("Atlantic"), Harleysville Insurance Company ("HIC"), Harleysville Insurance
Company of New Jersey ("HNJ"), Harleysville Insurance Company of New York ("HIC
New York"), Harleysville Insurance Company of Ohio ("HIC Ohio"), Harleysville
Lake States Insurance Company ("Lake States"), Harleysville Preferred Insurance
Company ("Preferred"), Harleysville Worcester Insurance Company ("Worcester"),
and Mid-America Insurance Company.
The Company has followed a regional strategy. 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)
Page 3
generally are performed regionally 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 eighteen
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 HIC New York,
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 HIC Ohio which began underwriting property and casualty insurance in
Ohio. In 1997, the Company acquired HIC, which primarily conducts business in
Minnesota and neighboring states.
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 includes substantially all of the Mutual
Company's property and casualty insurance business. See "Business - Pooling
Arrangement."
BUSINESS SEGMENTS.
Harleysville Group has three segments which consist of the personal lines
of insurance, the commercial lines of insurance and the investment function.
Financial information about these segments is set forth in Note 14 of the Notes
to Consolidated Financial Statements.
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.
Page 4
Harleysville Group and the Mutual Company have a pooled rating of "A"
(excellent) by A.M. Best Company, Inc. ("Best's") based upon 2001 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 ratios for the Company's property and
casualty subsidiaries, prepared in accordance with accounting principles
generally accepted in the United States of America ("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.
Page 5
HARLEYSVILLE GROUP BUSINESS ONLY
YEAR ENDED DECEMBER 31,
-------------------------
2002 2001 2000
------ ------ ------
GAAP combined ratio 102.2% 104.7% 106.2%
===== ===== =====
Statutory operating ratios:
Loss ratio 68.2% 71.2% 71.7%
Expense and dividend ratios 33.7% 33.0% 34.4%
----- ----- -----
Statutory combined ratio 101.9% 104.2% 106.1%
===== ===== =====
The following table sets forth the net written premiums and combined ratios
by line of insurance, prepared in accordance with statutory accounting practices
prescribed or permitted by state insurance authorities, for Harleysville Group
for the periods indicated:
HARLEYSVILLE GROUP BUSINESS ONLY
YEAR ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
-------- -------- --------
(dollars in thousands)
NET PREMIUMS WRITTEN
- --------------------
Commercial:
Automobile $199,511 $171,106 $142,589
Workers compensation 114,565 117,583 108,473
Commercial multi-peril 224,709 183,216 159,679
Other commercial 57,272 43,955 35,978
-------- -------- --------
Total commercial 596,057 515,860 446,719
-------- -------- --------
Personal:
Automobile 125,593 151,270 168,116
Homeowners 67,831 70,679 75,551
Other personal 8,369 9,778 11,086
-------- -------- --------
Total personal 201,793 231,727 254,753
-------- -------- --------
Total Harleysville
Group Business $797,850 $747,587 $701,472
======== ======== ========
COMBINED RATIOS
- ---------------
Commercial:
Automobile 91.6% 96.6% 106.9%
Workers compensation 127.4% 105.7% 102.2%
Commercial multi-peril 93.7% 100.2% 105.8%
Other commercial 86.3% 95.5% 95.2%
Total commercial 99.5% 100.0% 104.5%
Personal:
Automobile 115.8% 112.8% 106.0%
Homeowners 97.6% 117.8% 117.4%
Other personal 74.1% 85.2% 91.2%
Total personal 108.1% 113.1% 108.7%
Total Harleysville
Group Business 101.9% 104.2% 106.1%
Page 6
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 its 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, Preferred 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.
Page 7
CHRONOLOGY OF CHANGES IN POOLING AGREEMENT
HARLEYSVILLE MUTUAL
GROUP COMPANY
DATE PERCENTAGE PERCENTAGE EVENT
- --------------- ------------ ---------- --------------
January 1, 1986 30% 70% Current pooling agreement began
with Preferred 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% HIC New York and Mid-America
acquired and included in the pool
and the Mutual Company formed
Pennland (not a pool participant)
to write Pennsylvania personal
automobile business.
January 1, 1996 65% 35% Pennland included in the pool.
January 1, 1997 70% 30% Lake States included in the pool.
January 1, 1998 72% 28% HIC included in the pool.
Effective as of January 1, 1992, Harleysville-Garden State Insurance
Company (Garden State), a subsidiary of the Mutual Company, began insuring new
and renewal New Jersey personal automobile insurance policies that had been
included in the pooling arrangement. Garden State is not a participant 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 Management's
Discussion and Analysis of Financial Condition and Results of Operations.
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 Boards of Directors of the Company and the Mutual
Company maintain a coordinating committee which reviews and evaluates, and when
changes are warranted, approve the pooling arrangements between the Company and
the Mutual Company. See "Business-Relationship with the Mutual Company." In
evaluating pool participation changes, the
Page 8
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 premiums written 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,
-----------------------------------
2002 2001 2000
---------- ---------- --------
(dollars in thousands)
NET PREMIUMS WRITTEN
- --------------------
Commercial:
Automobile $ 277,807 $ 238,262 $198,579
Workers compensation 159,118 163,310 150,657
Commercial multi-peril 317,657 259,082 225,960
Other 81,152 62,324 51,154
---------- ---------- --------
Total commercial 835,734 722,978 626,350
---------- ---------- --------
Personal:
Automobile 175,076 210,834 234,347
Homeowners 96,504 100,685 107,632
Other 11,631 13,588 15,406
---------- ---------- --------
Total personal 283,211 325,107 357,385
---------- ---------- --------
Total pooled business $1,118,945 $1,048,085 $983,735
========== ========== ========
COMBINED RATIOS (1)
- ---------------
Commercial:
Automobile 91.4% 96.7% 107.3%
Workers compensation 127.9% 105.5% 102.8%
Commercial multi-peril 91.9% 99.1% 104.6%
Other 84.5% 94.4% 93.3%
Total commercial 98.6% 99.5% 104.2%
Personal:
Automobile 115.8% 113.2% 106.2%
Homeowners 95.6% 121.9% 117.4%
Other 73.9% 85.3% 91.2%
Total personal 107.3% 114.7% 108.9%
Total pooled business 101.0% 104.4% 105.9%
- ----------------
(1) See the definition of combined ratio in "Business-Property and Casualty
Underwriting".
Page 9
The combined ratio for the total pooled business differs from Harleysville
Group's combined ratio primarily because of the effect of the aggregate
catastrophe reinsurance agreement with the Mutual Company. See Note 2(a) of the
Notes to Consolidated Financial Statements and Business-Reinsurance.
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 been incurred but 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 estimates of the ultimate unpaid
cost of all losses incurred, including losses for claims which have been
incurred but have not yet been reported to Harleysville Group. 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 incurred but
unreported claims and loss settlement expense reserves are determined utilizing
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 using the most recent
information on reported claims and a variety of actuarial techniques. With the
exception of reserves relating to some workers compensation long-term disability
cases, loss reserves are not discounted.
Page 10
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,
----------------------------------------
2002 2001 2000
----------- ----------- ----------
(in thousands)
Reserves for losses
and loss settlement
expenses, beginning
of the year $1,147,517 $1,136,848 $1,181,066
---------- ---------- ----------
Incurred losses and loss
settlement expenses:
Provision for insured
events of the current
year 730,924 756,289 759,471
Decrease in provision
for insured events of
prior years (3,816) (22,444) (65,319)
---------- ---------- ----------
Total incurred
losses and loss
settlement expenses 727,108 733,845 694,152
---------- ---------- ----------
Payments:
Losses and loss
settlement expenses
attributable to
insured events of
the current year 277,603 327,615 346,846
Losses and loss
settlement expenses
attributable to
insured events of
prior years 372,642 395,561 391,524
---------- ---------- ----------
Total payments 650,245 723,176 738,370
---------- ---------- ----------
Reserves for losses and
loss settlement expenses,
end of the year $1,224,380 $1,147,517 $1,136,848
========== ========== ==========
Page 11
The following table sets forth the development of net reserves for unpaid
losses and loss settlement expenses from 1992 through 2002 for the pooled
business of the Mutual Company and Harleysville Group on a statutory basis.
"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 1992 liability has developed a redundancy after ten
years, in that reestimated losses and loss settlement expenses are expected to
be lower than the initial estimated liability established in 1992 of $784.5
million by $33.5 million, or 4.3%.
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 1992
column indicates that as of December 31, 2002, payments of $691.1 million of the
currently reestimated ultimate liability for losses and loss settlement expenses
had been made.
The "Redundancy" portion of the table shows the cumulative redundancy at
December 31, 2002 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.
The following table includes all 2002 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.
Page 12
TOTAL POOLED BUSINESS
YEAR ENDED DECEMBER 31,
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
(dollars in thousands)
Reserve for
losses and
loss
settlement
expenses $784,514 $825,028 $855,305 $900,336 $1,033,376 $1,124,910 $1,172,664 $1,181,066 $1,136,848 $1,147,517 $1,224,380
Reserves
reestimated:
One year
later 781,746 819,494 837,255 856,493 995,656 1,068,687 1,090,640 1,115,747 1,114,404 1,143,701
Two years
later 778,064 802,213 817,330 820,894 961,228 1,005,208 1,042,183 1,097,544 1,124,881
Three years
later 774,420 800,129 800,365 799,191 918,006 972,318 1,027,968 1,106,107
Four years
later 776,687 792,901 790,234 768,704 894,015 961,721 1,028,927
Five years
later 770,420 786,731 768,815 748,667 887,697 962,861
Six years
later 767,777 771,015 753,928 743,859 890,713
Seven years
later 756,912 759,080 750,226 747,954
Eight years
later 749,287 755,744 753,753
Nine years
later 746,889 760,274
Ten years
later 750,994
Cumulative
amount of
reserves paid:
One year
later 244,210 255,078 246,935 273,744 328,691 338,377 358,526 391,524 395,561 372,642
Two years
later 402,394 403,601 406,944 448,497 523,307 540,522 562,908 609,016 609,777
Three years
later 503,309 511,281 525,840 566,804 656,234 674,740 695,315 753,893
Four years
later 572,656 587,900 599,336 643,451 741,013 756,502 777,204
Five years
later 616,940 629,908 645,271 690,301 790,902 801,602
Six years
later 639,186 657,570 677,668 720,664 821,164
Seven years
later 656,913 677,123 698,652 740,151
Eight years
later 671,091 691,518 712,800
Nine years
later 682,514 702,435
Ten years
later 691,098
Redundancy 33,520 64,754 101,552 152,382 142,663 162,049 143,737 74,959 11,967 3,816
Redundancy
expressed
as a percent
of year end
reserves 4.3% 7.8% 11.9% 16.9% 13.8% 14.4% 12.3% 6.3% 1.1% 0.3%
Cumulative
redundancy
excluding
pre-1986
reserve
develop-
ment(1) 58,819 89,026 124,163 171,452 156,988 171,463 150,664 80,354 14,975 5,997
(1) Excludes years not included in pooling arrangement with Harleysville Group.
Page 13
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,
--------------------------------
2002 2001 2000
-------- -------- --------
(in thousands)
Reserves for losses and
loss settlement expenses,
beginning of the year $800,861 $792,584 $823,914
-------- -------- --------
Incurred losses and loss
settlement expenses:
Provision for insured
events of the current
year 526,265 537,172 541,738
Decrease in provision
for insured events of
prior years (4,648) (17,350) (48,937)
-------- -------- --------
Total incurred losses
and loss settlement
expenses 521,617 519,822 492,801
-------- -------- --------
Payments:
Losses and loss settlement
expenses attributable to
insured events of the
current year 199,874 229,435 244,978
Losses and loss settlement
expenses attributable to
insured events of prior
years 265,422 282,110 279,153
-------- -------- --------
Total payments 465,296 511,545 524,131
-------- -------- --------
Reserves for losses and loss
settlement expenses, end
of the year $857,182 $800,861 $792,584
======== ======== ========
See page 16 for reconciliation of net reserves to gross reserves.
Page 14
Harleysville Group recognized a decrease in the provision for insured
events of prior years (favorable development) of $4.6, $17.4 and $48.9 million
in 2002, 2001, and 2000, respectively. The favorable development for 2002
primarily relates to lower-than-expected claim severity in the commercial and
personal lines of business. The favorable development for 2001 primarily
relates to lower-than-expected loss adjusting expenses and, for 2000,
lower-than-expected claim severity in the commercial and personal lines of
business. The 2001 and 2000 favorable development includes $14.8 million and
$20.2 million of reductions in loss settlement expenses. In both years, such
reductions are related to benefits from initiatives to reduce costs of adjusting
claims and to the favorable development on losses.
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, 1996 increase in Harleysville Group's pooling
participation from 60% to 65% is reflected in the first line of the 1996 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 1995 column of the "Cumulative amount of reserves
paid" portion of the table reflects the assets transferred in conjunction with
the 1996 increase in the pooling percentage from 60% to 65% 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 12 to 14 to provide greater analysis of underlying claims development.
Page 15
HARLEYSVILLE GROUP BUSINESS
YEAR ENDED DECEMBER 31,
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
(dollars in thousands)
Reserve for
losses
and loss
settlement
expenses $437,883 $499,272 $535,452 $576,653 $718,700 $793,563 $813,519 $823,914 $792,584 $800,861 $857,182
Reserves
reestimated:
One year
later 438,135 496,057 524,565 541,654 688,972 750,956 753,987 774,977 775,234 796,213
Two years
later 435,005 483,635 507,090 513,555 662,393 704,157 717,324 761,234 781,117
Three years
later 430,728 477,164 491,919 496,138 630,170 678,757 706,491 765,816
Four years
later 429,125 468,804 482,834 473,084 611,179 670,534 705,615
Five years
later 421,408 462,571 466,309 456,940 606,037 669,789
Six years
later 417,715 450,152 453,934 452,885 606,642
Seven years
later 408,789 439,842 450,675 454,267
Eight years
later 401,582 436,846 451,648
Nine years
later 399,261 438,538
Ten years
later 400,647
Cumulative
amount
of reserves
paid:
One year
later 144,465 161,557 164,849 105,774 200,907 228,622 252,972 279,153 282,110 265,422
Two years
later 234,991 254,840 219,225 204,030 330,158 371,624 397,685 433,901 434,579
Three years
later 292,381 290,667 283,816 281,546 423,337 465,897 491,274 536,547
Four years
later 314,848 329,830 330,705 334,204 482,016 523,050 548,696
Five years
later 335,411 355,338 361,250 365,574 516,221 553,984
Six years
later 347,731 372,727 382,214 385,720 536,473
Seven years
later 357,966 384,443 395,607 398,214
Eight years
later 365,812 393,092 404,257
Nine years
later 372,321 399,416
Ten years
later 376,965
Redundancy 37,236 60,734 83,804 122,386 112,058 123,774 107,904 58,098 11,467 4,648
Redundancy
expressed
as a percent
of year end
reserves 8.5% 12.2% 15.7% 21.2% 15.6% 15.6% 13.3% 7.1% 1.4% 0.6%
Gross
reserve $486,608 $560,811 $603,088 $645,941 $796,820 $868,393 $893,420 $901,352 $864,843 $879,056 $928,335
Ceded
reserve 48,725 61,539 67,636 69,288 78,120 74,830 79,901 77,438 72,259 78,195 71,153
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net
reserve $437,883 $499,272 $535,452 $576,653 $718,700 $793,563 $813,519 $823,914 $792,584 $800,861 $857,182
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Gross
re-estimated $452,444 $509,519 $522,302 $525,397 $685,556 $748,266 $785,044 $858,086 $889,122 $893,981
Ceded
re-estimated 51,797 70,981 70,654 71,130 78,914 78,477 79,429 92,270 108,005 97,768
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net
re-estimated $400,647 $438,538 $451,648 $454,267 $606,642 $669,789 $705,615 $765,816 $781,117 $796,213
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
NOTE: The amount of cash and investments received equal to the increase in
liabilities for unpaid losses and loss settlement expenses was
$93,966,000, $28,318,000, and $12,392,000 for the changes in pool
participation in 1996, 1997, and 1998, respectively.
Page 16
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. 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 $8.5
million above a retention of $1.5 million. Harleysville Group's 2002 pooling
share of such recovery would be $6.1 million above a retention of $1.1 million.
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, 2002 which provides coverage ranging from
84.8% to 94.3% of up to $140.0 million in excess of a retention of $30.0 million
for any given catastrophe. Harleysville Group's 2002 pooling share of this
coverage would range from 84.8% to 94.3% of up to $100.8 million in excess of a
retention of $21.6 million for any given catastrophe. Accordingly, pursuant to
the terms of the treaty, the maximum recovery would be $126.5 million for any
catastrophe involving an insured loss equal to or greater than $170.0 million.
Harleysville Group's pooling share of this maximum recovery would be $91.1
million for any catastrophe involving an insured loss of $122.4 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. Most terrorism losses would not be
covered by the treaty. Harleysville Group has not purchased funded catastrophe
covers. Harleysville Group and Mutual have purchased property per risk excess of
loss reinsurance which covers certain terrorism losses and provides for recovery
of up to $8.5 million in excess of $1.5 million of terrorism losses for any one
risk under certain circumstances. The maximum recovery by Harleysville Group on
a terrorism loss occurrence is $27.0 million.
Casualty reinsurance (including liability and workers compensation) is
currently maintained under an excess of loss treaty affording recovery to $38.0
million above a retention of $2.0 million for each loss occurrence.
Harleysville Group's 2002
Page 17
pooling share of a recovery would be up to $25.9 million above a retention of
$1.4 million. In addition, there is reinsurance to protect Harleysville Group
from large workers compensation losses in 2002. For umbrella liability
coverages, reinsurance protection up to $14.0 million is provided over a
retention of $1.0 million. Harleysville Group's 2002 pooling share would provide
for recovery of $10.1 million over a retention of $0.7 million. The casualty
reinsurance programs provide coverage for a terrorist event with no
reinstatement provision.
Harleysville Group has a reinsurance agreement with the Mutual Company
whereby the Mutual Company reinsures accumulated catastrophe losses in a quarter
up to $14.4 million in excess of $3.6 million in return for a reinsurance
premium. The agreement excludes catastrophe losses resulting from earthquakes
or hurricanes. This agreement was amended effective July 1, 2002 to exclude
terrorism losses in order to reflect current reinsurance market conditions. The
premium rate and other terms were not changed.
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 Harleysville Group to the
same extent and at the same cost currently maintained.
Harleysville Group considers numerous factors in choosing reinsurers, the
most important of which are the financial stability and credit worthiness of the
reinsurer. Harleysville Group 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 the categories of business underwritten by Harleysville
Group in the geographic areas where 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.
Page 18
MARKETING. Harleysville Group markets its insurance products through
independent agencies and monitors the performance of these agencies relative to
many factors including profitability, growth and retention. At December 31,
2002, there were approximately 1,700 agencies.
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. At December 31, 2002, substantially
all of Harleysville Group's fixed maturity investment portfolio was rated at
investment grade and the investment portfolio did not contain any real estate or
mortgage loans. Harleysville Group also invests in equity securities with the
objective of capital appreciation.
Harleysville Group has adopted and follows an investment philosophy which
precludes the purchase of non-investment grade fixed income 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.
Page 19
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, 2002:
DECEMBER 31, 2002
----------------------
AMOUNT PERCENT
---------- -------
(dollars in thousands)
RATING(1)
- ---------
U.S. Treasury and U.S. agency bonds(2) $ 282,652 19.7%
Aaa 492,091 34.3
Aa 410,895 28.6
A 220,223 15.3
Baa 27,481 1.9
Ba 3,282 0.2
C 418 0.0
---------- -----
Total $1,437,042 100.0%
========== =====
- ---------------
(1) Ratings assigned by Moody's Investors Services, Inc.
(2) Includes GNMA pass-through obligations and collateralized mortgage
obligations.
Harleysville Group invests in both taxable and tax-exempt fixed income
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 44%, 40% and 45% of the total investment
portfolio at December 31, 2002, 2001 and 2000, 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, 2002:
DECEMBER 31, 2002
----------------------
AMOUNT PERCENT
---------- -------
(dollars in thousands)
Fixed maturities:
U.S. Treasury obligations $ 41,557 2.6%
U.S. agency obligations 33,888 2.1
Mortgage-backed securities 228,367 14.1
Obligations of states and
political subdivisions 703,558 43.5
Corporate securities 502,661 31.1
---------- -----
Total fixed maturities 1,510,031 93.4
---------- -----
Equity securities 107,177 6.6
---------- -----
Total $1,617,208 100.0%
========== =====
Page 20
Investment results of Harleysville Group's fixed maturity investment
portfolio are as shown in the following table:
YEAR ENDED DECEMBER 31,
---------------------------------------
2002 2001 2000
---------- ---------- ----------
(dollars in thousands)
Invested assets(1) $1,416,294 $ 1,379,551 $1,361,310
Investment income(2) $ 84,438 $ 83,191 $ 83,958
Average yield 6.0% 6.0% 6.2%
- ---------------
(1) Average of the aggregate invested amounts at amortized cost at the beginning
and end of the period.
(2) 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, 2002:
December 31, 2002
----------------------
AMOUNT PERCENT
---------- -------
(dollars in thousands)
DUE IN(1)
- ---------
1 year or less $124,689 8.3%
Over 1 year through 5 years 435,433 28.8
Over 5 years through 10 years 601,700 39.9
Over 10 years 119,842 7.9
---------- -----
1,281,664 84.9
Mortgage-backed securities 228,367 15.1
---------- -----
Total 1,510,031 100.0%
========== =====
- ---------------
(1) 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.
Page 21
The average expected life of Harleysville Group's investment portfolio as
of December 31, 2002 was approximately 4.6 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 premiums written 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.
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 writes such lines. 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.
Page 22
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 transactions between companies within the
holding company system that may materially affect the operations, management or
financial condition of the insurer within the system, including the payment of
dividends from the insurance subsidiaries to the Company.
Insurance holding company acts require that all transactions involving any
insurer within the holding company system, including those involving the Mutual
Company and the Company's insurance subsidiaries, must be fair and equitable to
that insurer. Further, approval of the applicable insurance commissioner is
required prior to the consummation of a transaction affecting the control of an
insurer.
The Terrorism Risk Insurance Act of 2002 (TRIA), signed into law on
November 26, 2002, provides a federal backstop for losses related to the writing
of the terrorism peril in property casualty insurance policies. Under TRIA, the
Companies had until February 24, 2003, to notify commercial policyholders about
requirements of the law, let them know that the Company was required to offer
coverage for acts of terrorism certified under TRIA and let them know how the
coverage would be priced.
Harleysville Group distributed the mandated disclosure which explained the
Act and notified policyholders of their coverage options. The terrorism rating
plan, with rates that vary based on geographical and risk-type factors, will
begin to go into effect in 2003. The plan will charge commercial policies a
nominal terrorism premium in most territories to encourage coverage acceptance
while minimizing the administrative costs.
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, regulations and legislation may be proposed to bring
the insurance industry
Page 23
under federal control; to strengthen state oversight, particularly in the field
of solvency and investments; to further restrict an insurer's flexibility in
underwriting and pricing 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 Harleysville Group.
The Company's insurance subsidiaries generally 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 the current regulatory restrictions as of December
31, 2002, $11.0 million would be available for distribution to Harleysville
Group Inc. without prior approval until October 1, 2003, after which $52.9
million would be available for distribution to Harleysville Group Inc. without
prior approval. The Company's insurance subsidiaries paid dividends of $12.0
million in 2002, $10.0 in 2001 and, $20.0 million in 2000 to Harleysville Group
Inc. An additional $42.0 million in aggregate dividends were declared by the
Company's insurance subsidiaries in 2002 and remain as a receivable on the books
of the Company at December 31, 2002.
Various states have adopted the National Association of Insurance
Commissioners (NAIC) 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 has statutory capital and surplus in excess of RBC requirements.
Various states have adopted the NAIC's Codification of Statutory
Accounting Principles which were effective January 1, 2001. The codified
principles are intended to provide a basis of accounting recognized and adhered
to in the absence of, conflict with, or silence of, state statutes and
regulations. The impact of the codified principles on the January 1, 2001
statutory capital and surplus of the Company's insurance subsidiaries ranged
from a decrease of $0.4 million to an increase of $6.4 million and was an
increase of $21.0 million on a consolidated basis.
Page 24
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,
-------------------------- --------------------
2002 2001 2000 2002 2001
------- ------- ------- -------- --------
(in thousands)
SAP amounts $42,338 $41,095 $48,412 $509,344 $538,878
Adjustments:
Deferred
policy
acquisition
costs 8,820 1,317 1,218 94,896 86,076
Deferred
income
taxes (708) 3,626 1,608 357 6,093
Unrealized
investment
gains 72,985 26,857
Other, net (3,925) (2,443) (2,109) (6,768) 3,526
Holding
company(1) (270) (102) (437) (38,702) (71,132)
------- ------- ------- -------- --------
GAAP amounts $46,255 $43,493 $48,692 $632,112 $590,298
======= ======= ======= ======== ========
(1) 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 owed approximately 56% of the issued and outstanding common stock of
Harleysville Group Inc. at December 31, 2002. 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
Page 25
which Harleysville Group received 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 $6.8 million, $7.3 million, and $7.4 million for the
years ended December 31, 2002, 2001 and 2000, 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
other material transactions between Harleysville Group and the Mutual Company
and is responsible for matters involving actual or potential conflicts of
interest between the two companies. The coordinating committee consists of six
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, a non-voting
Chairman, who is a member of both Boards. The decisions of the coordinating
committee are binding on the two companies. No intercompany transaction can be
authorized by the coordinating committee unless at least two of three of the
Company's committee members conclude that such transaction is fair and equitable
to Harleysville Group. For information concerning the members of the
coordinating committee, see "Board and Committee Meetings" section on pages 8 to
10 of the Company's proxy statement relating to the annual meeting of the
shareholders to be held April 23, 2003 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 $3.5
million for 2002 and 2001 and $3.4 million for 2000. 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 HIC New York, the
Company borrowed approximately $18.5 million from the Mutual Company. See Note
8 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 Inc. and, accordingly, are
considered to be employees of Harleysville Group Inc. As of December 31, 2002,
there were 2,413 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 of the Notes to Consolidated Financial Statements.
Page 26
AVAILABLE INFORMATION
The Company maintains a website at www.harleysvillegroup.com. Our annual
report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K, and amendments to those reports, filed or furnished pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of
charge on our website as soon as practicable after electronic filing of such
material with, or furnishing it to, the Securities and Exchange Commission.
ITEM 2. PROPERTIES.
- ------- -----------
The buildings which house the headquarters of Harleysville Group and the
Mutual Company are leased to the Mutual Company by 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. LEGAL PROCEEDINGS.
- ------- ------------------
In 2001, GE Reinsurance Corporation (GE Re) sought rescission of a
reinsurance agreement between Mutual and GE Re relating to certain automobile
insurance policies written in California through a managing general agent
beginning in 1999. On December 13, 2002, Mutual and GE Re settled this matter
by agreeing to a commutation and termination of the reinsurance agreement
effective December 31, 2002. The settlement agreement did not materially impact
Harleysville Group's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- -----------------------------------------------------------
No matter was submitted to a vote of the security holders during the fourth
quarter of 2002.
Page 27
PART II
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,
2002, which is included as Exhibit (13)(E) to this Form 10-K Report, is
incorporated herein by reference.
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, 2002, which is
included as Exhibit (13)(A) to this Form 10-K Report, is incorporated herein by
reference.
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, 2002, which is included as Exhibit (13)(B) to
this Form 10-K Report, is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
- -------- ----------------------------------------------------------
RISK.
- -----
The "Quantitative and Qualitative Disclosures About Market Risk" section
from the Company's annual report to stockholders for the year ended December 31,
2002, which is included as Exhibit (13)(C) to this Form 10-K Report, is
incorporated herein by reference.
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, 2002, which is included as Exhibit
(13)(D) to this Form 10-K Report, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
- ------- ------------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE.
- ---------------------------------------
None.
Page 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------- ----------------------------------------------------------
The "Election of Directors" and "Other Executive Officers" sections, which
provides information regarding the Company's directors and executive officers,
on pages 13 to 16 and the "Section 16 Reporting Compliance" section on page 36
of the Company's proxy statement relating to the annual meeting of stockholders
to be held April 23, 2003, are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
- -------- -------------------------
The information set forth on pages 29 to 34 and the "Compensation of
Directors" section on pages 11 and 12 of the Company's proxy statement relating
to the annual meeting of stockholders to be held April 23, 2003, are
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
- -------- ---------------------------------------------------------
MANAGEMENT.
- -----------
The "Ownership of Common Stock" section on page 21 of the Company's proxy
statement relating to the annual meeting of stockholders to be held April 23,
2003, is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- -------- ---------------------------------------------------
The "Transactions with Harleysville Mutual" section on pages 35 and 36 of
the Company's proxy statement relating to the annual meeting of stockholders to
be held April 23, 2003, is incorporated herein by reference.
ITEM 14. CONTROLS AND PROCEDURES
- -------- -------------------------
The Company has procedures in place for accumulating and evaluating
information which enable it to prepare and file reports with the Securities and
Exchange Commission. As a result of procedures required by the Sarbanes-Oxley
Act of 2002, the Company has formed a committee that includes certain members of
senior management and key officers to ensure that all information required to be
disclosed in the Company's reports is accumulated and communicated to those
individuals responsible for the preparation of the reports, and to our principal
executive and financial officers, in a manner that will allow timely decisions
regarding required disclosures.
Page 29
Within the 90 days prior to the date of this annual report, the Company
carried out an evaluation, under the supervision and with the participation of
management, including the chief executive officer and chief financial officer,
of the effectiveness of the design and operation of disclosure controls and
procedures. Based on that evaluation of these disclosure controls and
procedures, the chief executive officer and chief financial officer concluded
that Harleysville Group Inc.'s disclosure controls and procedures were effective
as of the date of such evaluation.
The chief executive officer and chief financial officer also have concluded
that there were no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date that the Company completed its evaluation.
Page 30
PART IV
ITEM 15. 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, 2002 and 2001 31*
Consolidated Statements of Income for
Each of the Years in the Three-year
Period Ended December 31, 2002 32*
Consolidated Statements of Shareholders'
Equity for Each of the Years in the Three-
year Period Ended December 31, 2002 33*
Consolidated Statements of Cash Flows
for Each of the Years in the Three-year
Period Ended December 31, 2002 34*
Notes to Consolidated Financial Statements 35*
Independent Auditors' Report 45*
(2) The following consolidated financial statement
schedules for the years 2002, 2001 and 2000
are submitted herewith:
Financial Statement Schedules
Schedule I. Summary of Investments - Other
Than Investments in Related
Parties 40
Schedule II. Condensed Financial Information
of Parent Company 41
Schedule III. Supplementary Insurance
Information 44
Schedule IV. Reinsurance 45
Schedule VI. Supplemental Insurance Information
Concerning Property and Casualty
Subsidiaries 46
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 2002 Annual
Report to Stockholders. The Consolidated Financial Statements and Independent
Auditors' Report, which are included as Exhibit (13)(D), 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.
Page 31
(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) Standard Deferred Compensation Plan for Directors
of Harleysville Mutual Insurance Company and
Harleysville Group Inc. Amended and Restated
November 17, 1999 - incorporated herein by
reference to Exhibit 10(A) to the Registrant's
Annual Report on Form 10-K for the year ended
December 31, 1999.
*(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 Amended and Restated November 17,
1999 - incorporated herein by reference to Exhibit
10(C) to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1999.
*(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.
Page 32
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- ------------------------------------------------------
*(10)(E) Harleysville Mutual Insurance Company/ Harleysville
Group Inc. Senior Management Incentive Compensation
Plan As Amended and Restated November 17, 1999 - incor-
porated herein by reference to Exhibit 10(E) to the
Registrant's Annual Report on Form 10-K for the
year ended December 31, 1999.
(10)(F) 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)(G) Equity Incentive Plan of Registrant, as amended -
incorporated herein by reference to Exhibit (4)(C) to
the Registrant's Form S-8 Registration Statement
No. 333-25817 filed April 25, 1997.
(10)(H) 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)(I) 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.
Page 33
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- ------------------------------------------------------
(10)(J) 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.
(10)(K) 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)(L) 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)(M) 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.
Page 34
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- ------------------------------------------------------
(10)(N) 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.
(10)(O) 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 - incorporated herein
by reference to Exhibit (10)(P) to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1996.
(10)(P) Amendment, effective January 1, 1998 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, Lake States Insurance
Company and Minnesota Fire and Casualty Company -
incorporated herein by reference to Exhibit (10)(Q) to
the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
Page 35
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- ------------------------------------------------------
(10)(Q) Lease and amendment effective January 1, 2000 between
Harleysville, 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, 1999.
*(10)(R) 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)(S) Harleysville Group Inc. Year 2000 Directors' Stock Option
Program of Registrant - incorporated herein by
reference to Exhibit (4)(C) to the Registrant's Form
S-8 Registration Statement No. 333-85941, filed August 26,
1999.
(10)(T) Loan Agreement dated as of March 19, 1998 by and
between Harleysville Group Inc. and Harleysville Mutual
Insurance Company - incorporated herein by reference to
Exhibit (10)(V) to the Registrant's Annual Report on Form
10-K for the year ended December 31, 1997.
(10)(U) Form of Management Agreements dated January 1, 1994
between Harleysville Group Inc. and Harleysville Mutual
Insurance Company, Harleysville-Garden State Insurance
Company, Mainland 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.
Page 36
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- ------------------------------------------------------
(10)(V) Form of Salary Allocation Agreements dated January 1,
1993 between Harleysville Group Inc. and Harleysville
Mutual Insurance Company, Harleysville-Garden State
Insurance Company, Mainland 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)(W) 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)(X) Form of Change of Control Employment Agreements dated
July 1, 1999 - incorporated herein by reference to
Exhibit 10(Z) to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1999.
*(10)(Y) Harleysville Group Inc. Supplemental Retirement Plan
Amended and Restated November 17, 1999 - incorporated
herein by reference to Exhibit 10(AB) to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1999.
*(10)(Z) 1996 Directors' Stock Purchase Plan of Registrant -
incorporated herein by reference to Exhibit (4)(C)
to the Registrant's Form S-8 Registration Statement
No. 333-03127 filed May 3, 1996.
Page 37
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- ------------------------------------------------------
*(10)(AA) 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.
*(10)(AB) Excess Stock Purchase Plan of Registrant - incorporated
herein by reference to Exhibit 4.3 to the Registrant's
Form S-8 Registration Statement No. 333-37212 filed
May 17, 2000.
*(10)(AC) Long Term Incentive Plan of Registrant - incorporated
herein by reference to Exhibit 4.3 to the Registrant's
Form S-8 Registration Statement No. 333-37386 filed
May 19, 2000.
(13)(A) Selected Consolidated Financial Data from the Company's
2002 annual report to stockholders.
(13)(B) Management's Discussion and Analysis of Results of
Operations and Financial Condition from the Company's
2002 annual report to stockholders.
(13)(C) Quantitative and Qualitative Disclosures About Market
Risk from the Company's 2002 annual report to
stockholders.
(13)(D) Consolidated financial statements from the Company's
2002 annual report to stockholders.
(13)(E) Market for Common Stock and Related Security Holder
Matters from the Company's 2002 annual report to
stockholders.
Page 38
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- ------------------------------------------------------
(21) Subsidiaries of Registrant.
(23) Independent Auditors' Consent and Report on Schedules.
(99) Form 11-K Annual Report for the Harleysville Group Inc.
Employee Stock Purchase Plan for the year ended
December 31, 2002.
(99.1) Certification of Chief Executive Officer
(99.2) Certification of Chief Financial Officer
- -----------------
* A management contract, compensatory plan or arrangement required
to be separately identified by reason of the provision of Item
14(a)(3).
(b) Reports on Form 8-K
A Form 8-K dated December 16, 2002 was filed disclosing that litigation
involving a reinsurance agreement with GE Reinsurance Corporation was settled.
Page 39
HARLEYSVILLE GROUP
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2002
(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 $ 68,289 $ 75,799 $ 75,445
States, municipalities
and political
subdivisions 674,553 720,436 703,558
Mortgage-backed
securities 214,453 228,367 228,367
All other corporate
bonds 479,747 517,209 502,661
---------- ---------- ----------
Total fixed
maturities 1,437,042 1,541,811 1,510,031
---------- ---------- ----------
Equity securities:
Common stocks:
Banks, trust and
insurance companies 22,841 22,104 22,104
Industrial,
miscellaneous and
all other 74,008 85,073 85,073
---------- ---------- ----------
Total equities 96,849 107,177 107,177
---------- ---------- ----------
Short-term
investments 89,692 89,692
---------- ----------
Total investments $1,623,583 $1,706,900
========== ==========
Page 40
HARLEYSVILLE GROUP INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED BALANCE SHEETS
(in thousands, except share data)
DECEMBER 31,
----------------------------
2002 2001
-------- --------
ASSETS
Short-term investments $ 8,652 $6,377
Fixed maturities:
Available for sale, at fair
value (cost $51 and $52) 55 53
Investments in common
stock of subsidiaries
(equity method) 670,814 661,430
Accrued investment income 17 16
Due from affiliate 3,636
Federal income tax recoverable 3,528
Dividends receivable from
subsidiaries 41,965 12,000
Other assets 13,748 14,521
-------- --------
Total assets $738,779 $698,033
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt $ 93,500 $ 93,500
Accounts payable and
accrued expenses 11,963 12,564
Due to affiliate 1,204
Federal income taxes payable 1,671
-------- --------
Total liabilities 106,667 107,735
-------- --------
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 2002, 30,917,575 and
2001, 30,444,678 shares; outstanding
2002, 29,917,575 and 2001,
29,444,678 shares 30,918 30,445
Additional paid-in capital 149,091 140,065
Accumulated other
comprehensive income 49,086 44,265
Retained earnings 418,582 391,088
Treasury stock, at cost,
1,000,000 shares (15,565) (15,565)
-------- --------
Total shareholders' equity 632,112 590,298
-------- --------
Total liabilities and
shareholders' equity $738,779 $698,033
======= ========
Page 41
HARLEYSVILLE GROUP INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED STATEMENTS OF INCOME
(in thousands)
YEAR ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
-------- -------- --------
Revenues $7,034 $7,782 $7,631
Expenses:
Interest 5,649 6,102 6,468
Expenses other than interest 1,793 1,828 1,823
------- ------- ------
(408) (148) (660)
Income tax benefit (138) (46) (223)
------- ------- -------
Loss before equity in
income of subsidiaries (270) (102) (437)
Equity in income of subsidiaries 46,525 43,595 49,129
------- ------- -------
Net income $46,255 $43,493 $48,692
======= ======= =======
Page 42
HARLEYSVILLE GROUP INC.
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
----------------------------------
2002 2001 2000
-------- -------- --------
Cash flows from operating
activities:
Net income $ 46,255 $ 43,493 $ 48,692
Adjustments to reconcile
net income to net cash
used by operating activities:
Equity in undistributed
earnings of subsidiaries (46,525) (43,595) (49,129)
(Increase) decrease in
accrued investment income (1) 19 (16)
Increase (decrease) in
accrued income taxes (5,179) (2,396) 3,209
Other, net 6,399 1,723 (3,984)
-------- -------- --------
Net cash provided (used)
by operating activities 949 (756) (1,228)
-------- -------- --------
Cash flows from investing activities:
Purchases of fixed maturity
investments (52)
Maturities of fixed maturity
investments 10
Net purchases of short-term
investments (2,275) (34) (4,646)
-------- -------- --------
Net cash used by
investing activities (2,275) (76) (4,646)
-------- -------- --------
Cash flows from financing activities:
Issuance of common stock 8,051 7,807 6,419
Dividends from subsidiaries 12,036 10,027 20,030
Dividends paid (18,761) (17,002) (15,864)
Purchase of treasury stock (4,711)
-------- -------- --------
Net cash provided by
financing activities 1,326 832 5,874
-------- -------- --------
Change in cash - - -
Cash at beginning of year
-------- -------- --------
Cash at end of year $ - $ - $ -
======== ======== ========
Page 43
HARLEYSVILLE GROUP
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(in thousands)
LIABILITY
FOR UNPAID AMORTIZATION
DEFERRED LOSSES AND LOSSES OF DEFERRED
POLICY LOSS NET AND LOSS POLICY OTHER
ACQUISITION SETTLEMENT UNEARNED EARNED INVESTMENT SETTLEMENT ACQUISITION UNDERWRITING PREMIUMS
COSTS EXPENSES PREMIUMS PREMIUMS INCOME EXPENSES COSTS EXPENSES WRITTEN
Year ended
December 31,
2002
Commercial
lines $702,663 $280,913 $553,194 $360,339 $596,057
Personal
lines 154,519 105,942 211,442 161,278 201,793
GAAP
adjustments(1) 71,153 19,422
-------- -------- -------- -------- --------
Total $94,896 $928,335 $406,277 $764,636 $521,617 $185,547 $74,105 $797,850
======= ======== ======== ======== ======== ======== ======= ========
Net
investment
income $86,265
=======
Year ended
December 31,
2001
Commercial
lines $651,088 $238,050 $493,362 $330,943 $515,860
Personal
lines 149,773 115,591 236,527 188,879 231,727
GAAP
adjustments(1) 78,195 20,096
-------- -------- -------- -------- --------
Total $86,076 $879,056 $373,737 $729,889 $519,822 $180,283 $64,267 $747,587
======= ======== ======== ======== ======== ======== ======= ========
Net
investment
income $85,518
=======
Year ended
December 31,
2000
Commercial
lines $635,184 $215,553 $437,873 $302,590 $446,719
Personal
lines 157,400 120,392 250,457 191,084 254,753
GAAP
adjustments(1) 72,259 18,153 (873)
-------- -------- -------- -------- --------
Total $84,759 $928,335 $354,098 $688,330 $492,801 $177,217 $60,916 $701,472
======= ======== ======== ======== ======== ======== ======= ========
Net
investment
income $86,791
=======
Page 44
HARLEYSVILLE GROUP
SCHEDULE IV - REINSURANCE
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(in thousands)
ASSUMED PERCENTAGE
CEDED FROM OF AMOUNT
GROSS TO OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- --------- --------- -------- ----------
Year ended
December 31, 2002
Property and
casualty
premiums $699,482 $732,487 $797,641 $764,636 104.3%
======== ======== ======== ======== =====
Year ended
December 31, 2001
Property and
casualty
premiums $658,166 $694,643 $766,366 $729,889 105.0%
======== ======== ======== ======== =====
Year ended
December 31, 2000
Property and
casualty
premiums $647,300 $679,770 $720,800 $688,330 104.7%
======== ======== ======== ======== =====
Note: The amounts ceded and assumed include the amounts ceded and
assumed under the terms of the pooling arrangement.
Page 45
HARLEYSVILLE GROUP
SCHEDULE VI - SUPPLEMENTAL INSURANCE INFORMATION CONCERNING
PROPERTY AND CASUALTY SUBSIDIARIES
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(in thousands)
LOSSES AND LOSS
LIABILITY SETTLEMENT EXPENSES
FOR UNPAID DISCOUNT, (BENEFITS)
LOSSES AND IF ANY, INCURRED PAID LOSSES
LOSS DEDUCTED RELATED TO AND LOSS
SETTLEMENT FROM CURRENT PRIOR SETTLEMENT
EXPENSES RESERVES(1) YEAR YEARS EXPENSES
---------- ----------- ------- --------- ----------
Year ended:
December 31,
2002 $928,335 $9,786 $526,265 $ (4,648) $465,296
======== ====== ======== ======== ========
December 31,
2001 $879,056 $8,007 $537,172 $(17,350) $511,545
======== ====== ======== ======== ========
December 31,
2000 $864,843 $7,774 $541,738 $(48,937) $524,131
======== ====== ======== ======== ========
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.
Page 46
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 26, 2003 By: /s/ WALTER R. BATEMAN
------------------------------
Walter R. Bateman
Chairman of the Board 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, March 26, 2003
Chief Executive Officer
/s/ WALTER R. BATEMAN and a Director
- ------------------------
Walter R. Bateman
Senior Vice President March 26, 2003
and Chief Financial
Officer (principal
financial officer and
principal accounting
/s/ BRUCE J. MAGEE officer)
- ------------------------
Bruce J. Magee
Page 47
SIGNATURES
(Continued)
SIGNATURE TITLE DATE
- --------------------------- --------------- --------------
/s/ LOWELL R. BECK Director March 26, 2003
- ---------------------------
Lowell R. Beck
/S/ W. THACHER BROWN Director March 26, 2003
- ---------------------------
W. Thacher Brown
/s/ MICHAEL L. BROWNE Director March 26, 2003
- ---------------------------
Michael L. Browne
/s/ ROBERT D. BUZZELL Director March 26, 2003
- ---------------------------
Robert D. Buzzell
/s/ MIRIAN M. GRADDICK-WEIR Director March 26, 2003
- ------------------------------
Mirian M. Graddick-Weir
/s/ JOSEPH E. MCMENAMIN Director March 26, 2003
- ---------------------------
Joseph E. McMenamin
/s/ FRANK E. REED Director March 26, 2003
- ---------------------------
Frank E. Reed
/s/ JERRY S. ROSENBLOOM Director March 26, 2003
- ---------------------------
Jerry S. Rosenbloom
Page 48
CERTIFICATION PURSUANT TO THE SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Walter R. Bateman certify that:
1. I have reviewed this annual report on Form 10-K of Harleysville
Group Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial conditions, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 /s/WALTER R. BATEMAN
------------------ -----------------------------
Walter R. Bateman
Chairman of the Board and
Chief Executive Officer
Page 49
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Bruce J. Magee certify that:
1. I have reviewed this annual report on Form 10-K of Harleysville
Group Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial conditions, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 /s/BRUCE J. MAGEE
------------------ -----------------------------
Bruce J. Magee
Senior Vice President and
Chief Financial Officer
Page 50
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
- -------- -------------------------------------------------
(13)(A) Selected Consolidated Financial Data from the
Company's 2002 annual report to stockholders.
(13)(B) Management's Discussion and Analysis of Results
of Operations and Financial Condition from the
Company's 2002 annual report to stockholders.
(13)(C) Quantitative and Qualitative Disclosures About
Market Risk from the Company's 2002 annual
report to stockholders.
(13)(D) Consolidated financial statements from the
Company's 2002 annual report to stockholders.
(13)(E) Market for Common Stock and Related Security
Holder Matters from the Company's 2002 annual
report to stockholders.
(21) Subsidiaries of Registrant.
(23) Independent Auditors' Consent and Report on
Schedules.
(99) Form 11-K Annual Report for the Harleysville
Group Inc. Employee Stock Purchase Plan for
the year ended December 31, 2002.
(99.1) Certification of Chief Executive Officer
(99.2) Certification of Chief Financial Officer