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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2004.
----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
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, PENNSYLVANIA 19438-2297
------------------------------------------------------------
(Address of principal executive offices, including zip code)
(215) 256-5000
--------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X . No .
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X . No .
----- -----
At May 3, 2004, 29,970,555 shares of common stock of Harleysville Group
Inc. were outstanding.
Page 1
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
INDEX
Page Number
------------
Part I - Financial Information
Consolidated Balance Sheets - March 31, 2004
and December 31, 2003 3
Consolidated Statements of Income (Loss) - For the
three months ended March 31, 2004 and 2003 4
Consolidated Statement of Shareholders' Equity -
For the three months ended March 31, 2004 5
Consolidated Statements of Cash Flows -
For the three months ended March 31, 2004
and 2003 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Results
of Operations and Financial Condition 14
Quantitative and Qualitative Disclosure About
Market Risk 26
Controls and Procedures 27
Part II - Other Information 28
Page 2
Item 1. Financial Statements
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, DECEMBER 31,
2004 2003
---------- ------------
(Unaudited)
ASSETS
------
Investments:
Fixed maturities:
Held to maturity, at amortized cost
(fair value $486,181 and $463,953) $ 456,781 $ 436,521
Available for sale, at fair value
(amortized cost $994,596 and $980,936) 1,056,210 1,033,855
Equity securities, at fair value
(cost $108,599 and $97,189) 142,705 137,590
Short-term investments, at cost,
which approximates fair value 68,691 31,411
Fixed maturity securities on loan:
Held to maturity, at amortized cost
(fair value $4,288 and $3,532) 3,834 3,092
Available for sale, at fair value
(amortized cost $166,076 and $202,222) 177,660 212,164
---------- ----------
Total investments 1,905,881 1,854,633
Cash 1,782 13,430
Receivables:
Premiums 138,258 140,674
Reinsurance (affiliate $2,399 and $699) 178,020 164,841
Accrued investment income 21,220 23,086
---------- ----------
Total receivables 337,498 328,601
Deferred policy acquisition costs 98,884 99,033
Prepaid reinsurance premiums 29,781 30,899
Property and equipment, net 23,095 23,824
Deferred income taxes 40,801 43,020
Securities lending collateral 186,570 221,454
Other assets 56,935 65,495
---------- ----------
Total assets $2,681,227 $2,680,389
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Liabilities:
Unpaid losses and loss settlement expenses
(affiliate $184,519 and $189,891) $1,251,877 $1,219,977
Unearned premiums (affiliate $56,642 and $52,839) 435,842 437,883
Accounts payable and accrued expenses 93,407 91,999
Security lending obligation 186,570 221,454
Debt (affiliate $18,500 and $18,500) 120,145 120,145
Due to affiliate 3,327 16,184
---------- ----------
Total liabilities 2,091,168 2,107,642
---------- ----------
Shareholders' equity:
Preferred stock, $1 par value, authorized
1,000,000 shares; none issued
Common stock, $1 par value, authorized
80,000,000 shares; issued 31,368,464
and 31,298,532 shares; outstanding
29,970,555 and 29,900,623 shares 31,368 31,299
Additional paid-in capital 158,062 156,997
Accumulated other comprehensive income 63,078 60,450
Retained earnings 362,238 350,844
Deferred compensation (200) (2,356)
Treasury stock, at cost, 1,397,909 shares (24,487) (24,487)
---------- ----------
Total shareholders' equity 590,059 572,747
---------- ----------
Total liabilities and
shareholders' equity $2,681,227 $2,680,389
========== ==========
See accompanying notes to consolidated financial statements.
Page 3
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(dollars in thousands, except per share data)
2004 2003
-------- ---------
Revenues:
Premiums earned from affiliate,
(ceded to affiliate, $181,176
and $172,305) $206,948 $198,829
Investment income, net of
investment expense 21,642 21,447
Realized investment gains (losses) 12,488 (433)
Other income (affiliate $1,775 and
$2,010) 4,564 4,520
-------- --------
Total revenues 245,642 224,363
-------- --------
Losses and expenses:
Losses and loss settlement expenses
(ceded to affiliate, $139,685 and
$142,882) 151,110 163,759
Amortization of deferred policy
acquisition costs 50,688 48,317
Other underwriting expenses 19,638 18,557
Interest expense (affiliate $84 and
$94) 1,577 1,394
Other expenses 1,419 1,211
-------- --------
Total expenses 224,432 233,238
-------- --------
Income (loss) before income
taxes 21,210 (8,875)
Income taxes (benefit) 4,717 (5,635)
-------- --------
Net income (loss) $ 16,493 $ (3,240)
======== ========
Per common share:
Basic earnings (loss) $ .55 $ (.11)
======== ========
Diluted earnings (loss) $ .55 $ (.11)
======== ========
Cash dividend $ .17 $ .165
======== ========
See accompanying notes to consolidated financial statements.
Page 4
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004
(dollars in thousands)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID-IN COMPREHENSIVE RETAINED DEFERRED TREASURY
SHARES AMOUNT CAPITAL INCOME EARNINGS COMPENSATION STOCK TOTAL
---------- ------ ---------- ------------- -------- ------------ -------- --------
Balance,
December 31,
2003 31,298,532 $31,299 $156,997 $60,450 $350,844 $(2,356) $(24,487) $572,747
--------
Net income 16,493 16,493
Other compre-
hensive income,
net of tax:
Unrealized
investment
gains, net of
reclassification
adjustment 2,628 2,628
--------
Comprehensive
income 19,121
Issuance of
common stock 69,932 69 1,190 1,259
Tax on stock
compensation (125) (125)
Deferred
compensation 2,156 2,156
Cash dividend
paid (5,099) (5,099)
---------- ------- -------- ------- -------- ------- -------- --------
Balance at
March 31,
2004 31,368,464 $31,368 $158,062 $63,078 $362,238 $ (200) $(24,487) $590,059
========== ======= ======== ======= ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
Page 5
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(in thousands)
2004 2003
-------- --------
Cash flows from operating activities:
Net income (loss) $ 16,493 $ (3,240)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Change in receivables, unearned
premiums, prepaid reinsurance
balances (9,820) 3,351
Change in affiliate balance (12,857) 13,126
Increase in unpaid losses and
loss settlement expenses 31,900 49,426
Deferred income taxes 804 (4,056)
(Increase) decrease in deferred
policy acquisition costs 149 (4,359)
Amortization and depreciation 1,406 844
Loss (gain) on sale of investments (12,488) 433
Other, net (4,393) (18,066)
-------- --------
Net cash provided by
operating activities 11,194 37,459
-------- --------
Cash flows from investing activities:
Fixed maturity investments:
Purchases (43,304) (97,495)
Sales or maturities 54,690 68,431
Equity securities:
Purchases (7,096)
Sales 14,183 1,923
Net purchases of short-term investments (37,280) (11,749)
Sale (purchase) of property and
equipment (195) 297
-------- --------
Net cash used by
investing activities (19,002) (38,593)
-------- --------
Cash flows from financing activities:
Issuance of common stock 1,259 6,080
Dividend paid (to affiliates, $2,890
and $2,743) (5,099) (4,972)
Purchase of treasury stock (427)
-------- --------
Net cash provided (used)
by financing activities (3,840) 681
-------- --------
Decrease in cash (11,648) (453)
Cash at beginning of period 13,430 2,944
-------- --------
Cash at end of period $ 1,782 $ 2,491
======== ========
See accompanying notes to consolidated financial statements.
Page 6
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 - Basis of Presentation
The financial information for the interim periods included herein is
unaudited; however, such information reflects all adjustments which are, in the
opinion of management, necessary to a fair presentation of the financial
position, results of operations, and cash flows for the interim periods. The
results of operations for interim periods are not necessarily indicative of
results to be expected for the full year.
These financial statements should be read in conjunction with the financial
statements and notes for the year ended December 31, 2003 included in the
Company's 2003 Annual Report filed with the Securities and Exchange Commission
on Form 10-K.
The affiliate transaction disclosures on the face of the financial
statements are in regards to transactions with Harleysville Mutual Insurance
Company (Mutual). Mutual owns approximately 57% of the outstanding common stock
of Harleysville Group Inc. As used herein, "Harleysville Group" refers to
Harleysville Group Inc. and its subsidiaries.
Policy Acquisition Costs
Policy acquisition costs, such as commissions, premium taxes and certain
other underwriting and agency expenses that vary with and are directly related
to the production of business, are deferred and amortized over the effective
period of the related insurance policies and in proportion to the premiums
earned. The method followed in computing deferred policy acquisition costs
limits the amount of such deferred costs to their estimated realizable value.
The estimation of net realizable value takes into account the premium to be
earned, related investment income over the claim paying period, losses and loss
settlement expenses, and certain other costs expected to be incurred as the
premium is earned. Future changes in estimates, the most significant of which
is expected losses and loss settlement expenses, may require adjustments to
deferred policy acquisition costs. If the estimation of net realizable value
indicates that the acquisition costs are unrecoverable, further analyses are
completed to determine if a reserve is required to provide for losses that may
exceed the related unearned premiums.
Page 7
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
Stock-based compensation plans are accounted for under the provisions of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Accordingly, no compensation
expense is recognized for fixed stock option grants and an employee stock
purchase plan. Compensation expense would be recorded on the date of a stock
option grant only if the current market price of the underlying stock exceeded
the exercise price. The following table illustrates the effect on net income
(loss) and earnings (loss) per share as if the provisions of statement of
Financial Accounting Standards (SFAS) No. 123 (as amended by SFAS No. 148),
"Accounting for Stock-Based Compensation," had been applied for the three months
ended March 31, 2004 and 2003:
FOR THE THREE MONTHS
ENDED MARCH 31,
2004 2003
-------- --------
(in thousands, except
per share data)
Net income (loss), as reported $16,493 $(3,240)
Plus:
Stock-based employee
compensation expense included
in reported net income (loss),
net of related tax effects 43 201
Less:
Total stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects (749) (1,088)
------- -------
Pro forma net income (loss) $15,787 $(4,127)
======= =======
Basic earnings (loss) per share:
As reported $ .55 $ (0.11)
Pro forma $ .53 $ (0.14)
Diluted earnings (loss) per share:
As reported $ .55 $ (0.11)
Pro forma $ .53 $ (0.14)
Page 8
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2 - Earnings Per Share
The computation of basic and diluted earnings (loss) per share is as
follows:
FOR THE THREE MONTHS
ENDED MARCH 31,
2004 2003
---------- ----------
(dollars in thousands,
except per share data)
Numerator for basic
and diluted earnings (loss)
per share:
Net income (loss) $16,493 $ (3,240)
======= ========
Denominator for basic
earnings (loss) per share --
weighted average
shares outstanding 29,960,760 29,987,316
Effect of stock
incentive plans 87,375
---------- ----------
Denominator for
diluted earnings (loss)
per share 30,048,135 29,987,316
========== ==========
Basic earnings (loss)
per share $ .55 $ (.11)
======= ========
Diluted earnings (loss)
per share $ .55 $ (.11)
======= ========
Page 9
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following options to purchase shares of common stock were not included
in the computation of diluted earnings (loss) per share because the exercise
price of the options was greater than the average market price:
FOR THE THREE MONTHS
ENDED MARCH 31,
2004 2003
-------- --------
(in thousands)
Number of options 1,413 904
===== ===
For the three months ended March 31, 2003, an additional 1,212,316 options
to purchase shares of common stock were not included in the computation of
diluted earnings (loss) per share because their inclusion would have had an
antidilutive effect.
3 - Reinsurance
Premiums earned are net of amounts ceded of $21,578,000 and $16,400,000 for
the three months ended March 31, 2004 and 2003, respectively. Losses and loss
settlement expenses are net of amounts ceded of $34,154,000 and $17,865,000 for
the three months ended March 31, 2004 and 2003, respectively. Such amounts do
not include the reinsurance transactions with Mutual under the pooling
arrangement.
Harleysville Group has a reinsurance agreement with Mutual whereby Mutual
reinsures accumulated catastrophe losses in a quarter up to $14,400,000 in
excess of $3,600,000 in return for a reinsurance premium. The agreement
excludes catastrophe losses resulting from earthquakes, terrorism or hurricanes,
and supplements the existing external catastrophe reinsurance program. Under the
agreement, Harleysville Group ceded premiums earned of $1,997,000 and $2,024,000
and losses incurred of $1,800,000 and $3,756,000 to Mutual for the three months
ended March 31, 2004 and 2003, respectively.
Pursuant to the terms of a reinsurance pooling agreement with Mutual, each
of the insurance subsidiaries of Harleysville Group Inc. cedes premiums, losses
and expenses on all of their respective business to Mutual which, in turn,
retrocedes to such subsidiaries a specified portion of premiums, losses and
expenses of Mutual and such subsidiaries. Because this agreement does not
relieve Harleysville Group Inc.'s insurance subsidiaries of
Page 10
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
primary liability as originating insurers, there is a concentration of credit
risk arising from business ceded to Mutual. However, the reinsurance pooling
agreement provides for the right of offset. Mutual has an A. M. Best rating of
"A-" (Excellent).
4 - Cash Flows
Cash tax refunds of $3,798,000 were received in the first quarter of 2004.
There were no cash tax payments in the first quarter of 2003. Cash interest
payments of $2,974,000 and $94,000 were made in the first quarter of 2004 and
2003, respectively.
5 - Segment Information
The performance of the personal lines and commercial lines is evaluated
based upon underwriting results as determined under statutory accounting
practices (SAP).
Financial data by segment is as follows:
FOR THE THREE MONTHS
ENDED MARCH 31,
2004 2003
--------- --------
(in thousands)
Revenues:
Premiums earned:
Commercial lines $162,320 $148,749
Personal lines 44,628 50,080
-------- --------
Total premiums earned 206,948 198,829
Net investment income 21,642 21,447
Realized investment
gains (losses) 12,488 (433)
Other 4,564 4,520
-------- --------
Total revenues $245,642 $224,363
======== ========
Income (loss) before income taxes:
Underwriting loss:
Commercial lines $ (9,648) $(28,006)
Personal lines (4,860) (7,894)
-------- --------
SAP underwriting loss (14,508) (35,900)
GAAP adjustments 20 4,096
-------- --------
GAAP underwriting loss (14,488) (31,804)
Net investment income 21,642 21,447
Realized investment
gains (losses) 12,488 (433)
Other 1,568 1,915
-------- --------
Income (loss) before income taxes $ 21,210 $ (8,875)
======== ========
Page 11
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
6 - Comprehensive Income
Comprehensive income (loss) for the three months ended March 31, 2004 and
2003 consisted of the following (all amounts are net of taxes):
FOR THE THREE MONTHS
ENDED MARCH 31,
2004 2003
-------- --------
(in thousands)
Net income (loss) $16,493 $(3,240)
Other comprehensive income (loss):
Unrealized investment holding
gains (losses) arising during
period 10,721 (4,120)
Less:
Reclassification adjustment
for (gains) losses included
in net income (8,093) 440
------- -------
Net unrealized investment gains
(losses) 2,628 (3,680)
------- -------
Comprehensive income (loss) $19,121 $(6,920)
======= =======
7 - Pension
Harleysville Group Inc. has a pension plan that covers substantially all
full-time employees. The net periodic pension cost for the plan including
Mutual consists of the following components:
FOR THE THREE MONTHS
ENDED MARCH 31,
2004 2003
--------- ---------
(in thousands)
Components of net periodic pension
cost:
Service cost $ 1,993 $ 1,658
Interest cost 2,770 2,507
Expected return on plan assets (3,020) (2,486)
Recognized net actuarial loss 518 13
Amortization of prior service cost 52 58
Net transition amortization 12 14
------- -------
Net periodic pension cost:
Entire plan $ 2,325 $ 1,764
======= =======
Harleysville Group portion $ 1,533 $ 1,212
======= =======
Page 12
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
(UNAUDITED)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Harleysville Group's expected portion of the 2004 contribution to the
pension plan is $6,600,000. No contributions were made in the quarter ended
March 31, 2004.
8 - Shareholders' Equity
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.
These RBC standards require the calculation of a ratio of total adjusted
capital to Authorized Control Level. Insurers with a ratio below 200% are
subject to different levels of regulatory intervention and action. Based upon
their 2003 statutory financial statements, the ratio of total adjusted capital
to the Authorized Control Level for the Company's nine insurance subsidiaries at
December 31, 2003 ranged from 478% to 609%.
Page 13
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
Certain of the statements contained herein (other than statements of
historical facts) are forward looking statements. Such forward looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and include estimates and assumptions
related to economic, competitive and legislative developments. These forward
looking statements are subject to change and uncertainty which are, in many
instances, beyond the Company's control and have been made based upon
management's expectations and beliefs concerning future developments and their
potential effect on Harleysville Group. There can be no assurance that future
developments will be in accordance with management's expectations so that the
effect of future developments on Harleysville Group will be those anticipated by
management. Actual financial results including premium growth and underwriting
results could differ materially from those anticipated by Harleysville Group
depending on the outcome of certain factors, which may include changes in
property and casualty loss trends and reserves; catastrophe losses; competition
in insurance product pricing; government regulation and changes therein which
may impede the ability to charge adequate rates; performance of the financial
markets; fluctuations in interest rates; availability and price of reinsurance;
the Best's rating of Harleysville Group; and the status of labor markets in
which the Company operates.
Overview
The Company's net income is primarily determined by three elements:
- net premium income
- investment income
- amounts paid or reserved to settle insured claims
A number of factors may affect the level of premium income, including:
- limitations on rates arising from the competitive market place
or regulation
- limitation on available business arising from a need to maintain
the quality of underwritten risks
- the Company's ability to maintain its A-("excellent") rating by
A.M. Best
- the ability of the Company to maintain a reputation for efficiency
and fairness in claims administration
Page 14
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
A number of factors may affect the level of investment income, including:
- general interest rate levels
- specific adverse events affecting the issuers of debt obligations
held by the Company
- changes in the prices of equity securities generally and those held
by the Company specifically
Loss and loss settlement expenses are affected by a number of factors,
including:
- the quality of the risks underwritten by the Company
- the nature and severity of catastrophic losses
- the availability, cost and terms of reinsurance
- underlying settlement costs, including medical and legal costs
The Company seeks to manage each of the foregoing to the extent within its
control. Many of the foregoing factors are partially, or entirely, outside of
the control of the Company.
Critical Accounting Policies and Estimates
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America, which
require Harleysville Group to make estimates and assumptions (see Note 1 of the
Notes to Consolidated Financial Statements for the year ended December 31, 2003
included in the Company's 2003 Annual Report filed with the Securities and
Exchange Commission on Form 10-K). Harleysville Group believes that of its
significant accounting policies, the following may involve a higher degree of
judgment and estimation. The judgments, or the methodology on which the
judgments are made, are reviewed quarterly with the Audit Committee.
Liability for Losses and Loss Settlement Expenses. The liability for
losses and loss settlement expenses represents estimates of the ultimate unpaid
cost of all losses incurred, including losses for claims which have not yet been
reported to Harleysville Group. The amount of loss reserves for reported claims
is based primarily upon a case-by-case evaluation of the
Page 15
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
type of risk involved, knowledge of the circumstances surrounding each claim and
the insurance policy provisions relating to the type of loss. The amounts of
loss reserves for unreported claims and loss settlement expense reserves are
determined 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 statistical
techniques. It is expected that such estimates will be more or less than the
amounts ultimately paid when the claims are settled. Changes in these estimates
are reflected in current operations.
Investments. Generally, unrealized investment gains or losses on
investments carried at fair value, net of applicable income taxes, are reflected
directly in shareholders' equity as a component of comprehensive income and,
accordingly, have no effect on net income. However, if the fair value of an
investment declines below its cost and that decline is deemed other than
temporary, the amount of the decline below cost is charged to earnings.
Harleysville Group monitors its investment portfolio and quarterly reviews
investments that have experienced a decline in fair value below cost to evaluate
whether the decline is other than temporary. Such evaluations consider, among
other things, the magnitude and reasons for a decline and the prospects for the
fair value to recover in the near term. Future adverse investment market
conditions, or poor operating results of underlying investments, could result in
an impairment charge in the future.
Harleysville Group evaluates its investment portfolio quarterly to
determine if a decline in fair value below cost is other than temporary.
Harleysville Group has written down to fair value, without exception, any equity
security that has declined below cost by more than 20% and maintained such
decline for six months, or by 50% or more, in the quarter in which either such
decline occurred. In some cases, securities that have declined by a lesser
amount or for a shorter period of time are written down if the evaluation
indicates the decline is other-than-temporary. Fair value of equity securities
is based on the closing market value as reported by a national stock exchange or
Nasdaq. The fair value of fixed maturities is based upon data supplied by an
independent pricing service. It can be difficult to determine the fair value of
non-traded securities but Harleysville Group does not own a material amount of
non-traded securities.
Page 16
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Policy Acquisition Costs. Policy acquisition costs, such as commissions,
premium taxes and certain other underwriting and agency expenses that vary with
and are directly related to the production of business, are deferred and
amortized over the effective period of the related insurance policies and in
proportion to the premiums earned. The method followed in computing deferred
policy acquisition costs limits the amount of such deferred costs to their
estimated realizable value. The estimation of net realizable value takes into
account the premium to be earned, related investment income over the claim
paying period, losses and loss settlement expenses, and certain other costs
expected to be incurred as the premium is earned. Future changes in estimates,
the most significant of which is expected losses and loss settlement expenses,
may require adjustments to deferred policy acquisition costs. If the estimation
of net realizable value indicates that the acquisition costs are unrecoverable,
further analyses are completed to determine if a reserve is required to provide
for losses that may exceed the related unearned premiums.
Contingencies. Besides claims related to its insurance products,
Harleysville Group is subject to proceedings, lawsuits and claims in the normal
course of business. Harleysville Group assesses the likelihood of any adverse
outcomes to these matters as well as potential ranges of probable losses. There
can be no assurance that actual outcomes will not differ from those assessments.
The application of certain of these critical accounting policies to the
periods ended March 31, 2004 and 2003 is discussed in greater detail below.
Results of Operations
Premiums earned increased $8.1 million during the three months ended March
31, 2004 as compared to the three months ended March 31, 2003. The increase is
primarily due to an increase of $13.6 million in premiums earned for commercial
lines partially offset by a decline of $5.5 million in personal lines premiums
earned. The increase in premiums earned for commercial lines was 9.1%,
primarily due to higher rates partially offset by fewer policy counts. The
decline in policy counts was primarily in the workers compensation line of
business. The decline in premiums earned for personal lines was 10.9%,
primarily due to fewer policy counts. The reduction in personal lines volume
was driven primarily by a reduction in personal automobile business from the
continued implementation of more stringent underwriting processes.
Page 17
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Investment income increased $0.2 million for the three months ended March
31, 2004 primarily due to a higher level of invested assets partially offset by
a lower yield on the fixed maturity investment portfolio.
Realized investment gains (losses) increased $12.9 million for the three
months ended March 31, 2004 compared to the same prior year quarter. The
increase primarily resulted from gains on the sale of two equity securities in
the first quarter of 2004.
Harleysville Group holds securities with unrealized losses at March 31,
2004 as follows:
LENGTH OF UNREALIZED LOSS
-------------------------
UNREALIZED LESS THAN OVER 12
FAIR VALUE LOSS 12 MONTHS MONTHS
---------- ---------- --------- -------
(in thousands)
Fixed maturities:
U.S. Treasury
securities and
obligations of
U.S. government
corporations
and agencies $ 3,438 $ 48 $ 48
Obligations of
states and
political
subdivisions 34,967 390 390
Corporate
securities 33,557 1,870 53 $1,817
Mortgage-backed
securities 4,826 138 138
------- ------ ---- ------
Total fixed
maturities $76,788 $2,446 $629 $1,817
======= ====== ==== ======
Equity securities $10,520 $ 798 $777 $ 21
======= ====== ==== ======
Substantially all of the fixed maturity securities are classified as
available for sale and are carried at fair value on the balance sheet.
There are 6 positions that comprise the unrealized loss in equity
investments at March 31, 2004. While 2 of these positions have been below cost
for more than six months, they have had volatile price movements and have not
been significantly below cost for significant continuous amounts of time.
Harleysville Group has been monitoring these securities and it is possible that
some may be written down in the income statement in the future.
Page 18
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
There are $21.3 million in fixed maturity securities, at amortized cost,
that at March 31, 2004, had been below amortized cost for over 12 months. These
primarily are comprised of airline enhanced equipment trust certificates (EETC)
as follows:
FAIR MATURITY
COST VALUE DATES
------- ------- ----------
(in thousands)
American Airlines $14,385 $13,302 2011
United Airlines 6,962 6,228 2010-2012
------- -------
$21,347 $19,530
======= =======
After the events of September 11, 2001, air travel and the value of these
airlines' EETC securities declined. The EETCs are all "A tranche" holdings,
which means they are in a senior credit position to the underlying airplane
collateral value as compared to B and C tranche holders. At the time of
issuance, the collateral was appraised at approximately twice the value of the A
tranche EETCs. Recent estimates indicate that in a distressed sale scenario,
the value of the collateral would be approximately the same as the EETCs' cost.
At March 31, 2004, these EETC's carry an investment grade debt rating and the
market value has improved over the past year. Harleysville Group is
participating in certain EETC creditor committees and is monitoring
developments. It is possible that these EETCs may be written down in the income
statement in the future, depending upon developments involving both the issuers
and world events which impact the level of air travel.
In the first quarter of 2004, Harleysville Group had income before income
taxes of $21.2 million, compared to a loss before income taxes of $8.9 million
in the first quarter of 2003. The increase in income before income taxes of
$30.1 million for the three months ended March 31, 2004, as compared to the same
period in 2003, was primarily due to the increased realized gains and to
improved underwriting results. The improved underwriting results in 2004
primarily was due to the change in the provision for insured events of prior
years recognized in the first quarter of 2004 as compared to 2003. Such
provisions were $0.6 million of favorable development for the three months ended
March 31, 2004 and $20.5 million ($19.9 million in the workers compensation
line) of adverse development for the three months ended March 31, 2003. Property
catastrophe losses were $2.6 million and $3.6 million for the three months ended
March 31, 2004 and 2003, respectively.
Page 19
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
An insurance company's statutory combined ratio is a standard measure of
underwriting profitability. This ratio is the sum of (1) the ratio of incurred
losses and loss settlement expenses to net earned premium; (2) the ratio of
expenses incurred for commissions, premium taxes, administrative and other
underwriting expenses to net written premium; and (3) the ratio of dividends to
policyholders to net earned premium. The combined ratio does not reflect
investment income, federal income taxes or other non-operating income or
expense. A ratio of less than 100 percent generally indicates underwriting
profitability. Harleysville Group's statutory combined ratio decreased to
107.2% for the three months ended March 31, 2004 from 115.4% for the three
months ended March 31, 2003. Such decrease was due to a lower underwriting loss
in both commercial lines and personal lines.
The statutory combined ratios by line of business for the three months
ended March 31, 2004, as compared to the three months ended March 31, 2003, were
as follows:
FOR THE THREE MONTHS
ENDED MARCH 31,
2004 2003
------ ------
Commercial:
Automobile 103.1% 96.0%
Workers compensation 122.9% 192.2%
Commercial multi-peril 105.1% 98.8%
Other commercial 81.7% 83.8%
Total commercial 104.7% 114.1%
Personal:
Automobile 118.3% 117.5%
Homeowners 109.3% 124.0%
Other personal 147.6% 114.8%
Total personal 116.2% 119.3%
Total personal and commercial 107.2% 115.4%
Page 20
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
The following table presents the liability for unpaid losses and loss
settlement expenses by major line of business:
MARCH 31, DECEMBER 31,
2004 2003
---------- ------------
(in thousands)
Commercial:
Automobile $ 232,625 $ 228,356
Workers compensation 296,892 294,750
Commercial multi-peril 332,090 320,607
Other commercial 60,895 59,042
---------- ----------
Total commercial 922,502 902,755
---------- ----------
Personal:
Automobile 113,292 117,034
Homeowners 41,772 41,264
Other personal 2,144 1,607
---------- ----------
Total personal 157,208 159,905
---------- ----------
Total personal and commercial $1,079,710 1,062,660
Plus reinsurance recoverables 172,167 157,317
---------- ----------
Total liability $1,251,877 $1,219,977
========== ==========
The commercial lines statutory combined ratio decreased to 104.7% for the
three months ended March 31, 2004 from 114.1% for the three months ended March
31, 2003. The decrease is primarily due to lesser adverse development in the
provision for insured events in prior years partially offset by increases in the
combined ratio for commercial automobile and commercial multi-peril.
The net $0.6 million of favorable development in the provision for insured
events in prior years for the three months ended March 31, 2004 was net of $3.1
million of adverse development in commercial automobile which was more than
offset by favorable development in other lines.
The adverse development in commercial automobile primarily was in accident
year 2000 and 2001 due to loss severity trends that were higher than the adverse
trends noted in this line in the third and fourth quarter of 2003. These trends
included an increase in litigation on bodily injury cases and a slowing rate of
settlement.
The increase in the commercial multi-peril combined ratio primarily was due
to greater property losses in the three months ended March 31, 2004.
Page 21
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Of the $19.9 million of 2003 adverse development in the provision for
insured events in prior years in workers compensation, $16.7 million was
attributable to the 1998 to 2001 accident years and the balance was attributable
to other accident years. Such adverse development represented 8.6% of the
December 31, 2002 workers compensation net liability for unpaid losses and loss
settlement expenses.
Harleysville Group had publicly noted adverse loss trends in its workers
compensation line for several quarters during 2002 and 2003. These trends are
consistent with the experience of other companies writing this coverage, many of
which have, during the past two years, made substantial additions to their
reserves for insured events in prior years in this line of insurance. The
change in loss development patterns in 2003 was influenced by a number of
factors. A reorganization of Harleysville Group's claim operations resulted in
more proactive claims management which, in turn, provided more contemporaneous
loss estimates. In addition, weak economic conditions have hampered the ability
to return injured workers to employment thus extending the estimated length of
disabilities and medical loss cost trends have increased.
The following table presents workers compensation claim count information
for the total pooled business in which Harleysville Group participates and
payment amounts which are Harleysville Group's pooling share of the total pooled
amounts:
FOR THE THREE MONTHS FOR THE YEAR ENDED
ENDED MARCH 31, 2004 DECEMBER 31, 2003
-------------------- ------------------
(dollars in thousands)
Number of claims pending,
beginning of period 8,005 8,900
Number of claims reported 2,665 12,952
Number of claims settled or
dismissed (3,015) (13,847)
------- --------
Number of claims pending,
end of period 7,655 8,005
======= ========
Losses paid $17,927 $ 82,003
Loss settlement expenses paid $ 3,922 $ 16,465
Workers compensation losses primarily consist of indemnity and medical
costs for injured workers. The reduction in claim counts reflects the impact of
a reduction in workers compensation exposure as policy counts have declined.
Page 22
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Harleysville Group records the actuarial best estimate of the ultimate
unpaid losses and loss settlement expenses incurred. Actuarial loss reserving
techniques and assumptions, which rely on historical information as adjusted to
reflect current conditions, have been consistently applied, after including
consideration of recent case reserve activity, during the periods presented.
Changes in the estimate of the liability for unpaid losses and loss settlement
expenses reflect actual payments and evaluations of new information and data
since the last reporting date. These changes correlate with actuarial trends.
Because of the nature of insurance claims, there are uncertainties inherent
in the estimates of ultimate losses. The aforementioned reorganization of the
claims operation has resulted in new people and processes involved in settling
claims. As a result, more recent statistical data reflects different patterns
than in the past and give rise to uncertainty as to the pattern of future loss
settlements. Litigation on bodily injury liability cases has increased during
the past two years while the rate of settlement has slowed. These changed
patterns give rise to greater uncertainty as to the pattern of future loss
settlements on bodily injury liability claims. There are uncertainties
regarding future loss cost trends particularly related to medical treatments and
automobile repair. Court decisions, regulatory changes and economic conditions
can affect the ultimate cost of claims that occurred in the past. Accordingly,
the ultimate liability for unpaid losses and loss settlement expenses will
likely differ from the amount recorded at March 31, 2004. For every 1% change
in the estimate, the effect on pre-tax income would be $10.8 million.
The property and casualty industry has had substantial aggregate loss
experience from claims related to asbestos-related illnesses, environmental
remediation, product liability, mold, and other uncertain exposures.
Harleysville Group has not experienced significant losses from such claims.
The personal lines combined ratio decreased to 116.2% for the three months
ended March 31, 2004 from 119.3% for the three months ended March 31, 2003. The
decrease primarily was due to lesser catastrophe losses from winter weather
which affected the homeowners line, partially offset by higher loss severity
which affected each of the personal lines.
Net catastrophe losses decreased $1.0 million and losses ceded under the
aggregate catastrophe reinsurance agreement with Mutual decreased $2.0 million
for the three months ended March 31, 2004, due to less severe catastrophes in
the 2004 period.
Page 23
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
The income tax expense for each of the three month periods ended March 31,
2004 and 2003 includes a tax benefit of $2.7 million and $2.5 million,
respectively, related to tax-exempt investment income.
Liquidity and Capital Resources
Operating activities provided $11.2 million and $37.5 million of net cash
for the three months ended March 31, 2004 and 2003, respectively. The change
primarily is from lesser underwriting cash flow, a change in the affiliate
balance and a change in the amount of accounts payable and accrued expenses.
Investing activities used $19.0 million and $38.6 million for the three
months ended March 31, 2004 and 2003, respectively. The decrease is primarily
due to a decrease in net purchases of fixed maturity investments, partially
offset by an increase in the purchase of short-term investments.
Financing activities used $3.8 million of net cash and provided $0.7
million of net cash for the three months ended March 31, 2004 and 2003,
respectively. The change is primarily due to a decrease in the issuance of
common stock and by the purchase of treasury stock in the 2003 period.
Harleysville Group participates in a securities lending program whereby
certain fixed maturity securities from the investment portfolio are loaned to
other institutions for a short period of time in return for a fee. At March 31,
2004, Harleysville Group held cash collateral of $186.6 million related to
securities on loan with a market value of $181.9 million. Harleysville Group's
policy is to require initial collateral of 102% of the market value of loaned
securities plus accrued interest, which is required to be maintained daily by
the borrower at no less than 100% of such market value plus accrued interest
over the life of the loan. Acceptable collateral includes cash and money market
instruments, government securities, A-rated corporate obligations, AAA-rated
asset-backed securities or GIC's and Funding Agreements from issuers rated A or
better. The securities on loan to others have been segregated from the other
invested assets on the balance sheet. In addition, the assets and liabilities
have been grossed up to reflect the collateral held under the securities lending
program and the obligation to return this collateral upon the return of the
loaned securities.
Page 24
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
(Continued)
Harleysville Group Inc. had $19.6 million of cash and marketable securities
at March 31, 2004 which is available for general corporate purposes including
dividends, debt service, capital contributions to subsidiaries, acquisitions and
the repurchase of stock. The Company has adopted a stock repurchase plan under
which the Company may purchase up to 500,000 shares of Harleysville Group Inc.
common stock. Mutual has authorized purchases of the common shares of
Harleysville Group in an equal amount. As of March 31, 2004, the Company had
repurchased 397,909 shares leaving 102,091 shares authorized to be repurchased.
The Company has no material commitments for capital expenditures as of March 31,
2004.
RISK FACTORS
The business, results of operations and financial condition, and therefore
the value of Harleysville Group's securities, are subject to a number of risks.
Some of those risks are set forth in the Company's annual report on Form 10-K
for fiscal year 2003, filed with the Securities and Exchange Commission on March
12, 2004.
Page 25
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK
Harleysville Group's market risk generally represents the risk of gain or
loss that may result from the potential change in the fair value of Harleysville
Group's investment portfolio as a result of fluctuations in prices and interest
rates. Harleysville Group attempts to manage its interest rate risk by
maintaining an appropriate relationship between the average duration of the
investment portfolio and the approximate duration of its liabilities.
Harleysville Group has maintained approximately the same duration of its
investment portfolio to its liabilities from December 31, 2003 to March 31,
2004. In addition, the Company has maintained approximately the same investment
mix during this period.
Page 26
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. The Company's chief
executive officer and its chief financial officer, based on their
evaluation of the Company's disclosure controls and procedures (as
defined in Exchange Act Rule 13a-15(e)) have concluded that the
Company's disclosure controls and procedures are adequate and
effective for the purposes set forth in the definition thereof in
Exchange Act Rule 13a-15(e) as of March 31, 2004.
(b) Change in internal control over financial reporting. There was no
change in the Company's internal control over financial reporting that
occurred during the first quarter of 2004 that has significantly
affected, or is reasonably likely to significantly affect, the Company's
internal control over financial reporting except as noted in the
next paragraph.
During 2003, the Company reviewed the processes by which case reserves
for loss and loss settlement expenses are estimated and whether those
processes were being consistently applied. These processes are an
important element in establishing aggregate reserves. Management took
steps in 2003 to improve internal controls in this area, including
hiring a new Senior Vice President to manage the claims function,
reducing turnover rates in the personnel engaged in estimating case
reserves and proactively managing the effects of such turnover,
implementing refinements in the processes which the Company follows
in estimating these reserves, and shifting the internal audit of
compliance with these processes from an internal auditor within the
claims department to the Company's regular internal audit group.
Management expects the effectiveness of these internal controls to
continue to improve in 2004 as a result of these actions and, as part
of our normal actuarial review process, will evaluate the impact of
these changes on a regular basis.
Page 27
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings - None
ITEM 2. Changes in Securities
(e) The Company announced a stock repurchase plan on March 3, 2003.
The Company may purchase up to 500,000 shares of Harleysville
Group Inc. common stock. The plan expires February 26, 2005.
As of March 31, 2004, the Company had repurchased 397,909 shares
leaving 102,091 shares authorized to be repurchased. There
was no activity in the plan during the three months ended March
31, 2004.
ITEM 3. Defaults Upon Senior Securities - None
ITEM 4. Submission of Matters to a Vote of Security Holders - None
ITEM 5. Other Information - None
Page 28
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
(Continued)
ITEM 6. a. Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) of the Exchange Act.
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) of the Exchange Act.
32.1 Certification of Chief Executive Officer Pursuant to 18
U.S.C. 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer Pursuant to 18
U.S.C. 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
b. Reports on Form 8-K
A Form 8-K dated February 5, 2004 was filed reporting the
election of Michael L. Browne as chief executive officer and
William W. Scranton III as non-executive chairman of the board.
A Form 8-K dated February 11, 2004 was filed furnishing, under
item 12 of Form 8-K, a press release commenting on estimated
results of operations for the three and twelve months ended
December 31, 2003.
A Form 8-K dated February 17, 2004 was filed furnishing, under
item 12 of Form 8-K, financial results for the three and twelve
months ended December 31, 2003.
A Form 8-K dated February 17, 2004 was filed reporting a
change in the Company's A.M. Best rating.
Page 29
HARLEYSVILLE GROUP INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
(Continued)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARLEYSVILLE GROUP INC.
Date: May 7, 2004 /s/ BRUCE J. MAGEE
------------- -----------------------------------
Bruce J. Magee
Senior Vice President and
Chief Financial Officer
(principal financial officer and
principal accounting officer)
Page 30
EXHIBIT (31.1)
CERTIFICATION PURSUANT TO THE SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Michael L. Browne, certify that:
1. I have reviewed the quarterly report on Form 10-Q of Harleysville Group
Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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
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-15(e) and 15d(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 7, 2004 /s/ MICHAEL L. BROWNE
------------- -------------------------------------------
Michael L. Browne
Chief Executive Officer and a Director
Page 31
EXHIBIT (31.2)
CERTIFICATION PURSUANT TO THE SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Bruce J. Magee, certify that:
1. I have reviewed the quarterly report on Form 10-Q of Harleysville Group
Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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
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-15(e) and 15d(e)) for the registrant
and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures,
as of the end of the period covered by this report based on such
evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 7, 2004 /s/ BRUCE J. MAGEE
------------- ----------------------------
Bruce J. Magee
Senior Vice President and
Chief Financial Officer
Page 32
EXHIBIT (32.1)
HARLEYSVILLE GROUP INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Harleysville Group Inc. (the
"Company") on Form 10-Q for the period ended March 31, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Michael
L. Browne, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002, that based on my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Date: May 7, 2004 /s/ MICHAEL L. BROWNE
------------- -------------------------------------------
Michael L. Browne
Chief Executive Officer and a Director
Page 33
EXHIBIT (32.2)
HARLEYSVILLE GROUP INC.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Harleysville Group Inc. (the
"Company") on Form 10-Q for the period ended March 31, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Bruce
J. Magee, Senior Vice President and Chief Financial Officer of the Company,
certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906
of the Sarbanes-Oxley Act of 2002, that based on my knowledge:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
Date: May 7, 2004 /s/ BRUCE J. MAGEE
--------------- ----------------------------
Bruce J. Magee
Senior Vice President and
Chief Financial Officer
Page 34