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8-K - HARLEYSVILLE GROUP INC. 8-K - HARLEYSVILLE GROUP INCa6616702.htm

Exhibit 99.1

Harleysville Group Inc. Reports Fourth Quarter and Year-End 2010 Results

Fourth quarter and year-end highlights:

  • Operating income of $0.76 per share in quarter, $2.41 per share for year
  • Operating return on equity1 of 10.0 percent
  • Statutory combined ratio2 of 101.2 percent in quarter, 102.5 percent for year
  • Book value of $28.42 per share
  • Cash dividends of $1.80 per share in quarter, which included special dividend of $1.44 per share

HARLEYSVILLE, Pa.--(BUSINESS WIRE)--February 17, 2011--Harleysville Group Inc. (NASDAQ: HGIC) today reported diluted operating income of $0.76 per share for the fourth quarter of 2010, compared to $0.84 per share in the fourth quarter of 2009. Catastrophe losses incurred during the fourth quarter of 2010 reduced operating income by $0.07 per share after taxes, compared to no catastrophe losses per share in the fourth quarter of 2009. For the 12-month periods, the company reported diluted operating income of $2.41 per share in 2010 and $3.02 per share in 2009. Catastrophe losses incurred during the 12 months of 2010 reduced operating income by $0.84 per share after taxes, compared to catastrophe losses of $0.14 per share in the 12 months of 2009. Operating income is a non-GAAP financial measure defined by the company as net income excluding after-tax realized gains and losses on investments. See below for the company’s reported GAAP net income.

“We had a solid performance in the fourth quarter and in 2010 overall as we continued to successfully execute our strategy to focus on the basics of our business—underwriting, claims, service and productivity,” commented Michael L. Browne, Harleysville Group’s president and chief executive officer. “We again were encouraged by the fact that our premium volume increased as a result of the successful execution of our targeted strategy to grow our small commercial and personal lines business, where pricing is stronger than in commercial middle-market business. Much of this growth is due to the new technology we’ve introduced that makes it easier for our agents to do business with us. Overall policy retention remained strong in both commercial and personal lines, a sign of the continued strength of our franchise. Our agents continue to be very loyal to Harleysville, and we are confident that the strength of those relationships will continue to serve as a differentiator for us in the market.

“Our balance sheet remains very strong, while our balanced capital management strategy continues to differentiate us from many of our competitors,” Browne continued. “During the quarter we paid a special cash dividend of $1.44 per share—which represents the amount of our current annualized dividend—in addition to our regular quarterly cash dividend of $0.36 per share. This special dividend is another example of our commitment to managing capital efficiently. Since June 2007, we have returned more than $375 million of our capital to our shareholders via dividends and the six stock repurchase programs that have amounted to 20 percent of our outstanding shares. Our ability to continue increasing our dividend and buying back shares reflects our financial strength, which is evidenced by a high-quality investment portfolio, a strong capital base and reserve position, a debt-to-capital ratio of 15 percent1, and a premium-to-surplus ratio of 1.3 to 1. In addition, our consolidated surplus—including Harleysville Mutual Insurance Company—stands at $1.3 billion, and we generated $170 million in surplus in 2010. This solid foundation positions us to continue to be a strong and stable market for our agents’ best business and to generate long-term profitability.”


The company reported diluted net income of $0.76 per share in the fourth quarter of 2010, compared to $0.86 per share in the fourth quarter of 2009. There were negligible realized investment gains after tax in the fourth quarter of 2010, compared to after-tax investment gains of $0.02 per share in 2009. For the 12-month periods, diluted net income was $2.42 per share in 2010 and $3.07 per share in 2009. For the 12 months, the company reported after-tax investment gains of $0.01 per share in 2010, compared to after-tax investment gains of $0.05 per share in 2009.

The company’s fourth quarter net written premiums increased 4.2 percent to $219.1 million in 2010, compared to $210.2 million in the same period in 2009. Net written premiums through 12 months were up 3.6 percent to $882.1 million in 2010, compared to $851.6 million in 2009.

Harleysville Group’s overall statutory combined ratio was 101.2 percent in the fourth quarter of 2010, compared to 99.1 percent in the fourth quarter of 2009. The company had 1.3 points of catastrophe losses in the fourth quarter of 2010 and negligible catastrophe losses in the fourth quarter of 2009. For the 12 months, the statutory combined ratio was 102.5 percent in 2010, versus 99.8 percent in 2009. Catastrophe losses added 4.1 points to the 12-month result in 2010 and 0.7 points in 2009.

Fourth quarter pretax investment income decreased 4.7 percent to $26.3 million, while after-tax investment income was down 3.1 percent in the fourth quarter to $20.4 million. For the 12 months, pretax investment income declined 3.1 percent to $103.3 million, while after-tax investment income was unchanged at $80.4 million.

Operating cash flow for the 12 months of 2010 was $98.2 million, compared to $105.4 million in the 12 months of 2009.

During the fourth quarter, the company amended its intercompany pooling agreement between Harleysville Group and Harleysville Mutual Insurance Company as it relates to its workers compensation business. The amendment establishes that the financial results associated with workers compensation business for accident years 2011 and following will be retained 100 percent by Harleysville Mutual. At the same time, the financial results of this business for prior accident years will continue to be shared between Harleysville Group and Harleysville Mutual under the existing pool participations.

Commercial lines Net written premiums in commercial lines increased 1.4 percent to $167.4 million in the fourth quarter of 2010. For the 12 months, net written premiums were up 0.7 percent to $679.2 million in 2010. The commercial lines statutory combined ratio was 102.1 percent in the fourth quarter of 2010, versus 99.9 percent in the fourth quarter of 2009. For the 12 months, the statutory combined ratio was 102.3 percent in 2010, compared to 100.7 percent in 2009.

Personal lines Net written premiums in personal lines were up 14.7 percent to $51.7 million in the fourth quarter of 2010. For the 12 months, net written premiums grew 14.4 percent to $202.9 million in 2010. Harleysville Group’s personal lines statutory combined ratio was 98.2 percent in the fourth quarter of 2010, versus 96.0 percent during the fourth quarter of 2009. For the 12 months, the statutory combined ratio was 103.5 percent in 2010, compared to 96.8 percent in 2009.

Outlook “Looking ahead, we will remain focused on the basics of our business—underwriting, claims, service and productivity—in order to retain our best business and generate responsible, profitable growth,” Browne said. “We are committed to a high degree of underwriting discipline, and will not compromise underwriting integrity for a near-term growth target. While we are not immune to the effects of the market, we believe that our strategy of continuing to focus on the basics of our business is the responsible and prudent direction for our company. Our investments in technology, our underwriting tools such as predictive modeling, our strong agency relationships, and our focus on small commercial and personal lines will continue to help us mitigate the effects of the market cycle. Bottom line, we are focused on protecting the quality and long-term profitability of all of our business, as we seek to produce results that will continue to differentiate us favorably from our competition.”


Webcast The company will host a live webcast on Friday, February 18, 2011, at 8 a.m. (ET) to discuss its fourth quarter results. The webcast and a replay will be available from the Investors section of the company’s website (www.harleysvillegroup.com).

GAAP and non-GAAP financial measures The company uses a non-GAAP financial measure called “operating income” that management believes is useful to investors because it illustrates the performance of normal, ongoing operations, which is important in understanding and evaluating the company’s financial condition and results of operations. While this measure is utilized by investors to evaluate performance, it is not a substitute for the U.S. GAAP financial measure of net income. Therefore, a reconciliation of this non-GAAP financial measure to the U.S. GAAP financial measure of net income is provided following the Consolidated Statements of Income contained in this release. Management also uses operating income for, among other things, goal setting, determining employee and senior management compensation, and evaluating performance.

Corporate profile Harleysville Insurance is a leading super-regional provider of insurance products and services for small and mid-sized businesses, as well as for individuals, and ranks among the top 70 U.S. property/casualty insurance groups based on net written premiums. As a Trusted Choice® company partner, Harleysville distributes its products exclusively through a network of independent agents primarily across 32 states. Harleysville is ranked #21 in the most recent InformationWeek 500, the publication’s annual listing of the most innovative information technology organizations in the U.S., and has been included on the list in each of the last five years. Harleysville Mutual Insurance Company owns approximately 54 percent of Harleysville Group Inc. (NASDAQ: HGIC), a publicly traded holding company for eight regional property/casualty insurance companies collectively rated A (Excellent) by A.M. Best Company. Harleysville Group is listed on the NASDAQ Global Select Market, which is comprised of the top third of all NASDAQ member companies and has the highest initial listing standards of any exchange in the world based on financial and liquidity requirements. Harleysville Group has paid a dividend every quarter since the company went public in 1986, and was recognized with a 2010 Mergent Dividend Achiever Award for its long-term history of dividend increases. Further information can be found on the company’s website at www.harleysvillegroup.com.

Forward-looking information Certain of the statements contained herein (other than statements of historical facts) are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and include estimates and assumptions related to economic, competitive and legislative developments. These forward-looking statements are subject to change and uncertainty that are, in many instances, beyond the company’s control, and have been made based upon management’s expectations and beliefs concerning future developments and their potential effect on Harleysville Group Inc. There can be no assurance that future developments will be in accordance with management’s expectations so that the effect of future developments on Harleysville Group will be those anticipated by management. Actual financial results, including operating return on equity, premium growth and underwriting results, could differ materially from those anticipated by Harleysville Group depending on the outcome of certain factors, which may include changes in property and casualty loss trends and reserves; catastrophe losses; reduced economic activity; the insurance product pricing environment; changes in applicable law and accounting standards; government regulation and changes therein that may impede the ability to charge adequate rates or to do business; performance of and instability in the financial markets; investment losses; fluctuations in interest rates; availability and price of reinsurance; and the status of the labor markets in which the company operates.

1 Excludes the effect of unrealized investment gains and losses recognized in accumulated other comprehensive income pursuant to ASC 320.

2 Statutory combined ratio is a non-GAAP measure of underwriting profitability and is based on numbers determined under statutory accounting practices as filed with state insurance regulators. It is the sum of the ratio of losses and loss settlement expenses to premiums earned plus the ratio of underwriting expenses to premiums written. A ratio of less than 100 percent indicates underwriting profitability.


       
Harleysville Group Inc. and Subsidiaries
FINANCIAL HIGHLIGHTS   Quarter ended December 31   Twelve months ended December 31
(in thousands, except per share data)   2010   2009   2010   2009
OPERATING RESULTS                
Diluted earnings per common share:
Operating income* $0.76 $0.84 $2.41 $3.02
Realized investment gains, net of income taxes       0.02   0.01   0.05
Net income   $0.76   $0.86   $2.42   $3.07
Cash dividends per common share   $1.80   $0.325   $2.81   $1.25
 
FINANCIAL CONDITION       December 31, 2010       December 31, 2009
Assets $3,278,232 $3,301,986
Shareholders' equity $768,633 $772,628
Per common share       $28.42       $27.98
 
 
 
                 
CONSOLIDATED STATEMENTS OF INCOME   Quarter ended December 31   Twelve months ended December 31
(in thousands, except per share data)   2010   2009   2010   2009
REVENUES:
Premiums earned $223,544 $213,097 $866,350 $858,500
Investment income, net of investment expense 26,293 27,597 103,313 106,649
Realized investment gains 71 894 597 2,293
Other income   4,102   3,385   16,012   13,178
Total revenues   254,010   244,973   986,272   980,620
LOSSES AND EXPENSES:
Losses and loss settlement expenses 149,250 134,377 589,105 552,491
Amortization of deferred policy acquisition costs 56,371 54,756 220,150 216,470
Other underwriting expenses 19,879 20,931 84,227 85,349
Interest expense 1,517 1,515 6,064 6,217
Other expenses   951   956   4,014   4,095
Total expenses   227,968   212,535   903,560   864,622
Income before income taxes 26,042 32,438 82,712 115,998
Income taxes   5,077   8,287   15,814   29,702
Net income   $20,965   $24,151   $66,898   $86,296
Weighted average number of shares outstanding:
Basic 27,246,211 27,773,065 27,521,016 27,956,227
Diluted   27,497,030   27,972,863   27,727,903   28,127,302
Per common share:
Basic earnings $0.77 $0.87 $2.43 $3.09
 
Diluted earnings $0.76 $0.86 $2.42 $3.07
                 
RECONCILIATION TO OPERATING INCOME :
Net income $20,965 $24,151 $66,898 $86,296
Less realized investment gains, net of income taxes   46   580   388   1,490
Operating income   $20,919   $23,571   $66,510   $84,806
 

These financial figures are unaudited.

*Operating income is a non-GAAP financial measure defined by the company as net income excluding after-tax realized gains and losses on investments.

 

   
Harleysville Group Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS            
(in thousands, except share data)   December 31, 2010*     December 31, 2009  
ASSETS
Investments:
Fixed maturities:

Held to maturity, at amortized cost (fair value $156,967 and $213,838)

$148,362 $204,284

Available for sale, at fair value (amortized cost $2,069,097 and $2,036,993)

2,165,101 2,130,179
Equity securities, at fair value (cost $191,095 and $137,150) 268,104 186,395
Short-term investments, at cost, which approximates fair value 79,909 116,476
Other invested assets, at cost, which approximates fair value         2,480  
Total investments   2,661,476     2,639,814  
Cash 39 126
Premiums in course of collection 133,758 141,486
Reinsurance receivable 219,149 226,781
Accrued investment income 26,910 26,058
Deferred policy acquisition costs 113,997 111,649
Prepaid reinsurance premiums 51,625 48,314
Property and equipment, net 13,312 13,579
Deferred income taxes 9,413 21,429
Other assets   48,553     72,750  
Total assets   $3,278,232     $3,301,986  
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss settlement expenses $1,771,661 $1,782,292
Unearned premiums 503,532 484,510
Accounts payable and accrued expenses 96,461 130,780
Due to affiliate 19,445 13,276
Debt   118,500     118,500  
Total liabilities   2,509,599     2,529,358  
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 34,987,829 and 34,583,182 shares; outstanding 27,044,836 and 27,615,120 shares

34,988 34,583
Additional paid-in capital 263,857 245,636
Accumulated other comprehensive income 80,506 62,276
Retained earnings 630,603 640,593
Treasury stock, at cost, 7,942,993 and 6,968,062 shares   (241,321 )   (210,460 )
Total shareholders' equity   768,633     772,628  
Total liabilities and shareholders' equity   $3,278,232     $3,301,986  
 
*These financial figures are unaudited.
 

       
Harleysville Group Inc. and Subsidiaries
SUPPLEMENTARY FINANCIAL ANALYSTS' DATA                        
    Quarter ended December 31     Twelve months ended December 31  
(dollars in thousands)   2010     2009     2010     2009  
Net premiums written*   $219,102     $210,246     $882,061     $851,617  
Statutory surplus*               $695,475     $681,160  
 
Pretax investment income $26,293 $27,597 $103,313 $106,649
Related federal income taxes   5,874     6,527     22,943     26,239  
After-tax investment income   $20,419     $21,070     $80,370     $80,410  
 
                         
SEGMENT INFORMATION                        
    Quarter ended December 31     Twelve months ended December 31  
(dollars in thousands)   2010     2009     2010     2009  
Revenues:
Premiums earned:
Commercial lines $173,072 $168,888 $676,740 $690,116
Personal lines   50,472     44,209     189,610     168,384  
Total premiums earned 223,544 213,097 866,350 858,500
Net investment income 26,293 27,597 103,313 106,649
Realized investment gains 71 894 597 2,293
Other   4,102     3,385     16,012     13,178  
Total revenues   $254,010     $244,973     $986,272     $980,620  
 
 
Income before income taxes:
Underwriting gain (loss):
Commercial lines ($1,590 ) $1,567 ($16,203 ) $1,196
Personal lines   546     1,466     (10,700 )   2,610  
SAP underwriting gain (loss)   (1,044 )   3,033     (26,903 )   3,806  
GAAP adjustments   (912 )         (229 )   384  
GAAP underwriting gain (loss)   (1,956 )   3,033     (27,132 )   4,190  
Net investment income 26,293 27,597 103,313 106,649
Realized investment gains 71 894 597 2,293
Other   1,634     914     5,934     2,866  
Income before income taxes   $26,042     $32,438     $82,712     $115,998  
 
Income taxes on net investment income $5,874 $6,527 $22,943 $26,239
Income tax expense (benefit) on remaining gains (losses)   (797 )   1,760     (7,129 )   3,463  
Total income taxes   $5,077     $8,287     $15,814     $29,702  
 
Effective tax rate on:
Net investment income 22.3 % 23.7 % 22.2 % 24.6 %
Income   19.5 %   25.5 %   19.1 %   25.6 %
 
These financial figures are unaudited.
 

*Statutory data is a non-GAAP measure. Because it is prepared in accordance with statutory accounting rules as defined by the National Association of Insurance Commissioners' Accounting Practices and Procedures Manual, a reconciliation to GAAP is not required.

 

           
Harleysville Group Inc. and Subsidiaries
STATUTORY DATA BY LINE OF BUSINESS*                                    
    Quarter ended December 31    

 

 

 

Twelve months ended December 31

       
(dollars in thousands)   2010     2009    

Percentage

Change

    2010     2009    

Percentage

Change

 
 
Net premiums written:
Commercial:
Automobile $43,635 $45,131 -3.3 % $178,353 $182,169 -2.1 %
Workers' compensation 19,184 17,598 9.0 % 77,734 80,484 -3.4 %
Commercial multi-peril 84,853 80,398 5.5 % 338,992 326,242 3.9 %
Other commercial 19,709 22,009 -10.5 % 84,078 85,380 -1.5 %
                                     
Total commercial   $167,381     $165,136     1.4 %   $679,157     $674,275     0.7 %
 
Personal:
Automobile $26,107 $21,804 19.7 % $102,045 $85,195 19.8 %
Homeowners 22,353 20,293 10.2 % 87,736 80,044 9.6 %
Other personal 3,261 3,013 8.2 % 13,123 12,103 8.4 %
                                     
Total personal   $51,721     $45,110     14.7 %   $202,904     $177,342     14.4 %
 
Total personal and commercial   $219,102     $210,246     4.2 %   $882,061     $851,617     3.6 %
 
Statutory combined ratios:
Commercial:
Automobile 99.5 % 94.1 % 100.0 % 91.4 %
Workers' compensation 101.3 % 99.9 % 106.1 % 106.2 %
Commercial multi-peril 106.1 % 105.2 % 106.1 % 105.1 %
Other commercial 92.1 % 91.4 % 88.8 % 97.6 %
 
Total commercial   102.1 %   99.9 %         102.3 %   100.7 %
 
Personal:
Automobile 105.0 % 104.7 % 104.9 % 103.0 %
Homeowners 94.1 % 86.3 % 108.2 % 92.7 %
Other personal 73.6 % 98.5 % 62.6 % 81.1 %
 
Total personal   98.2 %   96.0 %         103.5 %   96.8 %
 
Total personal and commercial statutory combined ratio   101.2 %   99.1 %         102.5 %   99.8 %
 
GAAP combined ratios:
Commercial 101.3 % 99.3 % 102.7 % 100.1 %
Personal 99.4 % 95.8 % 104.7 % 97.1 %
 
Total personal and commercial GAAP combined ratio   100.9 %   98.6 %         103.1 %   99.5 %
 
GAAP losses paid   $162,420     $134,639           $594,204     $551,576  
 
Net catastrophe losses incurred   $3,008     $0           $35,707     $6,244  
 
These financial figures are unaudited.
 

*Statutory data is a non-GAAP measure. Because it is prepared in accordance with statutory accounting rules as defined by the National Association of Insurance Commissioners' Accounting Practices and Procedures Manual, a reconciliation to GAAP is not required.

 

CONTACT:
Harleysville Group Inc.
Mark Cummins (Investors)
215-256-5025
mcummins@harleysvillegroup.com
or
Randy Buckwalter (Media)
215-256-5288
rbuckwalter@harleysvillegroup.com