Harleysville Group Inc. Reports Second Quarter 2011 Results

Harleysville Group Inc. (NASDAQ: HGIC) today reported a diluted operating loss of $0.43 per share for the second quarter of 2011, compared to operating income of $0.61 per share in the second quarter of 2010. Catastrophe losses incurred during the second quarter of 2011 reduced operating income by $0.83 per share after taxes, compared to catastrophe losses of $0.19 per share in the second quarter of 2010. For the six-month periods, the company reported a diluted operating loss of $0.14 per share in 2011 and operating income of $0.89 per share in 2010. Catastrophe losses incurred during the first six months of 2011 reduced operating income by $1.04 per share after taxes, compared to catastrophe losses of $0.68 per share in the first six months of 2010. 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.

“The weather in the second quarter truly was unprecedented, causing us to experience a record level of catastrophe storm activity and weather-related losses,” commented Michael L. Browne, Harleysville Group’s president and chief executive officer. “Our results are not surprising when you consider the magnitude of the catastrophes that occurred across the country during the quarter, with the industry’s insured loss estimate for the quarter expected to be well in excess of $15 billion.

“The effects of these storms were tragic for many of our policyholders, as they were forced out of their homes and businesses, and their possessions were destroyed,” Browne explained. “At a time when they are counting on us the most, we are well positioned and will deliver on our commitment to our agents and policyholders because of our strong balance sheet, outstanding financial strength and excellent claims service.

“We continue to maintain the strength of our balance sheet, which is clearly evidenced by a high-quality investment portfolio, a strong capital base and reserve position, a debt-to-capital ratio of 15 percent 1, and a premium-to-surplus ratio of 1.1 to 1,” Browne continued. “It’s because of that strong balance sheet that these record losses did not have a material impact on our financial position. In fact, our book value in the quarter increased to $28.81 per share.

“At the same time, our capital management efforts continue to differentiate us from our competitors. As we announced on Friday, we are increasing our quarterly dividend by 6 percent to $0.38 per share, which is a direct reflection of our financial strength,” Browne said. “Bottom line, our solid financial base—coupled with our ongoing focus on the fundamentals of our business—positions us well to continue to be a strong and stable market for our agents’ best business.”

The company reported a diluted net loss of $0.43 per share in the second quarter of 2011, compared to net income of $0.61 per share in the second quarter of 2010. There were nominal realized investment gains after tax in the second quarter of both years. For the six-month periods, diluted net income was $0.24 per share in 2011 and $0.90 per share in 2010. For the six months, the company reported after-tax investment gains of $0.38 per share in 2011, compared to after-tax investment gains of $0.01 per share in 2010.

The company’s second quarter net written premiums—excluding workers compensation business from both years—decreased 1.2 percent to $209.0 million in 2011, compared to $211.5 million in the same period in 2010. Excluding workers compensation business from both years, net written premiums through six months were up 0.1 percent to $407.4 million in 2011, compared to $406.9 million in 2010. As of January 1, 2011, Harleysville Group and Harleysville Mutual Insurance Company amended their intercompany pooling agreement as it relates to their 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 prior accident years will continue to be shared between Harleysville Group and Harleysville Mutual under the existing pool participations.

Harleysville Group’s overall statutory combined ratio was 125.2 percent in the second quarter of 2011, compared to 101.3 percent in the second quarter of 2010. The company had 17.1 points of catastrophe losses in the second quarter of 2011 and 3.8 points of catastrophe losses in the second quarter of 2010. For the six months, the statutory combined ratio—excluding the impact of the change to the intercompany pooling agreement—was 116.5 percent in 2011, versus 104.5 percent in 2010. Catastrophe losses added 10.8 points to the six-month result in 2011 and 6.9 points in 2010.

Second quarter pretax investment income decreased 3.8 percent to $24.8 million, while after-tax investment income was down 2.6 percent in the second quarter to $19.7 million. For the six months, pretax investment income declined 2.5 percent to $50.4 million, while after-tax investment income was down 1.4 percent to $39.7 million.

Operating cash flow for the six months of 2011 was $(27.9) million, compared to $40.3 million in the six months of 2010.

Commercial lines Excluding workers compensation business from both years, net written premiums in commercial lines declined 4.7 percent to $151.7 million in the second quarter of 2011 and were down 3.3 percent to $300.5 million in the six months ended June 30, 2011. The commercial lines statutory combined ratio was 120.9 percent in the second quarter of 2011, versus 101.5 percent in the second quarter of 2010. For the six months, the statutory combined ratio, adjusted for the pool change, was 113.4 percent in 2011, compared to 103.1 percent in 2010.

Personal lines Net written premiums in personal lines were up 9.6 percent to $57.3 million in the second quarter of 2011. For the six months, net written premiums grew 11.3 percent to $106.9 million in 2011. Harleysville Group’s personal lines statutory combined ratio was 137.7 percent in the second quarter of 2011, versus 100.9 percent during the second quarter of 2010. For the six months, the statutory combined ratio was 125.4 percent in 2011, compared to 109.9 percent in 2010.

Outlook “Looking ahead, we continue to remain focused on the basics of our business—underwriting, claims, service and productivity—in order to retain our best accounts and generate responsible, profitable growth, while creating shareholder value,” Browne said. “While we are not immune to the effects of the market, we believe that focus on the basics is the responsible and prudent course for our company. As a result, we will continue to work closely with our agency partners to protect the quality and long-term profitability of all of our business, as we seek to produce results that will differentiate us favorably from our competition.”

Webcast The company will host a live webcast on Tuesday, August 9, 2011, at 8 a.m. (ET) to discuss its second 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 60 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 June 30  

Six months ended June 30
 
(in thousands, except per share data)   2011   2010   2011   2010  
OPERATING RESULTS              
Diluted earnings per common share:
Operating income (loss)* ($0.43 ) $0.61 ($0.14 ) $0.89

Realized investment gains, net of income taxes
        0.38   0.01  
Net income (loss)   ($0.43 ) $0.61   $0.24   $0.90  
Cash dividends per common share   $0.36   $0.325   $0.72   $0.65  
 
FINANCIAL CONDITION   June 30, 2011 December 31, 2010
Assets $3,239,465 $3,278,232

Shareholders' equity
$781,664 $768,633
Per common share     $28.81     $28.42  
 
 
               
CONSOLIDATED STATEMENTS OF INCOME (LOSS)   Quarter ended June 30   Six months ended June 30  
(in thousands, except per share data)   2011   2010   2011   2010  
REVENUES:
Premiums earned $200,976 $213,488 $400,729 $422,571
Investment income, net of investment expense 24,839 25,814 50,424 51,697
Realized investment gains 98 192 15,872 526
Other income   4,754   4,012   9,164   7,669  
Total revenues   230,667   243,506   476,189   482,463  
LOSSES AND EXPENSES:
Losses and loss settlement expenses 183,086 143,252 327,281 295,288
Amortization of deferred policy acquisition costs 50,398 54,568 103,077 107,602
Other underwriting expenses 19,826 21,897 40,497 43,381
Interest expense 1,513 1,516 3,027 3,030
Other expenses   1,242   1,268   2,211   2,222  
Total expenses   256,065   222,501   476,093   451,523  
Income (loss) before income taxes (25,398 ) 21,005 96 30,940
Income tax expense (benefit)   (14,070 ) 3,951   (6,803 ) 5,836  
Net income (loss)   ($11,328 ) $17,054   $6,899   $25,104  
Weighted average number of shares outstanding:
Basic 27,090,626 27,737,746 27,028,138 27,723,696
Diluted   27,090,626   27,905,366   27,177,838   27,914,930  
Per common share:
Basic earnings (loss) ($0.43 ) $0.61 $0.24 $0.90
 
Diluted earnings (loss) ($0.43 ) $0.61 $0.24 $0.90
               
RECONCILIATION TO OPERATING INCOME (LOSS) :
Net income (loss) ($11,328 ) $17,054 $6,899 $25,104
Less realized investment gains, net of income taxes   64   125   10,317   342  
Operating income (loss)   ($11,392 ) $16,929   ($3,418 ) $24,762  
 
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)       June 30, 2011*     December 31, 2010  
ASSETS
Investments:
Fixed maturities:

Held to maturity, at amortized cost (fair value $136,517 and $156,967)
$128,482 $148,362

Available for sale, at fair value (amortized cost $1,943,621 and $2,069,097)
2,064,269 2,165,101

Equity securities, at fair value (cost $270,760 and $191,095)
352,101 268,104
Short-term investments, at cost, which approximates fair value       78,278       79,909  
Total investments       2,623,130       2,661,476  
Cash 78 39
Premiums in course of collection 140,525 133,758
Reinsurance recoverables 219,190 219,149
Accrued investment income 25,818 26,910
Deferred policy acquisition costs 107,356 113,997
Prepaid reinsurance premiums 50,150 51,625
Property and equipment, net 12,946 13,312
Deferred income taxes 9,413
Other assets       60,272       48,553  
Total assets       $3,239,465       $3,278,232  
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss settlement expenses $1,758,060 $1,771,661
Unearned premiums 468,681 503,532
Accounts payable and accrued expenses 81,234 96,461
Due to affiliate 26,648 19,445
Deferred income taxes 4,678
Debt       118,500       118,500  
Total liabilities       2,457,801       2,509,599  
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 35,179,315 and 34,987,829 shares;
outstanding 27,128,314 and 27,044,836 shares 35,179 34,988
Additional paid-in capital 273,201 263,857
Accumulated other comprehensive income 100,705 80,506
Retained earnings 617,725 630,603
Treasury stock, at cost, 8,051,001 and 7,942,993 shares       (245,146 )     (241,321 )
Total shareholders' equity       781,664       768,633  
Total liabilities and shareholders' equity       $3,239,465       $3,278,232  
 
*These financial figures are unaudited.
 

         
Harleysville Group Inc. and Subsidiaries  
SUPPLEMENTARY FINANCIAL ANALYSTS' DATA                      
      Quarter ended June 30     Six months ended June 30  
(dollars in thousands)     2011     2010     2011     2010  
Net premiums written*     $208,986     $230,226     $367,354     $447,056  
Statutory surplus*               $711,443     $690,948  
 
Pretax investment income $24,839 $25,814 $50,424 $51,697
Related federal income taxes     5,188     5,647     10,764     11,462  
After-tax investment income     $19,651     $20,167     $39,660     $40,235  
 
                       
SEGMENT INFORMATION                      
      Quarter ended June 30     Six months ended June 30  
(dollars in thousands)     2011     2010     2011     2010  
Revenues:
Premiums earned:
Commercial lines $148,522 $167,310 $297,542 $331,943
Personal lines     52,454     46,178     103,187     90,628  
Total premiums earned 200,976 213,488 400,729 422,571
Net investment income 24,839 25,814 50,424 51,697
Realized investment gains 98 192 15,872 526
Other     4,754     4,012     9,164     7,669  
Total revenues     $230,667     $243,506     $476,189     $482,463  
 
 
Income before income taxes:
Underwriting loss:
Commercial lines ($32,111 ) ($6,319 ) ($33,975 ) ($16,970 )
Personal lines     (21,186 )   (2,292 )   (27,327 )   (10,657 )
SAP underwriting loss     (53,297 )   (8,611 )   (61,302 )   (27,627 )
GAAP adjustments     963     2,382     (8,824 )   3,927  
GAAP underwriting loss     (52,334 )   (6,229 )   (70,126 )   (23,700 )
Net investment income 24,839 25,814 50,424 51,697
Realized investment gains 98 192 15,872 526
Other     1,999     1,228     3,926     2,417  
Income (loss) before income taxes     ($25,398 )   $21,005     $96     $30,940  
 
Income taxes on net investment income $5,188 $5,647 $10,764 $11,462
Income tax benefit on remaining losses     (19,258 )   (1,696 )   (17,567 )   (5,626 )
Total income tax expense (benefit)     ($14,070 )   $3,951     ($6,803 )   $5,836  
 
Effective tax rate on:
Net investment income 20.9 % 21.9 % 21.3 % 22.2 %
Income     55.4 %   18.8 %   N/M **   18.9 %
 
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.
**Not Meaningful
 

   
Harleysville Group Inc. and Subsidiaries
STATUTORY DATA BY LINE OF BUSINESS*                    
    Quarter ended June 30  

 
 

Six months ended June 30
 
Percentage Percentage
(dollars in thousands)   2011   2010   Change   2011   2010   Change
 
Net premiums written:
Commercial:
Automobile $43,092 $46,183 -6.7 % $86,305 $91,068 -5.2 %
Workers compensation 18,717 -100.0 % (40,012 ) 40,179 NM

 ***
Commercial multi-peril 90,410 92,608 -2.4 % 176,700 176,589 0.1 %
Other commercial 18,215 20,487 -11.1 % 37,469 43,176 -13.2 %
                     
Total commercial   $151,717   $177,995   -14.8 %   $260,462   $351,012   -25.8 %
 
Total commercial without workers compensation
net premiums written **   $151,717   $159,278   -4.7 %   $300,474   $310,833   -3.3 %
 
Personal:
Automobile $28,721 $25,546 12.4 % $55,610 $48,723 14.1 %
Homeowners 24,850 23,207 7.1 % 44,465 40,903 8.7 %
Other personal 3,698 3,478 6.3 % 6,817 6,418 6.2 %
                     
Total personal   $57,269   $52,231   9.6 %   $106,892   $96,044   11.3 %
 
Total personal and commercial   $208,986   $230,226   -9.2 %   $367,354   $447,056   -17.8 %
 

Total personal and commercial without workers compensation

net premiums written **
  $208,986   $211,509   -1.2 %   $407,366   $406,877   0.1

%
 
Statutory combined ratios:
Commercial:
Automobile 105.1 % 98.1 % 102.7 % 98.2 %
Workers compensation 111.0 % 109.2 %
Commercial multi-peril 136.7 % 105.4 % 127.1 % 108.0 %
Other commercial 99.3 % 85.5 % 93.2 % 89.3 %
 
Total commercial   120.9 % 101.5 %     116.3 % 103.1 %
 
Total commercial without intercompany pooling transfer **             113.4 %    
 
Personal:
Automobile 119.0 % 109.3 % 115.0 % 105.3 %
Homeowners 170.2 % 98.3 % 145.8 % 123.0 %
Other personal 69.8 % 56.4 % 71.7 % 58.3 %
 
Total personal   137.7 % 100.9 %     125.4 % 109.9 %
 
Total personal and commercial statutory combined ratio   125.2 % 101.3 %     118.4 % 104.5 %
 
Total personal and commercial statutory combined ratio
without intercompany pooling transfer **         116.5 %    
 
GAAP combined ratios:
Commercial 121.3 % 103.1 % 114.5 % 104.3 %
Personal 139.4 % 102.4 % 126.2 % 110.4 %
 
Total personal and commercial GAAP combined ratio   126.0 % 102.9 %     117.5 % 105.6 %
 
GAAP losses paid   $177,624   $157,372       $340,288   $285,117  
 
Net catastrophe losses incurred   $34,400   $8,040       $43,400   $29,000  
 
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.

** The effect of the January 1, 2011, pooling transfer of $40,011,594 of net premiums written (representing the transfer of the January 1, 2011, unearned premium balance of workers compensation) and the effect of the pool transfer on the statutory combined ratios are excluded for comparative purposes.

*** Not Meaningful

Copyright Business Wire 2010

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