Harleysville Group Reports First Quarter 2008 Results

Harleysville Group Inc. (NASDAQ:HGIC) today reported diluted operating income of $0.80 per share for the first quarter of 2008, compared to $0.70 per share in the first quarter of 2007. 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’re pleased to report that we’ve begun 2008 with another strong quarter, as we continue to see ongoing, steady improvement in our operating earnings. We posted our 13th straight quarter of double-digit percentage growth in operating income, as our operating earnings grew by 14 percent, to $0.80 per share, in the first quarter,” commented Michael L. Browne, Harleysville Group’s president and chief executive officer. "Our first quarter statutory combined ratio, adjusted to exclude the non-recurring impact of the pooling change, was 98.1 percent, and we generated an operating return on equity of 13.9 percent for the trailing 12 months. We continue to maintain our solid capital base and a strong balance sheet, a modest debt-to-capital ratio of 14 percent2, a high-quality investment portfolio, and a premium-to-surplus ratio of 1.4 to 1—all of which provide the sound financial position for us to write our agents’ best business.” The company reported diluted net income of $0.79 per share in the first quarter of 2008, compared to $0.71 per share in the first quarter of 2007. There was a $0.01 per share realized investment loss in the first quarter of 2008, compared to a $0.01 per share gain in the first quarter of 2007. First quarter net written premiums, excluding the non-recurring impact of the pooling change, increased 12 percent to $231.9 million in 2008, compared to $207.0 million in the same period in 2007. As previously announced, on January 1, Harleysville Group and Harleysville Mutual Insurance Company amended their intercompany pooling arrangement to increase the aggregate share of the pool for the insurance subsidiaries of Harleysville Group to 80 percent from 72 percent. The increase in net written premiums, on a basis unadjusted for the pooling change, includes $45.7 million in unearned premium reserves transferred to Harleysville Group from Harleysville Mutual Insurance Company at the January 1, 2008, effective date of the change. Furthermore, the increase in Harleysville Group’s percentage of the pool resulted in $23.2 million in additional written premiums during the quarter. Excluding both impacts from the pooling change—the one-time unearned premium transfer and the change in the pooling percentage—net written premiums increased 1%. Harleysville Group’s overall statutory combined ratio was 96.6 percent in the first quarter of 2008, compared to 97.9 percent in the first quarter of 2007. The increase in the intercompany pooling agreement had a 1.5 point non-recurring favorable impact to the statutory expense ratio for the quarter as a result of the $45.7 million in unearned premiums transferred, which was partially offset by $11.4 million of ceding commission paid at the January 1, 2008, effective date of the change. Adjusting for this pool change, the combined ratio was 98.1 percent. First quarter pretax investment income increased 7 percent to $29.2 million, while after-tax investment income grew 8 percent in the first quarter to $21.2 million. Operating cash flow for the first quarter, excluding the non-recurring impact of the pool change, was $32.3 million, compared to $59.4 million in the first quarter of 2007. Commercial lines — Net written premiums in commercial lines increased 12 percent to $195.8 million in the first quarter of 2008. The increase substantially reflects the change in the company’s pooling agreement. Excluding the impact of the change to the pooling percentage, net written premiums increased 1 percent. The commercial lines statutory combined ratio adjusted for the non-recurring impact of the pooling change was 99.0 percent in the first quarter of 2008, versus 97.9 percent in the first quarter of 2007. Personal lines — Net written premiums in personal lines were up 12 percent to $36.0 million in the first quarter of 2008, again driven substantially by the pooling change. Excluding the impact of the change to the pooling percentage, net written premiums increased 1 percent. Harleysville Group’s personal lines statutory combined ratio adjusted for the non-recurring impact of the pooling change was 94.0 percent in the first quarter of 2008, versus 98.5 percent during the first quarter of 2007. Outlook — "As we progress through 2008 and the longer term, we will remain focused on the basics of our business as we seek to consistently produce the kind of quality results we are reporting today—improving earnings, profitable underwriting and operating ROE over 12 percent—while always maintaining a healthy balance sheet,” Browne said. "The insurance marketplace remains challenging, and we are committed to retaining our best business, as well as generating responsible, profitable growth. However, we will not compromise underwriting quality to chase a near-term growth goal. Instead, we will remain disciplined—despite the current soft market conditions—as we focus on our goal of maintaining a long-term underwriting profit and the ongoing improvement in our performance that will continue to differentiate us throughout 2008 and beyond.” Webcast — The company will host a live Webcast tomorrow, April 23, 2008, at 8 a.m. (ET) to discuss its first quarter results. The Webcast and a replay will be available from the Investors section of the company’s Web site (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 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. Harleysville was listed recently as #23 in the InformationWeek 500, the publication’s annual listing of the most innovative information technology organizations in the U.S., and was the highest-ranked property and casualty insurer on the 2007 list. Harleysville Mutual Insurance Company owns 52 percent of Harleysville Group Inc. (NASDAQ: HGIC), a publicly traded holding company for nine 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 one of 3 percent of public companies recognized with a 2007 Mergent Dividend Achiever Award for its long-term history of dividend increases. Harleysville Insurance—which distributes its products exclusively through independent insurance agencies and reflects that commitment to its agency force by being a Trusted Choice® company partner—currently operates in 32 eastern and midwestern states. Further information can be found on the company’s Web site 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; the insurance product pricing environment; changes in applicable law; government regulation and changes therein that may impede the ability to charge adequate rates; changes in accounting principles; performance of the financial markets; fluctuations in interest rates; availability and price of reinsurance; and the status of the labor markets in which the company operates. 1 "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 to premiums earned plus the ratio of underwriting expenses to premiums written. A ratio of less than 100 percent indicates underwriting profitability. 2 Excludes the effects of SFAS No. 115. Harleysville Group Inc. and Subsidiaries FINANCIAL HIGHLIGHTS       Quarter ended March 31 (in thousands, except per share data)       2008     2007 OPERATING RESULTS               Diluted earnings per common share:       Operating income* $0.80 $0.70 Realized gains (losses), net of income taxes       (0.01 )   0.01 Net income       $0.79     $0.71 Cash dividend per common share       $0.25     $0.19   FINANCIAL CONDITION   March 31, 2008         December 31, 2007 Assets $3,277,311 $3,072,445 Shareholders' equity $763,377 $758,841 Per common share   $25.55         $25.03                       CONSOLIDATED STATEMENTS OF INCOME       Quarter ended March 31 (in thousands, except per share data)       2008     2007 REVENUES: Premiums earned $229,373 $205,378 Investment income, net of investment expense 29,198 27,397 Realized investment gains (losses) (232 ) 624 Other income       3,516     3,498 Total revenues       261,855     236,897 LOSSES AND EXPENSES: Losses and loss settlement expenses 147,310 131,151 Amortization of deferred policy acquisition costs 56,956 51,896 Other underwriting expenses 20,911 18,281 Interest expense 1,672 1,765 Other expenses       1,160     1,273 Total expenses       228,009     204,366 Income before income taxes 33,846 32,531 Income taxes       9,704     9,629 Net income       $24,142     $22,902 Weighted average number of shares outstanding: Basic 30,059,446 31,630,213 Diluted       30,447,596     32,116,305 Per common share: Basic earnings $0.80 $0.72   Diluted earnings $0.79 $0.71                 RECONCILIATION TO OPERATING INCOME : Net income $24,142 $22,902 Less realized investment gains (losses), net of income taxes (benefit)       (151 )   406 Operating income       $24,293     $22,496 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)     March 31, 2008*     December 31, 2007   ASSETS       Investments: Fixed maturities: Held to maturity, at amortized cost (fair value $302,160 and $319,510) $294,750 $316,043 Available for sale, at fair value (amortized cost $2,011,866 and $1,831,266) 2,062,384 1,858,192 Equity securities, at fair value (cost $127,393 and $66,433) 125,530 76,297 Short-term investments, at cost, which approximates fair value     90,624     107,941   Total investments     2,573,288     2,358,473   Cash 143 412 Premiums in course of collection 145,680 146,238 Reinsurance receivable 188,689 167,671 Accrued investment income 27,797 26,220 Deferred policy acquisition costs 113,509 101,954 Prepaid reinsurance premiums 40,894 38,721 Property and equipment, net 13,095 13,475 Deferred income taxes 40,533 38,544 Securities lending collateral 81,478 122,053 Due from affiliate 4,943 7,197 Other assets     47,262     51,487   Total assets     $3,277,311     $3,072,445   LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Unpaid losses and loss settlement expenses $1,735,942 $1,546,690 Unearned premiums 500,564 450,186 Accounts payable and accrued expenses 74,496 74,686 Securities lending obligation 84,432 123,542 Debt     118,500     118,500   Total liabilities     2,513,934     2,313,604   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 33,885,408 and 33,656,253 shares; outstanding 29,879,938 and 30,322,905 shares 33,885 33,656 Additional paid-in capital 216,825 213,654 Accumulated other comprehensive income 28,122 20,599 Retained earnings 595,332 578,705 Treasury stock, at cost, 4,005,470 and 3,333,348 shares     (110,787 )   (87,773 ) Total shareholders' equity     763,377     758,841   Total liabilities and shareholders' equity     $3,277,311     $3,072,445   * These financial figures are unaudited. Harleysville Group Inc. and Subsidiaries SUPPLEMENTARY FINANCIAL ANALYSTS' DATA     Quarter ended March 31 (dollars in thousands)   2008     2007   Net premiums written*   $277,578     $207,030   Statutory surplus*   $671,138     $712,129       Pretax investment income $29,198 $27,397 Related federal income taxes   8,033     7,816   After-tax investment income   $21,165     $19,581                   SEGMENT INFORMATION                 Quarter ended March 31 (dollars in thousands)   2008     2007   Revenues: Premiums earned: Commercial lines $189,512 $170,213 Personal lines   39,861     35,165   Total premiums earned 229,373 205,378 Net investment income 29,198 27,397 Realized investment gains (losses) (232 ) 624 Other   3,516     3,498   Total revenues   $261,855     $236,897       Income before income taxes: Underwriting gain (loss): Commercial lines ($9,531 ) $2,092 Personal lines   1,697     1,574   SAP underwriting gain (loss)   (7,834 )   3,666   GAAP adjustments   12,030     384   GAAP underwriting gain   4,196     4,050   Net investment income 29,198 27,397 Realized investment gains (losses) (232 ) 624 Other   684     460   Income before income taxes   $33,846     $32,531     Income taxes on net investment income $8,033 $7,816 Income taxes on remaining gain 1,671 1,813 Total income taxes   $9,704     $9,629     Effective tax rate on: Net investment income 27.5 % 28.5 % Income   28.7 %   29.6 % 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 March 31     Quarter ended March 31   Without Intercompany         Pooling Transfer**               (dollars in thousands)   2008     2008     2007     Net premiums written:   Commercial: Automobile $52,456 $62,759 $50,121 Workers' compensation 30,830 35,938 26,647 Commercial multi-peril 90,839 108,469 79,900 Other commercial 21,690 25,875 18,155                     Total commercial   $195,815     $233,041     $174,823     Personal: Automobile $18,113 $21,972 $16,527 Homeowners 15,750 19,882 13,660 Other personal 2,182 2,683 2,020                     Total personal   $36,045     $44,537     $32,207     Total personal and commercial   $231,860     $277,578     $207,030     Statutory combined ratios:   Commercial: Automobile 93.7 % 92.2 % 92.6 % Workers' compensation 111.7 % 110.7 % 112.6 % Commercial multi-peril 102.6 % 101.1 % 100.2 % Other commercial 82.4 % 80.8 % 84.3 %   Total commercial   99.0 %   97.6 %   97.9 %   Personal: Automobile 97.9 % 96.3 % 104.5 % Homeowners 93.8 % 91.1 % 92.6 % Other personal 69.2 % 68.9 % 95.7 %   Total personal   94.0 %   92.1 %   98.5 %   Total personal and commercial statutory combined ratio   98.1 %   96.6 %   97.9 %   GAAP combined ratio         98.2 %   98.0 %   Losses paid   $129,651           $111,687     Net catastrophe losses incurred         $3,026     $2,068   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, 2008, pooling transfer of $45,718,282 of net premiums written (representing the transfer of the January 1, 2008, unearned premium balance) and the effect of the pool transfer on the statutory combined ratios are excluded below for comparative purposes.