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 percent1, 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
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