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--Operating return on equity of 12.6 percent
--Statutory combined ratio(1) of 99.5 percent
--Book value of $25.08 per share; up 8 percent from year-end 2008
--Dividend raised 8 percent to $1.30 per share on an annualized basis; up more than 70 percent over the last three years
--$25 million share repurchase program announced
Harleysville Group Inc. (NASDAQ:HGIC) today reported diluted operating income of $0.72 per share for the second quarter of 2009, compared to $0.31 per share in the second quarter of 2008. For the six-month periods, the company reported diluted operating income of $1.34 per share in 2009 and $1.11 per share in 2008. 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.
"I'm pleased to report that we had a strong overall performance in the second quarter," commented Michael L. Browne, Harleysville Group's president and chief executive officer. "Our operating return on equity (ROE) for the trailing 12 months was 12.6 percent, exceeding our long-term ROE goal of at least 12 percent. We also reported a statutory combined ratio of 99.5 percent, and operating income of $0.72 per share.
"Our balance sheet remains strong, with our book value increasing 8 percent to $25.08 from $23.18 at year-end 2008," Browne continued. "At the same time, our capital management efforts continue to differentiate us from our competitors. As we announced earlier today, we are increasing our dividend by 8 percent to an annualized $1.30 per share from $1.20 per share. We also authorized a stock buyback to repurchase up to an additional $25 million, or approximately 3 percent, of our outstanding shares. This new stock repurchase program is our fifth since June 2007. When it's completed, we will have bought back approximately 20 percent of our outstanding shares since the middle of 2007. Our ability to continue increasing our dividend and buying back shares reflects our financial strength, as evidenced by a blue chip investment portfolio, a solid reserve position, a debt-to-capital ratio of 16 percent(2) and a premium-to-surplus ratio of 1.4 to 1. With that as our foundation, we're positioned to continue to be a strong and stable market for our agents' best business."
The company reported diluted net income of $0.72 per share in the second quarter of 2009, compared to $0.31 per share in the second quarter of 2008. Realized investment gains (losses) after tax in the second quarter of both 2009 and 2008 were negligible. For the six-month periods, diluted net income was $1.32 per share in 2009 and $1.11 per share in 2008. For the six months, the company reported $0.02 per share after tax of realized investment losses in 2009, compared to minimal investment losses in 2008.
The company's second quarter net written premiums decreased 6.6 percent to $222.3 million in 2009, compared to $237.9 million in the same period in 2008. Net written premiums through six months were $439.0 million in 2009, compared to $469.7 million in 2008, excluding the non-recurring impact of the pooling change in 2008.
Harleysville Group's overall statutory combined ratio was 99.5 percent in the second quarter of 2009, compared to 107.7 percent in the second quarter of 2008. Catastrophe losses added 1.7 points to the second quarter result in 2009, compared to 10.9 points in 2008. For the six months, the statutory combined ratio was 100.7 percent in 2009, versus 102.2 percent in 2008. Catastrophe losses added 1.2 points to the six-month result in 2009 and 6.1 points in 2008. Adjusting for the one-time impact of the 2008 pooling change, the statutory combined ratio for the six months of 2008 was 102.9 percent.
Second quarter pretax investment income decreased 7.7 percent to $26.4 million, while after-tax investment income was down 5.2 percent in the second quarter to $19.8 million. For the six months, pretax investment income declined 8.7 percent to $52.8 million, while after-tax investment income was down 6.3 percent to $39.4 million. Operating cash flow for the six months of 2009 was $38.2 million, compared to $44.7 million in the six months of 2008, excluding the non-recurring impact of the pooling change in 2008.
Commercial lines Net written premiums in commercial lines decreased 9.7 percent to $176.5 million in the second quarter of 2009. For the six months, net written premiums were down 9.3 percent to $354.9 million. The commercial lines statutory combined ratio was 100.2 percent in the second quarter of 2009, versus 106.1 percent in the second quarter of 2008. For the six months, the statutory combined ratio was 101.4 percent in 2009, compared to 102.5 percent in 2008, adjusting for the non-recurring impact of the pooling change in 2008.
Personal lines Net written premiums in personal lines were up 7.8 percent to $45.7 million in the second quarter of 2009. For the six months, net written premiums grew 7.2 percent to $84.2 million. Harleysville Group's personal lines statutory combined ratio was 96.8 percent in the second quarter of 2009, versus 115.7 percent during the second quarter of 2008. For the six months, the statutory combined ratio was 97.8 percent in 2009, compared to 104.8 percent in 2008, adjusting for the non-recurring impact of the pooling change in 2008.
Outlook "Looking ahead, we will remain focused on the basics of our business in order to retain our best accounts and generate responsible, profitable growth," Browne said. "Most importantly, we will not compromise underwriting quality to chase a near-term growth goal. Instead, we will work closely with our agency partners to remain disciplined--despite current market conditions--as we seek to consistently produce improving earnings, profitable underwriting and an operating ROE of 12 percent or better--all of which will serve to differentiate us throughout 2009 and beyond."
Webcast The company will host a live Webcast tomorrow, July 31, 2009, 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 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. As a Trusted Choice(R) company partner, Harleysville distributes its products exclusively through a network of independent agents primarily across 32 states. Harleysville was listed recently as #30 in the InformationWeek 500, the publication's annual listing of the most innovative information technology organizations in the U.S., and has been ranked on the list in each of the last three years. Harleysville Mutual Insurance Company owns 53 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 2009 Mergent Dividend Achiever Award for its long-term history of dividend increases. 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; 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) "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 June 30 Six months ended June 30 (in thousands, except per share data) 2009 2008 2009 2008 OPERATING RESULTS Diluted earnings per common share: Operating income* $0.72 $0.31 $1.34 $1.11 Realized investment losses, net of income tax benefit (0.02 ) Net income $0.72 $0.31 $1.32 $1.11 Cash dividends per common share $0.30 $0.25 $0.60 $0.50 FINANCIAL CONDITION June 30, 2009 December 31, 2008 Assets $3,203,625 $3,155,318 Shareholders' equity $692,056 $652,634 Per common share $25.08 $23.18 CONSOLIDATED STATEMENTS OF INCOME Quarter ended June 30 Six months ended June 30 (in thousands, except per share data) 2009 2008 2009 2008 REVENUES: Premiums earned $214,789 $229,835 $432,812 $459,208 Investment income, net of investment expense 26,364 28,565 52,753 57,763 Realized investment gains (losses) (98 ) 183 (1,041 ) (49 ) Other income 3,406 2,937 6,831 6,453 Total revenues 244,461 261,520 491,355 523,375 LOSSES AND EXPENSES: Losses and loss settlement expenses 138,750 170,733 285,479 318,043 Amortization of deferred policy acquisition costs 53,782 56,698 107,879 113,654 Other underwriting expenses 22,067 20,429 42,793 41,340 Interest expense 1,564 1,625 3,186 3,297 Other expenses 1,355 1,130 2,167 2,290 Total expenses 217,518 250,615 441,504 478,624 Income before income taxes 26,943 10,905 49,851 44,751 Income taxes 6,811 1,543 12,430 11,247 Net income $20,132 $9,362 $37,421 $33,504 Weighted average number of shares outstanding: Basic 28,001,825 29,677,137 28,146,539 29,993,446 Diluted 28,116,209 29,967,292 28,290,101 30,275,956 Per common share: Basic earnings $0.72 $0.32 $1.33 $1.12 Diluted earnings $0.72 $0.31 $1.32 $1.11 RECONCILIATION TO OPERATING INCOME : Net income $20,132 $9,362 $37,421 $33,504 Less realized investment gains (losses), net of income taxes (64 ) 119 (677 ) (32 ) (benefit) Operating income $20,196 $9,243 $38,098 $33,536
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, 2009* December 31, 2008 ASSETS Investments: Fixed maturities: Held to maturity, at amortized cost (fair value $233,438 and $225,670 $246,855 $250,798) Available for sale, at fair value (amortized cost $1,974,876 and 2,036,593 1,914,051 $1,889,778) Equity securities, at fair value (cost $134,742 and $96,004) 150,964 98,815 Short-term investments, at cost, which approximates fair value 123,368 210,682 Other invested assets, at cost, which approximates fair value 2,698 3,189 Total investments 2,539,293 2,473,592 Cash 146 146 Premiums in course of collection 151,609 142,602 Reinsurance receivable 207,420 212,654 Accrued investment income 26,445 25,630 Deferred policy acquisition costs 112,768 110,339 Prepaid reinsurance premiums 39,333 41,481 Property and equipment, net 13,645 12,511 Deferred income taxes 51,427 68,892 Other assets 61,539 67,471 Total assets $3,203,625 $3,155,318 LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Unpaid losses and loss settlement expenses $1,778,196 $1,767,601 Unearned premiums 488,639 484,560 Accounts payable and accrued expenses 120,110 119,063 Due to affiliate 6,124 12,960 Debt 118,500 118,500 Total liabilities 2,511,569 2,502,684 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 34,489 34,254 34,488,944 and 34,254,581 shares; outstanding 27,591,035 and 28,156,672 shares Additional paid-in capital 239,769 231,715 Accumulated other comprehensive income (loss) 16,257 (17,390 ) Retained earnings 609,770 589,146 Treasury stock, at cost, 6,897,909 and 6,097,909 shares (208,229 ) (185,091 ) Total shareholders' equity 692,056 652,634 Total liabilities and shareholders' equity $3,203,625 $3,155,318
*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) 2009 2008 2009 2008
Net premiums written* $222,251 $237,868 $439,038 $515,446
Statutory surplus* $640,983 $583,315
Pretax investment income $26,364 $28,565 $52,753 $57,763
Related federal income taxes 6,566 7,681 13,362 15,714
After-tax investment income $19,798 $20,884 $39,391 $42,049
SEGMENT INFORMATION
Quarter ended June 30 Six months ended June 30
(dollars in thousands) 2009 2008 2009 2008
Revenues:
Premiums earned:
Commercial lines $173,452 $189,746 $351,130 $379,258
Personal lines 41,337 40,089 81,682 79,950
Total premiums earned 214,789 229,835 432,812 459,208
Net investment income 26,364 28,565 52,753 57,763
Realized investment gains (losses) (98 ) 183 (1,041 ) (49 )
Other 3,406 2,937 6,831 6,453
Total revenues $244,461 $261,520 $491,355 $523,375
Income before income taxes:
Underwriting gain (loss):
Commercial lines ($1,402 ) ($13,406 ) ($6,278 ) ($22,937 )
Personal lines (43 ) (7,041 ) 1,012 (5,344 )
SAP underwriting loss (1,445 ) (20,447 ) (5,266 ) (28,281 )
GAAP adjustments 1,635 2,422 1,927 14,452
GAAP underwriting gain (loss) 190 (18,025 ) (3,339 ) (13,829 )
Net investment income 26,364 28,565 52,753 57,763
Realized investment gains (losses) (98 ) 183 (1,041 ) (49 )
Other 487 182 1,478 866
Income before income taxes $26,943 $10,905 $49,851 $44,751
Income taxes on net investment income $6,566 $7,681 $13,362 $15,714
Income taxes (benefit) on remaining gain (loss) 245 (6,138 ) (932 ) (4,467 )
Total income taxes $6,811 $1,543 $12,430 $11,247
Effective tax rate on:
Net investment income 24.9 % 26.9 % 25.3 % 27.2 %
Income 25.3 % 14.1 % 24.9 % 25.1 %
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 June 30 Six months ended June 30
Without Intercompany
Pooling Transfer**
(dollars in thousands) 2009 2008 2009 2008 2008
Net premiums written:
Commercial:
Automobile $46,699 $51,851 $94,101 $104,307 $114,610
Workers' compensation 19,461 27,205 45,207 58,035 63,143
Commercial multi-peril 88,265 92,479 172,278 183,318 200,948
Other commercial 22,097 23,905 43,299 45,595 49,780
Total commercial $176,522 $195,440 $354,885 $391,255 $428,481
Personal:
Automobile $21,252 $19,160 $40,706 $37,273 $41,132
Homeowners 21,246 20,250 37,582 36,000 40,132
Other personal 3,231 3,018 5,865 5,200 5,701
Total personal $45,729 $42,428 $84,153 $78,473 $86,965
Total personal and commercial $222,251 $237,868 $439,038 $469,728 $515,446
Statutory combined ratios:
Commercial:
Automobile 89.4 % 98.1 % 89.3 % 95.9 % 95.0 %
Workers' compensation 113.3 % 111.9 % 110.1 % 111.7 % 111.0 %
Commercial multi-peril 104.3 % 107.1 % 106.1 % 104.8 % 104.1 %
Other commercial 93.5 % 113.0 % 100.6 % 97.9 % 97.2 %
Total commercial 100.2 % 106.1 % 101.4 % 102.5 % 101.8 %
Personal:
Automobile 103.7 % 90.2 % 105.3 % 94.0 % 93.1 %
Homeowners 93.2 % 142.0 % 93.6 % 117.6 % 116.5 %
Other personal 74.6 % 114.6 % 76.1 % 92.4 % 92.5 %
Total personal 96.8 % 115.7 % 97.8 % 104.8 % 103.9 %
Total personal and commercial statutory combined ratio 99.5 % 107.7 % 100.7 % 102.9 % 102.2 %
GAAP combined ratio 99.9 % 107.8 % 100.8 % 103.0 %
GAAP losses paid $136,162 $155,322 $270,194 $284,973
Net catastrophe losses incurred $3,583 $25,069 $5,298 $28,095
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.
SOURCE: Harleysville Group Inc.
Harleysville Group Inc. Investors: Mark Cummins, 215-256-5025 mcummins@harleysvillegroup.com or Media: Randy Buckwalter, 215-256-5288 rbuckwalter@harleysvillegroup.com
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