Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2002
COMMISSION FILE NUMBER 0-22280
PHILADELPHIA CONSOLIDATED HOLDING CORP.
---------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2202671
------------ ----------
(State of Incorporation) (IRS Employer Identification No.)
ONE BALA PLAZA, SUITE 100
BALA CYNWYD, PENNSYLVANIA 19004
(610) 617-7900
-----------------------------------------
(Address, including zip code and
telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES: [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of August 8, 2002.
Preferred Stock, $.01 par value, no shares outstanding
Common Stock, no par value, 21,626,402 shares outstanding
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 2002 and
December 31, 2001 3
Consolidated Statements of Operations and Comprehensive
Income - For the three and six months ended
June 30, 2002 and 2001 4
Consolidated Statements of Changes in Shareholders' Equity - For the
six months ended June 30, 2002 and year ended
December 31, 2001 5
Consolidated Statements of Cash Flows - For the six
months ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7-11
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-17
Item 3.
Quantitative and Qualitative Disclosures About Market Risk 18
Part II - Other Information 19-21
Signatures 22
2
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
As of
--------------------------------------------
June 30, December 31,
2002 2001
(Unaudited)
----------------- ------------------
ASSETS
INVESTMENTS:
FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $708,101 AND $626,326)..................... $ 721,681 $ 632,416
EQUITY SECURITIES AT MARKET (COST $42,653
AND $34,065)............................................... 47,185 40,992
------------ ------------
TOTAL INVESTMENTS........................................ 768,866 673,408
CASH AND CASH EQUIVALENTS.................................... 45,711 49,910
ACCRUED INVESTMENT INCOME.................................... 7,722 6,582
PREMIUMS RECEIVABLE.......................................... 109,609 96,025
PREPAID REINSURANCE PREMIUMS AND
REINSURANCE RECEIVABLES...................................... 98,031 99,601
DEFERRED INCOME TAXES........................................ 7,480 6,196
DEFERRED ACQUISITION COSTS................................... 48,836 41,526
PROPERTY AND EQUIPMENT, NET.................................. 10,609 10,082
GOODWILL..................................................... 25,724 25,724
OTHER ASSETS................................................. 6,882 8,668
------------ ------------
TOTAL ASSETS............................................ $ 1,129,470 $ 1,017,722
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
POLICY LIABILITIES AND ACCRUALS:
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES..................... $ 331,889 $ 302,733
UNEARNED PREMIUMS............................................ 244,905 197,839
------------ ------------
TOTAL POLICY LIABILITIES AND ACCRUALS.................... 576,794 500,572
LOANS PAYABLE................................................ 31,341 31,341
PREMIUMS PAYABLE............................................. 32,451 25,659
OTHER LIABILITIES............................................ 34,282 31,458
------------ ------------
TOTAL LIABILITIES........................................ 674,868 589,030
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
PREFERRED STOCK, $.01 PAR VALUE,
10,000,000 SHARES AUTHORIZED, - -
NONE ISSUED AND OUTSTANDING................................
COMMON STOCK, NO PAR VALUE,
100,000,000 SHARES AUTHORIZED, 21,626,519 AND
21,509,723 SHARES ISSUED AND OUTSTANDING................... 270,977 268,509
NOTES RECEIVABLE FROM SHAREHOLDERS........................... (2,873) (3,373)
ACCUMULATED OTHER COMPREHENSIVE INCOME....................... 11,773 8,461
RETAINED EARNINGS............................................ 174,725 155,095
------------ ------------
TOTAL SHAREHOLDERS' EQUITY............................... 454,602 428,692
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............... $ 1,129,470 $ 1,017,722
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
3
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- -------------- ------------- --------------
REVENUE:
NET EARNED PREMIUMS............................... $ 100,273 $ 71,703 $ 189,517 $ 138,226
NET INVESTMENT INCOME............................. 9,375 8,091 18,230 16,133
NET REALIZED INVESTMENT GAIN (LOSS)............... (3,181) 318 (3,134) 2,617
OTHER INCOME...................................... 15 63 16 116
----------- ----------- ----------- -----------
TOTAL REVENUE................................... 106,482 80,175 204,629 157,092
----------- ----------- ----------- -----------
LOSSES AND EXPENSES:
LOSS AND LOSS ADJUSTMENT EXPENSES................. 72,067 54,686 137,678 100,224
NET REINSURANCE RECOVERIES........................ (11,235) (11,820) (23,797) (18,206)
------------ ------------ ------------ ------------
NET LOSS AND LOSS ADJUSTMENT EXPENSES............. 60,832 42,866 113,881 82,018
ACQUISITION COSTS AND OTHER
UNDERWRITING EXPENSES........................ 31,057 22,695 58,878 45,163
OTHER OPERATING EXPENSES.......................... 1,454 2,130 2,938 4,162
----------- ----------- ----------- -----------
TOTAL LOSSES AND EXPENSES....................... 93,343 67,691 175,697 131,343
----------- ----------- ----------- -----------
MINORITY INTEREST: DISTRIBUTIONS ON COMPANY OBLIGATED
MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST.................................. - 938 - 2,749
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES........................... 13,139 11,546 28,932 23,000
----------- ----------- ----------- -----------
INCOME TAX EXPENSE (BENEFIT):
CURRENT........................................... 5,798 5,921 12,369 10,698
DEFERRED.......................................... (1,612) (2,111) (3,067) (3,148)
------------ ------------ ------------ ------------
TOTAL INCOME TAX EXPENSE........................ 4,186 3,810 9,302 7,550
----------- ----------- ----------- -----------
NET INCOME...................................... $ 8,953 $ 7,736 $ 19,630 $ 15,450
=========== =========== =========== ===========
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
HOLDING GAIN (LOSS) ARISING DURING PERIOD............. 5,334 (921) 1,275 (1,512)
RECLASSIFICATION ADJUSTMENT........................... 2,068 (207) 2,037 (1,701)
----------- ------------ ----------- ------------
OTHER COMPREHENSIVE INCOME (LOSS)..................... 7,402 (1,128) 3,312 (3,213)
----------- ------------ ----------- ------------
COMPREHENSIVE INCOME..................................... $ 16,355 $ 6,608 $ 22,942 $ 12,237
=========== =========== =========== ===========
PER AVERAGE SHARE DATA:
BASIC EARNINGS PER SHARE.......................... $ 0.41 $ 0.50 $ 0.91 $ 1.06
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE........................ $ 0.40 $ 0.48 $ 0.88 $ 1.01
=========== =========== =========== ===========
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING....................................... 21,578,045 15,587,962 21,553,206 14,538,780
WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING....................................... 753,575 692,256 741,742 712,939
----------- ----------- ----------- -----------
WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING........................... 22,331,620 16,280,218 22,294,948 15,251,719
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated
financial statements.
4
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
For the Six Months
Ended For the Year Ended
June 30, 2002 December 31,
(Unaudited) 2001
--------------------- ---------------------
COMMON STOCK:
BALANCE AT BEGINNING OF YEAR.................................. $ 268,509 $ 46,582
ISSUANCE OF SHARES PURSUANT TO PUBLIC OFFERING................ - 114,518
ISSUANCE OF SHARES PURSUANT TO STOCK
PURCHASE CONTRACTS.......................................... - 98,905
EXERCISE OF EMPLOYEE STOCK OPTIONS............................ 2,115 6,437
ISSUANCE OF SHARES PURSUANT TO STOCK
PURCHASE PLANS.............................................. 353 2,067
----------------- -----------------
BALANCE AT END OF PERIOD.................................. 270,977 268,509
----------------- -----------------
NOTES RECEIVABLE FROM SHAREHOLDERS:
BALANCE AT BEGINNING OF YEAR.................................. (3,373) (2,287)
NOTES RECEIVABLE FORFEITED (ISSUED) PURSUANT
TO STOCK PURCHASE PLAN...................................... 46 (2,158)
COLLECTION OF NOTES RECEIVABLE................................ 454 1,072
----------------- -----------------
BALANCE AT END OF PERIOD.................................. (2,873) (3,373)
------------------ ------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF
DEFERRED INCOME TAXES:
BALANCE AT BEGINNING OF YEAR.................................. 8,461 13,494
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES............... 3,312 (5,033)
----------------- ------------------
BALANCE AT END OF PERIOD.................................. 11,773 8,461
----------------- -----------------
RETAINED EARNINGS:
BALANCE AT BEGINNING OF YEAR.................................. 155,095 124,536
NET INCOME.................................................... 19,630 30,559
----------------- -----------------
BALANCE AT END OF PERIOD.................................. 174,725 155,095
----------------- -----------------
TOTAL SHAREHOLDERS' EQUITY................................ $ 454,602 $ 428,692
================= =================
The accompanying notes are an integral part of the consolidated
financial statements.
5
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
For the Six Months Ended June 30,
-----------------------------------------
2002 2001
---------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 19,630 $ 15,450
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
NET REALIZED INVESTMENT (GAIN) LOSS........................ 3,134 (2,617)
DEPRECIATION AND AMORTIZATION EXPENSE...................... 738 1,225
DEFERRED INCOME TAX BENEFIT................................ (3,067) (3,148)
CHANGE IN PREMIUMS RECEIVABLE................................ (13,584) (1,281)
CHANGE IN OTHER RECEIVABLES................................ 430 (15,356)
CHANGE IN INCOME TAXES PAYABLE............................... (3,078) (8,015)
CHANGE IN DEFERRED ACQUISITION COSTS....................... (7,310) (5,596)
CHANGE IN OTHER ASSETS..................................... 5 784
CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES................................................... 29,156 31,094
CHANGE IN UNEARNED PREMIUMS................................ 47,066 31,188
CHANGE IN OTHER LIABILITIES................................ 10,134 (137)
TAX BENEFIT FROM EXERCISE OF EMPLOYEE
STOCK OPTIONS............................................. 1,251 24,474
---------------- ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES.............. 84,505 68,065
---------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITIES............................................... 137,290 23,311
PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITIES............................................... 49,730 25,482
PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES............................................... 12,891 11,988
COST OF FIXED MATURITIES ACQUIRED............................ (264,746) (131,266)
COST OF EQUITY SECURITIES ACQUIRED........................... (23,850) (7,695)
PURCHASE OF PROPERTY AND EQUIPMENT, NET...................... (1,736) (1,083)
---------------- ------------------
NET CASH USED BY INVESTING ACTIVITIES.................... (90,421) (79,263)
---------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
REPAYMENTS ON LOANS PAYABLE.................................. - (22,000)
PROCEEDS FROM LOANS PAYABLE.................................. - 20,841
PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS............. 864 1,860
PROCEEDS FROM COLLECTION OF NOTES RECEIVABLE................. 454 435
PROCEEDS FROM SHARES ISSUED PURSUANT TO
STOCK PURCHASE PLANS....................................... 399 24
---------------- ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. 1,717 1,160
---------------- ------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS....................... (4,199) (10,038)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................ 49,910 49,742
---------------- ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................... $ 45,711 $ 39,704
================ ==================
CASH PAID DURING THE PERIOD FOR:
INCOME TAXES................................................. $ 13,936 $ -
INTEREST..................................................... $ 288 $ 130
NON-CASH TRANSACTIONS:
ISSUANCE OF SHARES (FORFEITURES) PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR
NOTES RECEIVABLE............................................ $ (46) $ (84)
ISSUANCE OF COMMON SHARES IN SATISFACTION OF
STOCK PURCHASE CONTRACTS.................................... $ - $ 98,905
The accompanying notes are an integral part of the consolidated
financial statements.
6
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements as of and for the six months
ended June 30, 2002 and 2001 are unaudited, but in the opinion of
management, have been prepared on the same basis as the annual audited
consolidated financial statements and reflect all adjustments,
consisting of only normal recurring accruals, necessary for a fair
statement of the information set forth therein. The results of
operations for the six months ended June 30, 2002 are not necessarily
indicative of the operating results to be expected for the full year or
any other period.
These financial statements should be read in conjunction with the
financial statements and notes included in the Company's Annual Report
on Form 10-K as of and for the year ended December 31, 2001.
2. Investments
The carrying amounts for the Company's investments approximates their
estimated fair value, except for investments in limited partnerships,
which are valued at cost. The Company measures the fair value of
investments based upon quoted market prices or by obtaining quotes from
dealers. At June 30, 2002, the Company held no derivative financial
instruments or embedded financial derivatives.
The Company performs various analytical procedures with respect to its
investments, including identifying any security whose fair value is
below its cost. Upon identification of such securities, a detailed
review is performed to determine whether a decline in fair value below
a security's cost basis is other than temporary. If the Company
determines a decline in value to be other than temporary, the cost
basis of the security is written down to its fair value with the amount
of the write down included in earnings as a realized loss in the period
the impairment arose.
The Company's impairment evaluation and recognition for interests in
securitized assets is conducted in accordance with the guidance
provided by the Emerging Issues Task Force of the Financial Accounting
Standards Board. Under this guidance, impairment losses on securities
must be recognized if both the fair value of the security is less than
its book value and the net present value of expected future cash flows
is less than the net present value of expected future cash flows at the
most recent (prior) estimation date. If these criteria are met, an
impairment charge, calculated as the difference between the current
book value of the security and its fair value, is included in earnings
as a realized loss in the period the impairment arose. Realized losses
recorded for the three months ended June 30, 2002 and 2001 were $1.2
million and $4.3 million, respectively, and for the six months ended
June 30, 2002 and 2001 were $1.2 million and $4.3 million,
respectively, as a result of this impairment evaluation.
3. Goodwill
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets" on January 1, 2002. SFAS No. 142 eliminates the practice of
amortizing goodwill through periodic charges to earnings and
establishes a new methodology for recognizing and measuring goodwill
and other intangible assets. Under this new accounting standard, the
Company ceased goodwill amortization on January 1, 2002. Goodwill
amortization for the six months ended June 30, 2001 amounted to $0.8
million.
7
The following table provides a reconciliation of the prior year's three
and six month periods ended June 30 reported net income to adjusted net
income had SFAS No. 142 been applied at the beginning of fiscal 2001
(in millions, except per share amounts):
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- ------------------------------
2002 2001 2002 2001
-------------- -------------- ------------ --------------
Reported net income $ 8,953 $ 7,736 $ 19,630 $ 15,450
Adjustment for goodwill amortization - 376 - 752
-------------- -------------- ------------ --------------
Adjusted net income $ 8,953 $ 8,112 $ 19,630 $ 16,202
============== ============== ============ ==============
Reported basic earnings per share $ 0.41 $ 0.50 $ 0.91 $ 1.06
Adjustment for goodwill amortization - 0.02 - 0.05
-------------- -------------- ------------ --------------
Adjusted basic earnings per share $ 0.41 $ 0.52 $ 0.91 $ 1.11
============== ============== ============ ==============
Reported diluted earnings per share $ 0.40 $ 0.48 $ 0.88 $ 1.01
Adjustment for goodwill amortization - 0.02 - 0.05
-------------- -------------- ------------ --------------
Adjusted diluted earnings per share $ 0.40 $ 0.50 $ 0.88 $ 1.06
============== ============== ============ ==============
4. Liability for Unpaid Loss and Loss Adjustment Expenses
The liability for unpaid loss and loss adjustment expenses reflects the
Company's best estimate for future amounts needed to pay losses and
related settlement expenses with respect to insured events. Estimating
the ultimate claims liability is necessarily a complex and judgmental
process, inasmuch as the amounts are based on management's informed
estimates and judgments using data currently available. In some cases
significant periods of time, up to several years or more, may elapse
between the occurrence of an insured loss and the reporting of such to
the Company. The method for determining the Company's liability for
unpaid loss and loss adjustment expenses includes, but is not limited
to, reviewing past loss experience and considering other factors such
as legal, social, and economic developments. As additional experience
and data become available the Company's estimate for the liability for
unpaid loss and loss adjustment expenses is revised accordingly. If the
Company's ultimate losses, net of reinsurance, prove to differ
substantially from the amounts recorded at June 30, 2002, the related
adjustments could have a material adverse impact on the Company's
financial condition, and results of operations.
As a result of changes in estimates of insured events in prior years,
the Company increased loss and loss adjustment expenses incurred by
$5.0 million during the second quarter ended June 30, 2002. Such
adverse loss development is due to losses emerging at a higher rate on
automobile leases currently expiring on residual value policies
underwritten during the years 1996 through 1998 than had been
originally anticipated when the reserves were estimated as a result of
changes in the automobile after market.
The Company continues to evaluate and monitor the remaining leases
outstanding on its residual value policies underwritten during the
period 1996 through 2002. As part of this evaluation the Company has
recently engaged an outside consulting firm, which is a leading
provider of residual values, portfolio risk analysis and analytical
data products to the automotive industry, to further evaluate the
current conditions and determine the impact, if any, on the Company's
outstanding residual value policies as a result of changes in the
benchmark for residual values and the automotive after market which
have occurred subsequent to the inception date of the Company's
policies. It is expected that the outside consulting firm will complete
their analysis during the third quarter of 2002.
5. Loans Payable
As of June 30, 2002, the Company had aggregate borrowings of $31.3
million from the Federal Home Loan Bank. These borrowings bear interest
at adjusted LIBOR and mature twelve months from inception. The proceeds
from these borrowings were invested in collateralized mortgage
obligation and asset backed securities to achieve a positive spread
between the rate of interest on these securities and the borrowing
rates.
8
6. Earnings Per Share
Earnings per common share has been calculated by dividing net income
for the period by the weighted average number of common shares and
common share equivalents outstanding during the period. Following is
the computation of earnings per share for the three and six months
ended June 30, 2002 and 2001, respectively (in thousands):
As of and For the Three As of and For the Six
Months Ended June 30, Months Ended June 30
-------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ---------- -----------
Weighted-Average Common Shares Outstanding 21,578 15,588 21,553 14,539
Weighted-Average Share Equivalents Outstanding 754 692 742 713
-------- -------- -------- --------
Weighted-Average Shares and Share
Equivalents Outstanding 22,332 16,280 22,295 15,252
======== ======== ======== ========
Net Income $ 8,953 $ 7,736 $ 19,630 $ 15,450
======== ======== ======== ========
Basic Earnings per Share $ 0.41 $ 0.50 $ 0.91 $ 1.06
======== ======== ======== ========
Diluted Earnings per Share $ 0.40 $ 0.48 $ 0.88 $ 1.01
======== ======== ======== ========
7. Income Taxes
The effective tax rate differs from the 35% marginal tax rate
principally as a result of tax-exempt interest income, the dividend
received deduction and other differences in the recognition of revenues
and expenses for tax and financial reporting purposes.
8. Commitments and Contingencies
On April 30, 2002, U.S. Bank, N.A. d/b/a Firstar Bank ("Firstar"), a
bank to which one of the Company's insurance subsidiaries, Philadelphia
Indemnity Insurance Company ("PIIC"), issued insurance coverages, filed
a complaint against PIIC in the United States District Court for the
Southern District of Ohio (Western Division). The complaint asks for
damages and a declaratory judgment against PIIC. The complaint arises
principally out of a loss adjustment change and also relates to other
coverage interpretations made by PIIC under the terms of residual value
protection insurance policies issued to Firstar relating to vehicles
financed by Firstar. The complaint alleges that as a result of the loss
adjustment change Firstar may suffer damages of as much as $75,000,000.
On June 27, 2002, PIIC filed an answer to the complaint denying
liability with respect to the matters set forth above. PIIC believes
that this claim is without merit and intends to vigorously defend this
action.
As previously reported in the Company's Form 10-Q for the period ending
March 31, 2001 and Form 10-K for the period ending December 31, 2001,
two of the Company's subsidiaries, Liberty American Insurance Group
Inc. and Mobile Homeowners Insurance Agency Inc., had filed an action
in the U.S. District Court in the Middle District of Florida against
WestPoint Underwriters LLC, a managing general agent, two former
employees of Liberty American and a third individual, and a federal
magistrate judge issued a report and recommendations to the Federal
District court. With respect to Liberty American's request for
preliminary relief, the findings and recommendations stated that one of
the former employees had misappropriated Liberty American's trade
secrets by using its software to write WestPoint's software. The
magistrate judge recommended against injunctive relief, finding that
damages may be available as a remedy. Liberty American objected, in
part, to the findings. The District Court judge has now issued orders
denying Liberty American's objections to the findings, adopting
substantially all the magistrate judge's recommendations and dismissing
the Company's subsidiaries' claim against the third individual referred
to above. The claims against WestPoint and the two former employees
referred to above are still pending. The accompanying financial
statements contain no benefit, if any, from damages related to this
action.
9. Comprehensive Income
Components of comprehensive income, as detailed in the Consolidated
Statements of Operations and Comprehensive Income, are net of tax. The
related tax effect of Holding Gains (Losses) arising during the three
and six months ended June 30, 2002 and 2001 was $2.9 million and ($0.5)
million, respectively, and $0.7 million and ($0.8) million,
respectively. The related tax effect of Reclassification Adjustments
for the three and six months ended June 30, 2002 and 2001 was $1.1
million and ($0.1) million, respectively, and $1.1 million and ($0.9)
million respectively.
9
10. Segment Information
The Company's operations are classified into three reportable business
segments: The Commercial Lines Underwriting Group ("Commercial Lines"),
which has underwriting responsibility for the Commercial Automobile and
Commercial Property and Commercial multi-peril package insurance
products; the Specialty Lines Underwriting Group ("Specialty Lines"),
which has underwriting responsibility for the professional liability
insurance products; and the Personal Lines Group ("Personal Lines"),
which designs, markets and underwrites personal property and casualty
insurance products for the Manufactured Housing and Homeowners markets.
The reportable segments operate solely within the United States. The
segments follow the same accounting policies used for the Company's
consolidated financial statements. Management evaluates a segment's
performance based upon underwriting results.
Following is a tabulation of business segment information for the three
and six months ended June 30, 2002 and 2001. Corporate information is
included to reconcile segment data to the consolidated financial
statements (in thousands):
Six Months Ended,
-----------------------------------------------------------------
Commercial Specialty Personal
Lines Lines Lines Corporate Total
-----------------------------------------------------------------
June 30, 2002:
Gross Written Premiums $ 199,029 $ 52,324 $ 45,894 - $ 297,247
-----------------------------------------------------------------
Net Written Premiums $ 161,202 $ 48,488 $ 25,169 - $ 234,859
-----------------------------------------------------------------
Revenue:
Net Earned Premiums $ 131,346 $ 39,408 $ 18,763 - $ 189,517
Net Investment Income - - - 18,230 18,230
Net Realized Investment Loss - - - (3,134) (3,134)
Other Income - - 922 (906) 16
-----------------------------------------------------------------
Total Revenue 131,346 39,408 19,685 14,190 204,629
-----------------------------------------------------------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 37,81,266 23,153 9,462 - 113,881
Acquisition Costs and Other Underwriting
Expenses - - - 58,878 58,878
Other Operating Expenses - - 62 2,876 2,938
-----------------------------------------------------------------
Total Losses and Expenses 81,266 23,153 9,524 61,754 175,697
-----------------------------------------------------------------
Income Before Income Taxes 50,080 16,255 10,161 (47,564) 28,932
Total Income Tax Expense - - - 9,302 9,302
-----------------------------------------------------------------
Net Income $ 50,080 $ 16,255 $ 10,161 $ (56,866) $ 19,630
=================================================================
Total Assets - - $ 193,830 $ 935,640 $ 1,129,470
=================================================================
June 30, 2001:
Gross Written Premiums $ 135,590 $ 41,598 $ 47,519 - $ 224,707
-----------------------------------------------------------------
Net Written Premiums $ 94,306 $ 36,732 $ 28,585 - $ 159,623
-----------------------------------------------------------------
Revenue:
Net Earned Premiums $ 86,077 $ 32,711 $ 19,438 - $ 138,226
Net Investment Income - - - 16,133 16,133
Net Realized Investment Gain - - - 2,617 2,617
Other Income - - 1,598 (1,482) 116
-----------------------------------------------------------------
Total Revenue 86,077 32,711 21,036 17,268 157,092
-----------------------------------------------------------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 51,510 20,604 9,904 - 82,018
Acquisition Costs and Other Underwriting
Expenses - - - 45,163 45,163
Other Operating Expenses - - 778 3,384 4,162
-----------------------------------------------------------------
Total Losses and Expenses 51,510 20,604 10,682 48,547 131,343
-----------------------------------------------------------------
Minority Interest: Distributions on
Company
Obligated Mandatorily Redeemable
Preferred
Securities of Subsidiary Trust - - - 2,749 2,749
-----------------------------------------------------------------
Income Before Income Taxes 34,567 12,107 10,354 (34,028) 23,000
Total Income Tax Expense - - - 7,550 7,550
-----------------------------------------------------------------
Net Income $ 34,567 $ 12,107 $ 10,354 $ (41,578) $ 15,450
=================================================================
Total Assets - - $ 169,520 $ 636,124 $ 805,644
=================================================================
10
Three Months Ended,
------------------------------------------------------------------
Commercial Specialty Personal
Lines Lines Lines Corporate Total
------------------------------------------------------------------
June 30, 2002:
Gross Written Premiums $ 108,471 $ 27,895 $ 24,414 $ - $ 160,780
------------------------------------------------------------------
Net Written Premiums $ 86,340 $ 25,715 $ 13,305 $ - $ 125,360
------------------------------------------------------------------
Revenue:
Net Earned Premiums $ 70,275 $ 20,474 $ 9,524 - $ 100,273
Net Investment Income - - - 9,375 9,375
Net Realized Investment Loss - - - (3,181) (3,181)
Other Income - - 352 (337) 15
------------------------------------------------------------------
Total Revenue 70,275 20,474 9,876 5,857 106,482
------------------------------------------------------------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 44,609 11,487 4,736 - 60,832
Acquisition Costs and Other Underwriting
Expenses - - - 31,057 31,057
Other Operating Expenses - - 43 1,411 1,454
------------------------------------------------------------------
Total Losses and Expenses 44,609 11,487 4,779 32,468 93,343
------------------------------------------------------------------
Income Before Income Taxes 25,666 8,987 5,097 (26,611) 13,139
Total Income Tax Expense - - - 4,186 4,186
------------------------------------------------------------------
Net Income $ 25,666 $ 8,987 $ 5,097 $ (30,797) $ 8,953
==================================================================
Total Assets - - $ 193,830 $ 935,640 $ 1,129,470
==================================================================
June 30, 2001:
Gross Written Premiums $ 75,200 $ 21,015 $ 24,459 - $ 120,674
------------------------------------------------------------------
Net Written Premiums $ 52,495 $ 18,847 $ 11,194 - $ 82,536
------------------------------------------------------------------
Revenue:
Net Earned Premiums $ 44,659 $ 16,855 $ 10,189 - $ 71,703
Net Investment Income - - - 8,091 8,091
Net Realized Investment Gain - - - 318 318
Other Income - - 693 (630) 63
------------------------------------------------------------------
Total Revenue 44,659 16,855 10,882 7,779 80,175
------------------------------------------------------------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 27,097 10,586 5,183 - 42,866
Acquisition Costs and Other Underwriting
Expenses - - - 22,695 22,695
Other Operating Expenses - - 389 1,741 2,130
------------------------------------------------------------------
Total Losses and Expenses 27,097 10,586 5,572 24,436 67,691
------------------------------------------------------------------
Minority Interest: Distributions on
Company
Obligated Mandatorily Redeemable
Preferred
Securities of Subsidiary Trust - - - 938 938
------------------------------------------------------------------
Income Before Income Taxes 17,562 6,269 5,310 (17,595) 11,546
Total Income Tax Expense - - - 3,810 3,810
------------------------------------------------------------------
Net Income $ 17,562 $ 6,269 $ 5,310 $ (21,405) $ 7,736
==================================================================
Total Assets - - $ 169,520 $ 636,124 $ 805,644
==================================================================
11
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
Although the Company's financial performance is dependent upon its own specific
business characteristics, certain risk factors can affect the profitability of
the Company. These include, but are not limited to:
o Industry factors - Historically the financial performance of the property
and casualty insurance industry has tended to fluctuate in cyclical
patterns of soft markets followed by hard markets. The Company's strategy
is to focus on underwriting profits, and accordingly the Company's
marketing organization is being directed into those niche businesses that
exhibit the greatest potential for underwriting profits.
o Competition - The Company competes in the property and casualty business
with other domestic and international insurers having greater financial
and other resources than the Company.
o Regulation - The Company's insurance subsidiaries are subject to a
substantial degree of regulatory oversight, which generally is designed to
protect the interests of policyholders, as opposed to shareholders.
o Inflation - Property and casualty insurance premiums are established
before the amount of losses and loss adjustment expenses, or the extent to
which inflation may affect such amounts is known.
o Investment Risk - Substantial future increases in interest rates could
result in a decline in the market value of the Company's investment
portfolio and resulting losses and/or reduction in shareholders' equity.
o Catastrophe Exposure - The Company's insurance subsidiaries issue
insurance policies which provide coverage for commercial and personal
property and casualty risks. It is possible that a catastrophic event
could greatly increase claims under the insurance policies the insurance
subsidiaries issue. Catastrophes may result from a variety of events or
conditions, including hurricanes, windstorms, earthquakes, hail and other
severe weather conditions and may include terrorist events. It is possible
that a catastrophic event could adversely impact profitability.
The above risk factors should be read in conjunction with the Certain Critical
Accounting Estimates and Judgments included in the Company's Annual Report on
Form 10-K For the Fiscal Year Ended December 31, 2001.
RESULTS OF OPERATIONS (SIX MONTHS ENDED JUNE 30, 2002 VS. JUNE 30, 2001)
Premiums: Gross written premiums grew $72.5 million (32.3%) to $297.2
million for the six months ended June 30, 2002 from $224.7 million for the same
period of 2001; gross earned premiums grew $58.1 million (30.2%) to $250.5
million for the six months ended June 30, 2002 from $192.4 million for the same
period of 2001; net written premiums increased $75.3 million (47.2%) to $234.9
million for the six months ended June 30, 2002 from $159.6 million for the same
period of 2001; and net earned premiums grew $51.3 million (37.1%) to $189.5
million in 2002 from $138.2 million in 2001.
The respective gross written premium increases (decreases) for commercial lines,
specialty lines and personal lines segments for the six months ended June 30,
2002 vs. June 30, 2001 amount to $63.4 million (46.8%), $10.7 million (25.8%)
and ($1.6) million (3.4%) respectively. The overall growth in gross written
premiums is primarily attributable to the following:
o Rating downgrades of certain major competitor property and casualty
insurance companies have led to their diminished presence in the Company's
commercial and specialty lines business segments and continue to result in
additional prospects and increased premium writings, most notably for the
Company's various commercial package and non-profit D&O product lines.
12
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(Continued)
o The consolidation of certain competitor property and casualty insurance
companies has led to the displacement of certain of their independent
agency relationships. This consolidation continues to result in new agency
relationship opportunities for the Company. These relationships have
resulted in additional prospects and premium writings for the Company's
commercial and specialty lines segments.
o Continued expansion of marketing efforts relating to commercial lines and
specialty lines products through the Company's field organization and
preferred agents.
o Rate increases.
Overall premium growth in the specialty lines segment has been offset in part by
the Company's decision not to renew certain policies in the professional
liability product lines due to inadequate pricing levels being experienced as a
result of market conditions and/or loss experience emerging at higher than
expected levels.
The overall premium decrease for the personal lines segment was due principally
to the Company's decision not to write new business or renew certain policies in
designated areas of Florida in the Company's manufactured housing product line,
based on an evaluation of property exposures. This decrease has been partially
offset by an increase in premiums for the Company's homeowners product line for
which new and renewal policies are being added in select areas.
Pursuant to a routine underwriting review which focused on pricing adequacy,
loss experience, as well as other underwriting criteria, the Company cancelled a
Commercial Automobile Excess Liability Insurance customer (Commercial Lines
Underwriting Group) effective October 22, 2002 as a result of an unacceptable
underwriting risk profile. Such customer's gross written premium and net written
premium amounted to $45.8 million and $11.8 million, respectively, for the year
ended December 31, 2001 and $20.1 million and $5.8 million, respectively, for
the six months ended June 30, 2002.
The respective net written premium increases (decreases) for commercial lines,
specialty lines and personal lines segments for the six months ended June 30,
2002 vs. June 30, 2001 amount to $66.9 million (70.9%), $11.8 million (32.0%)
and ($3.4) million (12.0%) respectively. The differing percentage increases
(decreases) in net written premiums versus gross written premiums for the period
is primarily due to the Company commuting a 2001 accident year aggregate stop
loss reinsurance program whereby net written and net earned premiums increased
by $3.6 million ($2.4 million Commercial Lines, $0.8 million Specialty Lines,
0.4 million Personal Lines), and in part to other various changes in the
Company's reinsurance program.
Net Investment Income: Net investment income approximated $18.2 million
for the six months ended June 30, 2002 and $16.1 million for the same period of
2001. Total investments grew to $768.9 million at June 30, 2002 from $511.0
million at June 30, 2001. The growth in investment income is due to investing
net cash flows provided from operating activities and the proceeds of the
Company's equity offering received during the fourth quarter of 2001. The
capital market environment during 2001 and most of 2002 (low U.S. Treasury
yields) had the effect of increasing the level of prepayments in certain of the
Company's interest rate sensitive investments. The Company's average duration in
its fixed income portfolio approximated 3.5 years at June 30, 2002, compared to
3.2 years at June 30, 2001, and the Company's tax equivalent book yield on its
fixed income holdings was 6.2% at June 30, 2002, compared to 7.2% at June 30,
2001.
Net Realized Investment Gain (Loss): Net realized investment gains
(losses) were ($3.1) million for the six months ended June 30, 2002 and $2.6
million for the same period in 2001. The Company realized net investment losses
of $1.9 million principally from the sales of common stock equity securities
during the six months ended June 30, 2002. Additionally, $1.2 million in
non-cash realized investment losses were recorded on certain structured
securities as a result of the Company's impairment evaluation. The proceeds from
the common stock sales were reinvested principally in common stock securities.
The Company realized net investment gains of $5.9 million from the sales of
common stock equity securities and $1.0 million from the sales of fixed maturity
securities during the six months ended June 30, 2001. These realized net
investment gains were offset in part by $4.3 million in non-cash realized
investment losses experienced on certain structured securities as a result of an
impairment evaluation. The proceeds from the sales were reinvested in fixed
maturity securities to increase current investment income, lessen
13
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(Continued)
the Company's holdings in certain common stock positions, and decrease the
overall percentage of investments in common stock securities.
Other Income: Other income approximated $16,000 for the six months
ended June 30, 2002 and $116,000 for the same period of 2001. Other income
primarily consisted of commissions earned on brokered personal lines business.
Such commissions earned decreased as brokering activities were discontinued in
favor of writing business directly. However, the Company is seeking to increase
brokering activities in the future, as it is not writing new business or
renewing certain policies in designated areas of Florida for the Company's
manufactured housing product as a result of its property exposures in these
areas and related catastrophe loss considerations.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment
expenses increased $31.9 million (38.9%) to $113.9 million for the six months
ended June 30, 2002 from $82.0 million for the same period of 2001 and the loss
ratio increased to 60.1% in 2002 from 59.3% in 2001. This increase in net loss
and loss adjustment expenses was due principally to the 37.1% growth in net
earned premiums, and in part to the Company increasing loss and loss adjustment
expenses incurred by $5.0 million as a result of changes in estimates of insured
events in prior years. Such adverse loss development is due to losses emerging
at a higher rate on automobile leases currently expiring on residual value
policies underwritten during the years 1996 through 1998 than had been
originally anticipated when the reserves were estimated, as a result of changes
in the automobile after market. The Company also commuted a 2001 accident year
aggregate stop loss reinsurance program, resulting in net written and net earned
premium increasing by $3.6 million. The Company had not ceded any losses to the
2001 accident year aggregate stop loss reinsurance program.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs
and other underwriting expenses increased $13.7 million (30.3%) to $58.9 million
for the six months ended June 30, 2002 from $45.2 million for the same period of
2001. This increase was due primarily to the 37.1% growth in net earned
premiums, offset by relative changes in the Company's product mix and associated
distribution channel expense.
Other Operating Expenses: Other operating expenses decreased $1.3
million to $2.9 million for the six months ended June 30, 2002 from $4.2 million
for the same period of 2001. The decrease in other operating expenses was
primarily due to the discontinuance of goodwill amortization effective January
1, 2002.
Income Tax Expense: The Company's effective tax rate for the six months
ended June 30, 2002 and 2001 was 32.2% and 32.8%, respectively. The effective
rates differed from the 35% statutory rate principally due to investments in
tax-exempt securities and in part due to the discontinuance of goodwill
amortization. The decrease in the effective tax rate is principally due to a
greater investment of cash flows in tax-exempt securities relative to taxable
securities.
RESULTS OF OPERATIONS (THREE MONTHS ENDED JUNE 30, 2002 VS. JUNE 30, 2001)
Premiums: Gross written premiums grew $40.1 million (33.2%) to $160.8
million for the three months ended June 30, 2002 from $120.7 million for the
same period of 2001; gross earned premiums grew $30.1 million (29.7%) to $131.3
million for the three months ended June 30, 2002 from $101.2 million for the
same period of 2001; net written premiums increased $42.9 million (52.0%) to
$125.4 million for the three months ended June 30, 2002 from $82.5 million for
the same period of 2001; and net earned premiums grew $28.6 million (39.9%) to
$100.3 million in 2002 from $71.7 million in 2001.
The respective gross written premium increases (decreases) for commercial lines,
specialty lines and personal lines segments for the three months ended June 30,
2002 vs. June 30, 2001 amount to $33.3 million (44.2%), $6.9 million (32.7%) and
($45,000), (0.2%) respectively. The overall growth in gross written premiums is
primarily attributable to the following:
o Rating downgrades of certain major competitor property and casualty
insurance companies have led to their diminished presence in the Company's
commercial and specialty lines business segments and continue to result
14
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(Continued)
in additional prospects and increased premium writings, most notably for
the Company's various commercial package and non-profit D&O product lines.
o The consolidation of certain competitor property and casualty insurance
companies has led to the displacement of certain of their independent
agency relationships. This consolidation continues to result in new agency
relationship opportunities for the Company. These relationships have
resulted in additional prospects and premium writings for the Company's
commercial and specialty lines segments.
o Continued expansion of marketing efforts relating to commercial lines and
specialty lines products through the Company's field organization and
preferred agents.
o Rate increases.
Overall premium growth in the specialty lines segment has been offset in part by
the Company's decision not to renew certain policies in the professional
liability product lines due to inadequate pricing levels being experienced as a
result of market conditions and/or loss experience emerging at higher than
expected levels.
The overall premium decrease for the personal lines segment was due principally
to the Company's decision not to write new business or renew certain policies in
designated areas of Florida in the Company's manufactured housing product line
based on an evaluation of property exposures. This decrease has been partially
offset by an increase in premiums for the Company's homeowners product line for
which new and renewal policies are being added in select areas.
Pursuant to a recent underwriting review which focused on pricing adequacy, loss
experience, as well as other underwriting criteria, the Company cancelled a
Commercial Automobile Excess Liability Insurance customer (Commercial Lines
Underwriting Group) effective October 27, 2002 as a result of an unacceptable
underwriting risk profile. Such customer's gross written premium and net written
premium amounted to $45.8 million and $11.8 million, respectively, for the year
ended December 31, 2001 and $20.1 million and $5.8 million, respectively, for
the six months ended June 30, 2002.
The respective net written premium increases for commercial lines, specialty
lines and personal lines segments for the three months ended June 30, 2002 vs.
June 30, 2001 amount to $33.8 million (64.5%), $6.9 million (36.4%) and $2.1
million (18.9%) respectively. The differing percentage increases (decreases) in
net written premiums versus gross written premiums for the period is primarily
due to the Company commuting a 2001 accident year aggregate stop loss
reinsurance program whereby net written and net earned premiums increased by
$3.6 million ($2.4 million Commercial Lines, $0.8 million Specialty Lines, $0.4
million Personal Lines), and in part to other various changes in the Company's
reinsurance program.
Net Investment Income: Net investment income approximated $9.4 million
for the three months ended June 30, 2002 and $8.1 million for the same period of
2001. Total investments grew to $768.9 million at June 30, 2002 from $511.0
million at June 30, 2001. The growth in investment income is due to investing
net cash flows provided from operating activities and the proceeds of the
Company's equity offering received during the fourth quarter of 2001. The
capital market environment of 2001 and the latter part of the second quarter
2002 (low U.S. Treasury yields) had the effect of increasing the level of
prepayments in certain of the Company's interest rate sensitive investments.
Net Realized Investment Gain (Loss): Net realized investment gains
(losses) were ($3.2) million for the three months ended June 30, 2002 and $0.3
million for the same period in 2001. The Company realized net investment losses
of $2.0 million principally from the sales of common stock equity securities
during the three months ended June 30, 2002. Additionally, $1.2 million in
non-cash realized investment losses were recorded on certain structured
securities as a result of the Company's impairment evaluation. The proceeds from
the common stock sales were reinvested principally in common stock securities.
The Company realized net investment gains of $3.6 million from the sales of
common stock equity securities and $1.0 million from the sales of fixed maturity
securities during the three months ended June 30, 2001. These realized net
investment gains were offset in part by $4.3 million in non-cash realized
investment losses experienced on certain structured securities as a result of an
15
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(Continued)
impairment evaluation. The proceeds from the sales were reinvested in fixed
maturity securities to increase current investment income, lessen the Company's
holdings in certain common stock positions, and decrease the overall percentage
of investments in common stock securities.
Other Income: Other income approximated $15,000 for the three months
ended June 30, 2002 and $63,000 for the same period of 2001. Other income
primarily consisted of commissions earned on brokered personal lines business.
Such commissions earned decreased as brokering activities were discontinued in
favor of writing business directly. However, the Company is seeking to increase
brokering activities in the future as it is not writing new business or renewing
certain policies in designated areas of Florida for the Company's manufactured
housing product as a result of its property exposures in these areas and related
catastrophe loss considerations.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment
expenses increased $17.9 million (41.7%) to $60.8 million for the three months
ended June 30, 2002 from $42.9 million for the same period of 2001 and the loss
ratio increased to 60.7% in 2002 from 59.8% in 2001. This increase in net loss
and loss adjustment expenses was due principally to the 39.9% growth in net
earned premiums, and in part to the Company increasing loss and loss adjustment
expenses incurred by $5.0 million as a result of changes in estimates of insured
events in prior years. Such adverse loss development is due to losses emerging
at a higher rate on automobile leases currently expiring on residual value
policies underwritten during the years 1996 through 1998 than had been
originally anticipated when the reserves were estimated, as a result of changes
in the automobile after market. The Company also commuted a 2001 accident year
aggregate stop loss reinsurance program resulting in net written and net earned
premium increasing by $3.6 million. The Company had not ceded any losses to the
2001 accident year aggregate stop loss reinsurance program.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs
and other underwriting expenses increased $8.4 million (37.0%) to $31.1 million
for the three months ended June 30, 2002 from $22.7 million for the same period
of 2001. This increase was due primarily to the 39.9% growth in net earned
premiums offset by relative changes in the Company's product mix and associated
distribution channel expense.
Other Operating Expenses: Other operating expenses decreased $0.6
million to $1.5 million for the three months ended June 30, 2002 from $2.1
million for the same period of 2001. The decrease in other operating expenses
was primarily due to the discontinuance of goodwill amortization effective
January 1, 2002.
Income Tax Expense: The Company's effective tax rate for the three
months ended June 30, 2002 and 2001 was 31.9% and 33.0%, respectively. The
effective rates differed from the 35% statutory rate principally due to
investments in tax-exempt securities and in part to the discontinuance of
goodwill amortization. The decrease in the effective tax rate is principally due
to a greater investment of cash flows in tax-exempt securities relative to
taxable securities.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2002, the Company's investments
experienced unrealized investment appreciation of $3.3 million, net of the
related deferred tax expense of $1.8 million. At June 30, 2002, the Company had
total investments with a carrying value of $768.9 million, of which 93.9%
consisted of investments in fixed maturity securities, including U.S. treasury
securities and obligations of U.S. government corporations and agencies,
obligations of states and political subdivisions, corporate debt securities,
collateralized mortgage securities and asset backed securities. The
collateralized mortgage securities and asset backed securities consist of short
tranche securities possessing favorable pre-payment risk profiles. The remaining
6.1% of the Company's total investments consisted primarily of publicly traded
common stock securities.
The Company produced net cash from operations of $84.5 million and
$68.1 million, respectively, for the six months ended June 30, 2002 and 2001.
Management believes that the Company has adequate ability to pay all claims and
meet all other cash needs.
16
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(Continued)
Risk-based capital is designed to measure the acceptable amount of
capital an insurer should have based on the inherent specific risks of each
insurer. Insurers failing to meet this benchmark capital level may be subject to
scrutiny by the insurer's domiciliary insurance department and ultimately
rehabilitation or liquidation. Based on the standards currently adopted, the
Company's insurance subsidiaries' capital and surplus is in excess of the
prescribed risk-based capital requirements.
FORWARD-LOOKING INFORMATION
Certain information included in this report and other statements or
materials published or to be published by the Company are not historical facts
but are forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, new and
existing products, expectations for market segment and growth, and similar
matters. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company provides the following
cautionary remarks regarding important factors which, among others, could cause
the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development, results of the Company's business, and the
other matters referred to above include, but are not limited to: (i) changes in
the business environment in which the Company operates, including inflation and
interest rates; (ii) changes in taxes, governmental laws, and regulations; (iii)
competitive product and pricing activity; (iv) difficulties of managing growth
profitably; and (v) catastrophe losses.
17
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments are subject to the market risk of
potential losses from adverse changes in market rates and prices. The primary
market risks to the Company are equity price risk associated with investments in
equity securities and interest rate risk associated with investments in fixed
maturities. The Company has established, among other criteria, duration, asset
quality and asset allocation guidelines for managing its investment portfolio
market risk exposure. The Company's investments are held for purposes other than
trading and consist of diversified issuers and issues.
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. The information is presented
in U.S. dollar equivalents.
JUNE 30, 2002
EXPECTED MATURITY DATES
(In thousands, except average interest rate) TOTAL
FAIR
2002 2003 2004 2005 2006 Thereafter TOTAL VALUE
-------- -------- -------- -------- -------- ---------- -------- -----------
FIXED MATURITIES AVAILABLE
FOR SALE:
Principal Amount $ 34,285 $ 97,076 $ 95,359 $ 91,883 $ 59,577 $330,067 $708,247 $ 710,170
Book Value $ 34,317 $ 97,331 $ 95,641 $ 92,355 $ 59,875 $317,227 $696,746 --
Average Interest Rate 6.49% 4.63% 6.04% 6.22% 5.77% 5.57% 5.65% 4.79%
PREFERRED:
Principal Amount $ 2,400 $ 3,750 $ 1,500 $ 1,000 $ 2,500 -- $ 11,150 $ 11,511
Book Value $ 2,402 $ 3,858 $ 1,489 $ 1,040 $ 2,566 -- $ 11,355 --
Average Interest Rate 5.27% 5.90% 6.06% 6.84% 6.41% -- 5.99% 5.90%
SHORT-TERM DEBT:
Principal Amount $ 34,558 -- -- -- -- -- $ 34,558 $ 34,558
Book Value $ 34,558 -- -- -- -- -- $ 34,558 --
Average Interest Rate 1.89% -- -- -- -- -- 1.89% 1.89%
18
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
(a) On April 30, 2002, U.S. Bank, N.A. d/b/a Firstar Bank ("Firstar"), a
bank to which one of the Company's insurance subsidiaries, Philadelphia
Indemnity Insurance Company ("PIIC"), issued insurance coverages, filed
a complaint against PIIC in the United States District Court for the
Southern District of Ohio (Western Division). The complaint asks for
damages and a declaratory judgment against PIIC. The complaint arises
principally out of a loss adjustment change and also relates to other
coverage interpretations made by PIIC under the terms of residual value
protection insurance policies issued to Firstar relating to vehicles
financed by Firstar. The complaint alleges that as a result of the loss
adjustment change Firstar may suffer damages of as much as $75,000,000.
On June 27, 2002, PIIC filed an answer to the complaint denying
liability with respect to the matters set forth above. PIIC believes
that this claim is without merit and intends to vigorously defend this
action.
(b) As previously reported in the Company's Form 10-Q for the period ending
March 31, 2001 and Form 10-K for the period ending December 31, 2001,
two of the Company's subsidiaries, Liberty American Insurance Group
Inc. and Mobile Homeowners Insurance Agency Inc., had filed an action
in the U.S. District Court in the Middle District of Florida against
WestPoint Underwriters LLC, a managing general agent, two former
employees of Liberty American and a third individual, and a federal
magistrate judge issued a report and recommendations to the Federal
District court. With respect to Liberty American's request for
preliminary relief, the findings and recommendations stated that one of
the former employees had misappropriated Liberty American's trade
secrets by using its software to write WestPoint's software. The
magistrate judge recommended against injunctive relief, finding that
damages may be available as a remedy. Liberty American objected, in
part, to the findings. The District Court judge has now issued orders
denying Liberty American's objections to the findings, adopting
substantially all the magistrate judge's recommendations and dismissing
the Company's subsidiaries' claim against the third individual referred
to above. The claims against WestPoint and the two former employees
referred to above are still pending.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of shareholders held on May 1, 2002 the
following nominees were elected to the Board of Directors:
Votes For Votes Withheld
-------------------------- -----------------------
Elizabeth H. Gemmill 15,846,157 257,353
William J. Henrich, Jr. 15,845,862 257,648
Paul R. Hertel, Jr. 15,846,157 257,353
James J. Maguire 14,041,074 2,062,436
James J. Maguire, Jr. 14,045,569 2,057,941
Thomas J. McHugh 15,831,707 271,803
Michael J. Morris 15,846,157 257,353
Dirk A. Stuurop 15,846,157 257,353
Sean S. Sweeney 13,926,964 2,176,546
J. Eustace Wolfington 15,845,862 257,648
James L. Zech 13,879,864 2,223,646
19
The following other matters were approved at the Annual Meeting:
Votes For Votes Against Abstentions Broker Non
Votes
-------------- ----------------- --------------- -------------
Approval of the Appointment of 15,993,295 109,538 677 0
PricewaterhouseCoopers LLP as Independent
Auditors for the Fiscal Year Ending December
31, 2002
Approval of an amendment of the Company's
Articles of Incorporation to increase its
authorized shares of common stock from
50,000,000 to 100,000,000 shares 15,155,143 947,015 1,352 0
Approval and adoption of the amendment and
restatement of the Company's Employee Stock
Option Plan (the "Stock Option Plan") to
increase the number of shares of the
Company's common stock for which options
may be granted under the Stock Option Plan
and to make certain changes to Plan
administration 14,657,939 381,490 54,962 1,009,119
Approval of the continuation of the
Company's Cash Bonus Plan 14,927,516 111,270 55,605 1,009,119
Approval of the Company's Nonqualified
Employee Stock Purchase Plan 14,533,417 508,174 52,800 1,009,119
Item 5. Other information
Not applicable.
20
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit No. Description
- ---------------- ------------------------------------------------------------------------------------
3.1.2* Amendment to Articles of Incorporation, Philadelphia Consolidated Holding Corp.
10.1 Philadelphia Insurance Companies Non Qualified Employee Stock Purchase Plan -
incorporated by reference to Exhibit 4 to Registration Statement on Form S-8 (file
no. 333-91216) filed with the Securities and Exchange Commission on June 26, 2002
10.2 Philadelphia Consolidated Holding Corp. Employee's Stock Option Plan (Amended and
Restated Effective March 24, 2002) - incorporated by reference to Exhibit 4 to
Registration Statement on Form S-8 (file no. 333-91218) filed with the Securities
and Exchange Commission on June 26, 2002
10.3 Philadelphia Insurance Companies Key Employee Deferred Compensation Plan -
incorporated by reference to Exhibit 4.1 to Registration Statement on Form S-8
(file no. 333-90534) filed with the Securities and Exchange Commission on June 14,
2002
10.4* Employment Agreement with James J. Maguire, Jr. effective June 1, 2002
10.5* Employment Agreement with Sean S. Sweeney effective June 1, 2002
10.6* Employment Agreement with Craig P. Keller effective June 1, 2002
99.1* Certification of the Company's chief executive officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2* Certification of the Company's chief financial officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith.
b. The Company has not filed any reports on Form 8-K during the quarter
for which this report is filed.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHILADELPHIA CONSOLIDATED HOLDING CORP.
Registrant
Date August 12, 2002 /s/ James J. Maguire
------------------------ -----------------------------------------
James J. Maguire
Chairman of the Board of Directors,
and Chief Executive Officer
(Principal Executive Officer)
Date August 12, 2002 /s/ Craig P. Keller
------------------------ -----------------------------------------
Craig P. Keller
Senior Vice President, Secretary,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer)
22