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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 2003
OR
|| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from__________ to __________
COMMISSION FILE NUMBER: 0-22280
PHILADELPHIA CONSOLIDATED HOLDING CORP.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2202671
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
ONE BALA PLAZA, SUITE 100
BALA CYNWYD, PENNSYLVANIA 19004
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 617-7900
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
|X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES |X| NO: ||
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 10,
2004 as reported on the NASDAQ National Market System, was $510,690,534. Shares
of Common Stock held by each executive officer and director and by each person
who is known by the Registrant to beneficially own 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 10, 2004, Registrant had outstanding 22,033,824 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the definitive Proxy Statement for Registrant's 2004 Annual
Meeting of Shareholders to be held April 29, 2004 are incorporated by
reference in Part III.
PART I
Item 1. BUSINESS
GENERAL
As used in this Annual Report on Form 10-K, (i) "Philadelphia Insurance"
refers to Philadelphia Consolidated Holding Corp., (ii) the "Company" refers to
Philadelphia Insurance and its subsidiaries, doing business as Philadelphia
Insurance Companies; (iii) the "Insurance Subsidiaries" refers to Philadelphia
Indemnity Insurance Company ("PIIC"), Philadelphia Insurance Company ("PIC"),
Mobile USA Insurance Company ("MUSA") and Liberty American Insurance Company
("LAIC"), collectively; (iv) "MIA" refers to Maguire Insurance Agency, Inc., a
captive underwriting manager; (v) "MHIA" refers to Mobile Homeowners Insurance
Agencies, Inc., a managing general agency; (vi) "Premium Finance" refers to
Liberty American Premium Finance Company; and (vii) "PCHC Investment" refers to
PCHC Investment Corp., an investment holding company. Philadelphia Insurance was
incorporated in Pennsylvania in 1984 as an insurance holding company. Liberty
American Insurance Group, Inc., a Delaware insurance holding company, and its
subsidiaries MUSA, LAIC, MHIA and Premium Finance, are sometimes referred to
herein collectively as "Liberty".
During 2003, the Company continued its growth through adherence to its
core philosophies of specialization, mixed marketing and profitable
underwriting. 2003 gross written premiums increased 36.5% to $906.0 million.
Premium growth was primarily attributable to the Company capitalizing on
continuing turmoil in the property and casualty market, as well as better
"brand" recognition with agents and brokers. The turmoil created a general
environment of rate increases and reduced capacity in the marketplace. The
Company's GAAP basis combined ratio (the sum of the net loss and loss adjustment
expenses and acquisition costs and other underwriting expenses divided by net
earned premiums) was 91.3%, which was substantially lower than the property and
casualty industry as a whole. Total assets increased to $1.9 billion, and
shareholders' equity increased to $543.7 million.
INDUSTRY TRENDS
During the 1990s and into 2000, the insurance industry maintained excess
capacity, creating highly competitive market conditions, as evidenced by
declining premium rates and, in many cases, policy terms less favorable to the
insurer. As a result, the industry suffered from reduced profitability and a
contraction of capacity as insurers chose or were forced to exit the
marketplace. Subsequently, a tumultus environment has emerged in the property
and casualty insurance industry in large part due to: the significant losses
caused by the terrorist events of September 11, 2001; continued rating
downgrades and insolvencies; and lower interest rates resulting in reduced
investment income. These factors have resulted in a general environment of rate
increases and conservative risk selection. Industry participants expect a
moderation in rate increases for the foreseeable future. Increased reinsurance
costs, to some extent, offset the benefits of these trends to the Company and to
insurance companies in general.
During 2003, the Company's rate increases on renewal business approximated
4.3%, 10.2% and 9.4% for the commercial, specialty and personal lines segments,
respectively. There can be no assurance, however, that these favorable trends
will continue or that these rate increases can be sustained.
BUSINESS OVERVIEW AND STRATEGY
The Company designs, markets and underwrites specialty commercial and
personal property and casualty insurance products incorporating value-added
coverages and services for select target markets or niches. Insurance products
are distributed through a diverse multi-channel delivery system centered around
the Company's direct production underwriting organization. A select group of 105
"preferred agents" and a broader network of approximately 8,500 independent
agents supplement the production underwriting organization, which consisted of
204 professionals located in 36 regional and field offices across the United
States as of December 31, 2003.
The Company's commercial products include commercial multi-peril package
insurance targeting specialized niches, including, among others, non-profit
organizations, health and fitness organizations, homeowners' associations,
condominium associations, specialty schools and day care facilities; commercial
automobile insurance targeting the leasing and rent-a-car industries; property
insurance for large commercial accounts such as shopping centers, business
parks, hotels and medical facilities; and inland marine products targeting
larger risks such as new builders' risk and miscellaneous property floaters.
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The Company also writes select classes of professional liability and
directors' and officers' liability products, as well as personal property and
casualty products for the manufactured housing and homeowners' markets.
The Company maintains detailed systems, records and databases that enable
the continuous monitoring of its book of business in order to identify and react
swiftly to positive or negative developments and trends. The Company is able to
track performance, including loss ratios, by segment, product, region, state,
producer and policyholder. Detailed profitability reports are produced and
reviewed on a routine (primarily monthly) basis as part of the policy of
regularly analyzing and reviewing the Company's book of business.
The Company maintains a local presence to more effectively serve its
producer and customer base, operating through 12 regional offices and 24 field
offices throughout the country, which report to the regional offices. These
offices are staffed with field underwriters, marketers, accounts receivable and,
in some cases, claim personnel, who interact closely with home office management
in making key decisions. This approach allows the Company to adapt its
underwriting and marketing strategies to local conditions and build value-added
relationships with its customers and producers.
The Company selects and targets industries and niches that present
specialized areas of expertise where it believes it can grow business through
creatively developing insurance products with innovative features specially
designed to meet those areas of demand. The Company believes that these features
are not included in typical property and casualty policies, enabling it to
compete based on the unique or customized nature of the coverage provided.
Business Segments
The Company's operations are classified into three reportable business
segments:
- Commercial Lines Underwriting Group, which has underwriting
responsibility for the commercial multi-peril package, commercial
automobile and specialty property and inland marine insurance
products;
- Specialty Lines Underwriting Group, which has underwriting
responsibility for the professional liability and directors' and
officers' liability insurance products; and
- Personal Lines Underwriting Group, which has underwriting
responsibility for personal property and casualty insurance products
for the manufactured housing and homeowners' markets, principally in
Florida.
The following table sets forth, for the years ended December 31, 2003,
2002 and 2001, the gross written premiums for each of the Company's business
segments and the relative percentages that such premiums represented.
For the Years Ended December 31,
------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Dollars Percentage Dollars Percentage Dollars Percentage
------- ---------- ------- ---------- ------- ----------
(dollars in thousands)
Commercial Lines.......................... $ 662,339 73.1% $ 473,100 71.3% $ 315,948 66.7%
Specialty Lines........................... 154,105 17.0 110,176 16.6 79,317 16.7
Personal Lines............................ 89,549 9.9 80,463 12.1 78,300 16.6
---------- ----- ---------- ----- ---------- -----
Total..................................... $ 905,993 100.0% $ 663,739 100.0% $ 473,565 100.0%
========== ===== ========== ===== ========== =====
Commercial Lines:
Commercial Package: The Company has provided commercial multi-peril
package policies to targeted niche markets for over 15 years. The primary
customers for these policies include:
- non-profit and social service organizations;
- health and fitness organizations;
- homeowners' associations;
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- condominium associations;
- specialty schools;
- boat dealerships;
- mobile home parks;
- day care facilities; and
- mental health facilities.
The package policies provide a combination of comprehensive liability,
property and automobile coverage with limits up to $1.0 million for casualty,
$50.0 million for property, and umbrella limits on an optional basis up to $10.0
million. The Company believes its ability to provide professional liability and
general liability coverages in one policy is advantageous and convenient to
producers and policyholders.
Commercial Automobile and Commercial Excess: The Company has provided
primary, excess, contingent, interim and garage liability; physical damage;
property; and Guaranteed Asset Protection (GAP) to targeted markets for over 35
years. The primary customers for these policies include:
- rental car companies
- leasing companies
- banks
- credit unions
Specialty Property & Inland Marine: The Company has provided property and
inland marine coverage to targeted markets for the past 5 years. The primary
customers for these policies include:
- shopping centers
- business parks
- medical facilities
- hotels and motels
- new construction (inland marine)
Specialty Lines:
The Company has provided errors and omissions (professional) and directors
and officers (D&O) liability to targeted classes of business for approximately
14 years. The professional liability products provide errors and omissions
coverage primarily for:
- lawyers
- accountants
- miscellaneous (marketing, management, computer, marriage/family
counseling) consultants
- excess liability
The directors' and officers' product, with an emphasis on non-profit
institutions and private companies, are offered to:
- non-profit (501(c)(3) companies)
- for-profit public and private companies.
Personal Lines:
The Company entered the personal lines property and casualty business
through the acquisition of Liberty American Insurance Group, Inc. ("Liberty") in
1999. This personal lines platform produces and underwrites specialized
manufactured housing and homeowners' property and casualty business principally
in Florida, and to a lesser extent, in California, Arizona and Nevada. Liberty
also produces and services federal flood insurance under the National Flood
Insurance Program for both personal and commercial policyholders.
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Products offered include manufactured housing insurance for senior citizen
retirees in "preferred" parks, a program for newly constructed manufactured
homes on private property; a preferred homeowners' program that targets newer
homes valued between $100,000 and $375,000 in gated retiree communities, and a
homeowners' program excluding wind exposure in Florida coastal counties for the
in-park manufactured housing business. As a result of Florida's increased
seasonal residents during the winter months, approximately 50% of the in-park
manufactured housing business is written in the first four calendar months of
the year.
Geographic Distribution
The following table provides the geographic distribution for all
reportable business segments of the Company's risks insureds as represented by
direct earned premiums for the year ended December 31, 2003. No other state
accounted for more than 2% of total direct earned premiums for the year ended
December 31, 2003 (dollars in thousands).
State Direct Earned Premiums Percent of Total
----- ---------------------- ----------------
Florida.................................... $154,277 19.7%
California................................. 89,442 11.4
New York................................... 58,743 7.5
Texas...................................... 42,508 5.4
Illinois................................... 34,513 4.4
Pennsylvania............................... 32,447 4.1
Massachusetts.............................. 32,272 4.1
New Jersey................................. 31,850 4.1
Ohio....................................... 29,335 3.7
Minnesota.................................. 16,850 2.1
Other...................................... 262,208 33.5
-------- -----
Total Direct Earned Premiums............... $784,445 100.0%
======== =====
See Note 19 to the Company's financial statements included with this Form 10-K
for information concerning the revenues, net income and assets of the Company's
business segments.
Underwriting and Pricing
The Company's business segments are organized around its three
underwriting divisions: Commercial Lines, Specialty Lines, and Personal Lines.
Each underwriting division's responsibilities include: pricing, managing the
risk selection process, and monitoring loss ratios by product insured.
The Company attempts to adhere to conservative underwriting and pricing
practices. The Company's underwriting strategy is detailed in a document which
is signed by each underwriting professional. Written underwriting guidelines are
maintained and updated regularly for all classes of business underwritten and
adherence to these underwriting guidelines is maintained through underwriting
audits conducted by the Company. Product pricing levels are monitored utilizing
a system which measures the aggregate price level of a book of business. This
system assists management and underwriters to promptly recognize and respond to
price deterioration. When necessary, the Company is willing to re-underwrite,
sharply curtail or discontinue a product deemed to present unacceptable risks.
The Commercial Lines Underwriting Group has underwriting responsibility
for the Company's commercial multi-peril package, commercial automobile and
large property and inland marine products. The Group currently consists of 58
home office and 59 regional office underwriters which are supported by
underwriting assistants, raters, and other policy administration personnel. The
Commercial Lines home office underwriting unit is responsible for underwriting,
auditing, and servicing renewal business, as well as an authority referral for
the regional office underwriters for quoting new business. The regional office
underwriters have the responsibility for pricing, underwriting, and policy
issuance for new business. The commercial lines underwriting group is under the
immediate direction of Underwriter Managers who report to the Vice Presidents of
Commercial Lines Underwriting. Overall management responsibility of the book of
business resides in the home office with the senior underwriting officers. The
Company believes that its ability to deliver excellent service and build long
lasting relationships is enhanced through its management structure.
The Specialty Lines Underwriting Group has the underwriting responsibility
for the errors and omissions and directors and officers liability products. The
Group consists of 20 home office underwriters and underwriter trainees and 27
regional underwriters. These underwriters and underwriter trainees are supported
by underwriting assistants and other policy
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administration personnel. The home office underwriting unit is responsible for
underwriting, auditing and servicing renewal business, as well as an authority
referral for the regional office underwriters for quoting new business. The
regional office underwriters have the responsibility for pricing, underwriting,
and policy issuance of new business. The Specialty Lines Group is managed by
three Assistant Vice Presidents who report directly to the Chief Underwriting
Officer.
The Personal Lines Underwriting Group is located in Pinellas Park,
Florida. The underwriting staff consists of 14 professionals who are under the
direction of the Personal Lines Underwriting Vice President. Much of the
underwriting function is automated through internet accessed rating software.
Underwriting guidelines are embedded within this software which prohibit binding
of accounts if a risk does not meet the underwriting guidelines. The Company has
a proactive exposure distribution management system in place to aid in portfolio
optimization. The risk portfolio is managed at a zip code level through the use
of in-house software and external modeling tools. The Company inspects all risks
on its new preferred homeowners program and manufactured homes on private
property.
The Company uses a combination of Insurance Services Office, Inc. ("ISO")
coverage forms and rates and independently filed forms and rates. Coverage forms
and rates are independently developed for situations where the line of business
is not supported by ISO or where management believes the ISO forms and rates do
not adequately address the risk. Departures from ISO forms are also used to
differentiate the Company's products from its competitors.
Reinsurance
The Company has entered into various reinsurance agreements for the
purpose of limiting loss exposure. The Company's casualty excess of loss
reinsurance agreement provides that the Company bears the first $1.0 million
layer of liability on each occurrence. Casualty, fidelity, professional
liability and/or fiduciary liability risks in excess of $1.0 million up to $11.0
million are reinsured under a casualty treaty ("Excess Treaty") placed through a
reinsurance broker with Converium Reinsurance North America Inc., American
Reinsurance Company, Endurance Specialty Insurance LTD, and Liberty Mutual
Insurance Company, with a pro rata participation of 35%, 25%, 20% and 20%,
respectively. Facultative reinsurance (reinsurance which is provided on an
individual risk basis) is placed for each casualty risk in excess of $11.0
million. Effective January 1, 2004 the Company's casualty excess of loss
reinsurance agreement provides that the Company bears the first $1.0 million
layer of liability on umbrella risks for policies where the Company provides the
first $1.0 million primary layer of coverage.
The Company's property excess of loss reinsurance treaty provides that the
Company bears the first $2.0 million of loss on each risk with its reinsurers
bearing two layers of loss up to $15.0 million on each risk (General Reinsurance
Corporation provides limits of $8.0 million in excess of $2.0 million, and Swiss
Reinsurance American Corporation, provides limits of $5.0 million in excess of
$10.0 million). The Company also has automatic facultative excess of loss
reinsurance with General Reinsurance Corporation for each property loss in
excess of $15.0 million up to $50.0 million. To mitigate potential exposures to
losses arising from terrorist acts, the Company has purchased per risk
reinsurance coverage for terrorism with a $13.0 million aggregate policy limit
for 2003. Under this reinsurance coverage the Company bears the first $2.0
million layer of loss on each risk and coverage.
Effective April 1, 2003, the Company entered into a quota share
reinsurance agreement covering substantially all of the Company's lines of
business. Under this agreement, the Company cedes 22% of its net written premium
(including 22% of net unearned premium reserves at April 1, 2003) and loss and
loss adjustment expenses. The Company also receives a provisional ceding
commission of 33.0%, adjusted pro-rata based upon the ratio of losses incurred
to premiums earned. Pursuant to this reinsurance agreement the Company withholds
the reinsurance premium due the reinsurers in a Funds Held Payable to Reinsurer
account.
The Company has also purchased property catastrophe reinsurance covering
both its commercial and personal lines losses. For catastrophe losses occurring
in the State of Florida the Company's reinsurance coverage is approximately
$289.0 million in excess of the Company's $4.0 million per occurrence retention.
For catastrophe property losses occurring outside the State of Florida the
Company's reinsurance coverage is approximately $46.0 million for commercial
lines catastrophe losses and $6.0 million for personal lines catastrophe losses
in excess of the Company's $4.0 million retention. Based upon the various
modeling methods utilized by the Company to estimate its probable maximum loss,
the Company currently maintains catastrophe reinsurance coverage for the 250
year storm event on its personal lines business in Florida.
The Company also has an excess casualty reinsurance agreement which
provides an additional $5.0 million of coverage for protection from exposures
such as extra-contractual obligations and judgments in excess of policy limits.
6
Additionally, an errors and omissions insurance policy provides an additional
$10.0 million of coverage with respect to these exposures.
The Company seeks to limit the risk of a reinsurer's default in a number
of ways. First, the Company principally contracts with large reinsurers that are
rated at least "A" (Excellent) by A.M. Best. Secondly, the Company seeks to
collect the obligations of its reinsurers on a timely basis. This collection
effort is supported through the regular monitoring of reinsurance receivables.
Finally, the Company typically does not write casualty policies in excess of
$11.0 million or property policies in excess of $25.0 million. Although the
Company purchases reinsurance to limit its loss exposure by transferring the
risk to its reinsurers, reinsurance doesn't relieve the Company of its liability
to policyholders.
The Company regularly assesses its reinsurance needs and seeks to improve
the terms of its reinsurance arrangements as market conditions permit. Such
improvements may involve increases in retentions, modifications in premium
rates, changes in reinsurers and other matters.
Marketing and Distribution
Proactive risk selection based on sound underwriting criteria and
relationship selling in clearly defined target markets continues to be the
foundation of the Company's marketing plan. Within this framework, the Company's
marketing effort is designed to promote a systematic and disciplined approach to
developing business which is anticipated to be profitable.
The Company distributes its products through its direct production
underwriting organization, an extensive network of approximately 8,500
independent brokers' and its "preferred agent" program. The Company's most
important distribution channel is its production underwriting organization.
Although the Company has always written business directly, the production
underwriting organization was established by the Company to stimulate new sales
through independent agents. The production underwriting organization is
currently comprised of 204 professionals located in 36 offices in major markets
across the country. The field offices are focused daily on interacting with
prospective and existing insureds. In addition to this direct prospecting,
relationships with approximately 8,500 brokers have been formed, either because
the broker has a preexisting relationship with the insured or has sought the
Company's expertise in one of its specialty products. This mixed marketing
concept provides the Company with the flexibility to respond to changing market
conditions and, when appropriate, shift its emphasis to different product lines
to take advantage of opportunities as they arise. In addition, the production
underwriting organization's ability to gather market intelligence enables the
rapid identification of soft markets and redeployment to firmer markets, from a
product line or geographic perspective. The Company believes that its mixed
marketing platform provides a competitive edge in stable market conditions, the
strengths of which are all the more evident during periods of dislocation or
consolidation.
The Company's preferred agent program, in which business relationships are
formed with brokers specializing in certain of the Company's business niches,
consisted of 105 preferred agents at year-end 2003. Preferred agents are
identified by the Company based on productivity and loss experience, and receive
additional benefits from the Company in exchange for meeting defined production
and profitability criteria.
The Company supplements its marketing efforts through affinity programs,
trade shows, direct mailings and national advertisements placed in trade
magazines serving industries in which the Company specializes, as well as links
to industry web sites. The Company has also enhanced its marketing with
Internet-based initiatives, such as the Personal Lines Division's "Liberty
American In Touch(SM)" real-time policy inquiry system, which allows agents to
view account data, process non-dollar endorsements, rate, quote and issue a
policy over the Internet.
Product Development
The Company continually evaluates new product opportunities, consistent
with its strategic focus on selected market niches. Direct contacts between the
Company's field and home office personnel, preferred agent council and its
customers have produced a number of new product ideas. All new product ideas are
presented to the Product Development Committee for consideration. Such
Committee, currently composed of the Company's President and members of senior
management, meets regularly to review the feasibility of products from a variety
of perspectives, including profitability, underwriting risk, marketing and
distribution, reinsurance, long-term viability and consistency with the
Company's culture and philosophy. For each new product, an individualized test
market plan is prepared, addressing such matters as the appropriate distribution
channel (e.g., a limited number of selected production underwriters), an
appropriate cap on premiums to be generated during the test market phase and
reinsurance requirements for the test market phase. Test market products may
involve lower
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retentions than customarily utilized. After a new product is approved for test
marketing, the Company monitors its success based on specified criteria (e.g.,
underwriting results, sales success, product demand and competitive pressures).
If expectations are not realized, the Company either moves to improve results by
initiating adjustments or abandons the product.
Claims Management and Administration
In accordance with its emphasis on underwriting profitability, the Company
actively manages claims under its policies in an effort to investigate reported
incidents at an early stage, service insureds and reduce fraud. Claim files are
regularly audited by claims supervisors in an attempt to ensure that claims are
being processed properly and that reserves are being set at appropriate levels.
The Company's experienced staff of claims management professionals are
assigned to dedicated claim units within specific niche markets. Each of these
units receive supervisory direction and news, legislative and product
development updates from the unit director. Claims management personnel have an
average of approximately twenty years of experience in the industry. The
dedicated claim units meet regularly to communicate findings of change within
their assigned specialty. Staff within the dedicated claim units have an average
of ten years experience in the industry.
The claims department also maintains a Special Investigations Unit to
investigate suspicious claims and to serve as a clearinghouse for information
concerning fraudulent practices, primarily within the rental car industry. The
Special Investigations Unit works closely with a variety of industry contacts,
including attorneys, investigators and rental car company fraud units to
identify fraudulent claims.
Loss and Loss Adjustment Expenses
The Company is liable for losses and loss adjustment expenses under its
insurance policies and reinsurance treaties. While the Company's professional
liability policies are written on claims-made forms, and while claims on its
other policies are generally reported promptly after the occurrence of an
insured loss, in many cases several years may elapse between the occurrence of
an insured loss, the reporting of the loss to the Company and the Company's
payment of the loss. The Company reflects its liability for the ultimate payment
of all incurred losses and loss adjustment expenses by establishing loss and
loss adjustment expense reserves, which are balance sheet liabilities
representing estimates of future amounts needed to pay claims and related
expenses with respect to insured events that have occurred.
When a claim involving a probable loss is reported, the Company
establishes a case reserve for the estimated amount of the Company's ultimate
loss and loss adjustment expense. This estimate reflects an informed judgment,
based on the Company's reserving practices and the experience of the Company's
claims staff. Management also establishes reserves on an aggregate basis to
provide for losses incurred but not reported ("IBNR"), as well as future
development on claims reported to the Company.
As part of the reserving process, historical data are reviewed and
consideration is given to the anticipated effect of various factors, including
known and anticipated legal developments, changes in societal attitudes,
inflation and economic conditions. Reserve amounts are necessarily based on
management's estimates and judgments; as new data become available and are
reviewed, these estimates and judgments are revised, resulting in increases or
decreases to existing reserves. The Insurance Subsidiaries' actuary provides the
Company's with an annual statement of opinion for its statutory filings with
regulators.
The following table sets forth a reconciliation of beginning and ending
reserves for unpaid loss and loss adjustment expenses, net of amounts for
reinsured losses and loss adjustment expenses, for the years indicated.
8
As of and For the Years Ended December 31,
------------------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in Thousands)
Unpaid loss and loss adjustment expenses at
beginning of year ............................................. $359,711 $250,134 $195,464
-------- -------- --------
Provision for losses and loss adjustment expenses for
current year claims ........................................... 314,609 239,834 166,220
Increase in estimated ultimate losses and loss adjustment expenses
for prior year claims ............................................ 44,568 27,599 13,435
-------- -------- --------
Total incurred losses and loss adjustment expenses ............... 359,177 267,433 179,655
-------- -------- --------
Loss and loss adjustment expense payments for claims
attributable to:
Current year .................................................. 69,905 58,530 54,228
Prior years ................................................... 167,488 99,326 70,757
-------- -------- --------
Total payments ................................................... 237,393 157,856 124,985
-------- -------- --------
Unpaid loss and loss adjustment expenses at end of year (1)....... $481,495 $359,711 $250,134
======== ======== ========
(1) Unpaid loss and loss adjustment expenses differ from the amounts reported
in the Consolidated Financial Statements because of the inclusion therein
of reinsurance receivables of $145,591, $85,837 and $52,599 at December
31, 2003, 2002 and 2001, respectively.
During 2003 the Company increased the liability for unpaid loss and loss
adjustment expenses by $51.7 million ($44.6 million net of reinsurance
recoverables), primarily for accident years 1997 through 2001. This increase in
the liability for unpaid loss and loss adjustment expense, net of reinsurance
recoverables, was primarily due to the following:
-- The Company increased the estimated gross and net loss for
unreported claims incurred and related claim adjustment expenses on
residual value polices issued during the years 1998 through 2002 by
$38.8 million. As of December 31, 2003 the Company's total liability
for gross and net unpaid loss and loss adjustment expenses for these
policies is estimated to be $30.3 million. The residual value
policies provide coverage guaranteeing the value of a leased
automobile at the lease termination, which can be up to five years
from lease inception. The increase in the estimated gross and net
loss was a result of:
- Adverse trends further deteriorating in both claims
frequency and severity for leases expiring in 2003.
During the second quarter of 2003, the Company engaged a
consulting firm to aid in evaluating the ultimate
potential loss exposure under these policies. Based upon
the study and subsequent evaluation by the Company the
Company changed its assumptions relating to future
frequency and severity of losses, and increased the
estimate for unpaid loss and loss adjustment expenses by
$33.0 million. The Company primarily attributes this
deterioration to the following factors that led to a
softening of prices in the used car market subsequent to
the September 11, 2001 terrorist attacks: prolonged 0%
new car financing rates and other incentives which
increased new car sales and the volume of trade-ins,
daily rental units being sold into the market earlier
and in greater numbers than expected, further adding to
the over supply of used cars and the overall uncertain
economic conditions.
- The Company entering into an agreement with U.S. Bank,
N.A. d/b/a Firstar Bank ("Firstar") for residual value
insurance policies purchased by Firstar. Under the terms
of the agreement, the Company paid Firstar $27.5 million
in satisfaction of any and all claims made or which
could have been made by Firstar under the residual value
policies. The Company increased the gross and net
reserves for loss and loss adjustment expenses from
$21.7 million to $27.5 million pursuant to this
agreement.
-- The Company increased its estimate for unpaid loss and loss
adjustment expenses for non residual value policies by $43.5 million
($30.8 million net of reinsurance recoverables) primarily for
accident years 1999 to 2001 and decreased its estimate of the unpaid
loss and loss adjustment expenses by $30.6 million ($25.0 million
net of reinsurance recoverables) for the 2002 accident year. The
increase in accident years 1999 to 2001 is principally attributable
to:
- $19.6 million ($13.7 million net of reinsurance
recoverables) of development in claims made professional
liability products as a result of case reserves
developing greater than anticipated from the year-end
2002
9
ultimate loss estimate; $18.1 million ($11.1 million net
of reinsurance recoverables) of development in the
automobile and general liability coverages for
commercial package products due to the frequency and
severity of the losses developing beyond the underlying
pricing assumptions; and $5.8 million ($6.0 million net
of reinsurance recoverables) of development in the
commercial automobile excess liability insurance and GAP
commercial automobile products due to losses developing
beyond the underlying pricing assumptions.
-- The decrease in unpaid loss and loss adjustment expenses in accident
year 2002 is principally attributable to:
- $4.2 million ($4.7 million net of reinsurance
recoverables) and $26.4 million ($20.3 million net of
reinsurance recoverables) of favorable development in
professional liability products and commercial package
products, respectively, due to favorable loss experience
as a result of favorable product pricing.
The following table presents the development of unpaid loss and loss
adjustment expenses, net of amounts for reinsured losses and loss adjustment
expenses, from 1993 through 2003. The top line of the table shows the estimated
reserve for unpaid loss and loss adjustment expenses at the balance sheet date
for each of the indicated years. These figures represent the estimated amount of
unpaid loss and loss adjustment expenses for claims arising in the current year
and all prior years that were unpaid at the balance sheet date, including IBNR
losses. The table also shows the re-estimated amount of the previously recorded
unpaid loss and loss adjustment expenses based on experience as of the end of
each succeeding year. The estimate changes as more information becomes known
about the frequency and severity of claims for individual years.
10
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
(Dollars in Thousands)
1993 1994 1995 1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ---- ---- ---- ----
UNPAID LOSS AND LOSS
ADJUSTMENT EXPENSES,
AS STATED $38,714 $53,595 $68,246 $85,723 $108,928 $136,237 $161,353 $195,464 $250,134
Cumulative Paid as
of:
1 year later 10,792 12,390 15,214 22,292 26,870 43,769 60,922 70,757 99,325
2 years later 19,297 23,139 31,410 38,848 56,488 84,048 109,092 131,649 211,851
3 years later 24,991 33,511 40,637 52,108 80,206 115,900 144,435 213,286
4 years later 28,903 38,461 47,994 63,738 95,047 131,062 201,779
5 years later 30,558 42,366 51,806 69,116 99,755 151,753
6 years later 32,748 43,860 53,198 70,779 106,915
7 years later 32,929 44,243 53,701 73,939
8 years later 33,102 44,627 55,541
9 years later 33,721 45,902
10 years later 33,923
Unpaid Loss and Loss
Adjustment Expenses
re-estimated as of
End of Year:
1 year later 38,603 52,671 67,281 84,007 105,758 135,983 163,896 208,899 277,733
2 years later 38,016 52,062 66,061 81,503 103,513 138,245 177,782 232,582 334,802
3 years later 37,184 51,149 63,872 76,348 104,712 146,679 196,735 274,166
4 years later 36,272 49,805 59,085 73,992 109,061 151,077 228,082
5 years later 35,783 47,366 56,673 75,672 107,796 163,657
6 years later 34,509 45,797 55,861 74,645 110,845
7 years later 33,799 45,245 55,439 75,272
8 years later 33,695 44,878 55,606
9 years later 33,622 45,764
10 years later 33,782
Cumulative Redundancy
(Deficiency)
Dollars $4,932 $7,831 $12,640 $10,451 $(1,917) $(27,420) $(66,729) $(78,702) $(84,668)
Percentage 12.7% 14.6% 18.5% 12.2% (1.8)% (20.1)% (41.4)% (40.3)% (33.8)%
2002 2003
---- ----
UNPAID LOSS AND LOSS
ADJUSTMENT EXPENSES,
AS STATED $359,711 $481,496
Cumulative Paid as
of:
1 year later 167,489
2 years later
3 years later
4 years later
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
Unpaid Loss and Loss
Adjustment Expenses
re-estimated as of
End of Year:
1 year later 404,279
2 years later
3 years later
4 years later
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
Cumulative Redundancy
(Deficiency)
Dollars $(84,668) $(44,568)
Percentage (33.8)% (12.4%)
(1) Unpaid loss and loss adjustment expenses differ from the amounts reported
in the Consolidated Financial Statements because of the inclusion therein
of reinsurance receivables of $145,591, $85,837, $52,599, $42,030,
$26,710, $16,120, $13,502, $10,919, $9,440, $5,580, and $5,539 at December
31, 2003, 2002, 2001, 2000, 1999, 1998, 1997, 1996, 1995, 1994, and 1993,
respectively.
(2) 1998 Unpaid Loss and Loss Adjustment Expenses, as stated, adjusted to
include $1,207 unpaid loss and loss adjustment expenses for Mobile USA
Insurance Company as of acquisition date.
(3) The Company maintains its historical loss records net of reinsurance, and
therefore is unable to conform the presentation of this table to the
financial statements.
11
The cumulative redundancy (deficiency) represents the aggregate change in
the reserve estimated over all prior years, and does not present accident year
loss development. Therefore, each amount in the table includes the effects of
changes in reserves for all prior years.
The unpaid loss and loss adjustment expense of the Insurance Subsidiaries,
as reported in their Annual Statements prepared in accordance with statutory
accounting practices and filed with state insurance departments, differ from
those reflected in the Company's financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") with respect to recording
the effects of reinsurance. Unpaid loss and loss adjustment expenses under
statutory accounting practices are reported net of the effects of reinsurance,
whereas under GAAP these amounts are reported without giving effect to
reinsurance. Under GAAP, reinsurance receivables, with a corresponding increase
in unpaid loss and loss adjustment expense, have been recorded. (See footnote
(1) on Page 10 for amounts). There is no effect on net income or shareholders'
equity due to the difference in reporting the effects of reinsurance between
statutory accounting practices and GAAP as discussed above.
Operating Ratios
Statutory Combined Ratio
The statutory combined ratio, which is the sum of (a) the ratio of loss
and loss adjustment expenses incurred to net earned premiums (loss ratio) and
(b) the ratio of policy acquisition costs and other underwriting expenses to net
written premiums (expense ratio), is the traditional measure of underwriting
experience for insurance companies. If the combined ratio is below 100%, an
insurance company has an underwriting profit, and if it is above 100%, the
insurer has an underwriting loss.
The following table reflects the consolidated loss, expense and combined
ratios of the Insurance Subsidiaries, together with the property and casualty
industry-wide combined ratios after policyholders' dividends.
For the Years Ended December 31,
----------------------------------------------------------
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Loss Ratio ............................................ 63.1% 63.5% 60.7% 57.8% 59.7%
Expense Ratio ......................................... 27.2% 28.0% 31.2% 31.3% 33.6%
------ ------ ------ ------ ------
Combined Ratio ........................................ 90.3% 91.5% 91.9% 89.1% 93.3%
====== ====== ====== ====== ======
Industry Statutory Combined Ratio, after Policyholders'
Dividends ........................................... 101.1% 107.4% 115.9% 110.4% 108.1%
====== ====== ====== ====== ======
(1) (2) (2) (2) (2)
(1) Source: Best's Special Report "Keeping Pace" February 9, 2004 (Estimated
2003).
(2) Source: Best's Special Report "Keeping Pace" February 9, 2004
Premium-to-Surplus Ratio:
While there are no statutory provisions governing premium-to-surplus
ratios, regulatory authorities regard this ratio as an important indicator as to
an insurer's ability to withstand abnormal loss experience. Guidelines
established by the National Association of Insurance Commissioners (the "NAIC")
provide that an insurer's net premium-to-surplus ratio is satisfactory if it is
below 3 to 1.
The following table sets forth, for the periods indicated, net written
premiums to surplus as regards policyholders' for the Insurance Subsidiaries
(statutory basis):
As of and For the Years Ended December 31,
------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ------------- ------------ ------------ ------------
(Dollars in Thousands)
Net Written Premiums.................. $601,253 $523,962 $333,817 $263,637 $195,258
Surplus as regards Policyholders...... $415,900 $312,626 $280,960 $193,292 $179,341
Premium to Surplus Ratio.............. 1.5 to 1.0 1.7 to 1.0 1.2 to 1.0 1.4 to 1.0 1.1 to 1.0
12
Investments
The Company's investment objective is the realization of relatively high
levels of investment income while generating competitive after-tax total rates
of return within a prudent level of risk and within the constraints of
maintaining adequate securities in amount and duration to meet cash requirements
of current operations and long-term liabilities, as well as maintaining and
improving the Company's A.M. Best rating. The Company utilizes professional
investment managers for its fixed maturity and equity investments, which consist
of diversified issuers and issues.
At December 31, 2003, the Company had total investments with a carrying
value of $1,172.1 million, and 92.3% of the Company's total investments were
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, asset backed securities, mortgage
pass-through securities and collateralized mortgage obligations, with a weighted
average rating of "AA+". The asset backed, mortgage pass-through and
collateralized mortgage obligation securities amortizing securities possessing
favorable prepayment risk and/or extension profiles. The remaining 7.7% of the
Company's total investments consisted primarily of publicly-traded common
stocks.
The following table sets forth information concerning the composition of
the Company's total investments at December 31, 2003:
Estimated Percent of
Market Carrying Carrying
Amortized Cost Value Value Value
-------------- ----- ----- -----
(Dollars in Thousands)
Fixed Maturities:
Obligations of States and Political
Subdivisions............................. $ 476,762 $ 488,976 $ 488,976 41.7%
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies................ 51,480 51,918 51,918 4.4
Corporate and Bank Debt Securities.......... 142,264 147,054 147,054 12.6
Asset Backed Securities..................... 183,065 177,675 177,675 15.1
Mortgage Pass-Through Securities............ 159,160 162,529 162,529 13.9
Collateralized Mortgage Obligations......... 53,792 53,542 53,542 4.6
Equity Securities............................. 79,813 90,358 90,358 7.7
----------- ----------- ----------- -----
Total Investments........................ $ 1,146,336 $ 1,172,052 $ 1,172,052 100.0%
=========== =========== =========== =====
At December 31, 2003, approximately 98.7% of the Insurance Subsidiaries'
fixed maturity securities (cost basis) consisted of U.S. government securities
or securities rated "1" ("highest quality") or "2" ("high quality") by the NAIC.
The cost and estimated market value of fixed maturity securities at
December 31, 2003, by remaining original contractual maturity, is set forth
below. Expected maturities may differ from contractual maturities because
certain borrowers have the right to call or prepay obligations, with or without
call or prepayment penalties:
Amortized Cost Estimated Market Value
-------------- ----------------------
(Dollars in Thousands)
Due in one year or less....................................... $ 53,845 $ 54,545
Due after one year through five years......................... 223,676 229,476
Due after five years through ten years........................ 177,412 182,132
Due after ten years........................................... 215,573 221,795
Asset Backed, Mortgage Pass-Through and
Collateralized Mortgage Obligation Securities................. 396,017 393,746
------------- --------------
Total.................................................... $ 1,066,523 $ 1,081,694
============= ==============
Investments of the Insurance Subsidiaries must comply with applicable laws
and regulations which prescribe the type, quality and diversification of
investments. In general, these laws and regulations permit investments, within
specified limits and subject to certain qualifications, in federal, state and
municipal obligations, corporate bonds, preferred and common equity securities,
real estate mortgages and real estate.
13
Regulation
General: The Company is subject to extensive supervision and regulation in
the states in which it operates. Such supervision and regulation relate to
numerous aspects of the Company's business and financial condition. The primary
purpose of the supervision and regulation is the protection of insurance
policyholders and not the Company's investors. The extent of regulation varies
but generally is governed by state statutes. These statutes delegate regulatory,
supervisory and administrative authority to state insurance departments. This
system of regulation covers, among other things:
- issuance, renewal, suspension and revocation of licenses to engage
in the insurance business;
- standards of solvency, including risk-based capital measurements;
- restrictions on the nature, quality and concentration of
investments;
- restrictions on the types of terms that the Company can include in
the insurance policies it offers;
- certain required methods of accounting;
- maintenance of reserves for unearned premiums, losses and other
purposes; and
- potential assessments for the provision of funds necessary for the
settlement of covered claims under certain insurance policies
provided by impaired, insolvent or failed insurance companies.
The regulations or the state insurance departments may affect the cost or
demand for the Company's products and may present impediments to obtaining rate
increases or taking other actions to increase profitability. Also, regulatory
authorities have relatively broad discretion to grant, renew or revoke licenses
and approvals. If the Company does not have the requisite licenses and
approvals, or does not comply with applicable regulatory requirements, the
insurance regulatory authorities could stop or temporarily suspend the Company
from carrying on some or all of its activities. In light of several recent
significant property and casualty insurance company insolvencies, it is possible
that assessments paid to state guaranty funds may increase. Because the
Insurance Subsidiaries are domiciled in Pennsylvania and Florida, the
Pennsylvania Department of Insurance and the Florida Office of Insurance
Regulation have primary authority over the Company.
Regulation of Insurance Holding Companies: Pennsylvania and Florida, like
many other states, have laws governing insurance holding companies (such as
Philadelphia Insurance). Under these laws, a person generally must obtain the
applicable Insurance Department's approval to acquire, directly or indirectly,
5% to 10% or more of the outstanding voting securities of Philadelphia Insurance
or the Insurance Subsidiaries. Such Department's determination of whether to
approve any such acquisition would be based on a variety of factors, including
an evaluation of the acquirer's financial stability, the competence of its
management, the effect of rates on coverages provided, if any, and whether
competition in Pennsylvania or Florida would be reduced.
The Pennsylvania and Florida statutes require every Pennsylvania and
Florida domiciled insurer which is a member of an insurance holding company
system to register with Pennsylvania or Florida, respectively, by filing and
keeping current a registration statement on a form prescribed by the NAIC.
The Pennsylvania statute also specifies that at least one-third of the
board of directors, and each committee thereof, of either the domestic insurer
or its publicly owned holding company (if any), must be comprised of outsiders
(i.e., persons who are neither officers, employees nor controlling shareholders
of the insurer or any affiliate). In addition, the domestic insurer or its
publicly held holding company must establish one or more committees comprised
solely of outside directors, with responsibility for recommending the selection
of independent certified public accountants; reviewing the insurer's financial
condition, the scope and results of the independent audit and any internal
audit; nominating candidates for director; evaluating the performance of
principal officers; and recommending to the board the selection and compensation
of principal officers.
Under the Florida statute, a majority of the directors must be citizens of
the United States. In addition, no Florida insurer may make any contract whereby
any person is granted or is to enjoy in fact the management of the insurer to
the substantial exclusion of its board of directors or to have the controlling
or preemptive right to produce substantially all insurance business for the
insurer, unless the contract is filed with and approved by the Florida Office of
Insurance Regulation. An insurer must give the Department written notice of any
change of personnel among the directors or principal officers of the insurer
within 45 days of such change. The written notice must include all information
necessary to allow the Department to determine that the insurer will be in
compliance with state statutes.
Dividend Restrictions: As an insurance holding company, Philadelphia
Insurance will be largely dependent on dividends and other permitted payments
from the Insurance Subsidiaries to pay any cash dividends to its shareholders.
The ability of the Insurance Subsidiaries to pay dividends to the Company is
subject to certain restrictions imposed under Pennsylvania and Florida insurance
laws. Accumulated statutory profits of the Insurance Subsidiaries from which
dividends
14
may be paid totaled $179.2 million at December 31, 2003. Of this amount, the
Insurance Subsidiaries are entitled to pay a total of approximately $50.7
million of dividends in 2004 without obtaining prior approval from the
Pennsylvania Insurance Department or Florida Office of Insurance Regulation.
During 2003 the insurance subsidiaries paid dividends of $4.0 million to Liberty
American Insurance Group, Inc., a subsidiary of Philadelphia Insurance.
The National Association of Insurance Commissioners: In addition to
state-imposed insurance laws and regulations, the Insurance Subsidiaries are
subject to Statutory Accounting Principles ("SAP") as codified by the NAIC in
the "Accounting Practices and Procedures Manual" which was adopted by the
Pennsylvania Insurance Department and Florida Office of Insurance Regulation
effective January 1, 2001. The NAIC also promulgates model insurance laws and
regulations relating to the financial and operational regulation of insurance
companies. These model laws and regulations generally are not directly
applicable to an insurance company unless and until they are adopted by
applicable state legislatures or departments of insurance. However, NAIC model
laws and regulations have become increasingly important in recent years, due
primarily to the NAIC's state regulatory accreditation program. Under this
program, states which have adopted certain required model laws and regulations
and meet various staffing and other requirements are "accredited" by the NAIC.
Such accreditation is the cornerstone of an eventual nationwide regulatory
network, and there is a certain degree of political pressure on individual
states to become accredited by the NAIC. Because the adoption of certain model
laws and regulations is a prerequisite to accreditation, the NAIC's initiatives
have taken on a greater level of practical importance in recent years. The NAIC
accredited both Pennsylvania and Florida under the NAIC Financial Regulation
Standards.
All the states have adopted the NAIC's financial reporting form, which is
typically referred to as the NAIC "Annual Statement", and most states, including
Pennsylvania and Florida, generally defer to the NAIC with respect to SAP. In
this regard, the NAIC has a substantial degree of practical influence and is
able to accomplish certain quasi-legislative initiatives through amendments to
the NAIC annual statement and applicable accounting practices and procedures.
For instance, the NAIC requires all insurance companies to have an annual
statutory financial audit and an annual actuarial certification as to loss
reserves by including such requirements within the annual statement
instructions.
Capital and Surplus Requirements: PIC's eligibility to write insurance on
a surplus lines basis in most jurisdictions is dependent on its compliance with
certain financial standards, including the maintenance of a requisite level of
capital and surplus and the establishment of certain statutory deposits. In
recent years, many jurisdictions have increased the minimum financial standards
applicable to surplus lines eligibility. For example, California and certain
other states have adopted regulations which require surplus lines companies
operating therein to maintain minimum capital of $15 million, calculated as set
forth in the regulations. PIC maintains capital to meet these requirements.
Risk-Based Capital: 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 policyholders' surplus of each of the Insurance
Subsidiaries at December 31, 2003 is in excess of the minimum prescribed
risk-based capital requirements.
Insurance Guaranty Funds: The Insurance Subsidiaries are subject to
guaranty fund laws which can result in assessments, up to prescribed limits, for
losses incurred by policyholders as a result of the impairment or insolvency of
unaffiliated insurance companies. Typically, an insurance company is subject to
the guaranty fund laws of the states in which it conducts insurance business;
however, companies which conduct business on a surplus lines basis in a
particular state are generally exempt from that state's guaranty fund laws.
Shared Markets: As a condition of its license to do business in various
states, PIIC, MUSA and LAIC are required to participate in mandatory
property-liability shared market mechanisms or pooling arrangements which
provide various insurance coverages to individuals or other entities that
otherwise are unable to purchase coverage voluntarily provided by private
insurers. In addition, some states require automobile insurers to participate in
reinsurance pools for claims that exceed a certain amount. PIIC's, MUSA's and
LAIC's participation in such shared markets or pooling mechanisms is generally
in proportion to the amount of their direct writings for the type of coverage
written by the specific pooling mechanism in the applicable state.
Mold Contamination: The property-casualty insurance industry experienced
an increase in claim activity in the last few years pertaining to mold
contamination. Significant plaintiffs' verdicts and increased media attention to
the subject have caused insurers to develop and/or refine relevant insurance
policy language that excludes mold coverage. The insurance industry foresees
increased state legislative activity pertaining to mold contamination in 2004.
The Company will closely monitor litigation trends in 2004, and continue to
review relevant insurance policy exclusion language. There were few insurance
laws or regulations enacted in 2003 regarding mold coverages. The regulatory
emphasis appears to focus on
15
personal lines rather than commercial lines. The Company has experienced an
immaterial impact from mold claims and attaches a mold exclusion to policies
where applicable.
Health Insurance Portability and Accessibility Act: Regulations under the
Health Insurance Portability and Accessibility Act of 1996 (HIPAA) were adopted
on April 14, 2003 to protect the privacy of individual health information. While
property/casualty insurers are not required to comply with the various
administrative requirements of the act, the regulations have an impact on
obtaining information within the context of claims information. The Company
continues to monitor regulatory developments under HIPAA.
Certain Legislative Initiatives and Developments: A number of new,
proposed or potential legislative or industry developments could further
increase competition in the insurance industry. These developments include:
- the enactment of the Gramm-Leach-Bliley Act of 1999 (which permits
financial services companies such as banks and brokerage firms to
engage in the insurance business), which could result in increased
competition from new entrants to the Company's markets;
- the formation of new insurers and an influx of new capital in the
marketplace as existing companies attempt to expand their business
as a result of better pricing and/or terms;
- programs in which state-sponsored entities provide property
insurance in catastrophe-prone areas;
- changing practices caused by the Internet, which have led to greater
competition in the insurance business.
These developments could make the property and casualty insurance
marketplace more competitive by increasing the supply of insurance capacity. In
that event, recent favorable industry trends that have reduced insurance and
reinsurance supply and increased demand could be reversed and may negatively
influence the Company's ability to maintain or increase rates. Accordingly,
these developments could have an adverse effect on the Company's earnings.
The federal Terrorism Risk Insurance Act of 2002 (the "Act") established a
temporary federal program that provides for a system of shared public and
private compensation for insured commercial property and casualty losses
resulting from acts of terrorism, as defined in the Act. The Terrorism Insurance
Program (the "Program") requires all commercial property and casualty insurers
licensed in the United States to participate. The Program provides that in the
event of a terrorist attack, as defined, resulting in insurance industry losses
exceeding $5 million, the U.S. government will provide funding to the insurance
industry on an annual aggregate basis of 90% of covered losses up to $100
billion. Each insurance company is subject to a deductible based upon a
percentage of the previous year's direct earned premium, with the percentage
increasing each year. The Program requires that insurers notify in-force
commercial policyholders by February 24, 2003 that coverage for terrorism acts
is provided and the cost for this coverage. It also requires notices to be given
at certain specified times to insureds to which policies are issued after the
date of the Act's enactment. Policyholders have the option to accept or decline
the coverage, or negotiate other terms. Property and casualty insurers,
including the Company, are required to offer this coverage at each subsequent
renewal even if the policyholder elected to exclude this coverage in the
previous policy period. The Program became effective upon enactment and runs
through December 31, 2005. With the signing of the Act, all previously approved
exclusions for terrorism in any contract for property and casualty insurance in
force as of November 26, 2002 are excluded. However, an insurer may reinstate a
preexisting provision in a contract for property and casualty insurance that is
in force on the date of enactment and that excludes coverage for an act of
terrorism only:
(1) if the insurer has received a written statement from the insured that
affirmatively authorizes such reinstatement; or
(2) if
(A) the insured fails to pay any increased premium charged by the
insurer for providing such terrorism coverage; and
(B) the insurer provided notice, at least 30 days before any such
reinstatement, of (i) the increased premium for such terrorism coverage; and
(ii) the rights of the insured with respect to such coverage, including any date
upon which the exclusion would be reinstated if no payment is received.
Sarbanes-Oxley Act of 2002: The Sarbanes-Oxley Act of 2002, enacted on
July 30, 2002, presents a significant expansion of securities law regulation of
corporate governance, accounting practices, reporting and disclosure that
affects publicly traded companies. The act, in part, sets forth requirements for
certification by company CEOs and CFOs of certain reports filed with the SEC,
disclosures pertaining to the adoption of a code of ethics applicable to certain
management personnel, and safeguards against actions to fraudulently influence,
manipulate or mislead independent public or certified accountants of the
issuer's financial statements. It also requires stronger guidance for
development and evaluation of internal control procedures, as well as provisions
pertaining to a company's audit committee of the board of directors. The Company
16
continues its efforts toward compliance with the act, particularly related to
Section 404 dealing with our system of internal controls.
Competition
The Company competes with a large number of other companies in its
selected line of business, including major U.S. and non-U.S. insurers and other
regional companies, as well as mutual companies, specialty insurance companies,
underwriting agencies and diversified financial services companies. Some of
these competitors have greater financial and marketing resources than the
Company. Profitability could be adversely affected if business is lost due to
competitors offering similar or better products at or below the Company's
prices. In addition, a number of new, proposed or potential legislative or
industry developments could further increase competition. New competition from
these developments could cause the demand for the Company's products to fall,
which could adversely affect profitability.
The current business climate remains competitive from a solicitation
standpoint. The Company will "walk away", if necessary, from writing business
that does not meet established underwriting standards and pricing guidelines.
Management believes though that the Company's mixed marketing strategy is a
strength in that it provides the flexibility to quickly deploy the marketing
efforts of the Company's direct production underwriters from soft market
segments to market segments with emerging opportunities. Additionally, through
the mixed marketing strategy, the Company's production underwriters have
established relationships with approximately 8,500 brokers, thus facilitating a
regular flow of submissions.
Employees
As of February 25, 2004, the Company had 876 full-time employees and 30
part-time employees. The Company actively encourages its employees to continue
their educational efforts and aids in defraying their educational costs
(including 100% of education costs related to the insurance industry).
Management believes that the Company's relations with its employees are
generally excellent.
17
Company Website and Availability of Securities and Exchange Commission ("SEC")
Filings
The Company's Internet website is www.phly.com. Information on the
Company's website is not a part of this Form 10-K. The Company makes available
free of charge on its website, or provides a link to, the Company's Forms 10-K,
10-Q and 8-K filed or furnished on or after May 14, 1996, and any amendments to
these Forms, that have been filed with the SEC on or after May 14, 1996 as soon
as reasonably practicable after the Company electronically files such material
with, or furnishes it to the SEC. To access these filings, go to the Company's
website and click on "Investor Relations", then click on "SEC Filings."
Item 2. DESCRIPTION OF PROPERTY
The Company leases certain office space at One Bala Plaza, Bala Cynwyd, PA
which serves as its headquarters location, and also leases 36 offices for
its field marketing organization.
Item 3. LEGAL PROCEEDINGS
The Company is not subject to any material pending legal proceedings,
other than ordinary routine litigation incidental to its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 2003.
18
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) The Company's common stock, no par value, trades on The Nasdaq Stock
Market under the symbol "PHLY". As of February 24, 2004, there were 482
holders of record and 2,828 beneficial shareholders of the Company's
common stock. The high and low sales prices of the common stock, as
reported by the National Association of Securities Dealers, were as
follows:
2003 2002
----------------------------- -------------------------------
Quarter High Low High Low
------- ------------ ------------- ----------- ------------
First 38.700 28.571 42.750 35.230
Second 41.050 35.550 48.150 39.610
Third 46.270 38.000 46.000 29.000
Fourth 52.730 45.000 38.100 26.240
The Company did not declare cash dividends on its common stock in 2003 or
2002, and currently intends to retain its earnings to enhance future
growth. Any future payment of dividends by the Company will be determined
by the Board of Directors and will be based on general business conditions
and legal and regulatory restrictions.
As a holding company, the Company is dependent upon dividends and other
permitted payments from its subsidiaries to pay any cash dividends to its
shareholders. The ability of the Company's insurance subsidiaries to pay
dividends to the Company is subject to regulatory limitations (see Item
7.-Liquidity and Capital Resources and Note 2 to the Consolidated
Financial Statements).
(b) During the three years ended December 31, 2003, the Company did not
sell any of its securities which were not registered under the
Securities Act of 1933.
(c) The Company's purchases of its common stock during the fourth
quarter of 2003 are shown in the following table:
(c) Total
Number of (d) Approximate
Shares Dollar Value of
Purchased as Shares That May
Part of Yet Be
(a) Total Number (b) Average Publicly Purchased Under
of Shares Price Paid per Announced Plans the Plans or
Period Purchased Share or Programs Programs
----------------------------- ---------------- -------------- --------------- -----------------
October 1 - October 31 1,962 (1) $28.11 -- --
-- $24,700,000 (2)
November 1 - November 30 197 (1) $25.35 -- --
$24,700,000 (2)
December 1 - December 31 500 (1) $25.35 -- --
-----
$24,700,000 (2)
Total 2,659
=====
(1) Such shares were issued under the Company's Employee Stock Purchase Plan
and were repurchased by the Company upon the Employee's termination.
(2) The Company's total stock purchase authorization which was publicly
announced in August 1998, amounts to $55.0 million, of which $30.3 million
has been utilized.
19
Item 6. SELECTED FINANCIAL DATA
As of and For the Years Ended December 31,
(In Thousands, Except Share and Per Share Data)
-------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ------------ ----------- ----------- -----------
Operations and Comprehensive Income
Statement Data:
Gross Written Premiums ................. $ 905,993 $ 663,739 $ 473,565 $ 361,872 $ 274,918
Gross Earned Premiums .................. $ 789,498 $ 555,485 $ 421,063 $ 328,350 $ 245,978
Net Written Premiums ................... $ 599,361 $ 523,171 $ 333,817 $ 263,429 $ 184,071
Net Earned Premiums .................... $ 571,579 $ 421,186 $ 296,093 $ 227,292 $ 164,915
Net Investment Income .................. 38,806 37,516 32,426 25,803 20,695
Net Realized Investment Gain (Loss) .... 794 (3,371) 3,357 11,718 5,700
Other Income ........................... 5,519 911 587 8,981 4,722
----------- ------------ ----------- ----------- -----------
Total Revenue ..................... 616,698 456,242 332,463 273,794 196,032
----------- ------------ ----------- ----------- -----------
Net Loss and Loss Adjustment
Expenses ............................ 359,177 267,433 179,655 131,304 99,410
Acquisition Costs and Other
Underwriting Expenses ............... 162,912 129,918 97,020 75,054 53,793
Other Operating Expenses ............... 7,822 6,372 6,841 14,679 8,939
----------- ------------ ----------- ----------- -----------
Total Losses and Expenses ......... 529,911 403,723 283,516 221,037 162,142
----------- ------------ ----------- ----------- -----------
Minority Interest: Distributions on
Company Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust .................... -- -- 2,749 7,245 7,245
----------- ------------ ----------- ----------- -----------
Income Before Income Taxes ............. 86,787 52,519 46,198 45,512 26,645
Total Income Tax Expense ............... 26,510 16,514 15,639 14,742 7,802
----------- ------------ ----------- ----------- -----------
Net Income ........................ $ 60,277 $ 36,005 $ 30,559 $ 30,770 $ 18,843
----------- ------------ ----------- ----------- -----------
Weighted-Average Common Shares
Outstanding ......................... 21,908,788 21,611,053 16,528,601 12,177,989 12,501,165
Weighted-Average Share Equivalents
Outstanding ......................... 751,600 682,382 656,075 2,411,552 2,614,399
----------- ------------ ----------- ----------- -----------
Weighted-Average Shares and Share
Equivalents Outstanding ............. 22,660,388 22,293,435 17,184,676 14,589,541 15,115,564
----------- ------------ ----------- ----------- -----------
Basic Earnings Per Share ............... $ 2.75 $ 1.67 $ 1.85 $ 2.53 $ 1.51
----------- ------------ ----------- ----------- -----------
Diluted Earnings Per Share ............. $ 2.66 $ 1.62 $ 1.78 $ 2.11 $ 1.25
----------- ------------ ----------- ----------- -----------
Year End Financial Position:
Total Investments and Cash
and Cash Equivalents .............. $ 1,245,994 $ 950,861 $ 723,318 $ 487,028 $ 420,016
Total Assets ........................ 1,869,031 1,358,334 1,017,722 730,464 599,051
Unpaid Loss and Loss Adjustment
Expenses .......................... 627,086 445,548 302,733 237,494 188,063
Minority Interest in Consolidated
Subsidiaries ...................... -- -- -- 98,905 98,905
Total Shareholders' Equity .......... 543,736 477,823 428,692 182,325 161,440
Common Shares Outstanding ........... 22,007,552 21,868,877 21,509,723 13,431,408 12,590,908
----------- ------------ ----------- ----------- -----------
Insurance Operating Ratios
(Statutory Basis):
Net Loss and Loss Adjustment
Expenses to Net Earned Premiums ... 63.1% 63.5% 60.7% 57.8% 59.7%
Underwriting Expenses to Net
Written Premiums .................. 27.2% 28.0% 31.2% 31.3% 33.6%
----------- ------------ ----------- ----------- -----------
Combined Ratio ......................... 90.3% 91.5% 91.9% 89.1% 93.3%
----------- ------------ ----------- ----------- -----------
A.M. Best Rating...................... A+ A+ A+ A+ A+
(Superior) (Superior) (Superior) (Superior) (Superior)
20
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
OVERVIEW
The Company designs, markets, and underwrites specialty commercial and personal
property and casualty insurance products for select target industries or niches.
The Company's operations are classified into three reportable business segments
which are organized around its three underwriting divisions: The Commercial
Lines Underwriting Group which has underwriting responsibility for the
Commercial Automobile and Commercial Property and Commercial multi-peril package
insurance products; The Specialty Lines Underwriting Group which has
underwriting responsibility for the professional liability insurance products;
and The Personal Lines Group has responsibility for personal property and
casualty insurance products for the Manufactured Housing and Homeowners markets.
The company operates solely within the United States through its 12 regional and
24 field offices.
The Company generates its revenues through the sale of commercial property and
casualty insurance policies. The insurance policies are sold through the
Company's five distribution channels which include direct sales, retail
insurance agents/open brokerage, wholesalers, preferred agents and the internet.
The Company believes that consistency in its field office representation has
created excellent relationships with local insurance agencies across the
country.
The Company also generates revenue from its investment portfolio, which
approximated $1.2 billion at December 31, 2003 and generated $43.4 million in
gross pretax investment income during 2003. The Company utilizes external
independent professional investment managers with the objective of realizing
relatively high levels of investment income while generating competitive after
tax total rates of return within duration and credit quality targets.
Management measures the results of operations through monitoring certain
measures of growth and profitability, including, but not limited to: number of
policies written, pricing, risk selection, loss ratio (sum of net loss and loss
adjustment expenses divided by net earned premiums) and expense levels.
During 2003, the prior year market trends of premium rate increases and turmoil
in the property and casualty insurance market continued. Although further
premium rate increases were realized during 2003, the increases moderated from
those realized in 2002. The increases have primarily arisen due to the
significant property and casualty industry losses as a result of the tragic
terrorist attacks of September 11, 2001, lower interest rates, and diminished
risk capacity. Rating agency downgrades, insolvencies and consolidations in the
industry also continued to be market factors during 2003.
In this environment, the Company continued its strong growth, with gross written
premiums increasing 36.5% to $906.0 million. Gross written premium growth was
strong across all the Company's business segments with in-force policy counts
increasing 22.8% and 39.7% for the commercial and specialty lines segments,
respectively, remaining flat for the personal lines segment, and weighted
average premium rate increases on renewal business approximating 4.3%, 10.2% and
9.4% for the commercial, specialty and personal lines segments, respectively.
($'s in millions) Commercial Specialty Personal
Lines Lines Lines Total
----- ----- ----- -----
2003 Gross Written Premium $662.4 $154.1 $89.5 $906.0
2002 Gross Written Premium $473.1 $110.2 $80.5 $663.8
Percentage Increase 40.0% 39.9% 11.3% 36.5%
2003 Weighted Average Premium Rate Increase on
Renewal Business 4.3% 10.2% 9.4%
2002 Weighted Average Premium Rate Increase on
Renewal Business 10.0% 26.0% 8.0%
21
The Company also believes its core strategy of adhering to an underwriting
philosophy of sound risk selection and pricing discipline, the mixed marketing
platform for its product distribution and the creation of value added features
not typically found in property and casualty products have also contributed to
generating premium growth above industry averages, as well as enabling the
Company to produce combined ratios (the sum of net loss and loss adjustment
expenses and acquisition costs and other underwriting expenses, divided by net
earned premiums) well below industry averages.
The GAAP combined ratio for the year ended December 31, 2003 was 91.3%, which,
once again, was substantially lower than the property and casualty industry as a
whole. Included in the 2003 calendar year net loss and loss adjustment expenses
was $44.6 million of prior accident year development, of which, $38.8 million
was attributable to the Company's run-off residual value line of business. The
following table illustrates the 2003 calendar year and accident year loss ratios
by segment.
Commercial Specialty Personal
Lines Lines Lines Total
----- ----- ----- -----
2003 calendar year loss and loss adjustment expense ratio 63.9% 59.6% 60.1% 62.8%
2003 accident year loss and loss adjustment expense ratio 55.4% 53.2% 57.0% 55.0%
INVESTMENTS
The Company's investment objective is the realization of relatively high levels
of investment income while generating competitive after-tax total rates of
return within a prudent level of risk and within the constraints of maintaining
adequate securities in amount and duration to meet cash requirements of current
operations and long-term liabilities, as well as maintaining and improving the
Company's A.M. Best rating. The Company utilizes external independent
professional investment managers for its fixed maturity and equity investments.
These investments consist of diversified issuers and issues, and as of December
31, 2003, approximately 87.8% and 6.6% of the total invested assets (total
investments plus cash equivalents) on a cost basis consisted of investments in
fixed maturity and equity securities, respectively, versus 90.2% and 5.6%,
respectively, at December 31, 2002.
During 2003 the relative percentage investment in tax-exempt fixed maturity
securities versus taxable fixed maturity securities increased, due to the
Company taking advantage of the more favorable after-tax yields. At the end of
2003, on a cost basis, investment grade tax-exempt fixed maturity securities
represented 39.2% of the total invested assets, compared to 30.3% as of the end
of 2002.
Asset backed, mortgage pass through, and collateralized mortgage obligation
securities, on a cost basis, amounted to $183.0 million, $159.2 million and
$53.8 million, respectively, as of December 31, 2003 and $202.8 million, $81.3
million and $89.2 million, respectively, as of December 31, 2002. The asset
backed, mortgage pass through, and collateralized mortgage obligation
investments are amortizing securities possessing favorable prepayment risk
and/or extension profiles.
The Company regularly 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 for
all securities, except interests in securitized assets, meeting predetermined
thresholds to determine whether such decline is other than temporary. If the
Company determines a decline in value to be other than temporary, based upon its
detailed review, or if a decline in value for an equity investment has persisted
continuously for nine months, the cost basis of the security is written down to
its fair value. The factors considered in reaching the conclusion that a decline
below cost is other than temporary include, but are not limited to, whether: the
issuer is in financial distress; the investment is secured; a significant credit
rating action has occurred; scheduled interest payments have been delayed or
missed; or changes in laws and/or regulations have impacted an issuer or
industry. The amount of any write down is included in earnings as a realized
loss in the period the impairment arose. This evaluation resulted in non-cash
realized investment losses of $1.0 million and $2.1 million for the years ended
December 31, 2003 and 2002, respectively. Such non-cash realized investment
losses resulted from other than temporary declines in the fair value of certain
holdings in the Company's common stock portfolio occurring primarily in the
fourth quarter of 2002
22
and the first quarter of 2003. The Company primarily attributes these other than
temporary declines in fair value to the uncertain economic climate, the overhang
of corporate governance issues, and the high profile bankruptcies occurring
during 2002 into early 2003.
Additionally, the Company conducts its impairment evaluation and recognition for
interests in securitized assets in accordance with the guidance provided by the
Emerging Issues Task Force of the Financial Accounting Standards Board ("EITF")
in EITF 99-20. 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. This evaluation resulted in non-cash realized investment losses of $9.3
million and $1.6 million for the years ended December 31, 2003 and 2002,
respectively. These non-cash realized investment losses were primarily due to
investments in collateralized bond obligations as a result of the non investment
grade default rates which remain higher than historic averages.
The Company's fixed maturity portfolio amounted to $1,081.7 million and $854.5
million, as of December 31, 2003 and December 31, 2002, respectively, of which
98.6% of the portfolio for both years was comprised of investment grade
securities. From the fourth quarter of 2001 into early 2003 following the war in
Iraq, U.S. investment grade securities experienced varying price and ratings
volatility, having been affected by the uncertain economic climate, corporate
governance issues, and the subsequent stream of corporate scandals and high
profile bankruptcies. More recently certain sectors of the investment grade
security market have continued to lag despite a return to a more favorable
economic climate. However, the high quality of the Company's overall "AA+" rated
fixed maturity portfolio, has mitigated potential volatility. The Company had
fixed maturity investments with unrealized losses amounting to $10.6 million and
$9.2 million as of December 31, 2003 and December 31, 2002, respectively. Of
these amounts, interests in securitized assets had unrealized losses amounting
to $9.2 million and $7.3 million as of December 31, 2003 and December 31, 2002,
respectively. As discussed above, the Company's impairment evaluation and
recognition for interests in securitized assets is conducted in accordance with
the guidance provided by the EITF. Investments in aircraft collateralized
Enhanced Equipment Trust Certificates (EETCs) had unrealized losses amounting to
$0 and $1.3 million as of December 31, 2003 and December 31, 2002, respectively.
The following table identifies the period of time securities with an unrealized
loss at December 31, 2003 have continuously been in an unrealized loss position.
Included in the amounts displayed in the table are $6.5 million of unrealized
losses due to non-investment grade fixed maturity securities having a fair value
of $15.6 million. No issuer of securities or industry represents more than 4.4%
and 15.5%, respectively, of the total estimated fair value, or 18.1% and 39.7%,
respectively, of the total gross unrealized loss included in the table below. As
previously discussed, there are certain risks and uncertainties inherent in the
Company's impairment methodology, such as the financial condition of specific
industry sectors and the resultant effect on underlying security collateral
values. Should the Company subsequently determine a decline in the fair value
below the cost basis to be other than temporary, the security would be written
down to its fair value and the difference would be included in earnings as a
realized loss for the period such determination was made.
23
Gross Unrealized Losses
(in millions)
----------------------------------------------------------------------------------------------------
Fixed Maturities
Continuous Available for Sale Total
time in unrealized loss Excluding Interests Interests in Fixed Maturities
position in Securitized Assets Securitized Assets Available for Sale Equity Securities Total Investments
- -------- --------------------- ------------------ ------------------ ----------------- -----------------
0 - 3 months $ 0.2 $ 0.3 $ 0.5 $1.5 $ 2.0
(Greater Than) 3 - 6 months 0.3 0.5 0.8 0.1 0.9
(Greater Than) 6 - 9 months 0.5 0.6 1.1 -- 1.1
(Greater Than) 9 - 12 months -- -- -- -- --
(Greater Than) 12 - 18 months -- 1.9 1.9 -- 1.9
(Greater Than) 18 - 24 months -- 3.4 3.4 -- 3.4
(Greater Than) 24 months 0.4 2.5 2.9 -- 2.9
------ ----- ------ ---- ------
Total Gross Unrealized
Losses $ 1.4 $ 9.2 $ 10.6 $1.6 $ 12.2
====== ===== ====== ==== ======
Estimated fair value of
securities with a gross
unrealized loss $101.9 $96.9 $198.8 $6.8 $205.6
====== ===== ====== ==== ======
The following table presents certain information with respect to individual
securities with a significant unrealized loss position as of December 31, 2003.
Significant Unrealized Losses by Security
-----------------------------------------
(in millions)
Issuer Security Type Carrying Value Unrealized Loss
- ------ ------------- -------------- ---------------
Batterson Park CBO I CLC 144A Equity Security-Equity Tranche of Securitized Asset $ 0.0 $ 1.2
Conseco Fin SEC Corp 2000-4 M1 Fixed Maturity - Interest in Securitized Assets 0.5 1.6
Conseco Fin SEC Corp SER 2000-4 M2 Fixed Maturity - Interest in Securitized Assets 0.1 1.0
Greentree Financial Corp. 99-2 B1 Fixed Maturity - Interest in Securitized Assets 0.3 2.2
Nextcard CRCN MNT 2001-1 CLB144A Fixed Maturity - Interest in Securitized Assets 3.7 1.3
----- ------
$ 4.6 $ 7.3
===== ======
During 2003 the Company recorded impairment losses of $1.1 million, $0.1
million, $0.5 million for the Batterson Park CBO I CLC 144A, Conseco Fin SEC
Corp SER 2000-4M2, and Greentree Financial Corp 99-2-B1 securities,
respectively. Based upon the Company's impairment evaluation as of December 31,
2003 utilizing cash flow assumptions of the supporting collateral, estimated
default and recovery rates it was concluded that the remaining unrealized losses
in the significant unrealized losses by security table are not other than
temporary.
During 2003 the Company's gross loss on the sale of fixed maturity and equity
securities amounted to $0.7 million and $0.8 million, respectively. The fair
value of the fixed maturity and equity securities at the time of sale was $20.1
million and $4.4 million, respectively. During 2002 the Company's gross loss on
the sale of fixed maturity and equity securities amounted to $0.3 million and
$3.2 million, respectively. The fair value of the fixed maturity and equity
securities at the time of sale was $31.6 million and $14.1 million,
respectively. The decision to sell these securities was based upon management's
assessment of economic conditions.
Market Risk of Financial Instruments
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
24
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.
25
DECEMBER 31, 2003
EXPECTED MATURITY DATES TOTAL
(In thousands, except average interest rate) FAIR
2004 2005 2006 2007 2008 Thereafter TOTAL VALUE
-------- -------- -------- -------- -------- ---------- ---------- -----------
FIXED MATURITIES AVAILABLE
FOR SALE:
Principal Amount $119,372 $150,850 $128,609 $106,668 $127,667 $412,502 $1,045,668 $ 1,078,394
Book Value $120,047 $153,444 $130,874 $107,360 $129,818 $421,813 $1,063,356
Average Interest Rate 4.03% 3.80% 3.59% 4.78% 4.27% 4.11% 4.08% 4.29%
PREFERRED:
Principal Amount $ 1,500 $ 1,000 $ 3,625 -- -- -- $ 6,125 $ 6,572
Book Value $ 1,489 $ 1,040 $ 3,792 -- -- -- $ 6,321
Average Interest Rate 6.06% 6.84% 6.46% -- -- -- 6.43% 6.18%
SHORT-TERM INVESTMENTS:
Principal Amount $ 68,469 -- -- -- -- -- $ 68,469 $ 68,469
Book Value $ 68,469 -- -- -- -- -- $ 68,469 --
Average Interest Rate 1.24% -- -- -- -- -- 1.24% 1.24%
LOANS PAYABLE:
Principal Amount $ 48,482 -- -- -- -- -- $ 48,482 --
Average Interest Rate 1.23% -- -- -- -- -- 1.23% --
Certain Critical Accounting Estimates and Judgments
- - Investments
-- Fair values
The carrying amount for the Company's investments approximates their
estimated fair value. The Company measures the fair value of
investments based upon quoted market prices or by obtaining quotes
from third party broker-dealers. Material assumptions and factors
utilized by such broker-dealers in pricing these securities include:
future cash flows, constant default rates, recovery rates and any
market clearing activity that may have occurred since the prior
month-end pricing period. The Company's total investments include
$13.7 million in securities for which there is no readily available
independent market price.
-- Other than temporary impairment, excluding interests in securitized
assets
The Company regularly 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 for all securities,
meeting predetermined thresholds, to determine whether such decline
is other than temporary. If the Company determines a decline in
value to be other than temporary, based upon its detailed review, or
if a decline
26
in value for an equity investment has persisted continuously for
nine months, the cost basis of the security is written down to its
fair value. The factors considered in reaching the conclusion that a
decline below cost is other-than-temporary include, but are not
limited to, whether: the issuer is in financial distress; the
investment is secured; a significant credit rating action has
occurred; scheduled interest payments have been delayed or missed;
changes in laws and/or regulations have impacted an issuer or
industry. The amount of any write down is included in earnings as a
realized loss in the period the impairment arose (see Investments).
-- Impairment recognition for investments in securitized assets
The Company conducts its impairment evaluation and recognition for
interests in securitized assets 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 (see Investments).
- - Liability for Unpaid Loss and Loss Adjustment Expenses:
The liability for unpaid loss and loss adjustment expenses ($627.1 million
and $445.6 million as of December 31, 2003 and 2002, respectively)
reflects the Company's best estimate for future amounts needed to pay
losses and related settlement expenses with respect to insured events.
Based upon past experience this estimate has been redundant by as much as
18.5% and deficient by as much as 41.4%. The process of establishing the
liability for property and casualty unpaid loss and loss adjustment
expenses is a complex and imprecise process, requiring the use of informed
estimates and judgments. This liability includes an amount determined on
the basis of claim adjusters' evaluations with respect to insured events
that have occurred and an amount for losses incurred that have not been
reported to the Company. 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. The methods of making such estimates and establishing the
resulting liabilities are regularly reviewed and updated, and any
adjustments resulting therefrom are made in the accounting period in which
the adjustment arose.
During 2003 the Company increased the liability for unpaid loss and loss
adjustment expenses by $51.7 million ($44.6 million net of reinsurance
recoverables), primarily for accident years 1997 through 2001. This
increase in the liability for unpaid loss and loss adjustment expense, net
of reinsurance recoverables, was primarily due to the following:
-- The Company increased the estimated gross and net loss for
unreported claims incurred and related claim adjustment expenses on
residual value polices issued during the years 1998 through 2002 by
$38.8 million. As of December 31, 2003 the Company's total liability
for gross and net unpaid loss and loss adjustment expenses for these
policies is estimated to be $30.3 million. The residual value
policies provide coverage guaranteeing the value of a leased
automobile at the lease termination which can be up to five years
from lease inception. The increase in the estimated gross and net
loss was a result of:
- Further deterioration in both claims frequency and
severity for leases expiring in 2003. During the second
quarter of 2003, the Company engaged a consulting firm
to aid in evaluating the ultimate potential loss
exposure under these policies. Based upon the study and
the subsequent evaluation by the Company, the Company
changed its assumptions relating to future frequency and
severity of losses, the estimate for unpaid loss and
loss adjustment expenses by $33.0 million. The Company
primarily attributes this deterioration to the following
factors that led to a softening of prices in the used
car market subsequent to the September 11, 2001
terrorist attacks: prolonged 0% new car financing rates
and other incentives which increased new car sales and
the volume of trade-ins, daily rental units being sold
into the market earlier and in greater numbers than
expected, further adding to the over supply of used
cars, and the overall uncertain economic conditions.
27
- The Company entering into an agreement with U.S. Bank,
N.A. d/b/a Firstar Bank ("Firstar") for residual value
insurance policies purchased by Firstar. Under the terms
of the agreement, the Company paid Firstar $27.5 million
in satisfaction of any and all claims made or which
could have been made by Firstar under the residual value
policies. The Company increased the gross and net
reserves for loss and loss adjustment expenses from
$21.7 million to $27.5 million.
-- The Company increased its estimate for unpaid loss and loss
adjustment expenses for non residual value policies by $43.5 million
($30.8 million net of reinsurance recoverables) primarily for
accident years 1999 to 2001 and decreased its estimate of the unpaid
loss and loss adjustment expenses by $30.6 million ($25.0 million
net of reinsurance recoverables) for the 2002 accident year. The
increase in accident years 1999 to 2001 is principally attributable
to:
- $19.6 million ($13.7 million net of reinsurance
recoverables) of development in professional liability
products as a result of case reserves developing greater
than anticipated from the year-end 2002 ultimate loss
estimate; $18.1 million ($11.1 million net of
reinsurance recoverables) of development in the
automobile and general liability coverages for
commercial package products due to losses developing
beyond the underlying pricing assumptions; and $5.8
million ($6.0 million net of reinsurance recoverables)
of development in the commercial automobile excess
liability insurance and GAP commercial automobile
products due to losses developing beyond the underlying
pricing assumptions.
-- The decrease in unpaid loss and loss adjustment expenses in accident
year 2002 is principally attributable to:
- $4.2 million ($4.7 million net of reinsurance
recoverables) and $26.4 million ($20.3 million net of
reinsurance recoverables) of favorable development in
professional liability products and commercial package
products, respectively, due to conservative initial loss
estimates combined with favorable product pricing.
The method for determining reinsurance recoverables and estimated
recoverability are regularly reviewed and adjustments resulting from this
review are included in earnings in the period the adjustment arose.
- - Deferred Acquisition Costs:
Policy acquisition costs ($56.3 million and $61.3 million as of December
31, 2003 and 2002, respectively) which include commissions (net of ceding
commissions), premium taxes, fees, and certain other costs of underwriting
policies, are deferred and amortized over the same period in which the
related premiums are earned. Deferred acquisition costs are limited to the
estimated amounts recoverable after providing for losses and expenses that
are expected to be incurred, based upon historical and current experience.
Anticipated investment income is considered in determining whether a
premium deficiency exists. The methods of making such estimates and
establishing the deferred costs are continually reviewed by the Company,
and any adjustments therefrom are made in the accounting period in which
the adjustment arose.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements (as that term is defined in
Item 303(a) (4) of Regulation S-K) that have or are reasonably likely to have a
current or as of December 31, 2003, future effect on it financial condition,
changes in financial condition, revenue or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors as of December 31, 2003.
28
RESULTS OF OPERATIONS
(2003 versus 2002)
Premiums: Premium information relating to the Company's business segments is as
follows (in millions):
Commercial Lines Specialty Lines Personal Lines Total
---------------- --------------- -------------- -----
2003 Gross Written Premiums $662.4 $154.1 $89.5 $906.0
2002 Gross Written Premiums $473.1 $110.2 $80.4 $663.7
Percentage Increase (Decrease) 40.0% 39.9% 11.3% 36.5%
2003 Gross Earned Premiums $566.1 $138.3 $85.1 $789.5
2002 Gross Earned Premiums $384.4 $93.9 $77.2 $555.5
Percentage Increase (Decrease) 47.3% 47.2% 10.2% 42.1%
The overall growth in gross written premiums is primarily attributable to the
following:
- - Further 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.
- - The displacement of certain competitor property and casualty insurance
companies and their independent agency relationships continues to result
in new agency relationship opportunities for the Company. These
relationship opportunities have resulted in additional policyholders and
premium writings for the Company's commercial and specialty lines
segments.
- - Continued expansion of marketing efforts relating to commercial lines and
specialty lines products through the Company's field organization and
preferred agents.
- - In-force policy counts have increased 22.8% and 39.7% for the commercial
and specialty lines segments, respectively, primarily as a result of the
factors discussed above. Policy counts were approximately the same for the
personal lines segment as a result of restricting new business and not
renewing certain business to manage overall property exposures and the
related catastrophe loss considerations. Firming prices in the property
and casualty industry resulted in weighted average rate increases on
renewal business approximating 4.3%, 10.2%, and 9.4% for the commercial,
specialty and personal lines segments, respectively.
The respective net written premium changes for commercial lines, specialty lines
and personal lines segments for the year ended December 31, 2003 vs. December
31, 2002 were (in millions):
Commercial Lines Specialty Lines Personal Lines Total
---------------- --------------- -------------- -----
2003 Net Written Premiums $460.4 $108.3 $30.7 $599.4
2002 Net Written Premiums $383.3 $102.4 $37.5 $523.2
Percentage Increase (Decrease) 20.1% 5.8% (18.1%) 14.6%
2003 Net Earned Premiums $428.1 $109.2 $34.3 $571.6
2002 Net Earned Premiums $300.1 $ 85.7 $35.5 $421.3
Percentage Increase (Decrease) 42.7% 27.4% (3.4%) 35.7%
The differing percentage changes in net written premiums versus gross written
premiums for the commercial lines, specialty lines and personal lines segments
during the year results from:
- - The Company entering into a Quota Share reinsurance agreement (effective
April 1, 2003) covering all of the Company's lines of business. Under this
agreement, the Company cedes 22% of its net written premium (including 22%
of the net unearned premium reserves at April 1, 2003) and loss and loss
adjustment expenses. The Company also receives a provisional commission of
33.0% adjusted pro-rata based upon the ratio of losses incurred to
premiums earned. Pursuant to this reinsurance agreement the Company
withholds the reinsurance premium reduced by the reinsurers' expense
allowance and the Company's ceding commission allowance in a Funds Held
Payable to Reinsurer
29
account. This Funds Held Payable to Reinsurer account is also reduced by
ceded paid losses and loss adjustment expenses under this agreement, and
increased by an interest credit. During the year ended December 31, 2003,
the Company ceded $191.8 million of written premium, which included
unearned premium reserves of $63.6 million at April 1, 2003.
- - Relatively lower reinsurance costs (ceded premiums) as a result of
increasing the Company's loss retention from $0.5 million to $2.0 million
on its commercial lines per-risk property reinsurance treaty and from $0.9
million to $1.0 million on its excess liability reinsurance treaty,
effective January 1, 2003.
Net Investment Income Net investment income approximated $38.8 in 2003 and
$37.5 million in 2002. Total investments grew to $1,172.1 million at December
31, 2003 from $908.9 million at December 31, 2002. The growth in investment
income is due to investing net cash flows provided from operating activities.
The Company's average duration of its fixed income portfolio increased to
approximately 4.0 years at December 31, 2003, compared to 3.2 years at December
31, 2002 as a result of investing in overall "AAA" rated intermediate to longer
tax exempt fixed income securities due to their perceived relative value to
taxable alternatives. The Company's taxable equivalent book yield on its fixed
income holdings declined to 4.9% at December 31, 2003, from 5.2% at December 31,
2002, as a result of investing strong cash inflows due to premium increases at
relatively low interest rates during the Federal Reserve's latest easing cycle.
Net investment income was reduced by $2.3 million due to the interest credit on
the Funds Held Account balance pursuant to the Company's quota share reinsurance
agreement (see Premiums).
The total return, which includes the effects of both income and price
returns on securities, of the Company's fixed income portfolio was 4.36% and
9.09% for the years ended December 31, 2003 and 2002, respectively, and was
similar to the Lehman Brothers Intermediate Aggregate Bond Index ("the Index")
total return of 3.81% and 9.51% for the same periods, respectively. The Company
expects some variation in its portfolio's total return compared to the index
because of the differing sector, security and duration composition of its
portfolio compared to the index.
Net Realized Investment Gain (Loss): Net realized investment gains
(losses) were $0.8 million for the year ended December 31, 2003 and ($3.4)
million for the same period in 2002. The Company realized net investment gains
of $7.1 million and $4.0 million from the sale of fixed maturity and equity
securities, respectively, for the year ended December 31, 2003, and $4.0 million
and $6.3 million in non-cash realized investment losses for fixed maturity and
common stock investments, respectively, as a result of the Company's impairment
evaluations.
The Company realized $3.4 million in net investment gains from the sale of
fixed maturity securities and $3.1 million in net investment losses from the
sale of common stock equity securities for the year ended December 31, 2002.
Additionally, $2.1 million and $1.6 million in non-cash realized investment
losses were recorded for common stock and fixed maturity investments,
respectively as a result of the Company's impairment evaluations.
Other Income: Other income approximated $5.5 million for the year ended
December 31, 2003 and $0.9 million for the same period of 2002. Other income
primarily consists of commissions earned on brokered personal lines business,
and to a lesser extent brokered commercial lines business. The Company is
seeking to increase brokering activities in its personal lines segment as it is
restricting new business and not renewing certain policies in designated areas
of Florida 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 $91.8 million (34.3%) to $359.2 million for the year ended
December 31, 2003 from $267.4 million for the same period of 2002 and the loss
ratio decreased to 62.8% in 2003 from 63.3% in 2002. This increase in net loss
and loss adjustment expenses was due to the 35.7% growth in net earned premiums,
a $38.8 million increase in the estimated gross and net loss for unreported
claims incurred and related claim adjustment expenses on residual value polices
issued during the years 1998 through 2002, and a $5.8 million net increase in
the estimated gross and net loss reserves for loss and loss adjustment expenses
primarily for claims made professional liability and commercial automobile lines
of business in prior accident years. Additionally, during the year the Company
ceded $109.3 million of net earned premium and $62.7 million in net loss and
loss adjustment expenses pursuant to the quota share reinsurance agreement (see
Premiums).
As of December 31, 2003, the Company has estimated a total liability for
gross and net unpaid loss and loss adjustment expenses for the residual value
policies of $30.3 million. The residual value policies provide coverage
guaranteeing the value of a leased automobile at the lease termination, which
can be up to five years from lease inception. As part of the Company's
monitoring and evaluation process, a consulting firm was engaged during the
second quarter of 2003 to aid in evaluating the ultimate potential loss exposure
under these policies. Based upon the result of the indications and
30
subsequent evaluation by the Company and changes in the Company's assumptions
relating to future frequency and severity of losses, the estimate for unpaid
loss and loss adjustment expenses was increased by $33.0 million. The Company
primarily attributes this deterioration to the following factors that led to a
softening of prices in the used car market subsequent to the September 11, 2001
terrorist attacks: prolonged 0% new car financing rates and other incentives
which increased new car sales and the volume of trade-ins, daily rental units
being sold into the market earlier and in greater numbers than expected further
adding to the oversupply of used cars; and the overall general economic
conditions. As of December 31, 2003, approximately 22,000 leases were
outstanding under the Company's residual value policies.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs and
other underwriting expenses increased $33.0 million (25.4%) to $162.9 million
for the year ended December 31, 2003 from $129.9 million for the same period of
2002. This increase was due primarily to the 35.7% growth in net earned premiums
and in part to the Company establishing a $1.4 million allowance for doubtful
reinsurance receivables based upon its review of collectibility from its
reinsurers. During the year the Company ceded $109.3 million of net earned
premium and earned $46.7 million in ceding commission under the quota share
reinsurance agreement (see Premiums).
Other Operating Expenses: Other operating expenses increased $1.4 million
to $7.8 million for the year ended December 31, 2003 from $6.4 million for the
same period of 2002 as the Company continues to control its expenses during this
period of premium growth.
Income Tax Expense: The Company's effective tax rate for the years ended
December 31, 2003 and 2002 was 30.5% and 31.4%, respectively. The effective
rates differed from the 35% statutory rate principally due to investments in
tax-exempt securities and the relative proportion of tax exempt income to total
income before tax.
RESULTS OF OPERATIONS
(2002 versus 2001)
Premiums: Gross written premiums grew $190.1 million (40.1%) to $663.7 million
in 2002 from $473.6 million in 2001; gross earned premiums grew $134.4 million
(31.9%) to $555.5 million in 2002 from $421.1 million in 2001; net written
premiums increased $189.4 million (56.7%) to $523.2 million in 2002 from $333.8
million in 2001; and net earned premiums grew $125.1 million (42.2%) to $421.2
million in 2002 from $296.1 million in 2001.
The respective gross written premium increases for the commercial lines,
specialty lines and personal lines segments for the years ended December 31,
2002 vs. December 31, 2001 amount to $157.9 million (50.0%), $30.0 million
(37.8%) and $2.2 million (2.8%), respectively. The overall growth in gross
written premiums is primarily attributable to the following:
- - Further 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.
- - The continued 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, which have
resulted in additional prospects and premium writings for the Company's
commercial and specialty lines segments.
- - Continued expansion of marketing efforts relating to commercial lines and
specialty lines products through the Company's field organization and
preferred agents.
- - As a result of firming prices in the property and casualty industry, rate
increases on renewal business have approximated 16.0%, 26.0%, and 8.0% for
the commercial, specialty and the personal lines segments, respectively.
Additionally, in force policy counts have increased 43.0% and 13.0% for
the commercial and specialty lines segments, respectively, primarily as a
result of the factors discussed above. Policy counts have decreased
approximately 7.0% for the personal lines segment as a result of
restricting new business and not renewing certain business to manage
overall property exposures and the related catastrophe loss
considerations.
Overall premium growth has been offset in part by the following factors:
- - Specialty Lines Segment - The Company's decision not to renew
approximately 2,000 policies in the professional liability product lines
due to inadequate pricing levels being experienced as a result of market
conditions and/or an unacceptable underwriting risk profile.
31
- - Personal Lines Segment - The Company's decision to restrict new business
and not renew approximately 9,000 policies in designated areas of Florida
in the Company's manufactured housing and homeowners product lines, based
on an evaluation of property exposures and the related catastrophe loss
considerations.
Pursuant to a routine underwriting review which focused on pricing adequacy and
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 $36.7 million and $10.9 million, respectively, for the year
ended December 31, 2002.
Additionally, the respective net written premium increases (decreases) for
commercial lines, specialty lines and personal lines segments for the year ended
December 31, 2002 vs. December 31, 2001 amount to $160.5 million (71.7%), $31.8
million (45.6%) and ($2.9) million (7.1%) respectively. The differing percentage
increases (decreases) in net written premiums versus gross written premiums for
the year is primarily due to the Company commuting a 2001 accident year
aggregate stop loss reinsurance program during the quarter ended June 30, 2002
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, or pricing of, the Company's
reinsurance program.
Net Investment Income: Net investment income approximated $37.5 million in
2002 and $32.4 million in 2001. Total investments grew to $908.9 million at
December 31, 2002 from $673.4 million at December 31, 2001. The growth in
investment income is due to investing net cash flows provided from operating
activities and the proceeds of the Company's fourth quarter 2001 equity
offering. 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 of its fixed income portfolio approximated 3.2 years at
December 31, 2002, compared to 2.7 years at December 31, 2001. Additionally, due
to the capital market environment, the Company has invested approximately $75.1
million in overall "AAA" rated floating rate and shorter amortizing securities
to reduce interest rate risk with the expectation of reinvesting these funds
into longer duration investments at higher future fixed income rates. The
Company's tax equivalent book yield on its fixed income holdings was 5.2% at
December 31, 2002, compared to 6.0% at December 31, 2001.
The total return, which includes the effect of realized and unrealized
gains and losses, of the Company's fixed income portfolio was 9.09% and 7.30%
for the years ended December 31, 2002 and 2001, respectively versus the Lehman
Brothers US Aggregate Bond Index ("the Index") total return of 9.51% and 8.67%
for the same periods, respectively. While the performance during 2002 and 2001
was similar to the total return of the Index, performance differed from the
Index due primarily to the following factors:
- - the Company's fixed income portfolio is overweighted in the spread
sectors, versus the Index, to capture the incremental spread available in
non-Treasury securities consistent with its investment objective of
achieving the highest after-tax risk adjusted yields;
- - the Company maintains a higher level of credit quality in the portfolio
versus the Index; and
- - the Company maintains a shorter portfolio duration versus the Index.
Net Realized Investment Gain (Loss): Net realized investment gains
(losses) were ($3.4) million for the year ended December 31, 2002 and $3.4
million for the same period in 2001. The Company realized net investment losses
of $3.1 million from the sales of common stock equity securities and $3.4
million in net investment gains from the sale of fixed maturity securities
during the year ended December 31, 2002. Additionally, $2.1 million and $1.6
million in non-cash realized investment losses were recorded for common stock
and fixed maturity investments, respectively, as a result of the Company's
impairment evaluation (see Investments). The Company realized net investment
gains of $8.3 million from the sales of common stock equity securities and $0.9
million from the sales of fixed maturity securities during the year ended
December 31, 2001. These realized net investment gains were offset by $5.8
million in non-cash realized investment losses experienced on certain securities
as a result of the Company's impairment evaluation (see Investments). The
proceeds from the sales were reinvested in fixed maturity securities to increase
current investment income and decrease the overall percentage of investments in
common stock securities.
Other Income: Other income approximated $0.9 million for the year ended
December 31, 2002 and $0.6 million for the same period of 2001. Other income
primarily consists of commissions earned on brokered personal lines business,
and to
32
a lesser extent brokered commercial lines business. The Company is seeking to
increase brokering activities in its personal lines segment, as it is
restricting new business and not renewing certain policies in designated areas
of Florida as a result of its property exposures in these areas and the related
catastrophe loss considerations.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment
expenses increased $87.7 million (48.8%) to $267.4 million for the year ended
December 31, 2002 from $179.7 million for the same period of 2001 and the loss
ratio increased to 63.5% in 2002 from 60.7% in 2001. This increase in net loss
and loss adjustment expenses was due principally to the 42.2% growth in net
earned premiums, and in part to the Company increasing loss and loss adjustment
expenses incurred as a result of changes in estimates of insured events in prior
years by: $27.6 million ($68.0 million gross of reinsurance) due to
deterioration in frequency and severity trends on automobile leases currently
expiring on residual value policies issued during the years 1998 through 2001
(see Certain Critical Accounting Estimates and Judgments - Liability for Unpaid
Loss and Loss Adjustment Expense); and by $4.9 million ($6.9 million gross of
reinsurance) due to adverse loss experience on the Commercial Automobile Excess
Liability Insurance product (see Certain Critical Accounting Estimates and
Judgments - Liability for Unpaid Loss and Loss Adjustment Expense). The Company
also commuted a 2001 accident year aggregate stop loss reinsurance program in
the second quarter of 2002, 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. The year ended December
31, 2001 included a $4.0 million increase to unpaid loss and loss adjustment
expenses arising from business interruption, business personal property,
business property and workers' compensation exposures relating to the September
11, 2001 terrorist attacks. The Company has entered into various reinsurance
agreements for the purpose of limiting its loss exposure. Net reinsurance
recoveries as a percentage of loss and loss adjustment expenses may vary
considerably from period to period based upon the number and/or severity of our
individual losses in excess of the amount retained under the Company's
reinsurance agreements in any one period.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs and
other underwriting expenses increased $32.9 million (33.9%) to $129.9 million
for the year ended December 31, 2002 from $97.0 million for the same period of
2001. This increase was due primarily to the 42.2% growth in net earned
premiums, offset in part by:
- - A lower weighted average effective commission rate incurred on the
commercial and specialty lines segment products of approximately 12.7% for
the year ended December 31, 2002 compared to a weighted average effective
commission rate of approximately 13.9% for the year ended December 31,
2001. The Company has been able to incur a relatively lower commission
rate on business produced by independent agents in the current market
environment.
- - Incremental written premium growth without a corresponding incremental
increase in operating costs.
Other Operating Expenses: Other operating expenses decreased $0.4 million
to $6.4 million for the year ended December 31, 2002 from $6.8 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, which
amounted to $1.5 million for the year ended December 31, 2001. This decrease has
been partially offset by an increase in expenses attributable to increased
operating activities.
Income Tax Expense: The Company's effective tax rate for the year ended
December 31, 2002 and 2001 was 31.4% and 33.9%, 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.
LIQUIDITY AND CAPITAL RESOURCES
Philadelphia Consolidated Holding Corp. (PCHC) is a holding company whose
principal assets currently consist of 100% of the capital stock of its
subsidiaries. PCHC's primary sources of funds are dividends from its
subsidiaries and payments received pursuant to tax allocation agreements with
the insurance subsidiaries. For the year ended December 31, 2003, payments to
PCHC pursuant to such tax allocation agreements totaled $36.3 million. The
payment of dividends to PCHC from the insurance subsidiaries is subject to
certain limitations imposed by the insurance laws of the Commonwealth of
Pennsylvania and State of Florida. Accumulated statutory profits or
policyholders' surplus of the insurance subsidiaries from which dividends may be
paid totaled $179.2 million at December 31, 2003. Of this amount, the insurance
subsidiaries are entitled to pay a total of approximately $50.7 million of
dividends in 2004 without obtaining prior approval from the Insurance
Commissioner of the Commonwealth of Pennsylvania or State of Florida. During
2003 the insurance subsidiaries paid dividends of $4.0 million to Liberty
American Insurance Group, Inc., a subsidiary of PCHC.
33
During 2003 PCHC repurchased 10,000 shares of its common stock for approximately
$0.3 million under the stock repurchase authorization. At December 31, 2003 the
remaining stock repurchase authorization is $24.7 million.
The Company produced net cash from operations of $298.5 million in 2003, $205.0
million in 2002 and $115.1 million in 2001. Sources of operating funds consist
primarily of net premiums written and investment income. Funds are used
primarily to pay claims and operating expenses and for the purchase of
investments. Cash from operations in 2003 was primarily generated from strong
premium growth during such year due to increases in the number of policies
written and price increases realized on renewal business. Net loss and loss
expense payments were $237.4 million in 2003, $157.9 million in 2002, and $125.0
million in 2001. Net cash from operations also included cash provided from tax
savings as a result of the exercise of employee stock options amounting to $0.9
million, $1.3 million and $25.8 million for 2003, 2002 and 2001, respectively.
Management believes that the Company has adequate liquidity to pay all claims
and meet all other cash needs.
Two of the Company's Insurance Subsidiaries are members of the Federal Home Loan
Bank of Pittsburgh ("FHLB"). A primary advantage of FHLB membership is the
ability of members to access credit products from a reliable capital markets
provider. The availability of any one member's access to credit is based upon
its FHLB eligible collateral. At December 31, 2003, the Insurance Subsidiaries'
borrowing capacity with FHLB was $124.8 million. The Insurance Subsidiaries have
utilized a portion of its borrowing capacity to purchase a diversified portfolio
of investment grade floating rate securities. These purchases were funded by
floating rate FHLB borrowings to achieve a positive spread between the rate of
interest on these securities and FHLB borrowing rates. The remaining unused
borrowing capacity provides an immediately available line of credit. Borrowings
aggregated $48.5 million at December 31, 2003, bear interest at adjusted LIBOR
and mature twelve months from inception. The weighted-average interest rate on
borrowings outstanding as of December 31, 2003 was 1.23% per annum. These
borrowings are collateralized by investment securities, principally asset backed
securities, with a carrying value of $59.1 million.
In the normal course of business, the Company has entered into various
reinsurance contracts with unrelated reinsurers. The Company participates in
such agreements for the purpose of limiting loss exposure and diversifying
business. Reinsurance contracts do not relieve the Company from its obligations
to policyholders. To reduce the potential for a write-off of amounts due from
reinsurers, the Company: evaluates the financial condition of its reinsurers,
principally contracts with large reinsurers that are rated at least "A"
(Excellent) by A.M. Best Company, regularly monitors its reinsurance receivables
and attempts to collect the obligations of its reinsurers on a timely basis.
Under certain reinsurance agreements, the Company is required to maintain
investments in trust accounts to secure its reinsurance obligations (primarily
the payment of losses and loss adjustment expenses on business it does not write
directly). At December 31, 2003, the investment and cash balances in such trust
accounts totaled approximately $1.7 million. In addition, various insurance
departments of states in which the Company operates require the deposit of funds
to protect policyholders within those states. At December 31, 2003, the balance
on deposit for the benefit of such policyholders totaled approximately $15.5
million.
The Insurance Subsidiaries, which operate under an intercompany reinsurance
pooling agreement, must have certain levels of surplus to support premium
writings. Guidelines of the National Association of Insurance Commissioners (the
"NAIC") suggest that a property and casualty insurer's ratio of annual statutory
net premium written to policyholders' surplus should not exceed 3-to-1. The
ratio of combined annual statutory net premium written by the insurance
subsidiaries to their combined policyholders' surplus was 1.5-to-1.0 and
1.7-to-1.0 for 2003 and 2002, respectively.
The NAIC's risk-based capital method is designed to measure the acceptable
amount of capital and surplus an insurer should have based on the inherent
specific risks of each insurer. The adequacy of a company's actual capital and
surplus is evaluated by a comparison to the risk-based capital results. Insurers
failing to meet minimum risk-based capital requirements may be subject to
scrutiny by the insurer's domiciliary insurance department and ultimately
rehabilitation or liquidation. As of December 31, 2003, PIIC, PIC, MUSA and LAIC
exceeded their minimum risk-based capital requirements of $107.6 million, $13.1
million, $15.3 million and $14.9 million, respectively, by 218%, 134%, 40% and
48%, respectively.
34
CONTRACTUAL OBLIGATIONS
The Company has certain contractual obligations and commitments as of December
31, 2003 which are summarized below:
Payments Due by Period
----------------------
(in thousands)
------------------------------------------------------------------
Certain Contractual Obligations (1) Less than 1 More Than 5
Total year 1-3 years 4-5 years years
------- ----------- -------- --------- -----------
Long-Term Debt Obligations (2) $48,482 $48,482 $ -- $ -- $ --
Operating Leases 17,602 4,611 11,753 1,238 --
Other Long-Term Commercial Commitments (3)
2,252 2,252 -- -- --
------- ------- ------- ------ -------
Total $68,336 $55,345 $11,753 $1,238 $ --
======= ======= ======= ====== =======
(1) Unpaid loss and loss adjustment expenses are not included in the above
table as there is no related contractual maturity for such obligations.
(2) Represents 12 month collateralized borrowings from the Federal Home Loan
Bank of Pittsburgh.
(3) Represents open commitments under certain limited partnership and
information technology development agreements.
INFLATION
Property and casualty insurance premiums are established before the amount of
losses and loss adjusted expenses, or the extent to which inflation may affect
such amounts, is known. The Company attempts to anticipate the potential impact
of inflation in establishing its premiums and reserves. Substantial future
increases in inflation could result in future increases in interest rates,
which, in turn, are likely to result in a decline in the market value of the
Company's investment portfolio and resulting unrealized losses and/or reductions
in shareholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
FASB Interpretation 46 "Consolidation of Variable Interest Entities" was issued
in January 2003 and is effective at various dates for various requirements. This
interpretation addresses consolidation of variable interest entities (formerly
known as special purpose entities). Management has determined that this
interpretation will have no effect on the Company's consolidated financial
statements.
In May 2003, the Financial Accounting Standards Board "FASB" issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments With Characteristics of both Liabilities and Equity", which
establishes standards for how an issuer classifies and measures financial
instruments characteristics of both liabilities and equity. With the exception
of certain financial measurement criteria deferred indefinitely by the FASB,
SFAS No. 150 was adopted in fiscal 2003. The implementation of SFAS No. 150 had
no impact on the Company's financial condition or results of operations.
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; (v) claims development and the adequacy of our liability for unpaid
loss and loss adjustment expenses; (vi)
35
severity of natural disasters and other catastrophe losses; (vii) adequacy of
reinsurance coverage which may be obtained by the Company; (viii) ability and
willingness of our reinsurers to pay; and (ix) future terrorist attacks.
36
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The table below provides information about the Company's financial instruments
that are sensitive to changes in interest rates. The Company does not have any
derivative financial instruments. For debt obligations, the table presents
principal amounts due and related weighted average interest rates by expected
maturity dates. The information is presented in U.S. dollar equivalents, which
is the Company's reporting currency.
DECEMBER 31, 2003
EXPECTED MATURITY DATES TOTAL
(In thousands, except average interest rate) FAIR
2004 2005 2006 2007 2008 Thereafter TOTAL VALUE
-------- -------- -------- -------- -------- ---------- ---------- ----------
FIXED MATURITIES AVAILABLE
FOR SALE:
Principal Amount $119,372 $150,850 $128,609 $106,668 $127,667 $412,502 $1,045,668 $1,078,394
Book Value $120,047 $153,444 $130,874 $107,360 $129,818 $421,813 $1,063,356
Average Interest Rate 4.03% 3.80% 3.59% 4.78% 4.27% 4.11% 4.08% 4.29%
PREFERRED:
Principal Amount $ 1,500 $ 1,000 $ 3,625 -- -- -- $ 6,125 $ 6,572
Book Value $ 1,489 $ 1,040 $ 3,792 -- -- -- $ 6,321
Average Interest Rate 6.06% 6.84% 6.46% -- -- -- 6.43% 6.18%
SHORT-TERM INVESTMENTS:
Principal Amount $ 68,469 -- -- -- -- -- $ 68,469 $ 68,469
Book Value $ 68,469 -- -- -- -- -- $ 68,469 --
Average Interest Rate 1.24% -- -- -- -- -- 1.24% 1.24%
LOANS PAYABLE:
Principal Amount $ 48,482 -- -- -- -- -- $ 48,482 --
Average Interest Rate 1.23% -- -- -- -- -- 1.23% --
37
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Philadelphia Consolidated Holding Corp. and Subsidiaries
Index to Financial Statements and Schedules
Financial Statements Page
-------------------- ----
Report of Independent Auditors 39
Consolidated Balance Sheets - As of December 31, 2003 and 2002 40
Consolidated Statements of Operations and Comprehensive Income
- For the Years Ended December 31, 2003, 2002 and 2001 41
Consolidated Statements of Changes in Shareholders' Equity - For the Years Ended
December 31, 2003, 2002 and 2001 42
Consolidated Statements of Cash Flows - For the Years Ended December 31,
2003, 2002, and 2001 43
Notes to Consolidated Financial Statements 44-63
Financial Statement Schedules:
Schedule
I Summary of Investments - Other Than Investments in
Related Parties As of December 31, 2003 S-1
II Condensed Financial Information of Registrant As of
December 31, 2003 and 2002 and For Each of the Three
Years in the Period Ended December 31, 2003 S-2 -- S-4
III Supplementary Insurance Information As of and For the
Years Ended December 31, 2003, 2002 and 2001 S-5
IV Reinsurance For the Years ended December 31, 2003,
2002 and 2001 S-6
VI Supplementary Information Concerning Property-Casualty
Insurance Operations As of and For the Years Ended
December 31, 2003, 2002 and 2001 S-7
38
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of Philadelphia Consolidated Holding
Corp.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, changes in
shareholders' equity and cash flows present fairly, in all material respects,
the financial position of Philadelphia Consolidated Holding Corp. and
Subsidiaries at December 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill to conform with Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets."
PricewaterhouseCoopers LLP
Philadelphia, PA
February 11, 2004
39
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
As of December 31,
------------------------------
2003 2002
----------- -----------
ASSETS
Investments:
Fixed Maturities Available for Sale at Market
(Amortized Cost $1,066,523 and $832,701) ............................. $ 1,081,694 $ 854,513
Equity Securities at Market (Cost $79,813 and $51,257) ................. 90,358 54,346
----------- -----------
Total Investments .................................................. 1,172,052 908,859
Cash and Cash Equivalents .............................................. 73,942 42,002
Accrued Investment Income .............................................. 11,008 8,571
Premiums Receivable .................................................... 179,509 130,007
Prepaid Reinsurance Premiums and Reinsurance
Receivables .......................................................... 292,157 151,352
Deferred Income Taxes .................................................. 19,176 7,541
Deferred Acquisition Costs ............................................. 56,288 61,272
Property and Equipment, Net ............................................ 16,821 12,794
Goodwill ............................................................... 25,724 25,724
Other Assets ........................................................... 22,354 10,212
----------- -----------
Total Assets ....................................................... $ 1,869,031 $ 1,358,334
=========== ===========
LIABILITIES and SHAREHOLDERS' EQUITY
Policy Liabilities and Accruals:
Unpaid Loss and Loss Adjustment Expenses ............................... $ 627,086 $ 445,548
Unearned Premiums ...................................................... 422,589 306,093
----------- -----------
Total Policy Liabilities and Accruals .............................. 1,049,675 751,641
Funds Held Payable to Reinsurer ........................................ 110,011 --
Loans Payable .......................................................... 48,482 39,113
Premiums Payable ....................................................... 35,044 33,553
Other Liabilities ...................................................... 82,083 56,204
----------- -----------
Total Liabilities .................................................. 1,325,295 880,511
----------- -----------
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, 22,007,552 and 21,868,877
Shares Issued and Outstanding ........................................ 281,088 276,945
Notes Receivable from Shareholders ..................................... (5,444) (6,407)
Accumulated Other Comprehensive Income ................................. 16,715 16,185
Retained Earnings ...................................................... 251,377 191,100
----------- -----------
Total Shareholders' Equity ......................................... 543,736 477,823
----------- -----------
Total Liabilities and Shareholders' Equity ......................... $ 1,869,031 $ 1,358,334
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
40
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For the Years Ended December 31,
--------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Revenue:
Net Earned Premiums ............................................ $ 571,579 $ 421,186 $ 296,093
Net Investment Income .......................................... 38,806 37,516 32,426
Net Realized Investment Gain (Loss) ............................ 794 (3,371) 3,357
Other Income ................................................... 5,519 911 587
------------ ------------ ------------
Total Revenue ............................................. 616,698 456,242 332,463
------------ ------------ ------------
Losses and Expenses:
Loss and Loss Adjustment Expenses .............................. 469,547 361,154 222,581
Net Reinsurance Recoveries ..................................... (110,370) (93,721) (42,926)
------------ ------------ ------------
Net Loss and Loss Adjustment Expenses .......................... 359,177 267,433 179,655
Acquisition Costs and Other
Underwriting Expenses ....................................... 162,912 129,918 97,020
Other Operating Expenses ....................................... 7,822 6,372 6,841
------------ ------------ ------------
Total Losses and Expenses .................................. 529,911 403,723 283,516
------------ ------------ ------------
Minority Interest: Distributions on Company Obligated
Mandatorily Redeemable Preferred Securities of
Subsidiary Trust ............................................... -- -- 2,749
------------ ------------ ------------
Income Before Income Taxes ....................................... 86,787 52,519 46,198
------------ ------------ ------------
Income Tax Expense (Benefit):
Current ........................................................ 38,430 22,018 18,216
Deferred ....................................................... (11,920) (5,504) (2,577)
------------ ------------ ------------
Total Income Tax Expense ................................... 26,510 16,514 15,639
------------ ------------ ------------
Net Income ................................................. $ 60,277 $ 36,005 $ 30,559
============ ============ ============
Other Comprehensive Income (Loss), Net of Tax:
Holding Gain (Loss) Arising during Year ....................... $ 1,046 $ 5,533 $ (2,851)
Reclassification Adjustment ................................... (516) 2,191 (2,182)
------------ ------------ ------------
Other Comprehensive Income (Loss) ................................ 530 7,724 (5,033)
------------ ------------ ------------
Comprehensive Income ............................................. $ 60,807 $ 43,729 $ 25,526
============ ============ ============
Per Average Share Data:
Basic Earnings Per Share ....................................... $ 2.75 $ 1.67 $ 1.85
============ ============ ============
Diluted Earnings Per Share ..................................... $ 2.66 $ 1.62 $ 1.78
============ ============ ============
Weighted-Average Common Shares Outstanding ....................... 21,908,788 21,611,053 16,528,601
Weighted-Average Share Equivalents Outstanding ................... 751,600 682,382 656,075
------------ ------------ ------------
Weighted-Average Shares and Share Equivalents
Outstanding .................................................... 22,660,388 22,293,435 17,184,676
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
41
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
For the Years Ended December 31,
--------------------------------------------------------
2003 2002 2001
------------ ------------ ------------
Common Shares:
Balance at Beginning of Year ................................... 21,868,877 21,509,723 13,431,408
Issuance of Shares Pursuant to Public Offering ................. -- -- 3,600,000
Issuance of Shares Pursuant to Stock Purchase Contracts ........ -- -- 3,993,006
Exercise of Employee Stock Options ............................. 99,875 107,000 391,083
Issuance of Shares Pursuant to Stock Purchase Plans, net ....... 38,800 252,154 94,226
------------ ------------ ------------
Balance at End of Year ..................................... 22,007,552 21,868,877 21,509,723
------------ ------------ ------------
Treasury Shares:
Balance at Beginning of Year ................................... -- -- --
Exercise of Employee Stock Options ............................. (6,500) -- --
Issuance of Shares Pursuant to Stock Purchase Plans, net ....... (3,500) (75,000) --
Shares Repurchased Pursuant to Authorization ................... 10,000 75,000 --
------------ ------------ ------------
Balance at End of Year ..................................... -- -- --
------------ ------------ ------------
Common Stock:
Balance at Beginning of Year ................................... $ 276,945 $ 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 ............................. 2,852 2,115 6,437
Issuance of Shares Pursuant to Stock Purchase Plans ............ 1,291 6,321 2,067
------------ ------------ ------------
Balance at End of Year ..................................... 281,088 276,945 268,509
------------ ------------ ------------
Notes Receivable from Shareholders:
Balance at Beginning of Year ................................... (6,407) (3,373) (2,287)
Notes Receivable Issued Pursuant to Employee
Stock Purchase Plans ......................................... (1,065) (4,017) (2,158)
Collection of Notes Receivable ................................. 2,028 983 1,072
------------ ------------ ------------
Balance at End of Year ..................................... (5,444) (6,407) (3,373)
------------ ------------ ------------
Accumulated Other Comprehensive Income,
Net of Deferred Income Taxes:
Balance at Beginning of Year ................................. 16,185 8,461 13,494
Other Comprehensive Income (Loss), Net of Taxes .............. 530 7,724 (5,033)
------------ ------------ ------------
Balance at End of Year ..................................... 16,715 16,185 8,461
------------ ------------ ------------
Retained Earnings:
Balance at Beginning of Year ................................... 191,100 155,095 124,536
Net Income ..................................................... 60,277 36,005 30,559
------------ ------------ ------------
Balance at End of Year ..................................... 251,377 191,100 155,095
------------ ------------ ------------
Common Stock Held in Treasury:
Balance at Beginning of Year ................................... -- -- --
Common Shares Repurchased ...................................... (300) (2,023) --
Exercise of Employee Stock Options ............................. 94 -- --
Issuance of Shares Pursuant to Stock Purchase Plans ............ 206 2,023 --
------------ ------------ ------------
Balance at End of Year ..................................... -- -- --
------------ ------------ ------------
Total Shareholders' Equity ................................. $ 543,736 $ 477,823 $ 428,692
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
42
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Years Ended December 31,
-----------------------------------------------
2003 2002 2001
--------- --------- ---------
Cash Flows from Operating Activities:
Net Income .............................................................. $ 60,277 $ 36,005 $ 30,559
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Net Realized Investment (Gain) Loss ................................. (794) 3,371 (3,357)
Depreciation and Amortization Expense ............................... 8,097 2,142 2,528
Deferred Income Tax Benefit ......................................... (11,920) (5,504) (2,577)
Change in Premiums Receivable ....................................... (49,502) (33,982) (26,648)
Change in Other Receivables ......................................... (143,242) (53,740) (26,944)
Change in Deferred Acquisition Costs ................................ 4,984 (19,746) (8,202)
Change in Income Taxes Payable ...................................... 513 367 (6,083)
Change in Other Assets .............................................. (11,782) (2,438) (840)
Change in Unpaid Loss and Loss Adjustment Expenses .................. 181,538 142,815 65,239
Change in Unearned Premiums ......................................... 116,496 108,254 52,355
Change in Funds Held Payable to Reinsurer ........................... 110,011 -- --
Change in Other Liabilities ......................................... 32,958 26,173 13,320
Tax Benefit from Exercise of Employee Stock Options ................. 889 1,251 25,799
--------- --------- ---------
Net Cash Provided by Operating Activities ......................... 298,523 204,968 115,149
--------- --------- ---------
Cash Flows from Investing Activities:
Proceeds from Sales of Investments in Fixed
Maturities ............................................................ 184,082 226,981 112,676
Proceeds from Maturity of Investments in Fixed
Maturities .......................................................... 202,284 147,850 72,650
Proceeds from Sales of Investments in Equity
Securities ............................................................ 23,992 18,546 20,864
Cost of Fixed Maturities Acquired ....................................... (628,879) (576,564) (424,852)
Cost of Equity Securities Acquired ...................................... (54,956) (36,421) (22,529)
Purchase of Property and Equipment, Net ................................. (6,692) (5,191) (1,808)
--------- --------- ---------
Net Cash Used for Investing Activities ............................ (280,169) (224,799) (242,999)
--------- --------- ---------
Cash Flows from Financing Activities:
Net Proceeds from Public Offering of Common Stock ....................... -- -- 114,518
Proceeds from Loans Payable ............................................. 62,340 9,923 31,341
Repayments on Loans Payable ............................................. (52,971) (2,151) (22,000)
Proceeds from Exercise of Employee Stock Options ........................ 2,057 864 3,041
Proceeds from Collection of Notes Receivable ............................ 2,028 983 1,072
Proceeds from Shares Issued Pursuant to Stock Purchase Plans ............ 432 4,327 46
Cost of Common Stock Repurchased ........................................ (300) (2,023) --
--------- --------- ---------
Net Cash Provided by Financing Activities ......................... 13,586 11,923 128,018
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents ..................... 31,940 (7,908) 168
Cash and Cash Equivalents at Beginning of Year ........................... 42,002 49,910 49,742
--------- --------- ---------
Cash and Cash Equivalents at End of Year ................................. $ 73,942 $ 42,002 $ 49,910
========= ========= =========
Cash Paid During the Year for:
Income Taxes ............................................................ $ 36,319 $ 20,110 $ 7,023
Interest 638 616 689
Non-Cash Transactions:
Issuance of Shares Pursuant to Employee
Stock Purchase Plans in Exchange for Notes Receivable ................. $ 1,065 $ 4,017 $ 2,158
The accompanying notes are an integral part of the consolidated financial
statements.
43
Philadelphia Consolidated Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
1. General Information and Significant Accounting Policies
Philadelphia Consolidated Holding Corp. ("Philadelphia Insurance"), and its
subsidiaries (collectively the "Company") doing business as Philadelphia
Insurance Companies, include four property and casualty insurance companies,
Philadelphia Indemnity Insurance Company ("PIIC") and Philadelphia Insurance
Company ("PIC"), which are domiciled in Pennsylvania; and Mobile USA Insurance
Company ("MUSA") and Liberty American Insurance Company ("LAIC"), which are
domiciled in Florida (collectively the "Insurance Subsidiaries"); an
underwriting manager, Maguire Insurance Agency, Inc.; a managing general agency,
Mobile Homeowners Insurance Agencies, Inc; a premium finance company Liberty
American Premium Finance Company; and an investment subsidiary, PCHC Investment
Corp. The Company designs, markets, and underwrites specialty commercial and
personal property and casualty insurance products for select target industries
or niches including, among others, nonprofit organizations; the health, fitness
and wellness industry; select classes of professional liability; the rental car
industry; automobile leasing industry; and personal property and casualty
insurance products for the manufactured housing and homeowners markets. All
marketing, underwriting, claims management, investment, and general
administration is provided by the underwriting manager and managing general
agency.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company
prepared in conformity with accounting principles generally accepted in the
United States of America ("GAAP"). All significant intercompany balances and
transactions have been eliminated in consolidation. The preparation of financial
statements requires making estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Certain prior years' amounts have been reclassified for
comparative purposes.
(a) Investments
Fixed maturity investments, classified as Available for Sale, are carried at
market value with the change in unrealized appreciation (depreciation) credited
or charged directly to shareholders' equity, net of applicable deferred income
taxes. Income on fixed maturities is recognized on the accrual basis.
The carrying amount for the Company's investments approximates their estimated
fair value. The Company measures the fair value of investments based upon quoted
market prices or by obtaining quotes from third party broker-dealers. Material
assumptions and factors utilized by such broker-dealers in pricing these
securities include: future cash flows, constant default rates, recovery rates
and any market clearing activity that may have occurred since the prior
month-end pricing period. The Company's total investments include $13.7 million
in securities for which there is no readily available independent market price.
The decision to purchase or sell investments is based on management's assessment
of various factors such as foreseeable economic conditions, including current
interest rates and the interest rate risk, and the liquidity and capital
positions of the Company.
Investments in fixed maturities are adjusted for amortization of premiums and
accretion of discounts to maturity date, except for asset backed, mortgage
pass-through and collateralized mortgage obligation securities which are
adjusted for amortization of premiums and accretion of discounts over their
estimated lives. Certain asset backed, mortgage pass-through and collateralized
mortgage obligation security repayment patterns will change based on interest
rate movements and, accordingly, could impact future investment income if the
reinvestment of the repayment amounts are at lower interest rates than the
underlying securities. Asset backed, mortgage pass-through and collateralized
mortgage obligation securities amounted to $177.7 million, $162.5 million and
$53.5 million, respectively, at December 31, 2003 and $200.0 million, $86.1
million and $90.7 million, respectively, at December 31, 2002. The asset backed,
mortgage pass-through and collateralized mortgage obligation securities held as
of December 31, 2003 and 2002 are shorter tranche securities possessing
favorable prepayment risk profiles.
Equity securities are carried at market value with the change in unrealized
appreciation (depreciation) credited or charged directly to shareholders'
equity, net of applicable deferred income taxes.
44
Realized investment gains and losses are calculated on the specific
identification basis and recorded as income when the securities are sold.
The Company regularly 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 for
all securities, except interests in securitized assets, meeting predetermined
thresholds, to determine whether such decline 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.
This evaluation resulted in non-cash realized investment losses of $1.0 million
and $2.1 million for the years ended December 31, 2003 and December 31, 2002,
respectively. No impairment losses were recorded for the year ended December 31,
2001.
Additionally, 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. This re-evaluation
resulted in non-cash realized investment losses of $9.3 million, $1.6 million
and $5.8 million for the years ended December 31, 2003, 2002 and 2001,
respectively.
The Company held no derivative financial instruments, nor embedded financial
derivatives, as of December 31, 2003 and 2002.
(b) Cash and Cash Equivalents
Cash equivalents, consisting of fixed maturity investments with maturities of
three months or less when purchased and money market funds, are stated at market
value.
(c) Deferred Acquisition Costs
Policy acquisition costs, which include commissions (net of ceding commissions),
premium taxes, fees, and certain other costs of underwriting policies, are
deferred and amortized over the same period in which the related premiums are
earned. Deferred acquisition costs are limited to the estimated amounts
recoverable from future income, including anticipated investment income, after
providing for losses and expenses included in future income that are expected to
be incurred, based upon historical and current experience. If such costs are
estimated to be unrecoverable, they are expensed.
(d) Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets.
Costs incurred in developing information systems technology are capitalized and
included in property and equipment. These costs are amortized over their useful
lives from the dates the systems technology becomes operational. Upon disposal
of assets, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is included in earnings. The carrying
value of property and equipment is reviewed for recoverability including an
evaluation of the estimated useful lives of such assets.
(e) 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 two-step impairment test
to identify potential goodwill impairment and measure the amount of a goodwill
impairment loss to be recognized (if any). As a result of the impairment
analysis, no change in the carrying amount of goodwill, which arose from the
purchase of Liberty, was recorded by the Company for the years ended December
31, 2003 and December 31, 2002, respectively. Goodwill amortization was $1.5
million for the year ended December 31, 2001.
(f) 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. The process of establishing
the ultimate claims
45
liability is necessarily a complex imprecise process, requiring the use of
informed estimates and judgments using data currently available. The liability
includes an amount determined on the basis of claim adjusters' evaluations with
respect to insured events that have occurred and an amount for losses incurred
that have not been reported to the Company. 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. The methods of
making such estimates and establishing the resulting liabilities are regularly
reviewed and updated and any adjustments therefrom are made in the accounting
period in which the adjustment arose. If the Company's ultimate losses, net of
reinsurance, prove to differ substantially from the amounts recorded at December
31, 2003, the related adjustments could have a material adverse impact on the
Company's financial condition, and results of operations.
(g) Premiums
Premiums are generally earned on a pro rata basis over the terms of the
policies. Premiums applicable to the unexpired terms of the policies in-force
are reported as unearned premiums. The Company records an allowance for doubtful
accounts for premiums receivable balances estimated to be uncollectible. At
December 31, 2003 and 2002 the allowance for doubtful accounts amounted to $2.2
million and $1.7 million, respectively.
(h) Reinsurance Ceded
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with reinsurers. Amounts
recoverable from reinsurers are estimated in a manner consistent with the
reinsured policy. At December 31, 2003 and 2002 the allowance for uncollectible
reinsurance amounted to $1.2 million and $0, respectively. Amounts for
reinsurance assets and liabilities are reported gross.
(i) Assessments
The Insurance Subsidiaries are subject to state guaranty fund assessments, which
provide for the payment of covered claims or meet other insurance obligations
from insurance company insolvencies, and other assessments related to its
insurance activities. Each state has enacted legislation establishing guaranty
funds and other insurance activity related assessments resulting in a variety of
assessment methodologies. Expense for guaranty fund and insurance activity
related assessments are recognized when it is probable that an assessment will
be imposed, the obligatory event has occurred and the amount of the assessment
is reasonably estimatable. As of December 31, 2003 and 2002, included in Other
Liabilities in the Consolidated Balance Sheets were $10.3 million and $6.1
million, respectively, of liabilities for state guarantee fund and other
assessments. As of December 31, 2003 and 2002, included in other assets were
$0.1 million and $1.8 million, respectively, of related assets for premium tax
offsets or policy surcharges. The related asset is limited to the amount that is
determined based upon future premium collections or policy surcharges from
policies in force.
(j) Income Taxes
The Company files a consolidated federal income tax return. Deferred income
taxes are recognized for the tax consequences of temporary differences by
applying enacted statutory tax rates applicable to the differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes for a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) Earnings Per Share
Basic earnings per share has been calculated by dividing net income by the
weighted-average common shares outstanding. Diluted earnings per share has been
calculated by dividing net income by the weighted-average common shares
outstanding and the weighted-average share equivalents outstanding.
(l) 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 year was $0.6 million, $3.0 million
and ($1.5) million in 2003, 2002 and 2001, respectively. The related tax effect
of Reclassification Adjustments was $0.3 million, ($1.2) million, and $1.2
million in 2003, 2002 and 2001, respectively.
46
(m) Stock Based Compensation Plans
The Company continues to maintain its accounting for stock-based compensation in
accordance with APB No. 25, but has adopted the disclosure provisions of SFAS
No. 148. The following represents pro forma information as if the Company
recorded compensation costs using the fair value of the issued compensation
instruments (the results may not be indicative of the actual effect on net
income in future years) (in thousands, except per average common share data):
2003 2002 2001
--------- --------- ---------
Net Income As Reported $ 60,277 $ 36,005 $ 30,559
Assumed Stock Compensation Cost 3,029 2,254 1,543
--------- --------- ---------
Pro Forma Net Income $ 57,248 $ 33,751 $ 29,016
========= ========= =========
Diluted Earnings Per Average Common Share as Reported $ 2.66 $ 1.62 $ 1.78
========= ========= =========
Pro Forma Diluted Earnings Per Average Common Share $ 2.53 $ 1.51 $ 1.69
========= ========= =========
(n) New Accounting Pronouncements
FASB Interpretation 46 "Consolidation of Variable Interest Entities" was issued
in January 2003 and is effective at various dates for various requirements. This
interpretation addresses consolidation of variable interest entities (formerly
known as special purpose entities). Management has determined that this
interpretation will have no effect on the Company's consolidated financial
statements.
In May 2003, the Financial Accounting Standards Board "FASB" issued Statement of
Financial Accounting Standards No. 150, "Accounting for Certain Financial
Instruments With Characteristics of both Liabilities and Equity", which
establishes standards for how an issuer classifies and measures financial
instruments characteristics of both liabilities and equity. With the exception
of certain financial measurement criteria deferred indefinitely by the FASB,
SFAS No. 150 was adopted in fiscal 2003. The implementation of SFAS No. 150 had
no impact on the Company's financial condition or results of operations.
2. Statutory Information
Accounting Principles: GAAP differs in certain respects from Statutory
Accounting Principles ("SAP") prescribed or permitted by the Insurance
Department of the Commonwealth of Pennsylvania and/or the State of Florida. The
principal differences between SAP and GAAP are as follows:
- - Under SAP, investments in debt securities are carried at amortized cost,
while under GAAP, investments in debt securities classified as Available
for Sale are carried at fair value.
- - Under SAP, policy acquisition costs, such as commissions, premium taxes,
fees, and other costs of underwriting policies are charged to current
operations as incurred, while under GAAP, such costs are deferred and
amortized on a pro rata basis over the period covered by the policy.
- - Under SAP, certain assets, designated as "Non-admitted Assets" (such as
prepaid expenses) are charged against surplus.
- - Under SAP, net deferred income tax assets are admitted following the
application of certain criteria, with the resulting admitted deferred tax
amount being credited directly to policyholder surplus.
- - Under SAP, premiums receivable are considered nonadmitted if determined to
be uncollected based upon aging criteria as defined in SAP.
- - Under SAP, the costs and related recoverables for guaranty funds and other
assessments are recorded based on management's estimate of the ultimate
liability and related recoverable settlement, while under GAAP, such costs
are accrued when the liability is probable and reasonably estimatable and
the related recoverable amount is based on future premium collections or
policy surcharges from in-force policies.
- - Under SAP, unpaid losses and loss adjustment expenses and unearned
premiums are reported net of the effects of reinsurance transactions,
whereas under GAAP, unpaid loss and loss adjustment expenses and unearned
premiums are reported gross of reinsurance.
Financial Information: The combined statutory capital and surplus of the
Insurance Subsidiaries as of December 31, 2003 and 2002 was $415.9 million and
$312.6 million, respectively. Combined statutory net income for the years ended
December 31, 2003, 2002 and 2001 was $49.9 million, $14.5 million, and $28.3
million, respectively. The Company made capital contributions of $47.0 million
and $20.0 million to the Insurance Subsidiaries for the years ended December 31,
2003 and 2002, respectively.
Dividend Restrictions: The Insurance Subsidiaries are subject to various
regulatory restrictions which limit the maximum amount of annual shareholder
dividends allowed to be paid. The maximum dividend which the Insurance
Subsidiaries may pay to Philadelphia Insurance during 2004 without prior
approval is $50.7 million. Dividends paid for the years ended December 31, 2003
and 2002 were $4.0 million and $5.1 million, respectively.
Risk-Based Capital: Risk-based capital is a method developed by the National
Association of Insurance Commissioners ("NAIC") designed to measure the
acceptable amount of capital and surplus an insurer should have based on the
inherent specific risks of each insurer. The adequacy of a company's actual
capital and surplus is evaluated by a comparison to the risk-based capital
results. Insurers failing to meet minimum risk-based capital requirements may be
subject to scrutiny by the
47
insurer's domiciliary insurance department and ultimately rehabilitation or
liquidation. As of December 31, 2003, PIIC, PIC, MUSA and LAIC exceeded their
minimum risk-based capital requirement of $107.6 million, $13.1 million, $15.3
million and $14.9 million, respectively, by 218%, 134%, 40% and 48%,
respectively.
3. Investments
The Company invests primarily in investment grade fixed maturities which
possessed an average quality rating of AA+ at December 31, 2003. The cost, gross
unrealized gains and losses and estimated market value of investments as of
December 31, 2003 and 2002 are as follows (in thousands):
Gross Gross Estimated
Unrealized Unrealized Market
Cost (1) Gains Losses Value (2)
-------- ----- ------ ---------
December 31, 2003
Fixed Maturities:
Available for Sale
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $ 51,480 $ 456 $ 18 $ 51,918
Obligations of States and
Political Subdivisions 476,762 12,876 662 488,976
Corporate and Bank Debt Securities 142,264 5,558 768 147,054
Asset Backed Securities 183,065 2,688 8,078 177,675
Mortgage Pass-Through Securities 159,160 3,692 323 162,529
Collateralized Mortgage Obligations 53,792 454 704 53,542
---------- ------- ------- ----------
Total Fixed Maturities
Available for Sale 1,066,523 25,724 10,553 1,081,694
---------- ------- ------- ----------
Equity Securities 79,813 12,148 1,603 90,358
---------- ------- ------- ----------
Total Investments $1,146,336 $37,872 $12,156 $1,172,052
========== ======= ======= ==========
December 31, 2002
Fixed Maturities:
Available for Sale
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $ 9,754 $ 433 $ 1 $ 10,186
Obligations of States and
Political Subdivisions 279,397 10,600 7 289,990
Corporate and Bank Debt Securities 170,222 9,283 1,919 177,586
Asset Backed Securities 202,779 4,234 7,037 199,976
Mortgage Pass-Through Securities 81,360 4,726 -- 86,086
Collateralized Mortgage Obligations 89,189 1,771 271 90,689
---------- ------- ------- ----------
Total Fixed Maturities
Available for Sale 832,701 31,047 9,235 854,513
---------- ------- ------- ----------
Equity Securities 51,257 4,679 1,590 54,346
---------- ------- ------- ----------
Total Investments $ 883,958 $35,726 $10,825 $ 908,859
========== ======= ======= ==========
(1) Original cost of equity securities; original cost of fixed maturities
adjusted for amortization of premiums and accretion of discounts. All
amounts are shown net of impairment losses.
(2) Estimated market values have been based on quoted market prices or quotes
from third party broker-dealers..
48
The following table (in thousands) identifies the period of time securities
with an unrealized loss at December 31, 2003 have continuously been in an
unrealized loss position. Included in the amounts displayed in the table are
$6.5 million of unrealized losses due to non-investment grade fixed maturity
securities having a fair value of $15.6 million. No issuer of securities or
industry represents more than 4.4% and 15.5%, respectively, of the total
estimated fair value, or 18.1% and 39.7%, respectively, of the total gross
unrealized loss included in the table below. As previously discussed, there are
certain risks and uncertainties inherent in the Company's impairment
methodology, such as the financial condition of specific industry sectors and
the resultant effect on underlying security collateral values. Should the
Company subsequently determine a decline in the fair value below the cost basis
to be other than temporary, the security would be written down to its fair value
and the difference would be included in earnings as a realized loss for the
period such determination was made.
Less Than 12 Months 12 Months or More Total
-------------------------- -------------------------- --------------------------
Fixed Maturities: Unrealized Unrealized Unrealized
Available for Sale Fair Value Losses Fair Value Losses Fair Value Losses
---------- ---------- ---------- ---------- ---------- ----------
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $ 1,948 $ 18 $ -- $ -- $ 1,948 $ 18
Obligations of States and
Political Subdivisions 71,439 662 -- -- 71,439 662
Corporate and Bank Debt Securities 26,781 333 1,670 435 28,451 768
Asset Backed Securities 28,671 494 24,344 7,584 53,015 8,078
Mortgage Pass-Through Securities 13,508 323 -- -- 13,508 323
Collateralized Mortgage Obligations 29,467 546 933 158 30,400 704
---------- ---------- ---------- ---------- ---------- ----------
Total Fixed Maturities
Available for Sale 171,814 2,376 26,947 8,177 198,761 10,553
---------- ---------- ---------- ---------- ---------- ----------
Equity Securities 6,778 1,603 -- -- 6,778 1,603
---------- ---------- ---------- ---------- ---------- ----------
Total Investments $ 178,592 $ 3,979 $ 26,947 $ 8,177 $ 205,539 $ 12,156
---------- ---------- ---------- ---------- ---------- ----------
Based upon the Company's impairment evaluation as of December 31, 2003, it was
concluded that the remaining unrealized losses in the table above are not other
than temporary.
During 2003 the Company's gross loss on the sale of fixed maturity and equity
securities amounted to $0.7 million and $0.8 million, respectively. The fair
value of the fixed maturity and equity securities at the time of sale was $20.1
million and $4.4 million, respectively. During 2002 the Company's gross loss on
the sale of fixed maturity and equity securities amounted to $0.3 million and
$3.2 million, respectively. The fair value of the fixed maturity and equity
securities at the time of sale was $31.6 million and $14.1 million,
respectively. The decision to sell these securities was based upon management's
assessment of economic conditions.
The Company had no debt or equity investments in a single issuer totaling in
excess of 10% of shareholders' equity at December 31, 2003.
The cost and estimated market value of fixed maturity securities at December 31,
2003, by remaining contractual maturity, are shown below (in thousands).
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties.
49
Estimated
Market
Cost (1) Value (2)
------------ ---------------
Due in One Year or Less $ 53,845 $ 54,545
Due After One Year Through Five Years 223,676 229,476
Due After Five Years through Ten Years 177,412 182,132
Due After Ten Years 215,573 221,795
Asset Backed, Mortgage Pass-Through and Collateralized Mortgage
Obligation Securities 396,017 393,746
------------ ---------------
$ 1,066,523 $ 1,081,694
============ ===============
(1) Original cost adjusted for amortization of premiums and accretion of
discounts. All amounts are shown net of impairment losses.
(2) Estimated market values have been based on quoted market prices or quotes
from third party broker-dealers.
The sources of net investment income for the years ended December 31, 2003,
2002, and 2001 are as follows (in thousands):
2003 2002 2001
-------- -------- --------
Fixed Maturities $ 41,393 $ 37,959 $ 30,962
Equity Securities 1,373 706 1,343
Cash and Cash Equivalents 656 1,113 1,908
-------- -------- --------
Total Investment Income 43,422 39,778 34,213
Fund Held Credit (2,318) -- --
Investment Expense (2,298) (2,262) (1,787)
-------- -------- --------
Net Investment Income $ 38,806 $ 37,516 $ 32,426
======== ======== ========
There was one fixed maturity security with a carrying value of $0.6 million
which was non-income producing for the year ended December 31, 2003. Investment
expense includes $15,400, $77,000, and $107,000, in investment management fees
paid to a director of the Company in 2003, 2002, and 2001, respectively. These
transactions are in the ordinary course of business at negotiated prices
comparable to those of transactions with other investment advisors.
Realized pre-tax gains (losses) on the sale of investments for the years ended
December 31, 2003, 2002, and 2001 are as follows (in thousands):
2003 2002 2001
-------- -------- --------
Fixed Maturities
Gross Realized Gains $ 7,832 $ 3,771 $ 5,023
Gross Realized Losses (4,718) (1,952) (9,979)
-------- -------- --------
Net Gain (Loss) 3,114 1,819 (4,956)
-------- -------- --------
Equity Securities
Gross Realized Gains 4,903 177 10,259
Gross Realized Losses (7,223) (5,367) (1,946)
-------- -------- --------
Net Gain (Loss) (2,320) (5,190) 8,313
-------- -------- --------
Total Net Realized
Investment Gain (Loss) $ 794 $ (3,371) $ 3,357
======== ======== ========
4. Restricted Assets
The Insurance Subsidiaries have investments, principally U.S. Treasury
securities, on deposit with the various states in which they are licensed
insurers. At December 31, 2003 and 2002, the carrying value of the securities on
deposit totaled $15.5 million.
Additionally, the Insurance Subsidiaries have investments, principally asset
backed securities, which collateralize the borrowings from the Federal Home Loan
Bank of Pittsburgh, see Note 10. The carrying value of these investments was
$59.1 million and $49.2 million as of December 31, 2003 and 2002, respectively.
50
5. Trust Accounts
The Company maintains investments in trust accounts under reinsurance agreements
with unrelated insurance companies. These investments collateralize the
Company's obligations under the reinsurance agreements. The Company possesses
sole responsibility for investment and reinvestment of the trust account assets.
All dividends, interest and other income, resulting from investment of these
assets are distributed to the Company on a monthly basis. At December 31, 2003
and 2002 the carrying value of these trust fund investments were $1.7 million.
The Company's share of the investments in the trust accounts is included in
investments and cash equivalents, as applicable, in the accompanying
consolidated balance sheets.
6. Property and Equipment
The following table summarizes property and equipment at December 31, 2003 and
2002 (dollars in thousands):
Estimated Useful
December 31, Lives (Years)
-------------------------- ----------------
2003 2002
---- ----
Furniture, Fixtures and Automobiles $ 5,225 $ 4,491 5
Software, Computer Hardware and
Telephone Equipment 24,296 18,755 3 - 7
Land and Building 3,598 3,588 40
Leasehold Improvements 2,186 1,881 10 -12
--------- ---------
35,305 28,715
Accumulated Depreciation and
Amortization (18,484) (15,921)
--------- ---------
Property and Equipment $ 16,821 $ 12,794
========= =========
Included in property and equipment are costs incurred in developing or
purchasing information systems technology of $13.3 million and $8.2 million in
2003 and 2002, respectively. At December 31, 2003, costs incurred for Property
and Equipment not yet placed in service was $4.0 million. Amortization of these
costs was $1.1 million, $1.0 million and $0.8 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Depreciation expense, excluding
amortization of capitalized information systems technology costs, was $1.6
million, $1.5 million and $1.4 million, for the years ended December 31, 2003,
2002, and 2001, respectively.
7. Goodwill
The following table provides a reconciliation of the prior three year's ended
December 31 reported net income to adjusted net income had SFAS No. 142 been
applied at the beginning of fiscal 2001 (in thousands, except per share
amounts):
For the Year Ended December 31,
----------------------------------------------
2003 2002 2001
---------- ---------- ----------
Reported net income $ 60,277 $ 36,005 $ 30,559
Adjustment for goodwill amortization -- -- 1,500
---------- ---------- ----------
Adjusted net income $ 60,277 $ 36,005 $ 32,059
========== ========== ==========
Reported basic earnings per share $ 2.75 $ 1.67 $ 1.85
Adjustment for goodwill amortization -- -- 0.09
---------- ---------- ----------
Adjusted basic earnings per share $ 2.75 $ 1.67 $ 1.94
========== ========== ==========
Reported diluted earnings per share $ 2.66 $ 1.62 $ 1.78
Adjustment for goodwill amortization -- -- 0.09
---------- ---------- ----------
Adjusted diluted earnings per share $ 2.66 $ 1.62 $ 1.87
========== ========== ==========
51
8. Liability for Unpaid Loss and Loss Adjustment Expenses
Activity in the liability for Unpaid Loss and Loss Adjustment Expenses is
summarized as follows (in thousands):
2003 2002 2001
-------- -------- --------
Balance at January 1, $445,548 $302,733 $237,494
Less Reinsurance Recoverables 85,837 52,599 42,030
-------- -------- --------
Net Balance at January 1, 359,711 250,134 195,464
-------- -------- --------
Incurred related to:
Current Year 314,609 239,834 166,220
Prior Years 44,568 27,599 13,435
-------- -------- --------
Total Incurred 359,177 267,433 179,655
-------- -------- --------
Paid related to:
Current Year 69,905 58,530 54,228
Prior Years 167,488 99,326 70,757
-------- -------- --------
Total Paid 237,393 157,856 124,985
-------- -------- --------
Net Balance at December 31, 481,495 359,711 250,134
Plus Reinsurance Recoverables 145,591 85,837 52,599
-------- -------- --------
Balance at December 31, $627,086 $445,548 $302,733
======== ======== ========
During 2003 the Company increased the liability for unpaid loss and loss
adjustment expenses by $51.7 million ($44.6 million net of reinsurance
recoverables), primarily for accident years 1997 through 2001. This increase in
the liability for unpaid loss and loss adjustment expense, net of reinsurance
recoverables, was primarily due to the following:
-- The Company increased the estimated gross and net loss for
unreported claims incurred and related claim adjustment expenses on
residual value polices issued during the years 1998 through 2002 by
$38.8 million. As of December 31, 2003 the Company's total liability
for gross and net unpaid loss and loss adjustment expenses for these
policies is estimated to be $30.3 million. The residual value
policies provide coverage guaranteeing the value of a leased
automobile at the lease termination, which can be up to five years
from lease inception. The increase in the estimated gross and net
loss was a result of:
- Adverse trends further deteriorating in both claims
frequency and severity for leases expiring in 2003.
During the second quarter of 2003, the Company engaged a
consulting firm to aid in evaluating the ultimate
potential loss exposure under these policies. Based upon
the study and subsequent evaluation by the Company the
Company changed its assumptions relating to future
frequency and severity of losses, and increased the
estimate for unpaid loss and loss adjustment expenses by
$33.0 million. The Company primarily attributes this
deterioration to the following factors that led to a
softening of prices in the used car market subsequent to
the September 11, 2001 terrorist attacks: prolonged 0%
new car financing rates and other incentives which
increased new car sales and the volume of trade-ins,
daily rental units being sold into the market earlier
and in greater numbers than expected, further adding to
the over supply of used cars and the overall uncertain
economic conditions.
- The Company entering into an agreement with U.S. Bank,
N.A. d/b/a Firstar Bank ("Firstar") for residual value
insurance policies purchased by Firstar. Under the terms
of the agreement, the Company paid Firstar $27.5 million
in satisfaction of any and all claims made or which
could have been made by Firstar under the residual value
policies. The Company increased the gross and net
reserves for loss and loss adjustment expenses from
$21.7 million to $27.5 million.
-- The Company increased its estimate for unpaid loss and loss
adjustment expenses for non residual value policies by $43.5 million
($30.8 million net of reinsurance recoverables) primarily for
accident years 1999 to 2001 and decreased its estimate of the unpaid
loss and loss adjustment expenses by $30.6 million ($25.0 million
net of reinsurance recoverables) for the 2002 accident year. The
increase in accident years 1999 to 2001 is principally attributable
to:
- $19.6 million ($13.7 million net of reinsurance
recoverables) of development in professional liability
products as a result of case reserves developing greater
than anticipated from the year-end 2002 ultimate loss
estimate; $18.1 million ($11.1 million net of
reinsurance recoverables) of development in the
automobile and general liability coverages for
commercial package products due to losses developing
beyond the underlying pricing assumptions; and $5.8
million ($6.0 million net of reinsurance recoverables)
of development in the
52
commercial automobile excess liability insurance and GAP
commercial automobile products due to losses developing
beyond the underlying pricing assumptions.
-- The decrease in unpaid loss and loss adjustment expenses in accident
year 2002 is principally attributable to:
- $4.2 million ($4.7 million net of reinsurance
recoverables) and $26.4 million ($20.3 million net of
reinsurance recoverables) of favorable development in
professional liability products and commercial package
products, respectively, due to conservative initial loss
estimates combined with favorable product pricing.
During 2002, the Company increased the estimated loss for unreported claims
incurred and related claim adjustment expenses on residual value polices issued
during the years 1998 through 2001 by $30.2 million ($20.7 million net of
reinsurance). As of December 31, 2001 the Company had estimated a total
liability for unpaid loss and loss adjustment expenses for these policies of
$14.5 million ($8.7 million net of reinsurance recoverables). During 2002
adverse trends further deteriorated in both frequency and severity on leases
expiring in 2002. As part of the Company's monitoring and evaluation process,
consulting firms were engaged during the third quarter of 2002 to aid in
evaluating this deterioration and the ultimate potential loss exposure under
these policies. As a result of the indications and subsequent evaluation by the
Company and changes in the Company's assumptions relating to future frequency
and severity of losses, the estimate for unpaid loss and loss adjustment
expenses was increased. The Company primarily attributes this deterioration to
the following factors that led to a softening of prices in the used car market
subsequent to the September 11, 2001 terrorist attacks: prolonged 0% new car
financing rates and other incentives which increased new car sales and the
volume of trade-ins, daily rental units being sold into the market earlier and
in greater numbers than expected further adding to the over supply of used cars;
and the overall uncertain economic conditions.
The Company also increased the liability for unpaid loss and loss adjustment
expenses on the Commercial Automobile Excess Liability Insurance ("Excess
Liability") product sold to rental car companies (Commercial Lines Underwriting
Segment) primarily for the 2000 and 2001 accident years by $6.9 million ($4.9
million net of reinsurance). As of December 31, 2001 the Company had estimated a
total liability for unpaid loss and loss adjustment expenses for the Excess
Liability policies issued in these years of $23.0 million ($21.6 million net of
reinsurance). Excess Liability provides automobile liability coverage in excess
of the state mandated limits which are provided by the rental car company.
During the third quarter of 2002, pursuant to a routine underwriting review
focusing on price adequacy and loss experience, the Company non-renewed a
significant Excess Liability customer as a result of an unacceptable
underwriting risk profile. This adverse loss development was primarily due to
pricing inadequacy and the adverse loss experience of this customer.
Additionally, the Company has experienced a delay in both the reporting of
claims and the claim litigation discovery process as a result of this
policyholder and another Excess Liability policyholder filing for Chapter 11
during the third quarter 2002 and fourth quarter 2001, respectively.
During 2001, as a result of changes in estimates of insured events in prior
years, the Company increased losses and loss adjustment expenses incurred by
$13.4 million. Such development was primarily due to losses emerging at a higher
rate on automobile leases expiring in 2001 on residual value policies
underwritten in prior years than had been originally anticipated when the
initial reserves were estimated.
9. Funds Held Payable to Reinsurer
Effective April 1, 2003, the Company entered into a quota share reinsurance
agreement covering all of the Company's lines of business. Under this agreement,
the Company cedes 22% of its net written premium (including 22% of net unearned
premium reserves at April 1, 2003) and loss and loss adjustment expenses. The
Company also receives a provisional commission of 33.0% adjusted pro-rata based
upon the ratio of losses incurred to premiums earned. Pursuant to this
reinsurance agreement the Company withholds the reinsurance premium due the
reinsurers reduced by the reinsurers' expense allowance, and the Company's
ceding commission allowance in a Funds Held Payable to Reinsurer account. This
Funds Held Payable to Reinsurer account is also reduced by ceded paid losses and
loss adjustment expenses under this agreement, and increased by an interest
credit. The interest credit (expense), which is included in net investment
income, was $2.3 million for the year ended December 31, 2003.
10. Loans Payable
53
The Company had aggregate borrowings of $48.5 million and $39.1 million as of
December 31, 2003 and 2002, respectively, from the Federal Home Loan Bank of
Pittsburgh. These borrowings bear interest at adjusted LIBOR and mature twelve
months from inception. The proceeds from these borrowings were invested in asset
backed securities and collateralized mortgage obligations to achieve a positive
spread between the rate of interest on these securities and the borrowing rates.
The weighted-average interest rate on borrowings outstanding as of December 31,
2003 was 1.23%.
In November 2000 the Company, pursuant to a Board of Directors authorization,
entered into an unsecured revolving credit facility for aggregate borrowings of
up to $22.0 million at any one time outstanding with a maturity date of 364 days
after closing. During 2000, $22.0 million of the facility was utilized by the
Company to pay a withholding tax liability as a result of the CEO electing to
have shares otherwise issuable withheld in satisfaction of the minimum
withholding tax attributable to the exercise of stock options. Borrowings under
the facility bore interest at adjusted LIBOR and unused commitments under the
facility were subject to a fee of 20 basis points per annum. Interest expense
amounted to $0.1 million and $0.2 million for the years ended December 31, 2001
and 2000, respectively. During the first quarter 2001 the Company repaid all
aggregate borrowings and cancelled the commitment under this revolving credit
facility.
11. Income Taxes
The composition of deferred tax assets and liabilities and the related tax
effects as of December 31, 2003 and 2002 are as follows (in thousands):
December 31,
------------------------------
2003 2002
---- ----
Assets:
Excess of Tax Over Financial Reporting Earned Premium $ 21,142 $ 18,838
Loss Reserve Discounting 19,868 16,461
Excess of Financial Reporting Over Tax Net Realized Investment Losses 6,720 3,315
Deferred Compensation 471 282
Other Assets 1,695 345
-------- --------
Total Assets 49,896 39,241
======== ========
Liabilities:
Deferred Acquisition Costs 19,701 21,445
Unrealized Appreciation of Securities 9,001 8,715
Property and Equipment Basis 985 803
Excess of Financial Reporting Over Tax Net Investment Income 892 624
Other Liabilities 141 113
-------- --------
Total Liabilities 30,720 31,700
-------- --------
Net Deferred Income Tax Asset $ 19,176 $ 7,541
======== ========
54
The following table summarizes the differences between the Company's effective
tax rate for financial statement purposes and the federal statutory rate
(dollars in thousands):
Amount of Tax Percent
------------- -------
For the year ended December 31, 2003:
Federal Tax at Statutory Rate $ 30,375 35%
Nontaxable Municipal Bond Interest and Dividends Received Exclusion (4,522) (5)
Other, Net 657 1
--------- --
Income Tax Expense $ 26,510 31%
========= ==
For the year ended December 31, 2002:
Federal Tax at Statutory Rate $ 18,382 35%
Nontaxable Municipal Bond Interest and Dividends Received Exclusion (2,525) (5)
Other, Net 657 1
--------- --
Income Tax Expense $ 16,514 31%
========= ==
For the year ended December 31, 2001:
Federal Tax at Statutory Rate $ 16,169 35%
Nontaxable Municipal Bond Interest and Dividends Received Exclusion (1,456) (3)
Nondeductible Goodwill Amortization 523 1
Other, Net 403 1
--------- --
Income Tax Expense $ 15,639 34%
========= ==
Philadelphia Insurance has entered into tax sharing agreements with each of its
subsidiaries. Under the terms of these agreements, the income tax provision is
computed as if each subsidiary were filing a separate federal income tax return,
including adjustments for the income tax effects of net operating losses and
other special tax attributes, regardless of whether those attributes are
utilized in the Company's consolidated federal income tax return.
12. Minority Interest in Consolidated Subsidiaries
During 1998, the Company issued 10.350 million FELINE PRIDES(SM) at $10.00 per
security and PCHC Financing I, the Company's business trust subsidiary, issued
1,000,000 7.0% Trust Originated Preferred Securities with a stated liquidation
amount per trust preferred security equal to $10.00. The 10.350 million FELINE
PRIDES(SM) consisted of 9.350 million units referred to as Income Prides and
1.000 million units referred to as Growth Prides. Each Income Prides consisted
of a unit comprised of (a) a purchase contract under which the holder purchased
a number of shares of Philadelphia Consolidated Holding Corp. common stock on
May 16, 2001 (equal to .3858 shares per FELINE PRIDES(SM) under the terms
specified in the stock purchase contract and (b) beneficial ownership of a 7.0%
Trust Originated Preferred Security issued by PCHC Financing I and representing
an undivided beneficial ownership in the assets of PCHC Financing I. Each holder
received aggregate cumulative cash distributions at the annual rate of 7.00% of
the $10.00 stated amount for the security, payable quarterly in arrears. Each
Growth Prides consisted of a unit with a face amount of $10.00 comprised of (a)
a purchase contract under which (i) the holder purchased a number of shares of
Philadelphia Consolidated Holding Corp. common stock on May 16, 2001 (equal to
..3858 shares per FELINE PRIDES(SM) under the terms specified in the stock
purchase contract and (ii) the Company paid the holder contract adjustment
payments at the rate of .50% of the stated amount per annum and (b) a 1/100
undivided beneficial ownership interest in a treasury security having a
principal amount at maturity equal to $1,000 and maturing on May 15, 2001.
On May 16, 2001, the Company issued 4.0 million common shares to satisfy the
stock purchase contract obligation from the Company's 1998 FELINE PRIDES(SM)
offering. The issuance of such shares resulted in a $98.9 million increase in
Shareholders' Equity and a corresponding decrease in the Minority Interest In
Consolidated Subsidiaries balance.
55
13. Shareholders' Equity
Basic and diluted earnings per share are calculated as follows (dollars and
share data in thousands, except per share data):
As of and For the Years Ended December 31,
------------------------------------------
2003 2002 2001
------ ------- -------
Weighted-Average Common Shares Outstanding 21,909 21,611 16,529
Weighted-Average Share Equivalents Outstanding 751 682 656
------ ------- -------
Weighted-Average Shares and Share Equivalents Outstanding 22,660 22,293 17,185
====== ======= =======
Net Income 60,277 $36,005 $30,559
====== ======= =======
Basic Earnings Per Share $ 2.75 $ 1.67 $ 1.85
====== ======= =======
Diluted Earnings Per Share $ 2.66 $ 1.62 $ 1.78
====== ======= =======
The number of weighted share equivalents not included in the weighted-average
share equivalents outstanding calculation amounted to 2,730, 9,620 and 122 for
the years ended December 31, 2003, 2002 and 2001, respectively.
During the fourth quarter of 2001, the Company closed on its public offering of
an aggregate of 3.6 million shares of its common stock. Proceeds from the
offering amounted to $114.5 million (after underwriting and associated costs).
The Company contributed $70.0 million of the net proceeds to its subsidiaries in
2001, of which $60.0 million was contributed to the Insurance Subsidiaries. The
remaining proceeds are presently being held for general corporate purposes.
Under the Company's stock option plan, stock options may be granted for the
purchase of common stock at a price not less than the fair market value on the
date of grant. Options are primarily exercisable after the expiration of five
years following the grant date. Under this plan, as amended, the Company has
reserved 3,500,000 shares of common stock for issuance pursuant to options
granted under the plan. As of December 31, 2003, 119,725 shares of common stock
remain reserved for future issuance pursuant to options granted under this plan.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure ("SFAS No. 148") which amends SFAS
Statement No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). The
objective of SFAS No. 148 is to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. SFAS No. 148 does not change the provisions of SFAS No.
123 that permit entities to continue to apply the intrinsic value method of
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB No. 25"). In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
Company continues to maintain its accounting for stock-based compensation in
accordance with APB No. 25, but has adopted the disclosure provisions of SFAS
No. 148.
The following table presents certain information regarding the Company's stock
option plan.
56
2003 2002 2001
----------------------------- ----------------------------- -----------------------------
Exercise Exercise Exercise
Price Price Price
Options Per Option(1) Options Per Option(1) Options Per Option(1)
--------- ------------- --------- ------------- --------- -------------
Outstanding at beginning of
year 1,890,075 $ 24.82 1,453,075 $ 19.32 1,330,075 $ 12.68
Granted 484,000 $ 36.60 549,500 $ 36.14 572,500 $ 27.09
Exercised (106,375) $ 19.34 (107,000) $ 8.07 (392,000) $ 8.09
Canceled (33,000) $ 30.68 (5,500) $ 29.60 (57,500) $ 19.68
--------- --------- ---------
Outstanding at end of year 2,234,700 $ 27.55 1,890,075 $ 24.82 1,453,075 $ 19.32
========= ========= =========
Exercisable at end of year 323,200 194,950 296,950
Weighted-average fair
value of options granted
during the year (2) $11.27 $14.46 $10.99
Outstanding Exercise Remaining Exercisable Exercise
At Price Contractual at Price
December Per Life December Per
Range of Exercise Prices 31, 2003 Option(1) (Years)(1) 31, 2003 Option(1)
- ------------------------ ----------- --------- ----------- ---------- ----------
$8.13 to $9.31 188,450 $ 8.99 2.4 188,450 $ 8.99
$13.88 to $19.75 390,000 $ 15.47 5.6 90,000 18.63
$20.50 to $27.00 531,250 $ 25.23 6.9 3,750 21.96
$27.31 to $34.63 397,500 $ 30.60 8.6 41,000 29.80
$36.05 to $42.49 727,500 $ 39.15 9.0 -- --
--------- -------
2,234,700 $ 27.55 323,200 $ 14.46
========= =======
(1) Weighted Average.
(2) The Company uses the Black-Scholes pricing model to calculate the fair
value of the options awarded as of the date of grant.
The Company has established the following stock purchase plans:
Employee Stock Purchase Plan (the "Stock Purchase Plan"): The aggregate maximum
number of shares that may be issued pursuant to the Stock Purchase Plan as
amended is 1,000,000. Shares may be purchased under the Stock Purchase Plan by
eligible employees during designated one-month offering periods established by
the Compensation Committee of the Board of Directors at a purchase price of the
lesser of 85% of the fair market value of the shares on the first business day
of the offering period or the date the shares are purchased. The purchase price
of shares may be paid by the employee over six years pursuant to the execution
of a promissory note. The promissory note(s) are collateralized by such shares
purchased under the Stock Purchase Plan and are interest free. Under the Stock
Purchase Plan, the Company issued 36,265 and 77,730 shares in 2003 and 2002,
respectively. The weighted-average fair value of those purchase rights granted
in 2003 and 2002 was $6.00 and $4.47, respectively.
The Nonqualified Employee Stock Purchase Plan (the "Nonqualified Stock Plan"):
The aggregate maximum number of shares that may be issued pursuant to the
Nonqualified Stock Plan is 1,000,000. Shares may be purchased under the
Nonqualified Stock Plan by eligible employees during designated one-month
offering periods established by the Compensation Committee of the Board of
Directors at a purchase price of the lesser of 85% of the fair market value of
the shares on the first business day of the offering period or the date the
shares are purchased. The purchase price of shares may be paid by the employee
over nine years pursuant to the execution of a promissory note. The promissory
note(s) are collateralized by such shares purchased under the Nonqualified Stock
Plan and are interest free. Under the Nonqualified Stock Plan, the Company
issued 5,939 and 242,444 shares in 2003 and 2002, respectively. The
weighted-average fair value of those purchase rights granted in 2003 and 2002
was $6.00 and $4.47, respectively.
Directors Stock Purchase Plan ("Directors Plan"): The Directors Plan has been
established for the benefit of non-employee Directors. The aggregate maximum
number of shares that may be issued pursuant to the Directors Plan is 50,000.
Non-employee Directors, during monthly offerings periods, may designate a
portion of his or her fees to be used for the purchase of
57
shares under the terms of the Directors Plan at a purchase price of the lesser
of 85% of the fair market value of the shares on the first business day of the
offering period or the date the shares are purchased. Under the Directors Plan,
the Company issued 3,325 and 2,237 shares in 2003 and 2002, respectively. The
weighted-average fair value of those purchase rights granted in 2003 and 2002
was $5.96 and $5.63, respectively.
Preferred Agents Stock Purchase Plan ("Preferred Agents Plan"): The Preferred
Agents Plan has been established for the benefit of eligible Preferred Agents.
The aggregate maximum number of shares that may be issued pursuant to the
Preferred Agents Plan is 200,000. Eligible Preferred Agents during designated
offering periods may either remit cash or have the Company withhold from
commissions or other compensation amounts to be used for the purchase of shares
under the terms of the Preferred Agents Plan at a purchase price of the lesser
of 85% of the fair market value of the shares on the first business day of the
offering period or the date the shares are purchased. Under the Preferred Agents
Plan, the Company issued 7,056 and 10,966 shares in 2003 and 2002, respectively.
The weighted-average fair value of those purchase rights granted in 2003 and
2002 was $6.00 and $6.07, respectively.
The fair value of options at date of grant was estimated using the Black-Scholes
valuation model with the following weighted-average assumptions:
2003 2002 2001
--------- --------- ---------
Expected Stock Volatility 23.2% 33.0% 32.0%
Risk-Free Interest Rate 3.1% 4.1% 4.7%
Expected Option Life (Years) 6.0 6.0 6.0
Expected Dividends 0.0% 0.0% 0.0%
14. Stock Repurchase Authorization
During the three years ended December 31, 2003, the Company repurchased 0.1
million shares for approximately $2.5 million under its stock repurchase
authorization. At December 31, 2003, $24.7 million remains under a $55.0 million
stock purchase authorization.
15. Reinsurance
In the normal course of business, the Company has entered into various
reinsurance contracts with unrelated reinsurers. The Company participates in
such agreements for the purpose of limiting loss exposure and diversifying
business. Reinsurance contracts do not relieve the Company from its obligation
to policyholders.
The loss and loss adjustment expense reserves ceded under such arrangements were
$145.6 million and $85.8 million at December 31, 2003 and 2002, respectively.
The Company evaluates the financial condition of its reinsurers to minimize its
exposure to losses from reinsurer insolvencies. The percentage of ceded
reinsurance reserves (excluding reserves ceded to voluntary and mandatory pool
mechanisms) that are with companies rated "A" (Excellent) or better by A.M. Best
Company is 99.3% and 97.0% as of December 31, 2003 and 2002, respectively.
Additionally, approximately 1%, 1% and 3% of the Company's net written premiums
for the years ended December 31, 2003, 2002, and 2001, respectively, were
assumed from an unrelated reinsurance company.
58
The effect of reinsurance on premiums written and earned is as follows (in
thousands):
Written Earned
------- ------
For the Year Ended December 31, 2003:
Direct Business $898,170 $784,445
Reinsurance Assumed 7,823 5,053
Reinsurance Ceded 306,632 217,919
-------- --------
Net Premiums $599,361 $571,579
-------- --------
Percentage Assumed of Net 1.3% 0.9%
======== =========
For the Year Ended December 31, 2002:
Direct Business $660,789 $550,443
Reinsurance Assumed 2,950 5,042
Reinsurance Ceded 140,568 134,299
-------- --------
Net Premiums $523,171 $421,186
-------- --------
Percentage Assumed of Net 0.6% 1.2%
======== =========
For the Year Ended December 31, 2001:
Direct Business $464,491 $409,814
Reinsurance Assumed 9,074 11,249
Reinsurance Ceded 139,748 124,970
-------- --------
Net Premiums $333,817 $296,093
-------- --------
Percentage Assumed of Net 2.7% 3.8%
======== =========
16. Compensation Plans
The Company has a defined contribution Profit Sharing Plan, which includes a
401K feature, covering substantially all employees. Under the plan, employees
may contribute up to an annual maximum of the lesser of 15% of eligible
compensation or the applicable Internal Revenue Code limit in a calendar year.
The Company makes a matching contribution in an amount equal to 75% of the
participant's pre-tax contribution, subject to a maximum of 6% of the
participant's eligible compensation. The Company may also make annual
discretionary profit sharing contributions at each plan year end. Participants
are fully vested in the Company's contribution upon completion of four years of
service. The Company's total contributions to the plan were $0.9 million, $0.8
million and $0.6 million in 2003, 2002, and 2001, respectively.
The Company sponsors an unfunded nonqualified key employee deferred compensation
plan. Under the plan deferred compensation benefits are provided through
deferrals of base salary and bonus compensation ("Employee Deferrals") and
discretionary contributions by the Company ("Employer Contributions") for a
select group of management and highly compensated employees of the Company and
its subsidiaries. Each participant is permitted to specify an investment or
investments from among permissible investments which shall be the basis for
determining the gain or loss adjustment applicable to such participant's plan
deferral account. A participant's interest in the portion of his or her plan
deferral account that is attributable to Employee Deferrals are fully vested at
all times. That portion of a participant's plan deferral account attributable to
Employer Contributions generally will vest over the course of a five year period
beginning on the last day of the first year after the plan year for which the
Employer Contribution was made. The amounts in each participant's plan deferral
account represent an obligation of the Company to pay the participant at some
time in the future. The Company had a deferred compensation obligation pursuant
to the plan amounting to $1.8 million and $0.7 million as of December 31, 2003
and 2002, respectively.
The Company also sponsors an unfunded nonqualified executive deferred
compensation plan. Under the plan deferred compensation benefits are provided by
the Company through deferrals of base salary and bonus compensation for
management and highly compensated executives designated by the Board of
Directors. Each participant is permitted to specify an investment or investments
from among permissible investments which shall be the basis for determining the
gain or loss adjustment applicable to such participant's plan deferral account.
A participant's benefit under the plan is the amount of such participant's plan
deferral amount. The Company had a deferred compensation obligation pursuant to
the plan amounting to $0.8 million and $0.5 million as of December 31, 2003 and
2002, respectively.
59
17. Commitments and Contingencies
The Company is subject to routine legal proceedings in connection with its
property and casualty insurance business. The Company also is not involved in
any pending or threatened legal or administrative proceedings which management
believes can reasonably be expected to have a material adverse effect on the
Company's financial condition or results of operations.
The Company currently leases office space to serve as its headquarters location
and 36 field offices for its production underwriters. In addition, the Company
leases certain computer equipment. Rental expense for these operating leases was
$3.5 million, $3.1 million and $2.6 million for the years ended December 31,
2003, 2002, and 2001, respectively.
The future minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 2003 were as follows (in thousands):
Year Ending December 31:
2004 $ 4,611
2005 4,307
2006 3,952
2007 3,494
2008 and Thereafter 1,238
-------
Total Minimum Payments Required $17,602
=======
At December 31, 2003 the Company has open commitments of $2.3 million under
certain limited partnership and information technology development agreements.
18. Summary of Quarterly Financial Information - Unaudited
The following quarterly financial information for each of the three months ended
March 31, June 30, September 30 and December 31, 2003 and 2002 is unaudited.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the results of operations for
such periods, have been made for a fair presentation of the results shown (in
thousands, except share and per share data):
60
Three Months Ended
----------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
2003 (1) 2003 (1) 2003 (1) 2003 (1)(2)
------------ ------------ ------------- ------------
Net Earned Premiums $ 148,362 $ 121,449 $ 142,688 $ 159,080
Net Investment Income $ 9,805 $ 9,370 $ 9,173 $ 10,458
Net Realized Investment Gain (Loss) $ (1,133) $ (650) $ 474 $ 2,103
Net Loss and Loss Adjustment Expenses $ 90,360 $ 93,026 $ 79,405 $ 96,386
Acquisition Costs and Other
Underwriting Expenses $ 46,420 $ 32,158 $ 41,542 $ 42,792
Net Income $ 13,233 $ 3,627 $ 20,983 $ 22,434
Basic Earnings Per Share $ 0.61 $ 0.17 $ 0.96 $ 1.02
Diluted Earnings Per Share $ 0.59 $ 0.16 $ 0.92 $ 0.98
Weighted-Average Common Shares
Outstanding 21,865,269 21,860,396 21,913,053 21,994,960
Weighted-Average Share Equivalents 562,552 706,608 787,627 981,017
------------ ------------ ----------- ------------
Outstanding
Weighted-Average Shares and Share
Equivalents Outstanding 22,427,821 22,567,004 22,700,680 22,975,977
============ ============ =========== ============
March 31, June 30, September 30, December 31,
2002 (4) 2002 (3)(4) 2002 (4) 2002 (4)
------------ ------------ ------------- ------------
Net Earned Premiums $ 89,244 $ 100,273 $ 106,146 $ 125,523
Net Investment Income $ 8,855 $ 9,375 $ 9,497 $ 9,789
Net Realized Investment Gain (Loss) $ 47 $ (3,181) $ 199 $ (436)
Net Loss and Loss Adjustment Expenses $ 53,049 $ 60,832 $ 78,349 $ 75,203
Acquisition Costs and Other
Underwriting Expenses $ 27,821 $ 31,057 $ 32,343 $ 38,697
Net Income $ 10,677 $ 8,953 $ 2,892 $ 13,483
Basic Earnings Per Share $ 0.50 $ 0.41 $ 0.13 $ 0.62
Diluted Earnings Per Share $ 0.48 $ 0.40 $ 0.13 $ 0.61
Weighted-Average Common Shares
Outstanding 21,528,091 21,578,045 21,625,799 21,710,121
Weighted-Average Share Equivalents 724,311 753,575 636,828 558,100
------------ ------------ ----------- ------------
Outstanding
Weighted-Average Shares and Share
Equivalents Outstanding 22,252,402 22,331,620 22,262,627 22,268,221
============ ============ =========== ============
(1) Net Realized Investment (Gain) Loss for the three months ended March 31,
2003, June 30, 2003, September 30, 2003 and December 31, 2003 includes
non-cash realized losses of $1.5 million, $1.7 million, $0.4 million and
$6.7 million, respectively, as a result of impairment evaluations.
(2) During the three months ended December 31, 2003, the Company recorded a
benefit pursuant to the 2003 accident year quota share reinsurance
agreement. Consequently, net earned premiums and net income increased by
$7.5 million and $4.9 million, respectively.
(3) During the three months ended June 30, 2002, a 2001 accident year
aggregate stop loss reinsurance program was commuted. As a result of this
commutation, net earned premiums and net income increased by $3.6 million
and $2.3 million, respectively.
(4) Net Realized Investment Gain (Loss) for the three months ended June 30,
2002, September 30, 2002 and December 31, 2002 includes non-cash realized
losses of $1.2 million, $0.3 million, and $2.2 million, respectively, as a
result of impairment evaluations.
61
19. Segment Information
The Company's operations are classified into three reportable business segments
which are organized around its three underwriting divisions: The Commercial
Lines Underwriting Group which has underwriting responsibility for the
Commercial Automobile and Commercial Property and Commercial multi-peril package
insurance products; The Specialty Lines Underwriting Group which has
underwriting responsibility for the professional liability insurance products;
and The Personal Lines Group which designs, markets and underwrites personal
property and casualty insurance products for the Manufactured Housing and
Homeowners markets. Each business segment's responsibilities include: pricing,
managing the risk selection process, and monitoring the loss ratios by product
and insured. The reportable segments operate solely within the United States and
have not been aggregated.
The segments follow the same accounting policies used for the Company's
consolidated financial statements as described in the summary of significant
accounting policies. Management evaluates a segment's performance based upon
premium production and the associated loss experience which includes paid
losses, an amount determined on the basis of claim adjusters' evaluation with
respect to insured events that have occurred and an amount for losses incurred
that have not been reported. Investments and investment performance including
investment income and net realized investment gain (loss); acquisition costs and
other underwriting expenses including commissions, premium taxes and other
acquisition costs; and other operating expenses are managed at a corporate level
by the corporate accounting function in conjunction with other corporate
departments and are included in "Corporate".
Following is a tabulation of business segment information for each of the past
three years. Corporate information is included to reconcile segment data to the
consolidated financial statements (in thousands):
62
Commercial Specialty Personal
Lines Lines Lines Corporate Total
---------- --------- -------- --------- ------
2003:
Gross Written Premiums $662,339 $154,105 $ 89,549 $ -- $ 905,993
-------- -------- -------- ----------- -----------
Net Written Premiums $460,382 $108,308 $ 30,671 $ -- $ 599,361
-------- -------- -------- ----------- -----------
Revenue:
Net Earned Premiums $428,063 $109,206 $ 34,310 $ -- $ 571,579
Net Investment Income -- -- -- 38,806 38,806
Net Realized Investment Gain -- -- -- 794 794
Other Income -- -- 5,092 427 5,519
-------- -------- -------- ----------- -----------
Total Revenue 428,063 109,206 39,402 40,027 616,698
-------- -------- -------- ----------- -----------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 273,487 65,075 20,615 -- 359,177
Acquisition Costs and Other Underwriting Expenses -- -- -- 162,912 162,912
Other Operating Expenses -- -- 4,050 3,772 7,822
-------- -------- -------- ----------- -----------
Total Losses and Expenses 273,487 65,075 24,665 166,684 529,911
-------- -------- -------- ----------- -----------
Income Before Income Taxes 154,576 44,131 14,737 (126,657) 86,787
Total Income Tax Expense -- -- -- 26,510 26,510
-------- -------- -------- ----------- -----------
Net Income $154,576 $ 44,131 $ 14,737 $ (153,167) $ 60,277
======== ======== ======== =========== ===========
Total Assets $ -- $ -- $148,486 $ 1,720,545 $ 1,869,031
======== ======== ======== =========== ===========
2002:
Gross Written Premiums $473,100 $110,176 $ 80,463 $ -- $ 663,739
-------- -------- -------- ----------- -----------
Net Written Premiums $383,255 $102,423 $ 37,493 $ -- $ 523,171
-------- -------- -------- ----------- -----------
Revenue:
Net Earned Premiums $299,899 $ 85,830 $ 35,457 $ -- $ 421,186
Net Investment Income -- -- -- 37,516 37,516
Net Realized Investment Loss -- -- -- (3,371) (3,371)
Other Income -- -- 645 266 911
-------- -------- -------- ----------- -----------
Total Revenue 299,899 85,830 36,102 34,411 456,242
-------- -------- -------- ----------- -----------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 202,604 43,310 21,519 -- 267,433
Acquisition Costs and Other Underwriting Expenses -- -- -- 129,918 129,918
Other Operating Expenses -- -- 130 6,242 6,372
-------- -------- -------- ----------- -----------
Total Losses and Expenses 202,604 43,310 21,649 136,160 403,723
-------- -------- -------- ----------- -----------
Income Before Income Taxes 97,295 42,520 14,453 (101,749) 52,519
Total Income Tax Expense -- -- -- 16,514 16,514
-------- -------- -------- ----------- -----------
Net Income $ 97,295 $ 42,520 $ 14,453 $ (118,263) $ 36,005
======== ======== ======== =========== ===========
Total Assets $ -- $ -- $135,753 $ 1,222,581 $ 1,358,334
======== ======== ======== =========== ===========
2001:
Gross Written Premiums $315,948 $ 79,317 $ 78,300 $ -- $ 473,565
-------- -------- -------- ----------- -----------
Net Written Premiums $223,700 $ 69,772 $ 40,345 $ -- $ 333,817
-------- -------- -------- ----------- -----------
Revenue:
Net Earned Premiums $189,835 $ 68,156 $ 38,102 $ -- $ 296,093
Net Investment Income -- -- -- 32,426 32,426
Net Realized Investment Gain -- -- -- 3,357 3,357
Other Income -- -- 2,964 (2,377) 587
-------- -------- -------- ----------- -----------
Total Revenue 189,835 68,156 41,066 33,406 332,463
-------- -------- -------- ----------- -----------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 117,429 42,840 19,386 -- 179,655
Acquisition Costs and Other Underwriting Expenses -- -- -- 97,020 97,020
Other Operating Expenses -- -- 1,546 5,295 6,841
-------- -------- -------- ----------- -----------
Total Losses and Expenses 117,429 42,840 20,932 102,315 283,516
-------- -------- -------- ----------- -----------
Minority Interest: Distributions on Company
Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust -- -- -- 2,749 2,749
-------- -------- -------- ----------- -----------
Income Before Income Taxes 72,406 25,316 20,134 (71,658) 46,198
Total Income Tax Expense -- -- -- 15,639 15,639
-------- -------- -------- ----------- -----------
Net Income $ 72,406 $ 25,316 $ 20,134 $ (87,297) $ 30,559
======== ======== ======== =========== ===========
Total Assets $ -- $ -- $167,940 $ 849,782 $ 1,017,722
======== ======== ======== =========== ===========
63
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
Item 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and its Chief Financial Officer, after
evaluating the effectiveness of the Company's disclosure controls
and procedures (as defined in the Securities Exchange Act of 1934
Rules 13a-15(e) and 15d-15(e)) have concluded that, as of the end of
the period covered by this report on Form 10-K, the Company's
disclosure controls and procedures were effective to ensure that
material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within such
entities, particularly during the period in which this annual report
on Form 10-K was being prepared
(b) Changes in Internal Controls. There has been no change in the
Company's internal control over financial reporting during the
Company's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART III
Certain information required by Part III is omitted from this Report in that the
Company will file a definitive proxy statement pursuant to Regulation 14A (the
"Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's director and executive officers
required by this Item is incorporated by reference to the Proxy Statement
under the caption "Management-Directors and Executive Officers".
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
Proxy Statement under the captions "Executive Compensation", "Stock Option
Grants", "Stock Option Exercises and Holdings" and "Directors
Compensation".
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) The information required by this Item is incorporated by reference
to the Proxy Statement under the caption "Security Ownership of
Certain Beneficial Owners and Management".
(b) Equity Compensation Plan Information
64
The following table sets forth certain information relating to the Company's
equity compensation plans as of December 31, 2003:
Number of securities
remaining available for
future issuance under
Number of securities to Weighted-average exercise equity compensation
be issued upon exercise price of outstanding plans (excluding
of outstanding options, options, warrants and securities reflected in
warrants and rights rights column (a))
Plan Category (a) (b) (c)
- ----------------------------- ----------------------- ------------------------- -----------------------
Equity compensation plans
approved by security holders 2,234,700 $27.55 1,273,191 (1)
Equity compensation plans
not approved by security
holders -- -- 168,450 (2)
--------- ------ ---------
Total 2,234,700 $27.55 1,441,641
========= ====== =========
(1) Includes 752,779, 385,165, 119,725 and 15,522 shares of the Company's
common stock available for future issuance under the Company's
Non-Qualified Employee Stock Purchase Plan, Employee Stock Purchase Plan,
Employee Stock Option Plan and Directors Stock Purchase Plan,
respectively.
(2) These shares of the Company's common stock are available for future
issuance under a stock purchase plan for the Company's eligible Preferred
Agents approved by the Company's Board of Directors. Under this Plan the
Company's eligible Preferred Agents may purchase shares of the Company's
common stock during 30 day offering periods as designated by the Company's
Preferred Agent Committee at a per share price equal to 85% of the lesser
of the fair market value of a share of the Company's common stock on the
first business day of the offering period or the last day of the offering
period. Any shares purchased pursuant to the Plan are restricted for a
period of two-years, measured from the first day of the relevant offering
period, and no eligible Preferred Agent is permitted to purchase shares
under the plan during any three consecutive calendar years having an
aggregate value in excess of $100,000.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
Proxy Statement under the caption "Additional Information Regarding the
Board".
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to the
Proxy Statement under the caption "Principal Accountant Fees and
Services."
65
PART IV
Item 15. - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits
1. The Financial Statements and Financial Statement Schedules listed in
the accompanying index on page 38 are filed as part of this Report.
2. Exhibits: The Exhibits listed below are filed as part of, or
incorporated by reference into, this Report.
Exhibit No. Description
- ----------- -----------
3.1 A Articles of Incorporation of Philadelphia Insurance, as
amended to date.
3.1.1 A Amendment to Articles of Incorporation of Philadelphia
Insurance.
3.1.2 L Amendment to Articles of Incorporation, Philadelphia
Consolidated Holding Corp.
3.2 A By-laws of Philadelphia Insurance, as amended to date.
10.1 A (1) Amended and Restated Key Employees' Stock Option Plan.
10.1.1 H (1) Amended and Restated Key Employees' Stock Option Plan.
10.2 A (1) Key Employees' Stock Bonus Plan.
10.2.1 A (1) Excerpt of Board of Directors and Shareholders
Resolution amending Key Employees' Stock Bonus Plan.
10.6 A Casualty Excess of Loss Reinsurance Agreement No.
14P-106,401,402, effective January 1, 1990, with Swiss
Re, as amended to date.
10.7 A Property Quota Share Reinsurance Agreement No. 14P-202,
effective December 9, 1989, with Swiss Re, as amended to
date.
10.8 A Casualty Quota Share Reinsurance Agreement No. 14P-201,
effective January 1, 1989, with Swiss Re, as amended to
date.
10.9 A Retrocession Contract No. 80101, effective October 1,
1990, with Swiss Re, as amended to date, together with
related Casualty Quota Share Reinsurance Agreement No.
X21-201, as amended to date.
10.10 A Retrocession Contract No. 81100/81101, effective October
1, 1990, with Swiss Re, as amended to date, together
with related Property Quota Share Reinsurance Agreement
No. DP2AB, effective October 1, 1990, as amended to
date.
10.11 A Retrocession Contract No. 80100/80103, effective October
1, 1990, with Swiss Re, as amended to date, together
with related Casualty Quota Share Reinsurance Agreement
No. DC2ABC, effective October 1, 1990, as amended to
date.
10.12 A Agreement of Reinsurance no. B367, dated June 11, 1991,
with General Reinsurance Corporation, as amended to
date.
10.13 A Agreement of Reinsurance No. A271, dated July 2, 1993,
with General Reinsurance Corporation.
10.14 A General Agency Agreement, effective December 1, 1987,
between MIA and Providence Washington Insurance Company,
as amended to date, together with related Quota Share
Reinsurance Agreements, as amended to date.
10.15 A E & O Insurance Policy effective July 20, 1993.
10.15.1 G E & O Insurance Policy effective July 20, 1996.
10.15.2 I E & O Insurance Policy effective July 20, 1997.
10.16 A Minutes of the Board of Directors Meeting dated October
20, 1992, and excerpts from the Minutes of the Board of
Directors Meeting dated November 16, 1992.
10.17 A (1) Letter dated July 9, 1993 from James J. Maguire,
confirming verbal agreements concerning options.
10.18 A (1) James J. Maguire Stock Option Agreements.
10.18.1 C (1) Amendment to James J. Maguire Stock Option Agreements.
10.19 A (1) Wheelways Salary Savings Plus Plan Summary Plan
Description.
10.20 A Key Man Life Insurance Policies on James J. Maguire
10.21 A Reinsurance Pooling Agreement dated August 14, 1992,
between PIIC and PIC.
10.22 A Tax Sharing Agreement, dated July 16, 1987, between
Philadelphia Insurance and PIC, as amended to date.
10.23 A Tax Sharing Agreement, dated November 1, 1986, between
Philadelphia Insurance and PIIC, as amended to date.
10.24 A (1) Management Agreement dated May 20, 1991, between PIIC
and MIA, as amended to date.
66
10.24.1 G (1) Management Agreement dated May 20, 1991, between PIIC
and MIA, as amended September 25, 1996.
10.25 A (1) Management Agreement dated October 23, 1991, between PIC
and MIA, as amended to date.
10.25.1 G (1) Management Agreement dated October 23, 1991, between PIC
and MIA, as amended September 25, 1996.
10.26 A General Mutual Release and Settlement of All Claims
dated July 2, 1993, with the Liquidator of Integrity
Insurance Company.
10.27 A Settlement Agreement and General Release with Robert J.
Wilkin, Jr., dated August 18, 1993.
10.28 B Lease tracking portfolio assignment agreement.
10.29 D (1) James J. Maguire Split Dollar Life Insurance Agreement,
Collateral Assignment and Joint and Last Survivor
Flexible Premium Adjustable Life Insurance Policy
Survivorship Life.
10.30 E Allenbrook Software License Agreement, dated September
26, 1995.
10.31 E Sublease Agreement dated August 24, 1995 with CoreStates
Bank, N.A.
10.32 E Lease Agreement dated August 30, 1995 with The
Prudential Insurance Company of America.
10.33 F (1) Employee Stock Purchase Plan.
10.34 F (1) Cash Bonus Plan.
10.35 F (1) Executive Deferred Compensation Plan.
10.36 H (1) Directors Stock Purchase Plan
10.37 I Lease Agreement dated May 8, 1997 with Bala Plaza, Inc.
10.38 I Casualty Excess of Loss Reinsurance Agreement effective
January 1, 1997, together with Property Per Risk Excess
of Loss Reinsurance Agreement effective January 1, 1997
and Property Facultative Excess of Loss Automatic
Reinsurance Agreement effective January 1, 1997.
10.39 I Automobile Leasing Residual Value Excess of Loss
Reinsurance Agreement effective January 1, 1997,
together with Second Casualty Excess of Loss Reinsurance
Agreement, effective January 1, 1997.
10.40 J Inspire Software License Agreement, dated December 31,
1998.
10.41 J Lease Agreement dated July 6, 1998 with Bala Plaza, Inc.
10.42 K Plan and Agreement of Merger Between Philadelphia
Consolidated Holding Corp. and The Jerger Co. Inc.
10.43 L 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.
10.44 L 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.
10.45 L 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.
10.46 L (1) Employment Agreement with James J. Maguire, Jr.
effective June 1, 2002.
10.47 L (1) Employment Agreement with Sean S. Sweeney effective June
1, 2002.
10.48 L (1) Employment Agreement with Craig P. Keller effective June
1, 2002.
10.49 M (1) Employment Agreement with James J. Maguire effective
June 1, 2002.
10.50 M (1) Employment Agreement with Christopher J. Maguire
effective June 1, 2002.
10.51 N AQS, Inc. Software License Agreement, dated October 1,
2002.
10.52 N(1) Employment Agreement with P. Daniel Eldridge effective
October 1, 2002.
10.53 O Florida Hurricane Catastrophe Fund Reimbursement
Contract Effective June 1, 2003.
10.54 P Quota Share Reinsurance Contract with Swiss Reinsurance
America Corporation effective May 15, 2003 covering
policies within the Custom Harvest Program.
10.55 P Excess of Loss Agreement of Reinsurance No. 9034 with
General Reinsurance Corporation effective January 1,
2003.
10.56 P Addendum No. 3 to the Casualty Excess of Loss
Reinsurance Agreement No. TC988A, B with Swiss
Reinsurance American Corporation effective January 1,
2003.
10.57 P Property Excess of Loss Agreement of Reinsurance No.
TP1600E with Swiss Reinsurance America Corporation
effective January 1, 2003.
10.58 P Casualty Excess of Loss Reinsurance Contract with
American Re-Insurance Company, Converium Reinsurance
(North America) Inc., Endurance Specialty Insurance
Limited, Liberty Mutual Insurance Company effective
January 1, 2003.
67
10.59 Q Casualty Semi-Automatic Excess of Loss Reinsurance
Contract with Endurance Specialty Insurance, Ltd.
effective March 1, 2003 RE: Philadelphia Insurance
Company Master Policy PHUB015555 and Philadelphia
Indemnity Insurance Company Master Policy PHUB015555-01.
10.60 Q Casualty Semi-Automatic Excess of Loss Reinsurance
Contract with Endurance Specialty Insurance, Ltd.
effective March 1, 2003 RE: Philadelphia Insurance
Company Master Policy PHUB015557 and Philadelphia
Indemnity Insurance Company Master Policy PHUB015557-01.
10.61 Q Non Florida Commercial Excess Catastrophe Reinsurance
Contract with the Subscribing Reinsurer (s) Executing
the Interests and Liabilities Agreement (s) effective
June 1, 2003.
10.62 Q Florida Commercial Excess Catastrophe Reinsurance
Contract with the Subscribing Reinsurer (s) Executing
the Interests and Liabilities Agreement (s) effective
June 1, 2003.
10.63 Q Excess Catastrophe Reinsurance Contract with Federal
Insurance Company through Chubb Re, Inc. effective June
1, 2003.
10.64 Q Whole Account Net Quota Share Reinsurance Contract with
Federal Insurance Company through Chubb Re, Inc. and
Swiss Reinsurance America Corporation effective April 1,
2003.
11 Q Statement regarding computation of earnings per share.
21 Q List of Subsidiaries of the Registrant.
23 Q Consent of PricewaterhouseCoopers LLP.
24 A Power of Attorney
31.1 Q Certification of the Company's chief executive officer
pursuant to Section 302 of the Sarbanes- Oxley Act of
2002.
31.2 Q Certification of the Company's chief financial officer
pursuant to Section 302 of the Sarbanes- Oxley Act of
2002.
32.1 Q 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.
32.2 Q 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.
99.1 Q Report of Independent Auditors of PricewaterhouseCoopers
LLP on Financial Statement Schedules.
A Incorporated by reference to the Exhibit filed with the Registrant's Form
S-1 Registration Statement under the Securities Act of 1933 (Registration
No. 33-65958).
B Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1993 and incorporated by reference.
C Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1994 and incorporated by reference.
D Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1995 and incorporated by reference.
E Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995 and incorporated by reference.
F Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1996 and incorporated by reference.
G Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated by reference.
H Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1997 and incorporated by reference.
I Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1997.
J Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1998.
K Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1999.
L Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2002 and incorporated by reference.
M Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2002 and incorporated by reference.
N Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 2002.
O Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2003 and incorporated by reference.
68
P Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2003 and incorporated by reference.
Q Filed herewith.
(1) Compensatory Plan or Arrangement, or Management Contract.
(b) Reports on Form 8-K:
The Company filed or furnished the following reports on Form 8-K during
the quarterly period ended December 31, 2003:
Date of Report Item Reported
---------------- --------------------------------------------------------
October 23, 2003 Clarification of statement made during October 23, 2003
quarterly earnings conference call (filed Form 8-K).
October 23, 2003 Third quarter results September 30, 2003 and Regulation
FD disclosure (furnished Form 8-K).
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: James J. Maguire, Jr.
----------------------------------------------
James J. Maguire, Jr.
President and Chief Executive Officer
March 12, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
James J. Maguire, Jr. President & Chief Executive Officer, March 12, 2004
-------------------------------- (Principal Executive Officer)
James J. Maguire, Jr.
Craig P. Keller Executive Vice President, Secretary, March 12, 2004
-------------------------------- Treasurer, and Chief Financial Officer
Craig P. Keller (Principal Financial and
Accounting Officer)
March 12, 2004
James J. Maguire Chairman of the Board of
-------------------------------- Directors
James J. Maguire
March 12, 2004
Sean S. Sweeney Executive Vice President, Director
--------------------------------
Sean S. Sweeney
March 12, 2004
Michael J. Cascio Director
--------------------------------
Michael J. Cascio
March 12, 2004
Elizabeth H. Gemmill Director
--------------------------------
Elizabeth H. Gemmill
March 12, 2004
William J. Henrich, Jr. Director
--------------------------------
William J. Henrich, Jr.
March 12, 2004
Paul R. Hertel, Jr. Director
--------------------------------
Paul R. Hertel, Jr.
March 12, 2004
Director
--------------------------------
Margaret M. Mattix
March 12, 2004
Maureen H. McCullough Director
--------------------------------
Maureen H. McCullough
March 12, 2004
Michael J. Morris Director
--------------------------------
Michael J. Morris
March 12, 2004
Donald A. Pizer Director
--------------------------------
Donald A. Pizer
70
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
March 12, 2004
Dirk A. Stuurop Director
--------------------------------
Dirk A. Stuurop
March 12, 2004
J. Eustace Wolfington Director
--------------------------------
J. Eustace Wolfington
71
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule I - Summary of Investments - Other than Investments in Related Parties
As of December 31, 2003
(Dollars in Thousands)
COLUMN A COLUMN B COLUMN C COLUMN D
Estimated Amount at which
Market shown in the
Type of Investment Cost * Value Balance Sheet
------------------ ------------ ------------ ---------------
Fixed Maturities:
Bonds:
United States Government and Government Agencies and
Authorities $ 210,640 $ 214,447 $ 214,447
States, Municipalities and Political Subdivisions 476,762 488,976 488,976
Public Utilities 26,747 27,461 27,461
All Other Corporate Bonds 349,207 347,511 347,511
Redeemable Preferred Stock 3,167 3,299 3,299
------------ ------------ ------------
Total Fixed Maturities 1,066,523 1,081,694 1,081,694
------------ ------------ ------------
Equity Securities:
Common Stocks:
Public Utilities 217 276 276
Banks, Trust and Insurance Companies 20,589 23,749 23,749
Industrial, Miscellaneous and all other 55,854 63,060 63,060
Non-redeemable Preferred Stocks 3,153 3,273 3,273
------------ ------------ ------------
Total Equity Securities 79,813 90,358 90,358
------------ ------------ ------------
Total Investments $ 1,146,336 $ 1,172,052 $ 1,172,052
============ ============ ============
* Original cost of equity securities; original cost of fixed maturities
adjusted for amortization of premiums and accretion of discounts. All
amounts are shown net of impairment losses.
S-1
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II
Condensed Financial Information of Registrant
(Parent Only)
Balance Sheets
(In Thousands, Except Share Data)
As of December 31,
--------------------------
2003 2002
---- ----
ASSETS
Cash and Cash Equivalents $ 125 $ 124
Equity in and Advances to Unconsolidated Subsidiaries (a) 545,319 479,560
Other Assets 1 1
---------- ----------
Total Assets $ 545,445 $ 479,685
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Income Taxes Payable $ 1,282 $ 1,247
Other Liabilities 427 615
---------- ----------
Total Liabilities 1,709 1,862
---------- ----------
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, 22,007,552 and 21,868,877 Shares
Issued and Outstanding 281,088 276,945
Notes Receivable from Shareholders (5,444) (6,407)
Accumulated Other Comprehensive Income 16,715 16,185
Retained Earnings 251,377 191,100
---------- ----------
543,736 477,823
---------- ----------
Total Liabilities and Shareholders' Equity $ 545,445 $ 479,685
========== ==========
(a) This item has been eliminated in the Company's Consolidated Financial
Statements.
See Notes to Consolidated Financial Statements included in Item 8, pages 44-63.
S-2
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II, Continued
Condensed Financial Information of Registrant
(Parent Only)
Statements of Operations
(In Thousands)
For the Years Ended December 31,
----------------------------------------
2003 2002 2001
---- ---- ----
Revenue:
Dividends from Subsidiaries (a) $ 61,348 $ 27,804 $ 21,074
---------- ---------- ----------
Total Revenue 61,348 27,804 21,074
---------- ---------- ----------
Other Expenses 778 1,062 1,248
---------- ---------- ----------
Total Expenses 778 1,062 1,248
---------- ---------- ----------
Minority Interest: Distributions on Company
Mandatorily Redeemable Preferred Securities of Subsidiary Trust - - 2,749
---------- ---------- ----------
Income, Before Income Taxes and Equity in Earnings of
Unconsolidated Subsidiaries 60,570 26,742 17,077
Income Tax Benefit (272) (372) (1,399)
---------- ---------- ----------
Income, Before Equity in Earnings of Unconsolidated
Subsidiaries 60,842 27,114 18,476
Equity in Earnings of Unconsolidated Subsidiaries (565) 8,891 12,083
---------- ---------- ----------
Net Income $ 60,277 $ 36,005 $ 30,559
========== ========== ==========
(a) This item has been eliminated in the Company's Consolidated Financial
Statements.
See Notes to Consolidated Financial Statements included in Item 8, pages 44-63.
S-3
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II, Continued
Condensed Financial Information of Registrant
(Parent Only)
Statements of Cash Flows
(In Thousands)
For the Years Ended December 31,
----------------------------------------
2003 2002 2001
---- ---- ----
Cash Flows From Operating Activities:
Net Income $ 60,277 $ 36,005 $ 30,559
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Equity in Earnings of Unconsolidated Subsidiaries 565 (8,891) (12,083)
Change in Other Liabilities (188) 39 (611)
Change in Other Assets - - 3
Change in Income Taxes Payable 35 1,936 (20,911)
Tax Benefit from Exercise of Employee Stock Options 889 1,251 25,799
---------- ---------- ----------
Net Cash Provided by Operating Activities 61,578 30,340 22,756
---------- ---------- ----------
Cash Flows Used by Investing Activities:
Net Transfers to Subsidiaries (a) (65,794) (34,367) (119,679)
---------- ---------- ----------
Net Cash Used by Investing Activities (65,794) (34,367) (119,679)
---------- ---------- ----------
Cash Flows From Financing Activities:
Net Proceeds From Public Offering of Common Stock - - 114,518
Repayments on Loans Payable - - (22,000)
Proceeds from Exercise of Employee Stock Options 2,057 864 3,041
Proceeds from Collection of Notes Receivable 2,028 983 1,072
Proceeds from Shares Issued Pursuant to Stock Purchase Plans 432 4,327 46
Cost of Common Stock Repurchased (300) (2,023) -
---------- ---------- ----------
Net Cash Provided by Financing Activities 4,217 4,151 96,677
---------- ---------- ----------
Net Increase (Decrease) in Cash and Equivalents 1 124 (246)
Cash and Cash Equivalents at Beginning of Year 124 - 246
---------- ---------- ----------
Cash and Cash Equivalents at End of Year $ 125 $ 124 $ -
========== ========== ==========
Cash Dividends Received From Unconsolidated Subsidiaries $ 61,348 $ 27,804 $ 21,074
========== ========== ==========
Non-Cash Transactions:
Issuance of Shares Pursuant to Employee Stock Purchase Plan in exchange
for Notes Receivable $ 1,065 $ 4,017 $ 2,158
(a) This item has been eliminated in the Company's Consolidated Financial
Statements.
See Notes to Consolidated Financial Statements included in Item 8, pages 44-63.
S-4
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule III - Supplementary Insurance Information
As of and For the Year Ended December 31, 2003, 2002 and 2001
(In Thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN COLUMN F
Future
Policy
Deferred Benefits, Other Policy
Policy Losses, Claims and
Acquisition Claims and Unearned Benefits Premium
Segment Costs Loss Expenses Premiums Payable Revenue
------- ------------ ------------- -------- ------------ ---------
2003:
Commercial Lines $ - $ 477,483 $ 309,596 $ 428,063
Specialty Lines - 136,000 71,743 109,206
Personal Lines - 13,603 41,250 34,310
Corporate 56,288 - - -
--------- --------- --------- ---------
Total $ 56,288 $ 627,086 $ 422,589 $ 571,579
========= ========= ========= =========
2002:
Commercial Lines $ - $ 337,791 $ 214,021 $ 300,057
Specialty Lines - 96,837 55,251 85,672
Personal Lines - 10,920 36,821 35,457
Corporate 61,272 - - -
--------- --------- --------- ---------
Total $ 61,272 $ 445,548 $ 306,093 $ 421,186
========= ========= ========= =========
2001:
Commercial Lines $ - $ 212,134 $ 124,522 $ 189,835
Specialty Lines - 82,735 39,725 68,156
Personal Lines - 7,864 33,592 38,102
Corporate 41,526 - - -
--------- --------- --------- ---------
Total $ 41,526 $ 302,733 $ 197,839 $ 296,093
========= ========= ========= =========
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
Benefits, Amortization
Claims, of Deferred
Net Losses, and Policy Other
Investment Settlement Acquisition Operating Premiums
Segment Income Expenses Costs Expenses Written
------- ---------- ----------- ------------ --------- ---------
2003:
Commercial Lines $ - $ 273,487 $ - $ - $ 460,382
Specialty Lines - 65,075 - - 108,308
Personal Lines - 20,615 - - 30,671
Corporate 38,806 - 109,888 53,024 -
--------- --------- --------- --------- ---------
Total $ 38,806 $ 359,177 $ 109,888 $ 53,024 $ 599,361
========= ========= ========= ========= =========
2002:
Commercial Lines $ - $ 202,604 $ - $ - $ 384,060
Specialty Lines - 43,310 - - 101,618
Personal Lines - 21,519 - - 37,493
Corporate 37,516 - 108,097 21,821 -
--------- --------- --------- --------- ---------
Total $ 37,516 $ 267,433 $ 108,097 $ 21,821 $ 523,171
========= ========= ========= ========= =========
2001:
Commercial Lines $ - $ 117,429 $ - $ - $ 223,700
Specialty Lines - 42,840 - - 69,772
Personal Lines - 19,386 - - 40,345
Corporate 32,426 - 80,239 16,781 -
--------- --------- --------- --------- ---------
Total $ 32,426 $ 179,655 $ 80,239 $ 16,781 $ 333,817
========= ========= ========= ========= =========
S-5
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule IV - Reinsurance
Earned Premiums
For the Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------- -------- -------- -------- --------
Ceded to Other Assumed from Percentage of Amount
Gross Amount Companies Other Companies Net Amount Assumed to Net
------------ -------------- --------------- ----------- --------------------
2003
Property and Casualty Insurance $ 784,445 $ 217,919 $ 5,053 $ 571,579 0.9%
============ ============== =============== =========== ====
2002
Property and Casualty Insurance $ 550,443 $ 134,299 $ 5,042 $ 421,186 1.2%
============ ============== =============== =========== ====
2001
Property and Casualty Insurance $ 409,814 $ 124,970 $ 11,249 $ 296,093 3.8%
============ ============== =============== =========== ====
S-6
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule VI - Supplemental Information Concerning
Property - Casualty Insurance Operations
As of and For the Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands)
Reserve for
Deferred Unpaid Claims
Policy and Claim Discount if Net Net
Affiliation with Acquisition Adjustment any deducted Unearned Earned Investment
Registrant Costs Expenses in Column C Premiums Premiums Income
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
Consolidated Property -
Casualty Entities
December 31, 2003 $ 56,288 $ 627,086 $ 0 $ 422,589 $571,579 $ 38,806
December 31, 2002 $ 61,272 $ 445,548 $ 0 $ 306,093 $421,186 $ 37,516
December 31, 2001 $ 41,526 $ 302,733 $ 0 $ 197,839 $296,093 $ 32,426
Claims and Claims Adjustment
Expenses Incurred Related to
Paid Claims
and
(1) (2) Amortization of Claim
Affiliation with Current Prior deferred policy Adjustment Net Written
Registrant Year Year acquisition costs Expenses Premiums
COLUMN A COLUMN H COLUMN I COLUMN J COLUMN K
Consolidated Property -
Casualty Entities
December 31, 2003 $ 314,609 $ 44,568 $ 109,888 $ 237,393 $599,361
December 31, 2002 $ 239,834 $ 27,599 $ 108,097 $ 157,856 $523,171
December 31, 2001 $ 166,220 $ 13,435 $ 80,239 $ 124,985 $333,817
S-7
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Exhibit Index
For the Year Ended December 31, 2003
Exhibit No. Description
- ----------- -----------
10.59 Casualty Semi-Automatic Excess of Loss Reinsurance Contract
with Endurance Specialty Insurance, Ltd. effective March 1,
2003 RE: Philadelphia Insurance Company Master Policy
PHUB015555 and Philadelphia Indemnity Insurance Company Master
Policy PHUB015555-01.
10.60 Casualty Semi-Automatic Excess of Loss Reinsurance Contract
with Endurance Specialty Insurance, Ltd. effective March 1,
2003 RE: Philadelphia Insurance Company Master Policy
PHUB015557 and Philadelphia Indemnity Insurance Company Master
Policy PHUB015557-01.
10.61 Non Florida Commercial Excess Catastrophe Reinsurance Contract
with the Subscribing Reinsurer (s) Executing the Interests and
Liabilities Agreement (s) effective June 1, 2003.
10.62 Florida Commercial Excess Catastrophe Reinsurance Contract
with the Subscribing Reinsurer (s) Executing the Interests and
Liabilities Agreement (s) effective June 1, 2003.
10.63 Excess Catastrophe Reinsurance Contract with Federal Insurance
Company through Chubb Re, Inc. effective June 1, 2003.
10.64 Whole Account Net Quota Share Reinsurance Contract with
Federal Insurance Company through Chubb Re, Inc. and Swiss
Reinsurance America Corporation effective April 1, 2003.
11 Statement regarding computation of earnings per share.
21 List of Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney
31.1 Certification of the Company's chief executive officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Company's chief financial officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 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.
32.2 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.
99.1 Report of Independent Auditors of PricewaterhouseCoopers LLP
on Financial Statement Schedules.