1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2000 COMMISSION FILE NUMBER 0-22280 PHILADELPHIA CONSOLIDATED HOLDING CORP. --------------------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2202671 ------------ ---------- (State of Incorporation) (IRS Employer Identification No.) ONE BALA PLAZA, SUITE 100 BALA CYNWYD, PENNSYLVANIA 19004 (610) 617-7900 ------------------------------------------- (Address, including zip code and telephone number, including area code, of registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of August 3, 2000. Common Stock, no par value, 11,935,162 shares outstanding, 2 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES INDEX FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 Part I - Financial Information Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 3 Consolidated Statements of Operations and Comprehensive Income - For the three and six months ended June 30, 2000 and 1999 4 Consolidated Statements of Changes in Shareholders' Equity - For the six months ended June 30, 2000 and year ended December 31, 1999 5 Consolidated Statements of Cash Flows - For the six months ended June 30, 2000 and 1999 6 Notes to Consolidated Financial Statements 7-9 Management's Discussion and Analysis of Results of Operations and Financial Condition 10-14 Part II - Other Information 15 Signatures 16 Exhibits 17 2 3 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (Unaudited) As of ------------------------- June 30, December 31, 2000 1999 --------- ----------- ASSETS INVESTMENTS: FIXED MATURITIES AVAILABLE FOR SALE AT MARKET (AMORTIZED COST $351,751 AND $331,774) .................... $ 341,664 $ 321,018 EQUITY SECURITIES AT MARKET (COST $47,390 AND $41,231) ...... 81,718 72,768 --------- --------- TOTAL INVESTMENTS ....................................... 423,382 393,786 CASH AND CASH EQUIVALENTS ................................... 18,589 26,230 ACCRUED INVESTMENT INCOME ................................... 5,347 5,027 PREMIUMS RECEIVABLE ......................................... 55,369 49,176 PREPAID REINSURANCE PREMIUMS AND REINSURANCE RECEIVABLES ............................................... 66,777 54,920 DEFERRED ACQUISITION COSTS .................................. 30,227 26,054 PROPERTY AND EQUIPMENT ...................................... 10,150 9,277 GOODWILL LESS ACCUMULATED AMORTIZATION OF $3,366 AND $2,620.. 28,055 28,801 OTHER ASSETS ................................................ 5,921 5,780 --------- --------- TOTAL ASSETS .......................................... $ 643,817 $ 599,051 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY POLICY LIABILITIES AND ACCRUALS: UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES .................... $ 210,373 $ 188,063 UNEARNED PREMIUMS ........................................... 127,106 111,606 --------- --------- TOTAL POLICY LIABILITIES AND ACCRUALS ................... 337,479 299,669 PREMIUMS PAYABLE ............................................ 23,179 22,223 OTHER LIABILITIES ........................................... 14,649 14,762 DEFERRED INCOME TAXES ....................................... 1,339 2,052 --------- --------- TOTAL LIABILITIES ..................................... 376,646 338,706 --------- --------- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES: COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY DEBENTURES OF COMPANY .................................................. 98,905 98,905 --------- --------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: PREFERRED STOCK, $.01 PAR VALUE, 10,000,000 SHARES AUTHORIZED, NONE ISSUED AND OUTSTANDING ............................... COMMON STOCK, NO PAR VALUE, 50,000,000 SHARES AUTHORIZED, 13,381,924 SHARES ISSUED..................................................... 68,745 68,859 NOTES RECEIVABLE FROM SHAREHOLDERS .......................... (1,864) (2,506) ACCUMULATED OTHER COMPREHENSIVE INCOME ...................... 15,757 13,507 RETAINED EARNINGS ........................................... 105,233 93,766 LESS COST OF COMMON STOCK HELD IN TREASURY, 1,287,622 AND 791,016 SHARES .............................. (19,605) (12,186) --------- --------- TOTAL SHAREHOLDERS' EQUITY .............................. 168,266 161,440 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............. $ 643,817 $ 599,051 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. 3 4 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (Unaudited) For the Three Months For the Six Months Ended June 30, Ended June 30, ------------------------------ ------------------------------ 2000 1999 2000 1999 ------------ ------------ ------------ ------------ REVENUE: NET WRITTEN PREMIUMS .............................. $ 59,684 $ 45,482 $ 117,812 $ 88,287 CHANGE IN NET UNEARNED PREMIUMS (INCREASE) ..................................... (5,393) (6,329) (14,894) (12,370) ------------ ------------ ------------ ------------ NET EARNED PREMIUMS ............................... 54,291 39,153 102,918 75,917 NET INVESTMENT INCOME ............................. 5,832 4,996 12,096 9,850 NET REALIZED INVESTMENT GAIN ...................... 389 5,683 482 5,193 OTHER INCOME ...................................... 2,532 5,257 ------------ ------------ ------------ ------------ TOTAL REVENUE ................................... 63,044 49,832 120,753 90,960 ------------ ------------ ------------ ------------ LOSSES AND EXPENSES: LOSS AND LOSS ADJUSTMENT EXPENSES ................. 37,895 24,981 78,141 47,496 NET REINSURANCE RECOVERIES ........................ (5,922) (3,366) (17,928) (5,619) ------------ ------------ ------------ ------------ NET LOSS AND LOSS ADJUSTMENT EXPENSES ............. 31,973 21,615 60,213 41,877 ACQUISITION COSTS AND OTHER UNDERWRITING EXPENSES ........................ 17,317 12,087 34,036 23,864 OTHER OPERATING EXPENSES .......................... 3,431 777 6,241 1,296 ------------ ------------ ------------ ------------ TOTAL LOSSES AND EXPENSES ....................... 52,721 34,479 100,490 67,037 ------------ ------------ ------------ ------------ MINORITY INTEREST: DISTRIBUTIONS ON COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST .. 1,812 1,812 3,623 3,623 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES ........................... 8,511 13,541 16,640 20,300 ------------ ------------ ------------ ------------ INCOME TAX EXPENSE (BENEFIT): CURRENT ........................................... 4,402 4,418 7,067 6,463 DEFERRED .......................................... (1,693) (117) (1,894) (340) ------------ ------------ ------------ ------------ TOTAL INCOME TAX EXPENSE ........................ 2,709 4,301 5,173 6,123 ------------ ------------ ------------ ------------ NET INCOME ...................................... $ 5,802 $ 9,240 $ 11,467 $ 14,177 ============ ============ ============ ============ OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: HOLDING GAIN (LOSS) ARISING DURING PERIOD .......... (91) (3,849) 2,563 (4,612) RECLASSIFICATION ADJUSTMENT ....................... (253) (3,694) (313) (3,375) ------------ ------------ ------------ ------------ OTHER COMPREHENSIVE INCOME (LOSS) ................. (344) (7,543) 2,250 (7,987) ------------ ------------ ------------ ------------ COMPREHENSIVE INCOME ................................. $ 5,458 $ 1,697 $ 13,717 $ 6,190 ============ ============ ============ ============ PER AVERAGE SHARE DATA: BASIC EARNINGS PER SHARE .......................... $ 0.48 $ 0.76 $ 0.94 $ 1.16 ============ ============ ============ ============ DILUTED EARNINGS PER SHARE ........................ $ 0.39 $ 0.61 $ 0.78 $ 0.94 ============ ============ ============ ============ WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING ....................................... 12,122,135 12,236,221 12,224,966 12,222,880 WEIGHTED-AVERAGE SHARE EQUIVALENTS OUTSTANDING ....................................... 2,581,779 2,863,849 2,533,853 2,845,212 ------------ ------------ ------------ ------------ WEIGHTED-AVERAGE SHARES AND SHARE EQUIVALENTS OUTSTANDING ........................... 14,703,914 15,100,070 14,758,819 15,068,092 ============ ============ ============ ============ The accompanying notes are an integral part of the consolidated financial statements. 4 5 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA) (Unaudited) For the Six Months For the Year Ended Ended June 30, December 31, 2000 1999 --------- --------- COMMON STOCK: BALANCE AT BEGINNING OF PERIOD .............. $ 68,859 $ 44,796 ISSUANCE OF SHARES PURSUANT TO ACQUISITION AGREEMENT ................................. 25,000 ISSUANCE OF SHARES PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN ....................... (420) EXERCISE OF EMPLOYEE STOCK OPTIONS, NET OF TAX BENEFIT ............................... (116) (517) SHARES FORFEITED PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN ....................... 2 --------- --------- BALANCE AT END OF PERIOD ................ 68,745 68,859 ========= ========= NOTES RECEIVABLE FROM SHAREHOLDERS: BALANCE AT BEGINNING OF PERIOD .............. (2,506) (1,680) NOTES RECEIVABLE ISSUED PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN .............. (1,445) SHARES FORFEITED PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN ....................... 318 COLLECTION OF NOTES RECEIVABLE .............. 324 619 --------- --------- BALANCE AT END OF PERIOD ................ (1,864) (2,506) --------- --------- ACCUMULATED OTHER COMPREHENSIVE INCOME: BALANCE AT BEGINNING OF PERIOD ............ 13,507 22,417 OTHER COMPREHENSIVE INCOME, NET OF TAXES... 2,250 (8,910) --------- --------- BALANCE AT END OF PERIOD ................ 15,757 13,507 --------- --------- RETAINED EARNINGS: BALANCE AT BEGINNING OF PERIOD .............. 93,766 74,923 NET INCOME .................................. 11,467 18,843 --------- --------- BALANCE AT END OF PERIOD ................ 105,233 93,766 --------- --------- COMMON STOCK HELD IN TREASURY: BALANCE AT BEGINNING OF PERIOD .............. (12,186) (2,973) COMMON SHARES REPURCHASED ................... (7,333) (12,081) ISSUANCE OF SHARES PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN ....................... 1,893 ISSUANCE OF SHARES PURSUANT TO DIRECTOR STOCK PURCHASE PLAN ....................... 15 EXERCISE OF EMPLOYEE STOCK OPTIONS, NET OF TAX BENEFIT ............................... 219 975 SHARES FORFEITED PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN ............................. (320) --------- --------- BALANCE AT END OF PERIOD ................ (19,605) (12,186) --------- --------- TOTAL SHAREHOLDERS' EQUITY .............. $ 168,266 $ 161,440 ========= ========= The accompanying notes are an integral part of the consolidated financial statements. 5 6 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (Unaudited) For the Six Months Ended June 30, -------------------------------- 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME ........................................... $ 11,467 $ 14,177 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET REALIZED INVESTMENT GAIN ....................... (482) (5,193) DEPRECIATION AND AMORTIZATION EXPENSE .............. 1,894 1,150 DEFERRED INCOME TAX BENEFIT ........................ (1,894) (340) CHANGE IN PREMIUMS RECEIVABLE ...................... (6,193) (3,212) CHANGE IN OTHER RECEIVABLES ........................ (12,177) (6,096) CHANGE IN DEFERRED ACQUISITION COSTS ............... (4,173) (3,881) CHANGE IN OTHER ASSETS ............................. (141) (386) CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES ........................................... 22,310 10,850 CHANGE IN UNEARNED PREMIUMS ........................ 15,500 16,645 CHANGE IN OTHER LIABILITIES ........................ 844 1,788 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES ...... 26,955 25,502 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: PROCEEDS FROM SALES OF INVESTMENTS IN FIXED MATURITIES AVAILABLE FOR SALE .................... 42,156 57,901 PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED MATURITIES AVAILABLE FOR SALE .................... 14,745 17,850 PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY SECURITIES ....................................... 11,117 21,616 COST OF FIXED MATURITIES SECURITIES AVAILABLE FOR SALE ACQUIRED .................................... (78,090) (76,970) COST OF EQUITY SECURITIES ACQUIRED ................... (15,736) (13,274) PURCHASE OF PROPERTY AND EQUIPMENT ................... (1,897) (1,389) -------- -------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES.. (27,705) 5,734 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: EXERCISE OF EMPLOYEE STOCK OPTIONS, NET OF TAX BENEFIT ..................................... 103 373 ISSUANCE OF SHARES PURSUANT TO DIRECTOR STOCK PURCHASE PLAN .............................. 15 COLLECTION OF NOTES RECEIVABLE ....................... 324 310 PROCEEDS FROM SHARES PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN ....................... 24 COST OF COMMON STOCK REPURCHASED ..................... (7,333) -------- -------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (6,891) 707 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ..................................... (7,641) 31,943 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........ 26,230 31,573 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD .............. $ 18,589 $ 63,516 ======== ======== CASH PAID DURING THE PERIOD FOR: INCOME TAXES ......................................... $ 5,422 $ 3,334 NON-CASH FINANCING TRANSACTIONS: ISSUANCE OF SHARES (FORFEITURES) PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR NOTES RECEIVABLE ................................... $ (318) $ 489 The accompanying notes are an integral part of the consolidated financial statements. 6 7 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The consolidated financial statements as of and for the six months ended June 30, 2000 and 1999 are unaudited, but in the opinion of management, have been prepared on the same basis as the annual audited consolidated financial statements and reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the information set forth therein. The results of operations for the six months ended June 30, 2000 are not necessarily indicative of the operating results to be expected for the full year or any other period. Certain prior year amounts have been reclassified for comparative purposes. These financial statements should be read in conjunction with the financial statements and notes as of and for the year ended December 31, 1999 included in the Company's Annual Report on Form 10-K. 2. Acquisitions On July 16, 1999, Philadelphia Consolidated Holding Corp. (the "Company") closed on its acquisition of Liberty American Insurance Group, Inc. ("Liberty") for a purchase price of $45.0 million, and a contingent additional amount of up to $5.0 million based upon the future earnings for the acquired business. Of the purchase price, $20.0 million was paid in cash and the balance in 1,037,772 shares of common stock of the Company. Any contingent additional amount will be paid in cash. The acquisition is being accounted for using the purchase method of accounting. 3. Goodwill Goodwill resulting from the acquisition of Liberty amounted to $29.2 million. This amount represents the excess of acquisition costs over the fair value of net assets acquired. Goodwill is being amortized on a straight-line basis over 20 years. 4. Earnings Per Share Earnings per common share has been calculated by dividing net income for the period by the weighted average number of common shares and common share equivalents outstanding during the period. 5. Income Taxes The effective tax rate differs from the 35% marginal tax rate principally as a result of interest exempt from tax, the dividend received deduction and other differences in the recognition of revenues and expenses for tax and financial reporting purposes. 6. 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 six and three months ended June 30, 2000 and 1999 was $1.4 million and ($2.5) million respectively, and ($.1) million and ($2.1) million respectively. The related tax effect of Reclassification Adjustments for the six and three months ended June 30, 2000 and 1999 was ($.2) million and ($1.8) million respectively, and ($.1) million and ($2.0) million respectively. 7. Segment Information The Company has divided its operations into three reportable segments: The Commercial Lines Underwriting Group which has underwriting responsibility for the Commercial Automobile, 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 7 8 which designs, markets and underwrites personal property and casualty insurance products for the Manufactured Housing and Homeowners markets. Effective this quarter, due to a change in market focus, the previously reported Specialty Property Underwriting Group segment was restructured resulting in the combination of this Underwriting Group with the Commercial Lines Underwriting Group. Accordingly, prior information has been reclassified to reflect this change. The reportable segments operate solely within the United States. The segments follow the same accounting policies used for the Company's consolidated financial statements. Management evaluates a segment's performance based upon underwriting results. Following is a tabulation of business segment information for the six and three months ended June 30, 2000 and 1999. Corporate information is included to reconcile segment data to the consolidated financial statements (in thousands): Six Months Ended, ------------------------------------------------------------------- Commercial Specialty Personal Lines Lines Lines Corporate Total ------------------------------------------------------------------- June 30, 2000: Gross Written Premiums $ 103,861 $ 33,598 $ 29,530 $ 166,989 ------------------------------------------------------------------- Net Written Premiums $ 66,648 $ 34,668 $ 16,496 $ 117,812 ------------------------------------------------------------------- Revenue: Net Earned Premiums $ 64,473 $ 25,348 $ 13,097 $ 102,918 Net Investment Income 12,096 12,096 Net Realized Investment Gain (Loss) 482 482 Other Income 10,802 (5,545) 5,257 ------------------------------------------------------------------- Total Revenue 64,473 25,348 23,899 7,033 120,753 ------------------------------------------------------------------- Losses and Expenses: Net Loss and Loss Adjustment Expenses 37,576 15,892 6,745 60,213 Acquisition Costs and Other Underwriting Expenses 4,430 29,606 34,036 Other Operating Expenses 7,988 (1,747) 6,241 ------------------------------------------------------------------- Total Losses and Expenses 37,576 15,892 19,163 27,859 100,490 ------------------------------------------------------------------- Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust 3,623 3,623 ------------------------------------------------------------------- Income Before Income Taxes 26,897 9,456 4,736 (24,449) 16,640 Total Income Tax Expense 5,173 5,173 ------------------------------------------------------------------- Net Income $ 26,897 $ 9,456 $ 4,736 $ (29,622) $ 11,467 =================================================================== Total Assets $ 138,259 $ 505,558 $ 643,817 =================================================================== June 30, 1999: Gross Written Premiums $ 93,028 $ 22,562 $ 5,493 $ 121,083 ------------------------------------------------------------------- Net Written Premiums $ 64,408 $ 18,935 $ 4,944 $ 88,287 ------------------------------------------------------------------- Revenue: Net Earned Premiums $ 58,809 $ 14,772 $ 2,336 $ 75,917 Net Investment Income 9,850 9,850 Net Realized Investment Gain 5,193 5,193 ------------------------------------------------------------------- Total Revenue 58,809 14,772 2,336 15,043 90,960 ------------------------------------------------------------------- Losses and Expenses: Net Loss and Loss Adjustment Expenses 32,334 8,340 1,203 41,877 Acquisition Costs and Other Underwriting Expenses 23,864 23,864 Other Operating Expenses 1,296 1,296 ------------------------------------------------------------------- Total Losses and Expenses 32,334 8,340 1,203 25,160 67,037 ------------------------------------------------------------------- Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust 3,623 3,623 ------------------------------------------------------------------- Income Before Income Taxes 26,475 6,432 1,133 (13,740) 20,300 Total Income Tax Expense 6,123 6,123 ------------------------------------------------------------------- Net Income $ 26,475 $ 6,432 $ 1,133 $ (19,863) $ 14,177 =================================================================== Total Assets $ 509,557 $ 509,557 =================================================================== 8 9 Three Months Ended, ------------------------------------------------------------------- Commercial Specialty Personal Lines Lines Lines Corporate Total ------------------------------------------------------------------- June 30, 2000: Gross Written Premiums $ 59,091 $ 17,367 $ 13,385 $ 89,843 ------------------------------------------------------------------- Net Written Premiums $ 37,755 $ 16,602 $ 5,327 $ 59,684 ------------------------------------------------------------------- Revenue: Net Earned Premiums $ 33,845 $ 13,627 $ 6,819 $ 54,291 Net Investment Income 5,832 5,832 Net Realized Investment Gain (Loss) 389 389 Other Income 7,113 (4,581) 2,532 ------------------------------------------------------------------- Total Revenue 33,845 13,627 13,932 1,640 63,044 ------------------------------------------------------------------- Losses and Expenses: Net Loss and Loss Adjustment Expenses 19,943 8,534 3,496 31,973 Acquisition Costs and Other Underwriting Expenses 2,684 14,633 17,317 Other Operating Expenses 5,703 (2,272) 3,431 ------------------------------------------------------------------- Total Losses and Expenses 19,943 8,534 11,883 12,361 52,721 ------------------------------------------------------------------- Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust 1,812 1,812 ------------------------------------------------------------------- Income Before Income Taxes 13,902 5,093 2,049 (12,533) 8,511 Total Income Tax Expense 2,709 2,709 ------------------------------------------------------------------- Net Income $ 13,902 $ 5,093 $ 2,049 $ (15,242) $ 5,802 =================================================================== Total Assets $ 138,259 $ 505,558 $ 643,817 =================================================================== June 30, 1999: Gross Written Premiums $ 47,861 $ 11,648 $ 3,484 $ 62,993 ------------------------------------------------------------------- Net Written Premiums $ 32,429 $ 9,844 $ 3,209 $ 45,482 ------------------------------------------------------------------- Revenue: Net Earned Premiums $ 30,256 $ 7,490 $ 1,407 $ 39,153 Net Investment Income 4,996 4,996 Net Realized Investment Gain 5,683 5,683 ------------------------------------------------------------------- Total Revenue 30,256 7,490 1,407 10,679 49,832 ------------------------------------------------------------------- Losses and Expenses: Net Loss and Loss Adjustment Expenses 16,671 4,219 725 21,615 Acquisition Costs and Other Underwriting Expenses 12,087 12,087 Other Operating Expenses 777 777 ------------------------------------------------------------------- Total Losses and Expenses 16,671 4,219 725 12,864 34,479 ------------------------------------------------------------------- Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust 1,812 1,812 ------------------------------------------------------------------- Income Before Income Taxes 13,585 3,271 682 (3,997) 13,541 Total Income Tax Expense 4,301 4,301 ------------------------------------------------------------------- Net Income $ 13,585 $ 3,271 $ 682 $ (8,298) $ 9,240 =================================================================== Total Assets $ 509,557 $ 509,557 =================================================================== 9 10 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL Although the Company's financial performance is dependent upon its own specific business characteristics, certain risk factors can affect the profitability of the Company. These include: - Industry factors - Historically the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical patterns of soft markets followed by hard markets. In the current environment, insurance industry pricing in general continues to be soft; however, the Company's strategy is to focus on underwriting profits and accordingly the Company's marketing organization is being directed into those niche businesses that exhibit the greatest potential for underwriting profits. - Competition - The Company competes in the property and casualty business with other domestic and international insurers having greater financial and other resources than the Company. - Regulation - The Company's insurance subsidiaries are subject to a substantial degree of regulatory oversight, which generally is designed to protect the interests of policyholders, as opposed to shareholders. - Inflation - Property and casualty insurance premiums are established before the amount of losses and loss adjustment expenses, or the extent to which inflation may effect such amounts is known. - Investment Risk - Substantial future increases in interest rates could result in a decline in the market value of the Company's investment portfolio and resulting losses and/or reduction in shareholders' equity. - Catastrophe Exposure - The Company's insurance subsidiaries issue insurance policies which provide coverage for commercial and personal property and casualty risks. It is possible that a catastrophic event could greatly increase claims under these insurance policies. RESULTS OF OPERATIONS (SIX MONTHS ENDED JUNE 30, 2000 VS JUNE 30, 1999) Premiums: Gross written premiums grew $45.9 million (37.9%) to $167.0 million for the six months ended June 30, 2000 from $121.1 million for the same period of 1999; gross earned premiums grew $46.9 million (44.8%) to $151.7 million for the six months ended June 30, 2000 from $104.8 million for the same period of 1999; net written premiums increased $29.5 million (33.4%) to $117.8 million for the six months ended June 30, 2000 from $88.3 million for the same period of 1999; and net earned premiums grew $27.0 million (35.6%) to $102.9 million in 2000 from $75.9 million in 1999. The respective gross written and net written premium increases for commercial lines and specialty lines products for the six months ended June 30, 2000 vs. 1999 amount to $11.6 million and $7.1 million for commercial lines products, and $11.0 million and $15.7 million for specialty lines products. Overall premium growth in the commercial lines segment has been offset in part by the Company's decision not to renew certain policies in the commercial automobile and specialty property niches due to inadequate pricing levels being experienced as a result of market conditions and/or loss experience emerging at higher than expected levels. The overall growth in premiums are attributable to a number of factors: - - The acquisition of Liberty, resulting in an increase of $24.0 million and $11.6 million in gross and net manufactured housing, preferred homeowners and National Flood Insurance Program written premiums, respectively. - - Displacement of agency relationships in the marketplace due to the consolidation of certain competitor property and casualty insurance companies resulting in additional prospects and business. - - Recent rating agency downgrades of certain property and casualty insurance companies resulting in their diminished presence in the company's product niches resulting in additional prospects and business. 10 11 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - - Continued expansion of marketing efforts relating to commercial lines and specialty lines products through the Company's field organization and preferred agents. - - Modest pricing increases on select casualty renewal business. Net Investment Income: Net investment income approximated $12.1 million for the six months ended June 30, 2000 and $9.9 million for the same period of 1999. Total investments grew to $423.4 million at June 30, 2000 from $349.6 million at June 30, 1999. The growth in investment income is due to investing net cash flows provided from operating activities, the reinvesting of the net proceeds from equity security sales in fixed maturity securities, and the net investable assets acquired in the Company's acquisition of Liberty. Net Realized Investment Gain: Net realized investment gains were $0.5 million for the six months ended June 30, 2000 and $5.2 million for the same period in 1999. During the quarter ended June 30, 1999 the Company sold certain fixed maturity and equity investments which resulted in net realized gains of $5.7 million. The proceeds from these sales were utilized for the cash purchase price and repayment of certain obligations at the July 16, 1999 closing of the Liberty acquisition. The remaining proceeds were invested in fixed maturity securities in order to lessen the Company's holdings in certain common stock positions and increase current investment income. Other Income: Other income approximated $5.3 million for the six months ended June 30, 2000 and $0.0 for the same period of 1999. This increase is primarily attributed to commissions earned on personal lines brokered business arising from the acquisition of Liberty. Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $18.3 million (43.7%) to $60.2 million for the six months ended June 30, 2000 from $41.9 million for the same period of 1999 and the loss ratio increased to 58.5% in 2000 from 55.2% in 1999. The increase in net loss and loss adjustment expenses was due principally to the 35.6% growth in net earned premiums and in part to the relative growth in the professional liability and specialty property product lines which incur higher relative loss experience. Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $10.1 million (42.3%) to $34.0 million for the six months ended June 30, 2000 from $23.9 million for the same period of 1999. This increase was due primarily to the 35.6% growth in net earned premiums and in part to the higher acquisition costs as a result of the relative changes in the Company's product and associated distribution channel mix (see Results of Operations "Premiums"). Other Operating Expenses: Other operating expenses increased $4.9 million to $6.2 million for the six months ended June 30, 2000 from $1.3 million for the same period of 1999. The increase in other operating expenses was primarily due to the operating expenses of the Company's brokered personal lines business ($3.9 million), and goodwill amortization ($.8 million), both arising from the acquisition of Liberty. Income Tax Expense: The Company's effective tax rate for the six months ended June 30, 2000 and 1999 was 31.1% and 30.2%, respectively. The effective rates differed from the 35% statutory rate principally due to investments in tax-exempt securities offset in part by non-deductible goodwill amortization. The increase in the effective tax rate is principally due to a greater investment of cash flows in taxable securities relative to tax-exempt securities. RESULTS OF OPERATIONS (THREE MONTHS ENDED JUNE 30, 2000 VS JUNE 30, 1999) Premiums: Gross written premiums grew $26.8 million (42.5%) to $89.8 million for the three months ended June 30, 2000 from $63.0 million for the same period of 1999; gross earned premiums grew $26.4 million (48.5%) to $80.8 million for the three months ended June 30, 2000 from $54.4 million for the same period of 1999; net written premiums increased $14.2 million (31.2%) to $59.7 million for the three months ended June 30, 2000 from $45.5 million for the same period of 1999; and net earned premiums grew $15.1 million (33.2%) to $54.3 million in 2000 from $39.2 million in 1999. 11 12 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The respective gross written and net written premium increases for commercial lines and specialty lines products for the three months ended June 30, 2000 vs. 1999 amount to $11.8 million and $8.3 million for commercial lines products, and $5.7 million and $6.8 million for specialty lines products. Overall premium growth in the commercial lines segment has been offset in part by the Company's decision not to renew certain policies in its commercial automobile and specialty property product niches due to inadequate pricing levels being experienced as a result of market conditions and/or loss experience emerging at higher than expected levels. The overall growth in premiums are attributable to a number of factors: - - The acquisition of Liberty, resulting in an increase of $9.9 million and $2.1 million in gross and net manufactured housing, preferred homeowners and National Flood Insurance Program written premiums, respectively. - - Displacement of agency relationships in the marketplace due to the consolidation of certain competitor property and casualty insurance companies resulting in additional prospects and business. - - Recent rating agency down grades of certain property and casualty insurance companies resulting in their diminished presence in the company's product niches resulting in additional prospects and business. - - Continued expansion of marketing efforts relating to commercial lines and specialty lines products through the Company's field organization and preferred agents. - - Modest pricing increases on select casualty renewal business. Net Investment Income: Net investment income approximated $5.8 million for the three months ended June 30, 2000 and $5.0 million for the same period of 1999. Total investments grew to $423.4 million at June 30, 2000 from $349.6 million at June 30, 1999. The growth in investment income is due to investing net cash flows provided from operating activities, the reinvesting of the proceeds from equity security sales in fixed maturity securities, and the net investable assets acquired in the Company's acquisition of Liberty. Net Realized Investment Gain: Net realized investment gains were $0.4 million for the three months ended June 30, 2000 and $5.7 million for the same period in 1999. During the quarter ended June 30, 1999 the Company sold certain fixed maturity and equity investments which resulted in net realized gains of $5.7 million. The proceeds from these sales were utilized for the cash purchase price and repayment of certain obligations at the July 16, 1999 closing of the Liberty acquisition. The remaining proceeds were invested in fixed maturity securities in order to increase current investment income and to lessen the Company's holdings in certain common stock positions. Other Income: Other income approximated $2.5 million for the three months ended June 30, 2000 and $0.0 for the same period of 1999. This increase is primarily attributed to commissions earned on personal lines brokered business arising from the acquisition of Liberty. Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $10.4 million (48.1%) to $32.0 million for the three months ended June 30, 2000 from $21.6 million for the same period of 1999 and the loss ratio increased to 58.9% in 2000 from 55.2% in 1999. The increase in net loss and loss adjustment expenses was due principally to the 33.2% growth in net earned premiums and in part to the relative growth in the professional liability product line which incurs higher relative loss experience. Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $5.2 million (43.0%) to $17.3 million for the three months ended June 30, 2000 from $12.1 million for the same period of 1999. This increase was due primarily to the 33.2% growth in net earned premiums and in part to the higher acquisition costs as a result of the relative changes in the Company's product and associated distribution channel mix (see Results of Operations "Premiums"). Other Operating Expenses: Other operating expenses increased $2.6 million to $3.4 million for the three months ended June 30, 2000 from $0.8 million for the same period of 1999. The increase in other operating expenses was primarily due to the operating expenses of the Company's brokered personal lines business ($2.0 million), and goodwill amortization ($0.4 million), both arising from the acquisition of Liberty. 12 13 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Income Tax Expense: The Company's effective tax rate for the three months ended June 30, 2000 and 1999 was 31.8% and 31.8%, respectively. The effective rates differed from the 35% statutory rate principally due to investments in tax-exempt securities offset in part by non-deductible goodwill amortization. LIQUIDITY AND CAPITAL RESOURCES For the six months ended June 30, 2000 the Company's investments experienced unrealized investment appreciation of $2.3 million, net of the related deferred tax expense of $1.2 million. At June 30, 2000, the Company had total investments with a carrying value of $423.4 million, of which 80.7% consisted of investments in investment grade fixed maturity securities, including U.S. treasury securities and obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, corporate debt securities, collateralized mortgage securities and asset backed securities. The collateralized mortgage securities and asset backed securities consist of short tranche securities possessing favorable pre-payment risk profiles. The remaining 19.3% of the Company's total investments consisted primarily of publicly traded common stock securities. At its July 20, 2000 meeting, the Company's Board of Directors authorized the repurchase of an additional $10.0 million of the Company's common stock. This authorization is in addition to the previously announced $30.0 million common stock buyback authorization. The purchases are made from time to time in the open market or through privately negotiated transactions. The Company purchased 806,400 shares of its common stock during the six months ended June 30, 2000 for $12.4 million under its stock buyback authorization. During the second quarter 2000, the Company extended the lease agreement for its headquarters office space through February 2008. The aggregate future minimum rental payments for the additional 5 year lease term approximate $6.0 million. The Company produced net cash from operations of $27.0 million and $25.5 million, respectively, for the six months ended June 30, 2000 and 1999. Management believes that the Company has adequate ability to pay all claims and meet all other cash needs. Risk-based capital is designed to measure the acceptable amount of capital an insurer should have based on the inherent specific risks of each insurer. Insurers failing to meet this benchmark capital level may be subject to scrutiny by the insurer's domiciliary insurance department and ultimately rehabilitation or liquidation. Based on the standards currently adopted, the Company's insurance subsidiaries' capital and surplus is in excess of the prescribed risk-based capital requirements. YEAR 2000 ISSUES Many existing computer programs use only two digits, instead of four, to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create incorrect results on or after the Year 2000. The "Year 2000" issue affects computer and information technology systems, as well as non-information technology systems which include embedded technology such as micro-processors and micro-controllers (or micro-chips) that have date sensitive programs that may not properly recognize the year 2000 or beyond. As of August 1, 2000 the Company has not experienced any Year 2000 issues with respect to either computer and information technology systems, or non-information technology systems. The Company issues professional liability coverage, including directors and officers liability, and commercial multi-peril insurance policies. Coverage under certain of these policies may cover losses suffered by insureds as a result of the Year 2000 issues. Professional liability policies are written on a "claim made and reported" basis. Since early 1997 approximately 50% of these policies have included a Year 2000 exclusion endorsement. The Company includes a Year 2000 exclusion endorsement on virtually all new or renewing professional liability policies providing coverage effective January 1, 1999 and thereafter. On occasion, for 13 14 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION qualifying accounts, the Company's underwriters may remove the exclusion after receipt and review of a satisfactory supplemental application (which includes a warranty statement) and other underwriting information. With respect to commercial multi-peril policies, the Company believes that it should not be held liable for claims arising from the Year 2000 issue under comprehensive general liability policies. However, the Company cannot determine whether or to what extent courts may find liability for such claims. Additionally, expenses could be incurred to contest Year 2000 issue coverage claims, even if the Company prevails in its position. As a result, it cannot presently be determined what, if any, insurance exposure ultimately exists for Year 2000 issue claims. However, no Year 2000 issue claims have been reported to the Company as of August 1, 2000. There can be no assurance that such Year 2000 issues will not materially adversely affect the Company. 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, the impact of Year 2000 issues, 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) catastrophe losses; and (vi) the impact of Year 2000 issues, including the matters referred to above. 14 15 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities and Use of Proceeds Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders At the Company's annual meeting of shareholders held on May 4, 2000, the following members were elected to the Board of Directors: Votes For Votes Withheld --------- -------------- William J. Henrich, Jr. 7,461,515 3,700 Paul R. Hertel, Jr. 7,461,515 3,700 Roger L. Larson 7,461,515 3,700 James J. Maguire 7,461,515 3,700 James J. Maguire, Jr. 7,461,515 3,700 Thomas J. McHugh 7,461,515 3,700 Michael J. Morris 7,461,515 3,700 Dirk A. Stuurop 7,461,515 3,700 Sean S. Sweeney 7,461,515 3,700 J. Eustace Wolfington 7,461,515 3,700 The following other matters were approved at the Annual Meeting: Votes For Votes Against Abstentions --------- ------------- ----------- Approval of an Amendment to the Company's Employee Stock Purchase Plan to increase the number of shares subject to purchase under the plan from 500,000 to 1,000,000 shares 7,234,624 182,267 48,324 Approval of the Appointment of PricewaterhouseCoopers LLP as Independent Auditors for the Fiscal Year Ending December 31, 2000 7,464,545 600 70 Item 5. Other information Not applicable. Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit No. Description 11.0 Computation of Earnings Per Share b. The Company has not filed any reports on Form 8-K during the quarter for which this report is filed. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHILADELPHIA CONSOLIDATED HOLDING CORP. --------------------------------------- Registrant Date August 8, 2000 /s/ James J. Maguire ------------------------ ------------------------------------------- James J. Maguire Chairman of the Board of Directors, and Chief Executive Officer (Principal Executive Officer) Date August 8, 2000 /s/ Craig P. Keller ------------------------ ------------------------------------------- Craig P. Keller Senior Vice President, Secretary, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) 16 17 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (Dollars and Share Data in Thousands, except Per Share Data) (Unaudited) As of and For the Three As of and For the Six Months Ended June 30, Months Ended June 30 ----------------------- ------------------------ 2000 1999 2000 1999 -------- -------- -------- -------- Weighted-Average Common Shares Outstanding 12,122 12,236 12,225 12,223 Weighted-Average Share Equivalents Outstanding 2,582 2,864 2,534 2,845 -------- -------- -------- -------- Weighted-Average Shares and Share Equivalents Outstanding 14,704 15,100 14,759 15,068 ======== ======== ======== ======== Net Income $ 5,802 $ 9,240 $ 11,467 $ 14,177 ======== ======== ======== ======== Basic Earnings per Share $ 0.48 $ 0.76 $ 0.94 $ 1.16 ======== ======== ======== ======== Diluted Earnings per Share $ 0.39 $ 0.61 $ 0.78 $ 0.94 ======== ======== ======== ======== 17