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 March 31, 2001
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 May 9, 2001.
Preferred Stock, $.01 par value, no shares outstanding
Common Stock, no par value, 13,522,657 shares outstanding
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
Part I - Financial Information
Consolidated Balance Sheets - March 31, 2001 and
December 31, 2000 3
Consolidated Statements of Operations and Comprehensive
Income - For the three months ended March 31, 2001 and 2000 4
Consolidated Statements of Changes in Shareholders' Equity - For the
three months ended March 31, 2001 and year ended
December 31, 2000 5
Consolidated Statements of Cash Flows - For the three
months ended March 31, 2001 and 2000 6
Notes to Consolidated Financial Statements 7-9
Management's Discussion and Analysis of Results of Operations and
Financial Condition 10-12
Quantitative and Qualitative Disclosures About Market Risk 13
Part II - Other Information 14
Signatures 15
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
As of
----------------------
March 31, December 31,
2001 2000
ASSETS
INVESTMENTS:
FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $435,337 AND $392,439) .............. $440,261 $394,733
EQUITY SECURITIES AT MARKET (COST $21,850 AND $24,087).. 34,479 42,553
-------- --------
TOTAL INVESTMENTS ................................. 474,740 437,286
CASH AND CASH EQUIVALENTS ................................ 33,876 49,742
ACCRUED INVESTMENT INCOME ................................ 6,614 5,726
PREMIUMS RECEIVABLE ...................................... 68,109 69,377
PREPAID REINSURANCE PREMIUMS AND
REINSURANCE RECEIVABLES ............................. 74,334 73,513
INCOME TAXES RECOVERABLE ................................. 2,338 13,323
DEFERRED INCOME TAXES .................................... 3,068 909
DEFERRED ACQUISITION COSTS ............................... 35,741 33,324
PROPERTY AND EQUIPMENT ................................... 10,472 10,476
GOODWILL LESS ACCUMULATED AMORTIZATION
OF $4,485 AND $4,112 ................................ 30,436 30,809
OTHER ASSETS ............................................. 5,198 5,979
-------- --------
TOTAL ASSETS ...................................... $744,926 $730,464
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
POLICY LIABILITIES AND ACCRUALS:
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES ............... $249,886 $237,494
UNEARNED PREMIUMS ...................................... 158,153 145,484
-------- --------
TOTAL POLICY LIABILITIES AND ACCRUALS ............. 408,039 382,978
LOANS PAYABLE ............................................ 22,000
PREMIUMS PAYABLE ......................................... 22,303 20,868
OTHER LIABILITIES ........................................ 26,074 23,388
-------- --------
TOTAL LIABILITIES ................................. 456,416 449,234
-------- --------
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, 13,523,365 AND 13,431,408 SHARES ISSUED
AND OUTSTANDING ................................... 47,979 46,582
NOTES RECEIVABLE FROM SHAREHOLDERS ................... (2,033) (2,287)
ACCUMULATED OTHER COMPREHENSIVE INCOME ............... 11,409 13,494
RETAINED EARNINGS .................................... 132,250 124,536
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ...................... 189,605 182,325
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...... $ 744,926 $ 730,464
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
For the Three Months
Ended March 31,
--------------------
2001 2000
---- ----
REVENUE:
NET WRITTEN PREMIUMS ...................... $ 77,087 $ 58,128
CHANGE IN NET UNEARNED
PREMIUM RESERVE (INCREASE) .............. (10,564) (9,501)
------------ ------------
NET EARNED PREMIUMS ....................... 66,523 48,627
NET INVESTMENT INCOME ..................... 8,042 6,264
NET REALIZED INVESTMENT GAIN .............. 2,299 93
OTHER INCOME .............................. 53 2,725
------------ ------------
TOTAL REVENUE ........................... 76,917 57,709
------------ ------------
LOSSES AND EXPENSES:
LOSS AND LOSS ADJUSTMENT EXPENSES ......... 45,538 40,246
NET REINSURANCE RECOVERIES ................ (6,386) (12,006)
NET LOSS AND LOSS ADJUSTMENT EXPENSES ..... ------------ ------------
39,152 28,240
ACQUISITION COSTS AND OTHER UNDERWRITING
EXPENSES ................................ 22,468 16,719
OTHER OPERATING EXPENSES .................. 2,032 2,810
------------ ------------
TOTAL LOSSES AND EXPENSES ............... 63,652 47,769
------------ ------------
MINORITY INTEREST: DISTRIBUTIONS ON
COMPANY OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST ..................... 1,811 1,811
------------ ------------
INCOME BEFORE INCOME TAXES ................... 11,454 8,129
------------ ------------
INCOME TAX EXPENSE (BENEFIT):
CURRENT ................................... 4,777 2,665
DEFERRED .................................. (1,037) (201)
------------ ------------
TOTAL INCOME TAX EXPENSE ................ 3,740 2,464
------------ ------------
NET INCOME .............................. $ 7,714 $ 5,665
============== ============
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
HOLDING GAIN (LOSS) ARISING DURING PERIOD . $ (591) $ 2,654
RECLASSIFICATION ADJUSTMENT ............... (1,494) (60)
------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS) ......... (2,085) 2,594
------------ ------------
COMPREHENSIVE INCOME ......................... $ 5,629 $ 8,259
============ ============
PER AVERAGE SHARE DATA:
BASIC EARNINGS PER SHARE .................. $ 0.57 $ 0.46
============ ============
DILUTED EARNINGS PER SHARE ................ $ 0.54 $ 0.38
============ ============
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING ............................... 13,477,940 12,327,797
WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING ............................... 701,604 2,496,325
------------ ------------
WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING ................... 14,179,544 14,824,122
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(Unaudited)
For the Three For the Year Ended
Months Ended March December 31,
31, 2001 2000
------------------ ---------------
COMMON STOCK:
BALANCE AT BEGINNING OF YEAR ................ $ 46,582 $ 68,859
EXERCISE OF EMPLOYEE STOCK OPTIONS .......... 1,453 (23,132)
ISSUANCE OF SHARES PURSUANT TO STOCK
PURCHASE PLANS ............................ (56) 855
--------- ---------
BALANCE AT END OF PERIOD ................ 47,979 46,582
--------- ---------
NOTES RECEIVABLE FROM SHAREHOLDERS:
BALANCE AT BEGINNING OF PERIOD .............. (2,287) (2,506)
NOTES RECEIVABLE (ISSUED) FORFEITED PURSUANT
TO STOCK PURCHASE PLAN .................... 70 (414)
COLLECTION OF NOTES RECEIVABLE .............. 184 633
--------- ---------
BALANCE AT END OF PERIOD ................ (2,033) (2,287)
--------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
BALANCE AT BEGINNING OF PERIOD .............. 13,494 13,507
OTHER COMPREHENSIVE LOSS, NET OF TAXES ...... (2,085) (13)
--------- ---------
BALANCE AT END OF PERIOD ................ 11,409 13,494
--------- ---------
RETAINED EARNINGS:
BALANCE AT BEGINNING OF PERIOD .............. 124,536 93,766
NET INCOME .................................. 7,714 30,770
--------- ---------
BALANCE AT END OF PERIOD ................ 132,250 124,536
--------- ---------
COMMON STOCK HELD IN TREASURY:
BALANCE AT BEGINNING OF PERIOD .............. (12,186)
COMMON SHARES REPURCHASED ................... (40,766)
EXERCISE OF EMPLOYEE STOCK OPTIONS .......... 52,712
ISSUANCE OF SHARES PURSUANT TO EMPLOYEE STOCK
PURCHASE PLAN ............................. 240
--------- ---------
BALANCE AT END OF PERIOD ................ -- --
--------- ---------
TOTAL SHAREHOLDERS' EQUITY .............. $ 189,605 $ 182,325
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
For the Three Months Ended March 31,
------------------------------------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME ....................................... $ 7,714 $ 5,665
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
NET REALIZED INVESTMENT GAIN ................... (2,299) (93)
DEPRECIATION AND AMORTIZATION EXPENSE .......... 605 959
DEFERRED INCOME TAX BENEFIT .................... (1,037) (201)
CHANGE IN PREMIUMS RECEIVABLE .................. 1,268 2,272
CHANGE IN OTHER RECEIVABLES .................... (1,710) (4,442)
CHANGE IN DEFERRED ACQUISITION COSTS ........... (2,417) (1,895)
CHANGE IN INCOME TAXES RECOVERABLE ............. 10,986 2,630
CHANGE IN OTHER ASSETS ......................... 905 583
CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES ....................................... 12,392 10,346
CHANGE IN UNEARNED PREMIUMS .................... 12,669 6,691
CHANGE IN OTHER LIABILITIES .................... 4,123 (554)
TAX BENEFIT FROM EXERCISE OF EMPLOYEE
STOCK OPTIONS .................................. 693 13
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES... 43,892 21,974
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITIES ................................... 11,777 23,504
PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITIES ................................... 3,865 7,245
PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES ................................... 6,593 8,606
COST OF FIXED MATURITIES ACQUIRED ................ (58,436) (42,073)
COST OF EQUITY SECURITIES ACQUIRED ............... (2,022) (13,829)
PURCHASE OF PROPERTY AND EQUIPMENT ............... (493) (872)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES ........ (38,716) (17,419)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
REPAYMENTS ON LOANS PAYABLE ...................... (22,000)
EXERCISE OF EMPLOYEE STOCK OPTIONS ............... 760 8
PROCEEDS FROM SHARES ISSUED PURSUANT TO
STOCK PURCHASE PLANS ........................... 14 6
COLLECTION OF NOTES RECEIVABLE ................... 184 178
COST OF COMMON STOCK REPURCHASED ................. (5,549)
-------- --------
NET CASH USED BY FINANCING ACTIVITIES ...... (21,042) (5,357)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........... (15,866) (802)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .... 49,742 26,230
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......... $ 33,876 $ 25,428
========= ========
CASH PAID DURING THE PERIOD FOR:
INTEREST ......................................... $ 130 $
NON-CASH TRANSACTIONS:
ISSUANCE OF SHARES (FORFEITURES) PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR
NOTES RECEIVABLE ................................ $ 70 $ (226)
The accompanying notes are an integral part of the consolidated financial
statements.
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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 three months ended
March 31, 2001 and 2000 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 three months ended
March 31, 2001 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, 2000
included in the Company's Annual Report on Form 10-K.
2. Investments
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments and
Hedging Activities on January 1, 2001. The provisions of SFAS 133 require,
among other things, that all derivatives be recognized in the consolidated
balance sheets as either assets or liabilities and measured at fair value.
The corresponding derivative gains and losses should be reported based upon
the hedge relationship, if such a relationship exists. Changes in the fair
value of derivatives that are not designated as hedges or that do not meet
the hedge accounting criteria in SFAS 133 are required to be reported in
income. At March 31, 2001, the Company held no derivative financial
instruments nor imbedded financial derivatives. The Company's FELINE
PRIDESSM have been grandfathered under the current accounting guidance and
are therefore not subject to the provisions of SFAS No. 133. The Company
does not currently utilize derivatives in its investment or risk management
strategy.
3. Goodwill
Goodwill amounted to $30.4 million at March 31, 2001. Goodwill is being
amortized on a straight line basis over 20 years. The carrying value of
goodwill is reviewed for recoverability based on the undiscounted cash
flows of the businesses acquired over the remaining amortization period.
Should the review indicate that goodwill is not recoverable, the Company
would recognize an impairment loss.
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. Following is the computation of
earnings per share for the three months ended March 31, 2001 and 2000,
respectively:
As of and For the Three
Months Ended
March 31,
-----------------------
2001 2000
---- ----
Weighted-Average Common Shares Outstanding 13,478 12,328
Weighted-Average Share Equivalents Outstanding 702 2,496
------- -------
Weighted-Average Shares and Share
Equivalents Outstanding 14,180 14,824
======= =======
Net Income $ 7,714 $ 5,665
======= =======
Basic Earnings per Share $ 0.57 $ 0.46
======= =======
Diluted Earnings per Share $ 0.54 $ 0.38
======= =======
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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 quarter was
($0.3) million and $1.4 million for the three months ended March 31, 2001
and 2000, respectively. The related tax effect of Reclassification
Adjustments was ($0.8) million in 2001.
7. Segment Information
The Company's operations are classified into three reportable business
segments: 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.
Effective June 30, 2000, 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 three
months ended March 31, 2001 and 2000. Corporate information is included to
reconcile segment data to the consolidated financial statements (in
thousands):
8
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Commercial Specialty Personal
Lines Lines Lines Corporate Total
--------- --------- --------- --------- ---------
March 31, 2001:
Gross Written Premiums $ 60,390 $ 20,584 $ 23,060 $ 104,034
-------------------------------------------------------------------------------
Net Written Premiums $ 41,810 $ 17,886 $ 17,391 $ 77,087
-------------------------------------------------------------------------------
Revenue:
Net Earned Premiums $ 41,418 $ 15,856 $ 9,249 $ 66,523
Net Investment Income 8,042 8,042
Net Realized Investment Gain 2,299 2,299
Other Income 905 (852) 53
-------------------------------------------------------------------------------
Total Revenue 41,418 15,856 10,154 9,489 76,917
-------------------------------------------------------------------------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 24,413 10,018 4,721 39,152
Acquisition Costs and Other Underwriting
Expenses 22,468 22,468
Other Operating Expenses 389 1,643 2,032
-------------------------------------------------------------------------------
Total Losses and Expenses 24,413 10,018 5,110 24,111 63,652
-------------------------------------------------------------------------------
Minority Interest: Distributions on
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust 1,811 1,811
-------------------------------------------------------------------------------
Income Before Income Taxes 17,005 5,838 5,044 (16,433) 11,454
Total Income Tax Expense 3,740 3,740
-------------------------------------------------------------------------------
Net Income $ 17,005 $ 5,838 $ 5,044 $ (20,173) $ 7,714
===============================================================================
Total Assets $ 162,533 $ 582,393 $ 744,926
===============================================================================
March 31, 2000:
Gross Written Premiums $ 44,770 $ 16,231 $ 16,145 $ 77,146
-------------------------------------------------------------------------------
Net Written Premiums $ 28,893 $ 18,066 $ 11,169 $ 58,128
-------------------------------------------------------------------------------
Revenue:
Net Earned Premiums $ 30,628 $ 11,721 $ 6,278 $ 48,627
Net Investment Income 6,264 6,264
Net Realized Investment Gain 93 93
Other Income 3,689 (964) 2,725
-------------------------------------------------------------------------------
Total Revenue 30,628 11,721 9,967 5,393 57,709
-------------------------------------------------------------------------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 17,633 7,358 3,249 28,240
Acquisition Costs and Other Underwriting
Expenses 16,719 16,719
Other Operating Expenses 2,285 525 2,810
-------------------------------------------------------------------------------
Total Losses and Expenses 17,633 7,358 5,534 17,244 47,769
-------------------------------------------------------------------------------
Minority Interest: Distributions on
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust 1,811 1,811
-------------------------------------------------------------------------------
Income Before Income Taxes 12,995 4,363 4,433 (13,662) 8,129
Total Income Tax Expense 2,464 2,464
-------------------------------------------------------------------------------
Net Income $ 12,995 $ 4,363 $ 4,433 $ (16,126) $ 5,665
===============================================================================
Total Assets $ 135,703 $ 486,541 $ 622,244
===============================================================================
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Continued)
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. The Company's strategy
is and has been 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 adversely
impact profitability.
RESULTS OF OPERATIONS (THREE MONTHS ENDED MARCH 31, 2001 VS MARCH 31, 2000)
Premiums: Gross written premiums grew $26.9 million (34.9%) to $104.0
million for the three months ended March 31, 2001 from $77.1 million for the
same period of 2000; gross earned premiums grew $20.3 million (28.6%) to $91.2
million for the three months ended March 31, 2001 from $70.9 million for the
same period of 2000; net written premiums increased $19.0 million (32.7%) to
$77.1 million for the three months ended March 31, 2001 from $58.1 million for
the same period of 2000; and net earned premiums grew $17.9 million (36.8%) to
$66.5 million in 2001 from $48.6 million in 2000.
The respective gross written premium increases for commercial lines, specialty
lines and personal lines segments for the three months ended March 31, 2001 vs.
March 31, 2000 amount to $15.6 million (34.9%), $4.4 million (26.8%) and $6.9
million (42.8%) respectively. The overall growth in gross written premiums is
primarily attributable to the following:
- - Recent rating downgrades of certain major competitor property and casualty
insurance companies has led to their diminished presence in the Company's
commercial and specialty lines business segments and continues 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 consolidation of certain competitor property and casualty insurance
companies has led to the displacement of certain of its independent agency
relationships which continues to result in new agency relationships for the
Company which have been bringing 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.
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Continued)
- - Rate increases on select casualty renewal business.
- - The growth in the personal lines segment, resulting in an increase of $6.9
million in gross manufactured housing, preferred homeowners and National
Flood Insurance Program written premiums.
- - 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 product lines due to
inadequate pricing levels being experienced as a result of market
conditions and/or loss experience emerging at higher than expected levels.
The respective net written premium increases (decreases) for commercial lines,
specialty lines and personal lines segments for the three months ended March 31,
2001 vs. March 31, 2000 amount to $12.9 million (44.7%), ($0.2) million (1.0%)
and $6.2 million (55.7%) respectively. The differing percentage increases
(decreases) in net written premiums versus gross written premiums for the period
is primarily due to the various changes in the Company's reinsurance programs.
Net Investment Income: Net investment income approximated $8.0 million
for the three months ended March 31, 2001 and $6.3 million for the same period
of 2000. Total investments grew to $474.7 million at March 31, 2001 from $412.4
million at March 31, 2000. The growth in investment income is due to investing
net cash flows provided from operating activities and the reinvestment of $4.6
million in proceeds from the sale of common stock holdings which were reinvested
into fixed maturity securities.
Net Realized Investment Gain: Net realized investment gains were $2.3
million for the three months ended March 31, 2001 and $0.1 million for the same
period in 2000. The Company realized net investment gains of $2.3 million from
the sales of common stock equity securities during the three months ended March
31, 2001. The proceeds from these common stock sales are being reinvested in
fixed maturity securities to increase current investment income, lessen the
Company's holdings in certain common stock positions, and decrease the overall
percentage of investments in common stock securities.
Other Income: Other income approximated $0.1 million for the three
months ended March 31, 2001 and $2.7 million for the same period of 2000. Other
income primarily consists of commissions earned on brokered personal lines
business. Such commissions earned continue to decrease as brokering activities
are discontinued in favor of writing business directly.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment
expenses increased $11.0 million (39.0%) to $39.2 million for the three months
ended March 31, 2001 from $28.2 million for the same period of 2000 and the loss
ratio increased to 58.9% in 2001 from 58.1% in 2000. This increase in net loss
and loss adjustment expenses was due principally to the 36.8% growth in net
earned premiums and in part to the relative increase in the loss ratios for the
commercial lines and specialty lines segment products.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs
and other underwriting expenses increased $5.8 million (34.7%) to $22.5 million
for the three months ended March 31, 2001 from $16.7 million for the same period
of 2000. This increase was due primarily to the 36.8% growth in net earned
premiums offset by relative changes in the Company's product mix and associated
distribution channel expense.
Other Operating Expenses: Other operating expenses decreased $0.8
million to $2.0 million for the three months ended March 31, 2001 from $2.8
million for the same period of 2000. The decrease in other operating expenses
was primarily due to the discontinuance of brokering activities resulting in a
decrease in the amount of broker commissions (see Results of Operations "Other
Income").
Income Tax Expense: The Company's effective tax rate for the three
months ended March 31, 2001 and 2000 was 32.7% and 30.3%, 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
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Continued)
effective tax rate is principally due to a greater investment of cash flows in
taxable securities relative to tax-exempt securities.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2001 the Company's investments
experienced unrealized investment appreciation of $2.1 million, net of the
related deferred tax expense of $1.1 million. At March 31, 2001, the Company had
total investments with a carrying value of $474.7 million, of which 92.7%
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 7.3% of the Company's total investments consisted
primarily of publicly traded common stock securities.
The Company produced net cash from operations of $43.9 million and
$22.0 million, respectively, for the three months ended March 31, 2001 and 2000.
Management believes that the Company has adequate ability to pay all claims and
meet all other cash needs.
During the quarter ended March 31, 2001, the Company repaid $22.0
million of an unsecured revolving credit facility utilizing $8.6 million of
refunds of prior year tax payments which were received during January 2001 along
with the settlement of other intercompany tax balances.
Risk-based capital is designed to measure the acceptable amount of
capital an insurer should have based on the inherent specific risks of each
insurer. Insurers failing to meet this benchmark capital level may be subject to
scrutiny by the insurer's domiciliary insurance department and ultimately
rehabilitation or liquidation. Based on the standards currently adopted, the
Company's insurance subsidiaries' capital and surplus is in excess of the
prescribed risk-based capital requirements.
FORWARD-LOOKING INFORMATION
Certain information included in this report and other statements or
materials published or to be published by the Company are not historical facts
but are forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, new and
existing products, expectations for market segment and growth, and similar
matters. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company provides the following
cautionary remarks regarding important factors which, among others, could cause
the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development, results of the Company's business, and the
other matters referred to above include, but are not limited to: (i) changes in
the business environment in which the Company operates, including inflation and
interest rates; (ii) changes in taxes, governmental laws, and regulations; (iii)
competitive product and pricing activity; (iv) difficulties of managing growth
profitably; and (v) catastrophe losses.
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There is no material change to the Quantitative and Qualitative market risk
disclosure from the Company's Form 10-K for the fiscal year ended December 31,
2000.
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14
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On March 15, 2001, two of the Company's subsidiaries, Liberty American
Insurance Group, Inc. and Mobile Homeowners Insurance Agencies, Inc.,
filed an action in the U.S. District Court for the Middle District of
Florida against Westpoint Underwriters LLC, its managing general agent,
Modern Insurance Co., two former employees of Liberty American - John
Jerger and Lyle Vincent - and a third individual, Sandy Jerger, for
copyright infringement, theft of trade secrets and confidential
information and breach of a confidentiality agreement. The action
arises from the use of Liberty American's software to start up and
operate Westpoint, which competes in the same market with Liberty
American. Liberty American is seeking injunctive relief as well as
damages.
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
Not applicable
Item 5. Other information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a. Not applicable.
b. The Company filed the following reports on Form 8-K during the
quarterly period ended March 31, 2001:
Date of Report Item Reported
---------------- ---------------------------------------------------------------
February 12, 2001 December 31, 2000 Investor Presentation
February 19, 2001 Supplemental Financial Data for the three months and years ended
December 31, 2000 and 1999
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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 May 14, 2001 /s/ James J. Maguire
- ----------------------- ------------------------------------------
James J. Maguire
Chairman of the Board of Directors,
and Chief Executive Officer
(Principal Executive Officer)
Date May 14, 2001 /s/ Craig P. Keller
- ----------------------- ------------------------------------------
Craig P. Keller
Senior Vice President, Secretary,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer)
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