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, 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 August 8, 2001.
Preferred Stock, $.01 par value, no shares outstanding
Common Stock, no par value, 17,818,058 shares outstanding
2
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
Part I - Financial Information
Consolidated Balance Sheets - June 30, 2001 and
December 31, 2000 3
Consolidated Statements of Operations and Comprehensive
Income - For the three and six months ended
June 30, 2001 and 2000 4
Consolidated Statements of Changes in Shareholders' Equity - For
the six months ended June 30, 2001 and year ended
December 31, 2000 5
Consolidated Statements of Cash Flows - For the six
months ended June 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7-10
Management's Discussion and Analysis of Results of Operations and
Financial Condition 11-15
Quantitative and Qualitative Disclosures About Market Risk 16
Part II - Other Information 17-18
Signatures 19
2
3
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
As of
-------------------------------------
June 30, December 31,
2001 2000
----------------- ------------
(Unaudited)
ASSETS
INVESTMENTS:
FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $469,605 AND $392,439) .............................. $ 475,104 $ 394,733
EQUITY SECURITIES AT MARKET (COST $25,607 AND $24,087) .................. 35,926 42,553
--------- ---------
TOTAL INVESTMENTS ............................................... 511,030 437,286
CASH AND CASH EQUIVALENTS .................................................. 39,704 49,742
ACCRUED INVESTMENT INCOME .................................................. 6,327 5,726
PREMIUMS RECEIVABLE ........................................................ 70,658 69,377
PREPAID REINSURANCE PREMIUMS AND
REINSURANCE RECEIVABLES ............................................. 88,268 73,513
INCOME TAXES RECOVERABLE ................................................... - 13,323
DEFERRED INCOME TAXES ...................................................... 5,787 909
DEFERRED ACQUISITION COSTS ................................................. 38,920 33,324
PROPERTY AND EQUIPMENT ..................................................... 10,531 10,476
GOODWILL LESS ACCUMULATED AMORTIZATION
OF $4,858 AND $4,112 ................................................ 26,563 30,809
OTHER ASSETS ............................................................... 7,856 5,979
--------- ---------
TOTAL ASSETS .................................................... $ 805,644 $ 730,464
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
POLICY LIABILITIES AND ACCRUALS:
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES ................................ $ 268,588 $ 237,494
UNEARNED PREMIUMS ....................................................... 176,672 145,484
--------- ---------
TOTAL POLICY LIABILITIES AND ACCRUALS ........................... 445,260 382,978
LOANS PAYABLE .............................................................. 20,841 22,000
PREMIUMS PAYABLE ........................................................... 18,360 20,868
OTHER LIABILITIES .......................................................... 23,465 23,388
--------- ---------
TOTAL LIABILITIES ............................................... 507,926 449,234
--------- ---------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES:
COMPANY OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING
SOLELY DEBENTURES OF COMPANY ............................................ - 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, 17,666,342 AND 13,431,408 SHARES ISSUED
AND OUTSTANDING ..................................................... 149,219 46,582
NOTES RECEIVABLE FROM SHAREHOLDERS ...................................... (1,768) (2,287)
ACCUMULATED OTHER COMPREHENSIVE INCOME .................................. 10,281 13,494
RETAINED EARNINGS ....................................................... 139,986 124,536
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ...................................... 297,718 182,325
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................... $ 805,644 $ 730,464
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
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4
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------------ -----------------------------------
2001 2000 2001 2000
--------------- -------------- -------------- -------------
REVENUE:
NET WRITTEN PREMIUMS ............................ $ 82,536 $ 59,684 $ 159,623 $ 117,812
CHANGE IN NET UNEARNED PREMIUM
RESERVE (INCREASE) ......................... (10,833) (5,393) (21,397) (14,894)
------------ ------------ ------------ ------------
NET EARNED PREMIUMS ............................. 71,703 54,291 138,226 102,918
NET INVESTMENT INCOME ........................... 8,091 5,832 16,133 12,096
NET REALIZED INVESTMENT GAIN .................... 318 389 2,617 482
OTHER INCOME .................................... 63 2,532 116 5,257
------------ ------------ ------------ ------------
TOTAL REVENUE ............................... 80,175 63,044 157,092 120,753
------------ ------------ ------------ ------------
LOSSES AND EXPENSES:
LOSS AND LOSS ADJUSTMENT EXPENSES ............... 54,686 37,895 100,224 78,141
NET REINSURANCE RECOVERIES ...................... (11,820) (5,922) (18,206) (17,928)
------------ ------------ ------------ ------------
NET LOSS AND LOSS ADJUSTMENT EXPENSES ........... 42,866 31,973 82,018 60,213
ACQUISITION COSTS AND OTHER
UNDERWRITING EXPENSES ...................... 22,695 17,317 45,163 34,036
OTHER OPERATING EXPENSES ........................ 2,130 3,431 4,162 6,241
------------ ------------ ------------ ------------
TOTAL LOSSES AND EXPENSES ................... 67,691 52,721 131,343 100,490
------------ ------------ ------------ ------------
MINORITY INTEREST: DISTRIBUTIONS ON COMPANY
OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST ...................... 938 1,812 2,749 3,623
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES .......................... 11,546 8,511 23,000 16,640
------------ ------------ ------------ ------------
INCOME TAX EXPENSE (BENEFIT):
CURRENT ......................................... 5,921 4,402 10,698 7,067
DEFERRED ........................................ (2,111) (1,693) (3,148) (1,894)
------------ ------------ ------------ ------------
TOTAL INCOME TAX EXPENSE .................... 3,810 2,709 7,550 5,173
------------ ------------ ------------ ------------
NET INCOME .................................. $ 7,736 $ 5,802 $ 15,450 $ 11,467
============ ============ ============ ============
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
HOLDING GAIN (LOSS) ARISING DURING PERIOD ....... (921) (91) (1,512) 2,563
RECLASSIFICATION ADJUSTMENT ..................... (207) (253) (1,701) (313)
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS) ............... (1,128) (344) (3,213) 2,250
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME ................................ $ 6,608 $ 5,458 $ 12,237 $ 13,717
============ ============ ============ ============
PER AVERAGE SHARE DATA:
BASIC EARNINGS PER SHARE ........................ $ 0.50 $ 0.48 $ 1.06 $ 0.94
============ ============ ============ ============
DILUTED EARNINGS PER SHARE ...................... $ 0.48 $ 0.39 $ 1.01 $ 0.78
============ ============ ============ ============
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING ..................................... 15,587,962 12,122,135 14,538,780 12,224,966
WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING ..................................... 692,256 2,581,779 712,939 2,533,853
------------ ------------ ------------ ------------
WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING ......................... 16,280,218 14,703,914 15,251,719 14,758,819
============ ============ ============ ============
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)
For the Six Months For the Year Ended
Ended June 30, December 31,
2001 2000
---------------- ------------------
(Unaudited)
COMMON STOCK:
BALANCE AT BEGINNING OF YEAR ................ $ 46,582 $ 68,859
ISSUANCE OF SHARES PURSUANT TO STOCK
PURCHASE CONTRACTS ....................... 98,905
EXERCISE OF EMPLOYEE STOCK OPTIONS .......... 3,929 (23,132)
ISSUANCE OF SHARES PURSUANT TO STOCK
PURCHASE PLANS ........................... (197) 855
--------- ---------
BALANCE AT END OF PERIOD ............. 149,219 46,582
--------- ---------
NOTES RECEIVABLE FROM SHAREHOLDERS:
BALANCE AT BEGINNING OF PERIOD .............. (2,287) (2,506)
NOTES RECEIVABLE (ISSUED) FORFEITED PURSUANT
TO STOCK PURCHASE PLAN ................... 84 (414)
COLLECTION OF NOTES RECEIVABLE .............. 435 633
--------- ---------
BALANCE AT END OF PERIOD ............. (1,768) (2,287)
--------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
BALANCE AT BEGINNING OF PERIOD .............. 13,494 13,507
OTHER COMPREHENSIVE LOSS, NET OF TAXES ...... (3,213) (13)
--------- ---------
BALANCE AT END OF PERIOD ............. 10,281 13,494
--------- ---------
RETAINED EARNINGS:
BALANCE AT BEGINNING OF PERIOD .............. 124,536 93,766
NET INCOME .................................. 15,450 30,770
--------- ---------
BALANCE AT END OF PERIOD ............. 139,986 124,536
--------- ---------
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 ........... $ 297,718 $ 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 Six Months Ended June 30,
---------------------------------
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME .............................................. $ 15,450 $ 11,467
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
NET REALIZED INVESTMENT GAIN ............................ (2,617) (482)
DEPRECIATION AND AMORTIZATION EXPENSE ................... 1,225 1,894
DEFERRED INCOME TAX BENEFIT ............................. (3,148) (1,894)
CHANGE IN PREMIUMS RECEIVABLE ........................... (1,281) (6,193)
CHANGE IN OTHER RECEIVABLES ............................. (15,356) (12,177)
CHANGE IN INCOME TAXES RECOVERABLE ...................... (8,015)
CHANGE IN DEFERRED ACQUISITION COSTS .................... (5,596) (4,173)
CHANGE IN OTHER ASSETS .................................. 784 (141)
CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES .............................................. 31,094 22,310
CHANGE IN UNEARNED PREMIUMS ............................. 31,188 15,500
CHANGE IN OTHER LIABILITIES ............................. (137) 844
TAX BENEFIT FROM EXERCISE OF EMPLOYEE
STOCK OPTIONS ....................................... 24,474 67
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........ 68,065 27,022
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITIES ....................................... 23,311 42,156
PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITIES ....................................... 25,482 14,745
PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES .......................................... 11,988 11,117
COST OF FIXED MATURITIES ACQUIRED ....................... (131,266) (78,090)
COST OF EQUITY SECURITIES ACQUIRED ...................... (7,695) (15,736)
PURCHASE OF PROPERTY AND EQUIPMENT ...................... (1,083) (1,897)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES ............ (79,263) (27,705)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
REPAYMENTS ON LOANS PAYABLE ............................. (22,000)
PROCEEDS FROM LOANS PAYABLE ............................. 20,841
EXERCISE OF EMPLOYEE STOCK OPTIONS ...................... 1,860 36
COLLECTION OF NOTES RECEIVABLE .......................... 435 324
PROCEEDS FROM SHARES ISSUED PURSUANT TO
STOCK PURCHASE PLANS ................................ 24 15
COST OF COMMON STOCK REPURCHASED ........................ (7,333)
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES.. 1,160 (6,958)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................... (10,038) (7,641)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............ 49,742 26,230
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................. $ 39,704 $ 18,589
========= =========
CASH PAID DURING THE PERIOD FOR:
INCOME TAXES ............................................ $ $ 5,422
INTEREST ................................................ $ 130 $
NON-CASH TRANSACTIONS:
ISSUANCE OF SHARES (FORFEITURES) PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR
NOTES RECEIVABLE ....................................... $ (84) $ (318)
ISSUANCE OF COMMON SHARES IN SATISFACTION OF
STOCK PURCHASE CONTRACTS ............................... $ 98,905
The accompanying notes are an integral part of the
consolidated financial statements.
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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, 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 six months ended
June 30, 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 included in the Company's Annual Report
on Form 10-K as of and for the year ended December 31, 2000.
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 June 30, 2001, the Company
held no derivative financial instruments nor embedded financial
derivatives.
In November 2000, the Emerging Issues Task Force of the Financial
Accounting Standards Board ("FASB") reached a consensus on impairment
accounting for retained beneficial interests ("EITF 99-20"). Under this
consensus, impairment on certain beneficial interests in securitized
assets must be recognized when (1) the assets fair value is below its
carrying value, and (2) there has been an adverse change in estimated
cash flows. Previously, impairment on such assets was recognized when
the asset's carrying value exceeded estimated cash flows discounted at a
risk free rate of return. The adoption of EITF 99-20 on April 1, 2001 by
the Company had an immaterial effect on earnings and financial position.
During the quarter ended June 30, 2001 certain structured securities
were subject to re-evaluation under EITF 99-20 as a result of an adverse
change in estimated cash flows due to credit rating downgrades. This
re-evaluation resulted in non-cash realized investment losses of $4.3
million.
3. Goodwill
Goodwill amounted to $26.6 million at June 30, 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. Should the review indicate that
goodwill is not recoverable, the Company would recognize an impairment
loss. During the Quarter Ended June 30, 2001, goodwill was decreased
$3.5 million based upon the Company's current reduced estimate of the
contingent additional purchase price for the Liberty acquisition. The
effect of this transaction had no impact on operations for 2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 eliminates the practice of amortizing
goodwill through periodic charges to earnings and establishes a new
methodology for recognizing and measuring goodwill and other intangible
assets. Under this new accounting standard, the Company will cease
goodwill amortization on January 1, 2002. Goodwill amortization for the
year ended December 31, 2001 is anticipated to amount to approximately
$1.7 million. The Company will also review goodwill and other intangible
assets for any impairment or other effects of the new standard.
4. Loans Payable
As of June 30, 2001, the Company borrowed a total of $20.8 million from
the Federal Home Loan Bank. These borrowings bear interest at adjusted
LIBOR and mature twelve months from inception. The proceeds from these
borrowings were invested in collateralized mortgage obligation and asset
backed securities to achieve a positive spread between the rate of
interest on these securities and the borrowing rates.
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5. Shareholders' Equity
On May 16, 2001, the Company issued 3.9 million common shares to satisfy
the stock purchase contract obligation from the Company's 1998 FELINE
PRIDESSM 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.
6. Earnings Per Share
Earnings per common share has been calculated by dividing net income for
the period by the weighted average number of common shares and common
share equivalents outstanding during the period. Following is the
computation of earnings per share for the three and six months ended
June 30, 2001 and 2000, respectively (in thousands):
As of and For the Three As of and For the Six
Months Ended June 30, Months Ended June 30
-------------------------- ------------------------
2001 2000 2001 2000
---------- --------- --------- --------
Weighted-Average Common Shares Outstanding 15,588 12,122 14,539 12,225
Weighted-Average Share Equivalents Outstanding 692 2,582 713 2,534
------- ------- ------- -------
Weighted-Average Shares and Share
Equivalents Outstanding 16,280 14,704 15,252 14,759
======= ======= ======= =======
Net Income $ 7,736 $ 5,802 $15,450 $11,467
======= ======= ======= =======
Basic Earnings per Share $ 0.50 $ 0.48 $ 1.06 $ 0.94
======= ======= ======= =======
Diluted Earnings per Share $ 0.48 $ 0.39 $ 1.01 $ 0.78
======= ======= ======= =======
7. 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.
8. Comprehensive Income
Components of comprehensive income, as detailed in the Consolidated
Statements of Operations and Comprehensive Income, are net of tax. The
related tax effect of Holding Gains (Losses) arising during the three
and six months ended June 30, 2001 and 2000 was ($0.5) million and $0
million, respectively, and ($0.8) million and $1.4 million,
respectively. The related tax effect of Reclassification Adjustments for
the three and six months ended June 30, 2001 and 2000 was ($0.1) million
and ($0.1) million , respectively, and ($0.9) million and ($0.2)
million, respectively.
9. 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.
8
9
Following is a tabulation of business segment information for the six
and three months ended June 30, 2001 and 2000. 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, 2001:
Gross Written Premiums $ 135,590 $ 41,598 $ 47,519 $ 224,707
------------------------------------------------------------------------------
Net Written Premiums $ 94,306 $ 36,732 $ 28,585 $ 159,623
------------------------------------------------------------------------------
Revenue:
Net Earned Premiums $ 86,077 $ 32,711 $ 19,438 $ 138,226
Net Investment Income 16,133 16,133
Net Realized Investment Gain 2,617 2,617
Other Income 1,598 (1,482) 116
------------------------------------------------------------------------------
Total Revenue 86,077 32,711 21,036 17,268 157,092
------------------------------------------------------------------------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 51,510 20,604 9,904 82,018
Acquisition Costs and Other Underwriting
Expenses 45,163 45,163
Other Operating Expenses 778 3,384 4,162
------------------------------------------------------------------------------
Total Losses and Expenses 51,510 20,604 10,682 48,547 131,343
------------------------------------------------------------------------------
Minority Interest: Distributions on Company
Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust 2,749 2,749
------------------------------------------------------------------------------
Income Before Income Taxes 34,567 12,107 10,354 (34,028) 23,000
Total Income Tax Expense 7,550 7,550
------------------------------------------------------------------------------
Net Income $ 34,567 $ 12,107 $ 10,354 $ (41,578) $ 15,450
==============================================================================
Total Assets $ 169,520 $ 636,124 $ 805,644
==============================================================================
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 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 34,036 34,036
Other Operating Expenses 12,418 (6,177) 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
==============================================================================
9
10
Three Months Ended,
-----------------------------------------------------------------------------
Commercial Specialty Personal
Lines Lines Lines Corporate Total
------------------------------------------------------------------------------
June 30, 2001:
Gross Written Premiums $ 75,200 $ 21,015 $ 24,459 $ 120,674
------------------------------------------------------------------------------
Net Written Premiums $ 52,495 $ 18,847 $ 11,194 $ 82,536
------------------------------------------------------------------------------
Revenue:
Net Earned Premiums $ 44,659 $ 16,855 $ 10,189 $ 71,703
Net Investment Income 8,091 8,091
Net Realized Investment Gain 318 318
Other Income 693 (630) 63
------------------------------------------------------------------------------
Total Revenue 44,659 16,855 10,882 7,779 80,175
------------------------------------------------------------------------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 27,097 10,586 5,183 42,866
Acquisition Costs and Other Underwriting
Expenses 22,695 22,695
Other Operating Expenses 389 1,741 2,130
------------------------------------------------------------------------------
Total Losses and Expenses 27,097 10,586 5,572 24,436 67,691
------------------------------------------------------------------------------
Minority Interest: Distributions on Company
Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust 938 938
------------------------------------------------------------------------------
Income Before Income Taxes 17,562 6,269 5,310 (17,595) 11,546
Total Income Tax Expense 3,810 3,810
------------------------------------------------------------------------------
Net Income $ 17,562 $ 6,269 $ 5,310 $ (21,405) $ 7,736
==============================================================================
Total Assets $ 169,520 $ 636,124 $ 805,644
==============================================================================
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 17,317 17,317
Other Operating Expenses 5,703 (2,272) 3,431
------------------------------------------------------------------------------
Total Losses and Expenses 19,943 8,534 9,199 15,045 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 4,733 (15,217) 8,511
Total Income Tax Expense 2,709 2,709
------------------------------------------------------------------------------
Net Income $ 13,902 $ 5,093 $ 4,733 $ (17,926) $ 5,802
==============================================================================
Total Assets $ 138,259 $ 505,558 $ 643,817
==============================================================================
10
11
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
GENERAL
Although the Company's financial performance is dependent upon its own specific
business characteristics, certain risk factors can affect the profitability of
the Company. These include:
- - Industry factors - Historically the financial performance of the property
and casualty insurance industry has tended to fluctuate in cyclical
patterns of soft markets followed by hard markets. The Company's strategy
is to focus on underwriting profits and accordingly the Company's marketing
organization is being directed into those niche businesses that exhibit the
greatest potential for underwriting profits.
- - 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 (SIX MONTHS ENDED JUNE 30, 2001 VS JUNE 30, 2000)
Premiums: Gross written premiums grew $57.7 million (34.6%) to
$224.7 million for the six months ended June 30, 2001 from $167.0 million for
the same period of 2000; gross earned premiums grew $40.7 million (26.8%) to
$192.4 million for the six months ended June 30, 2001 from $151.7 million for
the same period of 2000; net written premiums increased $41.8 million (35.5%) to
$159.6 million for the six months ended June 30, 2001 from $117.8 million for
the same period of 2000; and net earned premiums grew $35.3 million (34.3%) to
$138.2 million in 2001 from $102.9 million in 2000.
The respective gross written premium increases for commercial lines, specialty
lines and personal lines segments for the six months ended June 30, 2001 vs.
June 30, 2000 amount to $31.7 million (30.5%), $8.0 million (23.8%) and $18.0
million (60.9%) 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
within these segments, respectively.
- - The consolidation of certain competitor property and casualty insurance
companies has led to the displacement of certain of its independent agency
relationships. This consolidation continues to result in new agency
relationships for the Company. These relationships 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.
11
12
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 $18.0
million in gross manufactured housing, preferred homeowners and National
Flood Insurance Program written premiums.
The respective net written premium increases for commercial lines, specialty
lines and personal lines segments for the six months ended June 30, 2001 vs.
June 30, 2000 amount to $27.7 million (41.5%), $2.1 million (6.0%) and $12.1
million (73.3%) respectively. The differing percentage increases 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 $16.1
million for the six months ended June 30, 2001 and $12.1 million for the same
period of 2000. Total investments grew to $511.0 million at June 30, 2001 from
$423.4 million at June 30, 2000. The growth in investment income is due to
investing net cash flows provided from operating activities, and the
reinvestment of $12.0 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
$2.6 million for the six months ended June 30, 2001 and $0.5 million for the
same period in 2000. The Company realized net investment gains of $5.9 million
from the sales of common stock equity securities and $1.0 million from the sales
of fixed maturity securities during the six months ended June 30, 2001. These
realized net investment gains were offset in part by $4.3 million in non-cash
realized investment losses experienced on certain structured securities as a
result of an impairment evaluation in accordance with the recent EITF 99-20
guidance. The proceeds from the 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 six
months ended June 30, 2001 and $5.3 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 $21.8 million (36.2%) to $82.0 million for the six
months ended June 30, 2001 from $60.2 million for the same period of 2000 and
the loss ratio increased to 59.3% in 2001 from 58.5% in 2000. The increase in
net loss and loss adjustment expenses was due principally to the 34.3% growth in
net earned premiums and in part to product mix changes.
Acquisition Costs and Other Underwriting Expenses: Acquisition
costs and other underwriting expenses increased $11.2 million (32.9%) to $45.2
million for the six months ended June 30, 2001 from $34.0 million for the same
period of 2000. This increase was due primarily to the 34.3% 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 $2.0
million to $4.2 million for the six months ended June 30, 2001 from $6.2 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 six
months ended June 30, 2001 and 2000 was 32.8% and 31.1%, 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.
12
13
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Continued)
RESULTS OF OPERATIONS (THREE MONTHS ENDED JUNE 30, 2001 VS JUNE 30, 2000)
Premiums: Gross written premiums grew $30.9 million (34.4%) to
$120.7 million for the three months ended June 30, 2001 from $89.8 million for
the same period of 2000; gross earned premiums grew $20.4 million (25.2%) to
$101.2 million for the three months ended June 30, 2001 from $80.8 million for
the same period of 2000; net written premiums increased $22.8 million (38.2%) to
$82.5 million for the three months ended June 30, 2001 from $59.7 million for
the same period of 2000; and net earned premiums grew $17.4 million (32.0%) to
$71.7 million in 2001 from $54.3 million in 2000.
The respective gross written premium increases for commercial lines, specialty
lines and personal lines segments for the three months ended June 30, 2001 vs.
June 30, 2000 amount to $16.2 million (27.3%), $3.6 million (21.0%) and $11.1
million (82.7%) 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
within these segments, respectively.
- - 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.
- - Rate increases on select casualty renewal business.
- - The growth in the personal lines segment, resulting in an increase of $11.1
million in gross manufactured housing, preferred homeowners and National
Flood Insurance Program written premiums.
The respective net written premium increases for commercial lines, specialty
lines and personal lines segments for the three months ended June 30, 2001 vs.
June 30, 2000 amount to $14.7 million (39.0%), $2.2 million (13.5%) and $5.9
million (110.2%) respectively. The differing percentage increases 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 $8.1
million for the three months ended June 30, 2001 and $5.8 million for the same
period of 2000. Total investments grew to $511.0 million at June 30, 2001 from
$423.4 million at June 30, 2000. The growth in investment income is due to
investing net cash flows provided from operating activities, and the
reinvestment of $5.4 million in proceeds from the sale of common stock holdings
during the quarter which were reinvested into fixed maturity securities.
Net Realized Investment Gain: Net realized investment gains were
$0.3 million for the three months ended June 30, 2001 and $0.3 million for the
same period in 2000. The Company realized net investment gains of $3.6 million
from the sales of common stock equity securities and $1.0 million from the sales
of fixed maturity securities during the three months ended June 30, 2001. These
realized net investment gains were offset in part by $4.3 million in non-cash
realized investment losses experienced during the quarter on certain structured
securities as a result of an impairment evaluation in accordance with the
recent EITF 99-20 guidance. The proceeds from the 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 June 30, 2001 and $2.5 for the same period of 2000. Other
income primarily consists of commissions earned on brokered personal lines
13
14
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Continued)
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 $10.9 million (34.1%) to $42.9 million for the
three months ended June 30, 2001 from $32.0 million for the same period of 2000
and the loss ratio increased to 59.8% in 2001 from 58.9% in 2000. This increase
in net loss and loss adjustment expenses was due principally to the 32.0% growth
in net earned premiums and in part to product mix changes.
Acquisition Costs and Other Underwriting Expenses: Acquisition
costs and other underwriting expenses increased $5.4 million (31.2%) to $22.7
million for the three months ended June 30, 2001 from $17.3 million for the same
period of 2000. This increase was due primarily to the 32.0% growth in net
earned premiums partially offset by a reinsurance change.
Other Operating Expenses: Other operating expenses decreased $1.3
million to $2.1 million for the three months ended June 30, 2001 from $3.4
million for the same period of 2000. The decrease in other operating expenses
was primarily due to the discontinuation 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 June 30, 2001 and 2000 was 33.0% 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. 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.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2001 the Company's investments
experienced unrealized investment depreciation of $3.2 million, net of the
related deferred tax benefit of $1.7 million. At June 30, 2001, the Company had
total investments with a carrying value of $511.0 million, of which 93.0%
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 remaining 7.0% of the Company's total investments consisted
primarily of publicly traded common stock securities.
The Company produced net cash from operations of $68.1 million
and $27.0 million, respectively, for the six months ended June 30, 2001 and
2000. Management believes that the Company has adequate ability to pay all
claims and meet all other cash needs.
During 2000 two of the Company's Insurance Subsidiaries were
approved for membership in the Federal Home Loan Bank ("FHLB"). A primary
advantage of FHLB membership is the ability for 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 June
30, 2001 the Company's borrowing capacity approximated $58.0 million. The
Company anticipates utilizing a portion of its borrowing capacity to purchase a
diversified portfolio in investment grade floating rate securities in the
capital markets funded by floating rate FHLB borrowings to achieve a positive
spread between the rate of interest on these securities and borrowing rates. The
remaining borrowing capacity will provide an immediately available line of
credit. Borrowings aggregated $20.8 million at June 30, 2001 and bear interest
at adjusted LIBOR and mature twelve months from inception.
14
15
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
(Continued)
Risk-based capital is designed to measure the acceptable amount
of capital an insurer should have based on the inherent specific risks of each
insurer. Insurers failing to meet this benchmark capital level may be subject to
scrutiny by the insurer's domiciliary insurance department and ultimately
rehabilitation or liquidation. Based on the standards currently adopted, the
Company's insurance subsidiaries' capital and surplus is in excess of the
prescribed risk-based capital requirements.
NEW ACCOUNTING PRONOUNCEMENT
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 eliminates the practice of amortizing goodwill
through periodic charges to earnings and establishes a new methodology for
recognizing and measuring goodwill and other intangible assets. Under this new
accounting standard, the Company will cease goodwill amortization on January 1,
2002. Goodwill amortization for the year ended December 31, 2001 is anticipated
to amount to approximately $1.7 million. The Company will also review goodwill
and other intangible assets for any impairment or other effects of the new
standard.
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 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.
15
16
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.
16
17
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 3,
2001 the following members were elected to the Board of Directors:
Votes For Votes Withheld
---------------------------------- ---------------------------
Elizabeth H. Gemmill 10,189,842 55,633
William J. Henrich, Jr. 10,189,842 55,633
Paul R. Hertel, Jr. 10,189,842 55,633
James J. Maguire 10,020,679 224,796
James J. Maguire, Jr. 10,020,679 224,796
Thomas J. McHugh 10,187,884 57,591
Michael J. Morris 10,189,842 55,633
Dirk A. Stuurop 10,189,842 55,633
Sean S. Sweeney 10,020,679 224,796
J. Eustace Wolfington 10,022,737 222,738
The following other matter was approved at the Annual Meeting:
Votes For Votes Against Abstentions
------------------- ------------------- ---------------
Approval of the Appointment of
PricewaterhouseCoopers LLP as Independent Auditors
for the Fiscal Year Ending December 31, 2001 10,245,042 433
Item 5. Other information
Not applicable.
17
18
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 June 30, 2001:
Date of Report Item Reported
---------------------------------- ------------------------------------------------------
April 20, 2001 Supplementary Financial Data for the three months ended
March 31, 2001 and 2000
May 4, 2001 March 31, 2001 Investor Presentation
June 1, 2001 Press Release - Philadelphia Consolidated Holding Corp.
joins S&P Smallcap 600 Index
18
19
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 9, 2001 /s/ James J. Maguire
--------------------- -----------------------------------------
James J. Maguire
Chairman of the Board of Directors,
and Chief Executive Officer
(Principal Executive Officer)
Date August 9, 2001 /s/ Craig P. Keller
--------------------- -----------------------------------------
Craig P. Keller
Senior Vice President, Secretary,
Treasurer and Chief Financial
Officer (Principal Financial and Accounting
Officer)
19