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 September 30, 2002
COMMISSION FILE NUMBER 0-22280
PHILADELPHIA CONSOLIDATED HOLDING CORP.
---------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2202671
------------ ----------
(State of Incorporation) (IRS Employer Identification No.)
ONE BALA PLAZA, SUITE 100
BALA CYNWYD, PENNSYLVANIA 19004
(610) 617-7900
-------------------------------------------
(Address, including zip code and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES: |X| NO | |
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES: |X| NO | |
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 12, 2002.
Preferred Stock, $.01 par value, no shares outstanding
Common Stock, no par value, 21,560,335 shares outstanding
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - September 30, 2002 and
December 31, 2001 3
Consolidated Statements of Operations and Comprehensive
Income - For the three and nine months ended
September 30, 2002 and 2001 4
Consolidated Statements of Changes in Shareholders' Equity - For the
nine months ended September 30, 2002 and year ended
December 31, 2001 5
Consolidated Statements of Cash Flows - For the nine
months ended September 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7-11
Item 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-17
Item 3
Quantitative and Qualitative Disclosures About Market Risk 18
Item 4
Controls and Procedures 19
Part II - Other Information 20
Signatures 21
Certification of the Company's Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 22
Certification of the Company's Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 23
2
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
As of
----------------------------
September 30, December 31,
2002 2001
(Unaudited)
------------ ------------
ASSETS
INVESTMENTS:
FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $787,746 AND $626,326) ............. $ 815,257 $ 632,416
EQUITY SECURITIES AT MARKET (COST $44,164
AND $34,065) ....................................... 44,357 40,992
------------ ------------
TOTAL INVESTMENTS ................................ 859,614 673,408
CASH AND CASH EQUIVALENTS ............................ 48,941 49,910
ACCRUED INVESTMENT INCOME ............................ 7,595 6,582
PREMIUMS RECEIVABLE .................................. 132,745 96,025
PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES ........................................ 135,360 99,601
DEFERRED INCOME TAXES ................................ 5,121 6,196
DEFERRED ACQUISITION COSTS ........................... 60,212 41,526
PROPERTY AND EQUIPMENT, NET .......................... 10,744 10,082
GOODWILL ............................................. 25,724 25,724
OTHER ASSETS ......................................... 10,184 8,668
------------ ------------
TOTAL ASSETS ..................................... $ 1,296,240 $ 1,017,722
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
POLICY LIABILITIES AND ACCRUALS:
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES ............. $ 399,502 $ 302,733
UNEARNED PREMIUMS .................................... 306,282 197,839
------------ ------------
TOTAL POLICY LIABILITIES AND ACCRUALS ............ 705,784 500,572
LOANS PAYABLE ........................................ 30,881 31,341
PREMIUMS PAYABLE ..................................... 40,711 25,659
OTHER LIABILITIES .................................... 54,962 31,458
------------ ------------
TOTAL LIABILITIES ................................ 832,338 589,030
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
PREFERRED STOCK, $.01 PAR VALUE,
10,000,000 SHARES AUTHORIZED,
NONE ISSUED AND OUTSTANDING ........................ -- --
COMMON STOCK, NO PAR VALUE,
100,000,000 SHARES AUTHORIZED, 21,625,335 AND
21,509,723 SHARES ISSUED AND OUTSTANDING ........... 270,949 268,509
NOTES RECEIVABLE FROM SHAREHOLDERS ................... (2,672) (3,373)
ACCUMULATED OTHER COMPREHENSIVE INCOME ............... 18,008 8,461
RETAINED EARNINGS .................................... 177,617 155,095
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ....................... 463,902 428,692
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....... $ 1,296,240 $ 1,017,722
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUE:
NET EARNED PREMIUMS .................................. $ 106,146 $ 77,755 $ 295,663 $ 215,981
NET INVESTMENT INCOME ................................ 9,497 8,238 27,727 24,371
NET REALIZED INVESTMENT GAIN (LOSS) .................. 199 488 (2,935) 3,105
OTHER INCOME ......................................... 419 105 435 221
------------ ------------ ------------ ------------
TOTAL REVENUE ...................................... 116,261 86,586 320,890 243,678
------------ ------------ ------------ ------------
LOSSES AND EXPENSES:
LOSS AND LOSS ADJUSTMENT EXPENSES .................... 114,325 59,109 252,003 159,333
NET REINSURANCE RECOVERIES ........................... (35,976) (8,469) (59,773) (26,675)
------------ ------------ ------------ ------------
NET LOSS AND LOSS ADJUSTMENT EXPENSES ................ 78,349 50,640 192,230 132,658
ACQUISITION COSTS AND OTHER
UNDERWRITING EXPENSES ........................... 32,343 25,880 91,221 71,043
OTHER OPERATING EXPENSES ............................. 1,632 974 4,570 5,136
------------ ------------ ------------ ------------
TOTAL LOSSES AND EXPENSES .......................... 112,324 77,494 288,021 208,837
------------ ------------ ------------ ------------
MINORITY INTEREST: DISTRIBUTIONS ON COMPANY OBLIGATED
MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST .................................... -- -- -- 2,749
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES .............................. 3,937 9,092 32,869 32,092
------------ ------------ ------------ ------------
INCOME TAX EXPENSE (BENEFIT):
CURRENT .............................................. 2,044 3,571 14,413 14,269
DEFERRED ............................................. (999) (451) (4,066) (3,599)
------------ ------------ ------------ ------------
TOTAL INCOME TAX EXPENSE ........................... 1,045 3,120 10,347 10,670
------------ ------------ ------------ ------------
NET INCOME ......................................... $ 2,892 $ 5,972 $ 22,522 $ 21,422
============ ============ ============ ============
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
HOLDING GAIN ARISING DURING PERIOD ................... 6,364 3,221 7,639 1,709
RECLASSIFICATION ADJUSTMENT .......................... (129) (317) 1,908 (2,018)
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS) .................... 6,235 2,904 9,547 (309)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME .................................... $ 9,127 $ 8,876 $ 32,069 $ 21,113
============ ============ ============ ============
PER AVERAGE SHARE DATA:
BASIC EARNINGS PER SHARE ............................. $ 0.13 $ 0.34 $ 1.04 $ 1.37
============ ============ ============ ============
DILUTED EARNINGS PER SHARE ........................... $ 0.13 $ 0.32 $ 1.01 $ 1.31
============ ============ ============ ============
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING .......................................... 21,625,799 17,808,317 21,577,670 15,645,956
WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING .......................................... 636,828 704,534 716,017 766,746
------------ ------------ ------------ ------------
WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING .............................. 22,262,627 18,512,851 22,293,687 16,412,702
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
For the Nine Months
Ended For the Year Ended
September 30, 2002 December 31,
(Unaudited) 2001
------------------- ------------------
COMMON STOCK:
BALANCE AT BEGINNING OF YEAR .................. $ 268,509 $ 46,582
ISSUANCE OF SHARES PURSUANT TO PUBLIC OFFERING -- 114,518
ISSUANCE OF SHARES PURSUANT TO STOCK
PURCHASE CONTRACTS .......................... -- 98,905
EXERCISE OF EMPLOYEE STOCK OPTIONS ............ 2,115 6,437
ISSUANCE OF SHARES PURSUANT TO STOCK
PURCHASE PLANS .............................. 325 2,067
------------ ------------
BALANCE AT END OF PERIOD .................. 270,949 268,509
------------ ------------
NOTES RECEIVABLE FROM SHAREHOLDERS:
BALANCE AT BEGINNING OF YEAR .................. (3,373) (2,287)
NOTES RECEIVABLE FORFEITED (ISSUED) PURSUANT
TO STOCK PURCHASE PLAN ...................... 84 (2,158)
COLLECTION OF NOTES RECEIVABLE ................ 617 1,072
------------ ------------
BALANCE AT END OF PERIOD .................. (2,672) (3,373)
------------ ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF
DEFERRED INCOME TAXES:
BALANCE AT BEGINNING OF YEAR .................. 8,461 13,494
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES 9,547 (5,033)
------------ ------------
BALANCE AT END OF PERIOD .................. 18,008 8,461
------------ ------------
RETAINED EARNINGS:
BALANCE AT BEGINNING OF YEAR .................. 155,095 124,536
NET INCOME .................................... 22,522 30,559
------------ ------------
BALANCE AT END OF PERIOD .................. 177,617 155,095
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ................ $ 463,902 $ 428,692
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
For the Nine Months Ended
September 30,
-----------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME ......................................... $ 22,522 $ 21,422
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
NET REALIZED INVESTMENT (GAIN) LOSS .............. 2,935 (3,105)
DEPRECIATION AND AMORTIZATION EXPENSE ............ 1,345 1,967
DEFERRED INCOME TAX BENEFIT ...................... (4,066) (3,599)
CHANGE IN PREMIUMS RECEIVABLE .................... (36,720) (28,930)
CHANGE IN OTHER RECEIVABLES ...................... (36,772) (24,482)
CHANGE IN INCOME TAXES PAYABLE ................... (5,520) (9,219)
CHANGE IN DEFERRED ACQUISITION COSTS ............. (18,686) (8,631)
CHANGE IN OTHER ASSETS ........................... (458) 1,054
CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES ....................................... 96,769 49,293
CHANGE IN UNEARNED PREMIUMS ...................... 108,443 54,705
CHANGE IN OTHER LIABILITIES ...................... 32,490 12,935
TAX BENEFIT FROM EXERCISE OF EMPLOYEE
STOCK OPTIONS .................................. 1,251 25,607
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES .... 163,533 89,017
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITIES ..................................... 188,746 27,063
PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITIES ..................................... 82,793 47,099
PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES ..................................... 13,898 12,603
COST OF FIXED MATURITIES ACQUIRED .................. (422,182) (178,611)
COST OF EQUITY SECURITIES ACQUIRED ................. (26,703) (11,691)
PURCHASE OF PROPERTY AND EQUIPMENT ................. (2,484) (1,385)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES .......... (165,932) (104,922)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
REPAYMENTS ON LOANS PAYABLE ........................ (461) (22,000)
PROCEEDS FROM LOANS PAYABLE ........................ -- 29,841
PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS ... 864 2,911
PROCEEDS FROM COLLECTION OF NOTES RECEIVABLE ....... 617 708
PROCEEDS FROM SHARES ISSUED PURSUANT TO
STOCK PURCHASE PLANS ............................. 410 33
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES .... 1,430 11,493
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............. (969) (4,412)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ...... 49,910 49,742
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............ $ 48,941 $ 45,330
=========== ===========
CASH PAID DURING THE PERIOD FOR:
INCOME TAXES ....................................... $ 18,412 $ 5,435
INTEREST ........................................... $ 466 $ 130
NON-CASH TRANSACTIONS:
ISSUANCE OF SHARES (FORFEITURES) PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR ...... $ (84) $ 1,243
NOTES RECEIVABLE
ISSUANCE OF COMMON SHARES IN SATISFACTION OF
STOCK PURCHASE CONTRACTS .......................... -- $ 98,905
The accompanying notes are an integral part of the consolidated financial
statements.
6
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements as of and for the nine months ended
September 30, 2002 and 2001 are unaudited, but in the opinion of
management, have been prepared on the same basis as the annual audited
consolidated financial statements and reflect all adjustments, consisting
of only normal recurring accruals, necessary for a fair statement of the
information set forth therein. The results of operations for the nine
months ended September 30, 2002 are not necessarily indicative of the
operating results to be expected for the full year or any other period.
These financial statements should be read in conjunction with the
financial statements and notes included in the Company's Annual Report on
Form 10-K as of and for the year ended December 31, 2001.
2. Investments
The carrying amounts for the Company's investments approximates their
estimated fair value. The Company measures the fair value of investments
based upon quoted market prices or by obtaining quotes from dealers. At
September 30, 2002, the Company held no derivative financial instruments
or embedded financial derivatives.
The Company performs various analytical procedures with respect to its
investments, including identifying any security whose fair value is below
its cost. Upon identification of such securities, a detailed review is
performed for securities meeting predetermined thresholds to determine
whether a decline in fair value below a security's cost basis is other
than temporary. If the Company determines a decline in value to be other
than temporary, the cost basis of the security is written down to its fair
value with the amount of the write down included in earnings as a realized
loss in the period the impairment arose.
The Company's impairment evaluation and recognition for interests in
securitized assets is conducted in accordance with the guidance provided
by the Emerging Issues Task Force of the Financial Accounting Standards
Board. Under this guidance, impairment losses on securities must be
recognized if both the fair value of the security is less than its book
value and the net present value of expected future cash flows is less than
the net present value of expected future cash flows at the most recent
(prior) estimation date. If these criteria are met, an impairment charge,
calculated as the difference between the current book value of the
security and its fair value, is included in earnings as a realized loss in
the period the impairment arose.
Realized losses recorded for the three months ended September 30, 2002 and
2001 were $0.3 million and $0 million, respectively, and for the nine
months ended September 30, 2002 and 2001 were $1.5 million and $4.3
million, respectively, as a result of the other than temporary impairment
evaluations.
3. Goodwill
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 142 (" SFAS No. 142"), "Goodwill and Other Intangible
Assets" on January 1, 2002. SFAS No. 142 eliminates the practice of
amortizing goodwill through periodic charges to earnings and establishes a
new methodology for recognizing and measuring goodwill and other
intangible assets. Under this new accounting standard, the Company ceased
goodwill amortization on January 1, 2002. Goodwill amortization for the
nine months ended September 30, 2001 amounted to $1.1 million.
7
The following table provides a reconciliation of the prior year's three
and nine month periods ended September 30 reported net income to adjusted
net income had SFAS No. 142 been applied at the beginning of fiscal 2001
(in thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------ ------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Reported net income ................ $ 2,892 $ 5,972 $ 22,522 $ 21,422
Adjustment for goodwill amortization -- 376 -- 1,128
------------ ------------ ------------ ------------
Adjusted net income ................ $ 2,892 $ 6,348 $ 22,522 $ 22,550
============ ============ ============ ============
Reported basic earnings per share .. $ 0.13 $ 0.34 $ 1.04 $ 1.37
Adjustment for goodwill amortization -- 0.02 -- 0.07
------------ ------------ ------------ ------------
Adjusted basic earnings per share .. $ 0.13 $ 0.36 $ 1.04 $ 1.44
============ ============ ============ ============
Reported diluted earnings per share $ 0.13 $ 0.32 $ 1.01 $ 1.31
Adjustment for goodwill amortization -- 0.02 -- 0.07
------------ ------------ ------------ ------------
Adjusted diluted earnings per share $ 0.13 $ 0.34 $ 1.01 $ 1.38
============ ============ ============ ============
4. Liability for Unpaid Loss and Loss Adjustment Expenses
The liability for unpaid loss and loss adjustment expenses reflects the
Company's best estimate for future amounts needed to pay losses and
related settlement expenses with respect to insured events. Estimating the
ultimate claims liability is necessarily a complex and judgmental process,
inasmuch as the amounts are based on management's informed estimates and
judgments using data currently available. In some cases significant
periods of time, up to several years or more, may elapse between the
occurrence of an insured loss and the reporting of such to the Company.
The method for determining the Company's liability for unpaid loss and
loss adjustment expenses includes, but is not limited to, reviewing past
loss experience and considering other factors such as legal, social, and
economic developments. As additional experience and data become available
the Company's estimate for the liability for unpaid loss and loss
adjustment expenses is revised accordingly. If the Company's ultimate
losses, net of reinsurance, prove to differ substantially from the amounts
recorded at September 30, 2002, the related adjustments could have a
material adverse impact on the Company's financial condition, and results
of operations.
Due to adverse changes in the estimates of insured events in prior years
for the Company's outstanding residual value policies, as previously
reported in the Company's Form 10-Q for the period ending June 30, 2002,
the Company, as part of its monitoring and evaluation procedures, engaged
two consulting firms to aid in evaluating the ultimate potential loss
exposure under these policies. As a result of the indications of these
evaluations, the Company increased its unpaid loss and loss adjustment
expenses by $27.0 million ($15.0 million net of reinsurance recoverables).
The adverse development results from changes in various factors primarily
related to the used car market which have occurred subsequent to the
inception date of the policies.
Additionally, the increase in unpaid loss and loss adjustment expense
ceded to the Company's reinsurer for the residual value policies utilized
the remaining reinsurance limit available to the Company under a combined
coverage reinsurance contract. Accordingly, the ceded unearned premium
reserve of $5.1 million for the Company's combined coverage reinsurance
was fully amortized during the three months ended September 30, 2002. The
combined coverage reinsurance contract provided a 2002 accident year
aggregate stop loss cover which had not been utilized by the Company,
reinsurance coverage for the residual value line of business, and $10.0
million excess $5.0 million catastrophe property reinsurance coverage.
The Company continues to maintain $306.5 million excess $15.0 million
catastrophe property reinsurance on its Florida business.
5. Loans Payable
As of September 30, 2002, the Company had aggregate borrowings of $30.9
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 are invested in collateralized mortgage obligation and
asset backed securities to achieve a positive spread between the rate of
interest on these securities and the borrowing rates.
8
6. Earnings Per Share
Earnings per common share has been calculated by dividing net income for
the period by the weighted average number of common shares and common
share equivalents outstanding during the period. Following is the
computation of earnings per share for the three and nine months ended
September 30, 2002 and 2001, respectively (in thousands, except per share
data):
As of and For the Three As of and For the Nine
Months Ended Months Ended
September 30, September 30
----------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Weighted-Average Common Shares Outstanding ... 21,626 17,808 21,578 15,646
Weighted-Average Share Equivalents Outstanding 637 705 716 767
-------- -------- -------- --------
Weighted-Average Shares and Share
Equivalents Outstanding ..................... 22,263 18,513 22,294 16,413
======== ======== ======== ========
Net Income ................................... $ 2,892 $ 5,972 $ 22,522 $ 21,422
======== ======== ======== ========
Basic Earnings per Share ..................... $ 0.13 $ 0.34 $ 1.04 $ 1.37
======== ======== ======== ========
Diluted Earnings per Share ................... $ 0.13 $ 0.32 $ 1.01 $ 1.31
======== ======== ======== ========
7. Income Taxes
The effective tax rate differs from the 35% marginal tax rate principally
as a result of tax-exempt interest income, the dividend received deduction
and other differences in the recognition of revenues and expenses for tax
and financial reporting purposes.
8. Commitments and Contingencies
On April 30, 2002, U.S. Bank, N.A. d/b/a Firstar Bank ("Firstar"), a bank
to which one of the Company's insurance subsidiaries, Philadelphia
Indemnity Insurance Company ("PIIC"), issued insurance coverages, filed a
complaint against PIIC in the United States District Court for the
Southern District of Ohio (Western Division). The complaint asks for
damages and a declaratory judgment against PIIC. The complaint arises
principally out of a loss adjustment change and also relates to other
coverage interpretations made by PIIC under the terms of residual value
protection insurance policies issued to Firstar relating to vehicles
financed by Firstar. The complaint alleges that as a result of the loss
adjustment change Firstar may suffer damages of as much as $75,000,000. On
June 27, 2002, PIIC filed an answer to the complaint denying liability
with respect to the matters set forth above. PIIC believes that this claim
is without merit and intends to vigorously defend this action.
9. Comprehensive Income
Components of comprehensive income, as detailed in the Consolidated
Statements of Operations and Comprehensive Income, are net of tax. The
related tax effect of Holding Gains arising during the three and nine
months ended September 30, 2002 and 2001 was $3.4 million and $1.7
million, respectively, and $4.1 million and $0.9 million, respectively.
The related tax effect of Reclassification Adjustments for the three and
nine months ended September 30, 2002 and 2001 was ($0.1) million and
($0.2) million, respectively, and $1.0 million and ($1.1) million
respectively.
10. Segment Information
The Company's operations are classified into three reportable business
segments: The Commercial Lines Underwriting Group ("Commercial Lines"),
which has underwriting responsibility for the Commercial Automobile and
Commercial Property and Commercial multi-peril package insurance products;
the Specialty Lines Underwriting Group ("Specialty Lines"), which has
underwriting responsibility for the professional liability insurance
products; and the Personal Lines Group ("Personal Lines"), which designs,
markets and underwrites personal property and casualty insurance products
for the Manufactured Housing and Homeowners
9
markets. The reportable segments operate solely within the United States.
The segments follow the same accounting policies used for the Company's
consolidated financial statements. Management evaluates a segment's
performance based upon underwriting results.
Following is a tabulation of business segment information for the three
and nine months ended September 30, 2002 and 2001. Corporate information
is included to reconcile segment data to the consolidated financial
statements (in thousands):
Nine Months Ended,
------------------------------------------------------------------------
Commercial Specialty Personal
Lines Lines Lines Corporate Total
------------ ------------ ------------ ------------ ------------
September 30, 2002:
Gross Written Premiums .................... $ 360,169 $ 82,427 $ 65,125 $ -- $ 507,721
------------ ------------ ------------ ------------ ------------
Net Written Premiums ...................... $ 287,797 $ 76,625 $ 31,670 $ -- $ 396,092
------------ ------------ ------------ ------------ ------------
Revenue:
Net Earned Premiums ..................... $ 208,396 $ 61,157 $ 26,110 $ -- $ 295,663
Net Investment Income ................... -- -- -- 27,727 27,727
Net Realized Investment Loss ............ -- -- -- (2,935) (2,935)
Other Income ............................ -- -- 1,294 (859) 435
------------ ------------ ------------ ------------ ------------
Total Revenue ........................... 208,396 61,157 27,404 23,933 320,890
------------ ------------ ------------ ------------ ------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses .. 147,723 30,551 13,956 -- 192,230
Acquisition Costs and Other Underwriting
Expenses ............................. -- -- -- 91,221 91,221
Other Operating Expenses ............... -- -- 140 4,430 4,570
------------ ------------ ------------ ------------ ------------
Total Losses and Expenses .............. 147,723 30,551 14,096 95,651 288,021
------------ ------------ ------------ ------------ ------------
Income Before Income Taxes ................ 60,673 30,606 13,308 (71,718) 32,869
Total Income Tax Expense .................. -- -- -- 10,347 10,347
------------ ------------ ------------ ------------ ------------
Net Income ................................ $ 60,673 $ 30,606 $ 13,308 $ (82,065) $ 22,522
============ ============ ============ ============ ============
Total Assets .............................. $ -- $ -- $ 215,058 $ 1,081,182 $ 1,296,240
============ ============ ============ ============ ============
September 30, 2001:
Gross Written Premiums .................... $ 236,795 $ 60,699 $ 64,406 $ -- $ 361,900
------------ ------------ ------------ ------------ ------------
Net Written Premiums ...................... $ 167,088 $ 53,465 $ 35,268 $ -- $ 255,821
------------ ------------ ------------ ------------ ------------
Revenue:
Net Earned Premiums ..................... $ 137,106 $ 50,060 $ 28,815 $ -- $ 215,981
Net Investment Income ................... -- -- -- 24,371 24,371
Net Realized Investment Gain ............ -- -- -- 3,105 3,105
Other Income ............................ -- -- 2,189 (1,968) 221
------------ ------------ ------------ ------------ ------------
Total Revenue ........................... 137,106 50,060 31,004 25,508 243,678
------------ ------------ ------------ ------------ ------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses .. 86,551 31,458 14,649 -- 132,658
Acquisition Costs and Other Underwriting
Expenses ............................. -- -- -- 71,043 71,043
Other Operating Expenses ............... -- -- 1,162 3,974 5,136
------------ ------------ ------------ ------------ ------------
Total Losses and Expenses .............. 86,551 31,458 15,811 75,017 208,837
------------ ------------ ------------ ------------ ------------
Minority Interest: Distributions on
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary
Trust ................................... -- -- -- 2,749 2,749
------------ ------------ ------------ ------------ ------------
Income Before Income Taxes ................ 50,555 18,602 15,193 (52,258) 32,092
Total Income Tax Expense .................. -- -- -- 10,670 10,670
------------ ------------ ------------ ------------ ------------
Net Income ................................ $ 50,555 $ 18,602 $ 15,193 $ (62,928) $ 21,422
============ ============ ============ ============ ============
Total Assets .............................. $ -- $ -- $ 174,652 $ 704,916 $ 879,568
============ ============ ============ ============ ============
10
Three Months Ended,
-------------------------------------------------------------------------
Commercial Specialty Personal
Lines Lines Lines Corporate Total
------------ ------------ ------------ ------------ ------------
September 30, 2002:
Gross Written Premiums .................... $ 161,139 $ 30,103 $ 19,232 $ -- $ 210,474
------------ ------------ ------------ ------------ ------------
Net Written Premiums ...................... $ 126,595 $ 28,137 $ 6,501 $ -- $ 161,233
------------ ------------ ------------ ------------ ------------
Revenue:
Net Earned Premiums ..................... $ 77,051 $ 21,748 $ 7,347 $ -- $ 106,146
Net Investment Income ................... -- -- -- 9,497 9,497
Net Realized Investment Gain ............ -- -- -- 199 199
Other Income ............................ -- -- 372 47 419
------------ ------------ ------------ ------------ ------------
Total Revenue ........................... 77,051 21,748 7,719 9,743 116,261
------------ ------------ ------------ ------------ ------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses .. 66,457 7,398 4,494 -- 78,349
Acquisition Costs and Other Underwriting
Expenses ............................. -- -- -- 32,343 32,343
Other Operating Expenses ............... -- -- 78 1,554 1,632
------------ ------------ ------------ ------------ ------------
Total Losses and Expenses .............. 66,457 7,398 4,572 33,897 112,324
------------ ------------ ------------ ------------ ------------
Income Before Income Taxes ................ 10,594 14,350 3,147 (24,154) 3,937
Total Income Tax Expense .................. -- -- -- 1,045 1,045
------------ ------------ ------------ ------------ ------------
Net Income ................................ $ 10,594 $ 14,350 $ 3,147 $ (25,199) $ 2,892
============ ============ ============ ============ ============
Total Assets .............................. $ -- $ -- $ 215,058 $ 1,081,182 $ 1,296,240
============ ============ ============ ============ ============
September 30, 2001:
Gross Written Premiums .................... $ 101,206 $ 19,101 $ 16,886 -- $ 137,193
------------ ------------ ------------ ------------ ------------
Net Written Premiums ...................... $ 72,782 $ 16,733 $ 6,683 -- $ 96,198
------------ ------------ ------------ ------------ ------------
Revenue:
Net Earned Premiums ..................... $ 51,028 $ 17,350 $ 9,377 -- $ 77,755
Net Investment Income ................... -- -- -- 8,238 8,238
Net Realized Investment Gain ............ -- -- -- 488 488
Other Income ............................ -- -- 591 (486) 105
------------ ------------ ------------ ------------ ------------
Total Revenue ........................... 51,028 17,350 9,968 8,240 86,586
------------ ------------ ------------ ------------ ------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses .. 35,040 10,854 4,746 -- 50,640
Acquisition Costs and Other Underwriting
Expenses ............................. -- -- -- 25,880 25,880
Other Operating Expenses ............... -- -- 384 590 974
------------ ------------ ------------ ------------ ------------
Total Losses and Expenses .............. 35,040 10,854 5,130 26,470 77,494
------------ ------------ ------------ ------------ ------------
Income Before Income Taxes ................ 15,988 6,496 4,838 (18,230) 9,092
Total Income Tax Expense .................. -- -- -- 3,120 3,120
------------ ------------ ------------ ------------ ------------
Net Income ................................ $ 15,988 $ 6,496 $ 4,838 $ (21,350) $ 5,972
============ ============ ============ ============ ============
Total Assets .............................. -- -- $ 174,652 $ 704,916 $ 879,568
============ ============ ============ ============ ============
11
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
Although the Company's financial performance is dependent upon its own specific
business characteristics, certain risk factors can affect the profitability of
the Company. These include, but are not limited to:
- - 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 affect 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.
- - Claims development and the process of estimating loss reserves -
Estimating the Company's ultimate liability for unpaid loss and loss
adjustment expenses is necessarily a complex and judgemental process,
inasmuch as the amounts of any ultimate liability of the Company with
respect to such claims are based on management's informed estimates
and judgments using data currently available.
- - Catastrophe Exposure - The Company's insurance subsidiaries issue
insurance policies which provide coverage for commercial and personal
property and casualty risks. It is possible that a catastrophic event
could greatly increase claims under the insurance policies the insurance
subsidiaries issue. Catastrophes may result from a variety of events or
conditions, including hurricanes, windstorms, earthquakes, hail and other
severe weather conditions and may include terrorist events. It is possible
that a catastrophic event could adversely impact profitability.
The above risk factors should be read in conjunction with the Certain Critical
Accounting Estimates and Judgments included in the Company's Annual Report on
Form 10-K For the Fiscal Year Ended December 31, 2001.
RESULTS OF OPERATIONS (NINE MONTHS ENDED SEPTEMBER 30, 2002 VS. SEPTEMBER 30,
2001)
Premiums: Gross written premiums grew $145.8 million (40.3%) to $507.7
million for the nine months ended September 30, 2002 from $361.9 million for the
same period of 2001; gross earned premiums grew $92.7 million (30.2%) to $399.7
million for the nine months ended September 30, 2002 from $307.0 million for the
same period of 2001; net written premiums increased $140.3 million (54.9%) to
$396.1 million for the nine months ended September 30, 2002 from $255.8 million
for the same period of 2001; and net earned premiums grew $79.7 million (36.9%)
to $295.7 million in 2002 from $216.0 million in 2001.
The respective gross written premium increases for commercial lines, specialty
lines and personal lines segments for the nine months ended September 30, 2002
vs. September 30, 2001 amount to $123.4 million (52.1%), $21.7 million (35.8%)
and $0.7 million (1.1%), respectively. The overall growth in gross written
premiums is primarily attributable to the following:
- - Rating downgrades of certain major competitor property and casualty
insurance companies have led to their diminished presence in the Company's
commercial and specialty lines business segments and continue to result
12
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(Continued)
in additional prospects and increased premium writings, most notably for
the Company's various commercial package and non-profit D&O product lines.
- - The consolidation of certain competitor property and casualty insurance
companies has led to the displacement of certain of their independent
agency relationships. This consolidation continues to result in new agency
relationship opportunities for the Company. These relationships have
resulted in additional prospects and premium writings for the Company's
commercial and specialty lines segments.
- - Continued expansion of marketing efforts relating to commercial lines and
specialty lines products through the Company's field organization and
preferred agents.
- - Rate increases realized on renewal business for the commercial lines
segment, the specialty lines segment and the personal lines segment and
increases in the number of policies written.
Overall premium growth has been offset in part by the following factors:
- - Specialty Lines Segment - The Company's decision not to renew certain
policies in the professional liability product lines due to inadequate
pricing levels being experienced as a result of market conditions and/or
loss experience emerging at higher than expected levels.
- - Personal Lines Segment - The Company's decision not to write new business
or renew certain policies in designated areas of Florida in the Company's
manufactured housing and homeowners product lines, based on an evaluation
of property exposures and related catastrophe loss considerations.
Pursuant to a routine underwriting review which focused on pricing adequacy and
loss experience, as well as other underwriting criteria, the Company cancelled a
Commercial Automobile Excess Liability Insurance customer (Commercial Lines
Underwriting Group) effective October 22, 2002 as a result of an unacceptable
underwriting risk profile. Such customer's gross written premium and net written
premium amounted to $30.9 million and $9.5 million, respectively, for the nine
months ended September 30, 2002.
Additionally, the respective net written premium increases (decreases)
for commercial lines, specialty lines and personal lines segments for the nine
months ended September 30, 2002 vs. September 30, 2001 amount to $120.7 million
(72.2%), $23.2 million (43.3%) and ($3.6) million (10.2%) respectively. The
differing percentage increases (decreases) in net written premiums versus gross
written premiums for the period is primarily due to the Company commuting a
2001 accident year aggregate stop loss reinsurance program during the three
months ended June 30, 2002 whereby net written and net earned premiums
increased by $3.6 million ($2.4 million Commercial Lines, $0.8 million
Specialty Lines, $0.4 million Personal Lines), and in part to other various
changes in, or pricing of, the Company's reinsurance program. Additionally,
during the three months ended September 30, 2002, as a result of utilizing the
remaining reinsurance limit available to the Company under a combined coverage
reinsurance contract for its residual value line of business, the ceded
unearned premium reserve of $5.1 million related to this reinsurance was fully
amortized.
Net Investment Income: Net investment income approximated $27.7
million for the nine months ended September 30, 2002 and $24.4 million for the
same period of 2001. Total investments grew to $859.6 million at September 30,
2002 from $543.6 million at September 30, 2001. The growth in investment income
is due to investing net cash flows provided from operating activities and the
proceeds of the Company's fourth quarter 2001 equity offering. The capital
market environment during 2001 and most of 2002 (low U.S. Treasury yields) had
the effect of increasing the level of prepayments in certain of the Company's
interest rate sensitive investments. Additionally, due to the capital market
environment, the Company has invested approximately $100 million in floating
rate and shorter amortizing securities to minimize interest rate risk with the
expectation of reinvesting these funds into longer duration investments at
higher future fixed income rates. The Company's average duration of its fixed
income portfolio approximated 3.3 years at September 30, 2002, compared to 3.1
years at September 30, 2001, and the Company's tax equivalent book yield on its
fixed income holdings was 5.7% at September 30, 2002, compared to 7.0% at
September 30, 2001.
13
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(Continued)
Net Realized Investment Gain (Loss): Net realized investment gains
(losses) were ($2.9) million for the nine months ended September 30, 2002 and
$3.1 million for the same period in 2001. The Company realized net investment
losses of $2.6 million from the sales of common stock equity securities and $1.2
million in net investment gains from the sale of fixed maturity securities
during the nine months ended September 30, 2002. Additionally, $1.5 million in
non-cash realized investment losses were recorded on certain securities as a
result of the Company's impairment evaluation. The Company realized net
investment gains of $5.9 million from the sales of common stock equity
securities and $1.5 million from the sales of fixed maturity securities during
the nine months ended September 30, 2001. These realized net investment gains
were offset in part by $4.3 million in non-cash realized investment losses
experienced on certain securities as a result of the Company's impairment
evaluation. The proceeds from the sales were reinvested in fixed maturity
securities to increase current investment income, lessen the Company's holdings
in certain common stock positions, and decrease the overall percentage of
investments in common stock securities.
Other Income: Other income approximated $435,000 for the nine months
ended September 30, 2002 and $221,000 for the same period of 2001. Other income
primarily consists of commissions earned on brokered personal lines business,
and to a lesser extent brokered commercial lines business. The Company is
seeking to increase brokering activities in its personal lines segment as it is
not writing new business or renewing certain policies in designated areas of
Florida for the Company's manufactured housing product as a result of its
property exposures in these areas and related catastrophe loss considerations.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment
expenses increased $59.5 million (44.8%) to $192.2 million for the nine months
ended September 30, 2002 from $132.7 million for the same period of 2001 and the
loss ratio increased to 65.0% in 2002 from 61.4% in 2001. This increase in net
loss and loss adjustment expenses was due principally to the 36.9% growth in net
earned premiums, and in part to the Company increasing loss and loss adjustment
expenses incurred by $32.0 million ($20.0 million net of reinsurance recover-
ables) as a result of changes in estimates of insured events in prior years.
Such adverse loss development is due to losses emerging at a higher rate on
automobile leases currently expiring on residual value policies than had been
originally anticipated when the reserves were estimated, primarily as a result
of a deterioration in the value of used cars. The Company also commuted a 2001
accident year aggregate stop loss reinsurance program in the second quarter of
2002, resulting in net written and net earned premium increasing by $3.6
million. The Company had not ceded any losses to the 2001 accident year
aggregate stop loss reinsurance program. The nine months ended September 30,
2001 included a $4.0 million increase to unpaid loss and loss adjustment
expenses arising from business interruption, business personal property,
business property and workers' compensation exposures relating to the September
11, 2001 terrorist attacks.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs
and other underwriting expenses increased $20.2 million (28.5%) to $91.2 million
for the nine months ended September 30, 2002 from $71.0 million for the same
period of 2001. This increase was due primarily to the 36.9% growth in net
earned premiums, offset in part by:
- - A lower weighted average effective commission rate incurred on the
commercial and specialty lines segment products of 12.8% for the nine
months ended September 30, 2002 compared to a weighted average effective
commission rate of 13.4% for the nine months ended September 30, 2001. The
Company has been able to incur a relatively lower commission rate on
business produced by independent agents in the current market environment.
- - Incremental written premium growth without a corresponding incremental
increase in operating leverage.
Other Operating Expenses: Other operating expenses decreased $0.5
million to $4.6 million for the nine months ended September 30, 2002 from $5.1
million for the same period of 2001. The decrease in other operating expenses
was primarily due to the discontinuance of goodwill amortization effective
January 1, 2002. This decrease has been partially offset by an increase in
expenses attributable to increased operating activities.
14
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(Continued)
Income Tax Expense: The Company's effective tax rate for the nine
months ended September 30, 2002 and 2001 was 31.5% and 33.3%, respectively. The
effective rates differed from the 35% statutory rate principally due to
investments in tax-exempt securities and in part due to the discontinuance of
goodwill amortization. The decrease in the effective tax rate is principally due
to a greater investment of cash flows in tax-exempt securities relative to
taxable securities.
RESULTS OF OPERATIONS (THREE MONTHS ENDED SEPTEMBER 30, 2002 VS. SEPTEMBER 30,
2001)
Premiums: Gross written premiums grew $73.3 million (53.4%) to
$210.5 million for the three months ended September 30, 2002 from $137.2 million
for the same period of 2001; gross earned premiums grew $34.7 million (30.3%) to
$149.3 million for the three months ended September 30, 2002 from $114.6 million
for the same period of 2001; net written premiums increased $65.0 million
(67.6%) to $161.2 million for the three months ended September 30, 2002 from
$96.2 million for the same period of 2001; and net earned premiums grew $28.3
million (36.4%) to $106.1 million in 2002 from $77.8 million in 2001.
The respective gross written premium increases for commercial lines, specialty
lines and personal lines segments for the three months ended September 30, 2002
vs. September 30, 2001 amount to $59.9 million (59.2%), $11.0 million (57.6%)
and $2.3 million, (13.9%) respectively. The overall growth in gross written
premiums is primarily attributable to the following:
- - Rating downgrades of certain major competitor property and casualty
insurance companies have led to their diminished presence in the Company's
commercial and specialty lines business segments and continue to result in
additional prospects and increased premium writings, most notably for the
Company's various commercial package and non-profit D&O product lines.
- - The consolidation of certain competitor property and casualty insurance
companies has led to the displacement of certain of their independent
agency relationships. This consolidation continues to result in new agency
relationship opportunities for the Company. These relationships have
resulted in additional prospects and premium writings for the Company's
commercial and specialty lines segments.
- - Continued expansion of marketing efforts relating to commercial lines and
specialty lines products through the Company's field organization and
preferred agents.
- - Rate increases realized on renewal business for the commercial lines
segment, the specialty lines segment and the personal lines segment and
increases in the number of policies written.
The respective net written premium increases (decreases) for commercial
lines, specialty lines and personal lines segments for the three months ended
September 30, 2002 vs. September 30, 2001 amount to $53.8 million (73.9%),
$11.4 million (68.2%) and ($0.2) million (2.7%) respectively. The differing
percentage increases (decreases) in net written premiums versus gross written
premiums for the period is primarily due to various changes in the Company's
reinsurance program. Additionally, during the three months ended September 30,
2002, as a result of utilizing the remaining reinsurance limit available to the
Company under a combined coverage reinsurance contract for its residual value
line of business, the ceded unearned premium reserve of $5.1 million related to
this reinsurance was fully amortized.
Net Investment Income: Net investment income approximated $9.5
million for the three months ended September 30, 2002 and $8.2 million for the
same period of 2001. Total investments grew to $859.6 million at September 30,
2002 from $543.6 million at September 30, 2001. The growth in investment income
is due to investing net cash flows provided from operating activities and the
proceeds of the Company's fourth quarter 2001 equity offering. The capital
market environment of 2001 and the third quarter 2002 (low U.S. Treasury yields)
had the effect of increasing the level of prepayments in certain of the
Company's interest rate sensitive investments. Additionally, due to this capital
market environment, the Company has invested approximately $100 million in
floating rate and shorter amortizing securities to minimize interest rate risk
with the expectation of reinvesting these funds in longer duration investments
at higher future fixed income rates.
15
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(Continued)
Net Realized Investment Gain: Net realized investment gains were
$0.2 million for the three months ended September 30, 2002 and $0.5 million for
the same period in 2001. The Company realized net investment losses of $0.3
million from the sales of common stock equity securities and $0.8 million in net
investment gains from the sales of fixed maturity securities during the three
months ended September 30, 2002. Additionally, $0.3 million in non-cash realized
investment losses were recorded on certain securities as a result of the
Company's impairment evaluation. The Company realized net investment gains of
$0.5 million from the sales of fixed maturity securities during the three months
ended September 30, 2001.
Other Income: Other income approximated $400,000 for the three
months ended September 30, 2002 and $105,000 for the same period of 2001. Other
income primarily consisted of commissions earned on brokered personal lines
business and to a lesser extent brokered commercial lines business. The Company
is seeking to increase brokering activities in its personal lines segment as it
is not writing new business or renewing certain policies in designated areas of
Florida for the Company's manufactured housing product as a result of its
property exposures in these areas and related catastrophe loss considerations.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment
expenses increased $27.7 million (54.7%) to $78.3 million for the three months
ended September 30, 2002 from $50.6 million for the same period of 2001 and the
loss ratio increased to 73.8% in 2002 from 65.1% in 2001. This increase in net
loss and loss adjustment expenses was due principally to the 36.4% growth in net
earned premiums, and in part to the Company increasing loss and loss adjustment
expenses incurred by $27.0 million ($15.0 million net of reinsurance recover-
ables) as a result of changes in estimates of insured events in prior years.
Such adverse loss development is due to losses emerging at a higher rate on
automobile leases currently expiring on residual value policies than had been
originally anticipated when the reserves were estimated, primarily as a result
of the deterioration in the value of used cars. The three months ended September
30, 2001 included a $4.0 million increase to unpaid loss and loss adjustment
expenses arising from business interruption, business personal property,
business property and workers' compensation exposures relating to the September
11, 2001 terrorist attacks.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs
and other underwriting expenses increased $6.4 million (24.7%) to $32.3 million
for the three months ended September 30, 2002 from $25.9 million for the same
period of 2001. This increase was due primarily to the 36.4% growth in net
earned premiums, offset in part by:
- - A lower weighted average effective commission rate incurred on the
commercial and specialty lines segment products of 12.3% for the three
months ended September 30, 2002 compared to a weighted average effective
commission rate of 13.1% for the three months ended September 30, 2001.
The Company has been able to incur a relatively lower commission rate on
business produced by independent agents in the current market environment.
- - Incremental written premium growth without a corresponding incremental
increase in operating leverage.
Other Operating Expenses: Other operating expenses increased $0.6
million to $1.6 million for the three months ended September 30, 2002 from $1.0
million for the same period of 2001. The increase in other operating expenses is
principally due to increased expenses attributable to operating activities,
partially offset by the discontinuance of goodwill amortization effective
January 1, 2002.
Income Tax Expense: The Company's effective tax rate for the three
months ended September 30, 2002 and 2001 was 26.5% and 34.3%, respectively. The
effective rates differed from the 35% statutory rate principally due to
investments in tax-exempt securities and in part to the discontinuance of
goodwill amortization. The decrease in the effective tax rate is principally due
to a greater investment of cash flows in tax-exempt securities relative to
taxable securities.
16
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
(Continued)
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 2002, the Company's
investments experienced unrealized investment appreciation of $9.5 million, net
of the related deferred tax expense of $5.1 million. At September 30, 2002, the
Company had total investments with a carrying value of $859.6 million, of which
94.9% consisted of investments in fixed maturity securities, including U.S.
treasury securities and obligations of U.S. government corporations and
agencies, obligations of states and political subdivisions, corporate debt
securities, collateralized mortgage securities and asset backed securities. The
collateralized mortgage securities and asset backed securities consist of short
tranche securities possessing favorable pre-payment risk profiles. The remaining
5.1% of the Company's total investments consisted primarily of publicly traded
common stock securities.
The Company produced net cash from operations of $163.5 million and
$89.0 million, respectively, for the nine months ended September 30, 2002 and
2001. Management believes that the Company has adequate ability to pay all
claims and meet all other cash needs.
Two of the Company's insurance subsidiaries are members of the
Federal Home Loan Bank of Pittsburgh ("FHLB"). A primary advantage of FHLB
membership is the ability of members to access credit products from a reliable
capital markets provider. The availability of any one member's access to credit
is based upon its FHLB eligible collateral. At September 30, 2002 the insurance
subsidiaries' borrowing capacity was $92.9 million. The insurance subsidiaries
have utilized a portion of their borrowing capacity to purchase a diversified
portfolio in investment grade floating rate securities. These purchases were
funded by floating rate FHLB borrowings to achieve a positive spread between the
rate of interest on these securities and borrowing rates. The remaining
borrowing capacity will provide an immediately available line of credit.
Borrowings aggregated $30.9 million at September 30, 2002 and bear interest at
adjusted LIBOR and mature twelve months from inception and are collateralized by
$35.6 million of the Company's fixed maturity securities. The weighted-average
interest rate on borrowings outstanding as of September 30, 2002 was 1.94%.
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, (v) claims development and the process of estimating loss
reserves; and (vi) catastrophe losses.
17
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's financial instruments are subject to the market risk
of potential losses from adverse changes in market rates and prices. The primary
market risks to the Company are equity price risk associated with investments in
equity securities and interest rate risk associated with investments in fixed
maturities. The Company has established, among other criteria, duration, asset
quality and asset allocation guidelines for managing its investment portfolio
market risk exposure. The Company's investments are held for purposes other than
trading and consist of diversified issuers and issues.
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates. For debt
obligations, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. The information is presented
in U.S. dollar equivalents.
SEPTEMBER 30, 2002
EXPECTED MATURITY DATES TOTAL
(In thousands, except average interest rate) FAIR
2002 2003 2004 2005 2006 Thereafter TOTAL VALUE
-------- -------- -------- -------- -------- ---------- -------- -----------
FIXED MATURITIES AVAILABLE
FOR SALE:
Principal Amount $ 18,650 $ 67,830 $143,810 $115,380 $ 61,680 $381,940 $789,290 $ 806,177
Book Value $ 18,670 $ 67,870 $144,750 $116,520 $ 61,520 $369,456 $778,786 --
Average Interest Rate 6.22% 5.17% 4.67% 4.81% 5.85% 5.29% 5.16% 4.16%
PREFERRED:
Principal Amount -- $ 3,750 $ 1,500 $ 1,000 $ 2,500 -- $ 8,750 $ 9,080
Book Value -- $ 3,860 $ 1,490 $ 1,040 $ 2,570 -- $ 8,960 --
Average Interest Rate -- 5.90% 6.06% 6.84% 6.41% -- 6.18% 6.10%
SHORT-TERM INVESTMENTS:
Principal Amount $ 45,050 -- -- -- -- -- $ 45,050 $ 45,040
Book Value $ 45,040 -- -- -- -- -- $ 45,040 --
Average Interest Rate 1.60% -- -- -- -- -- 1.60% 1.60%
LOANS PAYABLE:
Principal Amount $ 2,500 $ 28,381 -- -- -- -- $ 30,881 --
Average Interest Rate 1.94% 1.94% -- -- -- -- 1.94% --
18
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and its Chief Financial Officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date
within 90 days of the filing date of this quarterly report on Form 10-Q (the
"Evaluation Date"), have concluded that, as of the Evaluation Date, the
Company's disclosure controls and procedures were effective to ensure that
material information relating to the Company and its consolidated subsidiaries
would be made known to them by others within such entities, particularly during
the period in which this quarterly report on Form 10-Q was being prepared.
(b) Changes in Internal Controls. There were no significant changes
in the Company's internal controls or in other factors that could significantly
affect those controls subsequent to the Evaluation Date, including any
corrective actions with regard to deficiencies and material weaknesses in such
controls.
19
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
Not applicable.
Item 5. Other information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits:
Exhibit No. Description
- ---------- ----------------------------------------------------------------
10.1* (1) Employment Agreement with James J. Maguire, effective June 1,
2002
10.2* (1) Employment Agreement with Christopher J. Maguire, effective June
1, 2002
99.1* Certification of the Company's chief executive officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
99.2* Certification of the Company's chief financial officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
* Filed herewith.
(1) Compensatory plan or arrangement.
b. The Company has not filed any reports on Form 8-K during the quarter for
which this report is filed.
20
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 November 13, 2002 /s/ James J. Maguire, Jr.
------------------------ -----------------------------------------
James J. Maguire, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
Date November 13, 2002 /s/ Craig P. Keller
------------------------ -----------------------------------------
Craig P. Keller
Senior Vice President, Secretary,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer)
21
CERTIFICATION
I, James J. Maguire, Jr., President and Chief Executive Officer of Philadelphia
Consolidated Holding Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Philadelphia
Consolidated Holding Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002 Signed: /s/ James J. Maguire, Jr.
------------------- ---------------------------------------
Name: James J. Maguire, Jr.
---------------------------------------
Title: President and Chief Executive Officer
---------------------------------------
22
CERTIFICATION
I, Craig P. Keller, Chief Financial Officer of Philadelphia Consolidated Holding
Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Philadelphia
Consolidated Holding Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 13, 2002 Signed: /s/ Craig P. Keller
------------------------ ------------------------------
Name: Craig P. Keller
-------------------------------
Title: Chief Financial Officer
-------------------------------
23