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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from__________ to __________
COMMISSION FILE NUMBER: 0-22280
PHILADELPHIA CONSOLIDATED HOLDING CORP.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2202671
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
ONE BALA PLAZA, SUITE 100
BALA CYNWYD, PENNSYLVANIA 19004
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 617-7900
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 24,
1999 as reported on the NASDAQ National Market System, was $137,086,971. Shares
of Common Stock held by each executive officer and director and by each person
who is known by the Registrant to beneficially own 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 24, 1999, Registrant had outstanding 12,220,115 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the definitive Proxy Statement for Registrant's 1999 Annual
Meeting of Shareholders to be held May 6, 1999 are incorporated by
reference in Part III.
The Exhibit Index is located on Page 55 of 273.
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PART I
Item 1. BUSINESS
GENERAL
As used in this Annual Report on Form 10-K, (i) "Philadelphia
Insurance" refers to Philadelphia Consolidated Holding Corp., (ii) the "Company"
refers to Philadelphia Insurance and its subsidiaries, doing business as
Philadelphia Insurance Companies; (iii) the "Insurance Subsidiaries" refers to
Philadelphia Indemnity Insurance Company ("PIIC") and Philadelphia Insurance
Company ("PIC"), collectively; (iv) "MIA" refers to Maguire Insurance Agency,
Inc., a captive underwriting manager; and (v) "PCHC Investment" refers to PCHC
Investment Corp., an investment holding company. Philadelphia Insurance was
incorporated in Pennsylvania in 1984, to serve as a holding company for its four
wholly owned subsidiaries (PIIC, PIC, MIA, and PCHC Investment).
1998 marked the fifth anniversary for the Company as a publicly traded
entity. During this five-year period, gross written premiums increased from
$57.1 million to $197.4 million, the GAAP basis combined ratio (the sum of the
net loss and loss adjustment expenses and acquisition costs and other
underwriting expenses divided by net earned premiums) averaged 86.4%, and the
net operating income compound annual growth rate was 42.1%. The Company believes
these achievements are primarily due to its continued focus on generating
underwriting profits through conservative underwriting and pricing discipline,
its differentiation in the marketplace through development of value-added
coverage and service enhancements, and its multiple channels of distribution.
During 1998, the Company completed a $103.5 million FELINE PRIDES(SM)
security offering, thereby adding new capital to the Company. The Company
intends to use the proceeds from this security offering for general corporate
purposes, which may include acquisitions (including, without limitation,
acquisitions of programs or books of business), capital expenditures, capital
contributions, and the repurchase by the Company of its common stock. From these
proceeds, $33.1 million was contributed to the Company's subsidiaries and $3.1
million was utilized to buy back the Company's common stock, under a stock
buy-back program of up to $10.0 million authorized by the Company's Board of
Directors.
The Insurance Subsidiaries have been assigned an "A+" (Superior) Best's
Rating by A.M. Best Company. According to A.M. Best, the "A+" (Superior) rating
is issued to companies that demonstrate excellent financial strength and ability
to meet its obligations to policyholders. A.M. Best ratings are based upon
factors relevant to policyholders and are not directed toward the protection of
investors. The Insurance Subsidiaries also possess an "A" claims paying ability
rating by Standard & Poor's. According to Standard & Poor's, insurers rated "A"
offer good financial security for policyholders. The Company believes that the
"A+" rating assigned by A.M. Best and the "A" rating assigned by Standard &
Poor's are important factors in marketing its products.
BUSINESS STRATEGY
The Company designs, markets and underwrites specialty commercial
property and casualty insurance products incorporating value-added coverages and
services for select target industries or niches. A mixed marketing strategy is
utilized, wherein, the Company's production underwriting organization markets
the Company's insurance products directly to the insured, designated broker
representatives, and a network of preferred agents. The Company's production
underwriting organization, consisting of 160 professionals at year end 1998,
operates from 40 regional offices located across the United States and includes
telemarketing staffs at its regional offices and the Philadelphia Home Office.
Approximately, 54% of the total 1998 gross premium was produced indirectly
either through the Company's 53 preferred agents (16%) or its some 4,000 broker
relationships (38%).
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Product Lines
The following table sets forth, for the years ended December 31, 1998, 1997
and 1996, the gross written premiums on the Company's insurance product lines
and the relative percentages that such premiums represented.
For the Years Ended December 31,
-----------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Dollars Percentage Dollars Percentage Dollars Percentage
------- ---------- ------- ---------- ------- ----------
(Dollars in Thousands)
Gross Written Premiums
Commercial Automobile ....... $ 21,748 11.0% $ 18,415 11.6% $ 18,506 13.5%
Commercial Excess ........... 60,873 30.8 59,296 37.3 56,411 41.2
Commercial Package .......... 78,090 39.6 60,012 37.7 43,707 32.0
Specialty Lines ............. 30,396 15.4 20,748 13.0 16,558 12.1
Specialty Property & Inland
Marine ...................... 1,104 .6
New Programs ................ 4,828 2.4
Involuntary ................. 369 .2 620 .4 1,673 1.2
-------- ------- -------- ------- -------- -------
Total ....................... $197,408 100.0% $159,091 100.0% $136,855 100.0%
======== ======= ======== ======= ======== =======
Commercial Automobile and Commercial Excess: The Company has provided
Commercial Automobile Products to the leasing and rent-a-car industries for 36
years. Products offered to the rent-a-car industry include coverage for the
business owner's property, dual interest liability, and physical damage on the
rental vehicle. In 1998, the Company added paratransit as an additional class of
business.
Additionally, through arrangements with a number of the largest rent-a-car
companies, the Company also offers its commercial excess product at the rental
car counter to rent-a-car customers protecting them against liability for bodily
injury and property damage, which is excess of the statutory coverage provided
with the rental vehicle and primary over the renter's personal automobile
insurance coverage.
In keeping with its marketing philosophy, the Company includes a number of
special features in its rental car products and services in an attempt to
differentiate them from the competition. Such features include: catastrophic
comprehensive coverage for losses due to fire, lightening, windstorm, hail,
flood, earthquake and other specified causes; subrogation services on
self-insured physical damage; liability deductibles; and self-insured retention
programs.
The Company also offers a full range of liability and physical damage
coverages to automobile leasing companies and their customers. For the driver
(the lessee), coverages include both primary liability and physical damage
coverage on the vehicle. For the owner (the lessor), coverages include
contingent and excess liability over the primary liability layer which protects
lessors in the event of a loss when the primary coverage is absent or inadequate
and contingent physical damage coverage. Additional products offered to leasing
companies include interim primary liability and physical damage coverage, which
protects the lessor of the vehicle before and after it is delivered to the
lessee; residual value coverage which guarantees the value of the leased vehicle
at the termination of the lease; and guaranteed asset protection coverage which
protects the lessor and lessee for the difference between the leased vehicle's
actual cash value and the lease or loan net value in instances where the vehicle
is stolen or damaged beyond repair.
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Commercial Package: The Company has been providing Commercial Multi Peril
Package Policies ("Package Programs") to specific targeted niche markets for
over 10 years. Among the organizations to which the Company offers its specialty
niche package programs are non-profit, health and fitness, homeowners
associations, and most recently, condominium associations, and day care
facilities. The package policies provide a combination of comprehensive
liability, property, automobile, and workers compensation coverage with limits
up to $1.0 million for casualty, $100.0 million for property, and umbrella
limits on an optional basis up to $10.0 million. Policies are further tailored
to include special value-added features addressing unique aspects of each of the
above niche markets - differentiating the Company's product offerings from those
of its competitors.
Specialty Lines: The Company has been providing specialty professional
liability products for approximately ten years, specializing in non-ISO,
proprietary policies developed primarily for the professional liability,
employment practices and directors & officers liability markets. The Company
focuses on maintaining a high renewal retention, improving current products,
developing new products and staffing field offices with experienced
underwriters. During 1998, the Company introduced a variety of coverage
enhancements to several of its policies, including Executive Safeguard(SM),
Miscellaneous Professional and Non-Profit Directors & Officers. These
enhancements were designed to improve and differentiate the coverage offered
without sacrificing underwriting results. In addition, two new products -
Accountants and Dentists Professional Liability - were introduced into
previously untapped markets. The Company has taken significant steps to
regionalize its underwriting. By having a local underwriting presence,
policyholders can benefit from quicker service and easier access to their
underwriter. Furthermore, the Company is able to draw from other regional
markets to fill its highly specialized personnel needs. The Company plans on
staffing the remaining regional offices with experienced specialty lines
underwriters during 1999.
Specialty Property & Inland Marine: The Company established a Specialty
Property & Inland Marine underwriting organization during 1998 specializing in
large property risks and inland marine insurance. Products include the
UltimateCover Policy which is designed to insure a wide range of business
entities from shopping centers to hotels to educational. The Company anticipates
that the UltimateCover Policy will not only provide the opportunity to market to
new insureds, but will also provide the opportunity to round out existing
product offerings and create cross-selling opportunities. With respect to inland
marine products, the concentration of effort will be on the larger segments of
the inland marine market including builders' risk, contractors' equipment and
motor truck cargo. In addition, the expertise now exists to manuscript coverage
forms for the unusual, "one-of-a-kind-type" account. The Specialty Property and
Inland Marine Underwriting organization currently consists of a total of 20
professionals and support staff. The professionals possess an average experience
level of 25 years in this market niche and will immediately introduce a "new"
agency force to the Company's distribution, further complementing the Company's
mixed marketing approach.
New Products/Programs: The Company continually evaluates new
product(s)/program(s) which either complement its current niche markets or
provide opportunities consistent with its strategic focus on conservative
underwriting and pricing within a select market niche. During 1998, the Company
offered for the first time workers' compensation coverage (through a fronting
and quota share arrangement) to "round out" its specialty and commercial lines
product offerings. Additionally, the Company introduced a commercial multi-peril
package product for day care facilities and a mobile home program.
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The following table provides the geographic distribution of the Company's
risks insured as represented by direct earned premiums for all product lines for
the year ended December 31, 1998. No other state accounted for more than 2% of
total direct earned premiums for all product lines for the year ended December
31, 1998 (Dollars in Thousands).
State Direct Earned Premiums Percent of Total
----- ---------------------- ----------------
California................................. $32,395 18.7%
Florida.................................... 19,327 11.1
New York................................... 10,556 6.1
New Jersey................................. 8,809 5.1
Illinois................................... 7,186 4.1
Hawaii..................................... 7,015 4.0
Texas...................................... 6,478 3.7
North Carolina............................. 6,338 3.7
Massachusetts.............................. 6,241 3.6
Pennsylvania............................... 6,167 3.6
Ohio....................................... 6,057 3.5
Washington................................. 3,713 2.1
Connecticut................................ 3,588 2.1
Other...................................... 49,685 28.6
-------- -----
Total Direct Earned Premiums............... $173,555 100.0%
======== =====
Underwriting and Pricing
The Company's underwriting function is segregated into three independent
groups: Commercial Lines, Specialty Lines, and Specialty Property & Inland
Marine. Commercial and Specialty Lines, and Specialty Property and Inland Marine
responsibilities include: pricing all business, managing the risk selection
process, and monitoring loss ratios by product and insured.
The Commercial Lines group, which has underwriting responsibility for the
Company's commercial automobile and commercial package products, currently
consists of home office underwriters that are supported by underwriting
assistants, raters, and other policy administration personnel. The Commercial
Lines underwriters and support staff are organized into geographic underwriting
teams responsible for underwriting and servicing specific commercial automobile
and commercial package products. Each underwriting team is under the direction
of a Senior Underwriter who reports to the Vice President of Commercial Lines
Underwriting.
The Specialty Lines group, which has underwriting responsibility for the
Company's professional liability products, consists of 16 home office
underwriters and 10 regional underwriters, who report to the Chief Operating
Officer, and are supported by underwriting assistants. The Specialty Lines
underwriters have responsibility for underwriting specific professional
liability products within designated Company marketing regions. The Specialty
Lines underwriters located in regional offices work closely with the marketing
department to generate profitable business.
The Specialty Property & Inland Marine group, which has authority for the
Company's large property and inland marine products, currently consists of two
home office underwriters who are supported by underwriting assistants and other
personnel. In addition, the Company has strategically placed 13 underwriting
teams within the Company's existing field offices. These regional underwriters
have total responsibility for sales, underwriting, policy issuance, and overall
management of the book of business. All regional and home office Specialty
Property & Inland Marine underwriters report to the Vice President of Specialty
Property & Inland Marine Underwriting. The Company believes that by delivering
excellent service on a local basis, relationship building will be enhanced.
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The Company uses a combination of Insurance Services Office, Inc. ("ISO")
coverage forms and rates and independently filed forms and rates. Coverage forms
and rates are independently developed in situations where the line of business
is not supported by ISO or where management believes the ISO forms and rates do
not adequately address the risk. Departures from ISO forms are also used to
differentiate the Company's products from its competitor's products and are
independently filed.
The Company attempts to follow conservative underwriting and pricing
practices. When necessary, the Company is willing to reunderwrite, sharply
curtail or discontinue a product deemed to present unacceptable risks. Written
underwriting guidelines are maintained, and updated regularly, for all classes
of business underwritten. Adherence to underwriting guidelines is maintained
through underwriting audits. Product price levels are measured utilizing a price
monitoring system which measures the aggregate price level of the book of
business. This system is intended to assist management and underwriters in
recognizing and correcting price deterioration before it results in underwriting
losses.
Reinsurance
The Company's casualty reinsurance agreement with Swiss Re America (the
"Reinsurer") provides that the Company bears the first layer of liability on
each occurrence (varying from $100,000 to $500,000 based upon the specific
product) with the Reinsurer bearing the remaining contractual liability to
policy limits of $1.0 million. Casualty risks in excess of $1.0 million up to
$11.0 million are reinsured under a casualty treaty ("Excess Treaty") placed
through a reinsurance broker. GE RE, Trenwick, and Liberty Mutual currently
participate on the Excess Treaty at 50%, 25%, and 25%, respectively. Each of
these reinsurers is rated "A" (Excellent) or better by A.M. Best Company.
Facultative reinsurance is placed for each casualty risk in excess of $11.0
million.
The Company also has an excess casualty reinsurance agreement with the
Reinsurer providing an additional $5.0 million of coverage for protection from
exposures such as extra-contractual obligations and judgments in excess of
policy limits. Additionally, the Company has an errors and omissions insurance
policy which provides an additional $5.0 million of coverage with respect to
these exposures.
The Company's property excess of loss reinsurance treaty provides that the
Company bears the first $500,000 layer of loss on each risk with General
Reinsurance and Swiss Re America bearing the next $9.5 million layer of loss on
each risk on a 55% / 45% quota share basis, respectively. The Company has an
automatic facultative excess of loss cover with General Reinsurance and Swiss Re
America (participating on a 55% / 45% quota share basis, respectively) for each
property risk in excess of $10.0 million up to $100.0 million. Additionally, the
Company has property catastrophe reinsurance for property catastrophe losses in
excess of $2.0 million up to $14.0 million.
The Company seeks to limit the risk of a reinsurer's default in a number of
ways. First, the Company principally contracts with large reinsurers that are
rated at least "A-" (Excellent) by A.M. Best. Second, the Company seeks to
collect the obligations of its reinsurers on a timely basis. This collection
effort is supported by a reinsurance recoverable system that is regularly
monitored. Finally, the Company typically does not write casualty policies in
excess of $10.0 million nor property policies in excess of $50.0 million.
The Company regularly assesses its reinsurance needs and seeks to improve
the terms of its reinsurance arrangements as market conditions permit. Such
improvements may involve increases in retentions, modifications in premium
rates, changes in reinsurers and other matters.
Marketing and Distribution
Proactive risk selection based on sound underwriting criteria and
relationship selling in clearly defined target markets continues to be the
foundation of the Company's marketing plan. Within this framework, the Company's
marketing effort is designed to assure a systematic and disciplined approach to
developing business which is anticipated to be profitable. The Company's most
important distribution channel is its production underwriting organization. The
production underwriting organization is currently comprised of 160 employees
located in 40 field offices in major markets across the country. The field
offices are focused daily on interacting with prospective and existing insureds.
In addition to this direct
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marketing, relationships with approximately 4,000 brokers have been formed
either as a result of the broker having a relationship with the insured, or
through seeking the Company's expertise in one of its specialty products.
The Company's preferred agent program, wherein business relationships are
formed with brokers specializing in certain of the Company's business niches,
has grown to 53 preferred agent relationships at year end 1998, representing
approximately $32.0 million in gross written premium. The Company anticipates
increasing the number of these relationships by approximately 30% in 1999
thereby further increasing the distribution of the Company's niche products.
This mixed marketing concept not only provides the flexibility to work with the
broker and/or policyholder but also provides the flexibility to seize emerging
market opportunities.
With regard to the Specialty Property & Inland Marine underwriting
organization, the Company has developed working relationships with a variety of
distribution channels including wholesalers, brokers, and select independent
agents.
The Company supplements its marketing efforts through trade shows, direct
mailings and national advertisements placed in trade magazines serving
industries in which the Company specializes.
Product Development
The Company continually evaluates new product opportunities, consistent
with its strategic focus on selected market niches. Direct contacts between the
Company's field and home office personnel and its customers have produced a
number of new product ideas. All new product ideas are presented to the Product
Development Committee (the "Committee") for consideration. The Committee,
currently composed of the Company's two most senior executives, as well as
officers from the underwriting and claims departments, meets regularly to review
the feasibility of products from a variety of perspectives, including
underwriting risk, marketing and distribution, reinsurance, long-term viability
and consistency with the Company's culture and philosophy. For each new product,
an individualized test market plan is prepared, addressing such matters as the
appropriate distribution channel (e.g., a limited number of selected production
underwriters), an appropriate cap on premiums to be generated during the test
market phase and reinsurance requirements for the test market phase. Test market
products may involve lower retentions than customarily utilized. After a new
product is approved for test marketing, the Company monitors its success based
on specified criteria (e.g., underwriting results, sales success, product demand
and competitive pressures). If expectations are not realized, the Company either
moves to improve results by initiating adjustments or abandons the product.
Claims Management and Administration
In accordance with its emphasis on underwriting profitability, the Company
actively manages claims under its policies in an effort to investigate reported
incidents at the earliest juncture, service insureds and minimize fraud. Claim
files are regularly audited by claims supervisors and the Company's reinsurers
in an attempt to ensure that claims are being processed properly and that
reserves are being set at appropriate levels. Claims examiners are expected to
set conservative reserves, an important factor in the Company's reserve
development over the years. See "Loss and Loss Adjustment Expenses."
The Company maintains a Special Investigations Unit to investigate
suspicious claims and to serve as a clearinghouse for information concerning
fraudulent practices primarily within the rental car industry. Working closely
with a variety of industry contacts, including attorneys, investigators and
rental car company fraud units, this unit has uncovered a number of fraudulent
claims.
Loss and Loss Adjustment Expenses
The Company is liable for losses and loss adjustment expenses under its
insurance policies and reinsurance treaties. While the Company's professional
liability policies are written on claims-made forms and while claims on its
other policies are generally reported promptly after the occurrence of an
insured loss, in many cases several years may elapse between the occurrence of
an insured loss, the reporting of the loss to the Company and the Company's
payment of the loss. The Company reflects its liability for the ultimate payment
of all incurred losses and loss adjustment expenses by establishing loss and
loss adjustment expense reserves, which are balance sheet liabilities
representing estimates of future amounts needed to pay claims and related
expenses with respect to insured events that have occurred.
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When a claim involving a probable loss is reported, the Company establishes
a case reserve for the estimated amount of the Company's ultimate loss and loss
adjustment expense. This estimate reflects an informed judgment, based on the
Company's reserving practices and the experience of the Company's claims staff.
Management also establishes reserves on an aggregate basis to provide for losses
incurred but not reported ("IBNR"), as well as future development on claims
reported to the Company.
As part of the reserving process, historical data are reviewed and
consideration is given to the anticipated effect of various factors, including
known and anticipated legal developments, changes in societal attitudes,
inflation and economic conditions. Reserve amounts are necessarily based on
management's estimates and judgments; as new data become available and are
reviewed, these estimates and judgments are revised, resulting in increases or
decreases to existing reserves. To verify the adequacy of its reserves, the
Company engages independent actuarial consultants to perform interim loss
reserve analyses and annual certifications.
The following table sets forth a reconciliation of beginning and ending
reserves for unpaid loss and loss adjustment expenses, net of amounts for
reinsured losses and loss adjustment expenses, for the years indicated. As a
result of changes in estimates of insured events of prior years, the Company
reduced losses and loss adjustment expenses incurred by $3,170,000, $1,716,000
and $965,000 in 1998, 1997 and 1996, respectively. Such favorable development
was due to losses emerging at a lesser rate than had been originally anticipated
when the initial reserves for the applicable accident years were estimated.
As of and For the Years Ended December 31,
-----------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Unpaid loss and loss adjustment expenses at
beginning of year (1) .................................. $ 108,928 $ 85,723 $ 68,246
--------- --------- ---------
Provision for losses and loss adjustment expenses for
current year claims .................................... 69,544 56,725 41,083
Decrease in estimated ultimate losses and loss
adjustment expenses for prior year claims .............. (3,170) (1,716) (965)
--------- --------- ---------
Total incurred losses and loss adjustment expenses ........ 66,374 55,009 40,118
--------- --------- ---------
Loss and loss adjustment expense payments for claims
attributable to:
Current year ........................................... 13,402 9,512 7,427
Prior years ............................................ 26,870 22,292 15,214
--------- --------- ---------
Total payments ............................................ 40,272 31,804 22,641
--------- --------- ---------
Unpaid loss and loss adjustment expenses at end of year (1) $ 135,030 $ 108,928 $ 85,723
========= ========= =========
(1) Unpaid loss and loss adjustment expenses differ from the amounts
reported in the Consolidated Financial Statements because of the
inclusion therein of reinsurance receivables of $16,120, $13,502 and
$10,919 at December 31, 1998, 1997 and 1996, respectively.
The following table presents the development of unpaid loss and loss
adjustment expenses, net of amounts for reinsured losses and loss adjustment
expenses, from 1988 through 1998. The top line of the table shows the estimated
reserve for unpaid loss and loss adjustment expenses at the balance sheet date
for each of the indicated years. These figures represent the estimated amount of
unpaid loss and loss adjustment expenses for claims arising in the current year
and all prior years that were unpaid at the balance sheet date, including IBNR
losses. The table also shows the re-estimated amount of the previously recorded
unpaid loss and loss adjustment expenses based on experience as of the end of
each succeeding year. The estimate changes as more information becomes known
about the frequency and severity of claims for individual years.
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AS OF AND FOR THE YEARS ENDED DECEMBER 31,
(Dollars in Thousands)
UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES, AS STATED 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ----
$ 10,615 $ 12,198 $ 15,930 $ 22,248 $ 31,981 $ 38,714 $ 53,595 $ 68,246
Cumulative Paid as of:
1 year later .................... 2,955 3,354 4,286 6,698 9,865 10,792 12,391 15,214
2 years later .................... 4,832 6,249 8,084 12,485 16,290 19,297 23,139 31,410
3 years later .................... 6,584 8,807 10,838 16,288 21,253 24,991 33,511 40,637
4 years later .................... 7,813 10,155 12,907 17,780 24,299 28,903 38,461
5 years later .................... 8,341 11,217 13,211 19,406 25,793 30,558
6 years later .................... 8,748 11,497 13,792 19,898 26,321
7 years later .................... 8,704 11,760 14,074 20,246
8 years later .................... 8,696 11,902 14,329
9 years later .................... 8,746 11,905
10 years later ................... 8,754
Unpaid Loss and Loss Adjustment
Expenses re-estimated as of End of
Year:
1 year later ..................... 9,535 12,628 15,953 22,056 30,538 38,603 52,670 67,281
2 years later .................... 9,825 12,644 15,712 21,327 30,428 38,016 52,062 66,061
3 years later .................... 9,645 12,424 14,822 21,198 29,648 37,184 51,149 63,872
4 years later .................... 9,437 11,947 14,811 21,118 29,306 36,272 49,805
5 years later .................... 9,053 11,836 14,841 21,399 28,553 35,783
6 years later .................... 8,859 12,060 14,593 21,106 28,370
7 years later .................... 8,770 12,008 14,606 21,013
8 years later .................... 8,783 12,039 14,596
9 years later .................... 8,804 12,039
10 years later ................... 8,804
Cumulative Redundancy
Dollars ........................ $ 1,811 $ 159 $ 1,333 $ 1,235 $ 3,611 $ 2,931 $ 3,790 $ 4,374
Percentage ..................... 17.1% 1.3% 8.4% 5.6% 11.3% 7.6% 7.1% 6.4%
UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES, AS STATED 1996 1997 1998
---- ---- ----
$ 85,723 $108,928 $135,030
Cumulative Paid as of:
1 year later .................... 22,292 26,870
2 years later .................... 38,848
3 years later ....................
4 years later ....................
5 years later ....................
6 years later ....................
7 years later ....................
8 years later ....................
9 years later ....................
10 years later ...................
Unpaid Loss and Loss Adjustment
Expenses re-estimated as of End of
Year:
1 year later ..................... 84,007 105,759
2 years later .................... 81,503
3 years later ....................
4 years later ....................
5 years later ....................
6 years later ....................
7 years later ....................
8 years later ....................
9 years later ....................
10 years later ...................
Cumulative Redundancy
Dollars ........................ $ 4,220 3,170
Percentage ..................... 4.90% 2.9%
(1) Unpaid loss and loss adjustment expenses differ from the amounts reported
in the Consolidated Financial Statements because of the inclusion therein
of reinsurance receivables of $16,120, $13,502, $10,919, $9,440, $5,580,
$5,539, $1,770, $1,267, $1,672 and $1,591 at December 31, 1998, 1997, 1996,
1995, 1994, 1993, 1992, 1991, 1990, and 1989, respectively.
(2) The Company maintains its historical loss records net of reinsurance and
therefore is unable to conform the presentation of this table to the
financial statements.
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10
The cumulative redundancy represents the aggregate change in the reserve
estimated over all prior years, and does not present accident year loss
development. Therefore, each amount in the table includes the effects of changes
in reserves for all prior years.
The unpaid loss and loss adjustment expense of PIIC and PIC, as reported in
their Annual Statements prepared in accordance with statutory accounting
practices and filed with state insurance departments, differ from those
reflected in the Company's financial statements prepared in accordance with
generally accepted accounting principles ("GAAP") with respect to recording the
effects of reinsurance. Unpaid loss and loss adjustment expenses under statutory
accounting practices are reported net of the effects of reinsurance whereas
under GAAP these amounts are reported without giving effect to reinsurance in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 113.
Under GAAP, reinsurance receivables, with a corresponding increase in unpaid
loss and loss adjustment expense, have been recorded. (See footnote (1) on Page
10 for amounts). There is no effect on net income or shareholders' equity due to
the difference in reporting the effects of reinsurance between statutory
accounting practices and GAAP as discussed above.
Operating Ratios
Statutory Combined Ratio
The statutory combined ratio, which is the sum of (a) the ratio of loss and
loss adjustment expenses incurred to net earned premiums (loss ratio) and (b)
the ratio of policy acquisition costs and other underwriting expenses to net
written premiums (expense ratio), is the traditional measure of underwriting
experience for insurance companies. Generally, if the combined ratio is below
100%, an insurance company has an underwriting profit and if it is above 100%,
the insurer has an underwriting loss.
The following table reflects the consolidated loss, expense and combined
ratios of the Insurance Subsidiaries together with the property and casualty
industry-wide combined ratios after policyholders' dividends.
For the Years Ended December 31,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Loss Ratio ........................................... 54.1% 55.3% 55.7% 57.1% 59.5%
Expense Ratio ........................................ 31.0% 29.1% 31.1% 29.6% 29.9%
----- ----- ----- ----- -----
Combined Ratio ....................................... 85.1% 84.4% 86.8% 86.7% 89.4%
===== ===== ===== ===== =====
Industry Combined Ratio after Policyholders" Dividends 104.8% 101.6% 105.8% 106.3% 108.3%
===== ===== ===== ===== =====
(1) (2) (2) (2) (2)
(1) Source: Best's Review/Preview PC 1999 (Estimated 1998).
(2) Source: Best's Aggregates & Averages, 1998 Edition.
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Premium-to-Surplus Ratio:
While there are no statutory provisions governing premium-to-surplus
ratios, regulatory authorities regard this ratio as an important indicator as to
an insurer's ability to withstand abnormal loss experience. Guidelines
established by the National Association of Insurance Commissioners (the "NAIC")
provide that an insurer's net premium-to-surplus ratio is satisfactory if it is
below 3 to 1.
The following table sets forth, for the periods indicated, net written
premiums to policyholders' surplus for the Insurance Subsidiaries (statutory
basis):
As of and For the Years Ended December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ---------- -----------
(Dollars in Thousands)
Net Written Premiums.................. $ 143,036 $ 111,797 $ 83,994 $ 62,072 $ 55,398
Policyholders' Surplus................ $ 152,336 $ 105,985 $ 81,906 $ 67,500 $ 56,027
Premium to Surplus Ratio.............. 1.0 to 1.0 1.0 to 1.0 1.0 to 1.0 .9 to 1.0 1.0 to 1.0
Investments
The Company's investment objective continues to be the realization of
relatively high levels of investment income while generating competitive
after-tax total rates of return within a prudent level of risk and within the
constraints of maintaining adequate securities in amount and duration to meet
cash requirements of current operations and long-term liabilities, as well as
maintaining and improving the Company's A.M. Best and Standard & Poors' ratings.
The Company utilizes professional investment managers for its fixed maturity and
equity investments, which consist of diversified issuers and issues.
At December 31, 1998, the Company had total investments with a carrying
value of $356.5 million. At December 31, 1998, 79.6% of the Company's total
investments were investment grade fixed maturity securities, including U.S.
treasury securities and obligations of U.S. government corporations and
agencies, obligations of states and political subdivisions, corporate debt
securities, collateralized mortgage securities and asset backed securities. The
collateralized mortgage securities and asset backed securities consist of short
tranche securities possessing favorable pre-payment risk profiles. The remaining
20.4% of the Company's total investments consisted primarily of publicly-traded
common stock securities.
The following table sets forth information concerning the composition of
the Company's total investments at December 31, 1998:
Estimated Percent of
Amortized Market Carrying Carrying
Cost Value Value Value
-------- -------- -------- ----------
(Dollars in Thousands)
Fixed Maturities:
Obligations of States and Political
Subdivisions ....................... $112,196 $117,195 $117,195 32.9%
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies .......... 7,706 7,918 7,918 2.2
Corporate and Bank Debt Securities .. 69,532 69,391 69,391 19.5
Collateralized Mortgage Securities .. 42,755 42,820 42,820 12.0
Asset Backed Securities ............. 46,368 46,394 46,394 13.0
Equity Securities .................... 43,441 72,768 72,768 20.4
-------- -------- -------- -----
Total Investments .................. $321,998 $356,486 $356,486 100.0%
======== ======== ======== =====
At December 31, 1998, all of the Insurance Subsidiaries' fixed maturity
securities consisted of U.S. government securities or securities rated "1" or
"2" by the NAIC; the majority of the Company's fixed maturity securities were
rated "A-" or better by Standard & Poor's Corporation.
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12
The cost and estimated market value of fixed maturity securities at
December 31, 1998, by remaining original contractual maturity, are set forth
below. Expected maturities may differ from contractual maturities because
certain borrowers have the right to call or prepay obligations, with or without
call or prepayment penalties:
Amortized Cost Estimated Market Value
---------------- ------------------------
(Dollars in Thousands)
Due in one year or less....................................... $ 10,571 $ 10,737
Due after one year through five years......................... 33,688 34,237
Due after five years through ten years........................ 118,704 123,095
Due after ten years........................................... 26,471 26,435
Collateralized Mortgage and Asset Backed Securities........... 89,123 89,214
------------- --------------
Total.................................................... $ 278,557 $ 283,718
============= ==============
Investments of the Insurance Subsidiaries must comply with applicable laws
and regulations which prescribe the type, quality and diversification of
investments. In general, these laws and regulations permit investments, with
specified limits and subject to certain qualifications, in federal, state and
municipal obligations, corporate bonds, preferred and common equity securities,
real estate mortgages and real estate.
Regulation
General: Insurance companies are subject to supervision and regulation in
the states in which they transact business. Such supervision and regulation,
designed primarily for the protection of policyholders and not shareholders,
relates to most aspects of an insurance company's business and includes such
matters as authorized lines of business; underwriting standards; financial
condition standards; licensing of insurers; investment standards; premium
levels; policy provisions; the filing of annual and other financial reports
prepared on the basis of Statutory Accounting Practices ("SAP"); the filing and
form of actuarial reports; the establishment and maintenance of reserves for
unearned premiums; losses and loss adjustment expenses; transactions with
affiliates; dividends; changes in control; and a variety of other financial and
non-financial matters. Because the Insurance Subsidiaries are domiciled in
Pennsylvania, the Pennsylvania Department of Insurance (the "Department") has
primary authority over the Company.
Regulation of Insurance Holding Companies: Pennsylvania, like many other
states, has laws governing insurance holding companies (such as Philadelphia
Insurance). Under Pennsylvania law, a person generally must obtain the
Department's approval to acquire, directly or indirectly, 10% or more of the
outstanding voting securities of Philadelphia Insurance or either Insurance
Subsidiary. The Department's determination of whether to approve any such
acquisition is based on a variety of factors, including an evaluation of the
acquiror's financial stability, the competence of its management and whether
competition in Pennsylvania would be reduced.
The Pennsylvania statute requires every Pennsylvania-domiciled insurer
which is a member of an insurance holding company system to register with the
Department by filing and keeping current a registration statement on a form
prescribed by the NAIC.
The Pennsylvania statute also specifies that at least one-third of the
board of directors and each committee thereof, of either the domestic insurer or
its publicly owned holding company (if any), must be comprised of outsiders
(i.e., persons who are neither officers, employees nor controlling shareholders
of the insurer or any affiliate). In addition, the domestic insurer or its
publicly held holding company must establish one or more committees comprised
solely of outside directors, with responsibility for recommending the selection
of independent certified public accountants; reviewing the insurer's financial
condition, the scope and results of the independent audit and any internal
audit; nominating candidates for director; evaluating the performance of
principal officers; and recommending to the board the selection and compensation
of principal officers.
Dividend Restrictions: As an insurance holding company, Philadelphia
Insurance will be largely dependent on dividends and other permitted payments
from the Insurance Subsidiaries to pay any cash dividends to its shareholders.
The ability of the Insurance Subsidiaries to pay dividends to the Company is
subject to Pennsylvania insurance laws, which currently require that dividends
be paid from profits and afford the Department 30 days to disapprove the payment
of "extraordinary dividends" from a domestic property and casualty insurer to
its shareholders (i.e., dividends over a twelve-month period that exceed the
greater of (a) 10% of policyholders' surplus shown on the latest Annual
Statement filed with the Department, or (b) the net income for the period
covered by such statement but in no event to exceed the amount of unassigned
funds (i.e., retained earnings plus or minus net unrealized gains or losses). In
addition, the law specifies factors
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to be considered by the Department to allow it to determine that policyholders'
surplus after the payment of dividends is reasonable in relation to an insurance
company's outstanding liabilities and adequate to its financial needs. Such
factors include, for example, the size of the company, the extent to which its
business is diversified among several lines of insurance, the number and size of
risks insured, the nature and extent of the company's reinsurance, and the
adequacy of the company's reserves. Accumulated statutory profits of the
Insurance Subsidiaries from which dividends may be paid totaled $80.5 million at
December 31, 1998. Of this amount, the Insurance Subsidiaries are entitled to
pay a total of approximately $17.7 million of dividends in 1999 without
obtaining prior approval from the Department. During the fourth quarter of 1998,
for surplus allocation purposes, PIC paid a $5.5 million dividend to
Philadelphia Insurance which Philadelphia Insurance subsequently contributed to
PIIC.
The National Association of Insurance Commissioners: In addition to
state-imposed insurance laws and regulations, the Insurance Subsidiaries are
subject to the general SAP and reporting formats established by the NAIC. The
NAIC also promulgates model insurance laws and regulations relating to the
financial and operational regulation of insurance companies. These model laws
and regulations generally are not directly applicable to an insurance company
unless and until they are adopted by applicable state legislatures or
departments of insurance. However, NAIC model laws and regulations have become
increasingly important in recent years, due primarily to the NAIC's state
regulatory accreditation program. Under this program, states which have adopted
certain required model laws and regulations and meet various staffing and other
requirements are "accredited" by the NAIC. Such accreditation is the cornerstone
of an eventual nationwide regulatory network and there is a certain degree of
political pressure on individual states to become accredited by the NAIC.
Because the adoption of certain model laws and regulations is a prerequisite to
accreditation, the NAIC's initiatives have taken on a greater level of practical
importance in recent years. The NAIC accredited Pennsylvania under the NAIC
Financial Regulation Standards in March 1994.
All the states have adopted the NAIC's financial reporting form, which is
typically referred to as the NAIC "Annual Statement" and most states, including
Pennsylvania, generally defer to the NAIC with respect to SAP. In this regard,
the NAIC has a substantial degree of practical influence and is able to
accomplish certain quasi-legislative initiatives through amendments to the NAIC
annual statement and applicable accounting practices and procedures. For
instance, in recent years the NAIC has required all insurance companies to have
an annual statutory financial audit and an annual actuarial certification as to
loss reserves by including such requirements within the annual statement
instructions.
Capital and Surplus Requirements: PIC's eligibility to write insurance on a
surplus lines basis in most jurisdictions is dependent on its compliance with
certain financial standards, including the maintenance of a requisite level of
capital and surplus and the establishment of certain statutory deposits. In
recent years, many jurisdictions have increased the minimum financial standards
applicable to surplus lines eligibility. For example, California and certain
other states have adopted regulations which require surplus lines companies
operating therein to maintain minimum capital of $15 million, calculated as set
forth in the regulations. PIC maintains capital to meet these requirements.
Risk-Based Capital: Risk-based capital is designed to measure the
acceptable amount of capital an insurer should have based on the inherent
specific risks of each insurer. Insurers failing to meet this benchmark capital
level may be subject to scrutiny by the insurer's domiciliary insurance
department and ultimately rehabilitation or liquidation. Based on the standards
currently adopted, the policyholders' surplus at December 31, 1998 is in excess
of the prescribed risk-based capital requirements.
Insurance Guaranty Funds: The Insurance Subsidiaries are subject to
guaranty fund laws which can result in assessments, up to prescribed limits, for
losses incurred by policyholders as a result of the impairment or insolvency of
unaffiliated insurance companies. Typically, an insurance company is subject to
the guaranty fund laws of the states in which it conducts insurance business;
however, companies which conduct business on a surplus lines basis in a
particular state are generally exempt from that state's guaranty fund laws.
During the five years ended December 31, 1998, the amount of such guaranty fund
assessments paid by the Company was not material.
Shared Markets: As a condition of its license to do business in various
states, PIIC is required to participate in mandatory property-liability shared
market mechanisms or pooling arrangements which provide various insurance
coverages to individuals or other entities that otherwise are unable to purchase
coverage voluntarily provided by private insurers. In addition, some states
require automobile insurers to participate in reinsurance pools for claims that
exceed a certain amount. PIIC's participation in such shared markets or pooling
mechanisms is generally in amounts related to the amount of PIIC's direct
writings for the type of coverage written by the specific pooling mechanism in
the applicable state.
Possible New Legislation, Regulations or Interpretations: New regulations
and legislation have been (and are being) proposed from time to time to limit
damage awards; to bring the industry under regulation by the federal government;
to control premiums, policy terminations and other policy terms; and to impose
new taxes and assessments. It is not possible
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to determine whether any of these proposals will be adopted in any jurisdictions
and, if so, in what form or in what jurisdictions. In addition, the Company
could be affected by interpretations of state insurance regulators with respect
to licensing requirements applicable to the product distribution method
currently utilized by the rent a car companies that are customers of the
Company. The impact of these initiatives on the Company can not be determined.
Competition
The commercial property and casualty insurance industry is highly
competitive. Many of the Company's existing and potential competitors are
larger, have considerably greater financial and other resources, have greater
experience in the insurance industry and offer a broader line of insurance
products than the Company. Not only does the Company compete with other
insurers, it also competes with new forms of insurance organizations such as
risk retention groups and self-insurance mechanisms.
Overall, due to the abundance of capital in the insurance industry, the
current business climate remains competitive from a solicitation and pricing
standpoint. In the context of the current environment, the Company will not
sacrifice pricing guidelines for premium volume and will "walk away", if
necessary, from writing business that does not meet established underwriting
standards and pricing guidelines. Management believes, though, that the
Company's mixed marketing strategy is a strength in this market environment, in
that it provides the flexibility to quickly deploy the marketing efforts of the
Company's direct production underwriters from soft market segments to market
segments with emerging opportunities. Additionally, through the mixed marketing
strategy, the Company's production underwriters have established relationships
with approximately 4,000 brokers, thus facilitating a regular flow of
submissions.
Employees
As of February 26, 1999, the Company had 386 full-time employees and 13
part-time employees. The Company actively encourages its employees to continue
their educational efforts and aids in defraying their educational costs
(including 100% of education costs related to the insurance industry).
Management believes that the Company's relations with its employees are
generally excellent.
Item 2. DESCRIPTION OF PROPERTY
The Company leases certain office space in Bala Cynwyd, PA which serves as
its headquarters location and also leases 40 field offices for its field
marketing organization. The Company sold its previous headquarters building
in Wynnewood, PA for proceeds of approximately $2.0 million during 1998.
Item 3. LEGAL PROCEEDINGS
The Company is not subject to any material pending legal proceedings other
than ordinary routine litigation incidental to its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
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PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
During the fourth quarter of 1998, the Company did not sell any of its
securities which were not registered under the Securities Act of 1933.
The Company's common stock, no par value, trades on The NASDAQ Stock Market
under the symbol "PHLY". As of February 23, 1999, there were 272 holders of
record and 1,180 beneficial shareholders of the Company's common stock. The
high and low sales prices of the common stock, as reported by the National
Association of Securities Dealers, were as follows:
1998 1997(1)
----------------------------- -----------------------------
Quarter High Low High Low
------------ ------------- ------------ -------------
First 21.750 16.750 15.000 11.250
Second 24.375 20.000 17.563 14.000
Third 23.000 18.625 23.250 16.500
Fourth 23.688 19.375 23.000 15.688
(1) 1997 First, Second, and Third Quarters restated to reflect a two-for-one
split of the Company's common stock distributed in November 1997.
The Company did not declare cash dividends on its common stock in 1998 and
1997, and currently intends to retain its earnings to enhance future
growth. The payment of dividends by the Company will be determined by the
Board of Directors and will be based on general business conditions and
legal and regulatory restrictions.
As a holding company, the Company is dependent upon dividends and other
permitted payments from its subsidiaries to pay any cash dividends to its
shareholders. The ability of the Company's insurance subsidiaries to pay
dividends to the Company is subject to regulatory limitations (see Note 2
to the Consolidated Financial Statements).
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Item 6. SELECTED FINANCIAL DATA
As of and For the Years Ended December 31,
-----------------------------------------------------------------------------
(In Thousands, Except Share and Per Share Data)
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Operations Statement Data:
Gross Written Premiums ................... $ 197,408 $ 159,091 $ 136,855 $ 104,180 $ 89,099
Gross Earned Premiums .................... $ 174,737 $ 150,128 $ 121,820 $ 99,507 $ 84,657
Net Written Premiums ..................... $ 143,036 $ 111,797 $ 83,994 $ 62,072 $ 55,398
Net Earned Premiums ...................... $ 122,687 $ 100,555 $ 72,050 $ 58,188 $ 52,085
Net Investment Income .................... 15,448 9,703 7,910 6,506 4,902
Net Realized Investment Gain (Loss) ...... 474 (16) 260 181 (1,697)
Other Income ............................. 219 228 282 309 314
- --------------------------------------------------------------------------------------------------------------------------
Total Revenue ....................... 138,828 110,470 80,502 65,184 55,604
- --------------------------------------------------------------------------------------------------------------------------
Net Loss and Loss Adjustment
Expenses .............................. 66,374 55,009 40,118 33,227 31,009
Acquisition Costs and Other
Underwriting Expenses ................. 38,422 31,344 22,210 17,105 15,541
Other Operating Expenses ................. 2,212 1,909 1,386 2,564 1,347
- --------------------------------------------------------------------------------------------------------------------------
Total Losses and Expenses ........... 107,008 88,262 63,714 52,896 47,897
- --------------------------------------------------------------------------------------------------------------------------
Minority Interest: Distributions on
Company Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust ...................... 4,770
- --------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes ............... 27,050 22,208 16,788 12,288 7,707
Total Income Tax Expense ............ 7,022 5,338 3,414 2,458 1,734
- --------------------------------------------------------------------------------------------------------------------------
Net Income .......................... $ 20,028 $ 16,870 $ 13,374 $ 9,830 $ 5,973
- --------------------------------------------------------------------------------------------------------------------------
Weighted-Average Common Shares
Outstanding (1) ....................... 12,249,262 12,193,659 11,879,506 11,627,702 11,627,702
Weighted-Average Share Equivalents
Outstanding (1) ....................... 2,680,165 2,736,039 2,373,742 2,049,004 1,647,902
- --------------------------------------------------------------------------------------------------------------------------
Weighted-Average Shares and Share
Equivalents Outstanding (1) ........... 14,929,427 14,929,698 14,253,248 13,676,706 13,275,604
- --------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share (1)(2) .......... $ 1.63 $ 1.38 $ 1.13 $ 0.85 $ 0.51
- --------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share(1)(2) ......... $ 1.34 $ 1.13 $ 0.94 $ 0.72 $ 0.45
- --------------------------------------------------------------------------------------------------------------------------
Year End Financial Position:
Total Investments and Cash
and Cash Equivalents ................ $ 388,059 $ 229,599 $ 180,061 $ 140,086 $ 105,720
Total Assets .......................... 469,198 288,126 225,938 174,148 140,718
Unpaid Loss and Loss Adjustment
Expenses ............................ 151,150 122,430 96,642 77,686 59,175
Minority Interest in Consolidated
Subsidiaries: ....................... 98,905
Total Shareholders' Equity ............ 137,483 111,284 85,642 68,316 52,600
Common Shares Outstanding(1) .......... 12,200,563 12,242,431 12,079,612 11,627,702 11,627,702
- --------------------------------------------------------------------------------------------------------------------------
Insurance Operating Ratios
(Statutory Basis):
Net Loss and Loss Adjustment
Expenses to Net Earned Premiums ..... 54.1% 55.3% 55.7% 57.1% 59.5%
Underwriting Expenses to Net
Written Premiums .................... 31.0% 29.1% 31.1% 29.6% 29.9%
- --------------------------------------------------------------------------------------------------------------------------
Combined Ratio ........................... 85.1% 84.4% 86.8% 86.7% 89.4%
==========================================================================================================================
A.M. Best Rating ......................... A+ A A A A
(Superior) (Excellent) (Excellent) (Excellent) (Excellent)
(1) 1996, 1995, and 1994 restated to reflect a two-for-one split of the
Company's common stock distributed in November 1997.
(2) 1996, 1995, and 1994 earnings per share amounts restated in accordance with
the provisions of SFAS No. 128 adopted as of December 31, 1997.
16
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Operations
1998 marked the fifth anniversary for the Company as a publicly traded entity.
During this five-year period, gross written premiums increased from $57.1
million to $197.4 million, the GAAP basis combined ratio (the sum of the net
loss and loss adjustment expenses and acquisition costs and other underwriting
expenses divided by net earned premiums) averaged 86.4%, and the net operating
income compound annual growth rate was 42.1%. The Company believes these
achievements are primarily due to its continued focus on generating underwriting
profits through conservative underwriting and pricing discipline, its
differentiation in the marketplace through development of value-added coverage
and service enhancements, and its multiple channels of distribution.
1998 was a year in which the Company not only continued to realize profitable
growth, but also built upon its existing franchise foundation. For 1998, the
Company reported net income of $20.0 million, an 18.3% increase over its net
income of $16.9 for 1997. This increase was principally due to a 24.1% increase
in gross written premiums, a 58.8% increase in net investment income and
profitable underwriting which resulted in an 85.4% GAAP basis combined ratio,
which, once again, is substantially lower than the commercial property and
casualty insurance industry as a whole.
The Company's gross written premium growth during the year was attributable to a
number of factors, including: the continued growth and strengthening of the
Company's field marketing organization from 100 professionals at year end 1997
to 160 at year end 1998 and the addition of two new field offices; the addition
of a Specialty Property and Inland Marine underwriting organization which brings
a new line of business to the Company; increased product distribution through
the Preferred Agent Program by the addition of 18 new Preferred Agent
relationships; and new product offerings. Additionally, the 58.8% growth in net
investment income was due to the 63.8% increase in total investments during
1998. This growth in total investments was primarily due to investing the
proceeds of the Company's FELINE PRIDES(SM) security offering.
During 1998, the Company completed a $103.5 million FELINE PRIDES(SM) security
offering, thereby adding new capital to the Company. The Company intends to use
the proceeds from this security offering for general corporate purposes, which
may include acquisitions (including, without limitation, acquisitions of
programs or books of business), capital expenditures, capital contributions, and
the repurchase by the Company of its common stock. From these proceeds, $33.1
million was contributed to the Company's subsidiaries, of which, $20.0 million
was contributed to the Company's insurance subsidiaries to support anticipated
growth. Additionally, $3.1 million was utilized to buy back the Company's common
stock, under a stock buy-back program of up to $10.0 million authorized by the
Company's Board of Directors.
The Company's insurance subsidiaries are rated "A+" (Superior) by A.M. Best
Company and have been assigned an "A" claims paying ability rating by Standard &
Poors'.
Investments
The Company's investment objective continues to be the realization of relatively
high levels of investment income while generating competitive after-tax total
rates of return within a prudent level of risk and within the constraints of
maintaining adequate securities in amount and duration to meet cash requirements
of current operations and long-term liabilities, as well as maintaining and
improving the Company's A.M. Best and Standard & Poors' ratings. The Company
utilizes professional investment managers for its fixed maturity and equity
investments. These investments consist of diversified issuers and issues, and as
of December 31, 1998 approximately 73% of the total invested assets (total
investments plus cash equivalents) consisted of investments in fixed maturity
securities.
The Company increased its existing portfolio of fixed maturity securities by
predominately investing in investment grade taxable fixed maturity securities
during 1998 due to the more favorable after-tax yields as compared to tax-exempt
fixed maturity securities. At the end of 1998, investment grade taxable fixed
maturity securities represented 51.5% of the total invested assets, compared to
35.7% as of the end of 1997. The Company has also continued to invest in common
stock of quality growth-oriented mid-and large-cap companies seeking to achieve
diversification and capital appreciation in its invested assets. At December 31,
1998, common stocks comprised 18.8% of invested assets, compared to 20.9% as of
the end of 1997.
17
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The Company increased its existing portfolio of collateralized mortgage and
asset backed securities during 1998 in order to realize more favorable after-tax
yields. Collateralized mortgage and asset backed securities amounted to $42.8
million and $46.4 million, respectively, as of December 31, 1998 and $7.3 and
$11.3, respectively, as of December 31 1997. These securities are short tranche
securities possessing favorable prepayment risk profiles. The Company had no
derivative financial instruments.
RESULTS OF OPERATIONS
(1998 versus 1997)
Premiums: Gross written premiums grew $38.3 million (24.1%) to $197.4 million in
1998 from $159.1 million in 1997; gross earned premiums grew $24.6 million
(16.4%) to $174.7 million in 1998 from $150.1 million in 1997; net written
premiums increased $31.2 million (27.9%) to $143.0 million in 1998 from $111.8
million in 1997; and net earned premiums grew $22.1 million (22.0%) to $122.7
million in 1998 from $100.6 million in 1997. The overall growth in premiums are
attributable to a number of factors including:
- - Expansion of marketing efforts relating to commercial auto, commercial
package, and specialty lines products through the increase in the Company's
field organization to a total of 160 professionals.
- - The continued development and growth of the Company's Preferred Agent
Program (18 new preferred relationships formed in 1998), initiated in 1996,
wherein business relationships are formed with brokers specializing in
certain of the Company's business niches, thereby increasing the
distribution of the Company's niche products.
- - The addition of a new Specialty Property and Inland Marine underwriting
organization during the fourth quarter of 1998 as well as several other new
programs during the year.
Overall premium growth has been offset in part by the loss of accounts in
certain market niches due to inadequate pricing levels being experienced as a
result of market competition. Consistent with its underwriting focus, the
Company has maintained pricing levels for its insurance products reflective of
its underwriting assessment. As a result, loss in premium writings will occur
due to inadequate pricing levels.
Net Investment Income: Net investment income approximated $15.4 million in 1998
and $9.7 million in 1997. Total investments grew to $356.5 million at December
31, 1998 from $217.7 million at December 31, 1997, primarily due to investing
the proceeds from the Company's FELINE PRIDES(SM) security offering and cash
flows provided from operating activities.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses
increased $11.4 million (20.7%) to $66.4 million in 1998 from $55.0 million in
1997 and the loss ratio decreased to 54.1% in 1998 from 54.7% in 1997. The
increase in net loss and loss adjustment expenses was due primarily to the 22.0%
growth in net earned premiums.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other
underwriting expenses increased $7.1 million (22.7%), to $38.4 million in 1998
from $31.3 million in 1997. This increase was due primarily to the 22.0% growth
in net earned premiums.
Income Tax Expense: The Company's effective tax rates for 1998 and 1997 were
26.0% and 24.0%, respectively. The effective rates differed from the 35%
statutory rate principally due to investments in tax-exempt securities. 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 and greater
net investment gains on the sale of securities in 1998 vs. 1997.
RESULTS OF OPERATIONS
(1997 versus 1996)
Premiums: Gross written premiums grew $22.2 million (16.2%) to $159.1 million in
1997 from $136.9 million in 1996; gross earned premiums grew $28.3 million
(23.2%) to $150.1 million in 1997 from $121.8 million in 1996; net written
premiums increased $27.8 million (33.1%) to $111.8 million in 1997 from $84.0
million in 1996; and net earned premiums
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grew $28.5 million (39.5%) to $100.6 million in 1997 from $72.1 million in 1996.
The overall growth in premiums and the varying growth rates for gross written
premiums, gross earned premiums, net written premiums and net earned premiums
are attributable to a number of factors including:
- - Overall premium growth is primarily attributable to: continued marketing
efforts relating to commercial auto, commercial package, and specialty
lines products, along with the continued development of the Company's
Preferred Agent Program, initiated in 1996, wherein business relationships
are formed with brokers specializing in certain of the Company's business
niches, thereby increasing the distribution of the Company's niche
products; the increase of the Company's proprietary field organization to a
total of 100 professionals, production underwriters and customer service
representatives.
- - Net written and net earned premiums grew at higher rates than gross written
and gross earned premiums, primarily due to the renegotiation of the
Company's reinsurance program effective January 1, 1997, whereby more
favorable reinsurance rates were realized while substantially the same
retentions and coverages were maintained.
Net Investment Income: Net investment income approximated $9.7 million in 1997
and $7.9 million in 1996. The increase of $1.8 million (22.8%) is due primarily
to the increase in total investments as a result of cash flows provided from
operating activities and the additional investment income as a result of the
relative percentage increase in corporate taxable securities versus tax exempt
municipal securities.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses
increased $14.9 million (37.2%) to $55.0 million in 1997 from $40.1 million in
1996 and the loss ratio decreased to 54.7% in 1997 from 55.7% in 1996. The
increase in net loss and loss adjustment expenses was due primarily to the 39.5%
growth in net earned premiums. Additionally, since more earned premium was
retained from the lower cost of reinsurance (see "Premiums", above), and there
was relatively higher net earned premium growth on products with low loss
experience, the 37.2% increase in net loss and loss adjustment expenses was
lower than the 39.5% net earned premium growth.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other
underwriting expenses increased $9.1 million (41.0%), to $31.3 million in 1997
from $22.2 million in 1996. This increase was due primarily to the 39.5% growth
in net earned premiums.
Income Tax Expense: The Company's effective tax rates for 1997 and 1996 were
24.0% and 20.3%, respectively. The effective rates differed from the 35%
statutory rate principally due to investment income earned on tax-exempt
securities. The increase in the effective tax rate is principally due to a
greater investment in taxable securities relative to tax-exempt securities
during 1997.
GROWTH OPPORTUNITIES
The attainment of profitable new business continues to be a primary focus of the
Company. During the fourth quarter of 1998, the Company added a new Specialty
Property and Inland Marine underwriting organization which specializes in large
property risks and all classes of inland marine insurance. The Company also
anticipates growing its Preferred Agent Program, thereby further increasing the
distribution of the Company's niche products. In addition, the Company has grown
its field organization during 1998 to 160 professionals, including production
underwriters and customer service representatives, and plans to further expand
this organization in 1999, thereby further strengthening its resources to
prospect the Company's existing niches for profitable new business. The Company
also seeks acquisition opportunities to purchase programs or books of business
which complement its niche markets or parallel its conservative underwriting and
pricing discipline. The Company is exploring opportunities in this regard.
Overall, due to the abundance of capital in the insurance industry, the current
business climate remains very competitive from a solicitation and pricing
standpoint. In the context of the current environment, the Company will not
sacrifice underwriting standards or pricing guidelines solely for premium volume
and will "walk away", if necessary, from writing business that does not meet
established underwriting standards and pricing guidelines, as has occurred in
the commercial auto niche over the past three years and in the Company's nursing
home commercial package product during the fourth quarter of 1998. Management
believes, though, that the Company's mixed marketing strategy is a strength in
this market environment, in that it provides the flexibility to quickly deploy
the marketing efforts of the Company's direct production underwriters from soft
market segments to market segments with emerging opportunities. Additionally,
through the mixed marketing strategy, the
19
20
Company's production underwriters have established relationships with
approximately 4,000 brokers, thus facilitating a regular flow of submissions.
LIQUIDITY AND CAPITAL RESOURCES
Philadelphia Consolidated Holding Corp. (PCHC) is a holding company whose
principal assets currently consist of 100% of the capital stock of the Insurance
Subsidiaries (Philadelphia Indemnity Insurance Company and Philadelphia
Insurance Company), Maguire Insurance Agency, Inc., and PCHC Investment Corp.
Its primary sources of funds are dividends from its subsidiaries and payments to
it pursuant to tax allocation agreements with the Insurance Subsidiaries. For
the year ended December 31, 1998, payments to PCHC pursuant to such tax
allocation agreements totaled $9.3 million. The payment of dividends to PCHC
from the Insurance Subsidiaries is subject to certain limitations imposed by the
insurance laws of the Commonwealth of Pennsylvania. Accumulated statutory
profits of the Insurance Subsidiaries from which dividends may be paid totaled
$80.5 million at December 31, 1998. Of this amount, the Insurance Subsidiaries
are entitled to pay a total of approximately $17.7 million of dividends in 1999
without obtaining prior approval from the Insurance Commissioner of the
Commonwealth of Pennsylvania. During the fourth quarter of 1998, for surplus
allocation purposes, Philadelphia Insurance Company paid a $5.5 million dividend
to PCHC which PCHC subsequently contributed to Philadelphia Indemnity Insurance
Company.
On May 4, 1998, the consolidated capitalization of the Company increased by
approximately $99.0 million from the sale of FELINE PRIDES(SM) and Trust
Preferred securities. The sales of FELINE PRIDES(SM) consisted of 9,350,000
units of Income Prides with a stated amount of $10.00, 1,000,000 units of Growth
Prides with a face amount equal to the stated amount, and 1,000,000 units of
separate Trust Preferred securities with a stated amount of $10.00. $33.1
million from the sale of these securities was contributed to the Company's
subsidiaries, of which, $20.0 million was contributed to the Insurance
Subsidiaries. Additionally, $3.1 million was utilized by the Company to buy back
its common stock under its stock buy-back program. The Company anticipates using
the remaining proceeds for general corporate purposes, which may include
acquisitions (including, without limitation, acquisitions of programs or books
of business), capital expenditures, additional capital contributions to its
subsidiaries and the repurchase by the Company of its common stock. The Company
is obligated to make cash distributions, commencing May 4, 1998 through May 15,
2001, at a rate of 7.0% of the stated amount per annum for the Income Prides and
the separate Trust Preferred securities and contract adjustment payments at the
rate of .50% per annum of the $10.00 stated amount to the holders of the Growth
Prides.
Under certain reinsurance agreements, the Company is required to maintain
investments in trust accounts to secure its reinsurance obligations (primarily
the payment of losses and loss adjustment expenses on business it does not write
directly). At December 31, 1998, the investment and cash balances in such trust
accounts totaled approximately $11.2 million. In addition, various insurance
departments of states in which the Company operates require the deposit of funds
to protect policyholders within those states. At December 31, 1998, the balance
on deposit for the benefit of such policyholders totaled approximately $11.0
million.
The Company has produced net cash from operations of $49.8 million in 1998,
$38.0 million in 1997 and $37.6 million in 1996. Management believes that the
Company has adequate liquidity to pay all claims and meet all other cash needs.
The Insurance Subsidiaries, which operate under a pooling agreement, must have
certain levels of policyholders' surplus to support premium writings. Guidelines
of the National Association of Insurance Commissioners (the "NAIC") suggest that
a property and casualty insurer's ratio of annual statutory net premium written
to policyholders' surplus should not exceed 3-to-1. The ratio of combined annual
statutory net premium written by the Insurance Subsidiaries to their combined
policyholders' surplus was 1.0-to-1.0 for 1998 and 1997. Management believes
that the policyholders' surplus, which was $152.3 million at December 31, 1998,
will be sufficient to support current and anticipated premium writings.
Risk-based capital is designed to measure the acceptable amount of capital and
surplus an insurer should have, based on the inherent specific risks of each
insurer. Insurers failing to meet this benchmark level may be subject to
scrutiny by the insurer's domiciliary insurance department and ultimately
rehabilitation or liquidation. Based on the standards currently contained in the
applicable Pennsylvania Insurance Company statutes, the Insurance Subsidiaries'
capital and surplus is in excess of the prescribed risk-based capital
requirements.
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Year 2000 Readiness Disclosure
Background
In the past, many computer software programs were written utilizing two digits
rather than four in defining a year in the date field. As a result,
date-sensitive computer software and embedded technology may recognize the year
"00" in the date field as the year 1900 rather than 2000. This inability of
computer hardware, software, and other technology to distinguish between the
year 1900 and 2000 is generally referred to as the Year 2000 issue. If this
situation occurs, the potential exists for computer systems and equipment
failures or erroneous calculations by computer programs and embedded technology
in the year 2000.
Approach
The Company has established a Year 2000 oversight committee comprised of certain
senior officers and internal audit personnel to develop a comprehensive approach
with regard to the Company's assessment and mitigation of the Year 2000 issue.
To date, this approach has included the establishment of a Year 2000 task force
comprised principally of various information technology personnel under the
direction of the Company's Information Technology Vice President. The task force
has been meeting on a regularly scheduled basis to assess the Company's
readiness with regard to the Year 2000 issue. The task force has divided the
Year 2000 project into three main sections: "IT Systems", which encompasses the
Company's hardware and software (operating and application); "Non-IT Systems",
which encompasses embedded technology and microprocessors contained in
telecommunications and facilities management systems and other equipment; and
"Third Parties", which encompasses the Company's major vendors, suppliers and
customers.
The general phases to the task force's approach are:
Phase 1 Inventorying Year 2000 items;
Phase 2 Prioritizing identified items;
Phase 3 Assessing the Year 2000 Compliance of the items
determined to be material to the Company;
Phase 4 Creating a project plan to address material items
that are determined not to be Year 2000 compliant;
Phase 5 Executing the project plan, which includes repairing,
replacing or upgrading of such items;
Phase 6 Testing the material items.
Status
With respect to the "IT Systems" and "Non-IT Systems" sections, Phases 1 - 5
have been completed and Phase 6 is currently in process. The Company expects to
have substantially all "IT Systems" and "Non-IT Systems" Year 2000 issues
mitigated by March 31, 1999. With respect to the "Third Parties" section, the
Company has identified and prioritized its critical vendors, suppliers and
customers and communicated with them about their plans in addressing the Year
2000 problem. Evaluations of certain of the most critical vendors are in process
and the "Third Party" section is expected to be completed by June 30, 1999.
Costs
The total cost associated with required modifications to become Year 2000
compliant is not expected to have a material effect on the Company's operations
or financial condition. The estimated total cost to the Company of the Year 2000
project is approximately $125,000. The total amount expended on the project
through December 31, 1998 was approximately $115,000, which related primarily to
the "IT Systems" and "Non-IT Systems" section. This amount came from the
Company's operating funds.
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The estimated cost of the Company's Year 2000 efforts and the dates on which the
Company believes it will complete the various phases referred to above are based
on management's best estimates using various assumptions regarding future
events, including the continued availability of certain resources, third-party
remediation plans and other matters. There can be no assurance that these
estimates will prove to be accurate, and actual results could differ from those
currently anticipated. Specific factors that could cause such differences
include the availability and costs of personnel trained in Year 2000 issues, the
ability to identify, assess, remediate, and test all relevant computer codes and
embedded technology, the risk that reasonable testing will not uncover all Year
2000 problems and similar uncertainties.
Risk Factors
The Company utilizes computer systems in virtually all aspects of its business.
The Company also maintains relationships with a number of vendors, suppliers,
and customers whose own state of readiness with regard to the Year 2000 issue
could potentially impact the Company. These parties include software, hardware,
and telecommunication providers; banks and investment brokers; reinsurers and
reinsurance intermediaries; certain agents; and utilities. The failure to
correct a material Year 2000 issue by the Company or a material "Third Party"
could materially and adversely impact the Company's statement of operations,
liquidity; and financial position. Due to the uncertainty inherent in the Year
2000 issue, the Company is unable to determine whether the consequences of Year
2000 failures will have a material impact on the Company's statement of
operations, liquidity, or financial position. However, the Company believes with
its completion of its Year 2000 project significant interruptions of operations
should be reduced.
Additionally, the Company issues professional liability, including Directors &
Officers liability, and commercial multi-peril insurance policies. Coverage
under certain of these policies may cover losses suffered by insureds as a
result of Year 2000 issues. The Company's professional liability policies are
written on a "claims made and reported" basis, and since early 1997
approximately 50% of such policies have included a Year 2000 exclusion
endorsement. The Company is including a Year 2000 exclusion endorsement on
virtually all new or renewing professional liability policies providing coverage
effective January 1, 1999 and thereafter. On occasion, for qualifying accounts,
underwriters may remove the exclusion after satisfactory receipt and review of a
supplemental application (which includes a warranty statement) and other
underwriting information. With respect to its commercial multi-peril policies
the Company believes claims against the comprehensive general liability coverage
under these policies should fail based upon the doctrine of fortuity.
However, it is not possible to predict whether or to what extent coverage could
ultimately be found to exist by the courts and the effect thereof on the
Company. Additionally, the Company could incur expense to contest the assertion
of Year 2000 coverage claims, even if the Company prevails in its position. As a
result, it is impossible to predict what, if any, exposure insurance companies
may ultimately have for Year 2000 claims whether coverage for the issue is
specifically excluded or included.
Contingency Plans
The Company has not established contingency plans for non-compliance of its "IT
Systems" or "Non-IT Systems" since the Company anticipates that the "IT Systems"
and "Non-IT Systems" sections will be Year 2000 compliant by March 31, 1999. The
Company's review of the "Third Parties" section will be completed by June 30,
1999. Presently, the Company is not aware of any major "Third Party" problem.
The Company is on schedule with its expected completion dates for all sections.
To the extent that the Company is aware of a non-compliant material "Third
Party" a contingency plan would be developed which would potentially include
replacing non-compliant material "Third Party" vendors and suppliers.
INFLATION
Property and casualty insurance premiums are established before the amount of
losses and loss adjusted expenses, or the extent to which inflation may affect
such amounts, is known. The Company attempts to anticipate the potential impact
of inflation in establishing its premiums and reserves. Substantial future
increases in inflation could result in future increases in interest rates,
which, in turn, are likely to result in a decline in the market value of the
Company's investment portfolio and resulting unrealized losses and/or reductions
in shareholders' equity.
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all fiscal years
beginning after June 15, 1999. SFAS No. 133 requires that an entity shall
recognize all derivative instruments in the statement of financial position as
either assets or liabilities depending on the rights or obligations under the
instrument. Furthermore, derivative instruments shall be measured at fair value.
SFAS No. 133 also provides guidance for accounting for changes in the fair value
(that is, gains or losses) of a derivative instrument. The Company will adopt
the provisions of SFAS No. 133 as of January 1, 2000. At December 31, 1998 the
Company held no derivative financial instruments.
In December 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accounts issued Statement of Position (SOP) 97-3
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments," specifying the preferable accounting treatment for entities that
are subject to guaranty-fund and other insurance-related assessments. The
Company will adopt the provisions of SOP 97-3 in the first quarter of 1999 and
does not expect a material impact on the Company's financial statements.
FORWARD-LOOKING INFORMATION
Certain information included in this report and other statements or materials
published or to be published by the Company are not historical facts but are
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new and existing
products, expectations for market segment and growth, the impact of Year 2000
issues, and similar matters. In connection with the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995, the Company provides the
following cautionary remarks regarding important factors which, among others,
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development, results of the Company's business, and the
other matters referred to above include, but are not limited to: (i) changes in
the business environment in which the Company operates, including inflation and
interest rates; (ii) changes in taxes, governmental laws, and regulations; (iii)
competitive product and pricing activity; (iv) difficulties of managing growth
profitably; and (v) the impact of Year 2000 issues, including the matters
referred to above under "Risk Factors".
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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The table below provides information about the Company's financial instruments
that are sensitive to changes in interest rates. The Company does not have any
derivative financial instruments. For debt obligations, the table presents
principal cash flows and related weighted average interest rates by expected
maturity dates. The information is presented in U.S. dollar equivalents, which
is the Company's reporting currency.
DECEMBER 31, 1998
EXPECTED MATURITY DATES
(Dollars in thousands, except average interest rate)
TOTAL
FAIR
1999 2000 2001 2002 2003 Thereafter TOTAL VALUE
------- ------- ------- ------- ------- ---------- -------- --------
FIXED MATURITIES
AVAILABLE FOR SALE:
Principal Amount $27,070 $19,060 $37,900 $36,830 $25,470 $121,230 $267,560 $281,830
Book Value $27,160 $19,250 $38,150 $37,460 $25,690 $128,980 $276,690
Average Interest Rate 6.71% 6.10% 6.37% 5.95% 6.38% 6.08% 6.20% 5.71%
PREFERRED:
Principal Amount $ 30 0.0 0.0 0.0 0.0 0.0 $ 30 $ 1,880
Book Value $ 1,870 0.0 0.0 0.0 0.0 0.0 $ 1,870
Average Interest Rate 7.57% 0.0 0.0 0.0 0.0 0.0 7.57% 7.52%
SHORT-TERM DEBT:
Principal Amount $31,650 0.0 0.0 0.0 0.0 0.0 $ 31,650 $ 31,570
Book Value $31,570 0.0 0.0 0.0 0.0 0.0 $ 31,570
Average Interest Rate 4.92% 0.0 0.0 0.0 0.0 0.0 4.92% 4.92%
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Philadelphia Consolidated Holding Corp. and Subsidiaries
Index to Financial Statements and Schedules
Financial Statements Page
-------------------- ----
Report of Independent Accountants 26
Consolidated Balance Sheets - As of December 31, 1998 and 1997 27
Consolidated Statements of Operations - For the Years Ended December 31,
1998, 1997 and 1996 28
Consolidated Statements of Comprehensive Income - For the Years Ended
December 31, 1998, 1997, and 1996 29
Consolidated Statements of Changes in Shareholders' Equity - For the Years Ended
December 31, 1998, 1997 and 1996 30
Consolidated Statements of Cash Flows - For the Years Ended December 31,
1998, 1997 and 1996 31
Notes to Consolidated Financial Statements 32 - 44
Financial Statement Schedules:
Schedule
I Summary of Investments - Other Than Investments in
Related Parties As of December 31, 1998 S-1
II Condensed Financial Information of Registrant As of December
31, 1998 and 1997 and For Each of the Three
Years in the Period Ended December 31, 1998 S-2 -- S-4
IV Reinsurance For the Years ended December 31, 1998,
1997 and 1996 S-5
VI Supplemental Information Concerning Property-
Casualty Insurance Operations As of and For the Years Ended
December 31, 1998, 1997 and 1996 S-6
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26
To the Board of Directors and Shareholders of Philadelphia Consolidated Holding
Corp.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, comprehensive income, changes in
shareholders' equity and cash flows present fairly, in all material respects,
the financial position of Philadelphia Consolidated Holding Corp. and
Subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers, LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 5, 1999
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
As of December 31,
-----------------------
1998 1997
--------- ---------
ASSETS
Investments:
Fixed Maturities Available for Sale at Market
(Amortized Cost $278,557 and $165,052) ............................ $ 283,718 $ 170,678
Equity Securities at Market (Cost $43,441 and $29,501) ............... 72,768 46,988
--------- ---------
Total Investments ............................................... 356,486 217,666
Cash and Cash Equivalents .............................................. 31,573 11,933
Accrued Investment Income .............................................. 3,771 2,786
Premiums Receivable .................................................... 27,769 15,269
Prepaid Reinsurance Premiums and
Reinsurance Receivables ........................................... 22,892 18,573
Deferred Acquisition Costs ............................................. 16,853 10,970
Property and Equipment ................................................. 4,877 5,797
Other Assets ........................................................... 4,977 5,132
--------- ---------
Total Assets .................................................... $ 469,198 $ 288,126
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy Liabilities and Accruals:
Unpaid Loss and Loss Adjustment Expenses ............................. $ 151,150 $ 122,430
Unearned Premiums .................................................... 64,787 42,116
--------- ---------
Total Policy Liabilities and Accruals ........................... 215,937 164,546
Other Liabilities ...................................................... 9,463 7,948
Deferred Income Taxes .................................................. 7,410 4,348
--------- ---------
Total Liabilities ............................................... 232,810 176,842
--------- ---------
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, 12,330,825 Shares Issued and 12,242,431 Shares
Issued and Outstanding .......................................... 44,796 42,788
Notes Receivable from Shareholders ................................... (1,680) (1,422)
Accumulated Other Comprehensive Income ............................... 22,417 15,023
Retained Earnings .................................................... 74,923 54,895
Less Cost of Common Stock Held in Treasury,
130,262 Shares in 1998 ............................................ (2,973)
--------- ---------
Total Shareholders' Equity ...................................... 137,483 111,284
--------- ---------
Total Liabilities and Shareholders' Equity ...................... $ 469,198 $ 288,126
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For the Years Ended December 31,
----------------------------------------------
1998 1997 1996
------------ ------------ ------------
Revenue:
Net Written Premiums ............................... $ 143,036 $ 111,797 $ 83,994
Change in Net Unearned Premium Reserve (Increase) .. (20,349) (11,242) (11,944)
------------ ------------ ------------
Net Earned Premiums ................................ 122,687 100,555 72,050
Net Investment Income .............................. 15,448 9,703 7,910
Net Realized Investment Gain (Loss) ................ 474 (16) 260
Other Income ....................................... 219 228 282
------------ ------------ ------------
Total Revenue ................................. 138,828 110,470 80,502
------------ ------------ ------------
Losses and Expenses:
Loss and Loss Adjustment Expenses .................. 74,074 61,839 44,720
Net Reinsurance Recoveries ......................... (7,700) (6,830) (4,602)
------------ ------------ ------------
Net Loss and Loss Adjustment Expenses .............. 66,374 55,009 40,118
Acquisition Costs and Other
Underwriting Expenses ........................... 38,422 31,344 22,210
Other Operating Expenses ........................... 2,212 1,909 1,386
------------ ------------ ------------
Total Losses and Expenses ...................... 107,008 88,262 63,714
------------ ------------ ------------
Minority Interest: Distributions on Company Obligated
Mandatorily Redeemable Preferred Securities of
Subsidiary Trust ................................... 4,770
------------ ------------ ------------
Income Before Income Taxes ........................... 27,050 22,208 16,788
------------ ------------ ------------
Income Tax Expense (Benefit):
Current ............................................ 7,941 6,521 3,596
Deferred ........................................... (919) (1,183) (182)
------------ ------------ ------------
Total Income Tax Expense ....................... 7,022 5,338 3,414
------------ ------------ ------------
Net Income ..................................... $ 20,028 $ 16,870 $ 13,374
============ ============ ============
Per Average Share Data:
Basic Earnings Per Share(1) ........................ $ 1.63 $ 1.38 $ 1.13
============ ============ ============
Diluted Earnings Per Share(1) ...................... $ 1.34 $ 1.13 $ 0.94
============ ============ ============
Weighted-Average Common Shares Outstanding(1) ........ 12,249,262 12,193,659 11,879,506
Weighted-Average Share Equivalents Outstanding(1) .... 2,680,165 2,736,039 2,373,742
------------ ------------ ------------
Weighted-Average Shares and Share Equivalents
Outstanding(1) ..................................... 14,929,427 14,929,698 14,253,248
============ ============ ============
(1) 1996 share information restated to reflect a two-for-one split of the
Company's common stock distributed in November 1997, see Note 11.
The accompanying notes are an integral part of the consolidated
financial statements.
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29
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)
For the Years Ended December 31,
---------------------------------
1998 1997 1996
-------- -------- --------
Net Income ........................................... $ 20,028 $ 16,870 $ 13,374
-------- -------- --------
Other Comprehensive Income, Net of Tax:
Holding Gain Arising during Period, Net of Tax of
$4,147, $4,119, and $1,489 ...................... 7,702 7,649 2,766
Reclassification Adjustment, Net of Tax of $166 ... (308)
-------- -------- --------
Other Comprehensive Income ........................... 7,394 7,649 2,766
-------- -------- --------
Comprehensive Income ................................. $ 27,422 $ 24,519 $ 16,140
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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30
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
For the Years Ended December 31,
-------------------------------------
1998 1997 1996
--------- --------- ---------
Common Stock:
Balance at Beginning of Year .............................. $ 42,788 $ 41,167 $ 39,057
Issuance of Shares Pursuant to Employee Stock Purchase Plan 853 898 1,131
Exercise of Employee Stock Options, Net of Tax Benefit .... 597 723 979
Purchase Contracts of Common Stock ....................... 558
--------- --------- ---------
Balance at End of Year ................................ 44,796 42,788 41,167
--------- --------- ---------
Notes Receivable from Shareholders:
Balance at Beginning of Year .............................. (1,422) (924)
Notes Receivable Issued Pursuant to Employee
Stock Purchase Plan ..................................... (828) (873) (1,131)
Collection of Notes Receivable ............................ 570 375 207
--------- --------- ---------
Balance at End of Year ................................ (1,680) (1,422) (924)
--------- --------- ---------
Unrealized Investment Appreciation,
Net of Deferred Income Taxes:
Balance at Beginning of Year ............................ 15,023 7,374 4,608
Change in Unrealized Investment Appreciation,
Net of Deferred Income Taxes .......................... 7,394 7,649 2,766
--------- --------- ---------
Balance at End of Year ................................ 22,417 15,023 7,374
--------- --------- ---------
Retained Earnings:
Balance at Beginning of Year .............................. 54,895 38,025 24,651
Net Income ................................................ 20,028 16,870 13,374
--------- --------- ---------
Balance at End of Year ................................ 74,923 54,895 38,025
--------- --------- ---------
Common Stock Held in Treasury:
Balance at Beginning of Year
Common Shares Repurchased ................................. (3,100)
Exercise of Employee Stock Options, Net of Tax Benefit .... 127
--------- --------- ---------
Balance at End of Year ................................ (2,973)
--------- --------- ---------
Total Shareholders' Equity ............................ $ 137,483 $ 111,284 $ 85,642
========= ========= =========
(1) 1996 share information restated to reflect a two for one split of the
Company's common stock distributed in November 1997, see Note 11.
The accompanying notes are an integral part of the consolidated
financial statements.
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31
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Years Ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
Cash Flows from Operating Activities:
Net Income ............................................ $ 20,028 $ 16,870 $ 13,374
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Net Realized Investment (Gain) Loss ............... (474) 16 (260)
Depreciation and Amortization Expense ............. 1,277 1,232 930
Deferred Income Tax Benefit ....................... (919) (1,183) (182)
Change in Premiums Receivable ..................... (12,500) (7,157) (214)
Change in Other Receivables ....................... (5,318) (655) (5,747)
Change in Deferred Acquisition Costs .............. (5,883) (1,937) (3,876)
Change in Other Assets ............................ 522 (3,345) (269)
Change in Unpaid Loss and Loss Adjustment Expenses 28,847 25,788 18,956
Change in Unearned Premiums ....................... 22,671 8,962 15,035
Change in Other Liabilities ....................... 1,533 (575) (184)
--------- --------- ---------
Net Cash Provided by Operating Activities ....... 49,784 38,016 37,563
--------- --------- ---------
Cash Flows from Investing Activities:
Proceeds from Sales of Investments in Fixed
Maturities Available for Sale ....................... 50,874 5,564 2,594
Proceeds from Maturity of Investments in Fixed
Maturities Available for Sale ..................... 36,736 9,305 9,476
Proceeds from Sales of Investments in Equity
Securities .......................................... 19,440 5,896 2,168
Proceeds from Sale of Real Estate ..................... 1,987
Cost of Fixed Maturities Available for Sale
Acquired ............................................ (199,024) (42,309) (32,783)
Cost of Equity Securities Acquired .................... (35,610) (15,536) (12,412)
Purchase of Property and Equipment, net ............... (2,229) (1,609) (1,989)
--------- --------- ---------
Net Cash Used for Investing Activities .......... (127,826) (38,689) (32,946)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from Offering of Company Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trust . 99,463
Exercise of Employee Stock Options, Net of Tax Benefit 724 723 979
Collection of Notes Receivable ........................ 570 375 207
Proceeds from Shares Issued Pursuant to Employee Stock
Purchase Plan ....................................... 25 25
Cost of Common Stock Repurchased ...................... (3,100)
--------- --------- ---------
Net Cash Provided by Financing Activities ....... 97,682 1,123 1,186
--------- --------- ---------
Net Increase in Cash and Cash Equivalents .............. 19,640 450 5,803
Cash and Cash Equivalents at Beginning of Year ......... 11,933 11,483 5,680
--------- --------- ---------
Cash and Cash Equivalents at End of Year ............... $ 31,573 $ 11,933 $ 11,483
========= ========= =========
Cash Paid During the Year for:
Income Taxes .......................................... $ 7,546 $ 7,158 $ 3,024
Non-Cash Transactions:
Issuance of Shares Pursuant to Employee
Stock Purchase Plan in Exchange for Notes
Receivable ........................................ $ 828 $ 873 1,131
The accompanying notes are an integral part of the consolidated financial
statements.
31
32
Philadelphia Consolidated Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
1. General Information and Significant Accounting Policies
Philadelphia Consolidated Holding Corp. ("Philadelphia Insurance"), and its
subsidiaries (collectively the "Company") doing business as Philadelphia
Insurance Companies, include two Pennsylvania domiciled property and casualty
insurance companies, Philadelphia Indemnity Insurance Company and Philadelphia
Insurance Company ("Insurance Subsidiaries"); an underwriting manager Maguire
Insurance Agency, Inc.; and an investment subsidiary, PCHC Investment Corp. The
Company designs, markets, and underwrites specialty commercial property and
casualty insurance products for select target industries or niches including,
among others, the rent-a-car industry; automobile leasing industry; nonprofit
organizations; the health, fitness and wellness industry; and selected classes
of professional liability. All marketing, underwriting, claims management,
investment, and general administration is provided by the underwriting manager.
The Company manages one operating segment comprised of all its property and
casualty insurance business.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company
prepared in conformity with generally accepted accounting principles. All
significant intercompany balances and transactions have been eliminated in
consolidation. The preparation of financial statements requires making estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Certain
prior years' amounts have been reclassified for comparative purposes.
(a) Investments
Investments classified as Available for Sale are carried at market value with
the change in unrealized appreciation (depreciation) credited or charged
directly to shareholders' equity, net of applicable deferred income taxes.
Income on fixed maturities is recognized on the accrual basis.
The decision to purchase or sell investments is based on management's assessment
of various factors such as foreseeable economic conditions, including current
interest rates and the interest rate risk, and the liquidity and capital
positions of the Company.
Investments in fixed maturities are adjusted for amortization of premiums and
accretion of discounts to maturity date, except for collateralized mortgage and
asset backed securities which are adjusted for amortization of premiums and
accretion of discounts over their estimated lives. Certain collateralized
mortgage and asset backed securities repayment patterns will change based on
interest rate movements and, accordingly, could impact future investment income
if the reinvestment of the repayment amounts are at lower interest rates than
the underlying securities. Collateralized mortgage and asset backed securities
amounted to $42,820,000 and $46,394,000, respectively, at December 31, 1998 and
$7,329,000 and $11,302,000, respectively, at December 31, 1997. The
collateralized mortgage and asset back securities held as of December 31, 1998
and 1997 are short tranche securities possessing favorable prepayment risk
profiles.
Equity securities are carried at market value with the change in unrealized
appreciation (depreciation) credited or charged directly to shareholders'
equity, net of applicable deferred income taxes.
Realized investment gains and losses are calculated on the specific
identification basis and recorded as income when the securities are sold.
(b) Cash and Cash Equivalents
Cash equivalents, consisting of fixed maturity investments with maturities of
three months or less when purchased and money market funds, are stated at cost
which approximates market value.
32
33
(c) Deferred Acquisition Costs
Policy acquisition costs, which include commissions, premium taxes, fees, and
other costs of underwriting policies, are deferred and amortized over the same
period in which the related premiums are earned. Deferred acquisition costs are
limited to the estimated amounts recoverable after providing for losses and
expenses that are expected to be incurred, based upon historical and current
experience. Amortization of policy acquisition costs in the accompanying
consolidated statements of operations was $30,034,000, $25,034,000 and
$17,739,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
(d) Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets.
Costs incurred in developing information systems technology are capitalized and
included in property and equipment. These costs are amortized over their useful
lives from the dates the systems technology became operational. Upon disposal of
assets, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is included in earnings.
(e) Reserves for Unpaid Loss and Loss Adjustment Expenses
The liability for unpaid loss and loss adjustment expenses includes an amount
determined on the basis of claims adjusters' evaluations and an amount, based on
past experience, for losses incurred but not reported. Such liabilities are
necessarily based on estimates, and while management believes that the amount is
adequate, the ultimate liability may be in excess of, or less than, the amount
provided. The methods of making such estimates and establishing the resulting
liabilities are continually reviewed and updated and any adjustments resulting
therefrom are reflected in operations currently.
(f) Unearned Premiums
Premiums are generally earned on a pro rata basis over the terms of the
policies. Premiums applicable to the unexpired terms of the policies in-force
are reported as unearned premiums.
(g) Reinsurance Ceded
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with reinsurers. Amounts
recoverable from reinsurers are estimated in a manner consistent with the
reinsured policy. Amounts for reinsurance assets and liabilities are reported
gross.
(h) Income Taxes
The Company files a consolidated federal income tax return. Deferred income
taxes are recognized for the tax consequences of temporary differences by
applying enacted statutory tax rates applicable to the differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes for a change in tax rates is
recognized in income in the period that includes the enactment date (see Note
8).
(i) Earnings Per Share
Earnings per share and common stock equivalents outstanding have been
retroactively restated to reflect the increased number of common shares
resulting from a two-for-one stock split that was announced in October 1997 and
distributed to shareholders on November 5, 1997. A total of 6,119,716 additional
shares were issued as a result of the stock split. The par value of the
Company's stock remained unchanged.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share", specifying
the computation, presentation, and disclosure requirements for earnings per
share for entities with publicly held common stock. Under SFAS No. 128, basic
and diluted per share amounts shall be presented for net income on the face of
the statement of operations. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
33
34
in the earnings of the entity. The Company adopted the provisions of SFAS No.
128 as of December 31, 1997 and restated all prior period earnings per share
data to conform with the provisions of this Statement.
2. Statutory Information
Accounting Principles: The Philadelphia Indemnity Insurance Company ("PIIC") and
the Philadelphia Insurance Company ("PIC") are domiciled in the Commonwealth of
Pennsylvania. PIIC and PIC are required to report to certain regulatory agencies
on the basis of Statutory Accounting Practices ("SAP"). The statutory financial
statements are prepared in accordance with accounting practices prescribed or
permitted by the Insurance Department of the Commonwealth of Pennsylvania.
Prescribed statutory accounting practices include a variety of publications of
the National Association of Insurance Commissioners ("NAIC"), as well as
Commonwealth laws, regulations, and general administrative rules. Permitted
Statutory Accounting Practices encompass all accounting practices not so
prescribed.
Generally accepted accounting principles ("GAAP") differ in certain respects
from SAP prescribed or permitted by the Insurance Department of the Commonwealth
of Pennsylvania. The principal differences between SAP and GAAP are as follows:
- Under SAP, investments in debt securities are carried at
amortized cost, while under GAAP, investments in debt
securities classified as Available for Sale are carried at
fair value.
- Under SAP, policy acquisition costs, such as commissions,
premium taxes, fees, and other costs of underwriting policies
are charged to current operations as incurred, while under
GAAP, such costs are deferred and amortized on a pro rata
basis over the period covered by the policy.
- Under SAP, certain assets, designated as "Non-admitted Assets"
(such as prepaid expenses) are charged against surplus.
- Under SAP, federal income taxes are only provided on taxable
income for which income taxes are currently payable, while
under GAAP, deferred income taxes are provided with respect to
temporary differences.
- Under SAP, certain reserves are established in amounts which
differ from amounts which would be provided in conformity with
GAAP.
Financial Information: The statutory capital and surplus of PIIC as of December
31, 1998 and 1997 was $113,659,000 and $75,894,000, respectively. Statutory net
income of PIIC for the years ended December 31, 1998, 1997, and 1996 was
$9,785,000, $8,839,000 and $5,626,000, respectively. Capital contributions to
PIIC for the years ended December 31, 1998 and 1997 were $19,500,000 and $0,
respectively.
The statutory capital and surplus of PIC as of December 31, 1998 and 1997 was
$38,677,000 and $30,091,000, respectively. Statutory net income of PIC for the
years ended December 31, 1998, 1997, and 1996 was $6,339,000, $5,494,000 and
$3,629,000, respectively. Capital contributions to PIC for the years ended
December 31, 1998 and 1997 were $6,000,000 and $0, respectively.
Dividend Restrictions: The Insurance Subsidiaries are subject to various
regulatory restrictions which limit the maximum amount of annual shareholder
dividends allowed to be paid. The maximum dividend which PIIC may pay to
Philadelphia Insurance during 1999 without prior approval is $11,366,000 and the
maximum dividend which PIC may pay to Philadelphia Insurance during 1999 without
prior approval is $6,339,000.
Risk-Based Capital: Risk-based capital is designed to measure the acceptable
amount of capital an insurer should have based on the inherent specific risks of
each insurer. Insurers failing to meet this benchmark capital level may be
subject to scrutiny by the insurer's domiciliary insurance department, and
ultimately, rehabilitation or liquidation. Based on the standards, PIIC's and
PIC's capital and surplus at December 31, 1998 is in excess of the prescribed
risk-based capital requirements.
34
35
3. Investments
The Company invests primarily in investment grade fixed maturities, the majority
of which are rated "A-" or better by Standard and Poors'. The cost, gross
unrealized gains and losses, estimated market value and carrying value of
investments as of December 31, 1998 and 1997 are as follows (in thousands):
Gross Gross Estimated
Unrealized Unrealized Market Carrying
Cost (1) Gains Losses Value (2) Value
-------- ----- ------ --------- -----
December 31, 1998
Fixed Maturities:
Available for Sale
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $ 7,706 $ 212 $ $ 7,918 $ 7,918
Obligations of States and
Political Subdivisions 112,196 5,069 70 117,195 117,195
Corporate and Bank Debt Securities 69,532 1,011 1,152 69,391 69,391
Collateralized Mortgage Securities 42,755 174 109 42,820 42,820
Asset Backed Securities 46,368 213 187 46,394 46,394
- -----------------------------------------------------------------------------------------------------------------
Total Fixed Maturities
Available for Sale 278,557 6,679 1,518 283,718 283,718
- -----------------------------------------------------------------------------------------------------------------
Equity Securities 43,441 29,769 442 72,768 72,768
- -----------------------------------------------------------------------------------------------------------------
Total Investments $321,998 $ 36,448 $ 1,960 $356,486 $356,486
=================================================================================================================
December 31, 1997
Fixed Maturities:
Available for Sale
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $ 12,943 $ 205 $ 9 $ 13,139 $ 13,139
Obligations of States and
Political Subdivisions 105,117 4,670 91 109,696 109,696
Corporate Debt Securities 28,549 681 18 29,212 29,212
Collateralized Mortgage Securities 7,244 85 7,329 7,329
Asset Backed Securities 11,199 103 11,302 11,302
- -----------------------------------------------------------------------------------------------------------------
Total Fixed Maturities
Available for Sale 165,052 5,744 118 170,678 170,678
- -----------------------------------------------------------------------------------------------------------------
Equity Securities 29,501 17,800 313 46,988 46,988
- -----------------------------------------------------------------------------------------------------------------
Total Investments $194,553 $ 23,544 $ 431 $217,666 $217,666
=================================================================================================================
(1) Original cost of equity securities; original cost of fixed maturities
adjusted for amortization of premiums and accretion of discounts.
(2) Estimated market values have been based on quoted market prices.
The Company had no debt or equity investments in a single issuer totaling in
excess of 10% of shareholders' equity at December 31, 1998.
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36
The cost and estimated market value of fixed maturity securities at December 31,
1998, by remaining contractual maturity, are shown below (in thousands).
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties.
Estimated
Market
Cost (1) Value (2)
-------- --------
Due in One Year or Less $ 10,571 $ 10,737
Due After One Year Through Five Years 33,688 34,237
Due After Five Years through Ten Years 118,704 123,095
Due After Ten Years 26,471 26,435
Collateralized Mortgage and Asset Backed Securities 89,123 89,214
- ----------------------------------------------------------------------------------
$278,557 $283,718
==================================================================================
(1) Original cost adjusted for amortization of premiums and accretion of
discounts.
(2) Estimated market values have been based on quoted market prices.
The sources of net investment income for the years ended December 31, 1998,
1997, and 1996 are as follows (in thousands):
1998 1997 1996
-------- -------- --------
Fixed Maturities Available for Sale $ 13,404 $ 8,978 $ 7,377
Equity Securities 634 480 257
Cash and Cash Equivalents 1,983 602 422
- -----------------------------------------------------------------------------------
Total Investment Income 16,021 10,060 8,056
Investment Expense (573) (357) (146)
- -----------------------------------------------------------------------------------
Net Investment Income $ 15,448 $ 9,703 $ 7,910
===================================================================================
There are no investments in fixed maturity securities that were non-income
producing during the years ended December 31, 1998, 1997, and 1996. Investment
expense includes $189,000, $164,000 and $60,000, in advisory fees paid to a
related party in 1998, 1997, and 1996, respectively.
Realized pre-tax gains (losses) on the sale of investments for the years ended
December 31, 1998, 1997, and 1996 are as follows (in thousands):
1998 1997 1996
------- ------- -------
Fixed Maturities Available for Sale
Gross Realized Gains $ 1,090 $ 22 $ 47
Gross Realized Losses (89) (52) (28)
- ---------------------------------------------------------------------------------------
Net Gain (Loss) 1,001 (30) 19
- ---------------------------------------------------------------------------------------
Equity Securities
Gross Realized Gains 1,641 628 280
Gross Realized Losses (2,284) (614) (39)
- ---------------------------------------------------------------------------------------
Net Gain (Loss) (643) 14 241
- ---------------------------------------------------------------------------------------
Gross Realized Gain on Sale of Real Estate 116
- ---------------------------------------------------------------------------------------
Total Net Realized
Investment Gain (Loss) $ 474 $ (16) $ 260
=======================================================================================
36
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4. Restricted Assets
PIIC and PIC have investments, principally U.S. Treasury securities, on deposit
with the various states in which they are licensed insurers. At December 31,
1998 and 1997 the carrying value on deposit totaled $11,032,000 and $10,912,000,
respectively.
5. Trust Accounts
The Company is required to maintain certain investments in trust accounts under
reinsurance agreements with unrelated insurance companies that cede insurance
risks to the Company. At December 31, 1998 and 1997, the Company had investments
with a carrying value of $2,326,000 and $2,403,000, respectively, in trust
accounts pursuant to a terminated quota share reinsurance agreement. Under the
terms of this agreement, net premiums received by the Company were invested and
held in a trust account to pay future claims. Interest income on these
investments is distributed to the parties to the quota share agreement on a
quarterly basis. The Company receives its interest in net trust investments in
accordance with a formula that specifies certain percentages of funds to be
released over a five-year period as losses are settled.
The Company also maintains investments in trust accounts under current
reinsurance agreements with unrelated insurance companies. These investments
collateralize the Company's obligations under the reinsurance agreements. The
Company possesses sole responsibility for investment and reinvestment of the
trust account assets. All dividends, interest and other income, resulting from
investment of these assets are owned by the Company, and are distributed on a
monthly basis. At December 31, 1998 and 1997 the carrying value of these trust
fund investments were $8,886,000 and $12,205,000, respectively.
The Company's share of the investments in the trust accounts is included in
investments and cash equivalents, as applicable, in the accompanying
consolidated balance sheets.
6. Property and Equipment
The following table summarizes property and equipment at December 31, 1998 and
1997 (dollars in thousands):
December 31,
-------------------- Estimated Useful
1998 1997 Lives (Years)
---- ---- -------------
Furniture, Fixtures and Automobiles $ 2,676 $ 2,473 5
Computer and Telephone Equipment 8,890 7,176 3-7
Land and Building 150 2,277 40
Leasehold Improvements 1,247 974 10-12
- -------------------------------------------------------------------
12,963 12,900
Accumulated Depreciation and
Amortization (8,086) (7,103)
- -------------------------------------------------------------------
Property and Equipment $ 4,877 $ 5,797
===================================================================
Included in property and equipment are costs incurred in developing or
purchasing information systems technology of $2,716,500 and $2,516,500 in 1998
and 1997, respectively. Amortization of these costs was $195,300, $180,200 and
$100,100 for the years ended December 31, 1998, 1997, and 1996, respectively.
Depreciation expense, excluding amortization of capitalized information systems
technology costs, was $1,169,700, $858,200 and $530,000, for the years ended
December 31, 1998, 1997, and 1996, respectively.
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7. Liability for Unpaid Loss and Loss Adjustment Expenses
Activity in the liability for Unpaid Loss and Loss Adjustment Expenses is
summarized as follows (in thousands):
1998 1997 1996
--------- --------- ---------
Balance at January 1, $ 122,430 $ 96,642 $ 77,686
Less Reinsurance Recoverables 13,502 10,919 9,440
--------- --------- ---------
Net Balance at January 1, 108,928 85,723 68,246
--------- --------- ---------
Incurred related to:
Current Year 69,544 56,725 41,083
Prior Years (3,170) (1,716) (965)
--------- --------- ---------
Total Incurred 66,374 55,009 40,118
--------- --------- ---------
Paid related to:
Current Year 13,402 9,512 7,427
Prior Years 26,870 22,292 15,214
--------- --------- ---------
Total Paid 40,272 31,804 22,641
--------- --------- ---------
Net Balance at December 31, 135,030 108,928 85,723
Plus Reinsurance Recoverables 16,120 13,502 10,919
--------- --------- ---------
Balance at December 31, $ 151,150 $ 122,430 $ 96,642
========= ========= =========
As a result of changes in estimates of insured events of prior years, the
Company reduced losses and loss adjustment expenses incurred by $3,170,000,
$1,716,000 and $965,000 in 1998, 1997, and 1996, respectively. Such favorable
development was due to losses emerging at a lesser rate than had been originally
anticipated when the initial reserves for the applicable accident years were
estimated.
8. Income Taxes
The composition of deferred tax assets and liabilities and the related tax
effects as of December 31, 1998 and 1997 are as follows (in thousands):
December 31,
------------------
1998 1997
---- ----
Assets:
Effect of Loss Reserve Discounting $ 6,853 $ 5,735
Excess of Tax Over Financial Reporting Earned Premium 4,131 2,709
Other Assets 127 128
- -------------------------------------------------------------------------------------
Total Assets 11,111 8,572
=====================================================================================
Liabilities:
Deferred Policy Acquisition Costs, Deductible for Tax 5,899 3,752
Property and Equipment Basis 550 494
Tax Effect of Unrealized Appreciation of Securities 12,070 8,089
Other Liabilities 2 585
- -------------------------------------------------------------------------------------
Total Liabilities 18,521 12,920
- -------------------------------------------------------------------------------------
Net Deferred Income Tax Liability $ 7,410 $ 4,348
=====================================================================================
38
39
The following table summarizes the differences between the Company's effective
tax rate for financial statement purposes and the federal statutory rate
(dollars in thousands):
Amount of Tax Percent
------------- -------
For the year ended December 31, 1998:
Federal Tax at Statutory Rate $ 9,468 35%
Nontaxable Municipal Bond Interest and Dividends Received Exclusion (1,944) (7)
Other, Net (502) (2)
- ------------------------------------------------------------------------------------------------------
Income Tax Expense $ 7,022 26%
======================================================================================================
For the year ended December 31, 1997:
Federal Tax at Statutory Rate $ 7,773 35%
Nontaxable Municipal Bond Interest and Dividends Received Exclusion (1,812) (8)
Other, Net (623) (3)
- ------------------------------------------------------------------------------------------------------
Income Tax Expense $ 5,338 24%
======================================================================================================
For the year ended December 31, 1996:
Federal Tax at Statutory Rate $ 5,708 34%
Nontaxable Municipal Bond Interest and Dividends Received Exclusion (1,670) (10)
Other, Net (624) (4)
- ------------------------------------------------------------------------------------------------------
Income Tax Expense $ 3,414 20%
======================================================================================================
As of December 31, 1998, the Company has approximately $0.6 million in net
operating loss carryforwards, which expire in 2000 and 2001, available to offset
future taxable income. Utilization of the loss carryfowards is limited to an
annual amount of $336,000. For financial reporting purposes, the tax benefit of
any utilization of these operating loss carryfowards is applied to reduce
goodwill ($118,000 in 1998) and does not reduce income tax expense.
Philadelphia Insurance has entered into tax sharing agreements with each of its
subsidiaries. Under the terms of these agreements, the income tax provision is
computed as if each subsidiary were filing a separate federal income tax return,
including adjustments for the income tax effects of net operating losses and
other special tax attributes, regardless of whether those attributes are
utilized in the Company's consolidated federal income tax return.
9. Minority Interest in Consolidated Subsidiaries: Company Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding
Solely Debentures of Company
On May 5, 1998, the Company issued 10.350 million FELINE PRIDES(SM) at $10.00
per security and PCHC Financing I, the Company's business trust subsidiary,
issued 1,000,000 7.0% Trust Originated Preferred Securities with a stated
liquidation amount per trust preferred security equal to $10.00. The 10.350
million FELINE PRIDES(SM) consisted of 9.350 million units referred to as Income
Prides and 1.000 million units referred to as Growth Prides. Each Income Prides
consists of a unit comprised of (a) a purchase contract under which the holder
will purchase a number of shares of Philadelphia Consolidated Holding Corp.
common stock no later than May 16, 2001 (ranging from .3858 to .4706 shares per
FELINE PRIDES(SM)) under the terms specified in the stock purchase contract and
(b) beneficial ownership of a 7.0% Trust Originated Preferred Security issued by
PCHC Financing I and representing an undivided beneficial ownership in the
assets of PCHC Financing I. Each holder will receive aggregate cumulative cash
distributions at the annual rate of 7.00% of the $10.00 stated amount for the
security, payable quarterly in arrears. Each Growth Prides consists of a unit
with a face amount of $10.00 comprised of (a) a purchase contract under which
(i) the holder will purchase a number of shares of Philadelphia Consolidated
Holding Corp. common stock no later than May 16, 2001 (ranging from .3858 to
.4706 shares per FELINE PRIDES(SM)) under the terms specified in the stock
purchase contract and (ii) the Company will pay the holder contract adjustment
payments at the rate of .50% of the stated amount per annum and (b) a 1/100
undivided beneficial ownership interest in a treasury security having a
principal amount at maturity equal to $1,000 and maturing on May 15, 2001. The
applicable distribution rate on the trust originated securities that remain
outstanding during the period May 16, 2001 through May 16, 2003, will be reset
so that the market value of the Trust Originated Preferred Securities will be
equal to 100.5 percent of the stated amount. The Company may limit the reset
rate to be no higher than the rate on the two-year benchmark treasury plus 255
basis points. The guarantee by the Company is a full and unconditional guarantee
on a subordinated unsecured basis with respect to the Trust
39
40
Originated Preferred Securities, but will not apply to any payment of
distributions except to the extent the Trust shall have funds available
therefor.
Proceeds from the offering were approximately $99.0 million (after underwriting
and associated costs). The proceeds from the sale of the Growth Prides were used
to purchase the underlying securities to be transferred to the holders of the
Growth Prides pursuant to the terms thereof. All the proceeds from the sale of
the Trust Preferred Securities that were not components of the Income Prides and
all of the proceeds from the sale of the Income Prides were invested by PCHC
Financing I in debentures of the Company. The debentures account for
substantially all the assets of PCHC Financing I. The debentures, whose
principal amount is $106.7 million, mature on May 16, 2003 and pay interest
initially at the rate of 7.0% per annum until May 15, 2001 and at the reset rate
thereafter. The Company utilized $33.1 million of the net proceeds to make
contributions to its subsidiaries, of which $20.0 million was contributed to the
Insurance Subsidiaries. Additionally, $3.1 million was utilized by the Company
to buy back its common stock under its stock buy-back program. The Company
anticipates utilizing the remaining proceeds for general corporate purposes
which may include acquisitions, capital expenditures, and the repurchase by the
Company of its common stock.
10. Shareholders' Equity
The Company has established non-qualified stock bonus and stock option plans.
Under the stock bonus plan, the Company has granted a total of 137,500 shares to
certain officers of the Company, of which all such shares have been issued and
are vested.
Under the Company's stock option plan, stock options may be granted for the
purchase of common stock at a price not less than the fair market value on the
date of grant. Options outstanding as of December 31, 1994 are exercisable over
a four-to-five-year vesting period. Options issued in 1998, 1997, 1996, and 1995
are exercisable after the expiration of five years following the grant date.
Under this plan, the Company has reserved 2,475,000 shares of common stock for
issuance pursuant to options granted under the plan.
In addition to stock options granted pursuant to the Company's stock option
plan, the Company's Board of Directors have granted previous awards of 2,613,492
stock options.
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at a fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for the
Company's compensation instruments is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
40
41
The following is a summary of the Company's option activity, including
weighted-average option information:
1998 1997 1996(2)
---------------------- ---------------------- ----------------------
Exercise Exercise Exercise
Price Price Price
Per Per Per
Options Option(1) Options Option(1) Options Option(1)
--------- ---------- --------- --------- --------- ----------
Outstanding at beginning
of year 3,473,042 $ 3.85 3,572,292 $ 3.86 3,200,642 $2.84
Granted 256,125 $19.07 5,000 $16.38 917,900 $8.39
Exercised (68,600) $ 4.53 (84,250) $ 4.42 (292,500) $3.33
Canceled (23,400) $12.00 (20,000) $ 6.00 (253,750) $8.05
--------- --------- ---------
Outstanding at end of year 3,637,167 $ 4.85 3,473,042 $ 3.85 3,572,292 $3.86
========= ========= =========
Exercisable at end of year 2,708,142 2,768,792 2,819,218
Weighted-average fair
value of options granted
during the year $7.69 $6.38 $2.87
Exercise Exercisable Exercise
Outstanding Price Remaining at Price
At December Per Contractual December Per
Range of Exercise Prices 31, 1998 Option(1) Life (Years)(1) 31, 1998 Option(1)
- -------------------------------------------------------------------------------------------------------------
$2.61 2,664,142 $ 2.61 4.1 2,664,142 $ 2.61
$4.75 to $7.31 44,000 $ 5.22 2.6 44,000 $ 5.22
$8.13 to $9.31 667,900 $ 8.48 7.2 -- --
$16.38 to $19.75 203,625 $18.54 9.4 -- --
$20.50 to $23.50 57,500 $20.74 9.4 -- --
---------- ---------
3,637,167 $ 4.85 2,708,142 $ 2.65
========= =========
(1) Weighted Average.
(2) Restated to reflect a two-for-one split of the Company's common stock
distributed in November 1997, see Note 11.
The Company has established a non-qualified Employee Stock Purchase Plan (the
"Stock Purchase Plan"). The aggregate maximum number of shares that may be
issued pursuant to the Stock Purchase Plan is 500,000. Shares may be purchased
under the Stock Purchase Plan by eligible employees during designated one-month
offering periods established by the Compensation Committee of the Board of
Directors at a purchase price of the lesser of 85% of the fair market value of
the shares on the first business day of the offering period or the date the
shares are purchased. The purchase price of shares may be paid by the employee
over six years pursuant to the execution of a promissory note. The promissory
note(s) are collateralized by such shares purchased under the Stock Purchase
Plan and are interest free. Under the Stock Purchase Plan, the Company issued
51,794 and 78,569 shares in 1998 and 1997, respectively. The weighted-average
fair value of those purchase rights granted in 1998 and 1997 was $2.70 and
$1.94, respectively.
In addition, the Company has also established a non-qualified Directors Stock
Purchase Plan ("Directors Plan") for the benefit of non-employee Directors. The
aggregate maximum number of shares that may be issued pursuant to the Directors
Plan is 50,000. Non-employee Directors, during monthly offerings periods, may
designate a portion of his or her fees to be used for the purchase of shares
under the terms of the Directors Plan at a purchase price of the lesser of 85%
of the fair market value of the shares on the first business day of the offering
period or the date the shares are purchased. No shares have been issued pursuant
to the Directors Plan as of December 31, 1998.
41
42
Since the Company has adopted the disclosure-only provisions of SFAS No. 123, no
compensation cost has been recognized for the Company's compensation
instruments. The following represents pro forma information as if the Company
recorded compensation costs using the fair value of the issued compensation
instruments (the results may not be indicative of the actual effect on net
income in future years) (in thousands, except per average common share data):
1998 1997 1996(1)
------------ ------------- ------------
Net Income As Reported $20,028 $16,870 $13,374
Assumed Stock Compensation Cost 453 $ 354 281
------- -------- --------
Pro Forma Net Income $19,575 $16,516 $13,093
======= ======== ========
Diluted Earnings Per Average Common Share as Reported $ 1.34 $ 1.13 $ 0.94
======= ======= =======
Pro Forma Diluted Earnings Per Average Common Share $ 1.31 $ 1.11 $ 0.92
======= ======= =======
(1) Per share information restated to reflect a two-for-one split of the
Company's common stock distributed in November 1997, see Note 11.
The fair value of options at date of grant was estimated using the Black-Scholes
valuation model with the following weighted-average assumptions:
1998 1997 1996
------------ ------------- --------------
Expected Stock Volatility 29.5% 25.9% 20.0%
Risk-Free Interest Rate 5.3% 5.8% 5.8%
Expected Option Life-Years 6.0 6.0 6.0
Expected Dividends 0.0% 0.0% 0.0%
11. Common Stock Split
On October 16, 1997, the Board of Directors approved a two-for-one split of the
Company's common stock payable to shareholders of record on October 27, 1997 for
distribution on November 5, 1997. Weighted-average common shares outstanding,
common stock equivalents, and earnings per share have been restated to reflect
this stock split.
12. Stock Repurchase Authorization
On August 3, 1998, the Company's Board of Directors authorized the Company to
repurchase up to $10.0 million of its common stock. As of December 31, 1998, the
Company had repurchased 159,100 shares for approximately $3.1 million under this
authorization.
13. Reinsurance
In the normal course of business, the Company has entered into various
reinsurance contracts with unrelated reinsurers. The Company participates in
such agreements for the purpose of limiting loss exposure and diversifying
business. Reinsurance contracts do not relieve the Company from its obligation
to policyholders.
The loss and loss adjustment expense reserves ceded under such arrangements were
$16,120,000 and $13,502,000 at December 31, 1998 and 1997, respectively. The
Company evaluates the financial condition of its reinsurers to minimize its
exposure to losses from reinsurer insolvencies. The percentage of ceded
reinsurance reserves that are with companies rated "A" (Excellent) or better by
A.M. Best Company is 100% as of December 31, 1998 and 1997, respectively.
Additionally, approximately 1%, 2%, and 4% of the Company's net written premiums
for the years ended December 31, 1998, 1997, and 1996, respectively, were
assumed from an unrelated reinsurance company.
42
43
The effect of reinsurance on premiums written and earned is as follows (in
thousands):
Written Earned
For the Year Ended December 31, 1998:
Direct Business $195,697 $173,555
Reinsurance Assumed 1,712 1,181
Reinsurance Ceded 54,373 52,049
- ----------------------------------------------------------------------
Net Premiums $143,036 $122,687
- ----------------------------------------------------------------------
Percentage Assumed of Net 1.0%
======================================================================
For the Year Ended December 31, 1997:
Direct Business $157,060 $147,514
Reinsurance Assumed 2,031 2,614
Reinsurance Ceded 47,294 49,573
- ----------------------------------------------------------------------
Net Premiums $111,797 $100,555
- ----------------------------------------------------------------------
Percentage Assumed of Net 2.6%
======================================================================
For the Year Ended December 31, 1996:
Direct Business $132,611 $117,354
Reinsurance Assumed 4,244 4,466
Reinsurance Ceded 52,861 49,770
- ----------------------------------------------------------------------
Net Premiums $ 83,994 $ 72,050
- ----------------------------------------------------------------------
Percentage Assumed of Net 6.2%
======================================================================
14. Profit Sharing
The Company has a defined contribution Profit Sharing Plan, which includes a
401K feature, covering substantially all employees. Under the plan, employees
may contribute up to an annual maximum of the lesser of 15% of eligible
compensation or the applicable Internal Revenue Code limit in a calendar year.
The Company makes a matching contribution in an amount equal to 50% of the
participant's pre-tax contribution, subject to a maximum of 6% of the
participant's eligible compensation. The Company may also make annual
discretionary profit sharing contributions at each plan year end. Participants
are fully vested in the Company's contribution upon completion of seven years of
service. The Company's contributions to the plan were $423,000 $474,300 and
$322,400, in 1998, 1997, and 1996, respectively.
15. Commitments and Contingencies
The Company is subject to routine legal proceedings in connection with its
property and casualty insurance business. The Company is not involved in any
pending or threatened legal or administrative proceedings, which management
believes can reasonably be expected to have a material adverse effect on the
Company's financial condition or results of operations.
The Company currently leases office space to serve as its headquarters location
and 40 field offices for its production underwriters. Rental expense for these
operating leases was $1,242,000, $916,700 and $736,700 for the years ended
December 31, 1998, 1997, and 1996, respectively.
At December 31, 1998, the future minimum rental payments required under
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year as of December 31, 1998 were as follows:
Year Ending December 31:
1999 $ 1,618,000
2000 1,423,000
2001 1,141,000
2002 1,034,000
2003 and Thereafter 179,000
- -------------------------------------------------------------------------
Total Minimum Payments Required $ 5,395,000
=========================================================================
43
44
16. Summary of Quarterly Financial Information - Unaudited
The following quarterly financial information for each of the three months ended
March 31, June 30, September 30 and December 31, 1998 and 1997 is unaudited.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the results of operations for
such periods, have been made for a fair presentation of the results shown (in
thousands, except share and per share data):
Three Months Ended
----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
------------ ------------ ------------- ------------
Net Earned Premiums $ 26,915 $ 29,662 $ 32,165 $ 33,945
Net Investment Income $ 2,700 $ 3,730 $ 4,446 $ 4,572
Net Realized Investment Gain (Loss) $ 3 $ 96 $ 1,609 $
(1,234)
Net Loss and Loss Adjustment Expenses $ 14,858 $ 15,949 $ 17,438 $ 18,129
Acquisition Costs and Other
Underwriting Expenses $ 8,219 $ 9,187 $ 10,159 $ 10,857
Minority Interest:
Distributions on Company Obligated
Mandatorily Redeemable Preferred
Securities of Subsidiary Trust $ $ 1,217 $ 1,742 $ 1,811
Net Income $ 4,518 $ 4,841 $ 6,076 $ 4,593
Basic Earnings Per Share $ 0.37 $ 0.39 $ 0.50 $ 0.38
Diluted Earnings Per Share $ 0.30 $ 0.32 $ 0.41 $ 0.31
Weighted-Average Common Shares
Outstanding 12,262,983 12,297,633 12,248,331 12,188,540
Weighted-Average Share Equivalents
Outstanding 2,790,988 2,839,746 2,713,348 2,822,910
------------ ------------ ------------ ------------
Weighted-Average Shares and Share
Equivalents Outstanding 15,053,971 15,137,379 14,961,679 15,011,450
============ ============ ============ ============
March 31, June 30, September 30, December 31,
1997(1) 1997(1) 1997(1) 1997
------------ ------------ ------------- ------------
Net Earned Premiums $ 22,388 $ 25,163 $ 26,492 $ 26,512
Net Investment Income $ 2,211 $ 2,404 $ 2,535 $ 2,553
Net Realized Investment Gain (Loss) $ 28 $ (59) $ 156 $ (141)
Net Loss and Loss Adjustment Expenses $ 12,481 $ 13,832 $ 14,429 $ 14,267
Acquisition Costs and Other
Underwriting Expenses $ 6,946 $ 7,858 $ 8,429 $ 8,111
Net Income $ 3,622 $ 3,992 $ 4,468 $ 4,788
Basic Earnings Per Share $ 0.30 $ 0.33 $ 0.37 $ 0.39
Diluted Earnings Per Share $ 0.25 $ 0.27 $ 0.30 $ 0.32
Weighted-Average Common Shares
Outstanding 12,133,216 12,175,688 12,223,940 12,240,286
Weighted-Average Share Equivalents
Outstanding 2,570,174 2,674,217 2,815,533 2,792,963
------------ ------------ ------------ ------------
Weighted-Average Shares and Share
Equivalents Outstanding 14,703,390 14,849,905 15,039,473 15,033,249
============ ============ ============ ============
(1) Share information restated to reflect a two-for-one split of the
Company's common stock distributed in November 1997 (see Note 11).
44
45
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in that the
registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later that 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's director and executive
officers required by this Item is incorporated by reference to the
Proxy Statement under the caption "Management-Directors and Executive
Officers".
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Proxy Statement under the captions "Executive Compensation","Stock
Option Exercises and Holdings" and "Directors Compensation".
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Proxy Statement under the caption "Security Ownership of Certain
Beneficial Owners and Management".
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Proxy Statement under the caption "Additional Information Regarding
the Board".
PART IV
Item 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits
1. The Financial Statements and Financial Statement Schedules listed in
the accompanying index on page 25 are filed as part of this Report.
2. Exhibits: The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedules are filed as part of, or
incorporated by reference into, this Report.
Exhibit No. Description
- ----------- -----------
3.1 * Articles of Incorporation of Philadelphia Insurance, as amended to date.
3.1.1 * Amendment to Articles of Incorporation of Philadelphia Insurance.
3.2 * By-laws of Philadelphia Insurance, as amended to date.
10.1 *(1) Amended and Restated Key Employees' Stock Option Plan.
10.1.1 ********(1) Amended and Restated Key Employees' Stock Option Plan.
10.2 *(1) Key Employees' Stock Bonus Plan.
10.2.1 *(1) Excerpt of Board of Directors and Shareholders Resolution amending Key Employees' Stock
Bonus Plan.
10.6 * Casualty Excess of Loss Reinsurance Agreement No. 14P-106,401,402, effective January 1,
1990, with Swiss Re, as amended to date.
10.7 * Property Quota Share Reinsurance Agreement No. 14P-202, effective December 9, 1989, with
Swiss Re, as amended to date.
45
46
10.8 * Casualty Quota Share Reinsurance Agreement No. 14P-201, effective January 1, 1989, with
Swiss Re, as amended to date.
10.9 * Retrocession Contract No. 80101, effective October 1, 1990, with Swiss Re, as amended to
date, together with related Casualty Quota Share Reinsurance Agreement No. X21-201, as
amended to date.
10.10 * Retrocession Contract No. 81100/81101, effective October 1, 1990, with Swiss Re, as
amended to date, together with related Property Quota Share Reinsurance Agreement No.
DP2AB, effective October 1, 1990, as amended to date.
10.11 * Retrocession Contract No. 80100/80103, effective October 1, 1990, with Swiss Re, as
amended to date, together with related Casualty Quota Share Reinsurance Agreement No.
DC2ABC, effective October 1, 1990, as amended to date.
10.12 * Agreement of Reinsurance no. B367, dated June 11, 1991, with General Reinsurance
Corporation, as amended to date.
10.13 * Agreement of Reinsurance No. A271, dated July 2, 1993, with General Reinsurance
Corporation.
10.14 * General Agency Agreement, effective December 1, 1987, between MIA and Providence
Washington Insurance Company, as amended to date, together with related Quota Share
Reinsurance Agreements, as amended to date.
10.15 * E & O Insurance Policy effective July 20, 1993.
10.15.1 ******* E & O Insurance Policy effective July 20, 1996.
10.15.2 ********* E & O Insurance Policy effective July 20, 1997.
10.16 * Minutes of the Board of Directors Meeting dated October 20, 1992, and excerpts from the
Minutes of the Board of Directors Meeting dated November 16, 1992.
10.17 *(1) Letter dated July 9, 1993 from James J. Maguire, confirming verbal agreements concerning
options.
10.18 *(1) James J. Maguire Stock Option Agreements.
10.18.1 ***(1) Amendment to James J. Maguire Stock Option Agreements.
10.19 *(1) Wheelways Salary Savings Plus Plan Summary Plan Description.
10.20 * Key Man Life Insurance Policies on James J. Maguire
10.21 * Reinsurance Pooling Agreement dated August 14, 1992, between PIIC and PIC.
10.22 * Tax Sharing Agreement, dated July 16, 1987, between Philadelphia Insurance and PIC, as amended to date.
10.23 * Tax Sharing Agreement, dated November 1, 1986, between Philadelphia Insurance and
PIIC, as amended to date.
10.24 *(1) Management Agreement dated May 20, 1991, between PIIC and MIA, as
amended to date. 10.24.1 *******(1) Management Agreement dated May 20, 1991, between PIIC
and MIA, as amended September 25, 1996.
10.25 *(1) Management Agreement dated October 23, 1991, between PIC and MIA, as
amended to date.
10.25.1 *******(1) Management Agreement dated October 23, 1991, between PIC and MIA, as amended September 25, 1996.
10.26 * General Mutual Release and Settlement of All Claims dated July 2, 1993, with the
Liquidator of Integrity Insurance Company.
10.27 * Settlement Agreement and General Release with Robert J. Wilkin, Jr., dated August 18,
1993.
10.28 ** Lease tracking portfolio assignment agreement.
10.29 ****(1) James J. Maguire Split Dollar Life Insurance Agreement, Collateral Assignment and
Joint and Last Survivor Flexible Premium Adjustable Life Insurance Policy Survivorship
Life.
10.30 ***** Allenbrook Software License Agreement, dated September 26, 1995.
10.31 ***** Sublease Agreement dated August 24, 1995 with CoreStates Bank, N.A.
10.32 ***** Lease Agreement dated August 30, 1995 with The Prudential Insurance Company of America.
10.33 ******(1) Employee Stock Purchase Plan.
10.34 ******(1) Cash Bonus Plan.
10.35 ******(1) Executive Deferred Compensation Plan.
10.36 ********(1) Directors Stock Purchase Plan
10.37 ********* Lease Agreement dated May 8, 1997 with Bala Plaza, Inc.
10.38 ********* Casualty Excess of Loss Reinsurance Agreement effective
January 1, 1997, together with Property Per Risk Excess of Loss Reinsurance Agreement
effective January 1, 1997 and Property Facultative Excess of Loss Automatic Reinsurance
Agreement effective January 1, 1997.
46
47
10.39 ********* Automobile Leasing Residual Value Excess of Loss Reinsurance Agreement effective January
1, 1997, together with Second Casualty Excess of Loss Reinsurance Agreement, effective
January 1, 1997.
10.40 ********** Inspire Software License Agreement, dated December 31, 1998.
10.41 ********** Lease Agreement dated July 6, 1998 with Bala Plaza, Inc.
11 ********** Statement regarding computation of earnings per share.
21 * List of Subsidiaries of the Registrant.
23 ********** Consent of PricewaterhouseCoopers, LLP
24 * Power of Attorney
99.1 ********** Report of Independent Accountants of PricewaterhouseCoopers, LLP on Financial Statement
Schedules.
* Incorporated by reference to the Exhibit filed with the Registrant's Form S-1 Registration
Statement under the Securities Act of 1933 (Registration No. 33-65958).
** Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31,
1993 and incorporated by reference.
*** Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1994 and
incorporated by reference.
**** Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1995 and
incorporated by reference.
***** Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31,
1995 and incorporated by reference.
****** Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1996 and
incorporated by reference.
******* Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated by reference.
******** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 1997 and incorporated by reference.
********* Filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
********** Filed herewith.
(1) Compensatory Plan or Arrangement, or Management Contract.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1998.
47
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Philadelphia Consolidated Holding Corp.
By: /s/ James J. Maguire
------------------------------------------
James J. Maguire
Chairman of the Board of Directors, President,
and Chief Executive Officer
March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
March 26, 1999
/s/ James J. Maguire Chairman of the Board of
-------------------------------- Directors, President and Chief Executive
James J. Maguire Officer (Principal Executive Officer)
/s/ Craig P. Keller Vice President, Secretary, Treasurer, March 26, 1999
-------------------------------- and Chief Financial Officer
Craig P. Keller (Principal Financial and
Accounting Officer)
/s/ James J. Maguire, Jr. Executive Vice President & COO, Director March 26, 1999
--------------------------------
James J. Maguire, Jr.
/s/ Sean S. Sweeney Executive Vice President, Director March 26, 1999
--------------------------------
Sean S. Sweeney
/s/ William J. Henrich, Jr. Director March 26, 1999
--------------------------------
William J. Henrich, Jr.
/s/ Paul R. Hertel, Jr. Director March 26, 1999
--------------------------------
Paul R. Hertel, Jr.
/s/ Roger L. Larson Director March 26, 1999
--------------------------------
Roger L. Larson
/s/ Thomas J. McHugh Director March 26, 1999
--------------------------------
Thomas J. McHugh
/s/ Michael J. Morris Director March 26, 1999
--------------------------------
Michael J. Morris
/s/ J. Eustace Wolfington Director March 26, 1999
--------------------------------
J. Eustace Wolfington
48
49
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule I - Summary of Investments - Other than Investments in Related Parties
As of December 31, 1998
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
Estimated Amount at which
Market shown in the
Type of Investment Cost * Value Balance Sheet
- -------------------------------------------------------------------------------------------------------
Fixed Maturities:
Bonds:
United States Government and Government
Agencies and Authorities $ 26,759 $ 26,974 $ 26,974
States, Municipalities and Political Subdivisions 112,196 117,195 117,195
Public Utilities 3,366 3,634 3,634
All Other Corporate Bonds 133,854 133,539 133,539
Redeemable Preferred Stock 2,382 2,376 2,376
-------- -------- --------
Total Fixed Maturities 278,557 283,718 283,718
-------- -------- --------
Equity Securities:
Common Stocks:
Public Utilities 141 290 290
Banks, Trust and Insurance Companies 7,011 12,308 12,308
Industrial, Miscellaneous and all other 36,289 60,170 60,170
-------- -------- --------
Total Equity Securities 43,441 72,768 72,768
-------- -------- --------
Total Investments $321,998 $356,486 $356,486
======== ======== ========
* Original cost of equity securities; original cost of fixed maturities
adjusted for amortization of premiums and accretion of discounts.
S-1
50
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II
Condensed Financial Information of Registrant
(Parent Only)
Balance Sheets
(In Thousands, Except Share Data)
As of December 31,
--------------------------
1998 1997
--------- ---------
ASSETS
Fixed Maturities Available for Sale at Market $ $ 30
Cash and Cash Equivalents (65) (3)
Mortgage Loans (a) 1,125
Equity in and Advances to Unconsolidated Subsidiaries (a) 238,292 109,540
Other Assets 14 589
--------- ---------
Total Assets $ 238,241 $ 111,281
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Income Taxes Payable (Recoverable) $ 675 $ (162)
Other Liabilities 1,178 159
--------- ---------
Total Liabilities 1,853 (3)
--------- ---------
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, 12,330,825 shares Issued and 12,242,431 Shares
Issued and Outstanding 44,796 42,788
Notes Receivable from Shareholders (1,680) (1,422)
Accumulated Other Comprehensive Income 22,417 15,023
Retained Earnings 74,923 54,895
Less Cost of Common Stock held in Treasury,
130,262 Shares in 1998 (2,973)
--------- ---------
Total Shareholders' Equity 137,483 111,284
--------- ---------
Total Liabilities and Shareholders' Equity $ 238,241 $ 111,281
========= =========
(a) These items have been eliminated in the Company's Consolidated
Financial Statements.
See Notes to Consolidated Financial Statements
included in Item 8, pages 32-44.
S-2
51
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II, Continued
Condensed Financial Information of Registrant
(Parent Only)
Statements of Operations
(In Thousands)
For the Years Ended December 31,
------------------------------------
1998 1997 1996
-------- -------- --------
Revenue:
Dividends from Subsidiaries(a) $ 5,470 $ $
Net Investment Income 2,598 10 11
Net Realized Investment Gain, (Loss)(b) (671) 672
-------- -------- --------
Total Revenue 7,397 10 683
-------- -------- --------
Other Expenses 725 540 496
-------- -------- --------
Total Expenses 725 540 496
-------- -------- --------
Minority Interest: Distributions on Company
Mandatorily Redeemable Preferred Securities of Subsidiary Trust 4,770
-------- -------- --------
Income, (Loss) Before Income Taxes and Equity in Earnings of
Unconsolidated Subsidiaries 1,902 (530) 187
Income Tax Expense (Benefit) 675 (162) 74
-------- -------- --------
Income, (Loss) Before Equity in Earnings of Unconsolidated
Subsidiaries 1,227 (368) 113
Equity in Earnings of Unconsolidated Subsidiaries 18,801 17,238 13,261
-------- -------- --------
Net Income $ 20,028 $ 16,870 $ 3,374
======== ======== ========
(a) This item has been eliminated in the Company's Consolidated Financial
Statements.
(b) $31 and $665 of this amount has been eliminated in the Company's
Consolidated Financial Statements for 1998 and 1996, respectively.
See Notes to Consolidated Financial Statements
included in Item 8, pages 32-44.
S-3
52
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II, Continued
Condensed Financial Information of Registrant
(Parent Only)
Statements of Cash Flows
(In Thousands)
For the Years Ended December 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
Cash Flows From Operating Activities:
Net Income $ 20,028 $ 16,870 $ 13,374
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Net Realized Investment (Gain), Loss 671 (672)
Amortization Expense (Income) (145) 68 79
Equity in Earnings of Unconsolidated Subsidiaries (18,801) (17,238) (13,261)
Change in Other Liabilities 1,019 (16) 25
Change in Other Assets 575 10 (9)
Change in Income Taxes Payable 837 (584) (88)
--------- --------- ---------
Net Cash Provided (Used) by Operating Activities 4,184 (890) (552)
--------- --------- ---------
Cash Flows From Investing Activities:
Proceeds From Maturity of Investments in Fixed
Maturities Available for Sale 569
Proceeds From Sales of Investments in Equity Securities 2,427 2,335
Cost of Fixed Maturities Available for Sale Acquired (62,753)
Cost of Equity Securities Acquired (13,721) (119)
Net Transfers to Subsidiaries (a) (28,450) (581) (2,678)
--------- --------- ---------
Net Cash Used by Investing Activities (101,928) (581) (462)
--------- --------- ---------
Cash Flows From Financing Activities:
Proceeds From Offering of Company Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary
Trust 99,463
Exercise of Employee Stock Options, Net of Tax Benefit 724 723 979
Collection of Notes Receivable 570 375 207
Proceeds from Shares Pursuant to Employee Stock Purchase Plan 25 25
Cost of Common Stock Repurchased (3,100)
--------- --------- ---------
Net Cash Provided by Financing Activities 97,682 1,123 1,186
--------- --------- ---------
Net Increase (Decrease) in Cash and Equivalents (62) (348) 172
Cash and Cash Equivalents at Beginning of Year (3) 345 173
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ (65) $ (3) 345
========= ========= =========
Cash Dividends Received From Unconsolidated Subsidiaries $ 5,470 $ $
========= ========= =========
Non-Cash Transactions:
Issuance of Shares Pursuant to Employee Stock Purchase Plan in exchange
for Notes Receivable $ 828 $ 873 $ 1,131
(a) These items have been eliminated in the Company's Consolidated
Financial Statements.
See Notes to Consolidated Financial Statements
included in Item 8, pages 32-44.
S-4
53
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule IV - Reinsurance
Earned Premiums
For the Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------------------------------------------------------------------------------------------------------------------------
Ceded to Assumed from Percentage of
Gross Other Other Amount
Amount Companies Companies Net Amount Assumed to Net
- -------------------------------------------------------------------------------------------------------------------------
1998
Property and Casualty Insurance $173,555 $52,049 $1,181 $122,687 1.0%
=========================================================================================================================
1997
Property and Casualty Insurance $147,514 $49,573 $2,614 $100,555 2.6%
=========================================================================================================================
1996
Property and Casualty Insurance $117,354 $49,770 $4,466 $72,050 6.2%
=========================================================================================================================
S-5
54
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule VI - Supplemental Information Concerning Property -
Casualty Insurance Operations
As of and For the Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
Reserve for
Deferred Unpaid
Policy Claims and Discount if Net
Affiliation with Acquisition Claim any deducted Unearned Earned
Registrant Costs Adjustment in Column C Premiums Premiums
Expenses
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Consolidated Property
- Casualty Entities
December 31, 1998 $16,853 $151,150 $0 $64,787 $122,687
December 31, 1997 $10,970 $122,430 $0 $42,116 $100,555
December 31, 1996 $ 9,033 $ 96,642 $0 $33,154 $ 72,050
Claims and Claims
Adjustment Expenses Amortization of
Incurred Related to deferred policy Paid Claims
Net (1) (2) acquisition costs and Claim
Affiliation with Investment Current Prior Adjustment Net Written
Registrant Income Year Year Expenses Premiums
COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
Consolidated Property
- Casualty Entities
December 31, 1998 $15,448 $69,544 ($3,170) $30,034 $40,272 $143,036
December 31, 1997 $ 9,703 $56,725 ($1,716) $25,034 $31,804 $111,797
December 31, 1996 $ 7,910 $41,083 ($965) $22,210 $22,641 $ 83,994
S-6
55
Philadelphia Consolidated Holding Corp. and Subsidiaries
Exhibit Index
For the Year Ended December 31, 1998
Exhibit No. Page No. Description
- ----------- -------- -----------
3.1 * Articles of Incorporation of Philadelphia Insurance, as
amended to date.
3.1.1 * Amendment to Articles of Incorporation of Philadelphia
Insurance.
3.2 * By-laws of Philadelphia Insurance, as amended to date.
10.1 *(1) Amended and Restated Key Employees' Stock Option Plan.
10.1.1 ********(1) Amended and Restated Key Employers' Stock Option Plan.
10.2 *(1) Key Employees' Stock Bonus Plan.
10.2.1 *(1) Excerpt of Board of Directors and Shareholders Resolution
amending Key Employees' Stock Bonus Plan.
10.6 * Casualty Excess of Loss Reinsurance Agreement No. 14P-
106,401,402, effective January 1, 1990, with Swiss Re, as
amended to date.
10.7 * Property Quota Share Reinsurance Agreement No. 14P-202,
effective December 9, 1989, with Swiss Re, as amended to
date.
10.8 * Casualty Quota Share Reinsurance Agreement No. 14P-201,
effective January 1, 1989, with Swiss Re, as amended to
date.
10.9 * Retrocession Contract No. 80101, effective October 1, 1990,
with Swiss Re, as amended to date, together with related
Casualty Quota Share Reinsurance Agreement No. X21-201,
as amended to date.
10.10 * Retrocession Contract No. 81100/81101, effective October 1,
1990, with Swiss Re, as amended to date, together with
related Property Quota Share Reinsurance Agreement No.
DP2AB, effective October 1, 1990, as amended to date.
10.11 * Retrocession Contract No. 80100/80103, effective October 1,
1990, with Swiss Re, as amended to date, together with
related Casualty Quota Share Reinsurance Agreement No.
DC2ABC, effective October 1, 1990, as amended to date.
10.12 * Agreement of Reinsurance no. B367, dated June 11, 1991,
with General Reinsurance Corporation, as amended to date.
10.13 * Agreement of Reinsurance No. A271, dated July 2, 1993,
with General Reinsurance Corporation.
10.14 * General Agency Agreement, effective December 1, 1987,
between MIA and Providence Washington Insurance
Company, as amended to date, together with related Quota
Share Reinsurance Agreements, as amended to date.
10.15 * E & O Insurance Policy effective July 20, 1993.
10.15.1 ******* E & O Insurance Policy effective July 20, 1996.
10.15.2 ********* E & O Insurance Policy effective July 20, 1997.
10.16 * Minutes of the Board of Directors Meeting dated October 20,
1992, and excerpts from the Minutes of the Board of
Directors Meeting dated November 16, 1992.
(E-1)
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56
10.17 *(1) Letter dated July 9, 1993 from James J. Maguire, confirming
verbal agreements concerning options.
10.18 *(1) James J. Maguire Stock Option Agreements.
10.18.1 ***(1) Amendment to James J. Maguire Stock Option Agreements.
10.19 *(1) Wheelways Salary Savings Plus Plan Summary Plan
Description.
10.20 * Key Man Life Insurance Policies on James J. Maguire
10.21 * Reinsurance Pooling Agreement dated August 14, 1992,
between PIIC and PIC.
10.22 * Tax Sharing Agreement, dated July 16, 1987,
between Philadelphia Insurance and PIIC, as
amended to date.
10.23 * Tax Sharing Agreement, dated November 1, 1986,
between Philadelphia Insurance and PIIC, as
amended to date.
10.24 *(1) Management Agreement dated May 20, 1991, between PIIC
and MIA, as amended to date.
10.24.1 *******(1) Management Agreement dated May 20, 1991, between PIIC and MIA,
as amended September 25, 1996.
10.25 *(1) Management Agreement dated October 23, 1991, between
PIC and MIA, as amended to date.
10.25.1 *******(1) Management Agreement dated October 23, 1991, between PIC and MIA,
as amended September 25, 1996.
10.26 * General Mutual Release and Settlement of All Claims dated
July 2, 1993, with the Liquidator of Integrity Insurance
Company.
10.27 * Settlement Agreement and General Release with Robert J.
Wilkin, Jr., dated August 18, 1993.
10.28 ** Lease tracking portfolio assignment agreement.
10.29 ****(1) James J. Maguire Split Dollar Life Insurance Agreement,
Collateral Assignment and Joint and Last Survivor
Flexible Premium Adjustable Life Insurance Policy
Survivorship Life.
10.30 ***** Allenbrook Software License Agreement, dated September
26, 1995.
10.31 ***** Sublease Agreement dated August 24, 1995 with CoreStates
Bank, N.A.
10.32 ***** Lease Agreement dated August 30, 1995 with The Prudential
Insurance Company of America.
10.33 ******(1) Employee Stock Purchase Plan.
10.34 ******(1) Cash Bonus Plan.
10.35 ******(1) Executive Deferred Compensation Plan.
10.36 ********(1) Directors Stock Purchase Plan.
10.37 ********* Lease Agreement dated May 8, 1997 with Bala Plaza, Inc.
10.38 ********* Casualty Excess of Loss Reinsurance Agreement effective
January 1, 1997, together with Property Per Risk
Excess of Loss Reinsurance Agreement effective January
1, 1997 and Property Facultative Excess of Loss
Automatic Reinsurance Agreement effective January 1, 1997.
10.39 ********* Automobile Leasing Residual Value Excess of Loss
Reinsurance Agreement effective January 1, 1997, together
with Second Casualty Excess of Loss Reinsurance
Agreement, effective January 1, 1997.
10.40 ********** Page 58 of 273 Inspire Software License Agreement, dated December 31, 1998.
(E-2)
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57
10.41 ********** Page 85 of 273 Lease Agreement dated July 6, 1998 with Bala Plaza, Inc.
11 ********* Page 266 of 273 Statement regarding computation of earnings per share.
21 * List of Subsidiaries of the Registrant.
23 ********* Page 268 of 273 Consent of PricewaterhouseCoopers, LLP
24 * Power of Attorney
27 ********* Page 270 of 273 Financial Data Schedule
99.1 ********* Page 272 of 273 Report of Independent Accountants of PricewaterhouseCoopers, LLP
on Financial Statement Schedules.
* Incorporated by reference to the Exhibit filed with the Registrant's Form S-1
Registration Statement under the Securities Act of 1933 (Registration No. 33-65958).
** Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and
incorporated by reference.
*** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1994 and incorporated by reference.
**** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March
31, 1995 and incorporated by reference.
***** Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and
incorporated by reference.
****** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 1996 and incorporated by reference.
******* Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated by reference.
******** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1997 and incorporated by reference.
********* Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
********** Filed herewith.
(1) Compensatory Plan or Arrangement, or Management Contract.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1998.
(E-3)
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