UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2002
COMMISSION FILE NUMBER 0-22280
PHILADELPHIA CONSOLIDATED HOLDING CORP.
---------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2202671
------------ ----------
(State of Incorporation) (IRS Employer Identification No.)
ONE BALA PLAZA, SUITE 100
BALA CYNWYD, PENNSYLVANIA 19004
(610) 617-7900
--------------------------------------------------
(Address, including zip code and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO: [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of May 2, 2002.
Preferred Stock, $.01 par value, no shares outstanding
Common Stock, no par value, 21,558,995 shares outstanding
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
Part I - Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets - March 31, 2002 and
December 31, 2001 3
Consolidated Statements of Operations and Comprehensive
Income - For the three months ended March 31, 2002 and 2001 4
Consolidated Statements of Changes in Shareholders' Equity -
For the three months ended March 31, 2002 and year ended
December 31, 2001 5
Consolidated Statements of Cash Flows - For the three
months ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7-9
Item 2.
Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-12
Item 3.
Quantitative and Qualitative Disclosures About Market Risk 13
Part II - Other Information 14
Signatures 15
2
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
As of
---------------------------
March 31, December 31,
2002 2001
----------- -----------
(Unaudited)
ASSETS
INVESTMENTS:
FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $672,876 AND $626,326) ...... $ 673,163 $ 632,416
EQUITY SECURITIES AT MARKET (COST $51,709
AND $34,065) ................................ 58,147 40,992
----------- -----------
TOTAL INVESTMENTS ......................... 731,310 673,408
CASH AND CASH EQUIVALENTS .......................... 49,514 49,910
ACCRUED INVESTMENT INCOME .......................... 6,553 6,582
PREMIUMS RECEIVABLE ................................ 90,676 96,025
PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES ............................... 100,985 99,601
DEFERRED INCOME TAXES .............................. 9,853 6,196
DEFERRED ACQUISITION COSTS ......................... 43,940 41,526
PROPERTY AND EQUIPMENT, NET ........................ 10,310 10,082
GOODWILL ........................................... 25,724 25,724
OTHER ASSETS ....................................... 6,266 8,668
----------- -----------
TOTAL ASSETS .............................. $ 1,075,131 $ 1,017,722
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
POLICY LIABILITIES AND ACCRUALS:
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES ........... $ 324,584 $ 302,733
UNEARNED PREMIUMS .................................. 215,173 197,839
----------- -----------
TOTAL POLICY LIABILITIES AND ACCRUALS ..... 539,757 500,572
LOANS PAYABLE ...................................... 31,341 31,341
PREMIUMS PAYABLE ................................... 26,116 25,659
OTHER LIABILITIES .................................. 41,415 31,458
----------- -----------
TOTAL LIABILITIES ......................... 638,629 589,030
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
PREFERRED STOCK, $.01 PAR VALUE,
10,000,000 SHARES AUTHORIZED,
NONE ISSUED AND OUTSTANDING ................... -- --
COMMON STOCK, NO PAR VALUE,
50,000,000 SHARES AUTHORIZED, 21,559,095 AND
21,509,723 SHARES ISSUED AND OUTSTANDING ...... 269,471 268,509
NOTES RECEIVABLE FROM SHAREHOLDERS ................. (3,112) (3,373)
ACCUMULATED OTHER COMPREHENSIVE INCOME ............. 4,371 8,461
RETAINED EARNINGS .................................. 165,772 155,095
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ................ 436,502 428,692
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,075,131 $ 1,017,722
=========== ===========
The accompanying notes are an integral part
of the consolidated financial statements.
3
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
For the Three Months
Ended March 31,
-----------------------------
2002 2001
------------ ------------
REVENUE:
NET EARNED PREMIUMS ......................... $ 89,244 $ 66,523
NET INVESTMENT INCOME ....................... 8,855 8,042
NET REALIZED INVESTMENT GAIN ................ 47 2,299
OTHER INCOME ................................ 1 53
------------ ------------
TOTAL REVENUE ............................ 98,147 76,917
------------ ------------
LOSSES AND EXPENSES:
LOSS AND LOSS ADJUSTMENT EXPENSES ........... 65,611 45,538
NET REINSURANCE RECOVERIES .................. (12,562) (6,386)
------------ ------------
NET LOSS AND LOSS ADJUSTMENT EXPENSES ....... 53,049 39,152
ACQUISITION COSTS AND OTHER UNDERWRITING
EXPENSES ................................. 27,821 22,468
OTHER OPERATING EXPENSES .................... 1,484 2,032
------------ ------------
TOTAL LOSSES AND EXPENSES ................ 82,354 63,652
------------ ------------
MINORITY INTEREST: DISTRIBUTIONS ON
COMPANY OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST ......................... -- 1,811
------------ ------------
INCOME BEFORE INCOME TAXES ..................... 15,793 11,454
------------ ------------
INCOME TAX EXPENSE (BENEFIT):
CURRENT ..................................... 6,571 4,777
DEFERRED .................................... (1,455) (1,037)
------------ ------------
TOTAL INCOME TAX EXPENSE ................. 5,116 3,740
------------ ------------
NET INCOME ............................... $ 10,677 $ 7,714
============ ============
OTHER COMPREHENSIVE LOSS, NET OF TAX:
HOLDING LOSS ARISING DURING PERIOD .......... $ (4,059) $ (591)
RECLASSIFICATION ADJUSTMENT ................. (31) (1,494)
------------ ------------
OTHER COMPREHENSIVE LOSS .................... (4,090) (2,085)
------------ ------------
COMPREHENSIVE INCOME ........................... $ 6,587 $ 5,629
============ ============
PER AVERAGE SHARE DATA:
BASIC EARNINGS PER SHARE .................... $ 0.50 $ 0.57
============ ============
DILUTED EARNINGS PER SHARE .................. $ 0.48 $ 0.54
============ ============
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING ................................. 21,528,091 13,477,940
WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING ................................. 724,311 701,604
------------ ------------
WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING ..................... 22,252,402 14,179,544
============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
4
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
(Unaudited)
For the Three For the
Months Ended Year Ended
March 31, December 31,
2002 2001
------------- ------------
COMMON STOCK:
BALANCE AT BEGINNING OF YEAR ...................... $ 268,509 $ 46,582
ISSUANCE OF SHARES PURSUANT TO PUBLIC OFFERING .... -- 114,518
ISSUANCE OF SHARES PURSUANT TO STOCK
PURCHASE CONTRACTS ............................. -- 98,905
EXERCISE OF EMPLOYEE STOCK OPTIONS, NET OF TAX .... 982 6,437
ISSUANCE OF SHARES PURSUANT TO STOCK
PURCHASE PLANS ................................. (20) 2,067
--------- ---------
BALANCE AT END OF PERIOD .................... 269,471 268,509
--------- ---------
NOTES RECEIVABLE FROM SHAREHOLDERS:
BALANCE AT BEGINNING OF YEAR ...................... (3,373) (2,287)
NOTES RECEIVABLE FORFEITED (ISSUED) PURSUANT
TO STOCK PURCHASE PLAN ......................... 31 (2,158)
COLLECTION OF NOTES RECEIVABLE .................... 230 1,072
--------- ---------
BALANCE AT END OF YEAR ...................... (3,112) (3,373)
--------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
BALANCE AT BEGINNING OF YEAR ...................... 8,461 13,494
OTHER COMPREHENSIVE LOSS, NET OF TAXES ............ (4,090) (5,033)
--------- ---------
BALANCE AT END OF YEAR ...................... 4,371 8,461
--------- ---------
RETAINED EARNINGS:
BALANCE AT BEGINNING OF YEAR ...................... 155,095 124,536
NET INCOME ........................................ 10,677 30,559
--------- ---------
BALANCE AT END OF YEAR ...................... 165,772 155,095
--------- ---------
TOTAL SHAREHOLDERS' EQUITY .................. $ 436,502 $ 428,692
========= =========
The accompanying notes are an integral part
of the consolidated financial statements.
5
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
For the Three Months
Ended March 31,
--------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME ............................................. $ 10,677 $ 7,714
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
NET REALIZED INVESTMENT GAIN ........................... (47) (2,299)
DEPRECIATION AND AMORTIZATION EXPENSE .................. 196 605
DEFERRED INCOME TAX BENEFIT ............................ (1,455) (1,037)
CHANGE IN PREMIUMS RECEIVABLE .......................... 5,349 1,268
CHANGE IN OTHER RECEIVABLES ............................ (1,355) (1,710)
CHANGE IN DEFERRED ACQUISITION COSTS ................... (2,414) (2,417)
CHANGE IN INCOME TAXES PAYABLE ......................... 3,719 10,986
CHANGE IN OTHER ASSETS ................................. 494 905
CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES .............................................. 21,851 12,392
CHANGE IN UNEARNED PREMIUMS ............................ 17,334 12,669
CHANGE IN OTHER LIABILITIES ............................ (753) 4,123
TAX BENEFIT FROM EXERCISE OF EMPLOYEE
STOCK OPTIONS ....................................... 573 693
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...... 54,169 43,892
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITIES ...................................... 13,941 11,777
PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITIES ...................................... 26,807 3,865
PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES ....................................... 253 6,593
COST OF FIXED MATURITIES ACQUIRED ...................... (77,492) (58,436)
COST OF EQUITY SECURITIES ACQUIRED ..................... (17,955) (2,022)
PURCHASE OF PROPERTY AND EQUIPMENT ..................... (769) (493)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES .......... (55,215) (38,716)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
REPAYMENTS ON LOANS PAYABLE ............................ -- (22,000)
EXERCISE OF EMPLOYEE STOCK OPTIONS ..................... 410 760
PROCEEDS FROM SHARES ISSUED PURSUANT TO
STOCK PURCHASE PLANS ................................ 10 14
COLLECTION OF NOTES RECEIVABLE ......................... 230 184
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 650 (21,042)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................. (396) (15,866)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......... 49,910 49,742
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................ $ 49,514 $ 33,876
======== ========
CASH PAID DURING THE PERIOD FOR:
INCOME TAXES ........................................... $ 2,200 $ --
INTEREST ............................................... $ 129 $ 130
NON-CASH TRANSACTIONS:
ISSUANCE OF SHARES (FORFEITURES) PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR
NOTES RECEIVABLE ...................................... $ (31) $ (70)
The accompanying notes are an integral part
of the consolidated financial statements.
6
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements as of and for the three months ended
March 31, 2002 and 2001 are unaudited, but in the opinion of management,
have been prepared on the same basis as the annual audited consolidated
financial statements and reflect all adjustments, consisting of only normal
recurring accruals, necessary for a fair statement of the information set
forth therein. The results of operations for the three months ended March
31, 2002 are not necessarily indicative of the operating results to be
expected for the full year or any other period.
These financial statements should be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-K
as of and for the year ended December 31, 2001.
2. Investments
The carrying amounts for the Company's investments approximates their
estimated fair value except for investments in limited partnerships which
are valued at cost. The Company measures the fair value of investments
based upon quoted market prices or by obtaining quotes from dealers. At
March 31, 2002, the Company held no derivative financial instruments nor
embedded financial derivatives.
The Company performs various analytical procedures with respect to its
investments, including identifying any security whose fair value is below
its cost. Upon identification of such securities, a detailed review is
performed to determine whether a decline in fair value below a security's
cost basis is other than temporary. If the Company determines a decline in
value to be other than temporary, the cost basis of the security is written
down to its fair value with the amount of the write down included in
earnings as a realized loss in the period the impairment arose.
The Company's impairment evaluation and recognition for interests in
securitized assets is conducted in accordance with the guidance provided by
the Emerging Issues Task Force of the Financial Accounting Standards Board.
Under this guidance, impairment losses on securities must be recognized if
both the fair value of the security is less than its book value and the net
present value of expected future cash flows is less than the net present
value of expected future cash flows at the most recent (prior) estimation
date. If these criteria are met, an impairment charge, calculated as the
difference between the current book value of the security and its fair
value, is included in earnings as a realized loss in the period the
impairment arose.
3. Goodwill
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 142 (" SFAS No. 142"), "Goodwill and Other Intangible Assets"
on January 1, 2002. SFAS No. 142 eliminates the practice of amortizing
goodwill through periodic charges to earnings and establishes a new
methodology for recognizing and measuring goodwill and other intangible
assets. Under this new accounting standard, the Company ceased goodwill
amortization on January 1, 2002. Goodwill amortization for the three months
ended March 31, 2001 amounted to $0.4 million.
4. Loans Payable
As of March 31, 2002, the Company had aggregate borrowings of $31.3 million
from the Federal Home Loan Bank. These borrowings bear interest at adjusted
LIBOR and mature twelve months from inception. The proceeds from these
borrowings were invested in collateralized mortgage obligation and asset
backed securities to achieve a positive spread between the rate of interest
on these securities and the borrowing rates.
7
5. Earnings Per Share
Earnings per common share has been calculated by dividing net income for
the period by the weighted average number of common shares and common share
equivalents outstanding during the period. Following is the computation of
earnings per share for the three months ended March 31, 2002 and 2001,
respectively (in thousands):
As of and For the
Three Months Ended
March 31,
------------------
2002 2001
------- -------
Weighted-Average Common Shares Outstanding ....... 21,528 13,478
Weighted-Average Share Equivalents Outstanding ... 724 702
------- -------
Weighted-Average Shares and Share Equivalents
Outstanding ..................................... 22,252 14,180
======= =======
Net Income ....................................... $10,677 $ 7,714
======= =======
Basic Earnings per Share ......................... $ 0.50 $ 0.57
======= =======
Diluted Earnings per Share ....................... $ 0.48 $ 0.54
======= =======
6. Income Taxes
The effective tax rate differs from the 35% marginal tax rate principally
as a result of tax-exempt interest income, the dividend received deduction
and other differences in the recognition of revenues and expenses for tax
and financial reporting purposes.
7. Comprehensive Income
Components of comprehensive income, as detailed in the Consolidated
Statements of Operations and Comprehensive Income, are net of tax. The
related tax effect of Holding Losses arising during the three months ended
March 31, 2002 and 2001 was ($2.2) million and ($0.3) million,
respectively. The related tax effect of Reclassification Adjustments for
the three months ended March 31, 2002 and 2001 was $0 million and ($0.8)
million.
8. Segment Information
The Company's operations are classified into three reportable business
segments: The Commercial Lines Underwriting Group which has underwriting
responsibility for the Commercial Automobile and Commercial Property and
Commercial multi-peril package insurance products; the Specialty Lines
Underwriting Group which has underwriting responsibility for the
professional liability insurance products; and the Personal Lines Group
which designs, markets and underwrites personal property and casualty
insurance products for the Manufactured Housing and Homeowners markets. The
reportable segments operate solely within the United States. The segments
follow the same accounting policies used for the Company's consolidated
financial statements. Management evaluates a segment's performance based
upon underwriting results.
Following is a tabulation of business segment information for the three
months ended March 31, 2002 and 2001. Corporate information is included to
reconcile segment data to the consolidated financial statements (in
thousands):
8
Commercial Specialty Personal
Lines Lines Lines Corporate Total
---------- ---------- ---------- ---------- ----------
March 31, 2002:
Gross Written Premiums $ 90,559 $ 24,428 $ 21,480 $ -- $ 136,467
---------- ---------- ---------- ---------- ----------
Net Written Premiums $ 74,863 $ 22,773 $ 11,864 $ -- $ 109,500
---------- ---------- ---------- ---------- ----------
Revenue:
Net Earned Premiums $ 61,070 $ 18,935 $ 9,239 $ -- $ 89,244
Net Investment Income -- -- -- 8,855 8,855
Net Realized Investment Gain -- -- -- 47 47
Other Income -- -- 570 (569) 1
---------- ---------- ---------- ---------- ----------
Total Revenue 61,070 18,935 9,809 8,333 98,147
---------- ---------- ---------- ---------- ----------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 36,657 11,666 4,726 -- 53,049
Acquisition Costs and Other Underwriting
Expenses -- -- -- 27,821 27,821
Other Operating Expenses -- -- 19 1,465 1,484
---------- ---------- ---------- ---------- ----------
Total Losses and Expenses 36,657 11,666 4,745 29,286 82,354
---------- ---------- ---------- ---------- ----------
Income Before Income Taxes 24,413 7,269 5,064 (20,953) 15,793
Total Income Tax Expense -- -- -- 5,116 5,116
---------- ---------- ---------- ---------- ----------
Net Income $ 24,413 $ 7,269 $ 5,064 $ (26,069) $ 10,677
========== ========== ========== ========== ==========
Total Assets $ -- $ -- $ 174,093 $ 901,038 $1,075,131
========== ========== ========== ========== ==========
March 31, 2001:
Gross Written Premiums $ 60,390 $ 20,584 $ 23,060 $ -- $ 104,034
---------- ---------- ---------- ---------- ----------
Net Written Premiums $ 41,810 $ 17,886 $ 17,391 $ -- $ 77,087
---------- ---------- ---------- ---------- ----------
Revenue:
Net Earned Premiums $ 41,418 $ 15,856 $ 9,249 $ -- $ 66,523
Net Investment Income -- -- -- 8,042 8,042
Net Realized Investment Gain -- -- -- 2,299 2,299
Other Income -- -- 905 (852) 53
---------- ---------- ---------- ---------- ----------
Total Revenue 41,418 15,856 10,154 9,489 76,917
---------- ---------- ---------- ---------- ----------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 24,413 10,018 4,721 -- 39,152
Acquisition Costs and Other Underwriting
Expenses -- -- -- 22,468 22,468
Other Operating Expenses -- -- 389 1,643 2,032
---------- ---------- ---------- ---------- ----------
Total Losses and Expenses 24,413 10,018 5,110 24,111 63,652
---------- ---------- ---------- ---------- ----------
Minority Interest: Distributions on Company
Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust -- -- -- 1,811 1,811
---------- ---------- ---------- ---------- ----------
Income Before Income Taxes 17,005 5,838 5,044 (16,433) 11,454
Total Income Tax Expense -- -- -- 3,740 3,740
---------- ---------- ---------- ---------- ----------
Net Income $ 17,005 $ 5,838 $ 5,044 $ (20,173) $ 7,714
========== ========== ========== ========== ==========
Total Assets $ -- $ -- $ 162,533 $ 582,393 $ 744,926
========== ========== ========== ========== ==========
9
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
GENERAL
Although the Company's financial performance is dependent upon its own specific
business characteristics, certain risk factors can affect the profitability of
the Company. These include, but are not limited to:
- - Industry factors - Historically the financial performance of the property
and casualty insurance industry has tended to fluctuate in cyclical
patterns of soft markets followed by hard markets. The Company's strategy
is to focus on underwriting profits and accordingly the Company's
marketing organization is being directed into those niche businesses that
exhibit the greatest potential for underwriting profits.
- - Competition - The Company competes in the property and casualty business
with other domestic and international insurers having greater financial
and other resources than the Company.
- - Regulation - The Company's insurance subsidiaries are subject to a
substantial degree of regulatory oversight, which generally is designed to
protect the interests of policyholders, as opposed to shareholders.
- - Inflation - Property and casualty insurance premiums are established
before the amount of losses and loss adjustment expenses, or the extent to
which inflation may affect such amounts is known.
- - Investment Risk - Substantial future increases in interest rates could
result in a decline in the market value of the Company's investment
portfolio and resulting losses and/or reduction in shareholders' equity.
- - Catastrophe Exposure - The Company's insurance subsidiaries issue
insurance policies which provide coverage for commercial and personal
property and casualty risks. It is possible that a catastrophic event
could greatly increase claims under the insurance policies the insurance
subsidiaries issue. Catastrophes may result from a variety of events or
conditions, including hurricanes, windstorms, earthquakes, hail and other
severe weather conditions and may include terrorist events. It is possible
that a catastrophic event could adversely impact profitability.
RESULTS OF OPERATIONS (THREE MONTHS ENDED MARCH 31, 2002 VS. MARCH 31, 2001)
Premiums: Gross written premiums grew $32.5 million (31.3%) to $136.5
million for the three months ended March 31, 2002 from $104.0 million for the
same period of 2001; gross earned premiums grew $27.9 million (30.6%) to $119.1
million for the three months ended March 31, 2002 from $91.2 million for the
same period of 2001; net written premiums increased $32.4 million (42.0%) to
$109.5 million for the three months ended March 31, 2002 from $77.1 million for
the same period of 2001; and net earned premiums grew $22.7 million (34.1%) to
$89.2 million in 2002 from $66.5 million in 2001.
The respective gross written premium increases (decreases) for commercial lines,
specialty lines and personal lines segments for the three months ended March 31,
2002 vs. March 31, 2001 amount to $30.2 million (50.0%), $3.8 million (18.7%)
and ($1.6) million (6.9%) respectively. The overall growth in gross written
premiums is primarily attributable to the following:
- - Rating downgrades of certain major competitor property and casualty
insurance companies have led to their diminished presence in the Company's
commercial and specialty lines business segments and continue to result in
additional prospects and increased premium writings, most notably for the
Company's various commercial package and non-profit D&O product lines.
- - The consolidation of certain competitor property and casualty insurance
companies has led to the displacement of certain of their independent
agency relationships. This consolidation continues to result in new agency
10
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
relationship opportunities for the Company. These relationships have
resulted in additional prospects and premium writings for the Company's
commercial and specialty lines segments.
- - Continued expansion of marketing efforts relating to commercial lines and
specialty lines products through the Company's field organization and
preferred agents.
- - Rate increases on renewal business.
Overall premium growth in the specialty lines segment has been offset in part by
the Company's decision not to renew certain policies in the professional
liability product lines due to inadequate pricing levels being experienced as a
result of market conditions and/or loss experience emerging at higher than
expected levels.
The overall premium decrease for the personal lines segment was due principally
to the Company's decision not to write new business or renew certain policies in
designated areas of Florida in the Company's manufactured housing product line
based on an evaluation of property exposures. This decrease has been partially
offset by an increase in premiums for the Company's homeowners product line for
which new and renewal policies are being added in select areas.
The respective net written premium increases (decreases) for commercial lines,
specialty lines and personal lines segments for the three months ended March 31,
2002 vs. March 31, 2001 amount to $33.1 million (79.1%), $4.9 million (27.3%)
and ($5.5) million (31.8%) respectively. The differing percentage increases
(decreases) in net written premiums versus gross written premiums for the period
is primarily due to the various changes in the Company's reinsurance programs.
Net Investment Income: Net investment income approximated $8.9 million
for the three months ended March 31, 2002 and $8.0 million for the same period
of 2001. Total investments grew to $731.3 million at March 31, 2002 from $474.7
million at March 31, 2001. The growth in investment income is due to investing
net cash flows provided from operating activities and the proceeds of the
Company's equity offering received during the fourth quarter of 2001. The
capital market environment during 2001 (low U.S. Treasury yields) had the effect
of both increasing the level of prepayments in certain of the Company's interest
rate sensitive investments and causing the Company to slightly shorten its
average duration position in the expectation of higher future fixed income
yields. As a result, the Company's average duration in its fixed income
portfolio approximated 3.17 years at March 31, 2002, compared to 3.37 years at
March 31, 2001 and the Company's tax equivalent book yield on its fixed income
holdings was 6.15% at March 31, 2002, compared to 7.07% at March 31, 2001.
Net Realized Investment Gain: Net realized investment gains were
$47,000 for the three months ended March 31, 2002 and $2.3 million for the same
period in 2001. The Company realized net investment gains of $2.3 million from
the sales of common stock equity securities during the three months ended March
31, 2001. The proceeds from these common stock sales were reinvested in fixed
maturity securities to increase current investment income, lessen the Company's
holdings in certain common stock positions, and decrease the overall percentage
of investments in common stock securities.
Other Income: Other income approximated $1,000 for the three months
ended March 31, 2002 and $100,000 for the same period of 2001. Other income
primarily consisted of commissions earned on brokered personal lines business.
Such commissions earned decreased as brokering activities were discontinued in
favor of writing business directly. However, the Company is seeking to increase
brokering activities in the future as it is not writing new business or renewing
certain policies in designated areas of Florida for the Company's manufactured
housing product as a result of its property exposures in these areas and related
catastrophe loss considerations.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment
expenses increased $13.8 million (35.2%) to $53.0 million for the three months
ended March 31, 2002 from $39.2 million for the same period of 2001 and the loss
ratio increased to 59.4% in 2002 from 58.9% in 2001. This increase in net loss
and loss adjustment expenses was due principally to the 34.1% growth in net
earned premiums.
11
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Acquisition Costs and Other Underwriting Expenses: Acquisition costs
and other underwriting expenses increased $5.3 million (23.6%) to $27.8 million
for the three months ended March 31, 2002 from $22.5 million for the same period
of 2001. This increase was due primarily to the 34.1% growth in net earned
premiums offset by relative changes in the Company's product mix and associated
distribution channel expense.
Other Operating Expenses: Other operating expenses decreased $0.5
million to $1.5 million for the three months ended March 31, 2002 from $2.0
million for the same period of 2001. The decrease in other operating expenses
was primarily due to the discontinuance of goodwill amortization effective
January 1, 2002.
Income Tax Expense: The Company's effective tax rate for the three
months ended March 31, 2002 and 2001 was 32.4% and 32.7%, respectively. The
effective rates differed from the 35% statutory rate principally due to
investments in tax-exempt securities. The decrease in the effective tax rate is
principally due to a greater investment of cash flows in tax-exempt securities
relative to taxable securities.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 2002, the Company's investments
experienced unrealized investment depreciation of $4.1 million, net of the
related deferred tax benefit of $2.2 million. At March 31, 2002, the Company had
total investments with a carrying value of $731.3 million, of which 92.0%
consisted of investments in investment grade fixed maturity securities,
including U.S. treasury securities and obligations of U.S. government
corporations and agencies, obligations of states and political subdivisions,
corporate debt securities, collateralized mortgage securities and asset backed
securities. The collateralized mortgage securities and asset backed securities
consist of short tranche securities possessing favorable pre-payment risk
profiles. The remaining 8.0% of the Company's total investments consisted
primarily of publicly traded common stock securities.
The Company produced net cash from operations of $54.2 million and
$43.9 million, respectively, for the three months ended March 31, 2002 and 2001.
Management believes that the Company has adequate ability to pay all claims and
meet all other cash needs.
Risk-based capital is designed to measure the acceptable amount of
capital an insurer should have based on the inherent specific risks of each
insurer. Insurers failing to meet this benchmark capital level may be subject to
scrutiny by the insurer's domiciliary insurance department and ultimately
rehabilitation or liquidation. Based on the standards currently adopted, the
Company's insurance subsidiaries' capital and surplus is in excess of the
prescribed risk-based capital requirements.
FORWARD-LOOKING INFORMATION
Certain information included in this report and other statements or
materials published or to be published by the Company are not historical facts
but are forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, new and
existing products, expectations for market segment and growth, and similar
matters. In connection with the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, the Company provides the following
cautionary remarks regarding important factors which, among others, could cause
the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development, results of the Company's business, and the
other matters referred to above include, but are not limited to: (i) changes in
the business environment in which the Company operates, including inflation and
interest rates; (ii) changes in taxes, governmental laws, and regulations; (iii)
competitive product and pricing activity; (iv) difficulties of managing growth
profitably; and (v) catastrophe losses.
12
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There is no material change to the Quantitative and Qualitative market
risk disclosure from the Company's Form 10-K for the fiscal year ended December
31, 2001.
13
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a. Not applicable.
b. The Company filed the following report on Form 8-K during the
quarterly period ended March 31, 2002:
Date of Report Item Reported
---------------- --------------------------------------
February 5, 2002 February 5, 2002 Investor Presentation
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHILADELPHIA CONSOLIDATED HOLDING CORP.
---------------------------------------
Registrant
Date May 6, 2002 /s/ James J. Maguire
------------------------ -------------------------------------
James J. Maguire
Chairman of the Board of Directors,
and Chief Executive Officer
(Principal Executive Officer)
Date May 6, 2002 /s/ Craig P. Keller
------------------------ -------------------------------------
Craig P. Keller
Senior Vice President, Secretary,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer)
15