-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JZS9nI3RRWuGe5b4AMvFjRIql6/DLZ8R97I9RhJVoIwKg1F5X541hDJI87CMe/eX P9nhQKob9d7T7QZmvBCGng== 0000893220-98-001712.txt : 19981116 0000893220-98-001712.hdr.sgml : 19981116 ACCESSION NUMBER: 0000893220-98-001712 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILADELPHIA CONSOLIDATED HOLDING CORP CENTRAL INDEX KEY: 0000909109 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 232202671 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22280 FILM NUMBER: 98748939 BUSINESS ADDRESS: STREET 1: ONE BALA PLAZA STREET 2: SUITE 100 CITY: WYNNEWOOD STATE: PA ZIP: 19004 BUSINESS PHONE: 6106428400 MAIL ADDRESS: STREET 1: ONE BALA PLAZA STREET 2: SUITE 100 CITY: BALA CYNWYD STATE: PA ZIP: 19004 FORMER COMPANY: FORMER CONFORMED NAME: MAGUIRE HOLDING CORP DATE OF NAME CHANGE: 19930714 10-Q 1 QUARTERLY REPORT PERIOD ENDED 9/30/98 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 1998 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 November 12, 1998. Preferred Stock, $.01 par value, no shares outstanding Common Stock, no par value, 12,190,363 shares outstanding 2 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES INDEX FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 Part I - Financial Information Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 3 Consolidated Statements of Operations - For the three and nine months ended September 30, 1998 and 1997 4 Consolidated Statements of Comprehensive Income - For the three and nine months ended September 30, 1998 and 1997 5 Consolidated Statements of Changes in Shareholders' Equity - For the nine months ended September 30, 1998 and year ended December 31, 1997 6 Consolidated Statements of Cash Flows - For the nine months ended September 30, 1998 and 1997 7 Notes to Consolidated Financial Statements 8 Management's Discussion and Analysis of Results of Operations and Financial Condition 9-14 Part II - Other Information 15 Signatures 16 Exhibits 17 2 3 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
As of -------------------------- September 30, December 31, 1998 1997 --------- --------- (Unaudited) ASSETS INVESTMENTS: FIXED MATURITIES AVAILABLE FOR SALE AT MARKET (AMORTIZED COST $265,492 AND $165,052) ........... $ 273,952 $ 170,678 EQUITY SECURITIES AT MARKET (COST $47,439 AND $29,501) ..................................... 61,343 46,988 --------- --------- TOTAL INVESTMENTS .............................. 335,295 217,666 CASH AND CASH EQUIVALENTS .......................... 28,729 11,933 ACCRUED INVESTMENT INCOME .......................... 3,228 2,786 PREMIUMS RECEIVABLE ................................ 26,262 15,269 PREPAID REINSURANCE PREMIUMS AND REINSURANCE RECEIVABLES .......................... 20,251 18,573 DEFERRED ACQUISITION COSTS ......................... 15,429 10,970 PROPERTY AND EQUIPMENT ............................. 6,180 5,797 OTHER ASSETS ....................................... 5,528 5,132 --------- --------- TOTAL ASSETS ................................... $ 440,902 $ 288,126 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY POLICY LIABILITIES AND ACCRUALS: UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES ........... $ 141,189 $ 122,430 UNEARNED PREMIUMS .................................. 59,723 42,116 --------- --------- TOTAL POLICY LIABILITIES AND ACCRUALS .......... 200,912 164,546 PAYABLE FOR SECURITY PURCHASES ..................... 2,991 -- OTHER LIABILITIES .................................. 9,703 7,948 DEFERRED INCOME TAXES .............................. 3,838 4,348 --------- --------- TOTAL LIABILITIES .............................. 217,444 176,842 --------- --------- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES: COMPANY OBLIGATED MANDATORY 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, 12,329,510 ISSUED AND 12,242,431 SHARES ISSUED AND OUTSTANDING ..... 44,642 42,788 NOTES RECEIVABLE FROM SHAREHOLDERS ................. (1,856) (1,422) UNREALIZED INVESTMENT APPRECIATION (DEPRECIATION), NET OF DEFERRED INCOME TAXES ...... 14,537 15,023 RETAINED EARNINGS .................................. 70,330 54,895 --------- --------- 127,653 111,284 LESS COST OF COMMON STOCK HELD IN TREASURY, 159,100 SHARES IN 1998 .......................... (3,100) -- --------- --------- TOTAL SHAREHOLDERS' EQUITY ..................... 124,553 111,284 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..... $ 440,902 $ 288,126 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 3 4 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30, ------------------------------- ------------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ REVENUE: NET WRITTEN PREMIUMS .............................. $ 41,681 $ 30,079 $ 104,359 $ 83,676 CHANGE IN NET UNEARNED PREMIUM RESERVE (INCREASE) ..................................... (9,516) (3,587) (15,617) (9,633) ------------ ------------ ------------ ------------ NET EARNED PREMIUMS ............................... 32,165 26,492 88,742 74,043 NET INVESTMENT INCOME ............................. 4,446 2,535 10,876 7,150 NET REALIZED INVESTMENT GAIN ...................... 1,609 156 1,708 125 OTHER INCOME ...................................... 57 57 171 171 ------------ ------------ ------------ ------------ TOTAL REVENUE ................................... 38,277 29,240 101,497 81,489 ------------ ------------ ------------ ------------ LOSSES AND EXPENSES: LOSS AND LOSS ADJUSTMENT EXPENSES ................. 20,034 16,561 53,661 45,964 NET REINSURANCE RECOVERIES ........................ (2,596) (2,132) (5,416) (5,222) ------------ ------------ ------------ ------------ NET LOSS AND LOSS ADJUSTMENT EXPENSES ............. 17,438 14,429 48,245 40,742 ACQUISITION COSTS AND OTHER UNDERWRITING EXPENSES ........................... 10,159 8,429 27,565 23,233 OTHER OPERATING EXPENSES .......................... 530 430 1,715 1,609 ------------ ------------ ------------ ------------ TOTAL LOSSES AND EXPENSES ....................... 28,127 23,288 77,525 65,584 ------------ ------------ ------------ ------------ MINORITY INTEREST: DISTRIBUTIONS ON COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST ..................................... 1,742 -- 2,959 -- ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES ........................... 8,408 5,952 21,013 15,905 ------------ ------------ ------------ ------------ INCOME TAX EXPENSE (BENEFIT): CURRENT ........................................... 2,363 2,155 5,826 4,881 DEFERRED .......................................... (31) (671) (248) (1,058) ------------ ------------ ------------ ------------ TOTAL INCOME TAX EXPENSE ........................ 2,332 1,484 5,578 3,823 ------------ ------------ ------------ ------------ NET INCOME ...................................... $ 6,076 $ 4,468 $ 15,435 $ 12,082 ============ ============ ============ ============ PER AVERAGE SHARE DATA: BASIC EARNINGS PER SHARE(1) ....................... $ 0.50 $ 0.37 $ 1.26 $ 0.99 ============ ============ ============ ============ DILUTED EARNINGS PER SHARE(1) ..................... $ 0.41 $ 0.30 $ 1.03 $ 0.81 ============ ============ ============ ============ WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING(1) .................................... 12,248,331 12,223,940 12,269,595 12,177,948 WEIGHTED-AVERAGE SHARE EQUIVALENTS OUTSTANDING(1) .................................... 2,713,348 2,815,533 2,680,099 2,716,700 ------------ ------------ ------------ ------------ WEIGHTED-AVERAGE SHARES AND SHARE EQUIVALENTS OUTSTANDING(1) ........................ 14,961,679 15,039,473 14,949,694 14,894,648 ============ ============ ============ ============
(1) 1997 share information restated to reflect a two-for-one split of the Company's common stock distributed in November 1997. The accompanying notes are an integral part of the consolidated financial statements. 4 5 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS) (Unaudited)
For the Three Months For the Nine Months Ended September 30, Ended September 30, 1998 1997 1998 1997 -------- -------- -------- -------- NET INCOME ........................................ $ 6,076 $ 4,468 $ 15,435 $ 12,082 -------- -------- -------- -------- OTHER COMPREHENSIVE INCOME, NET OF TAX: HOLDING GAIN (LOSS) ARISING DURING PERIOD, NET OF TAX ............................................. (2,943) 2,665 624 5,601 RECLASSIFICATION ADJUSTMENT, NET OF TAX ......... (1,046) -- (1,110) -- -------- -------- -------- -------- OTHER COMPREHENSIVE INCOME (LOSS) ................. (3,989) 2,665 (486) 5,601 -------- -------- -------- -------- COMPREHENSIVE INCOME .............................. $ 2,087 $ 7,133 $ 14,949 $ 17,683 ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 5 6 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
For the Nine Months For the Year Ended Ended September 30, December 31, 1998 1997 ------------ ------------ (Unaudited) COMMON SHARES: BALANCE AT BEGINNING OF PERIOD(1) .............. 12,242,431 12,079,612 ISSUANCE OF SHARES PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN ..... 50,479 78,569 PURSUANT TO EMPLOYEE STOCK OPTION PLAN ....... 36,600 84,250 ------------ ------------ BALANCE AT END OF PERIOD ................... 12,329,510 12,242,431 ============ ============ COMMON STOCK: BALANCE AT BEGINNING OF PERIOD ................. $ 42,788 $ 41,167 PURCHASE CONTRACTS OF COMMON STOCK ............. 558 -- ISSUANCE OF SHARES PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN .......................... 887 898 EXERCISE OF EMPLOYEE STOCK OPTIONS, NET OF TAX BENEFIT .................................. 409 723 ------------ ------------ BALANCE AT END OF PERIOD ................... 44,642 42,788 ------------ ------------ NOTES RECEIVABLE FROM SHAREHOLDERS: BALANCE AT BEGINNING OF PERIOD ................. (1,422) (924) NOTES RECEIVABLE ISSUED PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN ................. (849) (873) COLLECTION OF NOTES RECEIVABLE ................. 415 375 ------------ ------------ BALANCE AT END OF PERIOD ................... (1,856) (1,422) ------------ ------------ UNREALIZED INVESTMENT APPRECIATION (DEPRECIATION), NET OF DEFERRED INCOME TAXES: BALANCE AT BEGINNING OF PERIOD ............... 15,023 7,374 CHANGE IN UNREALIZED INVESTMENT APPRECIATION (DEPRECIATION), NET OF DEFERRED INCOME TAXES (486) 7,649 ------------ ------------ BALANCE AT END OF PERIOD ................... 14,537 15,023 ------------ ------------ RETAINED EARNINGS: BALANCE AT BEGINNING OF PERIOD ................. 54,895 38,025 NET INCOME ..................................... 15,435 16,870 ------------ ------------ BALANCE AT END OF PERIOD ................... 70,330 54,895 ------------ ------------ TREASURY STOCK: BALANCE AT BEGINNING OF PERIOD ................. -- -- SHARES REPURCHASED ............................. (3,100) -- ------------ ------------ BALANCE AT END OF PERIOD ................... (3,100) -- ------------ ------------ TOTAL SHAREHOLDERS' EQUITY ................. $ 124,553 $ 111,284 ============ ============
(1) 1997 share information restated to reflect a two for one split of the Company's common stock distributed in November 1997. The accompanying notes are an integral part of the consolidated financial statements. 6 7 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (Unaudited)
For the Nine Months Ended September 30, -------------------------- 1998 1997 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME ..................................... $ 15,435 $ 12,082 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET REALIZED INVESTMENT GAIN ................. (1,708) (125) DEPRECIATION AND AMORTIZATION EXPENSE ........ 918 900 DEFERRED INCOME TAX BENEFIT .................. (248) (1,058) CHANGE IN PREMIUMS RECEIVABLE .................. (10,993) (8,023) CHANGE IN OTHER RECEIVABLES .................. (2,120) 572 CHANGE IN DEFERRED ACQUISITION COSTS ......... (4,459) (830) CHANGE IN OTHER ASSETS ....................... (405) (1,341) CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES ..................................... 18,759 18,774 CHANGE IN UNEARNED PREMIUMS .................. 17,607 7,252 CHANGE IN OTHER LIABILITIES .................. 1,966 (1,383) CHANGE IN INCOME TAXES PAYABLE ............... -- (451) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 34,752 26,369 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: PROCEEDS FROM SALES OF INVESTMENTS IN FIXED MATURITIES AVAILABLE FOR SALE .............. 50,874 3,318 PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED MATURITIES AVAILABLE FOR SALE .............. 12,276 7,285 PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY SECURITIES ................................. 5,958 4,069 COST OF FIXED MATURITIES AVAILABLE FOR SALE ACQUIRED .............................. (159,111) (36,297) COST OF EQUITY SECURITIES ACQUIRED ............. (23,795) (12,939) PURCHASE OF PROPERTY AND EQUIPMENT ............. (1,383) (1,347) --------- --------- NET CASH USED BY INVESTING ACTIVITIES ...... (115,181) (35,911) --------- --------- 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 ............................... 409 691 COLLECTION OF NOTES RECEIVABLE ................. 415 286 PROCEEDS FROM SHARES PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN ................. 38 24 COST OF COMMON STOCK REPURCHASED ............... (3,100) -- --------- --------- NET CASH PROVIDED BY FINANCING ACTIVITIES 97,225 1,001 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................... 16,796 (8,541) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .. 11,933 11,483 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ........ $ 28,729 $ 2,942 ========= ========= CASH PAID DURING THE PERIOD FOR: INCOME TAXES ................................... $ 5,184 $ 5,005 NON-CASH TRANSACTIONS: ISSUANCE OF SHARES PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR NOTES RECEIVABLE ............................. $ 849 $ 882
The accompanying notes are an integral part of the consolidated financial statements. 7 8 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The consolidated financial statements as of and for the nine months ended September 30, 1998 and 1997 are unaudited, but in the opinion of management, have been prepared on the same basis as the annual audited consolidated financial statements and reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the information set forth therein. The results of operations for the nine months ended September 30, 1998 are not necessarily indicative of the operating results to be expected for the full year or any other period. Certain prior year amounts have been reclassified for comparative purposes. These financial statements should be read in conjunction with the financial statements and notes as of and for the year ended December 31, 1997 included in the Company's Annual Report on Form 10-K. 2. 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. 3. Comprehensive Income In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This statement establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income includes all changes in equity during a period, except those resulting from investments by owners and distributions to owners. The deferred tax expense (benefit) for Holding Gain (Loss) arising for the three and nine months ended September 30, 1998 and 1997 amounted to ($1,585,000) and $1,435,000, respectively, and $336,000 and $3,016,000, respectively. The deferred tax expense for the Reclassification Adjustment for the three and nine months ended September 30, 1998 amounted to $563,000 and $598,000, respectively. 4. Income Taxes The effective tax rate differs from the 35% marginal tax rate principally as a result of interest exempt from tax, the dividend received deduction and other differences in the recognition of revenues and expenses for tax and financial reporting purposes. 5. Minority Interest in Consolidated Subsidiaries: Company Obligated Mandatory Redeemable Preferred Securities of Subsidiary Trust Holding Solely Debentures of Company. The assets of the Trust consist solely of approximately $106.7 million in aggregate principal amount of Debentures of the Company with an interest rate of 7.0% per annum and a maturity date of May 16, 2003. 8 9 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION GENERAL Although the Company's financial performance is dependent upon its own specific business characteristics, certain risk factors can affect the profitability of the Company. These include: - - Industry factors - Historically the financial performance of the commercial property and casualty insurance industry has tended to fluctuate in cyclical patterns of soft markets followed by hard markets. In the current environment, insurance industry pricing in general continues to be soft; however, 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 commercial 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 - Commercial property and casualty insurance premiums are established before the amount of losses and loss adjustment expenses, or the extent to which inflation may effect such amounts is known. - - Investment Risk - Substantial future increases in interest rates could result in a decline in the market value of the Company's investment portfolio and resulting losses and/or reduction in shareholders' equity. RESULTS OF OPERATIONS (NINE MONTHS ENDED SEPTEMBER 30, 1998 VS. SEPTEMBER 30, 1997) Premiums: Gross written premiums grew $24.7 million (20.8%) to $143.6 million for the nine months ended September 30, 1998 from $118.9 million for the same period of 1997; gross earned premiums grew $14.4 million (12.9%) to $126.0 million for the nine months ended September 30, 1998 from $111.6 million for the same period of 1997; net written premiums increased $20.7 million (24.7%) to $104.4 million for the nine months ended September 30, 1998 from $83.7 million for the same period of 1997; and net earned premiums grew $14.7 million (19.9%) to $88.7 million in 1998 from $74.0 million in 1997. 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 the following factors: - - Overall premium growth is primarily attributable to: expanded marketing efforts relating to commercial auto, commercial package, and specialty lines products through the increase in the Company's proprietary field organization to a total of 137 professionals, production underwriters and customer service representatives; and the continued development and growth 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 Company also underwrote several new programs which contributed to the overall premium growth during 1998. - - 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. 9 10 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) Net Investment Income: Net investment income approximated $10.9 million for the nine months ended September 30, 1998 and $7.2 million for the same period of 1997. Total investments grew to $335.3 million at September 30, 1998 from $212.0 million at September 30, 1997, primarily due to investing the proceeds from the Company's Feline Prides(SM) securities offering and cash flows provided from operating activities. Net Realized Investment Gain: Net Realized Investment Gains approximated $1.7 million for the nine months ended September 30,1998 and $.1 million for the same period of 1997. During the third quarter of 1998, the Company realigned the maturity distribution of certain of its tax exempt and taxable securities in order to increase after tax investment income. Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $7.5 million (18.4%) to $48.2 million for the nine months ended September 30, 1998 from $40.7 million for the same period of 1997 and the loss ratio decreased to 54.4% in 1998 from 55.0% in 1997. The increase in net loss and loss adjustment expenses was due primarily to the 19.9% growth in net earned premiums. Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $4.4 million (19.0%) to $27.6 million for the nine months ended September 30, 1998 from $23.2 million for the same period of 1997. This increase was due primarily to the 19.9% growth in net earned premiums offset in part by changes in product and distribution mix. Income Tax Expense: The Company's effective tax rate for the nine months ended September 30, 1998 and 1997 was 26.6% 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 realized investment gains on the sale of securities in 1998 vs. 1997. RESULTS OF OPERATIONS (THREE MONTHS ENDED SEPTEMBER 30, 1998 VS SEPTEMBER 30, 1997) Premiums: Gross written premiums grew $13.0 million (29.0%) to $57.8 million for the three months ended September 30, 1998 from $44.8 million for the same period of 1997; gross earned premiums grew $6.7 million (16.4%) to $47.6 million for the three months ended September 30, 1998 from $40.9 million for the same period of 1997; net written premiums increased $11.6 million (38.5%) to $41.7 million for the three months ended September 30, 1998 from $30.1 million for the same period of 1997; and net earned premiums grew $5.7 million (21.5%) to $32.2 million in 1998 from $26.5 million in 1997. 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 similar factors as addressed in the Premiums caption of the "Results of Operations" (nine months ended September 30, 1998 vs. September 30, 1997). Net Investment Income: Net investment income approximated $4.4 million for the three months ended September 30, 1998 and $2.5 million for the same period of 1997. Total investments grew to $335.3 million at September 30, 1998 from $212.0 million at September 30, 1997, primarily due to investing the proceeds from the Company's Feline Prides(SM) securities offering and cash flows provided from operating activities. Net Realized Investment Gain: Net Realized Investment Gains approximated $1.6 million for the three months ended September 30,1998 and $.2 million for the same period of 1997. During the third quarter of 1998, the Company realigned the maturity distribution of certain of its tax-exempt and taxable securities in order to increase after tax investment income. 10 11 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $3.0 million (20.8%) to $17.4 million in the third quarter 1998 from $14.4 million in the third quarter of 1997 and the loss ratio decreased to 54.2% in 1998 from 54.5% in 1997. The increase in net loss and loss adjustment expenses was due primarily to the 21.5% growth in net earned premiums. Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $1.8 million (21.4%) to $10.2 million for the three months ended September 30, 1998 from $8.4 million for the same period of 1997. This increase was due primarily to the 21.5% growth in net earned premiums. Income Tax Expense: The Company's effective tax rate for the three months ended September 30, 1998 and 1997 was 27.7% and 24.9%, 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 realized investment gains on the sale of securities for the three months ended September 30, 1998 vs. September 30, 1997. LIQUIDITY AND CAPITAL RESOURCES For the nine months ended September 30, 1998 the Company's investments experienced unrealized investment depreciation of $.5 million, net of the related deferred tax benefit of $.3 million. At September 30, 1998, approximately 94% of the Company's fixed maturity securities consisted of U.S. Government securities or securities rated "1" or "2" by the NAIC, approximately 90.0% were rated "A-" or better (with no security rated lower than "BB-") by Standard & Poor's Corporation. 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 sale of Feline Prides(SM) consisted of 9,300,000 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. $20.0 million from the sale of these securities was contributed to the Company's insurance subsidiaries. The company anticipates using the remaining funds 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. Additionally, the Company is obligated to make cash distributions at a rate of 7.0% of the stated amount per annum for the Income prides and the separate Trust Preferred securities, commencing May 4, 1998 through May 15, 2001 and payable quarterly in arrears. On August 3, 1998, the Company's Board of Directors authorized the repurchase of up to $10.0 million of the Company's Common Stock. The purchases will be made from time to time in the open market or through privately negotiated transactions. The decision to authorize the stock repurchase was based on the strong relative value currently represented by the Company's stock. The Company purchased 159,100 shares of common stock during the third quarter 1998 for $3,100,000. The Company produced net cash from operations of $34.8 million and $26.4 million, respectively, for the nine months ended September 30, 1998 and 1997. 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. 11 12 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) 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 micro processors 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 - 4 have been completed and Phase 5 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 is in the process of identifying and prioritizing its critical vendors, suppliers and customers and communicating with them about their plans in addressing the Year 2000 problem. Evaluations of certain of the most critical vendors have already started and the "Third Party" section is expected to be completed by June 30, 1999. 12 13 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) 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 $200,000. The total amount expended on the project through September 30, 1998 was approximately $85,000, which related primarily to the "IT Systems" and "Non-IT Systems" section. This amount came from the Company's operating funds. 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 "claim 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 all new or renewing professional liability policies providing coverage effective January 1, 1999 and thereafter. 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", or those of "Third Parties". The Company anticipates that the "IT Systems" and "Non-IT Systems" sections will be Year 2000 compliant by March 31, 1999, and a 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 and 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. 13 14 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION (continued) 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". 14 15 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. Legal Proceedings None. Item 2. Changes in Securities None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other information None. Item 6. Exhibits and Reports on Form 8-K a. Exhibits Exhibit No. Page No. Description 11.0 17 Computation of Earnings Per Share b. The Company has not filed any reports on Form 8-K during the quarter for which this report is filed. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHILADELPHIA CONSOLIDATED HOLDING CORP. Registrant Date November 13, 1998 /s/ James J. Maguire - ------------------------------- ------------------------------------------- James J. Maguire Chairman of the Board of Directors, President and Chief Executive Officer (Principal Executive Officer) Date November 13, 1998 /s/ Craig P. Keller - ------------------------------- ------------------------------------------- Craig P. Keller Vice President, Secretary, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) 16 EX-11 2 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (Dollars and Share Data in Thousands, except Per Share Data) (Unaudited)
As of and For the Three As of and For the Nine Months Ended September 30, Months Ended September 30, -------------------------- -------------------------- 1998 1997(1) 1998 1997(1) ------- ------- ------- ------- Weighted Average Common Shares Outstanding 12,248 12,224 12,270 12,178 Weighted Average Share Equivalents Outstanding 2,713 2,816 2,680 2,717 ------- ------- ------- ------- Weighted Average Shares and Share Equivalents Outstanding 14,961 15,040 14,950 14,895 ======= ======= ======= ======= Net Income $ 6,076 $ 4,468 $15,435 $12,082 ======= ======= ======= ======= Basic Earnings per Share $ 0.50 $ 0.37 $ 1.26 $ 0.99 ======= ======= ======= ======= Diluted Earnings per Share $ 0.41 $ 0.30 $ 1.03 $ 0.81 ======= ======= ======= =======
(1) 1997 share information restated to reflect a two-for-one split of the Company's common stock distributed in November 1997. 17 EX-27 3 FINANCIAL DATA SCHEDULE
7 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 273,952 0 0 61,343 0 0 335,295 28,729 806 15,429 440,902 141,189 59,723 0 0 0 0 0 44,642 79,911 440,902 88,742 10,876 1,708 171 48,245 27,565 1,715 21,013 5,578 15,435 0 0 0 15,435 1.26 1.03 108,928 48,245 0 8,394 21,598 127,181 0 UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES DIFFER FROM THE AMOUNTS REPORTED IN THE CONSOLIDATED FINANCIAL STATEMENTS BECAUSE OF THE INCLUSION HEREIN OF REINSURANCE RECEIVABLES OF $14,008 AND $13,502 AT SEPTEMBER 30, 1998 AND DECEMBER 31, 1997.
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