-----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, KuwvZKJ2qXX7yFW0QCIEQzt6PTWLcbDePbWO63yUSA6eo71obn1MoXexwnRu/EoC C/dwMX6vD4qdqs6/slUD5g== 0000893220-00-000382.txt : 20000331 0000893220-00-000382.hdr.sgml : 20000331 ACCESSION NUMBER: 0000893220-00-000382 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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-K405 SEC ACT: SEC FILE NUMBER: 000-22280 FILM NUMBER: 586313 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-K405 1 FORM 10-K405 1 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, 1999 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. [x] 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 27, 2000 as reported on the NASDAQ National Market System, was $77,618,227. 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 27, 2000, Registrant had outstanding 12,250,101 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the definitive Proxy Statement for Registrant's 2000 Annual Meeting of Shareholders to be held May 4, 2000 are incorporated by reference in Part III. The Exhibit Index is located on Page 57 of 67. 1 2 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"), Philadelphia Insurance Company ("PIC"), Mobile USA Insurance Company ("MUSA") and Liberty American Insurance Company ("LAIC"), collectively; (iv) "MIA" refers to Maguire Insurance Agency, Inc., a captive underwriting manager; (v) "MHIA" refers to Mobile Homeowners Insurance Agencies, Inc., a managing general agency; (vi) "Premium Finance" refers to MHIA Premium Finance Company; and (vii) "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 PIIC, PIC and MIA. On July 16, 1999 Philadelphia Insurance closed on its acquisition of Liberty American Insurance Group, Inc. ("Liberty") (formerly The Jerger Co., Inc.) and its subsidiaries. Liberty consists of MUSA, LAIC, MHIA and Premium Finance. During 1999, the Company continued its growth through adherence to its core philosophies of specialization, mixed marketing and profitable underwriting. 1999 gross written premiums increased 39.3% to $274.9 million, and 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) was 92.9%, which, once again, was substantially lower than the property and casualty industry as a whole. Through the acquisition of Liberty, the Company acquired approximately $32.0 million of annual mobile homeowners and homeowners gross written premium and $49.0 million of brokered personal lines business. Furthermore, this acquisition provides the platform for the Company's entry into the personal lines property and casualty business. In September 1999, the Board of Directors authorized the repurchase of an additional $20.0 million of the Company's common stock. This authorization is in addition to the initial $10.0 million stock buyback authorization. As of December 31, 1999 approximately $15.2 million of common stock had been repurchased since the initial authorization. As previously reported, the Company exited the nursing home and assisted living niche during the fourth quarter 1998. In spite of the Company's early recognition of the difficult market conditions, i.e., a heightened litigious climate and adverse development in jury verdicts, and its subsequent decision to quickly exit this business, the Company recorded an after-tax charge of $3.3 million in September 1999 to increase net unpaid loss and loss adjustment expenses. This charge was necessitated by higher than expected incidence and amount of claims which were noted in the third quarter 1999. During the third and fourth quarters of 1999 hurricanes and other storm events adversely affected both the Company's commercial and personal property books of business, resulting in after tax losses of approximately $4.0 million. Subsequent to the acquisition of Liberty, A.M. Best Company reaffirmed the "A+" (superior) pooled rating for PIIC and PIC and assigned the "A+" (superior) pooled rating to MUSA and LAIC. PIIC and PIC have also been assigned an "A" claims paying ability rating by Standard and Poor's. MUSA and LAIC have not sought such rating from Standard and Poor's. BUSINESS STRATEGY The Company designs, markets and underwrites specialty commercial and personal property and casualty insurance products incorporating value-added coverages and services for select target markets or niches. A mixed marketing strategy is utilized, wherein, the Company's production underwriting organization markets the Company's insurance products directly to the insureds, and also through designated broker representatives, and a network of preferred agents. The Company's production underwriting organization, consisting of 185 professionals at year end 1999, operating from 40 regional offices located across the United States and includes telemarketing staffs at its regional offices and the Philadelphia home office. 2 3 Business Segments The Company's operations are classified into four reportable business segments: The Commercial Lines Underwriting Group ("Commercial Lines") which has underwriting responsibility for the Commercial Automobile and Commercial multi-peril package insurance products; The Specialty Lines Underwriting Group ("Specialty Lines") which has underwriting responsibility for the professional liability insurance products; The Specialty Property Underwriting Group ("Special Property & Inland Marine") which has underwriting responsibility for the large property and inland marine insurance products; and The Personal Lines Group ("Personal Lines") which designs, markets and underwrites personal property and casualty insurance products for the mobile homeowners and homeowners markets. The following table sets forth, for the years ended December 31, 1999, 1998 and 1997, the gross written premiums for each of the Company's reportable business segments and the relative percentages that such premiums represented.
For the Years Ended December 31, -------------------------------------------------------------------------------- 1999 1998 1997 ---- ---- ---- Dollars Percentage Dollars Percentage Dollars Percentage ------- ---------- ------- ---------- ------- ---------- (Dollars in Thousands) Commercial Lines Underwriting Group...... $ 179,330 65.2% $ 162,058 82.1% $ 138,343 86.7% Specialty Lines Underwriting Group........ 48,532 17.7 30,396 15.4 20,748 13.3% Personal Lines Group...................... 25,414 9.2 3,850 1.9 Specialty Property Underwriting Group..... 21,642 7.9 1,104 .6 ---------- --------- ---------- --------- ---------- ------ Total..................................... $ 274,918 100.0% $ 197,408 100.0% $ 159,091 100.0% ========== ========= ========== ========= ========== ======
Commercial Lines: Commercial Automobile and Commercial Excess: The Company has provided Commercial Automobile Products to the leasing and rent-a-car industries for over 35 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. 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, lightning, 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. 3 4 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 professional liability products provide errors and omissions coverage for lawyers, accountants, insurance agents and other miscellaneous professions. The directors and officers product is offered to non-profit, for-profit and financial institutions. The Company focuses on maintaining a high renewal retention, improving current products, developing new products and staffing field offices with experienced underwriters. The Company periodically introduces coverage enhancements to its policies, designed to improve and differentiate the coverage offered. 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. 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 Ultimate Cover Policy which is designed to insure a wide range of business entities from shopping centers to hotels to educational. The Company believes that the Ultimate Cover Policy not only provides the opportunity to market to new insureds, but also provides the opportunity to round out existing product offerings and create cross-selling opportunities. With respect to inland marine products, the concentration of effort is on the larger segments of the inland marine market including builders' risk and contractors' equipment. In addition, the expertise currently exists to manuscript coverage forms for the unusual, "one-of-a-kind-type" account. Personal Lines: The Company entered the personal lines property and casualty business through the acquisition of Liberty. The Company produces and underwrites specialized mobile homeowners and homeowners property and casualty business, principally in Florida and also in Arizona and Nevada. The Company also produces business in the "National Federal Flood Insurance Program", and brokers certain mobile homeowners and homeowners business to insurance companies outside the consolidated group. The Company has initially targeted thirteen new states for expansion as well as geographic diversification of its personal lines business during 2000. The following table provides the geographic distribution of the Company's risks insured as represented by direct earned premiums for all reportable business segments for the year ended December 31, 1999. No other state accounted for more than 2% of total direct earned premiums for all product lines for the year ended December 31, 1999 (dollars in thousands).
State Direct Earned Premiums Percent of Total ----- ---------------------- ---------------- Florida.................................... $44,665 18.3% California................................. 34,515 14.2 New York................................... 15,851 6.5 Texas...................................... 11,920 4.9 New Jersey................................. 10,755 4.4 Pennsylvania............................... 10,138 4.2 Illinois................................... 9,320 3.8 Ohio....................................... 8,289 3.4 Massachusetts.............................. 7,231 3.0 North Carolina............................. 5,842 2.4 Washington................................. 4,926 2.0 Other...................................... 80,215 32.9 ------- ---- Total Direct Earned Premiums............... $243,667 100.0% ======== ======
4 5 Underwriting and Pricing The Company's business segments have been organized around its four underwriting divisions: Commercial Lines, Specialty Lines, Specialty Property & Inland Marine and Personal Lines. Each underwriting division's responsibilities include: pricing, managing the risk selection process, and monitoring loss ratios by product and insured. The Commercial Lines underwriting 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 underwriting group, which has underwriting responsibility for the Company's professional liability products, consists of 15 home office underwriters and 9 regional underwriters who report to the Assistant Vice President of Specialty Lines underwriting, 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 underwriting group, which has authority for the Company's large property and inland marine products, currently consists of seven home office professionals. In addition, the Company has strategically placed ten 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. The Personal Lines Group, which has responsibility for the Company's mobile homeowners and homeowners business, is located in Pinellas Park, Florida. The underwriting staff consists of seven professionals who are under the direction of the Chief Underwriting Officer. 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 competitors' 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 promptly recognizing and correcting price deterioration. Reinsurance The Company has entered into various reinsurance agreements for the purpose of limiting loss exposure and diversifying business. The Company's casualty excess of loss reinsurance agreement provides that the Company bears the first layer of liability on each occurrence (varying from $0.1 million to $1.0 million based upon the specific product) with its reinsurer bearing the remaining contractual liability up to $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 with several reinsurers. Facultative reinsurance (reinsurance which is provided on an individual risk basis) is placed for each casualty risk in excess of $11.0 million. The Company also has an excess casualty reinsurance agreement which provides an additional $5.0 million of coverage for protection from exposures such as extra-contractual obligations and judgments in excess of policy limits. Additionally, an errors and omissions insurance policy provides an additional $5.0 million of coverage with respect to these exposures. 5 6 The Company's property excess of loss reinsurance treaty provides that the Company bears the first layer of loss on each risk (varying from $0.1 million to $0.5 million based upon the specific product) with the reinsurers bearing the next layer of loss up to $10.0 million on each risk. The Company has an automatic facultative excess of loss cover for each property risk in excess of $10.0 million up to $100.0 million. Additionally, the Company has property catastrophe reinsurance for its commercial and personal property books of business. Under its commercial property catastrophe reinsurance agreements, the Company bears the first $2.0 million in catastrophe losses, per event, with the reinsurers bearing the next $18.0 million of loss. Under its personal property catastrophe reinsurance agreement, the Company bears the first $2.0 million in catastrophe losses, per event, with reinsurers bearing the next $135.0 million. Based upon the various modeling methods utilized by the Company to estimate its probable maximum loss, the Company currently maintains catastrophe reinsurance coverage for the 250 year storm event on both its commercial and personal lines business. Effective January 1, 2000, the Company entered into a three-year aggregate stop loss reinsurance agreement commencing with the 2000 accident year. The agreement includes all the business written by the Company. Under the terms of the agreement, the reinsurer provides reinsurance protection for a certain aggregate dollar limit for losses and loss adjustment expenses in excess of a predetermined loss ratio (the sum of losses and loss adjustment expenses divided by earned premiums). 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 or 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 185 professionals 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 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. 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. The Company has initially targeted thirteen new states for expansion of its personal lines business during 2000. The Company believes it can further grow and geographically diversify this business through leveraging its existing production underwriter channel of distribution, as well as through its e-commerce initiative, whereby agents can access the Company's internet web site for rating, quoting, issuing and billing of this business. 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 69 preferred agent relationships at year end 1999. The Company anticipates increasing the number of these relationships in 2000 thereby further increasing the distribution of the Company's niche products. The Company also anticipates some cross selling opportunities to arise between its personal and commercial lines business niches, wherein the Company's commercial lines agency base (in certain instances) also possess personal lines mobile homeowners and homeowners books of business which may now be solicited by the Company. The Company also is pursuing cross selling opportunities within its preferred agency base for its portfolio of commercial niche insurance products. 6 7 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, and links to industry web sites. 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 Executive Vice President, as well as officers from the underwriting, claims and compliance 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 an early stage, 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. 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 $0.3 7 8 million, $3.2 million and $1.7 million in 1999, 1998 and 1997, 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. The favorable development includes a $5.0 million increase to net unpaid loss and loss adjustment expense during 1999 for the Company's nursing home and assisted living policies. This increase was necessitated by higher than expected incidence and amounts of claims. The Company exited this business during 1998.
As of and For the Years Ended December 31, ------------------------------------------- 1999 1998 1997 --------- --------- --------- (Dollars in Thousands) Unpaid loss and loss adjustment expenses at beginning of year (1) ...................................... $ 137,205 $ 108,928 $ 85,723 --------- --------- --------- Provision for losses and loss adjustment expenses for current year claims ................................................ 99,663 69,544 56,725 Decrease in estimated ultimate losses and loss adjustment expenses for prior year claims .............................. (253) (3,170) (1,716) --------- --------- --------- Total incurred losses and loss adjustment expenses .......... 99,410 66,374 55,009 --------- --------- --------- Loss and loss adjustment expense payments for claims attributable to: Current year ................................................ 31,493 13,402 9,512 Prior years ................................................. 43,769 26,870 22,292 --------- --------- --------- Total payments .............................................. 75,262 40,272 31,804 --------- --------- --------- Unpaid loss and loss adjustment expenses at end of year (2) . $ 161,353 $ 135,030 $ 108,928 ========= ========= =========
(1) 1999 balance adjusted to include $2,175 net unpaid loss and loss adjustment expenses for MUSA as of acquisition date. (2) 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 $26,710, $16,120 and $13,502 at December 31, 1999, 1998 and 1997, 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 1989 through 1999. 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. 8 9 AS OF AND FOR THE YEARS ENDED DECEMBER 31, (Dollars in Thousands)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES, AS STATED $12,198 $15,930 $22,248 $31,981 $38,714 $53,595 $68,246 $85,723 $108,928 $136,237 $161,353 Cumulative Paid as of: 1 year later 3,354 4,286 6,698 9,865 10,792 12,391 15,214 22,292 26,870 43,769 2 years later 6,249 8,084 12,485 16,290 19,297 23,139 31,410 38,848 56,488 3 years later 8,807 10,838 16,288 21,253 24,991 33,511 40,637 52,108 4 years later 10,155 12,907 17,780 24,299 28,903 38,461 47,994 5 years later 11,217 13,211 19,406 25,793 30,558 42,366 6 years later 11,497 13,792 19,898 26,321 32,748 7 years later 11,760 14,074 20,246 27,252 8 years later 11,902 14,329 20,625 9 years later 11,905 14,343 10 years later 11,899 Unpaid Loss and Loss Adjustment Expenses re-estimated as of End of Year: 1 year later 12,628 15,953 22,056 30,538 38,603 52,670 67,281 84,007 105,759 135,984 2 years later 12,644 15,712 21,327 30,428 38,016 52,062 66,061 81,503 103,513 3 years later 12,424 14,822 21,198 29,648 37,184 51,149 63,872 76,348 4 years later 11,947 14,811 21,118 29,306 36,272 49,805 59,085 5 years later 11,836 14,841 21,399 28,553 35,783 47,366 6 years later 12,060 14,593 21,106 28,370 34,509 7 years later 12,008 14,606 21,013 27,959 8 years later 12,039 14,596 20,854 9 years later 12,039 14,525 10 years later 12,023 Cumulative Redundancy Dollars $175 $1,405 $1,394 $4,022 $4,205 $6,229 $9,161 $9,375 $5,415 $253 Percentage 1.4% 8.8% 6.3% 12.6% 10.9% 11.6% 13.4% 10.9% 5.0% 0.2%
(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 $26,710, $16,120, $13,502, $10,919, $9,440, $5,580, $5,539, $1,770, $1,267, $1,672 and $1,591 at December 31, 1999, 1998, 1997, 1996, 1995, 1994, 1993, 1992, 1991, 1990, and 1989, respectively. (2) 1998 Unpaid Loss and Loss Adjustment Expenses, As Stated, adjusted to include $1,207 unpaid loss and loss adjustment expenses for Mobile USA Insurance Company as of acquisition date. (3) 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. 9 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 the Insurance Subsidiaries, 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. Under GAAP, reinsurance receivables, with a corresponding increase in unpaid loss and loss adjustment expense, have been recorded. (See footnote (1) on Page 9 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, --------------------------------------------------------------------- 1999 1998 1997 1996 1995 ------ ------ ------ ------ ------ Loss Ratio ............................................... 59.7% 54.1% 55.3% 55.7% 57.1% Expense Ratio ............................................ 33.6% 31.0% 29.1% 31.1% 29.6% ------ ------ ------ ------ ------ Combined Ratio ........................................... 93.3% 85.1% 84.4% 86.8% 86.7% ====== ====== ====== ====== ====== Industry Combined Ratio after Policyholders" Dividends ... 107.5% 105.6% 101.6% 105.8% 106.4% ====== ====== ====== ====== ====== (1) (2) (2) (2) (2)
(1) Source: Best's Review/Preview PC 2000 (Estimated 1999). (2) Source: Best's Review/Preview PC 2000 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, ------------------------------------------------------------------------------ 1999 1998 1997 1996 1995 ----------- ------------- ------------ ------------ ------------ (Dollars in Thousands) Net Written Premiums (1) .................... $195,258 $143,036 $111,797 $83,994 $62,072 Policyholders' Surplus ...................... $179,341 $152,336 $105,985 $81,906 $67,500 Premium to Surplus Ratio (1) ................ 1.1 to 1.0 1.0 to 1.0 1.0 to 1.0 1.0 to 1.0 .9 to 1.0
(1) 1999 includes $11,187 net written premiums for MUSA from January 1, 1999 to date of acquisition. 10 11 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 & Poor's ratings. The Company utilizes professional investment managers for its fixed maturity and equity investments, which consist of diversified issuers and issues. At December 31, 1999, the Company had total investments with a carrying value of $393.8 million. At December 31, 1999, 81.6% 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 18.4% of the Company's total investments consisted primarily of publicly-traded common stocks. The following table sets forth information concerning the composition of the Company's total investments at December 31, 1999:
Estimated Percent of Market Carrying Carrying Amortized Cost Value Value Value -------------- ----- ----- ----- (Dollars in Thousands) Fixed Maturities: Obligations of States and Political Subdivisions .................. $123,317 $122,323 $122,323 31.1% U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies ..... 17,902 17,585 17,585 4.5 Corporate and Bank Debt Securities 102,672 96,533 96,533 24.5 Collateralized Mortgage Securities 48,521 46,764 46,764 11.9 Asset Backed Securities ............ 39,362 37,813 37,813 9.6 Equity Securities .................. 41,231 72,768 72,768 18.4 -------- -------- -------- ----- Total Investments .................. $373,005 $393,786 $393,786 100.0% ======== ======== ======== =====
At December 31, 1999, all of the Insurance Subsidiaries' fixed maturity securities consisted of U.S. government securities or securities rated "1" or "2" by the NAIC; these fixed maturities possessed an average quality rating of AA. The cost and estimated market value of fixed maturity securities at December 31, 1999, 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 ........................... $ 2,319 $ 2,325 Due after one year through five years ............. 55,792 55,141 Due after five years through ten years ............ 123,467 120,524 Due after ten years ............................... 62,313 58,451 Collateralized Mortgage and Asset Backed Securities 87,883 84,577 -------- -------- Total ............................................. $331,774 $321,018 ======== ========
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. 11 12 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 and Florida, the Pennsylvania Department of Insurance and the Florida Department of Insurance have primary authority over the Company. Regulation of Insurance Holding Companies: Pennsylvania and Florida, like many other states, have laws governing insurance holding companies (such as Philadelphia Insurance). Under these laws, a person generally must obtain the applicable Insurance Department's approval to acquire, directly or indirectly, 10% or more of the outstanding voting securities of Philadelphia Insurance or the Insurance Subsidiaries. Such Department's determination of whether to approve any such acquisition would be 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 or Florida would be reduced. The Pennsylvania and Florida statutes require every Pennsylvania and Florida-domiciled insurer which is a member of an insurance holding company system to register with Pennsylvania or Florida, respectively, 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. Under the Florida statute, a majority of the directors must be citizens of the United States. In addition, no Florida insurer may make any contract whereby any person is granted or is to enjoy in fact the management of the insurer to the substantial exclusion of its board of directors or to have the controlling or preemptive right to produce substantially all insurance business for the insurer, unless the contract is filed with and approved by the Florida Insurance Department. An insurer must give the Department written notice of any change of personnel among the directors or principal officers of the insurer within 45 days of such change. The written notice must include all information necessary to allow the Department to determine that the insurer will be in compliance with state statutes. 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 certain restrictions imposed under Pennsylvania and Florida insurance laws. Accumulated statutory profits of the Insurance Subsidiaries from which dividends may be paid totaled $82.7 million at December 31, 1999. Of this amount, the Insurance Subsidiaries are entitled to pay a total of approximately $22.2 million of dividends in 2000 without obtaining prior approval from the Pennsylvania or Florida Insurance Departments. During the fourth quarter of 1999, Philadelphia Insurance Company paid a $17.5 million dividend to Philadelphia Insurance which was subsequently contributed to Liberty American Insurance Company and Mobile USA Insurance Company in the amounts of $11.3 million and $6.2 million, respectively, to reallocate Policyholders' surplus among the Insurance Subsidiaries. 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 12 13 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 both Pennsylvania and Florida under the NAIC Financial Regulation Standards. 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 and Florida, 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 of each of the Insurance Subsidiaries at December 31, 1999 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, 1999, 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 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 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. 13 14 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 March 21, 2000, the Company had 544 full-time employees and 18 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. In July 1999, the Company acquired the principal executive offices of Liberty, located in Pinellas Park, Florida. 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 1999. 14 15 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) The Company's common stock, no par value, trades on The Nasdaq Stock Market under the symbol "PHLY". As of February 22, 2000, there were 392 holders of record and 1,461 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:
1999 1998 ----------------------------- ----------------------------------- Quarter High Low High Low ------------ ------------- -------------- ----------------- First 24.094 19.563 21.750 16.750 Second 25.375 21.000 24.375 20.000 Third 24.375 12.688 23.000 18.625 Fourth 16.313 13.688 23.688 19.375
The Company did not declare cash dividends on its common stock in 1999 and 1998, 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 3 to the Consolidated Financial Statements). (b) During the three years ended December 31, 1999, the Company did not sell any of its securities which were not registered under the Securities Act of 1933 except as follows: On July 16, 1999 the Company issued an aggregate of 1,037,772 shares of its common stock to the four (4) shareholders of The Jerger Company, Inc. in connection with the merger of The Jerger Company, Inc. into a subsidiary of the Company. This issuance was exempt from registration under Section 4(2) of the Securities Act of 1933 as a result of the limited number of persons to whom the shares were issued and the fact that the shares were issued in a negotiated merger transaction. 15 16 Item 6. SELECTED FINANCIAL DATA
As of and For the Years Ended December 31, ----------------------------------------------------------------------------- (In Thousands, Except Share and Per Share Data) 1999 1998 1997 1996 1995 ------------ ------------ ------------ ------------ ------------ Operations and Comprehensive Income Statement Data: Gross Written Premiums ............. $ 274,918 $ 197,408 $ 159,091 $ 136,855 $ 104,180 Gross Earned Premiums .............. $ 245,978 $ 174,737 $ 150,128 $ 121,820 $ 99,507 Net Written Premiums ............... $ 184,071 $ 143,036 $ 111,797 $ 83,994 $ 62,072 Net Earned Premiums ................ $ 164,915 $ 122,687 $ 100,555 $ 72,050 $ 58,188 Net Investment Income .............. 20,695 15,448 9,703 7,910 6,506 Net Realized Investment Gain (Loss) 5,700 474 (16) 260 181 Other Income ....................... 4,722 219 228 282 309 ------------ ------------ ------------ ------------ ------------ Total Revenue ...................... 196,032 138,828 110,470 80,502 65,184 ------------ ------------ ------------ ------------ ------------ Net Loss and Loss Adjustment Expenses ........................... 99,410 66,374 55,009 40,118 33,227 Acquisition Costs and Other Underwriting Expenses .............. 53,793 38,422 31,344 22,210 17,105 Other Operating Expenses ........... 8,939 2,212 1,909 1,386 2,564 ------------ ------------ ------------ ------------ ------------ Total Losses and Expenses .......... 162,142 107,008 88,262 63,714 52,896 ------------ ------------ ------------ ------------ ------------ Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust .................. 7,245 4,770 ------------ ------------ ------------ ------------ ------------ Income Before Income Taxes ......... 26,645 27,050 22,208 16,788 12,288 Total Income Tax Expense ........... 7,802 7,022 5,338 3,414 2,458 ------------ ------------ ------------ ------------ ------------ Net Income ......................... $ 18,843 $ 20,028 $ 16,870 $ 13,374 $ 9,830 ------------ ------------ ------------ ------------ ------------ Weighted-Average Common Shares Outstanding (1) .................... 12,501,165 12,249,262 12,193,659 11,879,506 11,627,702 Weighted-Average Share Equivalents Outstanding (1) .................... 2,614,399 2,680,165 2,736,039 2,373,742 2,049,004 ------------ ------------ ------------ ------------ ------------ Weighted-Average Shares and Share Equivalents Outstanding (1) ........ 15,115,564 14,929,427 14,929,698 14,253,248 13,676,706 ------------ ------------ ------------ ------------ ------------ Basic Earnings Per Share (1)(2) .... $ 1.51 $ 1.63 $ 1.38 $ 1.13 $ 0.85 ------------ ------------ ------------ ------------ ------------ Diluted Earnings Per Share(1)(2) ... $ 1.25 $ 1.34 $ 1.13 $ 0.94 $ 0.72 ------------ ------------ ------------ ------------ ------------ Year End Financial Position: Total Investments and Cash and Cash Equivalents ............... $ 420,016 $ 388,059 $ 229,599 $ 180,061 $ 140,086 Total Assets ....................... 599,051 476,390 292,724 231,725 177,203 Unpaid Loss and Loss Adjustment Expenses ........................... 188,063 151,150 122,430 96,642 77,686 Minority Interest in Consolidated Subsidiaries ....................... 98,905 98,905 Total Shareholders' Equity ......... 161,440 137,483 111,284 85,642 68,316 Common Shares Outstanding(1) ....... 12,590,908 12,200,563 12,242,431 12,079,612 11,627,702 ------------ ------------ ------------ ------------ ------------ Insurance Operating Ratios (Statutory Basis): Net Loss and Loss Adjustment Expenses to Net Earned Premiums .... 59.7% 54.1% 55.3% 55.7% 57.1% Underwriting Expenses to Net Written Premiums ................... 33.6% 31.0% 29.1% 31.1% 29.6% ============ ============ ============ ============ ============ Combined Ratio ..................... 93.3% 85.1% 84.4% 86.8% 86.7% ============ ============ ============ ============ ============ A.M. Best Rating ................... A+ A+ A A A (Superior) (Superior) (Excellent) (Excellent) (Excellent)
(1) 1996 and 1995 share data restated to reflect a two-for-one split of the Company's common stock distributed in November 1997. (2) 1996 and 1995 earnings per share amounts restated in accordance with the provisions of SFAS No. 128 adopted as of December 31, 1997. 16 17 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Operations 1999 was an eventful year for the Company. The Company continued its track record of growth through adherence to its core philosophies of specialization, mixed marketing and profitable underwriting. 1999 gross written premiums increased 39.3% to $274.9 million, and 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) was 92.9%, which once again, was substantially lower than the property and casualty industry as a whole. In July 1999 the Company closed on its acquisition of Liberty American Insurance Group, Inc. ("Liberty") (formerly The Jerger Company, Inc.) and subsidiaries which include: two personal lines property and casualty insurance companies, Mobile USA Insurance Company and Liberty American Insurance Company; a managing general agency, Mobile Homeowners Insurance Agencies, Inc.; and a premium finance company, MHIA Premium Finance Company. Through the acquisition, the Company acquired approximately $32.0 million of annual mobile homeowners, homeowners and National Flood Insurance Program ("NFIP") gross written premium and $49.0 million of annual brokered personal lines business. Furthermore, this acquisition provides the platform for the Company's entry into the personal lines property and casualty business. In September 1999, the Board of Directors authorized the repurchase of an additional $20.0 million of the Company's common stock. This authorization is in addition to the initial $10.0 million stock buyback authorization. As of December 31, 1999 approximately $15.2 million of common stock had been repurchased since the initial authorization. As previously reported, the Company exited the nursing home and assisted living niche during the fourth quarter 1998. In spite of the Company's early recognition of the difficult market conditions, i.e., a heightened litigious climate and adverse development in jury verdicts, and its subsequent decision to quickly exit this business, the Company recorded an after tax charge of $3.3 million in September 1999 to increase net unpaid loss and loss adjustment expenses. This charge was necessitated by higher than expected incidence and amount of claims which were noted in the third quarter 1999. During the third and fourth quarters of 1999, hurricanes and other storm events adversely affected both the Company's commercial and personal property books of business resulting in after-tax losses of approximately $4.0 million. Subsequent to the acquisition discussed above, A.M. Best Company reaffirmed the "A+" (superior) rating for Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company and assigned an "A+" (superior) rating to Mobile USA Insurance Company and Liberty American Insurance Company. Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company have been assigned an "A" claims paying ability rating by Standard and Poor's. Acquisition As noted previously in the "Operations" section, the Company closed on its acquisition of Liberty on July 16, 1999. The purchase price paid at closing consisted of $25.0 million in the Company's common stock (1,037,772 shares) plus $20.0 million in cash. The purchase also includes a contingent cash payment of up to $5.0 million based upon the combined earnings of 1999 and 2000 of the acquired business. Liberty is a producer and underwriter of highly specialized mobile homeowners and homeowners property and casualty business primarily in Florida, and also in Arizona and Nevada. For the year ended December 31, 1999, Liberty produced $81.0 million of mobile homeowners, homeowners and NFIP annual gross written premiums of which $32.0 million was written by either Mobile USA Insurance Company or Philadelphia Indemnity Insurance Company and $49.0 million was brokered to insurance companies outside the consolidated group. The Company has initially targeted thirteen new states for expansion of its personal lines business during 2000. The Company believes it can further grow and diversify this business through leveraging its existing production underwriter channel of distribution, which consists of 185 professionals located in 40 offices across the country, as well as through its e-commerce initiative, whereby, agents can access the Company's Internet Web site for rating, quoting, issuing and billing of this business. 17 18 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 & Poor's 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, 1999, approximately 83.9% of the total invested assets, on a cost basis, (total investments plus cash equivalents) consisted of investments in fixed maturity securities versus 78.6% at December 31, 1998. The Company increased its relative percentage investments in fixed maturity securities during 1999 through the investing of cash flows from operations and the reinvestment of proceeds from equity sales. During 1999 the relative percentage investment in taxable fixed maturity securities increased due to the more favorable after-tax yields as compared to tax-exempt fixed maturity securities. At the end of 1999, on a cost basis, investment grade taxable fixed maturity securities represented 52.7% of the total invested assets, compared to 46.9% as of the end of 1998. The Company decreased its relative percentage of total investments in equity securities during 1999, through the sale of certain common stocks. The decision to sell equity investments was made to lessen the Company's holdings in certain common stock positions as well as to decrease the overall relative exposure to equity investments. At December 31, 1999, common stocks, on a cost basis, comprised 10.4% of invested assets, compared to 12.3% at the end of 1998. Collateralized mortgage and asset backed securities, on a cost basis, amounted to $48.5 million and $39.4 million, respectively, as of December 31, 1999 and $42.8 and $46.4, respectively, as of December 31 1998. These securities are short tranche securities possessing favorable prepayment risk profiles. RESULTS OF OPERATIONS (1999 versus 1998) Premiums: Gross written premiums grew $77.5 million (39.3%) to $274.9 million in 1999 from $197.4 million in 1998; gross earned premiums grew $71.3 million (40.8%) to $246.0 million in 1999 from $174.7 million in 1998; net written premiums increased $41.1 million (28.7%) to $184.1 million in 1999 from $143.0 million in 1998; and net earned premiums grew $42.2 million (34.4%) to $164.9 million in 1999 from $122.7 million in 1998. The overall growth in premiums is attributable to a number of factors including: - - Expansion of marketing efforts relating to commercial lines, specialty lines and specialty property and inland marine products through the increase in the Company's field organization of approximately 20% to a total of 185 professionals as well as the increase in the Company's preferred agents (16 new relationships in 1999) wherein business relationships are formed with brokers specializing in certain of the Company's business niches. The respective gross written and net written premium increases for commercial lines, specialty lines and specialty property and inland marine products for the year ended December 31, 1999 vs. 1998 amount to $17.3 million and $5.1 million for commercial lines, $18.1 million and $14.8 million for specialty lines, and $20.5 million and $10.5 million for specialty property and inland marine. - - The acquisition of Liberty resulted in an increase of $21.6 million and $10.6 million in gross and net mobile homeowners, homeowners and NFIP written premiums, respectively. Overall premium growth has been offset in part by the Company's decision not to renew policies in the nursing home and assisting living niches due to inadequate pricing levels being experienced as a result of market conditions (refer to "Operations" section) and loss experience emerging at higher than expected levels. As a result, the aggregate total gross written and net written premiums for the nursing home and assisting living facility products decreased by $9.1 million and $8.3 million, respectively. Net Investment Income: Net investment income approximated $20.7 million in 1999 and $15.4 million in 1998. Total investments grew to $393.8 million at December 31, 1999 from $356.5 million at December 31, 1998. The growth in investment income is due to investing the proceeds from the Company's May 1998 FELINE PRIDESSM security offering for the entire year, net cash flows provided from operating activities, and the investable assets acquired in the Company's acquisition. 18 19 Net Realized Investment Gain: Net realized investment gains were $5.7 million for 1999 and $0.5 million for 1998. The increase is attributable to the sale of equity investments. The decision to sell equity investments was made to lessen the Company's holdings in certain common stock positions and decrease the Company's relative exposure to equity investments. The proceeds from these sales were principally reinvested in fixed maturity investments to increase current investment income. Other Income: Other income increased $4.5 million to $4.7 million for 1999 from $0.2 million for 1998. This increase is due to the acquisition of Liberty, and is primarily attributed to commissions earned on personal lines brokered business. Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $33.0 million (49.7%) to $99.4 million in 1999 from $66.4 million in 1998 and the loss ratio increased to 60.3% in 1999 from 54.1% in 1998. The increase in net loss and loss adjustment expenses was due to the following: a $5.0 million increase to unpaid loss and loss adjustment expenses for Nursing Home and Assisted Living commercial multi peril package policies which had been written in prior periods due to an increase in the incidence and amount of claims under the general liability coverage of these policies; $6.1 million in loss and loss adjustment expenses for property catastrophe losses resulting from Hurricane Floyd, Hurricane Irene and Arizona storms occurring during the third and fourth quarters; and a 34.4% growth in net earned premiums. Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $15.4 million (40.1%), to $53.8 million in 1999 from $38.4 million in 1998. This increase was due primarily to the 34.4% growth in net earned premiums and to relative changes in the Company's product and distribution mix. Other Operating Expenses: Other operating expenses increased $6.7 million to $8.9 million from $2.2 million for 1998. The increase in other operating expenses was due to the following: operating expenses of the agency operations of Liberty ($5.6 million); and goodwill amortization due to the acquisition of Liberty ($0.7 million). Income Tax Expense: The Company's effective tax rates for 1999 and 1998 were 29.3% and 26.0%, 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 1999 vs. 1998. 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 PRIDESSM security offering and cash flows provided from operating activities. 19 20 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. GROWTH OPPORTUNITIES The acquisition of Liberty provides the platform for the Company to enter the personal lines property and casualty insurance business. During 1999, Liberty produced $81.0 million of mobile homeowners, homeowners, NFIP annual gross written premiums of which $32.0 million was written by either Mobile USA Insurance Company or Philadelphia Indemnity Insurance Company and $49.0 million was brokered to insurance companies outside of the consolidated group. During the year 2000 the Company anticipates rolling over previously brokered mobile homeowners business along with growing the brokered homeowners business and NFIP on which it receives commission income. In addition, the Company has initially targeted thirteen new states for expansion of its personal lines business during 2000. The Company believes it can further grow and diversify this business through leveraging its existing production underwriter channel of distribution, which consists of 185 professionals located in 40 offices across the country, as well as through its e-commerce initiative, whereby, agents can access the Company's Internet Web site for rating, quoting, issuing and billing of this business. The Company continued to grow its field organization during 1999 to approximately 185 professionals, including production underwriters and customer service representatives. It is anticipated that the Company's field organization will continue to prospect the Company's existing niches for profitable new business. The Company also grew its Preferred Agents by 16 to 69 during 1999, further increasing the distribution of the Company's niche products. The Company also anticipates some cross selling opportunities to arise between its personal and commercial lines business niches, wherein certain of the Company's commercial lines agents also possess personal lines mobile homeowners and homeowners books of business which may now be solicited by the Company. The Company also is pursuing cross selling opportunities within its preferred agency base for its portfolio of commercial niche insurance products. Management believes that its mixed marketing strategy and specialization is a strength, in that it provides the market intelligence and flexibility to quickly deploy the marketing efforts of the Company's direct production underwriters from market segments where pricing is soft 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. 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 its subsidiaries. The Company's primary sources of funds are dividends from its subsidiaries and payments received pursuant to tax allocation agreements with the insurance subsidiaries. For the year ended December 31, 1999, payments to PCHC pursuant to such tax allocation agreements totaled $7.4 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 and State of Florida. Accumulated statutory profits of the insurance subsidiaries from which dividends may be paid totaled $82.7 million at December 31, 1999. Of this amount, the insurance subsidiaries are entitled to pay a total of approximately $22.2 million of dividends in 2000 without obtaining prior approval from the Insurance Commissioner of the Commonwealth of Pennsylvania or State of Florida. After the acquisition of Liberty, the insurance subsidiaries entered into an intercompany reinsurance pooling agreement. During the fourth quarter of 1999, in order to allocate policyholder surplus amongst the insurance subsidiaries to support their respective participation percentages in this intercompany reinsurance 20 21 pooling agreement, Philadelphia Insurance Company paid a $17.5 million dividend to PCHC which PCHC subsequently contributed to Liberty American Insurance Company and Mobile USA Insurance Company in the amounts of $11.3 million and $6.2 million, respectively. On May 4, 1998, the consolidated capitalization of the Company increased by approximately $99.0 million from the sale of FELINE PRIDESSM and Trust Preferred securities. The sales of FELINE PRIDESSM 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. The Company utilized $25.7 million of the net proceeds during 1999 for its acquisition of Liberty, contributed $33.1 million of the net proceeds to its subsidiaries in 1998, of which, $20.0 million was contributed to the insurance subsidiaries. Additionally, during 1998 and 1999 $15.2 million was utilized by the Company to buy back its common stock under its stock buy-back authorization. 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 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, 1999, the investment and cash balances in such trust accounts totaled approximately $13.0 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, 1999, the balance on deposit for the benefit of such policyholders totaled approximately $12.3 million. The Company produced net cash from operations of $47.2 million in 1999, $49.8 million in 1998 and $38.0 million in 1997. Management believes that the Company has adequate liquidity to pay all claims and meet all other cash needs. The insurance subsidiaries, which operate under an intercompany reinsurance 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 1.1-to-1.0 and 1.0-to-1.0 for 1999 and 1998, respectively. Management believes that the policyholders' surplus, which was $179.3 million at December 31, 1999, 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 and Florida Insurance Company statutes, the insurance subsidiaries' capital and surplus is in excess of the prescribed risk-based capital requirements. Year 2000 Readiness Disclosure Many existing computer programs use only two digits, instead of four, to identify a year in the date field. These programs were designed and developed without considering the impact of the change in the century. If not corrected, many computer applications could fail or create incorrect results on or after the Year 2000. The "Year 2000" issue affects computer and information technology systems, as well as non-information technology systems which include embedded technology such as micro-processors and micro-controllers (or micro-chips) that have date sensitive programs that may not properly recognize the year 2000 or beyond. The Company issues professional liability coverage, including directors and officers liability, and commercial multi-peril insurance policies. Coverage under certain of these policies may cover losses suffered by insureds as a result of the Year 2000 issues. Professional liability policies are written on a "claim made and reported" basis. Since early 1997 approximately 50% of these policies have included a Year 2000 exclusion endorsement. The Company includes 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, the Company's underwriters may remove the exclusion after receipt and review of a satisfactory supplemental application (which includes a warranty statement) and other underwriting information. 21 22 With respect to commercial multi-peril policies, the Company believes that it should not be held liable for claims arising from the Year 2000 issue under comprehensive general liability policies. However, the Company cannot determine whether or to what extent courts may find liability for such claims. Additionally, expenses could be incurred to contest Year 2000 issue coverage claims, even if the Company prevails in its position. As a result, it cannot presently be determined what, if any, insurance exposure ultimately exists for Year 2000 issue claims. However, no Year 2000 issue claims have been reported to the Company as of March 15, 2000. There can be no assurance that such Year 2000 issues will not materially adversely affect the Company. 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. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 ("SFAS 137"). SFAS 137 defers the provisions of SFAS 133 until January 1, 2001. The provisions of SFAS 133 require, among other things, that all derivatives be recognized in the consolidated balance sheets as either assets or liabilities and measured at fair value. The corresponding derivative gains and losses should be reported based upon the hedge relationship, if such a relationship exists. Changes in the fair value of derivatives that are not designated as hedges or that do not meet the hedge accounting criteria in SFAS 133 are required to be reported in income. The Company will adopt the provisions of SFAS No. 133 as of January 1, 2001. At December 31, 1999 the Company held no derivative financial instruments. In December 1998, the NAIC adopted the "NAIC Accounting Practices and Procedures Manual for Property and Casualty Insurance Companies, for Life, Accident and Health Insurance Companies, and for Health Maintenance Organizations" ("Accounting Practices and Procedures Manual") as submitted by the NAIC Accounting Practices and Procedures Task Force. This comprehensive guide to Statutory Accounting Principles is effective January 1, 2001. While this manual is intended to establish a comprehensive basis of accounting recognized and adhered to, it is not intended to pre-empt state legislative and regulatory authority. The Company will adopt the standards of the Accounting Practices and Procedures Manual as of January 1, 2001 as applied to statutory reporting, and is presently assessing its impact on financial position and results of operations of the insurance subsidiaries. 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; (v) catastrophe losses; and (vi) the impact of Year 2000 issues. 22 23 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, 1999 EXPECTED MATURITY DATES TOTAL (Dollars in thousands, except average interest rate) FAIR 2000 2001 2002 2003 2004 Thereafter TOTAL VALUE --------- --------- --------- -------- --------- ---------- ---------- --------- FIXED MATURITIES AVAILABLE FOR SALE: Principal Amount $10,600 $31,650 $41,200 $23,030 $37,150 $181,250 $324,880 $319,065 Book Value $11,050 $31,700 $41,530 $22,920 $37,390 $184,969 $329,559 Average Interest Rate 5.42% 6.64% 6.15% 6.70% 6.59% 6.27% 6.33% 6.97% PREFERRED: Principal Amount $2,060 $2,060 $1,953 Book Value $2,215 $2,215 Average Interest Rate 7.61% 7.61% 6.58% SHORT-TERM DEBT: Principal Amount $16,380 $16,380 $16,340 Book Value $16,350 $16,350 Average Interest Rate 5.37% 5.37% 5.37%
23 24 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 25 Consolidated Balance Sheets - As of December 31, 1999 and 1998 26 Consolidated Statements of Operations and Comprehensive Income - For the Years Ended December 31, 1999, 1998 and 1997 27 Consolidated Statements of Changes in Shareholders' Equity - For the Years Ended December 31, 1999, 1998 and 1997 28 Consolidated Statements of Cash Flows - For the Years Ended December 31, 1999, 1998 and 1997 29 Notes to Consolidated Financial Statements 30-45 Financial Statement Schedules: Schedule I Summary of Investments - Other Than Investments in Related Parties As of December 31, 1999 S-1 II Condensed Financial Information of Registrant As of December 31, 1999 and 1998 and For Each of the Three Years in the Period Ended December 31, 1999 S-2 -- S-4 III Supplementary Insurance Information As of and For the Years Ended December 31, 1999, 1998 and 1997 S-5 IV Reinsurance For the Years ended December 31, 1999, 1998 and 1997 S-6 VI Supplemental Information Concerning Property- Casualty Insurance Operations As of and For the Years Ended December 31, 1999, 1998 and 1997 S-7
24 25 REPORT OF INDEPENDENT ACCOUNTANTS 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 and 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 (the "Company") at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States 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 Philadelphia, Pennsylvania February 11, 2000 25 26 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
As of December 31, 1999 1998 --------- --------- ASSETS Investments: Fixed Maturities Available for Sale at Market (Amortized Cost $331,774 and $278,557) ................. $ 321,018 $ 283,718 Equity Securities at Market (Cost $41,231 and $43,441) .... 72,768 72,768 --------- --------- Total Investments................. ................. 393,786 356,486 Cash and Cash Equivalents ................................. 26,230 31,573 Accrued Investment Income ................................. 5,027 3,771 Premiums Receivable ....................................... 49,176 34,961 Prepaid Reinsurance Premiums and Reinsurance Receivables ............................... 54,920 22,892 Deferred Acquisition Costs ................................ 26,054 16,853 Property and Equipment .................................... 9,277 4,877 Goodwill less Accumulated Amortization of $2,620 and $1,669 28,801 416 Other Assets .............................................. 5,780 4,561 --------- --------- Total Assets ....................................... $ 599,051 $ 476,390 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Policy Liabilities and Accruals: Unpaid Loss and Loss Adjustment Expenses .............. $ 188,063 $ 151,150 Unearned Premiums ..................................... 111,606 64,787 --------- --------- Total Policy Liabilities and Accruals ..................... 299,669 215,937 Premiums Payable .......................................... 22,223 7,192 Other Liabilities ......................................... 14,762 9,463 Deferred Income Taxes ..................................... 2,052 7,410 --------- --------- Total Liabilities .................................. 338,706 240,002 --------- --------- Minority Interest in Consolidated Subsidiaries: Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Debentures of Company .................... 98,905 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, 13,381,924 and 12,330,825 Shares Issued ... 68,859 44,796 Notes Receivable from Shareholders ...................... (2,506) (1,680) Accumulated Other Comprehensive Income .................. 13,507 22,417 Retained Earnings ....................................... 93,766 74,923 Less Cost of Common Stock Held in Treasury, 791,016 and 130,262 Shares ............................ (12,186) (2,973) --------- --------- Total Shareholders' Equity ......................... 161,440 137,483 --------- --------- Total Liabilities and Shareholders' Equity ......... $ 599,051 $ 476,390 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 26 27 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For the Years Ended December 31, ---------------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ Revenue: Net Written Premiums ............................... $ 184,071 $ 143,036 $ 111,797 Change in Net Unearned Premium Reserve (Increase) .. (19,156) (20,349) (11,242) ------------ ------------ ------------ Net Earned Premiums ................................ 164,915 122,687 100,555 Net Investment Income .............................. 20,695 15,448 9,703 Net Realized Investment Gain (Loss) ................ 5,700 474 (16) Other Income ....................................... 4,722 219 228 ------------ ------------ ------------ Total Revenue..................................... 196,032 138,828 110,470 ------------ ------------ ------------ Losses and Expenses: Loss and Loss Adjustment Expenses .................. 122,491 74,074 61,839 Net Reinsurance Recoveries ......................... (23,081) (7,700) (6,830) ------------ ------------ ------------ Net Loss and Loss Adjustment Expenses .............. 99,410 66,374 55,009 Acquisition Costs and Other Underwriting Expenses ........................... 53,793 38,422 31,344 Other Operating Expenses ........................... 8,939 2,212 1,909 ------------ ------------ ------------ Total Losses and Expenses ...................... 162,142 107,008 88,262 ------------ ------------ ------------ Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust ..................................... 7,245 4,770 ------------ ------------ ------------ Income Before Income Taxes ........................... 26,645 27,050 22,208 ------------ ------------ ------------ Income Tax Expense (Benefit): Current ............................................ 8,360 7,941 6,521 Deferred ........................................... (558) (919) (1,183) ------------ ------------ ------------ Total Income Tax Expense ....................... 7,802 7,022 5,338 ------------ ------------ ------------ Net Income ..................................... $ 18,843 $ 20,028 $ 16,870 ============ ============ ============ Other Comprehensive Income (Loss), Net of Tax: Holding Gain (Loss) Arising during Year .............. $ (5,205) $ 7,702 $ 7,649 Reclassification Adjustment........................... (3,705) (308) ------------ ------------ ------------ Other Comprehensive Income (Loss) .................... (8,910) 7,394 7,649 ------------ ------------ ------------ Comprehensive Income ................................. $ 9,933 $ 27,422 $ 24,519 ============ ============ ============ Per Average Share Data: Basic Earnings Per Share ........................... $ 1.51 $ 1.63 $ 1.38 ============ ============ ============ Diluted Earnings Per Share ......................... $ 1.25 $ 1.34 $ 1.13 ============ ============ ============ Weighted-Average Common Shares Outstanding ........... 12,501,165 12,249,262 12,193,659 Weighted-Average Share Equivalents Outstanding ....... 2,614,399 2,680,165 2,736,039 ------------ ------------ ------------ Weighted-Average Shares and Share Equivalents Outstanding ........................................ 15,115,564 14,929,427 14,929,698 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 27 28 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
For the Years Ended December 31, ------------------------------------------- 1999 1998 1997 --------- --------- --------- Common Stock: Balance at Beginning of Year .............................. $ 44,796 $ 42,788 $ 41,167 Issuance of Shares Pursuant to Acquisition Agreement .... 25,000 Issuance of Shares Pursuant to Employee Stock Purchase Plan .................................................... (420) 853 898 Exercise of Employee Stock Options, Net of Tax Benefit .. (517) 597 723 Purchase Contracts of Common Stock ..................... 558 --------- --------- --------- Balance at End of Year .................................... 68,859 44,796 42,788 --------- --------- --------- Notes Receivable from Shareholders: Balance at Beginning of Year ............................ (1,680) (1,422) (924) Notes Receivable Issued Pursuant to Employee Stock Purchase Plan ..................................... (1,445) (828) (873) Collection of Notes Receivable .......................... 619 570 375 --------- --------- --------- Balance at End of Year .................................... (2,506) (1,680) (1,422) --------- --------- --------- Accumulated Other Comprehensive Income, Net of Deferred Income Taxes: Balance at Beginning of Year ............................ 22,417 15,023 7,374 Other Comprehensive Income, Net of Taxes ................ (8,910) 7,394 7,649 --------- --------- --------- Balance at End of Year .................................... 13,507 22,417 15,023 --------- --------- --------- Retained Earnings: Balance at Beginning of Year ............................ 74,923 54,895 38,025 Net Income .............................................. 18,843 20,028 16,870 --------- --------- --------- Balance at End of Year .................................... 93,766 74,923 54,895 --------- --------- --------- Common Stock Held in Treasury: Balance at Beginning of Year ............................ (2,973) Common Shares Repurchased ............................... (12,081) (3,100) Issuance of Shares Pursuant to Employee Stock Purchase Plan .................................................... 1,893 Exercise of Employee Stock Options, Net of Tax Benefit .. 975 127 --------- --------- --------- Balance at End of Year .................................... (12,186) (2,973) --------- --------- --------- Total Shareholders' Equity ................................ $ 161,440 $ 137,483 $ 111,284 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 28 29 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
For the Years Ended December 31, ------------------------------------------- 1999 1998 1997 --------- --------- --------- Cash Flows from Operating Activities: Net Income .................................................... $ 18,843 $ 20,028 $ 16,870 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Net Realized Investment (Gain) Loss .......................... (5,700) (474) 16 Depreciation and Amortization Expense ........................ 3,371 1,277 1,232 Deferred Income Tax Benefit .................................. (558) (919) (1,183) Change in Premiums Receivable ................................ (11,154) (12,500) (7,157) Change in Other Receivables .................................. (26,159) (5,318) (655) Change in Deferred Acquisition Costs ......................... (6,720) (5,883) (1,937) Change in Other Assets ....................................... (1,639) 522 (3,345) Change in Unpaid Loss and Loss Adjustment Expenses ........... 33,590 28,847 25,788 Change in Unearned Premiums .................................. 30,073 22,671 8,962 Change in Other Liabilities .................................. 13,215 1,533 (575) --------- --------- --------- Net Cash Provided by Operating Activities .................. 47,162 49,784 38,016 --------- --------- --------- Cash Flows from Investing Activities: Proceeds from Sales of Investments in Fixed Maturities Available for Sale .............................. 64,968 50,874 5,564 Proceeds from Maturity of Investments in Fixed Maturities Available for Sale .............................. 39,728 36,736 9,305 Proceeds from Sales of Investments in Equity Securities ................................................. 37,013 19,440 5,896 Proceeds from Sale of Real Estate ............................ 1,987 Cost of Fixed Maturities Available for Sale Acquired ................................................... (148,411) (199,024) (42,309) Cost of Equity Securities Acquired ........................... (25,686) (35,610) (15,536) Payment for Acquisition, Net of Cash Acquired ................ (7,372) Purchase of Property and Equipment, Net ...................... (1,768) (2,229) (1,609) --------- --------- --------- Net Cash Used for Investing Activities ..................... (41,528) (127,826) (38,689) --------- --------- --------- 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 ....... 458 724 723 Collection of Notes Receivable ............................... 619 570 375 Proceeds from Shares Issued Pursuant to Employee Stock Purchase Plan .............................................. 27 25 25 Cost of Common Stock Repurchased ............................. (12,081) (3,100) --------- --------- --------- Net Cash Provided (Used) by Financing Activities ........... (10,977) 97,682 1,123 --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents ......... (5,343) 19,640 450 Cash and Cash Equivalents at Beginning of Year ............... 31,573 11,933 11,483 --------- --------- --------- Cash and Cash Equivalents at End of Year ..................... $ 26,230 $ 31,573 $ 11,933 ========= ========= ========= Cash Paid During the Year for: Income Taxes ................................................. $ 8,295 $ 7,546 $ 7,158 Non-Cash Transactions: Issuance of Shares Pursuant to Employee Stock Purchase Plan in Exchange for Notes Receivable ......... $ 1,445 $ 828 $ 873 Acquisitions Fair Value Of Assets Acquired $ 77,310 Cash Paid (25,676) Common Stock Issued (25,000) ---------- Liabilities Assumed $ 26,634 ==========
The accompanying notes are an integral part of the consolidated financial statements. 29 30 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 four property and casualty insurance companies, Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company, which are domiciled in Pennsylvania; and Mobile USA Insurance Company and Liberty American Insurance Company, which are domiciled in Florida (collectively the "Insurance Subsidiaries"); an underwriting manager, Maguire Insurance Agency, Inc.; a managing general agency, Mobile Homeowners Insurance Agencies, Inc; a premium finance company MHIA Premium Finance Company; and an investment subsidiary, PCHC Investment Corp. The Company designs, markets, and underwrites specialty commercial and 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; selected classes of professional liability; and personal property and casualty insurance products for the mobile homeowners and homeowners markets. All marketing, underwriting, claims management, investment, and general administration is provided by the underwriting manager and managing general agency. 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 $46.8 million and $37.8 million, respectively, at December 31, 1999 and $42.8 million and $46.4 million, respectively, at December 31, 1998. The collateralized mortgage and asset back securities held as of December 31, 1999 and 1998 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. 30 31 (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 $46.5 million, $30.0 million, and $25.0 million for the years ended December 31, 1999, 1998, and 1997, 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 becomes 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) Goodwill Goodwill amounted to $28.8 million and $0.4 million at December 31, 1999 and 1998, respectively. Goodwill is being amortized on a straight line basis over 20 years. The carrying value of goodwill is reviewed for recoverability based on the undiscounted cash flows of the businesses acquired over the remaining amortization period. Should the review indicate that goodwill is not recoverable, the Company would recognize an impairment loss. Goodwill amortization was $0.8 million in 1999, $0.1 million in 1998 and $0.1 million in 1997. Goodwill and related amortization has increased due to the acquisition of Liberty American Insurance Group, Inc. ("Liberty"), (formerly the Jerger Company, Inc.) (f) 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. (g) 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. (h) 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. (i) Assessments The Insurance Subsidiaries are subject to state guaranty fund assessments, which provide for the payment of covered claims or meet other insurance obligations from insurance company insolvencies, and other assessments related to its insurance activities. Each state has enacted legislation establishing guaranty funds and other insurance activity related assessments resulting in a variety of assessment methodologies. Expense for guaranty fund and insurance activity related assessments are recognized when it is probable that an assessment will be imposed, the obligatory event has occurred and the amount of the assessment is reasonably estimated. 31 32 (j) 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. (k) Earnings Per Share Basic earnings per share has been calculated by dividing net income by the weighted-average common shares outstanding. Diluted earnings per share has been calculated by dividing net income by the weighted-average common shares outstanding and the weighted-average share equivalents outstanding. (l) Comprehensive Income Components of comprehensive income, as detailed in the Consolidated Statements of Operations and Comprehensive Income, are net of tax. The related tax effect of Holding Gains (Losses) arising during the year was ($2.8) million, $4.1 million and $4.1 million in 1999, 1998 and 1997, respectively. The related tax effect of Reclassification Adjustments was $2.0 million and $0.2 million in 1999 and 1998, respectively. 2. Acquisition On July 16, 1999, Philadelphia Insurance closed on its acquisition of Liberty (Mobile USA Insurance Company, Liberty American Insurance Company, Mobile Homeowners Insurance Agencies, Inc., and MHIA Premium Finance Company) for a purchase price of $45.0 million, and a contingent additional amount of up to $5.0 million based upon the future earnings for the acquired business. Of the purchase price, $20.0 million was paid in cash and the balance in 1,037,772 shares of common stock of the Company. Any contingent additional amount will be paid in cash. The acquisition is being accounted for using the purchase method of accounting. Goodwill resulting from the acquisition amounted to $29.2 million. This amount represents the excess of acquisition costs over the fair value of net assets acquired. 3. Statutory Information Accounting Principles: The Insurance Subsidiaries 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 Departments of the Commonwealth of Pennsylvania and the State of Florida. Prescribed statutory accounting practices include a variety of publications of the National Association of Insurance Commissioners ("NAIC"), as well as Commonwealth and State 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 and the State of Florida. 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. 32 33 Financial Information: The statutory capital and surplus of the Insurance Subsidiaries as of December 31, 1999 and 1998 was $179.3 million and $152.3 million (excluding Mobile USA Insurance Company and Liberty American Insurance Company), respectively. Statutory net income for the year ended December 31, 1999 including Mobile USA Insurance Company and Liberty American Insurance Company from acquisition to December 31, 1999, was $19.2 million. Net income for the years ended December 31, 1998 and 1997 was $16.1 million and $14.3 million, respectively. Capital contributions for the years ended December 31, 1999 and 1998 were $17.5 million and $25.5 million, 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 the Insurance Subsidiaries may pay to Philadelphia Insurance during 2000 without prior approval is $22.2 million. Dividends paid for the years ended December 31, 1999 and 1998 were $17.5 million and $0, respectively. 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, the Insurance Subsidiaries capital and surplus at December 31, 1999 is in excess of the prescribed risk-based capital requirements. 4. Investments The Company invests primarily in investment grade fixed maturities which possessed an average quality rating of AA at December 31, 1999. The cost, gross unrealized gains and losses, estimated market value and carrying value of investments as of December 31, 1999 and 1998 are as follows (in thousands): 33 34
Gross Gross Estimated Unrealized Unrealized Market Carrying Cost (1) Gains Losses Value (2) Value -------- ----- ------ --------- ----- December 31, 1999 Fixed Maturities: Available for Sale U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $ 17,902 $ 26 $ 343 $ 17,585 $ 17,585 Obligations of States and Political Subdivisions 123,317 1,460 2,454 122,323 122,323 Corporate and Bank Debt Securities 102,672 180 6,319 96,533 96,533 Collateralized Mortgage Securities 48,521 47 1,804 46,764 46,764 Asset Backed Securities 39,362 1,549 37,813 37,813 -------- -------- -------- -------- -------- Total Fixed Maturities Available for Sale 331,774 1,713 12,469 321,018 321,018 -------- -------- -------- -------- -------- Equity Securities 41,231 32,130 593 72,768 72,768 -------- -------- -------- -------- -------- Total Investments $373,005 $ 33,843 $ 13,062 $393,786 $393,786 ======== ======== ======== ======== ======== 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 69,532 1,011 1,152 69,391 69,391 Corporate and Bank Debt Securities 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 ======== ======== ======== ======== ========
(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, 1999. The cost and estimated market value of fixed maturity securities at December 31, 1999, 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. 34 35
Estimated Market Cost (1) Value (2) -------- --------- Due in One Year or Less $ 2,319 $ 2,325 Due After One Year Through Five Years 55,792 55,141 Due After Five Years through Ten Years 123,467 120,524 Due After Ten Years 62,313 58,451 Collateralized Mortgage and Asset Backed Securities 87,883 84,577 -------- -------- $331,774 $321,018 ======== ========
(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, 1999, 1998, and 1997 are as follows (in thousands):
1999 1998 1997 ---- ---- ---- Fixed Maturities Available for Sale $ 18,210 $ 13,404 $ 8,978 Equity Securities 1,169 634 480 Cash and Cash Equivalents 2,111 1,983 602 -------- -------- -------- Total Investment Income 21,490 16,021 10,060 Investment Expense (795) (573) (357) -------- -------- -------- Net Investment Income $ 20,695 $ 15,448 $ 9,703 ======== ======== ========
There are no investments in fixed maturity securities that were non-income producing during the years ended December 31, 1999, 1998, and 1997. Investment expense includes $212,000, $189,000, and $164,000, in investment management fees paid to a director of the Company in 1999, 1998, and 1997, respectively. These transactions are in the ordinary course of business at negotiated prices comparable to those of transactions with other investment advisors. Realized pre-tax gains (losses) on the sale of investments for the years ended December 31, 1999, 1998, and 1997 are as follows (in thousands):
1999 1998 1997 ---- ---- ---- Fixed Maturities Available for Sale Gross Realized Gains $ 285 $ 1,090 $ 22 Gross Realized Losses (1,079) (89) (52) ------- ------- ------- Net Gain (Loss) (794) 1,001 (30) ------- ------- ------- Equity Securities Gross Realized Gains 9,300 1,641 628 Gross Realized Losses (2,806) (2,284) (614) ------- ------- ------- Net Gain (Loss) 6,494 (643) 14 ------- ------- ------- Gross Realized Gain on Sale of Real Estate 116 ------- ------- ------- Total Net Realized Investment Gain (Loss) $ 5,700 $ 474 $ (16) ======= ======= =======
5. Restricted Assets The Insurance Subsidiaries have investments, principally U.S. Treasury securities, on deposit with the various states in which they are licensed insurers. At December 31, 1999 and 1998 the carrying value on deposit totaled $12.3 million and $11.0 million, respectively. 6. 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, 1999 and 1998, the Company had investments with a carrying value of $2.4 million and $2.3 million, respectively, in trust accounts pursuant to a terminated 35 36 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, 1999 and 1998 the carrying value of these trust fund investments were $10.6 million and $8.9 million, 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. 7. Property and Equipment The following table summarizes property and equipment at December 31, 1999 and 1998 (dollars in thousands):
Estimated Useful December 31, Lives (Years) ------------ ------------- 1999 1998 ---- ---- Furniture, Fixtures and Automobiles $ 3,291 $ 2,676 5 Software, Computer Hardware and Telephone Equipment 11,325 8,890 3 - 7 Land and Building 3,574 150 40 Leasehold Improvements 1,366 1,247 10 - 12 -------- -------- 19,556 12,963 Accumulated Depreciation and Amortization (10,279) (8,086) -------- --------- Property and Equipment $ 9,277 $ 4,877 ======== ========
Included in property and equipment are costs incurred in developing or purchasing information systems technology of $3.5 million and $2.7 million in 1999 and 1998, respectively. Amortization of these costs was $0.3 million, $0.2 million and $0.2 million for the years ended December 31, 1999, 1998 and 1997, respectively. Depreciation expense, excluding amortization of capitalized information systems technology costs, was $1.5 million, $1.2 million and $0.9 million, for the years ended December 31, 1999, 1998, and 1997, respectively. 36 37 8. 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):
1999 1998 1997 ---- ---- ---- Balance at January 1, (1) $ 154,473 $ 122,430 $ 96,642 Less Reinsurance Recoverables (2) 17,268 13,502 10,919 ---------- ---------- ---------- Net Balance at January 1, (3) 137,205 108,928 85,723 ---------- ---------- ---------- Incurred related to: Current Year 99,663 69,544 56,725 Prior Years (253) (3,170) (1,716) ----------- ----------- ----------- Total Incurred 99,410 66,374 55,009 ---------- ---------- ---------- Paid related to: Current Year 31,493 13,402 9,512 Prior Years 43,769 26,870 22,292 ---------- ---------- ---------- Total Paid 75,262 40,272 31,804 ---------- ---------- ---------- Net Balance at December 31, 161,353 135,030 108,928 Plus Reinsurance Recoverables 26,710 16,120 13,502 ---------- ---------- ---------- Balance at December 31, $ 188,063 $ 151,150 $ 122,430 ========== ========== ==========
(1) Adjusted to include $3,323 gross unpaid loss and loss adjustment expenses for Mobile USA Insurance Company as of acquisition date. (2) Adjusted to include $1,148 reinsurance recoverables for Mobile USA Insurance Company as of acquisition date. (3) Adjusted to include $2,175 net unpaid loss and loss adjustment expenses for Mobile USA Insurance Company as of acquisition date. As a result of changes in estimates of insured events of prior years, the Company reduced losses and loss adjustment expenses incurred by $0.3 million, $3.2 million and $1.7 million in 1999, 1998 and 1997, 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. The favorable development includes a $5.0 million increase to net unpaid loss and loss adjustment expense during 1999 for the Company's nursing home and assisted living policies. This increase was necessitated by higher than expected incidence and amount of claims. The Company exited this business during 1998. 9. Income Taxes The composition of deferred tax assets and liabilities and the related tax effects as of December 31, 1999 and 1998 are as follows (in thousands):
December 31, ------------ 1999 1998 ---- ---- Assets: Effect of Loss Reserve Discounting $ 7,998 $ 6,853 Excess of Tax Over Financial Reporting Earned Premium 6,276 4,131 Other Assets 652 127 ======= ======= Total Assets 14,926 11,111 ======= ======= Liabilities: Deferred Policy Acquisition Costs, Deductible for Tax 9,119 5,899 Tax Effect of Unrealized Appreciation of Securities 7,304 12,070 Property and Equipment Basis 347 550 Other Liabilities 208 2 ------- ------- Total Liabilities 16,978 18,521 ======= ======= Net Deferred Income Tax Liability $ 2,052 $ 7,410 ======= =======
37 38 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, 1999: Federal Tax at Statutory Rate $ 9,326 35% Nontaxable Municipal Bond Interest and Dividends Received Exclusion (1,931) (7) Nondeductible Goodwill Amortization 292 1 Other, Net 115 ------- ------- Income Tax Expense $ 7,802 29% ======= ======= 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% ======= =======
As of December 31, 1999, the Company has approximately $0.3 million in net operating loss carryforwards, which expire in 2000 and 2001, available to offset future taxable income. Utilization of the loss carryforwards is limited to an annual amount of $0.3 million. For financial reporting purposes, the tax benefit of any utilization of these operating loss carryforwards is applied to reduce goodwill ($0.1 million in 1999) 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. 10. Minority Interest in Consolidated Subsidiaries During 1998, the Company issued 10.350 million FELINE PRIDESSM 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 PRIDESSM 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 PRIDESSM) 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 PRIDESSM) 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 Originated Preferred Securities, but will not apply to any payment of distributions except to the extent the Trust shall have funds available therefor. 38 39 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 $25.7 million of the net proceeds during 1999 for its acquisition of Liberty, and contributed $33.1 million of the net proceeds to its subsidiaries in 1998, of which $20.0 million was contributed to the Insurance Subsidiaries. Additionally, $15.2 million was utilized by the Company to buy back its common stock under its stock buy-back authorization. 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. 11. 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 the years 1995 and subsequent 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. The following is a summary of the Company's option activity, including weighted-average option information:
1999 1998 1997 ------------------------------- ------------------------------ ------------------------------ Exercise Exercise Exercise Price Price Price Per Per Per Options Option(1) Options Option(1) Options Option(1) ------------ -------------- ------------ ------------- ------------ ------------- Outstanding at beginning of year 3,637,167 $ 4.85 3,473,042 $ 3.85 3,572,292 $ 3.86 Granted 257,500 $ 15.87 256,125 $ 19.07 5,000 $ 16.38 Exercised (46,250) $ 4.40 (68,600) $ 4.53 (84,250) $ 4.42 Canceled (12,500) $ 20.43 (23,400) $ 12.00 (20,000) $ 6.00 ---------- ---------- ---------- Outstanding at end of year 3,835,917 $ 5.55 3,637,167 $ 4.85 3,473,042 $ 3.85 ========== ========== ========== Exercisable at end of year 2,661,892 2,708,142 2,768,792 Weighted-average fair value of options granted during the year $6.76 $7.69 $6.38
39 40
Exercise Exercisable Exercise Outstanding Price Remaining at Price At December Per Contractual December Per Range of Exercise Prices 31, 1999 Option(1) Life (Years) (1) 31, 1999 Option(1) - ------------------------ -------- --------- ---------------- -------- --------- $2.61 2,646,892 $ 2.61 3.1 2,646,892 $ 2.61 $4.75 to $9.31 682,900 $ 8.40 6.1 15,000 $ 4.75 $13.88 to $15.00 212,500 $ 14.45 9.9 $16.38 to $19.75 201,125 $ 18.53 8.4 $20.50 to $24.56 92,500 $ 21.63 8.8 ---------- ---------- 3,835,917 $ 5.55 2,661,892 $ 2.62 ========== ==========
(1) Weighted Average. 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 112,228 and 51,794 shares in 1999 and 1998, respectively. The weighted-average fair value of those purchase rights granted in 1999 and 1998 was $2.52 and $2.70, 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, 1999. 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):
1999 1998 1997 ---- ---- ---- Net Income As Reported $ 18,843 $ 20,028 $ 16,870 Assumed Stock Compensation Cost 657 453 354 --------- --------- -------- Pro Forma Net Income $ 18,186 $ 19,575 $ 16,516 ========= ========= ======== Diluted Earnings Per Average Common Share as Reported $ 1.25 $ 1.34 $ 1.13 ========= ========= ======== Pro Forma Diluted Earnings Per Average Common Share $ 1.20 $ 1.31 $ 1.11 ========= ========= ========
The fair value of options at date of grant was estimated using the Black-Scholes valuation model with the following weighted-average assumptions:
1999 1998 1997 ---- ---- ---- Expected Stock Volatility 31.6% 29.5% 25.9% Risk-Free Interest Rate 5.9% 5.3% 5.8% Expected Option Life-Years 6.0 6.0 6.0 Expected Dividends 0.0% 0.0% 0.0%
40 41 12. Stock Repurchase Authorization On September 9, 1999, the Company's Board of Directors increased the authorization for the Company to repurchase up to a total of $30.0 million of its common stock. As of December 31, 1999, the Company had repurchased 1.0 million shares for approximately $15.2 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 $26.7 million and $16.1 million at December 31, 1999 and 1998, 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 (excluding reserves ceded to voluntary and mandatory pool mechanisms) that are with companies rated "A" (Excellent) or better by A.M. Best Company is 100% as of December 31, 1999 and 1998, respectively. Additionally, approximately 4%, 1% and 2% of the Company's net written premiums for the years ended December 31, 1999, 1998, and 1997, respectively, were assumed from an unrelated reinsurance company. The effect of reinsurance on premiums written and earned is as follows (in thousands):
Written Earned For the Year Ended December 31, 1999: Direct Business $271,312 $243,667 Reinsurance Assumed 6,767 4,339 Reinsurance Ceded 94,008 83,091 -------- -------- Net Premiums $184,071 $164,915 ======== ======== Percentage Assumed of Net 2.6% ======== 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% ========
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 total contributions to the plan were $0.3 million, $0.4 million and $0.5 million in 1999, 1998, and 1997, respectively. 41 42 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. In addition, the Company leases certain computer equipment. Rental expense for these operating leases was $1.7 million, $1.2 million and $0.9 million for the years ended December 31, 1999, 1998, and 1997, respectively. At December 31, 1999, 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, 1999 were as follows (in thousands): Year Ending December 31: 2000 $1,674 2001 1,280 2002 1,084 2003 214 2004 and Thereafter 6 ================================ ========= Total Minimum Payments Required $4,258 ================================ =========
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, 1999 and 1998 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): 42 43
Three Months Ended ----------------------------------------------------------------------- March 31, June 30, September 30, December 31, 1999 1999 1999 1999 -------------- --------------- ---------------- -------------- Net Earned Premiums $ 36,764 $ 39,153 $ 45,208 $ 43,790 Net Investment Income $ 4,854 $ 4,996 $ 5,411 $ 5,434 Net Realized Investment Gain (Loss) $ (490) $ 5,683 $ 48 $ 459 Net Loss and Loss Adjustment Expenses $ 20,262 $ 21,615 $ 32,652 $ 24,881 Acquisition Costs and Other Underwriting Expenses $ 11,777 $ 12,087 $ 14,958 $ 14,971 Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust $ 1,811 $ 1,812 $ 1,811 $ 1,811 Net Income $ 4,937 $ 9,240 $ 612 $ 4,054 Basic Earnings Per Share $0.40 $0.76 $0.05 $0.32 Diluted Earnings Per Share $0.33 $0.61 $0.04 $0.27 Weighted-Average Common Shares Outstanding 12,209,391 12,236,221 12,964,320 12,585,504 Weighted-Average Share Equivalents Outstanding 2,823,711 2,863,849 2,688,167 2,476,611 ----------- ----------- ------------ ----------- Weighted-Average Shares and Share Equivalents Outstanding 15,033,102 15,100,070 15,652,487 15,062,115 =========== =========== ============ ===========
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 =========== =========== ============ ===========
17. Segment Information The Company's operations are classified into four reportable business segments: The Commercial Lines Underwriting Group which has underwriting responsibility for the Commercial Automobile and Commercial multi-peril package insurance products; The Specialty Lines Underwriting Group which has underwriting responsibility for the professional liability insurance products; The Specialty Property Underwriting Group which has underwriting responsibility for the large property and Inland Marine insurance products; and The Personal Lines Group which designs, markets and underwrites personal property and casualty insurance products for the Mobile Homeowners and Homeowners markets. The reportable segments operate solely within the United States. 43 44 The segments follow the same accounting policies used for the Company's consolidated financial statements as described in the summary of significant accounting policies. Management evaluates a segment's performance based upon certain underwriting results. Following is a tabulation of business segment information for each of the past three years. Corporate information is included to reconcile segment data to the consolidated financial statements (in thousands): 44 45
Commercial Specialty Personal Specialty 1999: Lines Lines Lines Property Corporate Total ----- ----- ----- -------- --------- ----- Gross Written Premiums $ 179,330 $ 48,532 $ 25,414 $ 21,642 $ 274,918 --------- --------- --------- --------- --------- --------- Net Written Premiums $ 117,575 $ 40,936 $ 14,057 $ 11,503 $ 184,071 --------- --------- --------- --------- --------- --------- Revenue: Net Earned Premiums $ 111,019 $ 33,433 $ 12,859 $ 7,604 $ $ 164,915 Net Investment Income 1,546 19,149 20,695 Net Realized Investment Gain (Loss) (3) 5,703 5,700 Other Income 5,843 (1,121) 4,722 --------- --------- --------- --------- --------- --------- Total Revenue 111,019 33,433 20,245 7,604 23,731 196,032 --------- --------- --------- --------- --------- --------- Losses and Expenses: Net Loss and Loss Adjustment Expenses 66,544 17,873 9,251 5,742 99,410 Acquisition Costs and Other Underwriting Expenses 2,521 51,272 53,793 Other Operating Expenses 8,939 8,939 --------- --------- --------- --------- --------- --------- Total Losses and Expenses 66,544 17,873 11,772 5,742 60,211 162,142 --------- --------- --------- --------- --------- --------- Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust 7,245 7,245 --------- --------- --------- --------- --------- --------- Income Before Income Taxes 44,475 15,560 8,473 1,862 (43,725) 26,645 Total Income Tax Expense 7,802 7,802 --------- --------- --------- --------- --------- --------- Net Income $ 44,475 $ 15,560 $ 8,473 $ 1,862 $ (51,527) $ 18,843 ========= ========= ========= ========= ========= ========= Total Assets $ 98,503 $ 500,548 $ 599,051 ========= ========= ========= ========= ========= ========= 1998: Gross Written Premiums $ 162,058 $ 30,396 $ 3,850 $ 1,104 $ 197,408 --------- --------- --------- --------- --------- --------- Net Written Premiums $ 112,497 $ 26,095 $ 3,433 $ 1,011 $ 143,036 --------- --------- --------- --------- --------- --------- Revenue: Net Earned Premiums $ 101,954 $ 20,024 $ 624 $ 85 $ 122,687 Net Investment Income 15,448 15,448 Net Realized Investment Gain 474 474 Other Income 219 219 --------- --------- --------- --------- --------- --------- Total Revenue 101,954 20,024 624 85 16,141 138,828 --------- --------- --------- --------- --------- --------- Losses and Expenses: Net Loss and Loss Adjustment Expenses 54,179 11,764 356 75 66,374 Acquisition Costs and Other Underwriting Expenses 38,422 38,422 Other Operating Expenses 2,212 2,212 --------- --------- --------- --------- --------- --------- Total Losses and Expenses 54,179 11,764 356 75 40,634 107,008 --------- --------- --------- --------- --------- --------- Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust 4,770 4,770 --------- --------- --------- --------- --------- --------- Income Before Income Taxes 47,775 8,260 268 10 (29,263) 27,050 Total Income Tax Expense 7,022 7,022 --------- --------- --------- --------- --------- --------- Net Income $ 47,775 $ 8,260 $ 268 $ 10 $ (36,285) $ 20,028 ========= ========= ========= ========= ========= ========= Total Assets $ 476,390 $ 476,390 ========= ========= ========= ========= ========= ========= 1997: Gross Written Premiums $ 138,343 $ 20,748 $ 159,091 --------- --------- --------- --------- --------- -------- Net Written Premiums $ 92,614 $ 19,183 $ 111,797 --------- --------- --------- --------- --------- -------- Revenue: Net Earned Premiums $ 84,615 $ 15,940 $ 100,555 Net Investment Income 9,703 9,703 Net Realized Investment Loss (16) (16) Other Income 228 228 --------- --------- --------- --------- --------- -------- Total Revenue 84,615 15,940 9,915 110,470 --------- --------- --------- --------- --------- -------- Losses and Expenses: Net Loss and Loss Adjustment Expenses 45,553 9,456 55,009 Acquisition Costs and Other Underwriting Expenses 31,344 31,344 Other Operating Expenses 1,909 1,909 --------- --------- --------- --------- --------- -------- Total Losses and Expenses 45,553 9,456 33,253 88,262 --------- --------- --------- --------- --------- -------- Income Before Income Taxes 39,062 6,484 (23,338) 22,208 Total Income Tax Expense 5,338 5,338 --------- --------- --------- --------- --------- -------- Net Income $ 39,062 $ 6,484 $ (28,676) $ 16,870 ========= ========= ========= ========= ========= ======== Total Assets $ 292,724 $ 292,724 ========= ========= ========= ========= ========= ========
45 46 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 Grants", "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 24 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.
46 47 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. 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.
47 48 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. 10.42 *********** Plan and Agreement of Merger Between Philadelphia Consolidated Holding Corp. and The Jerger Co. 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 as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. *********** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. ************ 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 1999. 48 49 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 and Chief Executive Officer March 27, 2000 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 --------- ----- ---- /s/ James J. Maguire Chairman of the Board of March 27, 2000 -------------------------------- Directors and Chief Executive James J. Maguire Officer (Principal Executive Officer) /s/ Craig P. Keller Senior Vice President, Secretary, Treasurer, March 27, 2000 -------------------------------- and Chief Financial Officer Craig P. Keller (Principal Financial and Accounting Officer) /s/ James J. Maguire, Jr. President & COO, Director March 27, 2000 -------------------------------- James J. Maguire, Jr. /s/ Sean S. Sweeney Executive Vice President, Director March 27, 2000 -------------------------------- Sean S. Sweeney /s/ William J. Henrich, Jr. Director March 27, 2000 -------------------------------- William J. Henrich, Jr. /s/ Paul R. Hertel, Jr. Director March 27, 2000 -------------------------------- Paul R. Hertel, Jr. /s/ Roger L. Larson Director March 27, 2000 -------------------------------- Roger L. Larson Thomas J. McHugh Director March 27, 2000 -------------------------------- Thomas J. McHugh /s/ Michael J. Morris Director March 27, 2000 -------------------------------- Michael J. Morris Dirk A. Stuurop Director March 27, 2000 -------------------------------- Dirk A. Stuurop /s/ J. Eustace Wolfington Director March 27, 2000 -------------------------------- J. Eustace Wolfington
49 50 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule I - Summary of Investments - Other than Investments in Related Parties As of December 31, 1999 (Dollars in Thousands)
COLUMN A COLUMN B COLUMN C COLUMN D Estimated Amount at which Market shown in the Balance Type of Investment Cost * Value Sheet - ------------------ ------ ----- ----- Fixed Maturities: Bonds: United States Government and Government Agencies and Authorities $ 43,752 $ 42,500 $ 42,500 States, Municipalities and Political Subdivisions 123,317 122,323 122,323 Public Utilities 5,015 4,776 4,776 All Other Corporate Bonds 157,475 149,466 149,466 Redeemable Preferred Stock 2,215 1,953 1,953 --------- -------- -------- Total Fixed Maturities 331,774 321,018 321,018 --------- -------- -------- Equity Securities: Common Stocks: Public Utilities 438 479 479 Banks, Trust and Insurance Companies 2,718 6,007 6,007 Industrial, Miscellaneous and all other 38,075 66,282 66,282 --------- -------- -------- Total Equity Securities 41,231 72,768 72,768 --------- -------- -------- Total Investments $ 373,005 $393,786 $393,786 --------- -------- --------
* Original cost of equity securities; original cost of fixed maturities adjusted for amortization of premiums and accretion of discounts. S-1 51 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, ------------------ 1999 1998 ---- ---- ASSETS Cash and Cash Equivalents $ (15) $ (65) Equity in and Advances to Unconsolidated Subsidiaries (a) 258,722 238,292 Income Taxes Recoverable 2,775 Other Assets 3 14 --------- --------- Total Assets $ 261,485 $ 238,241 ========= ========= LIABILITIES AND SHAREHOLDERS" EQUITY Income Taxes Payable $ $ 675 Other Liabilities 1,140 1,178 --------- --------- Total Liabilities 1,140 1,853 --------- --------- Minority Interest in Consolidated Subsidiaries: Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Debentures of Company 98,905 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, 13,381,924 and 12,330,825 Shares Issued 68,859 44,796 Notes Receivable from Shareholders (2,506) (1,680) Accumulated Other Comprehensive Income 13,507 22,417 Retained Earnings 93,766 74,923 Less Cost of Common Stock held in Treasury, 791,016 and 130,262 Shares (12,186) (2,973) --------- --------- Total Shareholders" Equity 161,440 137,483 --------- --------- Total Liabilities and Shareholders" Equity $ 261,485 $ 238,241 ========= =========
(a) These items have been eliminated in the Company's Consolidated Financial Statements. See Notes to Consolidated Financial Statements included in Item 8, pages 30-45. S-2 52 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, -------------------------------- 1999 1998 1997 ---- ---- ---- Revenue: Dividends from Subsidiaries (a) $ 65,356 $ 5,470 $ Net Investment Income 2,598 10 Net Realized Investment Loss (b) (671) -------- -------- -------- Total Revenue 65,356 7,397 10 -------- -------- -------- Other Expenses 684 725 540 -------- -------- -------- Total Expenses 684 725 540 -------- -------- -------- Minority Interest: Distributions on Company Mandatorily Redeemable Preferred Securities of Subsidiary Trust 7,245 4,770 -------- -------- -------- Income, (Loss) Before Income Taxes and Equity in Earnings of Unconsolidated Subsidiaries 57,427 1,902 (530) Income Tax Expense (Benefit) (2,775) 675 (162) -------- -------- -------- Income, (Loss) Before Equity in Earnings of Unconsolidated Subsidiaries 60,202 1,227 (368) Equity in Earnings of Unconsolidated Subsidiaries (41,359) 18,801 17,238 -------- -------- -------- Net Income $ 18,843 $ 20,028 $ 16,870 ======== ======== ========
(a) These items have been eliminated in the Company's Consolidated Financial Statements. (b) $31 of this amount has been eliminated in the Company's Consolidated Financial Statements for 1998. See Notes to Consolidated Financial Statements included in Item 8, pages 30-45. S-3 53 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, ---------------------------------------------- 1999 1998 1997 ---- ---- ---- Cash Flows From Operating Activities: Net Income $ 18,843 $ 20,028 $ 16,870 Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: Net Realized Investment Loss 671 Amortization Expense (Income) (145) 68 Equity in Earnings of Unconsolidated Subsidiaries 41,359 (18,801) (17,238) Change in Other Liabilities (37) 1,019 (16) Change in Other Assets 11 575 10 Change in Income Taxes Recoverable (2,775) Change in Income Taxes Payable (675) 837 (584) --------- --------- --------- Net Cash Provided (Used) by Operating Activities 56,726 4,184 (890) --------- --------- --------- Cash Flows Used by Investing Activities: Proceeds From Maturity of Investments in Fixed Maturities Available for Sale 569 Proceeds From Sales of Investments in Equity Securities 2,427 Cost of Fixed Maturities Available for Sale Acquired (62,753) Cost of Equity Securities Acquired (13,721) Payment for Acquisition (25,676) Net Transfers to Subsidiaries (a) (20,023) (28,450) (581) --------- --------- --------- Net Cash Used by Investing Activities (45,699) (101,928) (581) --------- --------- --------- 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 458 724 723 Collection of Notes Receivable 619 570 375 Proceeds from Shares Pursuant to Employee Stock Purchase Plan 27 25 25 Cost of Common Stock Repurchased (12,081) (3,100) --------- --------- --------- Net Cash Provided (Used) by Financing Activities (10,977) 97,682 1,123 --------- --------- --------- Net Increase (Decrease) in Cash and Equivalents 50 (62) (348) Cash and Cash Equivalents at Beginning of Year (65) (3) 345 --------- --------- --------- Cash and Cash Equivalents at End of Year $ (15) $ (65) $ (3) ========= ========= ========= Cash Dividends Received From Unconsolidated Subsidiaries $ 65,356 $ 5,470 $ ========= ========= ========= Non-Cash Transactions: Issuance of Shares Pursuant to Employee Stock Purchase Plan in exchange for Notes Receivable $ 1,445 $ 828 $ 873 Acquisitions Fair Value of Assets Acquired $ 77,310 Cash Paid (25,676) Common Stock Issued (25,000) --------- Liabilities Assumed $ 26,634 =========
(a) This item has been eliminated in the Company's Consolidated Financial Statements. See Notes to Consolidated Financial Statements included in Item 8, pages 30-45. S-4 54 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule III - Supplementary Insurance Information As of and For the Year Ended December 31, 1999, 1998 and 1997 (In Thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G Future Policy Benefits, Deferred Losses, Other Policy Policy Claims and Claims and Net Acquisition Loss Unearned Benefits Premium Investment Segment Costs Expenses Premiums Payable Revenue Income 1999: Commercial Lines $ $143,180 $ 53,279 $111,019 $ Specialty Lines 35,314 27,236 33,433 Personal Lines 7,832 21,408 12,859 1,546 Specialty Property 1,737 9,683 7,604 Corporate 26,054 19,149 -------- -------- -------- -------- -------- Total $ 26,054 $188,063 $111,606 $164,915 $ 20,695 ======== ======== ======== ======== ======== 1998: Commercial Lines $ $125,656 $ 42,882 $101,954 $ Specialty Lines 24,981 18,086 20,024 Personal Lines 461 2,809 624 Specialty Property 52 1,010 85 Corporate 16,853 15,448 -------- -------- -------- -------- -------- Total $ 16,853 $151,150 $ 64,787 $122,687 $ 15,448 ======== ======== ======== ======== ======== 1997 Commercial Lines $ 84,615 $ Specialty Lines 15,940 Personal Lines Specialty Property Corporate 9,703 -------- -------- Total $100,555 $ 9,703 ======== ========
COLUMN A COLUMN H COLUMN I COLUMN J COLUMN K Benefits, Amortization Claims, of Deferred Losses, and Policy Other Settlement Acquisition Operating Premiums Segment Expenses Costs Expenses Written 1999: Commercial Lines $ 66,544 $ $ $117,575 Specialty Lines 17,873 40,936 Personal Lines 9,251 14,057 Specialty Property 5,742 11,503 Corporate 46,451 8,939 -------- ---------- ---------- -------- Total $ 99,410 $ 46,451 $ 8,939 $184,071 ======== ========== ========== ======== 1998: Commercial Lines $ 54,179 $ $ $112,497 Specialty Lines 11,764 26,095 Personal Lines 356 3,433 Specialty Property 75 1,011 Corporate 30,034 2,212 -------- ---------- ---------- -------- Total $ 66,374 $ 30,034 $ 2,212 $143,036 ======== ========== ========== ======== 1997 Commercial Lines $ 45,553 $ $ $ 92,614 Specialty Lines 9,456 19,183 Personal Lines Specialty Property Corporate 25,034 1,909 -------- ---------- ---------- -------- Total $ 55,009 $ 25,034 $ 1,909 $111,797 ======== ========== ========== ========
S-5 55 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule IV - Reinsurance Earned Premiums For the Years Ended December 31, 1999, 1998 and 1997 (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 Assumed to Amount Companies Companies Net Amount Net ------ --------- --------- ---------- --- 1999 Property and Casualty Insurance $ 243,667 $83,091 $4,339 $164,915 2.6% 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%
S-6 56 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule VI - Supplemental Information Concerning Property - Casualty Insurance Operations As of and For the Years Ended December 31, 1999, 1998 and 1997 (Dollars in Thousands)
Reserve for Deferred Unpaid Policy Claims and Discount if Net Affiliation with Acquisition Claim any Unearned Earned Registrant Costs Adjustment deducted in Premiums Premiums Expenses Column C COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F Consolidated Property - - Casualty Entities December 31, 1999 $ 26,054 $ 188,063 $ 0 $ 111,606 $ 164,915 December 31, 1998 $ 16,853 $ 151,150 $ 0 $ 64,787 $ 122,687 December 31, 1997 $ 10,970 $ 122,430 $ 0 $ 42,116 $ 100,555
Claims and Claims Adjustment Expenses Incurred Related to
Amortization of deferred policy Paid Claims Net (1) (2) acquisition costs and Claim Investment Current Prior Adjustment Net Written Income Year Year Expenses Premiums COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K Consolidated Property - - Casualty Entities December 31, 1999 $ 20,695 $ 99,663 $ (253) $ 46,451 $ 75,262 $ 184,071 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
S-7 57 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES Exhibit Index For the Year Ended December 31, 1999
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) P. 57 58 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 ********** Inspire Software License Agreement, dated December 31, 1998.
(E-2) P. 58 59 10.41 ********** Lease Agreement dated July 6, 1998 with Bala Plaza, Inc. 10.42 *********** Plan and Agreement of Merger Between Philadelphia Consolidated Holding Corp. and The Jerger Co. Inc. 11 ************ Page 60 of 67 Statement regarding computation of earnings per share. 21 * List of Subsidiaries of the Registrant. 23 ************ Page 62 of 67 Consent of PricewaterhouseCoopers LLP 24 * Power of Attorney 27 ************ Page 64 of 67 Financial Data Schedule 99.1 ************ Page 66 of 67 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 as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. *********** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. ************ 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 1999. (E-3) P. 59 EX-11 2 STATEMENT REGARDING EARNINGS PER SHARE 1 Philadelphia Consolidated Holding Corp. and Subsidiaries Computation of Earnings Per Share (Dollars and Share Data in Thousands, Except Per Share Data)
As of and For the Years Ended December 31, ------------------------------------------------------------ 1999 1998 1997 --------------- -------------- ------------- Weighted-Average Common Shares Outstanding 12,501 12,249 12,194 Weighted-Average Share Equivalents Outstanding 2,615 2,680 2,736 ----- ----- ----- Weighted-Average Shares and Share Equivalents Outstanding 15,116 14,929 14,930 ------ ------ ------ Net Income $18,843 $20,028 $16,870 ======= ======= ======= Basic Earnings Per Share $1.51 $1.63 $1.38 ----- ----- ----- Diluted Earnings Per Share $1.25 $1.34 $1.13 ===== ===== =====
Page 61 of 65 EX-23 3 CONSENT OF PRICEWATERHOUSECOOPERS, LLP 1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (No. 33-96604, No. 333-29643 and No. 333-29647) of Philadelphia Consolidated Holding Corp. of our reports dated February 11, 2000 relating to the consolidated financial statements and financial statement schedules which appear in this Form 10-K. /s/ PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 28, 2000 EX-27 4 FINANCIAL DATA SCHEDULE
7 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 321,018 0 0 72,768 0 0 393,786 26,230 6,266 26,054 599,051 188,063 111,606 0 0 0 0 0 68,859 92,581 599,051 164,915 20,695 5,700 4,722 99,410 53,793 8,939 26,645 7,802 18,843 0 0 0 18,843 1.51 1.25 137,205 99,663 (253) 31,493 43,769 161,353 0 UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES DIFFER FROM THE AMOUNTS REPORTED IN THE CONSOLIDATED FINANCIAL STATEMENTS BECAUSE OF THE INCLUSION HEREIN OF REINSURANCE RECEIVEABLES OF $26,710 AND $16,120 AT DECEMBER 31, 1999 AND 1998, RESPECTIVELY. ADJUSTED TO INCLUDE $2,175 NET UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES FOR MOBILE USA INSURANCE COMPANY AS OF ACQUISITION DATE.
EX-99.1 5 REPORT OF INDEPENDANT ACCOUNTANTS 1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Philadelphia Consolidated Holding Corp.: Our audits of the consolidated financial statements of Philadelphia Consolidated Holding Corp. and Subsidiaries appearing in this Form 10-K also included an audit of the financial statement schedules listed in the index on page 24 of this Form 10-K. In our opinion, the financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 11, 2000 -----END PRIVACY-ENHANCED MESSAGE-----