-----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, VdZ4SzNeLPYiOgV/EZ/0Nz5x2zY6BI6gdyYJiMOuVjuMURd3pucv6ejwWZbsfm8I d/9kOUMuv3YoTgd+oOHOIQ== 0000893220-01-000398.txt : 20010402 0000893220-01-000398.hdr.sgml : 20010402 ACCESSION NUMBER: 0000893220-01-000398 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 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-K SEC ACT: SEC FILE NUMBER: 000-22280 FILM NUMBER: 1587306 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-K 1 w47222e10-k.txt FORM 10-K PHILADELPHIA CONSOLIDATED HOLDING CORP. 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, 2000 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 /X/ NO / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on March 27, 2001 as reported on the NASDAQ National Market System, was $135,848,711. 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, 2001, Registrant had outstanding 13,523,397 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the definitive Proxy Statement for Registrant's 2001 Annual Meeting of Shareholders to be held May 3, 2001 are incorporated by reference in Part III. 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 Liberty American Premium Finance Company; and (vii) "PCHC Investment" refers to PCHC Investment Corp., an investment holding company. Philadelphia Insurance was incorporated in Pennsylvania in 1984, as an insurance holding company. Liberty American Insurance Group, Inc. ("Liberty") (formerly The Jerger Company, Inc.), a Delaware Insurance Holding Corp., and its subsidiaries consists of MUSA, LAIC, MHIA and Premium Finance. During 2000, the Company continued its growth through adherence to its core philosophies of specialization, mixed marketing and profitable underwriting. 2000 gross written premiums increased 31.6% to $361.9 million, the GAAP basis combined ratio (the sum of the net loss and loss adjustment expenses and acquisition costs and other underwriting expenses divided by net earned premiums) was 90.8%, which, once again, was substantially lower than the property and casualty industry as a whole, total assets increased to $730.5 million, and shareholders' equity increased to $182.3 million. For 2001, A.M. Best Company reaffirmed the "A+" (superior) rating for PIIC, PIC, MUSA and LAIC. Additionally, PIIC and PIC had been assigned an "A" claims paying ability rating by Standard and Poor's for 2000. 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 135 professionals at year-end 2000 operates from 37 regional offices located across the United States, and includes telemarketing staffs at its regional offices and the Philadelphia home office. Business Segments The Company's operations are classified into three reportable business segments: the Commercial Lines Underwriting Group ("Commercial Lines"), which has underwriting responsibility for the Commercial multi-peril package, Commercial Automobile and the Specialty Property and Inland Marine insurance products; the Specialty Lines Underwriting Group ("Specialty Lines"), which has underwriting responsibility for the Errors and Omissions and Directors' and Officers' liability insurance products; and the Personal Lines Group ("Personal Lines"), which designs, markets and underwrites personal property and casualty insurance products for the manufactured housing and homeowners markets. 2 3 The following table sets forth, for the years ended December 31, 2000, 1999 and 1998, 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, ------------------------------------------------------------------------------ 2000 1999 1998 ---- ---- ---- Dollars Percentage Dollars Percentage Dollars Percentage ------- ---------- ------- ---------- ------- ---------- (dollars in thousands) Commercial Lines......................... $ 239,446 66.2% $ 200,972 73.1% $ 163,162 82.7% Specialty Lines........................... 68,193 18.8 48,532 17.7 30,396 15.4 Personal Lines............................ 54,233 15.0 25,414 9.2 3,850 1.9 ---------- ----- ---------- ----- ---------- ----- Total..................................... $ 361,872 100.0% $ 274,918 100.0% $ 197,408 100.0% ========== ===== ========== ===== ========== =====
Commercial Lines: Commercial Package: The Company has been providing Commercial Multi-Peril Package Policies ("Package Programs") to specific targeted niche markets for over 15 years. Among the organizations to which the Company offers its specialty niche package programs are non-profit and social service, health and fitness, homeowners associations, specialty schools, 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, $50.0 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. 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. The Company differentiates its rental car products and services through the inclusion of special features. 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. Specialty Property & Inland Marine: The Company also has provided specialty property and inland marine policies since 1998 targeting large property and inland marine risks. Products include the Ultimate Cover(R) Policy, which is designed to insure a wide range of business entities from shopping centers to hotels to educational facilities. The Company believes that the Ultimate Cover(R) 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 3 4 products, the Company concentrates its efforts on the larger segments of the inland marine market including builders' risk and miscellaneous property floaters. Specialty Lines: The Company has been providing specialty professional liability products for approximately thirteen years, specializing in non-ISO, proprietary policies developed primarily for the professional liability, employment practices and directors and officers liability markets. The professional liability products provide errors and omissions coverage for lawyers, accountants, dentists and other 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. Personal Lines: The Company entered the personal lines property and casualty business through the acquisition of Liberty in 1999. With Liberty as its personal lines platform, the Company produces and underwrites specialized manufactured homeowners and homeowners property and casualty business, principally in Florida, California, Arizona and Nevada, and is expanding into New Jersey, Pennsylvania, and Colorado. The Company also writes and services federal flood insurance with the National Flood Insurance Program. Products offered include manufactured housing insurance for senior citizen retirees in "preferred" parks, a program for newly constructed manufactured homes on private property; and a preferred homeowners program that targets newer homes valued between $100,000 and $250,000 in protected, retiree subdivisions. There is also a homeowners program excluding wind exposure for coastal counties with the Florida Windstorm Underwriting Association insuring wind exposure. 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, 2000. No other state accounted for more than 2% of total direct earned premiums for all product lines for the year ended December 31, 2000 (dollars in thousands).
State Direct Earned Premiums Percent of Total ----- ---------------------- ---------------- Florida.................................... $79,139 24.8% California................................. 41,834 13.1 New York................................... 21,994 6.9 Texas...................................... 13,805 4.3 Pennsylvania............................... 11,863 3.7 New Jersey................................. 11,506 3.6 Ohio....................................... 11,235 3.5 Illinois................................... 10,761 3.4 Massachusetts.............................. 9,140 2.9 Minnesota.................................. 6,836 2.1 Washington 6,278 2.0 Other...................................... 95,200 29.7 -------- ----- Total Direct Earned Premiums............... $319,591 100.0% ======== =====
Underwriting and Pricing The Company's business segments are organized around its three underwriting divisions: Commercial Lines, Specialty Lines, 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 has underwriting responsibility for the Company's commercial package, commercial automobile and large property and inland marine products. The Commercial Lines Underwriting group currently consists of 20 home office underwriters that are supported by underwriting assistants, raters, and other policy administration personnel. The Commercial Lines home office underwriters and support staff are organized into an underwriting unit 4 5 responsible for underwriting and servicing renewal business and supporting the field underwriters. The underwriting unit is under the direction of an Underwriter Manager who reports to the Vice President of Commercial Lines Underwriting. The Company has also placed underwriters in each of the Company's regional marketing offices plus two of its field offices. These 11 underwriters have responsibility for pricing and underwriting new business within the Company's guidelines and policy issuance. Overall management of the book of business resides in the home office with the senior underwriting officers. The Company believes that its ability to deliver excellent service and build long lasting relationships is enhanced through maintaining a localized presence. The Specialty Lines underwriting group consists of 21 home office underwriters and underwriter trainees and 10 regional underwriters who report to the Assistant Vice President of Specialty Lines Underwriting. These underwriters and underwriter trainees are supported by underwriting assistants, raters, and other policy administration personnel. The Specialty Lines underwriters have responsibility for underwriting specific professional liability products within designated Company marketing regions. These regional underwriters work closely with the marketing department to generate profitable business. The Personal Lines Group is located in Pinellas Park, Florida. The underwriting staff consists of 13 professionals who are under the direction of the Personal Lines Underwriting Vice President. Much of the underwriting function is automated by rating software and the internet. The underwriting guidelines are embedded within the program and will not allow binding of accounts if a risk is ineligible. The Company has a proactive exposure distribution management system in place to assure portfolio optimization. This is managed on a zip code level basis through in-house software and external modeling tools. The Company inspects all risks on its new preferred homeowners program and manufactured homes on private property. 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 adhere to conservative underwriting and pricing practices. The Company's underwriting strategy is detailed in an "Underwriting Performance Goals" document, i.e., "Code of Business Conduct", which is signed by each underwriting professional. 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. When necessary, the Company is willing to re-underwrite, sharply curtail or discontinue a product deemed to present unacceptable risks. 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 $0.250 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's property excess of loss reinsurance treaty provides that the Company bears the first layer of loss on each risk (varying from $0.250 million to $0.50 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 $50.0 million. Additionally, the Company has property catastrophe reinsurance for its commercial and personal property books of business under which the Company bears the first $2.0 million in catastrophe losses per event, with the reinsurers bearing the next $164.0 million, except that, outside of Florida, the Company bears the first $2.0 million in catastrophe losses per event, with reinsurers bearing the next $3.0 million on its commercial property book of business. Based upon the various modeling methods utilized by the Company to estimate its probable 5 6 maximum loss, the Company currently maintains catastrophe reinsurance coverage for the 250 year storm event on personal lines business and the 100 year storm event on its commercial lines business. 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. Effective January 1, 2000, the Company entered into a three-year aggregate stop loss reinsurance agreement commencing with the 2000 accident year. The agreement included all the business written by the Company. Under the terms of the agreement, the reinsurer provided 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, in the fourth quarter of 2000, commuted the aggregate stop loss agreement for accident year 2000. There was no gain or loss resulting from the commutation, and the Company is renegotiating a three-year aggregate stop loss agreement commencing with the 2001 accident year. 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 through the regular monitoring of reinsurance receivables. Finally, the Company typically does not write casualty policies in excess of $11.0 million or property policies in excess of $25.0 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 distributes its products through its direct production underwriting organization, an extensive network of approximately 5,000 independent brokers and its "preferred agent" program. The Company's most important distribution channel is its production underwriting organization. Although the Company has always written business directly, the production underwriting organization was established by the Company to coordinate its direct sales efforts as well as act as the interface with the Company's external producers. The production underwriting organization is currently comprised of 135 professionals located in 37 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 5,000 brokers have been formed either because the broker has a preexisting relationship with the insured or has sought the Company's expertise in one of its specialty products. This mixed marketing concept provides the Company with the flexibility to respond to changing market conditions and, when appropriate, shift its emphasis between direct and indirect marketing approaches to seize opportunities as they arise. In addition, the production underwriting organization's ability to gather market intelligence enables the rapid identification of soft markets and redeployment to firmer markets, from a product line or geographic perspective. The Company believes that its mixed marketing platform provides a competitive edge in stable market conditions, the strengths of which are all the more evident during periods of dislocation or consolidation. The Company's preferred agent program, wherein business relationships are formed with brokers specializing in certain of the Company's business niches, consisted of 61 preferred agents at year-end 2000. Preferred Agents are identified by the Company based on productivity and loss experience and receive additional benefits from the Company in exchange for meeting defined production and profitability criteria. The Company supplements its marketing efforts through affinity programs, trade shows, direct mailings and national advertisements placed in trade magazines serving industries in which the Company specializes, as well as links to industry web sites. The Company has also enhanced its marketing with Internet-based initiatives such as: the Personal Lines Division's "In Touch(SM)" real-time policy inquiry system which allows agents to view account data, process non-dollar endorsements and in certain states, and for certain products, rate a policy over the internet, and the Specialty Lines Division's 6 7 partnership with a managing underwriter to offer select Errors and Omissions and Directors' and Officers' liability products over the internet. 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 adequate reserves, an important factor in the Company's reserve development over the years. The Company's experienced staff of claims management professionals are assigned to dedicated claim units within specific niche markets. Each of these units receive supervisory direction and news, legislation and product development updates from the unit director. Claims management personnel have an average of approximately twenty years of experience in the industry. The dedicated claim units meet regularly to communicate findings of change within their assigned specialty. Staff within the dedicated claim units have an average of ten years experience in the industry. 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 7 8 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 increased losses and loss adjustment expenses incurred by $2.5 million in 2000. Such development was primarily due to losses emerging at a higher rate for the 1997 and 1998 accident years than had been originally anticipated for certain products in the commercial lines segment when the initial reserves were estimated.
As of and For the Years Ended December 31, ----------------------------------------------- 2000 1999 1998 ---- ---- ---- (Dollars in Thousands) Unpaid loss and loss adjustment expenses at beginning of year (1) ........................................... $161,353 $ 137,205 $ 108,928 -------- --------- --------- Provision for losses and loss adjustment expenses for current year claims ................................................ 128,761 99,663 69,544 Increase (Decrease) in estimated ultimate losses and loss adjustment expenses for prior year claims .......................... 2,543 (253) (3,170) -------- --------- --------- Total incurred losses and loss adjustment expenses ................. 131,304 99,410 66,374 -------- --------- --------- Loss and loss adjustment expense payments for claims attributable to: Current year .................................................... 36,271 31,493 13,402 Prior years ..................................................... 60,922 43,769 26,870 -------- --------- --------- Total payments ..................................................... 97,193 75,262 40,272 -------- --------- --------- Unpaid loss and loss adjustment expenses at end of year (2) ........ $195,464 $ 161,353 $ 135,030 ======== ========= =========
(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 $42,030, $26,710 and $16,120 at December 31, 2000, 1999 and 1998, 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 1990 through 2000. 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)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES, AS STATED $15,930 $22,248 $31,981 $38,714 $53,595 $68,246 $85,723 $108,928 $136,237 $161,353 $195,464 Cumulative Paid as of: 1 year later 4,286 6,698 9,865 10,792 12,391 15,214 22,292 26,870 43,769 60,922 2 years later 8,084 12,485 16,290 19,297 23,139 31,410 38,848 56,488 84,048 3 years later 10,838 16,288 21,253 24,991 33,511 40,637 52,108 80,206 4 years later 12,907 17,780 24,299 28,903 38,461 47,994 63,738 5 years later 13,211 19,406 25,793 30,558 42,366 51,806 6 years later 13,792 19,898 26,321 32,748 43,860 7 years later 14,074 20,246 27,252 32,929 8 years later 14,329 20,625 27,336 9 years later 14,343 20,611 10 years later 14,327 Unpaid Loss and Loss Adjustment Expenses re-estimated as of End of Year: 1 year later 15,953 22,056 30,538 38,603 52,670 67,281 84,007 105,759 135,984 163,896 2 years later 15,712 21,327 30,428 38,016 52,062 66,061 81,503 103,513 138,245 3 years later 14,822 21,198 29,648 37,184 51,149 63,872 76,348 104,712 4 years later 14,811 21,118 29,306 36,272 49,805 59,085 73,992 5 years later 14,841 21,399 28,553 35,783 47,366 56,673 6 years later 14,593 21,106 28,370 34,509 45,797 7 years later 14,606 21,013 27,959 33,799 8 years later 14,596 20,854 27,724 9 years later 14,525 20,703 10 years later 14,408 Cumulative Redundancy (Deficiency) Dollars $1,522 $1,545 $4,257 $4,915 $7,798 $11,573 $11,731 $4,216 $(2,008) (2,543) Percentage 9.6% 6.9% 13.3% 12.7% 14.6% 17.0% 13.7% 3.9% (1.5)% (1.6)%
(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 $42,030, $26,710, $16,120, $13,502, $10,919, $9,440, $5,580, $5,539, $1,770, $1,267 and $1,672 at December 31, 2000, 1999, 1998, 1997, 1996, 1995, 1994, 1993, 1992, 1991 and 1990, 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 (deficiency) 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, ------------------------------------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Loss Ratio ........................................... 57.8% 59.7% 54.1% 55.3% 55.7% Expense Ratio ........................................ 31.3% 33.6% 31.0% 29.1% 31.1% ----- ----- ----- ----- ----- Combined Ratio ....................................... 89.1% 93.3% 85.1% 84.4% 86.8% ===== ===== ===== ===== ===== Industry Combined Ratio after Policyholders' Dividends 110.3% 107.8% 105.6% 101.6% 105.8% ====== ====== ====== ====== ====== (1) (2) (2) (2) (2)
(1) Source: Best's Review/Preview PC 2001 (Estimated 2000). (2) Source: Best's Review/Preview PC 2001 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, ---------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Dollars in Thousands) Net Written Premiums (1).............. $263,637 $195,258 $143,036 $111,797 $83,994 Policyholders' Surplus................ $193,292 $179,341 $152,336 $105,985 $81,906 Premium to Surplus Ratio (1).......... 1.4 to 1.0 1.1 to 1.0 1.0 to 1.0 1.0 to 1.0 1.0 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 is 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, 2000, the Company had total investments with a carrying value of $437.3 million and 90.3% 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 shorter tranche securities possessing favorable pre-payment risk profiles. The remaining 9.7% 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, 2000:
Estimated Percent of Market Carrying Carrying Amortized Cost Value Value Value -------------- ----- ----- ----- (Dollars in Thousands) Fixed Maturities: Obligations of States and Political Subdivisions .................... $ 82,596 $ 86,613 $ 86,613 19.8% U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies ............. 21,719 21,875 21,875 5.0 Corporate and Bank Debt Securities 115,684 115,513 115,513 26.4 Collateralized Mortgage Securities 65,637 66,820 66,820 15.3 Asset Backed Securities .................. 106,803 103,912 103,912 23.8 Equity Securities .......................... 24,087 42,553 42,553 9.7 -------- -------- -------- ----- Total Investments ..................... $416,526 $437,286 $437,286 100.0% ======== ======== ======== =====
At December 31, 2000, approximately 99.0% of the Insurance Subsidiaries' fixed maturity securities (cost basis) consisted of U.S. government securities or securities rated "1" or "2" by the NAIC. Additionally, the Company's fixed maturities possessed an average lowest quality rating of "AA". The cost and estimated market value of fixed maturity securities at December 31, 2000, by remaining original contractual maturity, are set forth below. Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations, with or without call or prepayment penalties:
Amortized Cost Estimated Market Value -------------- ---------------------- (Dollars in Thousands) Due in one year or less....................................... $ 10,845 $ 10,870 Due after one year through five years......................... 104,561 105,821 Due after five years through ten years........................ 41,295 42,706 Due after ten years........................................... 63,297 64,602 Collateralized Mortgage and Asset Backed Securities........... 172,441 170,734 ------------- -------------- Total.................................................... $ 392,439 $ 394,733 ============= ==============
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 $96.6 million at December 31, 2000. Of this amount, the Insurance Subsidiaries are entitled to pay a total of approximately $24.6 million of dividends in 2001 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, 2000 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, 2000, 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 at this time. 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 5,000 brokers, thus facilitating a regular flow of submissions. Employees As of March 22, 2001, the Company had 534 full-time employees and 26 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 36 offices for its field marketing organization. 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 2000. 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 21, 2001, there were 368 holders of record and 1,865 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:
2000 1999 ------- ------------------------ --------------------------- Quarter High Low High Low ------- ---- --- ---- --- First 16.000 14.250 24.094 19.563 Second 18.090 14.580 25.375 21.000 Third 20.880 15.690 24.375 12.688 Fourth 30.880 20.000 16.313 13.688
The Company did not declare cash dividends on its common stock in 2000 and 1999, 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, 2000, 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) 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Operations and Comprehensive Income Statement Data: Gross Written Premiums................ $ 361,872 $ 274,918 $ 197,408 $ 159,091 $ 136,855 Gross Earned Premiums................. $ 328,350 $ 245,978 $ 174,737 $ 150,128 $ 121,820 Net Written Premiums.................. $ 263,429 $ 184,071 $ 143,036 $ 111,797 $ 83,994 Net Earned Premiums................... $ 227,292 $ 164,915 $ 122,687 $ 100,555 $ 72,050 Net Investment Income................. 25,803 20,695 15,448 9,703 7,910 Net Realized Investment Gain (Loss)... 11,718 5,700 474 (16) 260 Other Income.......................... 8,981 4,722 219 228 282 - ---------------------------------------------------------------------------------------------------------------------------------- Total Revenue.................... 273,794 196,032 138,828 110,470 80,502 - ---------------------------------------------------------------------------------------------------------------------------------- Net Loss and Loss Adjustment Expenses........................... 131,304 99,410 66,374 55,009 40,118 Acquisition Costs and Other Underwriting Expenses.............. 75,054 53,793 38,422 31,344 22,210 Other Operating Expenses.............. 14,679 8,939 2,212 1,909 1,386 - ---------------------------------------------------------------------------------------------------------------------------------- Total Losses and Expenses........ 221,037 162,142 107,008 88,262 63,714 - ---------------------------------------------------------------------------------------------------------------------------------- Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust................... 7,245 7,245 4,770 - ---------------------------------------------------------------------------------------------------------------------------------- Income Before Income Taxes............ 45,512 26,645 27,050 22,208 16,788 Total Income Tax Expense.............. 14,742 7,802 7,022 5,338 3,414 - ---------------------------------------------------------------------------------------------------------------------------------- Net Income....................... $ 30,770 $ 18,843 $ 20,028 $ 16,870 $ 13,374 - ---------------------------------------------------------------------------------------------------------------------------------- Weighted-Average Common Shares Outstanding (1).................... 12,177,989 12,501,165 12,249,262 12,193,659 11,879,506 Weighted-Average Share Equivalents Outstanding (1).................... 2,411,552 2,614,399 2,680,165 2,736,039 2,373,742 - ---------------------------------------------------------------------------------------------------------------------------------- Weighted-Average Shares and Share Equivalents Outstanding (1)........ 14,589,541 15,115,564 14,929,427 14,929,698 14,253,248 - ---------------------------------------------------------------------------------------------------------------------------------- Basic Earnings Per Share (1)(2)....... $ 2.53 $ 1.51 $ 1.63 $ 1.38 $ 1.13 - ---------------------------------------------------------------------------------------------------------------------------------- Diluted Earnings Per Share(1)(2)..... $ 2.11 $ 1.25 $ 1.34 $ 1.13 $ 0.94 - ---------------------------------------------------------------------------------------------------------------------------------- Year End Financial Position: Total Investments and Cash and Cash Equivalents............. $ 487,028 $ 420,016 $ 388,059 $ 229,599 $ 180,061 Total Assets....................... 730,464 599,051 476,390 292,724 231,725 Unpaid Loss and Loss Adjustment Expenses......................... 237,494 188,063 151,150 122,430 96,642 Minority Interest in Consolidated Subsidiaries..................... 98,905 98,905 98,905 Total Shareholders' Equity......... 182,325 161,440 137,483 111,284 85,642 Common Shares Outstanding(1)....... 13,431,408 12,590,908 12,200,563 12,242,431 12,079,612 - ---------------------------------------------------------------------------------------------------------------------------------- Insurance Operating Ratios (Statutory Basis): Net Loss and Loss Adjustment Expenses to Net Earned Premiums.. 57.8% 59.7% 54.1% 55.3% 55.7% Underwriting Expenses to Net Written Premiums................. 31.3% 33.6% 31.0% 29.1% 31.1% - ---------------------------------------------------------------------------------------------------------------------------------- Combined Ratio........................ 89.1% 93.3% 85.1% 84.4% 86.8% ================================================================================================================================== A+ A+ A+ A A A.M. Best Rating...................... (Superior) (Superior) (Superior) (Excellent) (Excellent)
(1) 1996 share data restated to reflect a two-for-one split of the Company's common stock distributed in November 1997. (2) 1996 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 The Company continued its track record of growth through adherence to its core philosophies of specialization, mixed marketing and profitable underwriting. 2000 gross written premiums increased 31.6% to $361.9 million; the GAAP basis combined ratio (the sum of the net loss and loss adjustment expenses and acquisition costs and other underwriting expenses divided by net earned premiums) was 90.8%, which, once again, was substantially lower than the property and casualty industry as a whole; total assets increased to $730.5 million; and shareholders' equity increased to $182.3 million. Written premium growth occurred in all three of the Company's operating segments, including most notably the personal lines segment which grew to 15% of total gross written premium, or $54.2 million from the approximately $32.0 million of annualized manufactured housing, homeowners and national flood insurance program gross written premiums which were acquired through the 1999 acquisition of Liberty American Insurance Group, Inc. ("Liberty"). This growth occurred primarily from writing business directly which had previously been brokered to other insurance companies by Liberty due to its pre acquisition surplus limitations. The introduction of a new "preferred homeowners" insurance program targeted to retirees in gated communities with newer constructed homes and a program for newly constructed manufactured homes on private property also contributed to the growth. In July 2000, the Board of Directors authorized the repurchase of an additional $10.0 million of the Company's common stock. This authorization was in addition to the previous $30.0 million stock repurchase authorization. As of December 31, 2000 approximately $27.8 million of common stock had been repurchased since the initial authorization. For 2001, A.M. Best Company reaffirmed the "A+" (Superior) rating for Philadelphia Indemnity Insurance Company, Philadelphia Insurance Company, Mobile USA Insurance Company and Liberty American Insurance Company. Additionally, Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company had been assigned an "A" claims paying ability rating by Standard and Poor's for 2000. Investments Investments consist of diversified issuers and issues, and as of December 31, 2000, approximately 84.2% and 5.2% of the total invested assets, on a cost basis, (total investments plus cash equivalents) consisted of investments in fixed maturity and equity securities, respectively, versus 83.9% and 10.4%, respectively, at December 31, 1999. During 2000 the Company reduced the relative percentages of total investments in equity holdings through the sale of certain positions in the common stock portfolio realizing approximately $15.1 million in pretax realized investment gains. The decision to sell certain common stock positions was based on the valuation of the individual stock positions and the increased volatility in the overall equity markets. The proceeds from these common stock sales were reinvested in the fixed maturity portfolio. Additionally, the Company increased its relative percentage investments in fixed maturity securities during 2000 through the investing of cash flows from operations. Also, during 2000 the relative percentage investment in taxable fixed maturity securities versus tax-exempt fixed maturity securities continued to increase due to the Company taking advantage of the more favorable after-tax yields. At the end of 2000, on a cost basis, investment grade taxable fixed maturity securities represented 66.5% of the total invested assets, compared to 52.7% as of the end of 1999. Collateralized mortgage and asset backed securities, on a cost basis, amounted to $65.6 million and $106.8 million, respectively, as of December 31, 2000 and $48.5 and $39.4, respectively, as of December 31 1999. The increased investment in collateralized mortgage and asset backed securities was due to the relatively higher after tax rates of return compared to other investment options within the Company's investment objective of generating competitive after-tax total rates of return within a prudent level of risk and 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 collateralized mortgage and asset backed investments are shorter tranche securities possessing favorable prepayment risk profiles. The Company utilizes professional investment managers for its investments. 17 18 RESULTS OF OPERATIONS (2000 versus 1999) Premiums: Gross written premiums grew $87.0 million (31.6%) to $361.9 million in 2000 from $274.9 million in 1999; gross earned premiums grew $82.4 million (33.5%) to $328.4 million in 2000 from $246.0 million in 1999; net written premiums increased $79.3 million (43.1%) to $263.4 million in 2000 from $184.1 million in 1999; and net earned premiums grew $62.4 million (37.8%) to $227.3 million in 2000 from $164.9 million in 1999. The respective gross written premium increases for the commercial lines, specialty lines and personal lines segments for the years ended December 31, 2000 vs. December 31, 1999 amount to $38.5 million (19.2%), $19.7 million (40.6%) and $28.8 million (113.4%) respectively. The overall growth in gross written premiums is primarily attributable to the following: - - The growth of Liberty, resulting in an increase of $28.8 million in gross manufactured housing, preferred homeowners and National Flood Insurance Program written premiums. - - Recent rating downgrades of certain major competitor property and casualty insurance companies has led to their diminished presence in the Company's commercial and specialty lines business segments and continues to result in additional prospects and increased premium writings most notably for the Company's various commercial package and non-profit D&O product lines. - - The consolidation of certain competitor property and casualty insurance companies has led to the displacement of certain of its independent agency relationships which continues to result in new agency relationships for the Company which have been bringing additional prospects and premium writings for the Company's commercial and specialty lines segments. - - Continued expansion of marketing efforts relating to commercial lines and specialty lines products through the Company's field organization and preferred agents. - - Realized rate increases commencing during the latter part of 2000 on certain renewal business. - - Overall premium growth in the commercial lines segment has been offset in part by the Company's decision not to renew certain policies in the commercial automobile and specialty property product lines due to inadequate pricing levels being experienced as a result of market conditions and/or loss experience emerging at higher than expected levels. The respective net written premium increases for the commercial lines, specialty lines and personal lines segments for the years ended December 31, 2000 vs. December 31, 1999 amount to $34.4 million (26.6%), $26.9 million (65.8%) and $18.1 million (128.6%) respectively. The higher percentage increase in net written premiums versus gross written premiums for the period is primarily due to the Company, effective January 2000, increasing its liability retention on each occurrence from $250,000 to $1.0 million for all specialty lines segment business, thus reducing its reinsurance cost (ceded written premiums) and increasing its retained premiums (net written premiums). Net Investment Income: Net investment income approximated $25.8 million in 2000 and $20.7 million in 1999. Total investments grew to $437.3 million at December 31, 2000 from $393.8 million at December 31, 1999. The growth in investment income is due primarily to investing net cash flows provided from operating activities; the net investable assets acquired in the Company's acquisition of Liberty; the reinvestment of $31.4 million in proceeds from the net decrease in common stock holdings which were reinvested into fixed maturity securities; and the increase in the Company's tax equivalent book yield on its fixed income holdings to 7.37% at December 31, 2000 versus 7.08% at December 31, 1999. The Company's average duration on its fixed income portfolio approximated 3.5 years at December 31, 2000 and 4.0 years at December 31, 1999. Net Realized Investment Gain: Net realized investment gains were $11.7 million for 2000 and $5.7 million for 1999. The Company realized net investment gains of $15.1 million from the sales of common stock equity securities offset by $3.4 million of realized net investment losses from sales of certain fixed maturity securities during the year ended December 2000. The proceeds from these common stock sales were reinvested in fixed maturity securities to increase current investment income, lessen the Company's holdings in certain common stock positions, and decrease the overall percentage of investments in common stock securities. The proceeds realized from the fixed maturity sales were reinvested in fixed maturity securities with higher relative book yields than the fixed income securities sold. The net realized investment gains of $5.7 million for the year ended December 31, 1999 were due to the sales of certain fixed maturity and equity investments. A portion of the proceeds from these sales were utilized for the cash purchase price and repayment of certain obligations of the Liberty acquisition. The remaining proceeds were repositioned within the fixed maturity portfolio. 18 19 Other Income: Other income approximated $9.0 million for the year ended December 31, 2000 and $4.7 for the same period of 1999. Other income primarily consists of commissions earned by Liberty on brokered personal lines business, and for the year ended December 31, 1999 only included such income from the July 1999 acquisition date to December 31, 1999. Prospectively the Company anticipates commissions earned on brokered personal lines business to significantly decrease as the Company discontinues brokering activities in favor of writing the business directly. Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $31.9 million (32.1%) to $131.3 million in 2000 from $99.4 million in 1999 and the loss ratio decreased to 57.8% in 2000 from 60.3% in 1999. The year ended December 31, 1999 included 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 issued in prior periods and $6.1 million for unpaid loss and loss adjustment expenses related to property catastrophe losses. Excluding these items, net loss and loss adjustment expenses increased by $43.0 million (48.7%) and the loss ratio for the year ending December 31, 1999 was 53.6%. This increase in net loss and loss adjustment expenses was due principally to the following: - - 37.8% growth in net earned premiums; - - The increase in the loss ratio due to the relatively higher net earned premium growth on products (specialty lines) with higher relative loss experience; and - - Losses emerging during 2000 at a higher rate than had been originally anticipated for certain products in the commercial lines segment when the initial reserves were estimated. Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $21.3 million (39.6%), to $75.1 million in 2000 from $53.8 million in 1999. This increase was due primarily to the 37.8% growth in net earned premiums and to relative changes in the Company's product mix and associated distribution expense. Other Operating Expenses: Other operating expenses increased $5.8 million to $14.7 million in 2000 from $8.9 million for 1999. The increase in other operating expenses was primarily due to the inclusion of the operating expenses of Liberty's brokered personal lines business ($4.2 million), and goodwill amortization ($.7 million) arising from the acquisition of Liberty. Such expenses have been incurred for the entire year ending December 31, 2000, while the 1999 expenses include the period from the July 1999 acquisition date to December 31, 1999. Prospectively the Company anticipates operating expenses on brokered personal lines business to significantly decrease as the Company discontinues brokering activities in favor of writing the business directly. Income Tax Expense: The Company's effective tax rates for 2000 and 1999 were 32.4% and 29.3%, respectively. The effective rates differed from the 35% statutory rate principally due to investments in tax-exempt securities offset in part by non-deductible goodwill amortization. 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. 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. 19 20 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 PRIDES(SM) security offering for the entire year, net cash flows provided from operating activities, and the investable assets acquired in the Company's acquisition. 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. GROWTH OPPORTUNITIES The Company believes that it can continue its premium growth in its commercial and specialty lines segments due to the disruption in the market place caused by consolidation activity and certain distressed situations along with the improving fundamentals in the property and casualty industry, resulting in the opportunity for rate increases. The Company also believes its unique product features and mixed marketing strategy 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, Liberty, the Company's platform for its personal lines property and casualty business, is targeting its new preferred homeowners product and expansion of its personal lines business into new states as sources of premium growth in addition to seeking premium growth in its current markets. The Company also anticipates cross selling opportunities to arise between its personal and commercial lines business niches as well as cross selling opportunities within its preferred agency base for its portfolio of commercial niche insurance products. 20 21 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, 2000, payments to PCHC pursuant to such tax allocation agreements totaled $12.3 million. The payment of dividends to PCHC from the insurance subsidiaries is subject to certain limitations imposed by the insurance laws of the Commonwealth of Pennsylvania and State of Florida. Accumulated statutory profits of the insurance subsidiaries from which dividends may be paid totaled $96.6 million at December 31, 2000. Of this amount, the insurance subsidiaries are entitled to pay a total of approximately $24.6 million of dividends in 2001 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 among the insurance subsidiaries to support their respective participation percentages in this intercompany reinsurance 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 PRIDES(SM) and Trust Preferred securities. The sales of FELINE PRIDES(SM) consisted of 9,350,000 units of Income Prides with a stated amount of $10.00, 1,000,000 units of Growth Prides with a face amount equal to the stated amount, and 1,000,000 units of separate Trust Preferred securities with a stated amount of $10.00. 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. For the three year period ended December 31, 2000, $27.8 million was utilized by the Company to repurchase its common stock under its stock repurchase authorization. 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. In November 2000, the Company entered into an unsecured revolving credit facility for aggregate borrowings of up to $22.0 million. During 2000, $22.0 million of the facility was utilized by the Company to pay a withholding tax liability as a result of the CEO electing to have shares otherwise issuable pursuant to the exercise by the CEO of various stock options withheld in satisfaction of the minimum withholding tax attributable to the exercise of the stock options. As a result of the stock option exercise, the Company generated a $22.5 million tax benefit of which $8.6 million of prior year tax payments were received during January 2001. During the first quarter 2001 the Company repaid all aggregate borrowings under this revolving credit facility utilizing the aforementioned $8.6 million tax recovery along with the settlement of other intercompany tax balances. 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, 2000, the investment and cash balances in such trust accounts totaled approximately $10.9 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, 2000, the balance on deposit for the benefit of such policyholders totaled approximately $12.5 million. The Company produced net cash from operations of $47.0 million in 2000, $47.4 million in 1999 and $50.2 million in 1998. 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 1.4-to-1.0 and 1.0-to-1.0 for 2000 and 1999, respectively. Management believes that the policyholders' surplus, which was $193.3 million at December 31, 2000, 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 21 22 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 Issues 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. 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. Therefore, there can be no assurance that any future Year 2000 issue claims will not materially adversely affect the Company. However, no Year 2000 issue claims have been reported to the Company as of March 15, 2001. 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 adopted the provisions of SFAS No. 133 as of January 1, 2001. At December 31, 2000 and 1999, the Company held no derivative financial instruments nor imbedded financial derivatives. The Company's FELINE PRIDES(SM) have been grandfathered under the current accounting guidance and are therefore not subject to the provisions of SFAS No. 133. The Company does not currently utilize derivatives in its investment or risk management strategy. 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 was 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 adopted 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. 22 23 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. 23 24 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, 2000 EXPECTED MATURITY DATES TOTAL (Dollars in thousands, except average interest rate) FAIR 2001 2002 2003 2004 2005 Thereafter TOTAL VALUE ------- ------- ------- ------- ------- -------- -------- -------- FIXED MATURITIES AVAILABLE FOR SALE: Principal Amount $29,090 $47,150 $38,400 $57,340 $72,250 $147,320 $391,550 $391,313 Book Value $29,120 $47,430 $38,210 $57,470 $71,330 $145,129 $388,689 Average Interest Rate 6.66% 6.15% 7.24% 7.09% 7.49% 6.83% 6.93% 6.81% PREFERRED: Principal Amount $ 3,700 $ 3,700 $ 3,420 Book Value $ 3,750 $ 3,750 Average Interest Rate 5.74% 5.74% 6.49% SHORT-TERM DEBT: Principal Amount $40,960 $ 40,960 $ 40,840 Book Value $40,840 $ 40,840 Average Interest Rate 6.40% 6.40% 6.40%
24 25 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Philadelphia Consolidated Holding Corp. and Subsidiaries Index to Financial Statements and Schedules
Financial Statements Page -------------------- ---- Report of Independent Accountants 26 Consolidated Balance Sheets - As of December 31, 2000 and 1999 27 Consolidated Statements of Operations and Comprehensive Income - For the Years Ended December 31, 2000, 1999 and 1998 28 Consolidated Statements of Changes in Shareholders' Equity - For the Years Ended December 31, 2000, 1999 and 1998 29 Consolidated Statements of Cash Flows - For the Years Ended December 31, 2000, 1999 and 1998 30 Notes to Consolidated Financial Statements 31-46 Financial Statement Schedules: Schedule I Summary of Investments - Other Than Investments in Related Parties As of December 31, 2000 S-1 II Condensed Financial Information of Registrant As of December 31, 2000 and 1999 and For Each of the Three Years in the Period Ended December 31, 2000 S-2 -- S-4 III Supplementary Insurance Information As of and For the Years Ended December 31, 2000, 1999 and 1998 S-5 IV Reinsurance For the Years ended December 31, 2000, 1999 and 1998 S-6 VI Supplementary Information Concerning Property-Casualty Insurance Operations As of and For the Years Ended December 31, 2000, 1999 and 1998 S-7
25 26 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 of America 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 our opinion. /s/ PricewaterhouseCoopers LLP February 7, 2001, except for certain information in Note 9 as to which the date is February 20, 2001 26 27 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
As of December 31, -------------------------- 2000 1999 --------- --------- ASSETS Investments: Fixed Maturities Available for Sale at Market (Amortized Cost $392,439 and $331,774) .................... $ 394,733 $ 321,018 Equity Securities at Market (Cost $24,087 and $41,231) ...... 42,553 72,768 --------- --------- Total Investments ........................................ 437,286 393,786 Cash and Cash Equivalents ................................... 49,742 26,230 Accrued Investment Income ................................... 5,726 5,027 Premiums Receivable ......................................... 69,377 49,176 Prepaid Reinsurance Premiums and Reinsurance Receivables ..................................... 73,513 54,920 Income Taxes Recoverable .................................... 13,323 819 Deferred Income Taxes ....................................... 909 Deferred Acquisition Costs .................................. 33,324 26,054 Property and Equipment ...................................... 10,476 9,277 Goodwill less Accumulated Amortization of $4,112 and $2,620.. 30,809 28,801 Other Assets ................................................ 5,979 4,961 --------- --------- Total Assets ............................................. $ 730,464 $ 599,051 ========= ========= LIABILITIES and SHAREHOLDERS' EQUITY Policy Liabilities and Accruals: Unpaid Loss and Loss Adjustment Expenses .................... $ 237,494 $ 188,063 Unearned Premiums ........................................... 145,484 111,606 --------- --------- Total Policy Liabilities and Accruals .................... 382,978 299,669 Loans Payable ............................................... 22,000 Premiums Payable ............................................ 20,868 22,223 Other Liabilities ........................................... 23,388 14,762 Deferred Income Taxes ....................................... 2,052 --------- --------- Total Liabilities ........................................ 449,234 338,706 --------- --------- 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, 13,431,408 Shares Issued and Outstanding, and 13,381,924 Shares Issued ............................................ 46,582 68,859 Notes Receivable from Shareholders .......................... (2,287) (2,506) Accumulated Other Comprehensive Income ...................... 13,494 13,507 Retained Earnings ........................................... 124,536 93,766 Less Cost of Common Stock Held in Treasury, 791,016 Shares in 1999 .................................... (12,186) --------- --------- Total Shareholders' Equity .............................. 182,325 161,440 --------- --------- Total Liabilities and Shareholders' Equity .............. $ 730,464 $ 599,051 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 27 28 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, ------------------------------------------------- 2000 1999 1998 ------------- ------------- ------------- Revenue: Net Written Premiums............................... $ 263,429 $ 184,071 $ 143,036 Change in Net Unearned Premium Reserve (Increase).. (36,137) (19,156) (20,349) ------------- ------------- ------------- Net Earned Premiums................................ 227,292 164,915 122,687 Net Investment Income.............................. 25,803 20,695 15,448 Net Realized Investment Gain....................... 11,718 5,700 474 Other Income....................................... 8,981 4,722 219 ------------ ------------ ------------ Total Revenue................................. 273,794 196,032 138,828 ------------ ------------ ------------ Losses and Expenses: Loss and Loss Adjustment Expenses.................. 175,163 122,491 74,074 Net Reinsurance Recoveries......................... (43,859) (23,081) (7,700) ------------- ------------- ------------- Net Loss and Loss Adjustment Expenses.............. 131,304 99,410 66,374 Acquisition Costs and Other Underwriting Expenses........................... 75,054 53,793 38,422 Other Operating Expenses........................... 14,679 8,939 2,212 ------------ ------------ ------------ Total Losses and Expenses...................... 221,037 162,142 107,008 ------------ ------------ ------------ Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust................................... 7,245 7,245 4,770 ------------ ------------ ------------ Income Before Income Taxes........................... 45,512 26,645 27,050 ------------ ------------ ------------ Income Tax Expense (Benefit): Current............................................ 17,666 8,360 7,941 Deferred........................................... (2,924) (558) (919) ------------- ------------- ------------- Total Income Tax Expense....................... 14,742 7,802 7,022 ------------ ------------ ------------ Net Income..................................... $ 30,770 $ 18,843 $ 20,028 ============ ============ ============ Other Comprehensive Income (Loss), Net of Tax: Holding Gain (Loss) Arising during Year........... $ 7,604 $ (5,205) $ 7,702 Reclassification Adjustment....................... (7,617) (3,705) (308) ------------- ------------- ------------- Other Comprehensive Income (Loss).................... (13) (8,910) 7,394 ------------- ------------- ------------ Comprehensive Income................................. $ 30,757 $ 9,933 $ 27,422 ============ ============ ============ Per Average Share Data: Basic Earnings Per Share........................... $ 2.53 $ 1.51 $ 1.63 ============ ============ ============ Diluted Earnings Per Share......................... $ 2.11 $ 1.25 $ 1.34 ============ ============ ============ Weighted-Average Common Shares Outstanding........... 12,177,989 12,501,165 12,249,262 Weighted-Average Share Equivalents Outstanding....... 2,411,552 2,614,399 2,680,165 ------------ ------------ ------------ Weighted-Average Shares and Share Equivalents Outstanding........................................ 14,589,541 15,115,564 14,929,427 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 28 29 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
For the Years Ended December 31, ------------------------------------------- 2000 1999 1998 --------- --------- --------- Common Stock: Balance at Beginning of Year ....................... $ 68,859 $ 44,796 $ 42,788 Issuance of Shares Pursuant to Acquisition Agreement 25,000 Exercise of Employee Stock Options ................. (23,132) (517) 597 Issuance of Shares Pursuant to Stock Purchase Plans 855 (420) 853 Purchase Contracts of Common Stock ................ 558 --------- --------- --------- Balance at End of Year ......................... 46,582 68,859 44,796 --------- --------- --------- Notes Receivable from Shareholders: Balance at Beginning of Year ....................... (2,506) (1,680) (1,422) Notes Receivable Issued Pursuant to Employee Stock Purchase Plan .............................. (414) (1,445) (828) Collection of Notes Receivable ..................... 633 619 570 --------- --------- --------- Balance at End of Year ......................... (2,287) (2,506) (1,680) --------- --------- --------- Accumulated Other Comprehensive Income, Net of Deferred Income Taxes: Balance at Beginning of Year ..................... 13,507 22,417 15,023 Other Comprehensive Income (Loss), Net of Taxes .. (13) (8,910) 7,394 --------- --------- --------- Balance at End of Year ......................... 13,494 13,507 22,417 --------- --------- --------- Retained Earnings: Balance at Beginning of Year ....................... 93,766 74,923 54,895 Net Income ......................................... 30,770 18,843 20,028 --------- --------- --------- Balance at End of Year ......................... 124,536 93,766 74,923 --------- --------- --------- Common Stock Held in Treasury: Balance at Beginning of Year ....................... (12,186) (2,973) Common Shares Repurchased .......................... (40,766) (12,081) (3,100) Exercise of Employee Stock Options ................. 52,712 975 127 Issuance of Shares Pursuant to Stock Purchase Plans 240 1,893 --------- --------- --------- Balance at End of Year ......................... (12,186) (2,973) --------- --------- --------- Total Shareholders' Equity ..................... $ 182,325 $ 161,440 $ 137,483 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 29 30 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
For the Years Ended December 31, ------------------------------------------- 2000 1999 1998 --------- --------- --------- Cash Flows from Operating Activities: Net Income ................................................. $ 30,770 $ 18,843 $ 20,028 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Net Realized Investment Gain ........................... (11,718) (5,700) (474) Depreciation and Amortization Expense .................. 3,856 3,371 1,277 Deferred Income Tax Benefit ............................ (2,924) (558) (919) Change in Premiums Receivable .......................... (20,201) (11,154) (12,500) Change in Other Receivables ............................ (19,292) (26,159) (5,318) Change in Deferred Acquisition Costs ................... (7,270) (6,720) (5,883) Change in Income Taxes Recoverable ..................... (12,504) (211) (243) Change in Other Assets ................................. (959) (1,428) 765 Change in Unpaid Loss and Loss Adjustment Expenses ..... 49,431 33,590 28,847 Change in Unearned Premiums ............................ 33,878 30,073 22,671 Change in Other Liabilities ............................ 3,740 13,215 1,533 Tax Benefit from Exercise of Employee Stock Options .... 145 255 425 --------- --------- --------- Net Cash Provided by Operating Activities ............ 46,952 47,417 50,209 --------- --------- --------- Cash Flows from Investing Activities: Proceeds from Sales of Investments in Fixed Maturities ..... 122,795 64,968 50,874 Proceeds from Maturity of Investments in Fixed Maturities .. 22,110 39,728 36,736 Proceeds from Sales of Investments in Equity Securities .... 50,230 37,013 19,440 Proceeds from Sale of Real Estate .......................... 1,987 Cost of Fixed Maturities Acquired .......................... (208,513) (148,411) (199,024) Cost of Equity Securities Acquired ......................... (18,861) (25,686) (35,610) Payment for Acquisition, Net of Cash Acquired .............. (7,372) Purchase of Property and Equipment, Net .................... (3,184) (1,768) (2,229) --------- --------- --------- Net Cash Used for Investing Activities ............... (35,423) (41,528) (127,826) --------- --------- --------- Cash Flows from Financing Activities: Proceeds from Offering of Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust ...... 99,463 Proceeds from Loans Payable ................................ 22,000 Exercise of Employee Stock Options ......................... 1,853 203 299 Collection of Notes Receivable ............................. 633 619 570 Proceeds from Shares Issued Pursuant to Stock Purchase Plans 188 27 25 Cost of Common Stock Repurchased ........................... (12,691) (12,081) (3,100) --------- --------- --------- Net Cash Provided (Used) by Financing Activities ..... 11,983 (11,232) 97,257 --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents ........ 23,512 (5,343) 19,640 Cash and Cash Equivalents at Beginning of Year .............. 26,230 31,573 11,933 --------- --------- --------- Cash and Cash Equivalents at End of Year .................... $ 49,742 $ 26,230 $ 31,573 ========= ========= ========= Cash Paid During the Year for: Income Taxes ............................................... $ 7,760 $ 8,295 $ 7,546 Interest ................................................... $ 200 Non-Cash Transactions: Acceptance of Mature Shares For Exercise of Employee Stock Options .................................................. $ 6,811 Issuance of Shares Pursuant to Employee Stock Purchase Plan in Exchange for Notes Receivable ..... $ 414 $ 1,445 $ 828 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 30 31 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, Liberty American Premium Finance Company; and an investment subsidiary, PCHC Investment Corp. The Company designs, markets, and underwrites specialty commercial and personal 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; select classes of professional liability; and personal property and casualty insurance products for the manufactured housing 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 $66.8 million and $103.9 million, respectively, at December 31, 2000 and $46.8 million and $37.8 million, respectively, at December 31, 1999. The collateralized mortgage and asset backed securities held as of December 31, 2000 and 1999 are shorter 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. Investments are considered impaired when the Company determines a decline in value to be other than temporary. Accordingly, a decline is recorded as a charge to income in the period this determination is made. (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. 31 32 (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 and comprehensive income was $60.4 million, $46.5 million, and $30.0 million for the years ended December 31, 2000, 1999, and 1998, 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 $30.8 million and $28.8 million at December 31, 2000 and 1999, 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 $1.5 million in 2000, $0.8 million in 1999, and $0.1 million in 1998. Goodwill was increased $3.5 million as of December 31, 2000 as an estimate of the contingent additional purchase price for the Liberty acquisition. (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. 32 33 (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 $4.1 million, ($2.8) million and $4.1 million in 2000, 1999 and 1998, respectively. The related tax effect of Reclassification Adjustments was $4.1 million, $2.0 million, and $0.2 million in 2000, 1999 and 1998, respectively. (m) 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, 2000 the Company held no derivative financial instruments nor imbedded financial derivatives. The Company's FELINE PRIDES(SM) have been grandfathered under the current accounting guidance and are therefore not subject to the provisions of SFAS No. 133. The Company does not currently utilize derivatives in its investment or risk management strategy. 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 Liberty American 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. Additionally, goodwill was increased $3.5 million as of December 31, 2000 as an estimate for the contingent additional amount pending final determination of this amount. The 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 $32.7 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, as applicable. 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/or 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. 33 34 - Under SAP, policy acquisition costs, such as commissions, premium taxes, fees, and other costs of underwriting policies are charged to current operations as incurred, while under GAAP, such costs are deferred and amortized on a pro rata basis over the period covered by the policy. - Under SAP, certain assets, designated as "Non-admitted Assets" (such as prepaid expenses) are charged against surplus. - Under SAP, federal income taxes are only provided on taxable income for which income taxes are currently payable, while under GAAP, deferred income taxes are provided with respect to temporary differences. - Under SAP, certain reserves are established in amounts which differ from amounts which would be provided in conformity with GAAP. Financial Information: The statutory capital and surplus of the Insurance Subsidiaries as of December 31, 2000 and 1999 was $193.3 million and $179.3 million, respectively. Statutory net income for the years ended December 31, 2000, 1999 and 1998 was $26.2 million, $19.2 million, and $16.1 million, respectively. Capital contributions for the years ended December 31, 2000 and 1999 were $0 and $17.5 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 2001 without prior approval is $24.6 million. Dividends paid for the years ended December 31, 2000 and 1999 were $0 and $17.5 million, 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, 2000 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 lowest quality rating of AA at December 31, 2000. The cost, gross unrealized gains and losses, estimated market value and carrying value of investments as of December 31, 2000 and 1999 are as follows (in thousands): 34 35
Gross Gross Estimated Unrealized Unrealized Market Carrying Cost (1) Gains Losses Value (2) Value -------- ----- ------ --------- ----- December 31, 2000 Fixed Maturities: Available for Sale U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies ............. $ 21,719 $ 160 $ 4 $ 21,875 $ 21,875 Obligations of States and Political Subdivisions ................ 82,596 4,035 18 86,613 86,613 Corporate and Bank Debt Securities .... 115,684 1,784 1,955 115,513 115,513 Collateralized Mortgage Securities .... 65,637 1,452 269 66,820 66,820 Asset Backed Securities ............... 106,803 1,614 4,505 103,912 103,912 - ------------------------------------------------------------------------------------------------------------------- Total Fixed Maturities Available for Sale .................... 392,439 9,045 6,751 394,733 394,733 - ------------------------------------------------------------------------------------------------------------------- Equity Securities ........................ 24,087 18,761 295 42,553 42,553 - ------------------------------------------------------------------------------------------------------------------- Total Investments ........................ $416,526 $27,806 $ 7,046 $437,286 $437,286 =================================================================================================================== 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 ===================================================================================================================
(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, 2000. The cost and estimated market value of fixed maturity securities at December 31, 2000, 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. 35 36
Estimated Market Cost (1) Value (2) -------- --------- Due in One Year or Less $ 10,845 $ 10,870 Due After One Year Through Five Years 104,561 105,821 Due After Five Years through Ten Years 41,295 42,706 Due After Ten Years 63,297 64,602 Collateralized Mortgage and Asset Backed Securities 172,441 170,734 - ----------------------------------------------------------------------------------------------------------- $ 392,439 $ 394,733 ===========================================================================================================
(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, 2000, 1999, and 1998 are as follows (in thousands):
2000 1999 1998 ----------- ----------- ----------- Fixed Maturities $ 23,396 $ 18,210 $ 13,404 Equity Securities 1,414 1,169 634 Cash and Cash Equivalents 1,961 2,111 1,983 - ----------------------------------------------------------------------------------------------------------------- Total Investment Income 26,771 21,490 16,021 Investment Expense (968) (795) (573) - ----------------------------------------------------------------------------------------------------------------- Net Investment Income $ 25,803 $ 20,695 $ 15,448 =================================================================================================================
There are no investments in fixed maturity securities that were non-income producing during the years ended December 31, 2000, 1999, and 1998. Investment expense includes $182,000, $212,000, and $189,000, in investment management fees paid to a director of the Company in 2000, 1999, and 1998, 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, 2000, 1999, and 1998 are as follows (in thousands):
2000 1999 1998 ---------- ---------- ---------- Fixed Maturities Gross Realized Gains $ 242 $ 285 $ 1,090 Gross Realized Losses (3,607) (1,079) (89) - --------------------------------------------------------------------------------------------------------------- Net Gain (Loss) (3,365) (794) 1,001 - --------------------------------------------------------------------------------------------------------------- Equity Securities Gross Realized Gains 18,685 9,300 1,641 Gross Realized Losses (3,602) (2,806) (2,284) - --------------------------------------------------------------------------------------------------------------- Net Gain (Loss) 15,083 6,494 (643) - --------------------------------------------------------------------------------------------------------------- Gross Realized Gain on Sale of Real Estate 116 - --------------------------------------------------------------------------------------------------------------- Total Net Realized Investment Gain $ 11,718 $ 5,700 $ 474 ===============================================================================================================
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, 2000 and 1999, the carrying value on deposit totaled $12.5 million and $12.3 million, respectively. 6. Trust Accounts The Company maintains investments in trust accounts under 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 distributed to the Company on a monthly basis. At December 31, 2000 and 1999 the carrying value of these trust fund investments were $10.9 million and $10.6 million, respectively. 36 37 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, 2000 and 1999 (dollars in thousands):
Estimated Useful December 31, Lives (Years) ------------------------------ ------------- 2000 1999 ---- ---- Furniture, Fixtures and Automobiles $ 3,351 $ 3,291 5 Software, Computer Hardware and Telephone Equipment 13,767 11,325 3 - 7 Land and Building 3,580 3,574 40 Leasehold Improvements 1,489 1,366 10 - 12 - -------------------------------------------------------------------------------- 22,187 19,556 Accumulated Depreciation and Amortization (11,711) (10,279) - -------------------------------------------------------------------------------- Property and Equipment $ 10,476 $ 9,277 ================================================================================
Included in property and equipment are costs incurred in developing or purchasing information systems technology of $5.4 million and $3.5 million in 2000 and 1999, respectively. Amortization of these costs was $0.6 million, $0.3 million and $0.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. Depreciation expense, excluding amortization of capitalized information systems technology costs, was $1.4 million, $1.5 million and $1.2 million, for the years ended December 31, 2000, 1999, and 1998, respectively. The carrying value of property and equipment is reviewed for recoverability based on an evaluation of the estimated useful life of such assets. 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):
2000 1999 1998 ---------- ---------- ---------- Balance at January 1, (1) $ 188,063 $ 154,473 $ 122,430 Less Reinsurance Recoverables (2) 26,710 17,268 13,502 ---------- ---------- ---------- Net Balance at January 1, (3) 161,353 137,205 108,928 ---------- ---------- ---------- Incurred related to: Current Year 128,761 99,663 69,544 Prior Years 2,543 (253) (3,170) ---------- ---------- ---------- Total Incurred 131,304 99,410 66,374 ---------- ---------- ---------- Paid related to: Current Year 36,271 31,493 13,402 Prior Years 60,922 43,769 26,870 ---------- ---------- ---------- Total Paid 97,193 75,262 40,272 ---------- ---------- ---------- Net Balance at December 31, 195,464 161,353 135,030 Plus Reinsurance Recoverables 42,030 26,710 16,120 ---------- ---------- ---------- Balance at December 31, $ 237,494 $ 188,063 $ 151,150 ========== ========== ==========
(1) 1999 Adjusted to include $3,323 gross unpaid loss and loss adjustment expenses for Mobile USA Insurance Company as of acquisition date. (2) 1999 Adjusted to include $1,148 reinsurance recoverables for Mobile USA Insurance Company as of acquisition date. (3) 1999 Adjusted to include $2,175 net unpaid loss and loss adjustment expenses for Mobile USA Insurance Company as of acquisition date. 37 38 As a result of changes in estimates of insured events in prior years, the Company increased losses and loss adjustment expenses incurred by $2.5 million in 2000. Such development was primarily due to losses emerging at a higher rate for the 1997 and 1998 accident years than had been originally anticipated for certain products in the commercial lines segment when the initial reserves were estimated. 9. Loans Payable In November 2000 the Company, pursuant to a Board of Directors authorization, entered into an unsecured revolving credit facility for aggregate borrowings of up to $22.0 million at any one time outstanding with a maturity date of 364 days after closing. During 2000, $22.0 million of the facility was utilized by the Company to pay a withholding tax liability as a result of the CEO electing to have shares otherwise issuable withheld in satisfaction of the minimum withholding tax attributable to the exercise of stock options. Borrowings under the facility bear interest at adjusted LIBOR and unused commitments under the facility are subject to a fee of 20 basis points per annum. Interest expense amounted to $0.2 million for the year ended December 31, 2000. During the first quarter 2001 the Company repaid all aggregate borrowings and cancelled the commitment under this revolving credit facility. 10. Income Taxes The composition of deferred tax assets and liabilities and the related tax effects as of December 31, 2000 and 1999 are as follows (in thousands):
December 31, ---------------------------------- 2000 1999 ---- ---- Assets: Loss Reserve Discounting $ 10,252 $ 7,998 Excess of Tax Over Financial Reporting Earned Premium 8,821 6,276 Deferred Compensation 777 Other Assets 515 652 - ---------------------------------------------------------------------------------------------------------------- Total Assets 20,365 14,926 ================================================================================================================ Liabilities: Deferred Acquisition Costs 11,663 9,119 Unrealized Appreciation of Securities 7,266 7,304 Property and Equipment Basis 470 347 Other Liabilities 57 208 - ---------------------------------------------------------------------------------------------------------------- Total Liabilities 19,456 16,978 - ---------------------------------------------------------------------------------------------------------------- Net Deferred Income Tax Asset (Liability) $ 909 $ (2,052) ================================================================================================================
38 39 The following table summarizes the differences between the Company's effective tax rate for financial statement purposes and the federal statutory rate (dollars in thousands):
Amount of Tax Percent ------------- ------- For the year ended December 31, 2000: Federal Tax at Statutory Rate $ 15,929 35% Nontaxable Municipal Bond Interest and Dividends Received Exclusion (1,884) (4) Nondeductible Goodwill Amortization 522 1 Other, Net 175 - ----------------------------------------------------------------------------------------------------------------- Income Tax Expense $ 14,742 32% ================================================================================================================= 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% =================================================================================================================
Income taxes recoverable amounted to $13.3 million and $0.8 million at December 31, 2000 and 1999, respectively. Of the 2000 amount, $8.6 million of prior year tax payments were received during January 2001. The Company anticipates carrying forward the remaining recoverable amount to reduce future taxable income. Such carryforwards expire in 2020. 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. 11. Minority Interest in Consolidated Subsidiaries During 1998, the Company issued 10.350 million FELINE PRIDES(SM) at $10.00 per security and PCHC Financing I, the Company's business trust subsidiary, issued 1,000,000 7.0% Trust Originated Preferred Securities with a stated liquidation amount per trust preferred security equal to $10.00. The 10.350 million FELINE PRIDES(SM) consisted of 9.350 million units referred to as Income Prides and 1.000 million units referred to as Growth Prides. Each Income Prides consists of a unit comprised of (a) a purchase contract under which the holder will purchase a number of shares of Philadelphia Consolidated Holding Corp. common stock no later than May 16, 2001 (ranging from .3858 to .4706 shares per FELINE PRIDES(SM) under the terms specified in the stock purchase contract and (b) beneficial ownership of a 7.0% Trust Originated Preferred Security issued by PCHC Financing I and representing an undivided beneficial ownership in the assets of PCHC Financing I. Each holder will receive aggregate cumulative cash distributions at the annual rate of 7.00% of the $10.00 stated amount for the security, payable quarterly in arrears. Each Growth Prides consists of a unit with a face amount of $10.00 comprised of (a) a purchase contract under which (i) the holder will purchase a number of shares of Philadelphia Consolidated Holding Corp. common stock no later than May 16, 2001 (ranging from .3858 to .4706 shares per FELINE PRIDES(SM)) under the terms specified in the stock purchase contract and (ii) the Company will pay the holder contract adjustment payments at the rate of .50% of the stated amount per annum and (b) a 1/100 undivided beneficial ownership interest in a treasury security having a principal amount at maturity equal to $1,000 and maturing on May 15, 2001. The applicable distribution rate on the trust originated securities that remain outstanding during the period May 16, 2001 through May 16, 2003, will be reset so that the market value of the Trust Originated Preferred Securities will be equal to 100.5 percent of the stated amount. The Company may limit the reset rate to be no higher than the rate on the two-year benchmark treasury plus 255 basis points. The guarantee by the Company is a full and unconditional guarantee on a subordinated unsecured basis with respect to the Trust Originated Preferred Securities, but will not apply to any payment of distributions except to the extent the Trust shall have funds available therefor. Proceeds from the offering were approximately $99.0 million (after underwriting and associated costs). The proceeds from the sale of the Growth Prides were used to purchase the underlying securities to be transferred to the holders of the Growth Prides pursuant to the terms thereof. All the proceeds from the sale of the Trust Preferred Securities that were not components of the Income Prides and all of the proceeds from the sale of the Income Prides were invested by PCHC Financing I in debentures of the Company. The debentures account for substantially all the assets of PCHC 39 40 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. For the three year period ended December 31, 2000, $27.8 million was utilized by the Company to repurchase its common stock under its stock repurchase authorization. 12. 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. 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. During 2000 all such stock options were exercised. 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 granted prior to January 1, 1995 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. 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:
2000 1999 1998 --------------------------- --------------------------- --------------------------- Exercise Exercise Exercise Price Price Price Per Per Per Options Option(1) Options Option(1) Options Option(1) --------- --------- --------- --------- --------- --------- Outstanding at beginning of year 3,835,917 $ 5.55 3,637,167 $ 4.85 3,473,042 $ 3.85 Granted 272,500 $ 18.32 257,500 $ 15.87 256,125 $ 19.07 Exercised (2,640,842) $ 2.61 (46,250) $ 4.40 (68,600) $ 4.53 Canceled (137,500) $ 18.28 (12,500) $ 20.43 (23,400) $ 12.00 --------- --------- --------- Outstanding at end of year 1,330,075 $ 12.68 3,835,917 $ 5.55 3,637,167 $ 4.85 ========= ========= ========= Exercisable at end of year 21,050 2,661,892 2,708,142 Weighted-average fair value of options granted during the year $7.75 $6.76 $7.69
Exercise Exercisable Exercise Outstanding Price Remaining at Price At December Per Contractual December Per Range of Exercise Prices 31, 2000 Option(1) Life (Years) (1) 31, 2000 Option(1) - -------------------------------------------------------------------------------------------------------------------------------- $2.61 to $9.31 688,950 $ 8.33 5.1 21,050 $ 3.62 $13.88 to $19.75 451,125 $ 16.00 8.4 $20.50 to $27.00 190,000 $ 22.52 9.1 --------- ------ 1,330,075 $ 12.68 21,050 $ 3.62 ========= ======
(1) Weighted Average. 40 41 The Company has established the following non-qualified stock purchase plans: Employee Stock Purchase Plan (the "Stock Purchase Plan"): The aggregate maximum number of shares that may be issued pursuant to the Stock Purchase Plan as amended is 1,000,000. 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 54,463 and 112,228 shares in 2000 and 1999, respectively. The weighted-average fair value of those purchase rights granted in 2000 and 1999 was $3.08 and $2.52, respectively. Directors Stock Purchase Plan ("Directors Plan"): The Directors Plan has been established 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. Under the Directors Plan, the Company issued 2,207 shares in 2000. The weighted-average fair value of those purchase rights granted in 2000 was $2.64. Preferred Agents Stock Purchase Plan ("Preferred Agents Plan"): The Preferred Agents Plan has been established for the benefit of eligible Preferred Agents. The aggregate maximum number of shares that may be issued pursuant to the Preferred Agents Plan is 200,000. Eligible Preferred Agents during designated offering periods may either remit cash or have the Company withhold from commissions or other compensation amounts to be used for the purchase of shares under the terms of the Preferred Agents 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. Under the Preferred Agents Plan, the Company issued 13,528 shares in 2000. The weighted-average fair value of those purchase rights granted in 2000 was $2.48. 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):
2000 1999 1998 --------- --------- --------- Net Income As Reported $ 30,770 $ 18,843 $ 20,028 Assumed Stock Compensation Cost 947 657 453 --------- --------- --------- Pro Forma Net Income $ 29,823 $ 18,186 $ 19,575 ========= ========= ========= Diluted Earnings Per Average Common Share as Reported $ 2.11 $ 1.25 $ 1.34 ========= ========= ========= Pro Forma Diluted Earnings Per Average Common Share $ 2.04 $ 1.20 $ 1.31 ========= ========= =========
The fair value of options at date of grant was estimated using the Black-Scholes valuation model with the following weighted-average assumptions:
2000 1999 1998 ---- ---- ---- Expected Stock Volatility 30.6% 31.6% 29.5% Risk-Free Interest Rate 6.2% 5.9% 5.3% Expected Option Life-Years 6.0 6.0 6.0 Expected Dividends 0.0% 0.0% 0.0%
13. Stock Repurchase Authorization On July 20, 2000, the Company's Board of Directors increased the authorization for the Company to repurchase up to a total of $40.0 million of its common stock. For the three year period ended December 31, 2000, the Company repurchased 1.8 million shares for approximately $27.8 million under this authorization. 14. 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. 41 42 The loss and loss adjustment expense reserves ceded under such arrangements were $42.0 million and $26.7 million at December 31, 2000 and 1999, 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 99.2% and 100.0% as of December 31, 2000 and 1999, respectively. Additionally, approximately 4%, 4% and 1% of the Company's net written premiums for the years ended December 31, 2000, 1999, and 1998, 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, 2000: Direct Business $ 350,603 $ 319,591 Reinsurance Assumed 11,256 8,747 Reinsurance Ceded 98,430 101,046 - ---------------------------------------------------------------------------------------------------------------- Net Premiums $ 263,429 $ 227,292 - ---------------------------------------------------------------------------------------------------------------- Percentage Assumed of Net 3.8% ================================================================================================================ 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% ================================================================================================================
42 43 15. 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 75% 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 four years of service. The Company's total contributions to the plan were $0.6 million, $0.3 million and $0.4 million in 2000, 1999, and 1998, respectively. 16. 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 36 field offices for its production underwriters. In addition, the Company leases certain computer equipment. Rental expense for these operating leases was $2.2 million, $1.7 million and $1.2 million for the years ended December 31, 2000, 1999, and 1998, respectively. At December 31, 2000, 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, 2000 were as follows (in thousands):
Year Ending December 31: 2001 $2,708 2002 2,014 2003 1,308 2004 1,205 2005 and Thereafter 3,852 - -------------------------------------------------------------------------------- Total Minimum Payments Required $11,087 ================================================================================
17. 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, 2000 and 1999 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): 43 44
Three Months Ended -------------------------------------------------------------------- March 31, June 30, September 30, December 31, 2000 2000 2000 2000 ----------- ----------- ------------ ----------- Net Earned Premiums $ 48,627 $ 54,291 $ 59,271 $ 65,103 Net Investment Income $ 6,264 $ 5,832 $ 6,030 $ 7,677 Net Realized Investment Gain $ 93 $ 389 $ 3,556 $ 7,680 Net Loss and Loss Adjustment Expenses $ 28,240 $ 31,973 $ 33,970 $ 37,121 Acquisition Costs and Other Underwriting Expenses $ 16,719 $ 17,317 $ 19,532 $ 21,486 Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust $ 1,811 $ 1,812 $ 1,811 $ 1,811 Net Income $ 5,665 $ 5,802 $ 8,128 $ 11,175 Basic Earnings Per Share $0.46 $0.48 $0.69 $0.90 Diluted Earnings Per Share $0.38 $0.39 $0.56 $0.78 Weighted-Average Common Shares Outstanding 12,327,797 12,122,135 11,825,698 12,437,348 Weighted-Average Share Equivalents Outstanding 2,496,325 2,581,779 2,603,161 1,838,712 ----------- ----------- ------------ ----------- Weighted-Average Shares and Share Equivalents Outstanding 14,824,122 14,703,914 14,428,859 14,276,060 =========== =========== ============ ===========
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 =========== =========== ============ ===========
18. Segment Information The Company's operations are classified into three reportable business segments: The Commercial Lines Underwriting Group which has underwriting responsibility for the Commercial Automobile and Commercial Property and Commercial multi-peril package insurance products; The Specialty Lines Underwriting Group which has underwriting responsibility for the professional liability insurance products; and The Personal Lines Group which designs, markets and underwrites personal property and casualty insurance products for the Manufactured Housing and Homeowners markets. Effective June 30, 2000, due to a change in market focus, the previously reported Specialty Property Underwriting Group segment was restructured resulting in the combination of this Underwriting Group with the Commercial Lines Underwriting Group. Accordingly, prior information has been reclassified to reflect this change. The reportable segments operate solely within the United States. 44 45 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): 45 46
Commercial Specialty Personal 2000: Lines Lines Lines Corporate Total ----------------------------------------------------------------------- Gross Written Premiums $ 239,446 $ 68,193 $ 54,233 $ 361,872 ----------------------------------------------------------------------- Net Written Premiums $ 163,430 $ 67,860 $ 32,139 $ 263,429 ----------------------------------------------------------------------- Revenue: Net Earned Premiums $ 142,250 $ 56,884 $ 28,158 $ 227,292 Net Investment Income 25,803 25,803 Net Realized Investment Gain 11,718 11,718 Other Income 11,720 (2,739) 8,981 ----------------------------------------------------------------------- Total Revenue 142,250 56,884 39,878 34,782 273,794 ----------------------------------------------------------------------- Losses and Expenses: Net Loss and Loss Adjustment Expenses 85,677 32,448 13,179 131,304 Acquisition Costs and Other Underwriting Expenses 75,054 75,054 Other Operating Expenses 10,227 4,452 14,679 ----------------------------------------------------------------------- Total Losses and Expenses 85,677 32,448 23,406 79,506 221,037 ----------------------------------------------------------------------- Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust 7,245 7,245 ----------------------------------------------------------------------- Income Before Income Taxes 56,573 24,436 16,472 (51,969) 45,512 Total Income Tax Expense 14,742 14,742 ----------------------------------------------------------------------- Net Income $ 56,573 $ 24,436 $ 16,472 $ (66,711) $ 30,770 ======================================================================= Total Assets $ 154,874 $ 575,590 $ 730,464 ======================================================================= 1999: Gross Written Premiums $ 200,972 $ 48,532 $ 25,414 $ 274,918 ----------------------------------------------------------------------- Net Written Premiums $ 129,078 $ 40,936 $ 14,057 $ 184,071 ----------------------------------------------------------------------- Revenue: Net Earned Premiums $ 118,623 $ 33,433 $ 12,859 $ 164,915 Net Investment Income 20,695 20,695 Net Realized Investment Gain 5,700 5,700 Other Income 5,843 (1,121) 4,722 ----------------------------------------------------------------------- Total Revenue 118,623 33,433 18,702 25,274 196,032 ----------------------------------------------------------------------- Losses and Expenses: Net Loss and Loss Adjustment Expenses 72,286 17,873 9,251 99,410 Acquisition Costs and Other Underwriting Expenses 53,793 53,793 Other Operating Expenses 5,938 3,001 8,939 ----------------------------------------------------------------------- Total Losses and Expenses 72,286 17,873 15,189 56,794 162,142 ----------------------------------------------------------------------- Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust 7,245 7,245 ----------------------------------------------------------------------- Income Before Income Taxes 46,337 15,560 3,513 (38,765) 26,645 Total Income Tax Expense 7,802 7,802 ----------------------------------------------------------------------- Net Income $ 46,337 $ 15,560 $ 3,513 $ (46,567) $ 18,843 ======================================================================= Total Assets $ 98,503 $ 500,548 $ 599,051 ======================================================================= 1998: Gross Written Premiums $ 163,162 $ 30,396 $ 3,850 $ 197,408 ----------------------------------------------------------------------- Net Written Premiums $ 113,508 $ 26,095 $ 3,433 $ 143,036 ----------------------------------------------------------------------- Revenue: Net Earned Premiums $ 102,039 $ 20,024 $ 624 $ 122,687 Net Investment Income 15,448 15,448 Net Realized Investment Gain 474 474 Other Income 219 219 ----------------------------------------------------------------------- Total Revenue 102,039 20,024 624 16,141 138,828 ----------------------------------------------------------------------- Losses and Expenses: Net Loss and Loss Adjustment Expenses 54,254 11,764 356 66,374 Acquisition Costs and Other Underwriting Expenses 38,422 38,422 Other Operating Expenses 2,212 2,212 ----------------------------------------------------------------------- Total Losses and Expenses 54,254 11,764 356 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 47,785 8,260 268 (29,263) 27,050 Total Income Tax Expense 7,022 7,022 ----------------------------------------------------------------------- Net Income $ 47,785 $ 8,260 $ 268 $ (36,285) $ 20,028 ======================================================================= Total Assets $ 476,390 $ 476,390 =======================================================================
46 47 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 25 are filed as part of this Report. 2. Exhibits: The Exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedules are filed as part of, or incorporated by reference into, this Report.
Exhibit No. Description - ----------- ----------- 3.1 * Articles of Incorporation of Philadelphia Insurance, as amended to date. 3.1.1 * Amendment to Articles of Incorporation of Philadelphia Insurance. 3.2 * By-laws of Philadelphia Insurance, as amended to date. 10.1 * (1) Amended and Restated Key Employees' Stock Option Plan. 10.1.1 ********(1) Amended and Restated Key Employees' Stock Option Plan. 10.2 * (1) Key Employees' Stock Bonus Plan. 10.2.1 * (1) Excerpt of Board of Directors and Shareholders Resolution amending Key Employees' Stock Bonus Plan. 10.6 * Casualty Excess of Loss Reinsurance Agreement No. 14P-106,401,402, effective January 1, 1990, with Swiss Re, as amended to date. 10.7 * Property Quota Share Reinsurance Agreement No. 14P-202, effective December 9, 1989, with Swiss Re, as amended to date.
47 48 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.
48 49 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: The Company filed the following reports on Form 8-K during the quarterly period ended December 31, 2000 Date of Report Item Reported October 19, 2000 Supplemental financial data for the three and nine months ended September 30, 2000 and 1999 November 6, 2000 September 30, 2000 Investor Presentation 49 50 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 30, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- March 30, 2001 /s/ James J. Maguire Chairman of the Board of --------------------------------- Directors and Chief Executive James J. Maguire Officer (Principal Executive Officer) March 30, 2001 /s/ Craig P. Keller Senior Vice President, Secretary, Treasurer, --------------------------------- and Chief Financial Officer Craig P. Keller (Principal Financial and Accounting Officer) March 30, 2001 /s/ James J. Maguire, Jr. President & COO, Director --------------------------------- James J. Maguire, Jr. March 30, 2001 /s/ Sean S. Sweeney Executive Vice President, Director --------------------------------- Sean S. Sweeney March 30, 2001 /s/ Elizabeth H. Gemmill. Director --------------------------------- Elizabeth H. Gemmill March 30, 2001 /s/ William J. Henrich, Jr. Director --------------------------------- William J. Henrich, Jr. March 30, 2001 /s/ Paul R. Hertel, Jr. Director --------------------------------- Paul R. Hertel, Jr. March 30, 2001 /s/ Roger L. Larson Director --------------------------------- Roger L. Larson March 30, 2001 /s/ Thomas J. McHugh Director --------------------------------- Thomas J. McHugh March 30, 2001 /s/ Michael J. Morris Director --------------------------------- Michael J. Morris March 30, 2001 /s/ Dirk A. Stuurop Director --------------------------------- Dirk A. Stuurop March 30, 2001 /s/ J. Eustace Wolfington Director --------------------------------- J. Eustace Wolfington
50 51 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule I - Summary of Investments - Other than Investments in Related Parties As of December 31, 2000 (Dollars in Thousands)
- ------------------------------------------------------------------------------------------------------ COLUMN A COLUMN B COLUMN C COLUMN D Estimated Amount at which Market shown in the Type of Investment Cost * Value Balance Sheet - ------------------------------------------------------------------------------------------------------ Fixed Maturities: Bonds: United States Government and Government Agencies and Authorities $ 21,719 $ 21,875 $ 21,875 States, Municipalities and Political Subdivisions 82,596 86,613 86,613 Public Utilities 25,006 24,529 24,529 All Other Corporate Bonds 259,366 258,301 258,301 Redeemable Preferred Stock 3,752 3,415 3,415 -------- -------- -------- Total Fixed Maturities 392,439 394,733 394,733 -------- -------- -------- Equity Securities: Common Stocks: Banks, Trust and Insurance Companies 2,624 7,118 7,118 Industrial, Miscellaneous and all other 21,463 35,435 35,435 -------- -------- -------- Total Equity Securities 24,087 42,553 42,553 -------- -------- -------- Total Investments $416,526 $437,286 $437,286 ======== ======== ========
* Original cost of equity securities; original cost of fixed maturities adjusted for amortization of premiums and accretion of discounts. S-1 52 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, 2000 1999 --------- --------- ASSETS Cash and Cash Equivalents $ 246 $ (15) Equity in and Advances to Unconsolidated Subsidiaries (a) 301,847 258,722 Income Taxes Recoverable 2,320 2,775 Other Assets 4 3 --------- --------- Total Assets $ 304,417 $ 261,485 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Loans Payable $ 22,000 Other Liabilities 1,187 $ 1,140 --------- --------- Total Liabilities 23,187 1,140 --------- --------- 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, 13,431,408 Shares Issued and Outstanding, and 13,381,924 Shares Issued 46,582 68,859 Notes Receivable from Shareholders (2,287) (2,506) Accumulated Other Comprehensive Income 13,494 13,507 Retained Earnings 124,536 93,766 Less Cost of Common Stock held in Treasury, 791,016 Shares in 1999 (12,186) --------- --------- Total Shareholders' Equity 182,325 161,440 --------- --------- Total Liabilities and Shareholders' Equity $ 304,417 $ 261,485 ========= =========
(a) These items have been eliminated in the Company's Consolidated Financial Statements. See Notes to Consolidated Financial Statements included in Item 8, pages 31-46. S-2 53 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, 2000 1999 1998 -------- -------- -------- Revenue: Dividends from Subsidiaries (a) $ 20,122 $ 65,356 $ 5,470 Net Investment Income 2,598 Net Realized Investment Loss (b) (671) -------- -------- -------- Total Revenue 20,122 65,356 7,397 -------- -------- -------- Other Expenses 1,077 684 725 -------- -------- -------- Total Expenses 1,077 684 725 -------- -------- -------- Minority Interest: Distributions on Company Mandatorily Redeemable Preferred Securities of Subsidiary Trust 7,245 7,245 4,770 -------- -------- -------- Income, Before Income Taxes and Equity in Earnings of Unconsolidated Subsidiaries 11,800 57,427 1,902 Income Tax Expense (Benefit) (2,913) (2,775) 675 -------- -------- -------- Income, Before Equity in Earnings of Unconsolidated Subsidiaries 14,713 60,202 1,227 Equity in Earnings of Unconsolidated Subsidiaries (b) 16,057 (41,359) 18,801 -------- -------- -------- Net Income $ 30,770 $ 18,843 $ 20,028 ======== ======== ========
(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 31-46. S-3 54 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, 2000 1999 1998 --------- --------- --------- Cash Flows From Operating Activities: Net Income $ 30,770 $ 18,843 $ 20,028 Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: Net Realized Investment Loss 671 Amortization Expense (145) Equity in Earnings of Unconsolidated Subsidiaries (16,057) 41,359 (18,801) Change in Other Liabilities 46 (37) 1,019 Change in Other Assets (1) 11 575 Change in Income Taxes Recoverable 455 (3,450) 837 Tax Benefit from Exercise of Employee Stock Options 145 255 425 --------- --------- --------- Net Cash Provided by Operating Activities 15,358 56,981 4,609 --------- --------- --------- 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) (27,080) (20,023) (28,450) --------- --------- --------- Net Cash Used by Investing Activities (27,080) (45,699) (101,928) --------- --------- --------- Cash Flows From Financing Activities: Proceeds From Offering of Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust 99,463 Proceeds from Loans Payable 22,000 Exercise of Employee Stock Options 1,853 203 299 Collection of Notes Receivable 633 619 570 Proceeds from Shares Pursuant to Stock Purchase Plans 188 27 25 Cost of Common Stock Repurchased (12,691) (12,081) (3,100) --------- --------- --------- Net Cash Provided (Used) by Financing Activities 11,983 (11,232) 97,257 --------- --------- --------- Net Increase (Decrease) in Cash and Equivalents 261 50 (62) Cash and Cash Equivalents at Beginning of Year (15) (65) (3) --------- --------- --------- Cash and Cash Equivalents at End of Year $ 246 $ (15) $ (65) ========= ========= ========= Cash Dividends Received From Unconsolidated Subsidiaries $ 20,122 $ 65,356 $ 5,470 ========= ========= ========= Non-Cash Transactions: Acceptance of Mature Shares for Exercise Cost of Employee Stock Options $ 6,811 Issuance of Shares Pursuant to Employee Stock Purchase Plan in exchange for Notes Receivable $ 414 $ 1,445 $ 828 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 31-46. S-4 55 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule III - Supplementary Insurance Information As of and For the Year Ended December 31, 2000, 1999 and 1998 (In Thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H Segment Deferred Future Unearned Other Policy Premium Net Benefits, Policy Policy Premiums Claims and Revenue Investment Claims, Acquisition Benefits, Benefits Income Losses, and Costs Losses, Payable Settlement Claims and Expenses Loss Expenses ----------- ---------- --------- ------------ --------- ---------- ----------- 2000: Commercial Lines $ $ 161,801 $ 84,418 $ 142,250 $ $ 85,677 Specialty Lines 67,260 35,549 56,884 32,448 Personal Lines 8,433 25,517 28,158 13,179 Corporate 33,324 25,803 --------- --------- --------- --------- --------- --------- Total $ 33,324 $ 237,494 $ 145,484 $ 227,292 $ 25,803 $ 131,304 ========= ========= ========= ========= ========= ========= 1999: Commercial Lines $ $ 144,917 $ 62,962 $ 118,623 $ $ 72,286 Specialty Lines 35,314 27,236 33,433 17,873 Personal Lines 7,832 21,408 12,859 9,251 Corporate 26,054 20,695 --------- --------- --------- --------- --------- --------- Total $ 26,054 $ 188,063 $ 111,606 $ 164,915 $ 20,695 $ 99,410 ========= ========= ========= ========= ========= ========= 1998: Commercial Lines $ $ 125,708 $ 43,892 $ 102,039 $ $ 54,254 Specialty Lines 24,981 18,086 20,024 11,764 Personal Lines 461 2,809 624 356 Corporate 16,853 15,448 --------- --------- --------- --------- --------- --------- Total $ 16,853 $ 151,150 $ 64,787 $ 122,687 $ 15,448 $ 66,374 ========= ========= ========= ========= ========= =========
COLUMN A COLUMN I COLUMN J COLUMN K Segment Amortization Other Premiums of Deferred Operating Written Policy Expenses Acquisition Costs ----------- --------- --------- 2000: Commercial Lines $ $ $ 163,430 Specialty Lines 67,860 Personal Lines 10,227 32,139 Corporate 60,415 4,452 --------- --------- --------- Total $ 60,415 $ 14,679 $ 263,429 ========= ========= ========= 1999: Commercial Lines $ $ $ 129,078 Specialty Lines 40,936 Personal Lines 5,938 14,057 Corporate 46,451 3,001 --------- --------- --------- Total $ 46,451 $ 8,939 $ 184,071 ========= ========= ========= 1998: Commercial Lines $ $ $ 113,508 Specialty Lines 26,095 Personal Lines 3,433 Corporate 30,034 2,212 --------- --------- --------- Total $ 30,034 $ 2,212 $ 143,036 ========= ========= =========
S-5 56 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule IV - Reinsurance Earned Premiums For the Years Ended December 31, 2000, 1999 and 1998 (Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - -------------------------------------------------------------------------------------------------------------------------- Ceded to Assumed from Percentage of Gross Amount Other Other Amount Assumed to Companies Companies Net Amount Net - -------------------------------------------------------------------------------------------------------------------------- 2000 Property and Casualty Insurance $ 319,591 $101,046 $8,747 $227,292 3.8% ========================================================================================================================== 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% ==========================================================================================================================
S-6 57 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule VI - Supplemental Information Concerning Property - Casualty Insurance Operations As of and For the Years Ended December 31, 2000, 1999 and 1998 (Dollars in Thousands)
Claims and Claims Adjustment Expenses Incurred Related to Reserve for Deferred Unpaid Policy Claims and Discount if Net Net (1) (2) Affiliation with Acquisition Claim any Unearned Earned Investment Current Prior Registrant Costs Adjustment deducted in Premiums Premiums Income Year Year Expenses Column C COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H Consolidated Property - Casualty Entities December 31, 2000 $33,324 $237,494 $0 $145,484 $227,292 $25,803 $128,761 $2,543 December 31, 1999 $26,054 $188,063 $0 $111,606 $164,915 $20,695 $99,663 ($253) December 31, 1998 $16,853 $151,150 $0 $64,787 $122,687 $15,448 $69,544 ($3,170)
Amortization of deferred policy Paid Claims acquisition and Claim Affiliation with costs Adjustment Net Written Registrant Expenses Premiums COLUMN A COLUMN I COLUMN J COLUMN K Consolidated Property - Casualty Entities December 31, 2000 $60,415 $97,193 $ 263,429 December 31, 1999 $46,451 $75,262 $ 184,071 December 31, 1998 $30,034 $40,272 $ 143,036
S-7 58 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES Exhibit Index For the Year Ended December 31, 2000
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 KeyEmployees' 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.58 59 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.59 60 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 61 of 66 Statement regarding computation of earnings per share. 21 * List of Subsidiaries of the Registrant. 23 ************ Page 63 of 66 Consent of PricewaterhouseCoopers LLP 24 * Power of Attorney 99.1 ************ Page 65 of 66 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: The Company filed the following reports on Form 8-K during the quarterly period ended December 31, 2000
Date of Report Item Reported -------------- ------------- October 19, 2000 Supplemental financial data for the three and nine months ended September 30, 2000 and 1999 November 6, 3000 September 30, 2000 Investor Presentation
(E-3) P.60 EX-11 2 w47222ex11.txt STATEMENT REGARDING COMPUTATION OF EARNINGS 1 EXHIBIT 11.0 P.61 of 66 2 Exhibit - 11 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, ------------------------------------------ 2000 1999 1998 ------- ------- ------- Weighted-Average Common Shares Outstanding 12,178 12,501 12,249 Weighted-Average Share Equivalents Outstanding 2,412 2,615 2,680 ------- ------- ------- Weighted-Average Shares and Share Equivalents Outstanding 14,590 15,116 14,929 ======= ======= ======= Net Income $30,770 $18,843 $20,028 ======= ======= ======= Basic Earnings Per Share $ 2.53 $ 1.51 $ 1.63 ======= ======= ======= Diluted Earnings Per Share $ 2.11 $ 1.25 $ 1.34 ======= ======= =======
EX-23 3 w47222ex23.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23 P.63 of 66 2 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (No. 333-39794, No. 33-96604, No. 333-29643 and No. 333-29647) of Philadelphia Consolidated Holding Corp. of our reports dated February 7, 2001, except for certain information in Note 9 as to which the date is February 20, 2001, relating to the consolidated financial statements and financial statement schedules which appear in this Form 10-K. /s/ PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 30, 2001 EX-99.1 4 w47222ex99-1.txt REPORT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 99.1 P. 65 of 66 2 Exhibit 99.1 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 25 of this Form 10-K. In our opinion, these 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 7, 2001, except for certain information in Note 9 to the consolidated financial statements as to which the date is February 20, 2001 -----END PRIVACY-ENHANCED MESSAGE-----