0000893220-01-500837.txt : 20011128
0000893220-01-500837.hdr.sgml : 20011128
ACCESSION NUMBER: 0000893220-01-500837
CONFORMED SUBMISSION TYPE: S-3/A
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20011107
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: S-3/A
SEC ACT: 1933 Act
SEC FILE NUMBER: 333-72722
FILM NUMBER: 1776628
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
S-3/A
1
w54409as-3a.txt
AMENDMENT #1 TO FORM S-3
As filed with the Securities and Exchange Commission on November 7, 2001
Registration No. 333-72722
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PHILADELPHIA CONSOLIDATED HOLDING CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2202671
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
INCORPORATION)
ONE BALA PLAZA, SUITE 100
BALA CYNWYD, PENNSYLVANIA 19004
(610) 617-7900
FAX: (610) 617-7600
---------------------------------
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MR. JAMES J. MAGUIRE, CHIEF EXECUTIVE OFFICER
OR
MR. CRAIG P. KELLER, SECRETARY
ONE BALA PLAZA, SUITE 100
BALA CYNWYD, PENNSYLVANIA 19004
(610) 617-7900
FAX: (610) 617-7600
--------------------------------
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
MICHAEL M. SHERMAN, ESQUIRE JEFF S. LIEBMANN, ESQUIRE
WOLF, BLOCK, SCHORR AND SOLIS-COHEN LLP JONATHAN L. FREEDMAN, ESQUIRE
1650 ARCH STREET - 22ND FLOOR DEWEY BALLANTINE LLP
PHILADELPHIA, PENNSYLVANIA 19103-2097 1301 AVENUE OF THE AMERICAS
(215) 977-2236 NEW YORK, NEW YORK 10019
FAX: (215) 977-2334 (212) 259-8000
FAX: (212) 259-6333
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable following effectiveness of this registration
statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 7, 2001
PROSPECTUS
4,000,000 SHARES
[PHILADELPHIA CONSOLIDATED HOLDING CORP. LIBERTY BELL GRAPHIC]
PHILADELPHIA CONSOLIDATED HOLDING CORP.
COMMON STOCK
----------------------
Philadelphia Consolidated Holding Corp. is selling 3,000,000 shares and one
of our shareholders is selling 1,000,000 shares.
The shares are quoted on the Nasdaq National Market under the symbol
"PHLY." On November 6, 2001, the last sale price of the shares as reported on
the Nasdaq National Market was $38.15 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
----------------------
PER SHARE TOTAL
--------- -----
Public offering price...................................... $ $
Underwriting discount...................................... $ $
Proceeds, before expenses,
to Philadelphia Consolidated............................. $ $
Proceeds, before expenses, to the selling shareholder...... $ $
The underwriters may also purchase up to an additional 600,000 shares from
Philadelphia Consolidated at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus to cover
over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The shares will be ready for delivery on or about , 2001.
----------------------
MERRILL LYNCH & CO. BANC OF AMERICA SECURITIES LLC
----------------------
The date of this prospectus is , 2001.
TABLE OF CONTENTS
PROSPECTUS
PAGE
----
Prospectus Summary.......................................... 1
Risk Factors................................................ 9
Use of Proceeds............................................. 14
Dividend Policy............................................. 14
Capitalization.............................................. 15
Price Range of Common Stock................................. 16
Business.................................................... 17
Selling Shareholder and Related Information................. 27
Underwriting................................................ 28
Where You Can Find More Information -- Incorporation of
Information by Reference.................................. 30
Special Note on Forward-Looking Statements.................. 31
Legal Matters............................................... 32
Experts..................................................... 32
September 30, 2001 Unaudited Financial Statements........... F-1
----------------------
You should rely only on the information contained or incorporated by
reference in this prospectus. We have not, and the underwriters have not,
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to sell these
securities in any jurisdiction where the offer or sale is not permitted. You
should assume that the information appearing in this prospectus and the
documents incorporated by reference is accurate only as of their respective
dates. Our business, financial condition, results of operations and prospects
may have changed since those dates.
PROSPECTUS SUMMARY
This summary may not contain all of the information that may be important
to you. You should read the entire prospectus, including the financial
statements and related notes and other financial data included or incorporated
by reference in this prospectus, before making an investment decision. Investors
should carefully consider the information set forth under "Risk Factors." In
addition, some statements include forward-looking statements that involve risk
and uncertainties. See "Special Note on Forward-Looking Statements."
As used in this prospectus, "we," "us," "our" and "Philadelphia
Consolidated" mean Philadelphia Consolidated Holding Corp. and our subsidiaries,
unless the context indicates otherwise.
PHILADELPHIA CONSOLIDATED HOLDING CORP.
WHO WE ARE
We are a publicly traded specialty property and casualty insurer located in
Bala Cynwyd, Pennsylvania. We offer a portfolio of specialized commercial and
personal insurance on a nationwide basis through a diverse distribution network.
Our Chairman and Chief Executive Officer, James J. Maguire, founded our business
in 1962. We believe that we have built a strong reputation among our producers,
customer base and the marketplace as a disciplined underwriter and quality
service provider.
Our commercial products include commercial multi-peril package insurance
targeting specialized niches, including non-profit organizations, health and
fitness organizations, homeowners' associations, condominium associations,
specialty schools and day care facilities; commercial automobile insurance
targeting the leasing and rent-a-car industries; property insurance for large
commercial accounts such as shopping centers, business parks and medical
facilities; and inland marine products targeting larger risks such as new
builders' risk and miscellaneous property floaters. We also write select classes
of professional liability and directors' and officers' liability products, as
well as personal property and casualty products for the manufactured housing and
homeowners' markets.
Our core strategy involves three major principles:
- First, we adhere to an underwriting philosophy aimed at consistently
generating underwriting profits through sound risk selection and pricing
discipline.
- Second, we distribute our products through a "mixed" marketing platform,
combining direct sales, an extensive network of independent agents and a
subset of this network, known as "preferred agents," with whom we have
established special distribution arrangements.
- Third, we seek to create value-added coverage and service features not
found in typical property and casualty policies that we believe
differentiate and enhance the marketability and appeal of our products
relative to our competitors.
We maintain detailed systems, records and databases that enable us to
continuously monitor our book of business and identify and react swiftly to
positive or negative development trends. We are able to track our performance,
including loss ratios, by segment, product, region, state, producer and
policyholder. We produce and review detailed profitability reports on a routine,
primarily monthly, basis as part of our policy of continuously analyzing and
reviewing our book of business.
We maintain a local presence to more effectively serve our producer and
customer base, operating through 9 regional offices and 27 field offices
throughout the country which report to the regional offices. These offices are
staffed with field underwriters, marketers and, in some cases, claims personnel,
who interact closely with home office management in making key decisions. This
approach allows us to adapt our underwriting and marketing strategies to local
conditions and build close relationships with our customers and producers at the
local level.
1
As of September 30, 2001, we had total assets of $879.6 million and
shareholders' equity of $309.1 million. A.M. Best rates our insurance
subsidiaries "A+" (Superior). Philadelphia Consolidated is quoted on the Nasdaq
National Market and trades under the symbol "PHLY."
OPERATING RESULTS
Our core strategy has enabled us to produce combined ratios well below
industry averages, while simultaneously generating premium growth well above
industry averages. We have achieved an 89.5% average statutory combined ratio
after policyholder dividends for the ten-year period ended December 31, 2000,
compared to 107.7% for the property and casualty industry overall, based on data
compiled by A.M. Best. While maintaining underwriting profitability, we have
also produced compound annual net written premium growth of 29.2% over the same
period, compared to 3.3% for the property and casualty industry overall, based
on data compiled by A.M. Best.
The following table illustrates our statutory net premiums written and statutory
combined ratios for the ten-year period ended December 31, 2000.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 CAGR(1)
----- ----- ----- ----- ----- ----- ------ ------ ------ ------ -------
(DOLLARS IN MILLIONS)
Net Premiums Written................ $26.2 $36.2 $40.6 $55.4 $62.1 $84.0 $110.8 $143.0 $195.3 $263.6 29.2%
Loss & Loss Adjustment AVG
----
Expense Ratio...................... 57.8% 57.1% 56.5% 59.5% 57.1% 55.7% 55.3% 54.1% 59.7% 57.8% 57.1%
Expense Ratio....................... 35.0 38.7 34.5 29.9 29.6 31.1 29.1 31.0 33.6 31.3 32.4
----- ----- ----- ----- ----- ----- ------ ------ ------ ------ ----
Statutory Combined Ratio............ 92.8% 95.8% 91.0% 89.4% 86.7% 86.8% 84.4% 85.1% 93.3% 89.1% 89.5%
===== ===== ===== ===== ===== ===== ====== ====== ====== ====== ====
---------------
(1) Compound annual growth rate.
In addition to underwriting profitability and favorable premium growth, we
have also focused on bottom line results, producing a compound annual growth
rate of 31.7% in net operating income and 32.8% in net income since 1993, the
year of our initial public offering. We have grown our shareholders' equity at a
compound annual growth rate of 20.6%, and we have generated an average return on
shareholders' equity of 15.7% over the same period.
MARKET OUTLOOK AND GROWTH OPPORTUNITIES
Industry Trends
During the 1990s and into 2000, the insurance industry maintained excess
capacity, creating highly competitive market conditions, as evidenced by
declining premium rates and, in many cases, policy terms less favorable to the
insurer. As a result, the industry suffered from reduced profitability and a
contraction of capacity as insurers chose or were forced to exit the
marketplace. During the second half of 2000 and through the first nine months of
2001, reduced insurance and reinsurance supply and increased demand caused
premium rates and policy terms to show signs of significant improvement.
The terrorist attacks of September 11, 2001 caused the property and
casualty industry to experience significant losses. As a result, industry
participants expect that the rate increases and improving terms occurring before
September 11 will continue through the remainder of 2001 and possibly into 2003.
Increased reinsurance costs may, to some extent, offset the benefits of these
trends to insurance companies.
We believe that we are favorably positioned to take advantage of these
improving conditions. We are currently experiencing average rate increases of 5%
to 30% upon renewals. There can be no assurance, however, that these favorable
trends will continue or that we can sustain these rate increases.
2
Innovative Product Development
Consistent with our focus on select niches and our product differentiation
strategy, we continually seek out and evaluate new product opportunities. Using
market information gathered by our production underwriting organization,
preferred agents and home office staff, we create innovative products that we
believe respond to the unique needs of our customers and producers. Through a
disciplined process overseen by a product development committee, we develop
features that we believe differentiate our polices and services from those of
our competitors. We further differentiate ourselves by packaging multiple
coverages into integrated policies that address the specific needs of some of
our target markets. We believe that this innovative capability has enabled us to
achieve more favorable pricing than our competitors.
Acquisitions
Since our inception, we have achieved our growth primarily through internal
means. However, we consider acquisition opportunities when they arise, including
books of business or companies, which complement our niche focus, parallel our
conservative underwriting philosophy or otherwise meet our strategic objectives.
In 1999 we established our presence in personal lines insurance through the
acquisition of Liberty American Insurance Group, Inc.
SEGMENTS
We divide our operations into three reportable business segments: the
Commercial Lines Underwriting Group, which has underwriting responsibility for
the commercial multi-peril package, commercial automobile and specialty property
and inland marine insurance products; the Specialty Lines Underwriting Group,
which has underwriting responsibility for the professional liability and
directors' and officers' liability insurance products; and the Personal Lines
Underwriting Group, which has underwriting responsibility for personal property
and casualty insurance products for the manufactured housing and homeowners'
markets.
The following table sets forth, for the years ended December 31, 1998, 1999
and 2000 and for the nine months ended September 30, 2001, the gross written
premiums for each of our reportable business segments and the percentages that
those premiums represented.
FOR THE
NINE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------------- ---------------------
1998 1999 2000 2001
--------------------- --------------------- --------------------- ---------------------
DOLLARS PERCENTAGE DOLLARS PERCENTAGE DOLLARS PERCENTAGE DOLLARS PERCENTAGE
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Commercial Lines....... $163,162 82.7% $200,972 73.1% $239,446 66.2% $236,795 65.4%
Specialty Lines........ 30,396 15.4 48,532 17.7 68,193 18.8 60,699 16.8
Personal Lines......... 3,850 1.9 25,414 9.2 54,233 15.0 64,406 17.8
-------- ----- -------- ----- -------- ----- -------- -----
Total......... $197,408 100.0% $274,918 100.0% $361,872 100.0% $361,900 100.0%
======== ===== ======== ===== ======== ===== ======== =====
Commercial Lines
We have offered commercial multi-peril package policies to targeted niche
markets for over 15 years. We offer our specialty niche package programs to
non-profit and social service organizations, health and fitness organizations,
homeowners' associations, specialty schools, condominium associations, boat
dealerships, mobile home parks and day care facilities. We believe our ability
to provide professional liability, general liability and directors' and
officers' coverages in one policy is advantageous and convenient to our
producers and policyholders.
We have 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,
3
dual interest liability and physical damage on the rental vehicle. Additionally,
through arrangements with a number of the largest rent-a-car companies, we also
offer insurance at the rental car counter to rent-a-car customers. This
insurance protects them against liability for bodily injury and property damage
in excess of the statutory coverage provided with the rental vehicle and primary
coverage over the customer's personal automobile insurance coverage. We have
developed a proprietary sales training program to help the car rental companies
offer this coverage to the public.
We also offer a wide range of liability and physical damage coverages to
companies that lease automobiles on an extended term basis and to their
customers. For the renter, coverages include both primary liability and physical
damage coverage on the vehicle. For the leasing company, coverages include
contingent and excess liability over the primary liability layer, which protects
the leasing company in the event of a loss when the primary coverage is absent
or inadequate. Additional products offered to leasing companies include interim
primary liability and physical damage coverage, which protects the leasing
company before and after the vehicle is delivered to the renter; 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 leasing
company and renter for the difference between the leased vehicle's actual cash
value and the lease or loan value in instances where the vehicle is stolen or
damaged beyond repair.
We also have provided specialty property and inland marine policies since
1998, targeting large property and inland marine risks. Products include the
Ultimate Cover(R) policy, designed to insure specific classes of customers,
including shopping centers, business parks and medical facilities. We believe
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. For our inland marine
products, we concentrate our efforts on the larger segments of the inland marine
market, including new builders' risk and miscellaneous property floaters.
Specialty Lines
We have been providing specialty professional liability products for
approximately 13 years, specializing in 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 and other professionals. We
offer the directors' and officers' liability product to non-profit, for-profit
and financial institutions, with an emphasis on non-profit institutions and
private companies.
Personal Lines
We entered the personal lines property and casualty business when we
acquired Liberty American Insurance Group, Inc. in 1999. Through Liberty as our
personal lines platform, we produce and underwrite specialized manufactured
housing and homeowners' property and casualty business, principally in Florida,
and, to a lesser extent, in California, Arizona and Nevada. We also write and
service federal flood insurance under the National Flood Insurance Program for
both personal and commercial policyholders. 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 gated retiree communities. In coastal counties in Florida, we
also offer a homeowners' program that excludes wind exposure. The Florida
Windstorm Underwriting Association insures the wind exposure on these risks.
DISTRIBUTION
We market our products and services through a multi-channel distribution
system, which we believe enables us to increase the effectiveness of our
producers and more readily identify those opportunities offering a good balance
between risk and return. Our "mixed" marketing approach also gives us closer
interaction with our producers and policyholders and enhances our ability to
provide high quality service. We supplement our marketing efforts through trade
shows, direct mailings, print media and advertisements
4
placed in select national trade magazines. We have also established an
Internet-based marketing system for our personal lines business.
Our production underwriting organization, the focal point of our marketing
program, consisted of 144 professionals as of September 30, 2001, operating from
36 offices located across the United States. Our production underwriting
organization markets our products and services directly to our customers,
coordinates the efforts of our external producers and trains our external
producers to more effectively generate profitable business. Our production
underwriters have a strong underwriting orientation and act as our first screen
for consistency with our organization's underwriting criteria. For example, our
production underwriters review all applications against our general underwriting
guidelines before the applications are submitted to our home office underwriters
for a more detailed review.
Our network of independent agents and brokers was approximately 6,000
strong as of September 30, 2001. We have established special relationships with
a core group of 59 producers that we refer to as "preferred agents." Preferred
agents derive numerous benefits from us, including sharing in their underwriting
profits, in exchange for meeting pre-established production and loss ratio
criteria. Through consultative sales and marketing, we have developed
"value-added" relationships with our producers, allowing us to compete on a
basis other than price alone. Our field force assists our producers in
developing focused marketing plans as well as training agents to implement those
plans. Agents are also provided with leads as well as point of sale support to
enhance their effectiveness at customer presentations. The following table shows
our gross written premiums for the nine months ended September 30, 2001 by
source of production.
DISTRIBUTION OF GROSS WRITTEN
PREMIUMS BY PRODUCTION SOURCE
Production Underwriters..................................... 8%
Preferred Agents............................................ 21%
Independent Brokers......................................... 71%
---
Total............................................. 100%
===
During 2000, we renewed approximately 82% of our insurance policies. Our
average renewal rate over the last five years has been approximately 82%. We
attribute this to our strong relationships with our policyholders and producers,
maintained primarily through regular interaction with our production
underwriting organization, as well as our belief that we are perceived as a long
term, stable industry leader in the specialty property and casualty marketplace.
We are licensed in 48 states and the District of Columbia and write
business in all states and the District of Columbia. We are also approved to
write insurance on an excess and surplus lines basis in 37 states through our
surplus lines insurance subsidiary, Philadelphia Insurance Company.
MANAGEMENT
Our senior management team has extensive experience in the insurance
industry. James J. Maguire, our founder, Chairman and Chief Executive Officer,
has spent over 40 years in the industry. The remaining members of the senior
management team average over 20 years of insurance experience. Our senior
management team is supported by 9 regional Vice Presidents with an average of 13
years of experience.
RECENT DEVELOPMENTS
We have exposure to the September 11, 2001 terrorist attacks, with claims
expected to arise mainly from our business interruption, business personal
property, business property and workers' compensation insurance coverages. We
have performed a detailed analysis of contracts we believe are exposed to this
5
event. We estimate losses incurred of $4.0 million, net of reinsurance
recoveries, based on our preliminary reports and estimates of loss and damage.
We estimate ceded reinsurance coverage of $0.5 million. While this is our best
estimate at this time, it could change as more information becomes available. We
do not believe that there will be any collectibility issues with respect to the
$0.5 million of ceded losses.
Our most recent financial results are as follows. Net operating income,
excluding losses resulting from the September 11 terrorist attacks, for the
third quarter ended September 30, 2001 increased 43.1% to $8.3 million, $0.45
diluted earnings per share, versus net operating income of $5.8 million, $0.40
diluted earnings per share, for the same period in 2000. Net income for the
third quarter was $6.0 million, $0.32 diluted and $0.34 basic earnings per
share, versus $8.1 million, $0.56 diluted and $0.69 basic earnings per share,
for the same period in 2000. Net income for the quarter ended September 30, 2001
included pre-tax losses of $4.0 million, $0.14 diluted loss per share, resulting
from the September 11 terrorist attacks and $0.3 million, $0.01 diluted earnings
per share, in after-tax realized investment gains versus $2.3 million, $0.16
diluted earnings per share, in after-tax realized investment gains for the same
quarter in 2000. Gross written premiums increased 31.8% in the third quarter to
$137.2 million versus $104.1 million in the same quarter in 2000.
Net operating income, excluding losses resulting from the September 11
terrorist attacks, for the nine months ended September 30, 2001 increased 29.4%
to $22.0 million, $1.34 diluted earnings per share, versus net operating income
of $17.0 million, $1.16 diluted earnings per share, for the same period in 2000.
Net income for the nine months ended September 30, 2001 was $21.4 million, $1.31
diluted and $1.37 basic earnings per share, versus $19.6 million, $1.34 diluted
and $1.62 basic earnings per share, for the same period in 2000. Net income for
the nine months ended September 30, 2001 included pre-tax losses of $4.0
million, $0.16 diluted loss per share, resulting from the September 11 terrorist
attacks and $2.0 million, $0.13 diluted earnings per share, in after-tax
realized investment gains versus $2.6 million, $0.18 diluted earnings per share,
in after-tax realized investment gains for the same period in 2000. Gross
written premiums increased 33.5% for the nine month period in 2001 to $361.9
million, versus $271.1 million for the same period in 2000. Our book value per
share at September 30, 2001 was $17.31.
As a result of the terrorist attacks on September 11, the Administration
and Congress have been engaged in discussions with the insurance industry as to
the possible involvement of the federal government with respect to terrorism
insurance. There can be no assurance as to whether there will be any federal
government role in insuring losses from terrorism or the precise nature of any
role, and there is no assurance as to the effect of any federal government role
on our business and results of operations.
PRINCIPAL EXECUTIVE OFFICES
Our principal executive offices are located at One Bala Plaza, Suite 100,
Bala Cynwyd, Pennsylvania, 19004 (telephone number: (610) 617-7900).
6
THE OFFERING
Common stock offered
By Philadelphia
Consolidated.................. 3,000,000 shares
By the selling
shareholder................... 1,000,000 shares
Common stock outstanding after
the offering (assuming the
offering occurred on
September 30, 2001)......... 20,851,595 shares
Use of proceeds............... We estimate that our net proceeds from this
offering without exercise of the over-allotment
options will be approximately $108.7 million.
We intend to use these net proceeds for
- additional capital for our insurance
subsidiaries, and
- general corporate purposes.
We will not receive any proceeds from the sale
of shares by the selling shareholder.
Risk factors.................. See "Risk Factors" and other information
included in this prospectus for a discussion of
factors you should consider before deciding to
invest in our common stock.
Dividend policy............... We have not paid dividends on our common stock
and do not intend to pay any dividends in the
foreseeable future. We intend to retain
earnings to enhance future growth.
Nasdaq National Market
symbol........................ PHLY
The number of shares outstanding after the offering excludes 1,363,275
shares reserved for issuance on the exercise of options granted under our stock
option plans at an average option exercise price of $17.60 per share. The number
of shares outstanding after the offering assumes that the underwriters' over-
allotment options are not exercised. If the over-allotment options are exercised
in full, we will issue and sell an additional 600,000 shares, so that a total of
21,451,595 shares would be outstanding after the offering (assuming the offering
occurred on September 30, 2001).
SUMMARY FINANCIAL DATA
The following table sets forth our summary consolidated financial data and
other operating information. The financial data as of and for each of the five
years ended December 31, 2000 are derived from our audited consolidated
financial statements. The financial data as of and for the nine month periods
ended September 30, 2001 and 2000 are derived from our unaudited consolidated
financial statements. However, in management's opinion, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results for these periods have been included. Operating
results for the nine months ended September 30, 2001 are not necessarily
indicative of the results that may be expected for the entire year ending
December 31, 2001 or for any other period.
The following summary consolidated financial data should be read in
conjunction with the consolidated financial statements of Philadelphia
Consolidated and the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" incorporated by reference in this
prospectus.
7
SUMMARY CONSOLIDATED HISTORICAL FINANCIAL AND OPERATING DATA
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
AS OF
AND FOR THE
NINE MONTHS ENDED
AS OF AND FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------- -------------------------
1996 1997 1998 1999 2000 2000 2001
----------- ----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED)
OPERATIONS AND COMPREHENSIVE
INCOME STATEMENT DATA:
Gross Written Premiums.......... $ 136,855 $ 159,091 $ 197,408 $ 274,918 $ 361,872 $ 271,110 $ 361,900
Net Written Premiums............ 83,994 111,797 143,036 184,071 263,429 191,523 255,821
Net Earned Premiums............. 72,050 100,555 122,687 164,915 227,292 162,189 215,981
Net Investment Income........... 7,910 9,703 15,448 20,695 25,803 18,126 24,371
Net Realized Investment Gain
(Loss)........................ 260 (16) 474 5,700 11,718 4,038 3,105
Other Income.................... 282 228 219 4,722 8,981 7,525 221
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Revenue........... 80,502 110,470 138,828 196,032 273,794 191,878 243,678
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Loss and Loss Adjustment
Expenses...................... 40,118 55,009 66,374 99,410 131,304 94,183 132,658
Acquisition Costs and Other
Underwriting Expenses......... 22,210 31,344 38,422 53,793 75,054 53,568 71,043
Other Operating Expenses........ 1,386 1,909 2,212 8,939 14,679 9,962 5,136
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total Losses and
Expenses.............. 63,714 88,262 107,008 162,142 221,037 157,713 208,837
----------- ----------- ----------- ----------- ----------- ----------- -----------
Minority Interest:
Distributions on Company
Obligated Mandatorily
Redeemable Preferred
Securities of Subsidiary
Trust....................... 4,770 7,245 7,245 5,434 2,749
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income Before Income Taxes...... 16,788 22,208 27,050 26,645 45,512 28,731 32,092
Total Income Tax Expense........ 3,414 5,338 7,022 7,802 14,742 9,136 10,670
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net Income.............. $ 13,374 $ 16,870 $ 20,028 $ 18,843 $ 30,770 $ 19,595 $ 21,422
----------- ----------- ----------- ----------- ----------- ----------- -----------
BASIC EARNINGS PER
SHARE(1)(2)................... $ 1.13 $ 1.38 $ 1.63 $ 1.51 $ 2.53 $ 1.62 $ 1.37
----------- ----------- ----------- ----------- ----------- ----------- -----------
DILUTED EARNINGS PER
SHARE(1)(2)................... $ 0.94 $ 1.13 $ 1.34 $ 1.25 $ 2.11 $ 1.34 $ 1.31
----------- ----------- ----------- ----------- ----------- ----------- -----------
FINANCIAL POSITION:
Total Investments and Cash and
Cash Equivalents............ $ 180,061 $ 229,599 $ 388,059 $ 420,016 $ 487,028 $ 457,977 $ 588,961
Total Assets.................. 231,725 292,724 476,390 599,051 730,464 682,187 879,568
Unpaid Loss and Loss
Adjustment Expenses......... 96,642 122,430 151,150 188,063 237,494 226,680 286,787
Minority Interest in
Consolidated Subsidiaries... 98,905 98,905 98,905 98,905 --
Total Shareholders' Equity.... 85,642 111,284 137,483 161,440 182,325 171,158 309,061
Common Shares
Outstanding(1).............. 12,079,612 12,242,431 12,200,563 12,590,908 13,431,408 13,381,924 17,851,595
INSURANCE OPERATING RATIOS
(STATUTORY BASIS):
Net Loss and Loss Adjustment
Expenses to Net Earned
Premiums.................... 55.7% 55.3% 54.1% 59.7% 57.8% 58.1% 61.4%
Underwriting Expenses to Net
Written Premiums............ 31.1% 29.1% 31.0% 33.6% 31.3% 33.1% 31.1%
----------- ----------- ----------- ----------- ----------- ----------- -----------
Combined Ratio................ 86.8% 84.4% 85.1% 93.3% 89.1% 91.2% 92.5%
=========== =========== =========== =========== =========== =========== ===========
A A A+ A+ A+ A+ A+
A.M. Best Rating................ (Excellent) (Excellent) (Superior) (Superior) (Superior) (Superior) (Superior)
---------------
(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.
8
RISK FACTORS
IF OUR INSURANCE COMPANY SUBSIDIARIES ARE UNABLE TO PAY DIVIDENDS OR MAKE LOANS
TO US DUE TO GOVERNMENT REGULATIONS THAT APPLY TO INSURANCE COMPANIES OR FOR ANY
REASON, WE MAY NOT BE ABLE TO CONTINUE OUR NORMAL BUSINESS OPERATIONS.
We are a holding company. Our principal assets currently consist of all or
substantially all of the equity interests of our subsidiaries listed below:
- Philadelphia Indemnity Insurance Company;
- Philadelphia Insurance Company;
- Maguire Insurance Agency, Inc.;
- PCHC Investment Corp., a Delaware investment corporation;
- Liberty American Insurance Group, Inc., an insurance holding company;
- Mobile USA Insurance Company;
- Liberty American Insurance Company;
- Mobile Homeowners Insurance Agencies, Inc.; and
- Liberty American Premium Finance Company.
Philadelphia Indemnity Insurance Company, Philadelphia Insurance Company,
Mobile USA Insurance Company, Inc. and Liberty American Insurance Company are
our insurance company subsidiaries and are licensed to issue insurance policies.
Maguire Insurance Agency, Inc. is an underwriting manager and Mobile Homeowners
Insurance Agencies, Inc. is an insurance agency that markets, underwrites and
services mobile homeowners and preferred homeowners insurance policies.
Our primary sources of funds are dividends and payments from our
subsidiaries that we receive under tax allocation agreements. Government
regulations that apply to insurance companies restrict the ability of our
insurance company subsidiaries to pay dividends and make loans to us. The
accumulated profits of these subsidiaries from which dividends may be paid
totaled $96.6 million at December 31, 2000. Of this amount, these insurance
company subsidiaries may pay a total of about $24.6 million of dividends in 2001
without obtaining prior approval from the department of insurance for the states
in which they are located. Further, creditors of any of our subsidiaries will
have the right to be paid in full the amounts they are owed if a subsidiary
liquidates its assets or undergoes a reorganization or other similar transaction
before we will have the right to receive any distribution of assets from the
subsidiary, unless we also are recognized as a creditor of the subsidiary. If we
are unable to receive distributions from our subsidiaries, we may not be able to
continue our normal business operations. At September 30, 2001, our subsidiaries
had total liabilities, excluding liabilities owed to us, of approximately $570.4
million.
IF A.M. BEST DOWNGRADES THE RATINGS OF OUR INSURANCE COMPANY SUBSIDIARIES, WE
WILL NOT BE ABLE TO COMPETE AS EFFECTIVELY WITH OUR COMPETITORS AND OUR ABILITY
TO SELL INSURANCE POLICIES COULD DECLINE, REDUCING OUR SALES AND EARNINGS.
A.M. Best Company rates our insurance company subsidiaries "A+" (Superior).
According to A.M. Best Company, companies rated "A+" (Superior) have, on
balance, superior financial strength, operating performance and market profile,
when compared to the standards established by the A.M. Best Company, and have a
very strong ability to meet their ongoing obligations to policyholders. We
believe that the rating assigned by A.M. Best Company is an important factor in
marketing our products. If the agency downgrades our ratings in the future, it
is likely that:
- we would not be able to compete as effectively with our competitors; and
- our ability to sell insurance policies could decline.
If that happens, our sales and earnings would decrease. Rating agencies evaluate
insurance companies based on financial strength and the ability to pay claims,
factors more relevant to policyholders than investors.
9
IF OUR RESERVES FOR LOSSES AND COSTS RELATED TO ADJUSTMENT OF LOSSES ARE NOT
ADEQUATE, WE WOULD HAVE TO INCREASE OUR RESERVES, WHICH WOULD RESULT IN
REDUCTIONS IN NET INCOME AND POLICYHOLDERS' SURPLUS AND COULD RESULT IN A
DOWNGRADING OF THE RATING OF OUR INSURANCE COMPANY SUBSIDIARIES.
We establish reserves for losses and costs related to the adjustment of
losses under the insurance policies we write. We determine the amount of these
reserves based on our best estimate and judgment of the losses and costs we will
incur on existing insurance policies. Our insurance subsidiaries obtain an
annual statement of opinion from an independent actuary firm on these reserves.
While we believe that our reserves are adequate, we base these reserves on
assumptions about future events. The following factors may have a substantial
impact on our future loss experience:
- the amounts of claims settlements;
- legislative activity; and
- changes in inflation and economic conditions.
Actual losses and the costs we incur related to the adjustment of losses
under insurance policies may be different from the amount of reserves we
establish. Government regulators will require that we increase our reserves if
they later determine that we understated our reserves. When we increase
reserves, our net income for the period will decrease by a corresponding amount.
For example, during the third quarter of 1999 we increased our reserves by $5.0
million as a result of an increase in the incidence and amount of claims under
the general liability coverage of our nursing home and assisted living insurance
policies. We discontinued offering those classes of business during the fourth
quarter of 1998. In addition, strengthening reserves causes a reduction in
policyholders' surplus and could cause a downgrading of the rating of our
insurance company subsidiaries. This in turn could hurt our ability to sell
insurance policies.
We recently announced that we estimate our pre-tax losses from the recent
attacks of September 11, 2001 to be $4.0 million, net of reinsurance recoveries.
These estimates are based on our analysis to date and our examination of known
exposures. Although we are comfortable with these estimates, it is conceivable
that we will need to increase them given the uncertain nature of damage theories
and loss amounts and the ongoing development of facts related to the attacks.
IF MARKET CONDITIONS CAUSE REINSURANCE TO BE MORE COSTLY OR UNAVAILABLE, WE MAY
BE REQUIRED TO BEAR INCREASED RISKS OR REDUCE THE LEVEL OF OUR UNDERWRITING
COMMITMENTS.
As part of our overall risk and capacity management strategy, we purchase
reinsurance for significant amounts of risk underwritten by our insurance
company subsidiaries, especially catastrophe risks. Market conditions beyond our
control determine the availability and cost of the reinsurance we purchase,
which may affect the level of our business and profitability. Our reinsurance
facilities are generally subject to annual renewal. We may be unable to maintain
our current reinsurance facilities or to obtain other reinsurance facilities in
adequate amounts and at favorable rates. If we are unable to renew our expiring
facilities or to obtain new reinsurance facilities, either our net exposure to
risk would increase or, if we are unwilling to bear an increase in net risk
exposures, we would have to reduce the amount of risk we underwrite, especially
risks related to catastrophes. As a result of the attacks of September 11, 2001,
we anticipate significant increases in the price of reinsurance we purchase
beginning in 2002. We also anticipate that the terms available for reinsurance
will become less favorable to us.
WE CANNOT GUARANTEE THAT OUR REINSURERS WILL PAY IN A TIMELY FASHION, IF AT ALL,
AND, AS A RESULT, WE COULD EXPERIENCE LOSSES.
We transfer some of the risk we have assumed to reinsurance companies in
exchange for part of the premium we receive in connection with the risk.
Although reinsurance makes the reinsurer liable to us to the extent the risk is
transferred, it does not relieve us of our liability to our policyholders. Our
reinsurers may not pay the reinsurance recoverables that they owe to us or they
may not pay such recoverables on a timely basis. If our reinsurers fail to pay
us or fail to pay us on a timely basis, our financial results would be adversely
affected. The attacks of September 11, 2001 may affect the financial resources
of some of our reinsurers.
10
WE, AS A PRIMARY INSURER, MAY NOT BE ABLE TO OBTAIN REINSURANCE COVERAGE FOR
TERRORIST ACTS. IF THAT HAPPENS, WE WOULD HAVE A SIGNIFICANT GAP IN OUR
REINSURED PROTECTION AND WOULD BE EXPOSED TO POTENTIAL LOSSES AS A RESULT OF ANY
TERRORIST ACTS.
We cannot determine the full impact of the terrorist attacks of September
11, 2001 on the availability, price, and terms of insurance and reinsurance for
future acts of terrorism. Even if reinsurers are able to exclude coverage for
terrorist acts or price that coverage at unreasonably high rates, primary
insurers, like our insurance company subsidiaries, might not be able to likewise
exclude terrorist acts because of regulatory constraints. If this does occur,
we, in our capacity as a primary insurer, would have a significant gap in our
reinsured protection and would be exposed to potential losses as a result of any
terrorist acts.
CLAIMS RELATED TO CATASTROPHIC EVENTS COULD RESULT IN CATASTROPHE LOSSES.
It is possible that a catastrophic event could greatly increase claims
under the insurance policies we write. This, in turn, could result in losses for
one or more of our insurance company subsidiaries. Catastrophes may result from
a variety of events or conditions, including hurricanes, windstorms,
earthquakes, hail and other severe weather conditions and may include terrorist
events such as the attacks on the World Trade Center and Pentagon on September
11, 2001.
We generally try to reduce our exposure to catastrophe losses through
underwriting and the purchase of catastrophe reinsurance. But, reinsurance may
not be sufficient to cover our actual losses. In addition, a number of states
from time to time have passed legislation that has had the effect of limiting
the ability of insurers to manage risk, such as legislation prohibiting an
insurer from withdrawing from catastrophe-prone areas. If we are unable to
maintain adequate reinsurance or to withdraw from areas where we experience or
expect significant catastrophe-related claims, we could experience significant
losses.
OUR RESULTS MAY FLUCTUATE AS A RESULT OF MANY FACTORS, INCLUDING CYCLICAL
CHANGES IN THE INSURANCE INDUSTRY.
The results of companies in the property and casualty insurance industry
historically have been subject to significant fluctuations and uncertainties.
The industry's profitability can be affected significantly by:
- rising levels of actual costs that are not known by companies at the time
they price their products;
- volatile and unpredictable developments, including man-made,
weather-related and other natural catastrophes or additional terrorist
attacks;
- changes in loss reserves resulting from the general claims and legal
environments as different types of claims arise and judicial
interpretations relating to the scope of insurer's liability develop; and
- fluctuations in interest rates, inflationary pressures and other changes
in the investment environment, which affect returns on invested assets
and may impact the ultimate payout of losses.
The demand for property and casualty insurance can also vary significantly,
rising as the overall level of economic activity increases and falling as that
activity decreases. The property casualty insurance industry historically is
cyclical in nature. These fluctuations in demand and competition could produce
underwriting results that would have a negative impact on our results of
operations and financial condition.
WE FACE SIGNIFICANT COMPETITIVE PRESSURES IN OUR BUSINESS THAT COULD CAUSE
DEMAND FOR OUR PRODUCTS TO FALL AND ADVERSELY AFFECT OUR PROFITABILITY.
We compete with a large number of other companies in our selected lines of
business. We compete, and will continue to compete, with major U.S. and non-U.S.
insurers and other regional companies, as well as mutual companies, specialty
insurance companies, underwriting agencies and diversified financial services
companies. Some of our competitors have greater financial and marketing
resources than we do. Our profitability could be adversely affected if we lose
business to competitors offering similar or better products at or below our
prices. In addition, a number of new, proposed or potential legislative or
industry developments could further increase competition in our industry. New
competition from these developments could cause the demand for our products to
fall, which could adversely affect our profitability.
11
A number of new, proposed or potential legislative or industry developments
could further increase competition in our industry. These developments include:
- the enactment of the Gramm-Leach-Bliley Act of 1999 (which permits
financial services companies such as banks and brokerage firms to engage
in the insurance business), which could result in increased competition
from new entrants to our markets;
- the formation of new insurers and an influx of new capital in the
marketplace as existing companies attempt to expand their business as a
result of better pricing and/or terms;
- programs in which state-sponsored entities provide property insurance in
catastrophe-prone areas or other alternative markets types of coverage;
and
- changing practices caused by the Internet, which have led to greater
competition in the insurance business.
These developments could make the property and casualty insurance
marketplace more competitive by increasing the supply of insurance capacity. In
that event, recent favorable industry trends that have reduced insurance and
reinsurance supply and increased demand could be reversed and may negatively
influence our ability to maintain or increase rates. Accordingly, these
developments could have an adverse effect on our earnings.
BECAUSE WE ARE HEAVILY REGULATED BY THE STATES IN WHICH WE OPERATE, WE MAY BE
LIMITED IN THE WAY WE OPERATE.
We are subject to extensive supervision and regulation in the states in
which we operate. The supervision and regulation relate to numerous aspects of
our business and financial condition. The primary purpose of the supervision and
regulation is the protection of our insurance policyholders and not our
investors. The extent of regulation varies, but generally is governed by state
statutes. These statutes delegate regulatory, supervisory and administrative
authority to state insurance departments. This system of regulation covers,
among other things:
- standards of solvency, including risk-based capital measurements;
- restrictions on the nature, quality and concentration of investments;
- restrictions on the types of terms that we can include in the insurance
policies we offer;
- certain required methods of accounting;
- reserves for unearned premiums, losses and other purposes; and
- potential assessments for the provision of funds necessary for the
settlement of covered claims under certain insurance policies provided by
impaired, insolvent or failed insurance companies.
The regulations or the state insurance departments may affect the cost or
demand for our products and may impede us from obtaining rate increases or
taking other actions we might wish to take to increase our profitability.
Further, we may be unable to maintain all required licenses and approvals and
our business may not fully comply with the wide variety of applicable laws and
regulations or the relevant authority's interpretation of the laws and
regulations. Also, regulatory authorities have relatively broad discretion to
grant, renew or revoke licenses and approvals. If we do not have the requisite
licenses and approvals or do not comply with applicable regulatory requirements,
the insurance regulatory authorities could stop or temporarily suspend us from
carrying on some or all of our activities or monetarily penalize us. In light of
several recent significant property and casualty insurance company insolvencies,
it is possible that assessments we must pay to state guarantee funds may
increase.
12
BECAUSE OUR INVESTMENT PORTFOLIO IS MADE UP OF PRIMARILY FIXED INCOME
SECURITIES, OUR INVESTMENT INCOME COULD SUFFER AS A RESULT OF FLUCTUATIONS IN
INTEREST RATES.
We currently maintain and intend to continue to maintain an investment
portfolio made up of primarily fixed income securities. The fair value of these
securities can fluctuate depending on changes in interest rates. Generally, the
fair market value of these investments increases or decreases in an inverse
relationship with changes in interest rates, while net investment income earned
by us from future investments in fixed income securities will generally increase
or decrease with interest rates. Changes in interest rates may result in
fluctuations in the income derived from, and the valuation of, our fixed income
investments, which could have an adverse effect on our results of operations and
financial condition.
PROVISIONS OF THE PENNSYLVANIA BUSINESS CORPORATION LAW, OUR ARTICLES OF
INCORPORATION AND THE INSURANCE LAWS OF PENNSYLVANIA, FLORIDA AND OTHER STATES
MAY DISCOURAGE TAKEOVER ATTEMPTS.
The Pennsylvania Business Corporation Law contains "anti-takeover"
provisions. We have opted out of most of these provisions. However, Subchapter F
of Chapter 25 of the Business Corporation Law applies to us and may have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a shareholder might consider in his or her best interest, including
those attempts that might result in shareholders receiving a premium over market
price for their shares. Subchapter F of the Business Corporation Law prohibits
certain "business combinations" between an "interested shareholder" and a
corporation, unless the corporation's board of directors gives prior approval
and certain other conditions are satisfied, or there is an available exemption.
The term "business combination" is defined broadly to include various merger,
consolidation, division, exchange or sale transactions, including transactions
using our assets for purchase price amortization or refinancing purposes. An
"interested shareholder," in general, is a beneficial owner of shares entitling
that person to cast at least 20% of the votes that all shareholders would be
entitled to cast in an election of directors.
In addition, our Articles of Incorporation allow the Board of Directors to
issue one or more classes or series of preferred stock with voting rights,
preferences and other privileges as the Board may determine. The issuance of
preferred shares could adversely affect the holders of our common stock and
could prevent, delay or defer a change of control.
We are also subject to the laws of various states, like Pennsylvania and
Florida, governing insurance holding companies. Under these laws, a person
generally must obtain the applicable Insurance Department's approval to acquire,
directly or indirectly, 5% to 10% or more of the outstanding voting securities
of Philadelphia Consolidated or our insurance subsidiaries. An Insurance
Department's determination of whether to approve an 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 that
state would be reduced. These laws may delay or prevent a takeover of
Philadelphia Consolidated or our insurance company subsidiaries.
WE HAVE A LARGE SHAREHOLDER WHOSE INTERESTS MAY DIVERGE FROM THOSE OF OUR OTHER
SHAREHOLDERS.
Mr. James J. Maguire, our Chief Executive Officer and Chairman of our Board
of Directors, and his wife beneficially own approximately 26% of our issued and
outstanding common stock. If Mr. Maguire sells all 1,000,000 shares of common
stock as described in this prospectus, he and his wife will beneficially own
approximately 17% of our issued and outstanding common stock. Other members of
Mr. Maguire's immediate family own an additional 4% of our issued and
outstanding common stock. Consequently, Mr. Maguire will be in a position to
strongly influence the outcome of substantially all corporate actions requiring
shareholder approval, including mergers involving us, sales of all or
substantially all of our assets, and the adoption of certain amendments to our
Articles of Incorporation. In so acting, Mr. Maguire may have interests
different than, or adverse to, those of the rest of our shareholders.
13
USE OF PROCEEDS
We estimate that we will receive about $108.7 million in net proceeds from
this offering, based upon an assumed public offering price of $38.15 per share
(the last reported sale price of our common stock on the Nasdaq National Market
on November 6, 2001), after deducting underwriting discounts and commissions and
our estimated expenses for this offering of approximately $5.8 million. If the
underwriters' over-allotment is exercised in full, we estimate that our net
proceeds will be about $130.5 million.
We intend to use the net proceeds from this offering for additional capital
for our insurance subsidiaries, as needed, and for general corporate purposes.
We will not receive any proceeds from the sale of shares by the selling
shareholder.
DIVIDEND POLICY
We have not in the past paid dividends on our stock and do not intend to
pay any dividends in the foreseeable future. We intend to retain earnings to
enhance future growth.
As a holding company, we are dependent upon dividends and other permitted
payments from our subsidiaries to pay any cash dividend. Our subsidiaries'
ability to pay dividends to us is limited by government regulations. See "Risk
Factors."
14
CAPITALIZATION
The following table shows our capitalization at September 30, 2001, and as
adjusted to give effect to the sale of the common stock offered by this
prospectus based upon an assumed public offering price of $38.15 per share (the
last reported sale price of our common stock on the Nasdaq National Market on
November 6, 2001) and assumes underwriting discounts and commissions and
estimated offering expenses of approximately $5.8 million.
ACTUAL AS ADJUSTED
----------- --------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Loans....................................................... $ 29,841 $ 29,841
-------- --------
Shareholders' equity:
Preferred stock, par value $.01 per share, 10,000,000
shares authorized; no shares issued.................... -- --
Common stock no par value, 50,000,000 shares authorized,
17,851,595 (actual) and 20,851,595 (as adjusted) shares
issued and outstanding................................. 149,918 258,582
Additional paid-in capital
Retained earnings......................................... 145,958 145,958
Accumulated other comprehensive income.................... 13,185 13,185
-------- --------
Total shareholders' equity............................. 309,061 417,725
-------- --------
Total capitalization................................. $338,902 $447,566
======== ========
Book value per share........................................ $ 17.31 $ 20.03
15
PRICE RANGE OF COMMON STOCK
Our common stock is quoted on the Nasdaq National Market under the symbol
"PHLY." The following table shows the high and low bid prices of our common
stock as reported by the National Association of Securities Dealers for each
fiscal period shown.
COMMON STOCK
------------------
HIGH LOW
------- -------
1999
First quarter............................................. $24.188 $ 19.375
Second quarter............................................ 25.500 20.625
Third quarter............................................. 24.438 10.813
Fourth quarter............................................ 16.688 13.125
2000
First quarter............................................. 16.250 14.125
Second quarter............................................ 18.125 14.250
Third quarter............................................. 21.000 15.625
Fourth quarter............................................ 30.875 19.875
2001
First quarter............................................. 31.922 25.375
Second quarter............................................ 36.000 24.250
Third quarter............................................. 37.500 24.350
Fourth quarter (through November 6, 2001)................. 41.050 32.880
On November 6, 2001, the last reported sale price of our common stock on
the Nasdaq National Market was $38.15 per share. As of November 1, 2001, there
were 373 holders of record of our common stock.
16
BUSINESS
BUSINESS OVERVIEW AND STRATEGY
We design, market and underwrite specialty commercial and personal property
and casualty insurance products incorporating value-added coverages and services
for select target markets or niches. We distribute our insurance through a
diverse, multichannel delivery system centered around our direct production
underwriting organization. A select group of 59 "preferred agents" and a broader
network of approximately 6,000 independent agents supplement our production
underwriting organization, which consisted of 144 professionals located in 36
regional and field offices across the United States as of September 30, 2001.
Our commercial products include commercial multi-peril package insurance
targeting specialized niches, including non-profit organizations, health and
fitness organizations, homeowners' associations, condominium associations,
specialty schools and day care facilities; commercial automobile insurance
targeting the leasing and rent-a-car industries; property insurance for large
commercial accounts such as shopping centers, business parks and medical
facilities; and inland marine products targeting larger risks such as new
builders' risk and miscellaneous property floaters. We also write select classes
of professional liability and directors' and officers' liability products, as
well as personal property and casualty products for the manufactured housing and
homeowners' markets.
Our core strategy involves three major principles:
- First, we adhere to an underwriting philosophy aimed at consistently
generating underwriting profits through sound risk selection and pricing
discipline.
- Second, we distribute our products through a "mixed" marketing platform,
combining direct sales, an extensive network of independent agents and a
subset of this network, known as "preferred agents," with whom we have
established special distribution arrangements.
- Third, we seek to create value-added coverage and service features not
found in typical property and casualty policies that we believe
differentiate and enhance the marketability and appeal of our products
relative to our competitors.
We maintain detailed systems, records and databases that enable us to
continuously monitor our book of business and identify and react swiftly to
positive or negative development trends. We are able to track our performance,
including loss ratios, by segment, product, region, state, producer and
policyholder. We produce and review detailed profitability reports on a routine,
primarily monthly, basis as part of our policy of continuously analyzing and
reviewing our book of business.
We maintain a local presence to more effectively serve our producer and
customer base, operating through 9 regional offices and 27 field offices
throughout the country, which report to the regional offices. These offices are
staffed with field underwriters, marketers and, in some cases, claims personnel,
who interact closely with home office management in making key decisions. This
approach allows us to adapt our underwriting and marketing strategies to local
conditions and build close relationships with our customers and producers at the
local level.
We select and target industries and niches that present specialized areas
of demand where we believe we can grow our business through creatively
developing insurance products with innovative features specially designed to
meet those areas of demand. We have found that these features are not included
in typical property and casualty policies, enabling us to compete based on the
unique or customized nature of the coverage we provide as opposed to its price.
17
BUSINESS SEGMENTS
Our operations are divided into three reportable business segments:
- Commercial Lines Underwriting Group, which has underwriting
responsibility for the commercial multi-peril package, commercial
automobile and specialty property and inland marine insurance products;
- Specialty Lines Underwriting Group, which has underwriting responsibility
for the professional liability and directors' and officers' liability
insurance products; and
- Personal Lines Underwriting Group, which has underwriting responsibility
for personal property and casualty insurance products for the
manufactured housing and homeowners' markets.
The following table sets forth, for the years ended December 31, 1998, 1999
and 2000 and for the nine months ended September 30, 2001, the gross written
premiums for each of our reportable business segments and the percentages that
those premiums represented.
FOR THE
NINE MONTHS ENDED
FOR THE YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------------------------- ---------------------
1998 1999 2000 2001
--------------------- --------------------- --------------------- ---------------------
DOLLARS PERCENTAGE DOLLARS PERCENTAGE DOLLARS PERCENTAGE DOLLARS PERCENTAGE
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Commercial Lines....... $163,162 82.7% $200,972 73.1% $239,446 66.2% $236,795 65.4%
Specialty Lines........ 30,396 15.4 48,532 17.7 68,193 18.8 60,699 16.8
Personal Lines......... 3,850 1.9 25,414 9.2 54,233 15.0 64,406 17.8
-------- ----- -------- ----- -------- ----- -------- -----
Total.............. $197,408 100.0% $274,918 100.0% $361,872 100.0% $361,900 100.0%
======== ===== ======== ===== ======== ===== ======== =====
Commercial Lines
Commercial Package: We have offered commercial multi-peril package
policies to targeted niche markets for over 15 years. Our customers for these
policies include:
- non-profit and social service organizations;
- health and fitness organizations;
- homeowners' associations;
- specialty schools;
- condominium associations;
- boat dealerships;
- mobile home parks; and
- day care facilities.
The package policies provide a combination of comprehensive liability, property
and automobile 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. We believe our ability to provide professional liability, general
liability and directors' and officers' coverages in one policy is advantageous
and convenient to our producers and policyholders.
18
Commercial Automobile and Commercial Excess: We have provided commercial
automobile products to the leasing and rent-a-car industries for over 35 years.
We offer to the rent-a-car industry coverage for:
- the business owner's property; and
- dual interest liability and physical damage on the rental vehicle.
We offer additional coverage at the rental car counter to rent-a-car
customers through arrangements with a number of the largest rent-a-car
companies. This insurance protects them against liability for bodily injury and
property damage in excess of the statutory coverage provided with the rental
vehicle and primary coverage over the customer's personal automobile insurance
coverage. We have developed a proprietary sales training program to help the car
rental companies offer this coverage to the public. This coverage also pays
claims up to the coverage limit and is primary over the renter's personal
automobile insurance coverage.
We also offer a wide range of liability and physical damage coverages to
companies that lease automobiles on an extended term basis and to their
customers. For the renter, coverages include both primary liability and physical
damage coverage on the vehicle. For the leasing company, coverages include
contingent and excess liability over the primary liability layer, which protects
the leasing company in the event of a loss when the primary coverage is absent
or inadequate. We also offer the following products to leasing companies:
- interim primary liability and physical damage coverage, which protects
the leasing company before and after the vehicle is delivered to the
renter;
- 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 leasing company
and renter for the difference between the leased vehicle's actual cash
value and the lease or loan value in instances where the vehicle is
stolen or damaged beyond repair.
Specialty Property & Inland Marine: In September 1998, we introduced a new
line of business with our specialty property and inland marine underwriters.
These underwriters specialize in:
- insuring large property risks for specific classes of customers,
including shopping centers, business parks and medical facilities; and
- underwriting and providing marketing for various classes of inland marine
insurance, concentrating on the larger segments of inland marine,
including new builders' risk and miscellaneous property floaters.
Specialty Lines
We have been providing specialty professional liability products for
approximately 13 years, specializing in 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 and other professionals. We
offer the directors' and officers' liability product to non-profit, for-profit
and financial institutions, with an emphasis on non-profit institutions and
private companies.
Personal Lines
We entered the personal lines property and casualty business when we
acquired Liberty American Insurance Group, Inc. in 1999. Through Liberty as our
personal lines platform, we produce and underwrite specialized manufactured
housing and homeowners' property and casualty business, principally in Florida,
and, to a lesser extent, in California, Arizona and Nevada. We also write and
service federal flood insurance under the National Flood Insurance Program for
both personal and commercial policyholders.
19
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 gated retiree communities.
In coastal counties in Florida, we also offer a homeowners' program that
excludes wind exposure. The Florida Windstorm Underwriting Association insures
the wind exposure on these risks.
UNDERWRITING AND PRICING
Our three underwriting divisions, the commercial lines, specialty lines,
and personal lines, are responsible for pricing, managing the risk selection
process and monitoring loss ratios and trends in their respective books of
business.
We attempt to adhere to conservative underwriting and pricing practices.
Our underwriting strategy is detailed in an "Underwriting Performance Goals"
document signed by each underwriting professional. We maintain written
underwriting guidelines for all classes of business underwritten, and we update
them regularly. We maintain adherence to underwriting guidelines through
underwriting audits, and we measure product price levels using 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, we are
willing to re-underwrite, sharply curtail or discontinue a product if we believe
it presents unacceptable risks.
The Commercial Lines Underwriting Group has underwriting responsibility for
our commercial multi-peril package, commercial automobile and specialty property
and inland marine products. The Commercial Lines Underwriting Group currently
consists of 33 home office underwriters that are supported by underwriting
assistants, raters, and other policy administration personnel. The commercial
lines home office underwriters and support staff underwrite and service renewal
business and support the field underwriters. The underwriting unit is under the
direction of an Underwriter Manager who reports to the Vice President of
Commercial Lines Underwriting.
We have commercial lines underwriters in each of our regional marketing
offices and two of our field offices. These 15 underwriters must price and
underwrite new business within our guidelines and policy issuance. Our senior
underwriting officers and our home office, however, are responsible for overall
management of the book of business. We believe that our ability to deliver
excellent service and build long lasting relationships is enhanced through
maintaining a local presence.
The Specialty Lines Underwriting Group consists of 15 home office
underwriters and underwriter trainees and 16 regional underwriters. These
underwriters and underwriter trainees are supported by underwriting assistants,
raters, and other policy administration personnel. The specialty lines
underwriters underwrite specific professional liability products within
designated marketing regions. These regional underwriters work closely with our
marketing department.
The Personal Lines Underwriting Group is located in Pinellas Park, Florida.
This underwriting staff consists of 13 professionals who are under the direction
of our Personal Lines Underwriting Vice President. Rating software and the
Internet automate much of the underwriting function. The underwriting guidelines
are embedded within our software program and will not allow binding of accounts
if a risk does not meet our guidelines. We have a proactive exposure
distribution management system in place to assist with respect to portfolio
optimization. This is managed on a ZIP code level basis through in-house
software and external modeling tools. We inspect all risks on our new preferred
homeowners program and manufactured homes on private property.
We use a combination of Insurance Services Office, Inc., known as ISO,
coverage forms and rates and independently filed forms and rates. We
independently develop coverage forms and rates 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 our products from our competitors' products and are
independently filed with state insurance departments.
20
REINSURANCE
We have entered into reinsurance agreements for the purpose of limiting our
loss exposure and diversifying business. Our casualty excess of loss reinsurance
agreement provides that we bear the first layer of liability on each occurrence
(varying from $0.25 million to $1.0 million based upon the specific product) and
that our reinsurer bears 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 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.
Our property excess of loss reinsurance treaty provides that we bear the
first layer of loss on each risk, varying from $0.25 million to $0.50 million
based upon the specific product, and that the reinsurers bear the next layer of
loss up to $10.0 million on each risk. We have an automatic facultative excess
of loss cover for each property risk in excess of $10.0 million, up to $50.0
million. Additionally, we have property catastrophe reinsurance for our
commercial and personal property books of business under which we bear the first
$5.0 million in catastrophe losses per event, with the reinsurers bearing the
next $242.4 million, except that, outside of Florida, we bear the first $5.0
million in catastrophe losses per event, with reinsurers bearing the next $5.0
million on our commercial property book of business. Based upon the modeling
methods used by us to estimate our probable maximum loss, we currently maintain
catastrophe reinsurance coverage for the 250-year storm event on personal lines
business and the 100-year storm event on our commercial lines business.
We also have 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. An
errors and omissions insurance policy provides an additional $5.0 million of
coverage for these exposures.
Effective January 1, 2001, we entered into a three-year aggregate stop loss
reinsurance agreement commencing with the 2001 accident year. The agreement
covers all the business written by us. Under the terms of the agreement, the
reinsurer provides reinsurance protection for an aggregate dollar limit of
losses and loss adjustment expenses in excess of a predetermined loss ratio (the
sum of losses and loss adjustment expenses divided by earned premiums).
We seek to limit the risk of a reinsurer's default in a number of ways.
First, we principally contract with large reinsurers rated at least "A-"
(Excellent) by A.M. Best. Second, we seek to collect the obligations of our
reinsurers on a timely basis. We support this collection effort through the
regular monitoring of reinsurance receivables. Finally, we typically do not
write casualty policies in excess of $11.0 million or property policies in
excess of $25.0 million. Although reinsurance makes the reinsurer liable to us
to the extent the risk is transferred, it does not relieve us of our liability
to our policyholders. The attacks of September 11, 2001 may effect the financial
resources of some of our reinsurers.
We regularly assess our reinsurance needs and seek to improve the terms of
our reinsurance arrangements as market conditions permit. Such improvements may
involve increases in retentions, modifications in premium rates, and changes in
reinsurers.
MARKETING AND DISTRIBUTION
Our marketing plan is founded on proactive risk selection and relationships
with our direct sales force and customers in clearly defined target markets.
Within this framework, our marketing effort is designed to assure a systematic
and disciplined approach to developing business which is anticipated to be
profitable.
We distribute our insurance through a diverse, multichannel delivery system
centered around our direct production underwriting organization, which includes
a network of approximately 6,000 independent agents and our "preferred agent"
program. Our most important distribution channel is our production underwriting
organization. Although we have always written business directly, we established
the production underwriting organization to coordinate our direct sales efforts
as well as act as the interface with our external producers. The production
underwriting organization is currently comprised of 144 professionals located in
36 regional and field offices across the country as of September 30, 2001. The
field offices are focused daily on interacting with prospective and existing
insureds. In addition to this direct
21
marketing, we have formed relationships with approximately 6,000 agents either
because the agent has a preexisting relationship with the insured or has sought
our expertise in one of our specialty products. This mixed marketing concept
provides us with the flexibility to respond to changing market conditions and,
when appropriate, shift our emphasis between direct and indirect marketing
approaches to seize opportunities as they arise. In addition, we believe the
ability of the production underwriting organization to gather market
intelligence enables the rapid identification of soft markets and redeployment
to firmer markets, from a product line or geographic perspective. We believe
that our mixed marketing platform provides a competitive edge in stable market
conditions, the strength of which is all the more evident during periods of
dislocation or consolidation.
Through our preferred agent program we form business relationships with
brokers specializing in our business niches. The program consisted of 59
preferred agents at September 30, 2001. We select preferred agents based on
productivity and loss experience, and they receive additional benefits from us
in exchange for meeting our defined production and profitability criteria.
We supplement our marketing efforts through affinity programs, trade shows,
direct mailings and national advertisements placed in trade magazines serving
industries in which we specialize, as well as links to industry web sites. We
have also enhanced our marketing with Internet-based initiatives such as our
personal lines division's "In Touch"(SM) real-time policy inquiry system. In
Touch(SM) allows agents to view account data, process non-dollar endorsements
and, in selected states and for selected products, rate a policy over the
Internet. Also, the specialty lines division partners with a managing
underwriter to offer select professional liability and directors' and officers'
liability products over the Internet.
PRODUCT DEVELOPMENT
Consistent with our focus on select niches and our product differentiation
strategy, we continually seek out and evaluate new product opportunities. Direct
contacts between our field and home office personnel and our customers have
produced a number of new product ideas. All new product ideas are presented to
our product development committee for consideration. The product development
committee, currently composed of our Executive Vice President and 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 our culture and philosophy. For each new product, we
prepare an individualized test market plan and address such matters as the
appropriate distribution channel (for example, 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 we customarily use. After
we approve a new product for test marketing, we monitor our success based on
specified criteria (for example, underwriting results, sales success, product
demand and competitive pressures). If a new product does not meet our
expectations, we either move to improve results by initiating adjustments or
abandon the product.
CLAIMS MANAGEMENT AND ADMINISTRATION
Because of our emphasis on underwriting profitability, we actively manage
claims under our policies to investigate reported incidents at an early stage,
service our customers and minimize fraud. Our claims supervisors and our
reinsurers regularly audit our claims files in an attempt to ensure that claims
are being processed properly and that reserves are being set at appropriate
levels.
Our staff of claims management professionals is assigned to dedicated claim
units within specific niche markets. Each of these units receives legislation
and product development updates from the unit director. Claims management
personnel have an average of about fifteen years of experience in the industry.
Staff within the dedicated claim units have an average of ten years experience
in the industry.
We maintain a special investigations unit to investigate suspicious claims
and to serve as a clearinghouse for information about 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.
22
LOSS AND LOSS ADJUSTMENT EXPENSES
We are liable for losses and loss adjustment expenses under our insurance
policies and reinsurance treaties. While our professional liability policies are
written on claims-made forms and while claims on our 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 us and our payment of the loss. We reflect our
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, we establish a case
reserve for the estimated amount of our ultimate loss and loss adjustment
expense. This estimate reflects an informed judgment, based on our reserving
practices and the experience of our claims staff. Management also establishes
reserves on an aggregate basis to provide for losses incurred but not reported,
which are known as IBNR, as well as future development on claims reported to us.
As part of the reserving process, we review historical data and consider
the anticipated effect of various factors, including known and anticipated legal
developments, changes in societal attitudes that could affect damages awarded in
lawsuits, inflation and economic conditions. Reserve amounts are necessarily
based on management's estimates and judgments. As new data become available,
these estimates and judgments are revised, resulting in increases or decreases
to existing reserves. Our insurance subsidiaries obtain an annual statement of
opinion from an independent actuary firm on these reserves.
The following table presents 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, we increased
losses and loss adjustment expenses incurred by $2.5 million in 2000. This
development was primarily due to losses emerging at a higher rate for the 1997
and 1998 accident years than had been originally anticipated for several
products in the commercial lines segment when the initial reserves were
estimated.
AS OF THE YEARS ENDED
DECEMBER 31,
------------------------------
1998 1999 2000
-------- -------- --------
(DOLLARS IN THOUSANDS)
Unpaid loss and loss adjustment expenses at beginning of
year(1)................................................... $108,928 $137,205 $161,353
-------- -------- --------
Provision for losses and loss adjustment expenses for
current year claims....................................... 69,544 99,663 128,761
Increase (Decrease) in estimated ultimate losses and loss
adjustment expenses for prior year claims................. (3,170) (253) 2,543
-------- -------- --------
Total incurred losses and loss adjustment expenses.......... 66,374 99,410 131,304
-------- -------- --------
Loss and loss adjustment expense payments for claims
attributable to:
Current year.............................................. 13,402 31,493 36,271
Prior years............................................... 26,870 43,769 60,922
-------- -------- --------
Total payments.............................................. 40,272 75,262 97,193
-------- -------- --------
Unpaid loss and loss adjustment expenses at end of
year(2)................................................... $135,030 $161,353 $195,464
======== ======== ========
---------------
(1) 1999 balance adjusted to include $2,175 net unpaid loss and loss adjustment
expenses for Mobile USA Insurance Company as of acquisition date.
(2) Unpaid loss and loss adjustment expenses differ from the amounts reported in
our consolidated financial statements because of the inclusion in the
Consolidated Financial Statements of reinsurance receivables of $42,030,
$26,710 and $16,120 at December 31, 2000, 1999 and 1998, respectively.
23
The following table presents the development of our 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 our 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.
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1990 1991 1992 1993 1994 1995
------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)(1)(2)(3)
Unpaid Loss and Loss
Adjustment Expenses,
As Stated $15,930 $22,248 $31,981 $38,714 $53,595 $68,246
Cumulative Paid as of:
1 year later 4,286 6,698 9,865 10,792 12,391 15,214
2 years later 8,084 12,485 16,290 19,297 23,139 31,410
3 years later 10,838 16,288 21,253 24,991 33,511 40,637
4 years later 12,907 17,780 24,299 28,903 38,461 47,994
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
2 years later 15,712 21,327 30,428 38,016 52,062 66,061
3 years later 14,822 21,198 29,648 37,184 51,149 63,872
4 years later 14,811 21,118 29,306 36,272 49,805 59,085
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
Percentage 9.6% 6.9% 13.3% 12.7% 14.6% 17.0%
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------------
1996 1997 1998 1999 2000
------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)(1)(2)(3)
Unpaid Loss and Loss
Adjustment Expenses,
As Stated $85,723 $108,928 $136,237 $161,353 $195,464
Cumulative Paid as of:
1 year later 22,292 26,870 43,769 60,922
2 years later 38,848 56,488 84,048
3 years later 52,108 80,206
4 years later 63,738
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
Unpaid Loss and Loss
Adjustment Expenses
re-estimated as of
End of Year:
1 year later 84,007 105,759 135,984 163,896
2 years later 81,503 103,513 138,245
3 years later 76,348 104,712
4 years later 73,992
5 years later
6 years later
7 years later
8 years later
9 years later
10 years later
Cumulative Redundancy
(Deficiency) Dollars $11,731 $ 4,216 $(2,008) $(2,543)
Percentage 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 in the
Consolidated Financial Statements 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) We maintain our historical loss records net of reinsurance and therefore are
unable to conform the presentation of this table to the financial
statements.
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 our 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 our financial statements prepared in accordance with
generally accepted accounting principles with respect to recording the effects
of reinsurance. Unpaid loss and loss
24
adjustment expenses under statutory accounting practices are reported net of the
effects of reinsurance whereas under generally accepted accounting principles
these amounts are reported without giving effect to reinsurance. Under generally
accepted accounting principles, reinsurance receivables, with a corresponding
increase in unpaid loss and loss adjustment expense, have been recorded. 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
generally accepted accounting principles 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 presents the statutory consolidated loss, expense and
combined ratios of our insurance subsidiaries together with the property and
casualty industry-wide statutory combined ratios after policyholders' dividends.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1996 1997 1998 1999 2000
----- ----- ----- ----- -----
Loss Ratio..................................... 55.7% 55.3% 54.1% 59.7% 57.8%
Expense Ratio.................................. 31.1% 29.1% 31.0% 33.6% 31.3%
----- ----- ----- ----- -----
Statutory Combined Ratio....................... 86.8% 84.4% 85.1% 93.3% 89.1%
===== ===== ===== ===== =====
Industry Statutory Combined Ratio after
Policyholders' Dividends..................... 105.8%(1) 101.6%(1) 105.6%(1) 107.8%(1) 110.3%(2)
===== ===== ===== ===== =====
---------------
(1) Source: Best's Review/Preview PC 2001 Premium-to-Surplus Ratio.
(2) Source: Best's Review/Preview PC 2001 (Estimated 2000).
While there are no statutory provisions governing premium-to-surplus
ratios, regulatory authorities regard this ratio as an important indicator of an
insurer's ability to withstand abnormal loss experience. Guidelines established
by the National Association of Insurance Commissioners provide that an insurer's
net premium-to-surplus ratio is satisfactory if it is below 3 to 1.
The following table presents, for the periods indicated, net written
premiums to policyholders' surplus for our insurance subsidiaries (statutory
basis):
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Net Written Premiums(1).......... $83,994 $110,790 $143,036 $195,258 $263,637
Policyholders' Surplus........... $81,906 $105,985 $152,336 $179,341 $193,292
Premium to Surplus Ratio(1)...... 1.0 to 1.0 1.0 to 1.0 1.0 to 1.0 1.1 to 1.0 1.4 to 1.0
---------------
(1) 1999 includes $11,187 net written premiums for Mobile USA Insurance Company
from January 1, 1999 to date of acquisition.
INVESTMENTS
Our investment objective is to realize 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
25
and long-term liabilities. We also seek to maintain and improve our A.M. Best
rating. We utilize professional investment managers for our fixed maturity and
equity investments, which consist of diversified issuers and issues.
At September 30, 2001, we had total investments with a carrying value of
$543.6 million, 93.2% of which 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 6.8% of our total investments consisted primarily of
publicly-traded common stocks.
The following table sets forth information concerning the composition of
our total investments at September 30, 2001:
ESTIMATED
AMORTIZED MARKET CARRYING PERCENT OF
COST VALUE VALUE CARRYING VALUE
--------- --------- -------- --------------
(DOLLARS IN THOUSANDS)
Fixed Maturities:
Obligations of States and Political
Subdivisions............................... $ 80,362 $ 83,936 $ 83,936 15.4%
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and
Agencies................................... 34,059 35,414 35,414 6.5
Corporate Bank Debt Securities................ 180,081 184,910 184,910 34.1
Collateralized Mortgage Securities............ 69,833 72,313 72,313 13.3
Asset Backed Securities......................... 128,503 129,876 129,876 23.9
Equity Securities............................... 30,509 37,182 37,182 6.8
-------- -------- -------- -----
Total Investments............................... $523,347 $543,631 $543,631 100.0%
======== ======== ======== =====
At September 30, 2001, approximately 97.8% of our insurance subsidiaries'
fixed maturity securities (cost basis) consisted of U.S. government securities
or securities rated "1" or "2" by the National Association of Insurance
Commissioners. Additionally, our fixed maturities possessed an average lowest
quality rating of "AA-."
The cost and estimated market value of fixed maturity securities at
September 30, 2001, 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.................................... $ 17,595 $ 17,858
Due after one year through five years...................... 133,037 137,034
Due after five years through ten years..................... 64,583 67,919
Due after ten years........................................ 79,287 81,449
Collateralized Mortgage and Asset Backed Securities........ 198,336 202,189
-------- --------
Total............................................ $492,838 $506,449
======== ========
Our insurance subsidiaries' investments 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.
26
SELLING SHAREHOLDER
AND RELATED INFORMATION
The following table includes (1) the identity of the selling shareholder,
(2) the number of shares and the percentage of common stock that the selling
shareholder owned before the offering, (3) the number of shares that the selling
shareholder is offering for his account, and (4) the number of shares and the
percentage of common stock that the selling shareholder will own after
completion of the offering, assuming all shares owned by the selling
shareholders covered by this prospectus are sold.
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF
SHARES OF COMMON STOCK SHARES OF COMMON STOCK
BEFORE OFFERING(1) NUMBER OF SHARES AFTER OFFERING(2)
SELLING -------------------------- OF COMMON STOCK --------------------------
SHAREHOLDER NUMBER PERCENTAGE(3) BEING OFFERED NUMBER PERCENTAGE(3)
----------- --------- ------------- ---------------- --------- -------------
James J. Maguire......... 4,584,781 25.7% 1,000,000 3,584,781 17.2%
---------------
(1) Of these shares, 1,750,500 are owned jointly by the selling shareholder and
his wife Frances Maguire, as to which the selling shareholder shares the
voting and investment power with his wife; 254,266 are owned by The Maguire
Foundation of which the selling shareholder is co-director with his wife as
to which the selling shareholder shares voting and investment power with his
wife; and 200,000 are owned of record by his wife. The selling shareholder
disclaims beneficial ownership of the 200,000 shares owned of record by his
wife.
(2) Assumes that the selling shareholder will sell all shares of common stock he
is offering by this prospectus to third parties unaffiliated with the
selling shareholder.
(3) Percentages are calculated in accordance with Section 13(d) of the Exchange
Act and the rules promulgated under the Exchange Act and are based upon
17,851,595 shares of common stock outstanding as of September 30, 2001 and
20,851,595 shares of common stock outstanding after this offering.
James J. Maguire has served as our Chief Executive Officer and Chairman of
the Board of Directors since our formation in 1981 and, until October 2000, also
served as our President. He is also the Chief Executive Officer and a director
of the following subsidiaries of Philadelphia Consolidated: Philadelphia
Indemnity Insurance Company; Philadelphia Insurance Company; Maguire Insurance
Agency, Inc. and Liberty American Insurance Group, Inc.
The selling shareholder is not making an offer to sell these securities in
any jurisdiction where the offer or sale is not permitted.
27
UNDERWRITING
We intend to offer the shares through the underwriters, for whom Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Banc of America Securities LLC
are acting as representatives. Subject to the terms and conditions described in
a purchase agreement among us, the selling shareholder and the underwriters, we
and the selling shareholder have agreed to sell to the underwriters, and the
underwriters severally have agreed to purchase from us and the selling
shareholder, the number of shares listed opposite their names below.
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------ ---------
Merrill Lynch, Pierce, Fenner & Smith Incorporated..........
Banc of America Securities LLC..............................
---------
Total.......................................... 4,000,000
=========
The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We and the selling shareholder have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to make in respect of
those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
Merrill Lynch will be facilitating Internet distribution for this offering
to some of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its online brokerage customers.
An electronic prospectus is available on the Internet Web site maintained by
Merrill Lynch. Other than the prospectus in electronic format, the information
on the Web site of Merrill Lynch is not part of this prospectus.
COMMISSIONS AND DISCOUNTS
The underwriters have advised us and the selling shareholder that they
propose initially to offer the shares to the public at the public offering price
on the cover page of this prospectus and to dealers at that price less a
concession not in excess of $ per share. The underwriters may allow, and the
dealers may reallow, a discount not in excess of $ per share to other
dealers. After the offering, the public offering price, concession and discount
may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before expenses to us and the selling shareholder. The information
assumes either no exercise or full exercise by the underwriters of their
over-allotment options.
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
Public offering price................................. $ $ $
Underwriting discount................................. $ $ $
Proceeds, before expenses, to Philadelphia
Consolidated........................................ $ $ $
Proceeds, before expenses, to the selling
shareholder......................................... $ $ $
28
The expenses of the offering, not including the underwriting discount, are
estimated at $350,000 and are payable by Philadelphia Consolidated.
OVER-ALLOTMENT OPTIONS
We have granted options to the underwriters to purchase up to 600,000
additional shares at the public offering price less the underwriting discount.
The underwriters may exercise these options for 30 days from the date of this
prospectus solely to cover any over-allotments. If the underwriters exercise
these options, each will be obligated, subject to conditions contained in the
purchase agreement, to purchase a number of additional shares proportionate to
that underwriter's initial amount reflected in the above table.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors have agreed, with exceptions,
not to sell or transfer any common stock for 90 days after the date of this
prospectus without first obtaining the written consent of Merrill Lynch.
Specifically, we and these other individuals have agreed not to directly or
indirectly:
- offer, pledge, sell or contract to sell any common stock;
- sell any option or contract to purchase any common stock;
- purchase any option or contract to sell any common stock;
- grant any option, right or warrant for the sale of any common stock;
- lend or otherwise dispose of or transfer any common stock;
- request or demand that we file a registration statement related to the
common stock; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common stock whether
any such swap or transaction is to be settled by delivery of shares or
other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible
into or exchangeable or exercisable for or repayable with common stock. It also
applies to common stock owned now or acquired later by the person executing the
agreement or for which the person executing the agreement later acquires the
power of disposition. The lockup provisions, however, do not apply to:
- dispositions of common stock by delivery of shares to us as payment for
some or all of (i) the exercise price of any option to purchase common
stock granted by us, and (ii) that person's income tax withholding
obligation in connection with any option;
- the issuance by us of shares of common stock upon the exercise of an
option or warrant or the conversion of a security outstanding on the date
of this prospectus of which the underwriters have been advised in
writing;
- the issuance by us of additional options under existing stock option
plans, provided that such options are not exercisable during the 90 day
lock-up period;
- transfers by any person other than us as a bona fide gift, provided that
the person receiving the transfer agrees to be bound by the lock-up
restrictions; and
- transfers for estate planning purposes to family members or to trusts or
other entities for the benefit of family members, provided that the
person receiving the transfer agrees to be bound by the lock-up
restrictions.
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of the shares is completed, SEC rules may limit the
underwriters from bidding for and purchasing our common stock. However, the
underwriters may engage in transactions that stabilize the price of the common
stock, such as bids or purchases to peg, fix or maintain the price.
29
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the underwriters may reduce that short position by
purchasing shares in the open market. The underwriters may also elect to reduce
any short position by exercising all or part of the over-allotment option
described above. Purchases of the common stock to stabilize its price or to
reduce a short position may cause the price of the common stock to be higher
than it might be in the absence of such purchases.
Neither we, the selling shareholder nor any of the underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the common stock. In
addition, neither we, the selling shareholder nor any of the underwriters makes
any representation that the underwriters will engage in these transactions or
that these transactions, once commenced, will not be discontinued without
notice.
PASSIVE MARKET MAKING
In connection with this offering, underwriters and selling group members
may engage in passive market making transactions in the common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Securities Exchange Act of 1934 during a period before the commencement of
offers or sales of common stock and extending through the completion of
distribution. A passive market maker must display its bid at a price not in
excess of the highest independent bid of that security. However, if all
independent bids are lowered below the passive market maker's bid, that bid must
then be lowered when specified purchase limits are exceeded.
Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us. They have received customary fees and
commissions for these transactions.
TRANSFER AGENT
The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Co., and its address is 40 Wall Street, New York, NY 10005.
WHERE YOU CAN FIND MORE INFORMATION --
INCORPORATION OF INFORMATION BY REFERENCE
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any document we file at the
following public reference rooms maintained by the SEC at:
450 Fifth Street, N.W 233 Broadway 500 West Madison Street
Washington, DC 20549 New York, NY 10279 Chicago, IL 60661
You may obtain information on the operation of the SEC's public reference
room by calling the SEC at 1-800-SEC-0330. Our SEC filings also are available to
the public from the SEC's website at http://www.sec.gov.
We have filed a registration statement on Form S-3 with the SEC to register
the shares offered by this prospectus. This prospectus is part of the
registration statement. However, this prospectus does not contain all the
information that you can find in the registration statement or the exhibits to
the registration statement. You should refer to the registration statement and
to the exhibits filed with the registration statement for additional information
about us, our consolidated subsidiaries and the shares.
The SEC allows us to "incorporate by reference" the information we file
with them. This means that we may disclose information to you by referring you
to other documents we have filed with the SEC. The information that we
incorporate by reference is considered to be part of this prospectus. In
addition, information that we file with the SEC after the date of this
prospectus will automatically update and supersede the information in this
prospectus.
30
We incorporate by reference in this prospectus all the documents listed
below and any filings Philadelphia Consolidated makes with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
prospectus and before all the shares of common stock offered by this prospectus
have been sold or de-registered:
- the annual report on Form 10-K for the fiscal year ended December 31,
2000;
- the quarterly reports on Form 10-Q for the fiscal periods ended March 31,
June 30 and September 30, 2001;
- the current reports on Form 8-K filed with the SEC on February 13,
February 20, May 3, May 4, June 1, July 20, September 25 and November 5,
2001; and
- the description of our common stock, no par value, that is contained in
the registration statement on Form 8-A/A, dated September 13, 1993,
including any amendments or reports filed for the purpose of updating the
description of the shares.
You may send a written request or call us to obtain without charge a copy
of the documents incorporated by reference in this prospectus. We will not send
exhibits to these documents unless we specifically incorporated the exhibits by
reference in this prospectus. Make your request by calling or writing to:
Craig P. Keller
Senior Vice President, Secretary, Treasurer
and Chief Financial Officer
Philadelphia Consolidated Holding Corp.
One Bala Plaza, Suite 100
Bala Cynwyd, PA 19004
(610) 617-7900
You should rely only on the information that we have provided or
incorporated by reference in this prospectus. We have not authorized anyone else
to provide you with different information. You should assume that the
information in this prospectus, as well as information we previously filed with
the SEC and incorporated by reference, is accurate only as of the date on the
front cover of this prospectus. Our business, financial condition, results of
operations and prospects may have changed since then.
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Some of the information in this prospectus may contain forward-looking
statements. These statements can be identified by the use of forward-looking
phrases such as "will likely result," "may," "are expected to," "is
anticipated," "estimate," "projected," "intends to," or other similar words.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from those projected, such as:
- changes in the business environment in which we operate, including
inflation and interest rates;
- availability, terms and collectibility of reinsurance;
- changes in taxes, laws and governmental regulations;
- competitive product and pricing activity;
- difficulties of managing growth profitably;
- catastrophe losses including those from future terrorist activity;
- the cyclical nature of the property casualty industry;
- product demand;
- claims development and the process of estimating reserves;
- the impact of the terrorist events of September 11, 2001 and any future
terrorist attacks;
- the ability of our reinsurers to pay reinsurance recoverables owed to us;
31
- investment results;
- legislative and regulatory developments;
- changes in the ratings assigned to us by ratings agencies;
- uncertainty as to reinsurance coverage for terrorist acts; and
- availability of dividends from our insurance company subsidiaries.
We have described these and other risks under "Risk Factors" in this
prospectus. We have included in this prospectus and in our other filings with
the SEC additional risks that may affect our future performance. You should keep
in mind these risk factors and other cautionary statements in this prospectus
when considering forward-looking statements.
Except as required by law, we undertake no obligation to update or revise
our forward-looking statements, whether as a result of new information, future
events or otherwise.
LEGAL MATTERS
Wolf, Block, Schorr and Solis-Cohen LLP will pass on the validity of the
shares of common stock offered in this prospectus. Dewey Ballantine LLP will
pass upon certain legal matters related to the offering for the underwriters.
EXPERTS
We have incorporated by reference in this prospectus the consolidated
financial statements of Philadelphia Consolidated Holding Corp. and its
subsidiaries as of December 31, 2000 and for each of the three years in the
period ended December 31, 2000 in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
32
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
PAGE
------
Consolidated Balance Sheets -- September 30, 2001 and
December 31, 2000...................................... F-2
Consolidated Statements of Operations and Comprehensive
Income -- For the three and nine months ended September
30, 2001 and 2000...................................... F-3
Consolidated Statements of Changes in Shareholders'
Equity -- For the nine months ended September 30, 2001
and year ended December 31, 2000....................... F-4
Consolidated Statements of Cash Flows -- For the nine
months ended September 30, 2001 and 2000............... F-5
Notes to Consolidated Financial Statements................ F-6
F-1
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
AS OF
-----------------------------
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
(UNAUDITED)
ASSETS
Investments:
Fixed Maturities Available for Sale at Market (Amortized
Cost $492,838 and $392,439)............................ $506,449 $394,733
Equity Securities at Market (Cost $30,509 and $24,087).... 37,182 42,553
-------- --------
Total Investments...................................... 543,631 437,286
Cash and Cash Equivalents................................... 45,330 49,742
Accrued Investment Income................................... 6,165 5,726
Premiums Receivable......................................... 98,307 69,377
Prepaid Reinsurance Premiums and Reinsurance Receivables.... 97,556 73,513
Income Taxes Recoverable.................................... -- 13,323
Deferred Income Taxes....................................... 4,675 909
Deferred Acquisition Costs.................................. 41,955 33,324
Property and Equipment...................................... 10,278 10,476
Goodwill Less Accumulated Amortization of $5,231 and
$4,112.................................................... 26,190 30,809
Other Assets................................................ 5,481 5,979
-------- --------
TOTAL ASSETS.............................................. $879,568 $730,464
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy Liabilities and Accruals:
Unpaid Loss and Loss Adjustment Expenses.................. $286,787 $237,494
Unearned Premiums......................................... 200,189 145,484
-------- --------
Total Policy Liabilities and Accruals............. 486,976 382,978
Loans Payable............................................... 29,841 22,000
Premiums Payable............................................ 27,455 20,868
Other Liabilities........................................... 26,235 23,388
-------- --------
TOTAL LIABILITIES......................................... 570,507 449,234
-------- --------
Minority Interest in Consolidated Subsidiaries:
Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely
Debentures of Company.................................. -- 98,905
-------- --------
Commitments and Contingencies
Shareholders' Equity:
Preferred Stock, $.01 Par Value, 10,000,000 Shares
Authorized, None Issued and Outstanding................
Common Stock, No Par Value, 50,000,000 Shares Authorized,
17,851,595 and 13,431,408 Shares Issued and
Outstanding............................................ 152,740 46,582
Notes Receivable from Shareholders........................ (2,822) (2,287)
Accumulated Other Comprehensive Income.................... 13,185 13,494
Retained Earnings......................................... 145,958 124,536
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................. 309,061 182,325
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $879,568 $730,464
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
FOR THE FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenue:
Net Written Premiums........................ $ 96,198 $ 73,711 $ 255,821 $ 191,523
Change in Net Unearned Premiums
(Increase)................................ (18,443) (14,440) (39,840) (29,334)
----------- ----------- ----------- -----------
Net Earned Premiums......................... 77,755 59,271 215,981 162,189
Net Investment Income....................... 8,238 6,030 24,371 18,126
Net Realized Investment Gain................ 488 3,556 3,105 4,038
Other Income................................ 105 2,268 221 7,525
----------- ----------- ----------- -----------
TOTAL REVENUE............................. 86,586 71,125 243,678 191,878
----------- ----------- ----------- -----------
Losses and Expenses:
Loss and Loss Adjustment Expenses........... 59,109 50,957 159,333 129,098
Net Reinsurance Recoveries.................. (8,469) (16,987) (26,675) (34,915)
----------- ----------- ----------- -----------
Net Loss and Loss Adjustment Expenses....... 50,640 33,970 132,658 94,183
Acquisition Costs and Other Underwriting
Expenses.................................. 25,880 19,532 71,043 53,568
Other Operating Expenses.................... 974 3,721 5,136 9,962
----------- ----------- ----------- -----------
TOTAL LOSSES AND EXPENSES................. 77,494 57,223 208,837 157,713
----------- ----------- ----------- -----------
Minority Interest:
Distributions on Company Obligated
Mandatorily Redeemable Preferred
Securities of Subsidiary Trust............ -- 1,811 2,749 5,434
----------- ----------- ----------- -----------
Income Before Income Taxes.................... 9,092 12,091 32,092 28,731
----------- ----------- ----------- -----------
Income Tax Expense (Benefit):
Current..................................... 3,571 3,129 14,269 10,196
Deferred.................................... (451) 834 (3,599) (1,060)
----------- ----------- ----------- -----------
TOTAL INCOME TAX EXPENSE.................... 3,120 3,963 10,670 9,136
----------- ----------- ----------- -----------
NET INCOME.................................. $ 5,972 $ 8,128 $ 21,422 $ 19,595
=========== =========== =========== ===========
Other Comprehensive Income (Loss), Net of Tax:
Holding Gain Arising During Period.......... 3,221 2,090 1,709 4,654
Reclassification Adjustment................. (317) (2,311) (2,018) (2,625)
----------- ----------- ----------- -----------
Other Comprehensive Income (Loss)........... 2,904 (221) (309) 2,029
----------- ----------- ----------- -----------
Comprehensive Income.......................... $ 8,876 $ 7,907 $ 21,113 $ 21,624
=========== =========== =========== ===========
Per Share Data:
BASIC EARNINGS PER SHARE.................... $ 0.34 $ 0.69 $ 1.37 $ 1.62
=========== =========== =========== ===========
DILUTED EARNINGS PER SHARE.................. $ 0.32 $ 0.56 $ 1.31 $ 1.34
=========== =========== =========== ===========
Weighted-Average Common Shares Outstanding.... 17,808,317 11,825,698 15,645,956 12,090,905
Weighted-Average Share Equivalents
Outstanding................................. 704,534 2,603,161 766,746 2,550,705
----------- ----------- ----------- -----------
Weighted-Average Shares and Share Equivalents
Outstanding................................. 18,512,851 14,428,859 16,412,702 14,641,610
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE NINE
MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------------
(UNAUDITED)
Common Stock:
Balance at Beginning of Year.............................. $ 46,582 $ 68,859
Issuance of Shares Pursuant to Stock Purchase Contracts... 98,905
Exercise of Employee Stock Options........................ 6,113 (23,132)
Net Issuance of Shares Pursuant to Stock Purchase Plans... 1,140 855
-------- --------
BALANCE AT END OF PERIOD............................... 152,740 46,582
-------- --------
Notes Receivable from Shareholders:
Balance at Beginning of Period............................ (2,287) (2,506)
Notes Receivable Issued Pursuant to Stock Purchase Plan... (1,243) (414)
Collection of Notes Receivable............................ 708 633
-------- --------
BALANCE AT END OF PERIOD............................... (2,822) (2,287)
-------- --------
Accumulated Other Comprehensive Income:
Balance at Beginning of Period............................ 13,494 13,507
Other Comprehensive Loss, Net of Taxes.................... (309) (13)
-------- --------
BALANCE AT END OF PERIOD............................... 13,185 13,494
-------- --------
Retained Earnings:
Balance at Beginning of Period............................ 124,536 93,766
Net Income................................................ 21,422 30,770
-------- --------
BALANCE AT END OF PERIOD............................... 145,958 124,536
-------- --------
Common Stock Held in Treasury:
Balance at Beginning of Period............................ (12,186)
Common Shares Repurchased................................. (40,766)
Exercise of Employee Stock Options........................ 52,712
Issuance of Shares Pursuant to Employee Stock Purchase
Plan................................................... 240
-------- --------
BALANCE AT END OF PERIOD............................... -- --
-------- --------
TOTAL SHAREHOLDERS' EQUITY............................. $309,061 $182,325
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
2001 2000
--------- ---------
Cash Flows from Operating Activities:
Net Income................................................ $ 21,422 $ 19,595
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Net Realized Investment Gain............................ (3,105) (4,038)
Depreciation and Amortization Expense................... 1,967 2,844
Deferred Income Tax Benefit............................. (3,599) (1,060)
Change in Premiums Receivable........................... (28,930) (18,639)
Change in Other Receivables............................. (24,482) (19,878)
Change in Income Taxes Recoverable...................... (9,219)
Change in Deferred Acquisition Costs.................... (8,631) (7,107)
Change in Other Assets.................................. 1,054 557
Change in Unpaid Loss and Loss Adjustment Expenses...... 49,293 38,617
Change in Unearned Premiums............................. 54,705 32,179
Change in Other Liabilities............................. 12,935 2,620
Tax Benefit from Exercise of Employee Stock Options..... 25,607 81
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES............ 89,017 45,771
--------- ---------
Cash Flows from Investing Activities:
Proceeds from Sales of Investments in Fixed Maturities.... 27,063 94,560
Proceeds from Maturity of Investments in Fixed
Maturities.............................................. 47,099 22,900
Proceeds from Sales of Investments in Equity Securities... 12,603 34,242
Cost of Fixed Maturities Acquired......................... (178,611) (166,449)
Cost of Equity Securities Acquired........................ (11,691) (22,394)
Purchase of Property and Equipment........................ (1,385) (2,701)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES................ (104,922) (39,842)
--------- ---------
Cash Flows from Financing Activities:
Repayments on Loans Payable............................... (22,000)
Proceeds from Loans Payable............................... 29,841
Exercise of Employee Stock Options........................ 2,911 43
Collection of Notes Receivable............................ 708 480
Proceeds from Shares Issued Pursuant to Stock Purchase
Plans................................................... 33 182
Cost of Common Stock Repurchased.......................... (12,692)
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES..... 11,493 (11,987)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................... (4,412) (6,058)
Cash and Cash Equivalents at Beginning of Period............ 49,742 26,230
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 45,330 $ 20,172
========= =========
Cash Paid During the Period for:
Income Taxes.............................................. $ 5,435 $ 7,760
Interest.................................................. $ 130
Non-Cash Transactions:
Issuance of Shares (Forfeitures) Pursuant to Employee
Stock Purchase Plan in Exchange for Notes Receivable.... $ 1,243 $ (380)
Issuance of Common Shares in Satisfaction of Stock
Purchase Contracts...................................... $ 98,905
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements as of and for the three and nine
months ended September 30, 2001 and 2000 are unaudited, but in the opinion of
management, have been prepared on the same basis as the annual audited
consolidated financial statements and reflect all adjustments, consisting of
only normal recurring accruals, necessary for a fair statement of the
information set forth therein. The results of operations for the nine months
ended September 30, 2001 are not necessarily indicative of the operating results
to be expected for the full year or any other period. Certain prior year amounts
have been reclassified for comparative purposes.
These financial statements should be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-K as of
and for the year ended December 31, 2000.
2. INVESTMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities" on 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. On
January 1, 2001 and at September 30, 2001, the Company held no derivative
financial instruments nor embedded financial derivatives.
In November 2000, the Emerging Issues Task Force of the Financial
Accounting Standards Board ("FASB") reached a consensus on impairment accounting
for retained beneficial interests ("EITF 99-20"). Under this consensus,
impairment on certain beneficial interests in securitized assets must be
recognized when (1) the assets fair value is below its carrying value, and (2)
there has been an adverse change in estimated cash flows. Previously, impairment
on such assets was recognized when the asset's carrying value exceeded estimated
cash flows discounted at a risk free rate of return. The adoption of EITF 99-20
on April 1, 2001 by the Company had an immaterial effect on earnings and
financial position. During 2001 certain structured securities were subject to
re-evaluation under EITF 99-20 as a result of an adverse change in estimated
cash flows due to credit rating downgrades. This re-evaluation resulted in
non-cash realized investment losses of $4.3 million in the quarter ended June
30, 2001.
3. GOODWILL
Goodwill amounted to $26.2 million at September 30, 2001. 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. Should the review indicate that goodwill is not
recoverable, the Company would recognize an impairment loss. During 2001
goodwill was decreased $3.5 million based upon the Company's current reduced
estimate of the contingent additional purchase price for the Liberty
acquisition. The effect of this transaction had no impact on operations for
2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 eliminates the practice of amortizing goodwill through
periodic charges to earnings and establishes a new methodology for recognizing
and measuring goodwill and other intangible assets. Under this new accounting
standard, the Company will cease goodwill amortization on January 1, 2002.
Goodwill amortization for the year ended December 31, 2001 is anticipated to
amount to approximately $1.7
F-6
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
million. The Company will also review goodwill and other intangible assets for
any impairment or other effects of the new standard.
4. SEPTEMBER 11, 2001 TERRORIST ATTACKS
The Company has exposure to the September 11, 2001 terrorist attacks with
claims expected to arise mainly from its business interruption, business
personal property, business property, and workers' compensation insurance
coverages. The Company has performed a detailed analysis of contracts it
believes are exposed to this event. The Company estimates losses incurred of
$4.0 million, net of reinsurance recoveries, based on preliminary reports and
estimates of loss and damage. The Company estimates ceded reinsurance coverage
of $0.5 million. While this is management's best estimate at this time, it could
change as more information becomes available. Management does not believe that
there will be any collectibility issues with respect to its $0.5 million of
ceded losses.
5. LOANS PAYABLE
As of September 30, 2001, the Company had aggregate borrowings of $29.8
million from the Federal Home Loan Bank. These borrowings bear interest at
adjusted LIBOR and mature twelve months from inception. The proceeds from these
borrowings were invested in collateralized mortgage obligation and asset backed
securities to achieve a positive spread between the rate of interest on these
securities and the borrowing rates.
6. SHAREHOLDERS' EQUITY
On May 16, 2001, the Company issued 3.9 million common shares to satisfy
the stock purchase contract obligation from the Company's 1998 FELINE PRIDES(SM)
offering. The issuance of such shares resulted in a $98.9 million increase in
Shareholders' Equity and a corresponding decrease in the Minority Interest In
Consolidated Subsidiaries balance.
7. EARNINGS PER SHARE
Earnings per common share has been calculated by dividing net income for
the period by the weighted average number of common shares and common share
equivalents outstanding during the period. Following is the computation of
earnings per share for the three and nine months ended September 30, 2001 and
2000, respectively (in thousands):
AS OF AND FOR THE AS OF AND FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2001 2000 2001 2000
------- ------- ------- -------
Weighted-Average Common Shares Outstanding.......... 17,808 11,826 15,646 12,091
Weighted-Average Share Equivalents Outstanding...... 705 2,603 767 2,551
------- ------- ------- -------
Weighted-Average Shares and Share Equivalents
Outstanding....................................... 18,513 14,429 16,413 14,642
======= ======= ======= =======
Net Income.......................................... $ 5,972 $ 8,128 $21,422 $19,595
======= ======= ======= =======
BASIC EARNINGS PER SHARE.......................... $ 0.34 $ 0.69 $ 1.37 $ 1.62
======= ======= ======= =======
DILUTED EARNINGS PER SHARE........................ $ 0.32 $ 0.56 $ 1.31 $ 1.34
======= ======= ======= =======
F-7
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES
The effective tax rate differs from the 35% marginal tax rate principally
as a result of interest exempt from tax, the dividend received deduction and
other differences in the recognition of revenues and expenses for tax and
financial reporting purposes.
9. 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 arising during the three and nine months ended
September 30, 2001 and 2000 was $1.7 million and $1.1 million, respectively, and
$0.9 million and $2.5 million, respectively. The related tax effect of
Reclassification Adjustments for the three and nine months ended September 30,
2001 and 2000 was ($0.2) million and ($1.2) million, respectively, and ($1.1)
million and ($1.4) million, respectively.
10. 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. The segments follow the same
accounting policies used for the Company's consolidated financial statements.
Management evaluates a segment's performance based upon underwriting results.
Following is a tabulation of business segment information for the nine and
three months ended September 30, 2001 and 2000. Corporate information is
included to reconcile segment data to the consolidated financial statements (in
thousands):
NINE MONTHS ENDED,
------------------------------------------------------------
COMMERCIAL SPECIALTY PERSONAL
LINES LINES LINES CORPORATE TOTAL
---------- --------- -------- --------- --------
September 30, 2001:
Gross Written Premiums............ $236,795 $60,699 $ 64,406 $361,900
-------- ------- -------- -------- --------
Net Written Premiums.............. $167,088 $53,465 $ 35,268 $255,821
-------- ------- -------- -------- --------
Revenue:
Net Earned Premiums............... $137,106 $50,060 $ 28,815 $215,981
Net Investment Income............. 24,371 24,371
Net Realized Investment Gain...... 3,105 3,105
Other Income...................... 2,189 (1,968) 221
-------- ------- -------- -------- --------
Total Revenue..................... 137,106 50,060 31,004 25,508 243,678
-------- ------- -------- -------- --------
F-8
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NINE MONTHS ENDED,
------------------------------------------------------------
COMMERCIAL SPECIALTY PERSONAL
LINES LINES LINES CORPORATE TOTAL
---------- --------- -------- --------- --------
Losses and Expenses:
Net Loss and Loss Adjustment
Expenses....................... 86,551 31,458 14,649 132,658
Acquisition Costs and Other
Underwriting Expenses.......... 71,043 71,043
Other Operating Expenses.......... 1,162 3,974 5,136
-------- ------- -------- -------- --------
Total Losses and Expenses......... 86,551 31,458 15,811 75,017 208,837
-------- ------- -------- -------- --------
Minority Interest:
Distributions on Company Obligated
Mandatorily Redeemable Preferred
Securities of Subsidiary Trust.... 2,749 2,749
-------- ------- -------- -------- --------
Income Before Income Taxes.......... 50,555 18,602 15,193 (52,258) 32,092
Total Income Tax Expense............ 10,670 10,670
-------- ------- -------- -------- --------
Net Income.......................... $ 50,555 $18,602 $ 15,193 $(62,928) $ 21,422
======== ======= ======== ======== ========
Total Assets...................... $174,652 $704,916 $879,568
======== ======== ========
September 30, 2000:
Gross Written Premiums............ $178,308 $51,691 $ 41,111 $271,110
-------- ------- -------- -------- --------
Net Written Premiums.............. $118,184 $51,945 $ 21,394 $191,523
-------- ------- -------- -------- --------
Revenue:
Net Earned Premiums............... $101,501 $40,603 $ 20,085 $162,189
Net Investment Income............. 18,126 18,126
Net Realized Investment Gain...... 4,038 4,038
Other Income...................... 14,953 (7,428) 7,525
-------- ------- -------- -------- --------
Total Revenue..................... 101,501 40,603 35,038 14,736 191,878
-------- ------- -------- -------- --------
Losses and Expenses:
Net Loss and Loss Adjustment
Expenses....................... 59,242 25,438 9,503 94,183
Acquisition Costs and Other
Underwriting Expenses.......... 53,568 53,568
Other Operating Expenses.......... 11,863 (1,901) 9,962
-------- ------- -------- -------- --------
Total Losses and Expenses......... 59,242 25,438 21,366 51,667 157,713
-------- ------- -------- -------- --------
Minority Interest:
Distributions on Company Obligated
Mandatorily Redeemable Preferred
Securities of Subsidiary Trust.... 5,434 5,434
-------- ------- -------- -------- --------
Income Before Income Taxes.......... 42,259 15,165 13,672 (42,365) 28,731
Total Income Tax Expense............ 9,136 9,136
-------- ------- -------- -------- --------
Net Income.......................... $ 42,259 $15,165 $ 13,672 $(51,501) $ 19,595
======== ======= ======== ======== ========
Total Assets........................ $145,153 $537,034 $682,187
======== ======== ========
F-9
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED,
------------------------------------------------------------
COMMERCIAL SPECIALTY PERSONAL
LINES LINES LINES CORPORATE TOTAL
---------- --------- -------- --------- --------
September 30, 2001:
Gross Written Premiums............ $101,206 $19,101 $ 16,886 $137,193
-------- ------- -------- -------- --------
Net Written Premiums.............. $ 72,782 $16,733 $ 6,683 $ 96,198
-------- ------- -------- -------- --------
Revenue:
Net Earned Premiums............... $ 51,028 $17,350 $ 9,377 $ 77,755
Net Investment Income............. 8,238 8,238
Net Realized Investment Gain...... 488 488
Other Income...................... 591 (486) 105
-------- ------- -------- -------- --------
Total Revenue..................... 51,028 17,350 9,968 8,240 86,586
-------- ------- -------- -------- --------
Losses and Expenses:
Net Loss and Loss Adjustment
Expenses....................... 35,040 10,854 4,746 50,640
Acquisition Costs and Other
Underwriting Expenses.......... 25,880 25,880
Other Operating Expenses.......... 384 590 974
-------- ------- -------- -------- --------
Total Losses and Expenses......... 35,040 10,854 5,130 26,470 77,494
-------- ------- -------- -------- --------
Income Before Income Taxes.......... 15,988 6,496 4,838 (18,230) 9,092
Total Income Tax Expense............ 3,120 3,120
-------- ------- -------- -------- --------
Net Income.......................... $ 15,988 $ 6,496 $ 4,838 $(21,350) $ 5,972
======== ======= ======== ======== ========
Total Assets...................... $174,652 $704,916 $879,568
======== ======== ========
September 30, 2000:
Gross Written Premiums............ $ 74,446 $18,094 $ 11,582 $104,122
-------- ------- -------- -------- --------
Net Written Premiums.............. $ 51,536 $17,277 $ 4,898 $ 73,711
-------- ------- -------- -------- --------
Revenue:
Net Earned Premiums............... $ 37,028 $15,255 $ 6,988 $ 59,271
Net Investment Income............. 6,030 6,030
Net Realized Investment Gain...... 3,556 3,556
Other Income...................... 4,151 (1,883) 2,268
-------- ------- -------- -------- --------
Total Revenue..................... 37,028 15,255 11,139 7,703 71,125
-------- ------- -------- -------- --------
Losses and Expenses:
Net Loss and Loss Adjustment
Expenses....................... 21,666 9,546 2,758 33,970
Acquisition Costs and Other
Underwriting Expenses.......... 19,532 19,532
Other Operating Expenses.......... 3,875 (154) 3,721
-------- ------- -------- -------- --------
Total Losses and Expenses......... 21,666 9,546 6,633 19,378 57,223
-------- ------- -------- -------- --------
F-10
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS ENDED,
------------------------------------------------------------
COMMERCIAL SPECIALTY PERSONAL
LINES LINES LINES CORPORATE TOTAL
---------- --------- -------- --------- --------
Minority Interest:
Distributions on Company Obligated
Mandatorily Redeemable Preferred
Securities of Subsidiary Trust.... 1,811 1,811
-------- ------- -------- -------- --------
Income Before Income Taxes.......... 15,362 5,709 4,506 (13,486) 12,091
Total Income Tax Expense............ 3,963 3,963
-------- ------- -------- -------- --------
Net Income.......................... $ 15,362 $ 5,709 $ 4,506 $(17,449) $ 8,128
======== ======= ======== ======== ========
Total Assets........................ $145,153 $537,034 $682,187
======== ======== ========
F-11
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
4,000,000 SHARES
[PHILADELPHIA CONSOLIDATED HOLDING CORP. LIBERTY BELL GRAPHIC]
PHILADELPHIA CONSOLIDATED HOLDING CORP.
COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
, 2001
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Securities and Exchange Commission
Registration Fee...................... $ 44,102.50
Nasdaq Listing Fees....................... 22,500.00
Accounting Fees and Expenses*............. 25,000.00
Legal Fees and Expenses*.................. 130,000.00
Printing*................................. 50,000.00
Miscellaneous*............................ 78,397.50
Total Expenses*........................... $350,000.00
--------------
* Estimated for purposes of completing the information required pursuant to this
Item 14.
Philadelphia Consolidated will pay all fees and expenses associated with
filing the Registration Statement, except that the Selling Shareholder will pay
underwriting discounts and commissions related to shares sold by the Selling
Shareholder.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subchapter D (Sections 1741 through 1750) of Chapter 17 the Pennsylvania
Business Corporation Law of 1988, as amended (the "BCL"), contains provisions
for mandatory and discretionary indemnification of a corporation's directors,
officers, employees and agents (collectively "Representatives"), and related
matters.
Under Section 1741, subject to certain limitations, a corporation has the
power to indemnify Representatives under certain prescribed circumstances
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with a threatened,
pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (other than derivative or corporate actions), to
which any of them is a party or threatened to be made a party by reason of his
or her being a Representative of the corporation or serving at the request of
the corporation as a Representative of another corporation, partnership, joint
venture, trust or other enterprise, if he or she acted in good faith and in a
manner he or she reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal proceeding, had
no reasonable cause to believe his or her conduct was unlawful.
Section 1742 provides for indemnification with respect to derivative and
corporate actions similar to that provided by Section 1741. However,
indemnification is not provided under Section 1742 in respect of any claim,
issue or matter as to which a Representative has been adjudged to be liable to
the corporation unless and only to the extent that the proper court determines
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, a Representative is fairly and reasonably
entitled to indemnity for the expenses that the court deems proper.
II-1
Section 1743 provides that indemnification against actual and reasonable
expenses is mandatory to the extent that a Representative has been successful on
the merits or otherwise in defense of any such action or proceeding referred to
in Section 1741 or 1742.
Section 1744 provides that, unless ordered by a court, any indemnification
under Section 1741 or 1742 shall be made by the corporation only as authorized
in the specific case upon a determination that indemnification of a
Representative is proper because the Representative met the applicable standard
of conduct. Section 1744 further provides that such determination will be made
by the board of directors by a majority vote of a quorum consisting of directors
not parties to the action or proceeding; if a quorum is not obtainable or if
obtainable and a majority vote of a quorum of disinterested directors so
directs, by independent legal counsel; or by the shareholders.
Section 1745 provides that expenses incurred by a Representative in
defending any action or proceeding referred to in Subchapter D of Chapter 17 of
the BCL may be paid by the corporation in advance of the final disposition of
such action or proceeding upon receipt of an undertaking by or on behalf of the
Representative to repay such amount if it shall ultimately be determined that
such Representative is not entitled to be indemnified by the corporation.
Section 1746 provides generally that except in any case where the act or
failure to act giving rise to the claim for indemnification is determined by a
court to have constituted willful misconduct or recklessness, the
indemnification and advancement of expenses provided by Subchapter D of Chapter
17 of the BCL shall not be deemed exclusive of any other rights to which a
Representative seeking indemnification or advancement of expenses may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in such Representative's official
capacity and as to action in another capacity while holding that office.
Section 1747 grants a corporation the power to purchase and maintain
insurance on behalf of any Representative against any liability incurred by such
Representative in his or her capacity as a Representative, whether or not the
corporation would have the power to indemnify such Representative against that
liability under Subchapter D of Chapter 17 of the BCL.
Sections 1748 and 1749 apply the indemnification and advancement of
expenses provisions contained in Subchapter D of Chapter 17 of the BCL to all
constituent corporations absorbed in a consolidation, merger or division, as
well as the surviving or new corporations surviving or resulting therefrom, and
to service as a representative of a corporation or an employee benefit plan.
Section 1750 provides that the indemnification and advancement of expenses
provided by, or granted pursuant to, Subchapter D of Chapter 17 of the BCL
shall, unless otherwise provided when authorized or ratified, continue as to a
person who has ceased to be a Representative and shall inure to the benefit of
the heirs and personal representative of such person.
Section 9 of Article IV of Philadelphia Consolidated's By-Laws provides
indemnification to directors for all actions taken by them and for all failures
to take action to the fullest extent permitted by Pennsylvania law against all
expense, liability and loss reasonably incurred or suffered by them in
connection with any threatened, pending or completed action, suit or
II-2
proceeding (including, without limitation, an action, suit or proceeding by or
in the right of Philadelphia Consolidated), whether civil, criminal,
administrative, investigative or through arbitration. Section 9 of Article IV of
the By-Laws also permits Philadelphia Consolidated, by action of its board of
directors, to indemnify officers, employees and other persons to the same extent
as directors. Section 9 of Article IV of the By-Laws also provides that no
director of Philadelphia Consolidated shall be personally liable for monetary
damages as such for any action taken or any failure to take any action unless:
(a) the director has breached or failed to perform the duties of his or her
office under Section 1721 of the BCL; and (b) the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness; provided, however,
that these provisions shall not apply to the responsibility or liability of a
director pursuant to any criminal statute, or to the liability of a director for
the payment of taxes pursuant to local, state or federal law. The provisions of
Section 9 of Article IV of the By-Laws relating to the limitation of directors'
liability, to indemnification and to the advancement of expenses constitute a
contract between Philadelphia Consolidated and each of its directors which may
be modified as to any director only with that director's consent or as otherwise
specifically provided in Section 9. Any repeal or amendment of Section 9 of
Article IV of the By-Laws which is adverse to any director will apply to such
director only on a prospective basis, and will not reduce any limitation on the
personal liability of a director of Philadelphia Consolidated, or limit the
rights of an indemnitee to indemnification or to the advancement of expenses
with respect to any action or failure to act occurring prior to the time of such
repeal or amendment. No repeal or amendment of the By-Laws will affect any or
all of Section 9 of Article IV so as either to reduce the limitation of
directors' liability or limit indemnification or the advancement of expenses in
any manner unless adopted by the unanimous vote of the directors of Philadelphia
Consolidated then serving or the affirmative vote of shareholders entitled to
cast not less than a majority of the votes that all shareholders are entitled to
cast in the election of directors.
Section 9 of Article IV further permits Philadelphia Consolidated to
maintain insurance, at its expense, for the benefit of any person on behalf of
whom insurance is permitted to be purchased by Pennsylvania law against any such
expenses, liability or loss, whether or not Philadelphia Consolidated would have
the power to indemnify such person against such expense, liability or loss under
Pennsylvania or other law. Philadelphia Consolidated has purchased directors'
and officers' liability insurance.
ITEM 16. EXHIBITS
Exhibit No. Description
----------- -----------
1.1 Purchase Agreement*
3.1 Articles of Incorporation of Philadelphia Consolidated, as
amended (incorporated by reference to Exhibit 3.1 filed with
Philadelphia Consolidated's Form S-1 Registration Statement
under the Securities Act of 1933 (Registration No. 33-65958)).
3.2 Bylaws of Philadelphia Consolidated, as amended (incorporated
by reference to Exhibit 3.2 filed with Philadelphia
Consolidated's Form S-1 Registration Statement under the
Securities Act of 1933 (Registration No. 33-65958)).
5.1 Opinion of Wolf, Block, Schorr and Solis-Cohen LLP regarding
the legality of the securities being registered by
Philadelphia Consolidated hereby.*
23.1 Consent of PricewaterhouseCoopers LLP related to the financial
statements of Philadelphia Consolidated Holding Corp.**
II-3
23.2 Consent of Wolf, Block, Schorr and Solis-Cohen LLP (included
in Exhibit 5.1).*
24.1 Powers of attorney (included on signature pages of this
Registration Statement).**
* To be filed by amendment.
** Previously filed.
ITEM 17. UNDERTAKINGS.
(a) The Undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
of 1933 shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains
a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Philadelphia
Consolidated Holding Corp. certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on Form S-3 and has duly caused
this Amendment No. 1 to the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in Bala Cynwyd, Pennsylvania on
November 7, 2001.
PHILADELPHIA CONSOLIDATED HOLDING CORP.
By: /s/ Craig P. Keller
-----------------------------------
Craig P. Keller
Senior Vice President, Secretary,
Treasurer and Chief Financial Officer
II-5
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities indicated on November 7, 2001.
Signature Title
--------- -----
*
_____________________________ Chairman of the Board of Directors,
James J. Maguire Chief Executive Officer and
Director (Principal Executive Officer)
*
_____________________________ President, Chief Operating Officer
James J. Maguire, Jr. and Director
/s/ Craig P. Keller
_____________________________ Senior Vice President, Secretary, Treasurer
Craig P. Keller and Chief Financial Officer (Principal
Financial and Accounting Officer)
*
_____________________________ Executive Vice President and Director
Sean S. Sweeney
*
_____________________________ Director
Elizabeth H. Gemmill
*
_____________________________ Director
William J. Henrich, Jr.
II-6
*
_____________________________ Director
Paul R. Hertel, Jr.
*
_____________________________ Director
Thomas J. McHugh
*
_____________________________ Director
Michael J. Morris
*
_____________________________ Director
Dirk A. Stuurop
*
_____________________________ Director
J. Eustace Wolfington
*
_____________________________ Director
James Zech
*By: /s/ Craig P. Keller
_________________________
Craig P. Keller
as attorney-in-fact
pursuant to the Powers
of Attorney previously
filed as Exhibit 24.1
to this Registration
Statement.
II-7
EXHIBIT INDEX
Exhibit No. Description Method of Filing
----------- ----------- ----------------
1.1 Purchase Agreement *
3.1 Articles of Incorporation of Philadelphia Consolidated, as
amended (incorporated by reference to Exhibit 3.1 filed with
Philadelphia Consolidated's Form S-1 Registration Statement
under the Securities Act of 1933 (Registration No.
33-65958)).
3.2 Bylaws of Philadelphia Consolidated, as amended
(incorporated by reference to Exhibit 3.2 filed with
Philadelphia Consolidated's Form S-1 Registration Statement
under the Securities Act of 1933 (Registration No.
33-65958)).
5.1 Opinion of Wolf, Block, Schorr and Solis-Cohen LLP regarding
the legality of the securities being registered by
Philadelphia Consolidated hereby. *
23.1 Consent of PricewaterhouseCoopers LLP related to the
financial statements of Philadelphia Consolidated Holding
Corp. **
23.2 Consent of Wolf, Block, Schorr and Solis-Cohen LLP (included
in Exhibit 5.1). *
24.1 Powers of attorney (included on signature pages of this
Registration Statement). **
-------------
* To be filed by amendment.
** Previously filed.
II-8