-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IQbUNmWP/netN8+SXaLy7r3A47+nO8Dk3rOBQ5j/q7qGbSHEQyF/hN5r2sBbyZqa vYUfP/Uap6u5qc0rR4I87g== 0000893220-02-000367.txt : 20020415 0000893220-02-000367.hdr.sgml : 20020415 ACCESSION NUMBER: 0000893220-02-000367 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILADELPHIA CONSOLIDATED HOLDING CORP CENTRAL INDEX KEY: 0000909109 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 232202671 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-22280 FILM NUMBER: 02591066 BUSINESS ADDRESS: STREET 1: ONE BALA PLAZA STREET 2: SUITE 100 CITY: WYNNEWOOD STATE: PA ZIP: 19004 BUSINESS PHONE: 6106428400 MAIL ADDRESS: STREET 1: ONE BALA PLAZA STREET 2: SUITE 100 CITY: BALA CYNWYD STATE: PA ZIP: 19004 FORMER COMPANY: FORMER CONFORMED NAME: MAGUIRE HOLDING CORP DATE OF NAME CHANGE: 19930714 10-K 1 w58688e10-k.txt 10-K FOR PHILADELPHIA CONSOLIDATED ================================================================================ FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to ---------- ---------- COMMISSION FILE NUMBER: 0-22280 PHILADELPHIA CONSOLIDATED HOLDING CORP. (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2202671 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) ONE BALA PLAZA, SUITE 100 BALA CYNWYD, Pennsylvania 19004 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 617-7900 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, NO PAR VALUE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES: [X] NO: [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. YES: [ ] NO: [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of the Common Stock on March 21, 2002 as reported on the NASDAQ National Market System, was $463,818,905. Shares of Common Stock held by each executive officer and director and by each person who is known by the Registrant to beneficially own 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 22, 2002, Registrant had outstanding 21,558,334 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the definitive Proxy Statement for Registrant's 2002 Annual Meeting of Shareholders to be held May 1, 2002 are incorporated by reference in Part III. ================================================================================ 1 PART I Item 1. BUSINESS GENERAL As used in this Annual Report on Form 10-K, (i) "Philadelphia Insurance" refers to Philadelphia Consolidated Holding Corp., (ii) the "Company" refers to Philadelphia Insurance and its subsidiaries, doing business as Philadelphia Insurance Companies; (iii) the "Insurance Subsidiaries" refers to Philadelphia Indemnity Insurance Company ("PIIC"), Philadelphia Insurance Company ("PIC"), Mobile USA Insurance Company ("MUSA") and Liberty American Insurance Company ("LAIC"), collectively; (iv) "MIA" refers to Maguire Insurance Agency, Inc., a captive underwriting manager; (v) "MHIA" refers to Mobile Homeowners Insurance Agencies, Inc., a managing general agency; (vi) "Premium Finance" refers to Liberty American Premium Finance Company; and (vii) "PCHC Investment" refers to PCHC Investment Corp., an investment holding company. Philadelphia Insurance was incorporated in Pennsylvania in 1984, as an insurance holding company. Liberty American Insurance Group, Inc. (formerly The Jerger Company, Inc.), a Delaware insurance holding company, and its subsidiaries of MUSA, LAIC, MHIA and Premium Finance, are sometimes referred to herein collectively as "Liberty". During 2001, the Company continued its growth through adherence to its core philosophies of specialization, mixed marketing and profitable underwriting. 2001 gross written premiums increased 30.9% to $473.6 million. The GAAP basis combined ratio (the sum of the net loss and loss adjustment expenses and acquisition costs and other underwriting expenses divided by net earned premiums) was 93.4%, which was substantially lower than the property and casualty industry as a whole. Total assets increased to $1,017.7 million, and shareholders' equity increased to $428.7 million. Premium growth was also attributable to marketplace disruptions which resulted in improving premium rates and policy terms during the second half of 2000 and through the first nine months of 2001. Additionally, the terrorist attacks of September 11, 2001 caused the property and casualty industry to experience significant losses. As a result, the Company anticipates that the rate increases and improving policy terms, which started to occur in the second half of 2000, will now continue, possibly for an extended period of time. To better position itself to take advantage of these improving conditions the Company issued 3.6 million shares of its common stock through a public offering in the fourth quarter of 2001. The $114.5 million in net proceeds from this offering are primarily being utilized to provide additional capital for the Company's Insurance Subsidiaries and to fund general corporate purposes. In February 2001, A.M. Best Company reaffirmed the "A+" (superior) rating for the Insurance Subsidiaries. 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 11th will continue through the remainder of 2001 and possibly for an extended period of time. Increased reinsurance costs may, to some extent, offset the benefits of these trends to insurance companies. The Company believes that it is favorably positioned to take advantage of these improving conditions. The rate increase currently being experienced on renewal business is in the 5% to 30% range. There can be no assurance, however, that these favorable trends will continue or that these rate increases can be sustained. BUSINESS OVERVIEW AND STRATEGY The Company designs, markets and underwrites specialty commercial and personal property and casualty insurance products incorporating value-added coverages and services for select target markets or niches. Insurance products are distributed through a diverse multichannel delivery system centered around the Company's direct production underwriting organization. A select group of 59 "preferred agents" and a broader network of approximately 6,000 independent agents 2 supplement the production underwriting organization, which consisted of 148 professionals located in 36 regional and field offices across the United States as of December 31, 2001. The Company's 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. The Company also writes 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. The Company maintains detailed systems, records and databases that enable the continuous monitoring of its book of business in order to identify and react swiftly to positive or negative development trends. The Company is able to track performance, including loss ratios, by segment, product, region, state, producer and policyholder. Detailed profitability reports are produced and reviewed on a routine, primarily monthly, basis as part of the policy of continuously analyzing and reviewing the book of business. The Company maintains a local presence to more effectively serve its 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, claim personnel, which interact closely with home office management in making key decisions. This approach allows the Company to adapt its underwriting and marketing strategies to local conditions and build close relationships with its customers and producers at the local level. The Company selects and targets industries and niches that present specialized areas of demand where it believes it can grow business through creatively developing insurance products with innovative features specially designed to meet those areas of demand. The Company believes that these features are not included in typical property and casualty policies, enabling it to compete based on the unique or customized nature of the coverage provided as opposed to price. Business Segments The Company's operations are classified 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, 2001, 2000 and 1999, the gross written premiums for each of the Company's business segments and the relative percentages that such premiums represented.
For the Years Ended December 31, ----------------------------------------------------------------------------------------- 2001 2000 1999 ------------------------ ------------------------- ------------------------- Dollars Percentage Dollars Percentage Dollars Percentage -------- ---------- -------- ---------- -------- ---------- (dollars in thousands) Commercial Lines $315,948 66.7% $239,446 66.2% $200,972 73.1% Specialty Lines 79,317 16.7 68,193 18.8 48,532 17.7 Personal Lines 78,300 16.6 54,233 15.0 25,414 9.2 -------- ----- -------- ----- -------- ----- Total $473,565 100.0% $361,872 100.0% $274,918 100.0% ======== ===== ======== ===== ======== =====
3 Commercial Lines: Commercial Package: The Company has provided commercial multi-peril package policies to targeted niche markets for over 15 years. The customers for these policies include: - non-profit and social service organizations; - health and fitness organizations; - homeowners' associations; - condominium associations; - specialty schools; - 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. The Company believes its ability to provide professional liability, general liability and directors' and officers' coverages in one policy is advantageous and convenient to producers and policyholders. Commercial Automobile and Commercial Excess: The Company has provided commercial automobile products to the leasing and rent-a-car industries for over 35 years. Coverages offered to the rent-a-car industry include: - the business owner's property; and - dual interest liability and physical damage on the rental vehicle. The Company also offers additional coverage at the rental car counter to rent-a-car customers through arrangements with a number of the largest rent-a-car companies. The insurance protects 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. A proprietary sales training program has been developed 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 coverages. The Company also offers 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. The following products are also offered 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 net value in instances where the vehicle is stolen or damaged beyond repair. Specialty Property & Inland Marine: In September 1998, the Company introduced a new line of business utilizing experienced 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. 4 Specialty Lines: The Company has been providing specialty professional liability products for approximately 14 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 professions. The directors' and officers' product is offered to non-profit, for-profit and financial institutions, with an emphasis on non-profit institutions and private companies. Personal Lines: The Company entered the personal lines property and casualty business through the acquisition of Liberty American Insurance Group, Inc. in 1999. Through Liberty as the personal lines platform, specialized manufactured housing and homeowners' property and casualty business is produced and underwritten, principally in Florida, and to a lesser extent, in California, Arizona and Nevada. The Company also writes and services 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 a homeowners' program is also offered that excludes wind exposure. The Florida Windstorm Underwriting Association insures the wind exposure on these risks. The following table provides the geographic distribution of the Company's risks insured as represented by direct earned premiums for all reportable business segments for the year ended December 31, 2001. No other state accounted for more than 2% of total direct earned premiums for all product lines for the year ended December 31, 2001 (dollars in thousands).
State Direct Earned Premiums Percent of Total - ----- ---------------------- ---------------- Florida $108,175 26.4% California 47,364 11.6 New York 24,976 6.1 Ohio 20,929 5.1 Texas 17,617 4.3 Pennsylvania 14,716 3.6 New Jersey 14,498 3.5 Illinois 13,845 3.4 Massachusetts 12,381 3.0 Other 135,313 33.0 -------- ----- Total Direct Earned Premiums $409,814 100.0% ======== =====
Underwriting and Pricing The Company's business segments are organized around its three underwriting divisions: Commercial Lines, Specialty Lines, and Personal Lines. Each underwriting division's responsibilities include: pricing, managing the risk selection process, and monitoring loss ratios by product and insured. The Company attempts to adhere to conservative underwriting and pricing practices. The Company's underwriting strategy is detailed in a document, which is signed by each underwriting professional. Written underwriting guidelines are maintained, and updated regularly, for all classes of business underwritten. Adherence to underwriting guidelines is maintained through underwriting audits conducted by the Company. Product price levels are measured utilizing a price monitoring system which measures the aggregate price level of the book of business. This system is intended to assist management and underwriters in promptly recognizing and correcting price deterioration. When necessary, the Company is willing to re-underwrite, sharply curtail or discontinue a product deemed to present unacceptable risks. The Commercial Lines Underwriting Group has underwriting responsibility for the Company's commercial multi-peril package, commercial automobile and large property and inland marine products. The Commercial Lines Underwriting Group currently consists of 30 home office underwriters that are supported by underwriting assistants, raters, and other policy administration personnel. The Commercial Lines home office underwriters and support staff are organized into an underwriting unit responsible for underwriting and servicing renewal business and supporting the field underwriters. The 5 underwriting unit is under the direction of Underwriter Managers who report to the Vice President of Commercial Lines Underwriting. The Company has also placed underwriters in each of the Company's regional marketing offices plus two of its field offices. These 16 underwriters have responsibility for pricing and underwriting new business within the Company's guidelines and policy issuance. Overall management of the book of business resides in the home office with the senior underwriting officers. The Company believes that its ability to deliver excellent service and build long lasting relationships is enhanced through maintaining a localized presence. The Specialty Lines Underwriting Group consists of 15 home office underwriters and underwriter trainees and 14 regional underwriters. These underwriters and underwriter trainees are supported by underwriting assistants, raters, and other policy administration personnel. The Specialty Lines underwriters have responsibility for underwriting specific professional liability products within designated Company marketing regions. These regional underwriters work closely with the marketing department. The Personal Lines Underwriting Group is located in Pinellas Park, Florida. The underwriting staff consists of 14 professionals who are under the direction of the Personal Lines Underwriting Vice President. Much of the underwriting function is automated by rating software and internet access. The underwriting guidelines are embedded within the program and will not allow binding of accounts if a risk does not meet the presented underwriting guidelines. The Company has a proactive exposure distribution management system in place to assure portfolio optimization. This is managed on a zip code level basis through in-house software and external modeling tools. The Company inspects all risks on its new preferred homeowners program and manufactured homes on private property. The Company uses a combination of Insurance Services Office, Inc. ("ISO") coverage forms and rates and independently filed forms and rates. Coverage forms and rates are independently developed in situations where the line of business is not supported by ISO or where management believes the ISO forms and rates do not adequately address the risk. Departures from ISO forms are also used to differentiate the Company's products from its competitors' products and are independently filed. Reinsurance The Company has entered into various reinsurance agreements for the purpose of limiting loss exposure and diversifying business. The Company's casualty excess of loss reinsurance agreement provides that the Company bears the first layer of liability on each occurrence (varying from $0.5 million to $1.0 million based upon the specific product) with its reinsurer bearing the remaining contractual liability, if any, up to $1.0 million. Casualty risks in excess of $1.0 million up to $11.0 million are reinsured under a casualty treaty ("Excess Treaty") placed through a reinsurance broker with several reinsurers. Facultative reinsurance (reinsurance which is provided on an individual risk basis) is placed for each casualty risk in excess of $11.0 million. The Company's property excess of loss reinsurance treaty provides that the Company bears the first $0.5 million layer of loss on each risk with the reinsurers bearing the next layer of loss up to $10.0 million on each risk. The Company has an automatic facultative excess of loss cover for each property risk in excess of $10.0 million up to $50.0 million. To mitigate potential exposures to losses arising from terrorist acts, the Company has purchased reinsurance coverage for terrorism with a $10.0 million aggregate policy limit for 2002. Additionally, the Company has property catastrophe reinsurance for its commercial and personal property books of business under which the Company bears the first $5.0 million in catastrophe losses per event, with the reinsurers bearing the next $242.4 million, except that, outside of Florida, the Company bears the first $5.0 million in catastrophe losses per event, with reinsurers bearing the next $5.0 million on its commercial property book of business. Based upon the various modeling methods utilized by the Company to estimate its probable maximum loss, the Company currently maintains catastrophe reinsurance coverage for the 250 year storm event on personal lines business and the 100 year storm event on its commercial lines business. The Company also has an excess casualty reinsurance agreement which provides an additional $5.0 million of coverage for protection from exposures such as extra-contractual obligations and judgments in excess of policy limits. Additionally, an errors and omissions insurance policy provides an additional $10.0 million of coverage with respect to these exposures. Effective January 1, 2001, the Company entered into a three-year aggregate stop loss reinsurance agreement commencing with the 2001 accident year. The agreement includes all the business written by the Company. Under the terms 6 of the agreement, the reinsurer provides reinsurance protection for a certain aggregate dollar limit for losses and loss adjustment expenses in excess of a predetermined loss ratio (the sum of losses and loss adjustment expenses divided by earned premiums). The Company seeks to limit the risk of a reinsurer's default in a number of ways. First, the Company principally contracts with large reinsurers that are rated at least "A-" (Excellent) by A.M. Best. Second, the Company seeks to collect the obligations of its reinsurers on a timely basis. This collection effort is supported through the regular monitoring of reinsurance receivables. Finally, the Company typically does not write casualty policies in excess of $11.0 million or property policies in excess of $25.0 million. Although reinsurance makes the reinsurer liable, to the extent the risk is transferred, it doesn't relieve the Company of its liability to policyholders. The Company regularly assesses its reinsurance needs and seeks to improve the terms of its reinsurance arrangements as market conditions permit. Such improvements may involve increases in retentions, modifications in premium rates, changes in reinsurers and other matters. Marketing and Distribution Proactive risk selection based on sound underwriting criteria and relationship selling in clearly defined target markets continues to be the foundation of the Company's marketing plan. Within this framework, the Company's marketing effort is designed to assure a systematic and disciplined approach to developing business which is anticipated to be profitable. The Company distributes its products through its direct production underwriting organization, an extensive network of approximately 6,000 independent brokers and its "preferred agent" program. The Company's most important distribution channel is its production underwriting organization. Although the Company has always written business directly, the production underwriting organization was established by the Company to coordinate its direct sales efforts as well as act as the interface with the Company's external producers. The production underwriting organization is currently comprised of 148 professionals located in 36 offices in major markets across the country. The field offices are focused daily on interacting with prospective and existing insureds. In addition to this direct marketing, relationships with approximately 6,000 brokers have been formed either because the broker has a preexisting relationship with the insured or has sought the Company's expertise in one of its specialty products. This mixed marketing concept provides the Company with the flexibility to respond to changing market conditions and, when appropriate, shift its emphasis between direct and indirect marketing approaches to seize opportunities as they arise. In addition, the production underwriting organization's ability to gather market intelligence enables the rapid identification of soft markets and redeployment to firmer markets, from a product line or geographic perspective. The Company believes that its mixed marketing platform provides a competitive edge in stable market conditions, the strengths of which are all the more evident during periods of dislocation or consolidation. The Company's preferred agent program, in which business relationships are formed with brokers specializing in certain of the Company's business niches, consisted of 59 preferred agents at year-end 2001. Preferred Agents are identified by the Company based on productivity and loss experience and receive additional benefits from the Company in exchange for meeting defined production and profitability criteria. The Company supplements its marketing efforts through affinity programs, trade shows, direct mailings and national advertisements placed in trade magazines serving industries in which the Company specializes, as well as links to industry web sites. The Company has also enhanced its marketing with Internet-based initiatives such as: the Personal Lines Division's "In Touch(SM)" real-time policy inquiry system which allows agents to view account data, process non-dollar endorsements and in certain states, and for certain products, rate a policy over the internet. Product Development The Company continually evaluates new product opportunities, consistent with its strategic focus on selected market niches. Direct contacts between the Company's field and home office personnel and its customers have produced a number of new product ideas. All new product ideas are presented to the Product Development Committee for consideration. That committee, currently composed of the Company's 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 the Company's culture and philosophy. For each new product, an individualized test market plan is prepared, addressing such matters as the appropriate distribution channel (e.g., a limited number of selected production underwriters), an appropriate cap on premiums to be generated during the test market phase and reinsurance requirements for the test market phase. Test market products 7 may involve lower retentions than customarily utilized. After a new product is approved for test marketing, the Company monitors its success based on specified criteria (e.g., underwriting results, sales success, product demand and competitive pressures). If expectations are not realized, the Company either moves to improve results by initiating adjustments or abandons the product. Claims Management and Administration In accordance with its emphasis on underwriting profitability, the Company actively manages claims under its policies in an effort to investigate reported incidents at an early stage, service insureds and minimize fraud. Claim files are regularly audited by claims supervisors and the Company's reinsurers in an attempt to ensure that claims are being processed properly and that reserves are being set at appropriate levels. The Company's experienced staff of claims management professionals are assigned to dedicated claim units within specific niche markets. Each of these units receive supervisory direction and news, legislative and product development updates from the unit director. Claims management personnel have an average of approximately twenty years of experience in the industry. The dedicated claim units meet regularly to communicate findings of change within their assigned specialty. Staff within the dedicated claim units have an average of ten years experience in the industry. The Company maintains a Special Investigations Unit to investigate suspicious claims and to serve as a clearinghouse for information concerning fraudulent practices primarily within the rental car industry. Working closely with a variety of industry contacts, including attorneys, investigators and rental car company fraud units, this unit has uncovered a number of fraudulent claims. Loss and Loss Adjustment Expenses The Company is liable for losses and loss adjustment expenses under its insurance policies and reinsurance treaties. While the Company's professional liability policies are written on claims-made forms and while claims on its other policies are generally reported promptly after the occurrence of an insured loss, in many cases several years may elapse between the occurrence of an insured loss, the reporting of the loss to the Company and the Company's payment of the loss. The Company reflects its liability for the ultimate payment of all incurred losses and loss adjustment expenses by establishing loss and loss adjustment expense reserves, which are balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events that have occurred. When a claim involving a probable loss is reported, the Company establishes a case reserve for the estimated amount of the Company's ultimate loss and loss adjustment expense. This estimate reflects an informed judgment, based on the Company's reserving practices and the experience of the Company's claims staff. Management also establishes reserves on an aggregate basis to provide for losses incurred but not reported ("IBNR"), as well as future development on claims reported to the Company. As part of the reserving process, historical data are reviewed and consideration is given to the anticipated effect of various factors, including known and anticipated legal developments, changes in societal attitudes, inflation and economic conditions. Reserve amounts are necessarily based on management's estimates and judgments; as new data become available and are reviewed, these estimates and judgments are revised, resulting in increases or decreases to existing reserves. The Insurance Subsidiaries obtain an annual statement of opinion from an independent actuary firm for its statutory filings with regulators. The following table sets forth a reconciliation of beginning and ending reserves for unpaid loss and loss adjustment expenses, net of amounts for reinsured losses and loss adjustment expenses, for the years indicated. As a result of changes in estimates of insured events in prior years, the Company increased losses and loss adjustment expenses incurred by $13.4 million in 2001. Such development was primarily due to losses emerging at a higher rate on automobile leases expiring in 2001 on residual value policies underwritten in prior years than had been originally anticipated when the initial reserves were estimated. 8
As of and For the Years Ended December 31, ------------------------------------------ 2001 2000 1999 -------- -------- --------- (Dollars in Thousands) Unpaid loss and loss adjustment expenses at beginning of year (1) $195,464 $161,353 $137,205 -------- -------- -------- Provision for losses and loss adjustment expenses for current year claims 166,220 128,761 99,663 Increase (Decrease) in estimated ultimate losses and loss adjustment expenses for prior year claims 13,435 2,543 (253) -------- -------- -------- Total incurred losses and loss adjustment expenses 179,655 131,304 99,410 -------- -------- -------- Loss and loss adjustment expense payments for claims attributable to: Current year 54,228 36,271 31,493 Prior years 70,757 60,922 43,769 -------- -------- -------- Total payments 124,985 97,193 75,262 -------- -------- -------- Unpaid loss and loss adjustment expenses at end of year (2) $250,134 $195,464 $161,353 ======== ======== ========
(1) 1999 balance adjusted to include $2,175 net unpaid loss and loss adjustment expenses for MUSA as of acquisition date. (2) Unpaid loss and loss adjustment expenses differ from the amounts reported in the Consolidated Financial Statements because of the inclusion therein of reinsurance receivables of $52,599, $42,030 and $26,710 at December 31, 2001, 2000 and 1999, respectively. The following table presents the development of unpaid loss and loss adjustment expenses, net of amounts for reinsured losses and loss adjustment expenses, from 1991 through 2001. The top line of the table shows the estimated reserve for unpaid loss and loss adjustment expenses at the balance sheet date for each of the indicated years. These figures represent the estimated amount of unpaid loss and loss adjustment expenses for claims arising in the current year and all prior years that were unpaid at the balance sheet date, including IBNR losses. The table also shows the re-estimated amount of the previously recorded unpaid loss and loss adjustment expenses based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about the frequency and severity of claims for individual years. 9
AS OF AND FOR THE YEARS ENDED DECEMBER 31, (Dollars in Thousands) --------------------------------------------------------- 1991 1992 1993 1994 1995 1996 ------- ------- ------- ------- ------- ------- UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES, AS STATED $22,248 $31,981 $38,714 $53,595 $68,246 $85,723 Cumulative Paid as of: 1 year later 6,698 9,865 10,792 12,391 15,214 22,292 2 years later 12,485 16,290 19,297 23,139 31,410 38,848 3 years later 16,288 21,253 24,991 33,511 40,637 52,108 4 years later 17,780 24,299 28,903 38,461 47,994 63,738 5 years later 19,406 25,793 30,558 42,366 51,806 69,116 6 years later 19,898 26,321 32,748 43,860 53,198 7 years later 20,246 27,252 32,929 44,243 8 years later 20,625 27,336 33,102 9 years later 20,611 27,288 10 years later 20,599 Unpaid Loss and Loss Adjustment Expenses re-estimated as of End of Year: 1 year later 22,056 30,538 38,603 52,670 67,281 84,007 2 years later 21,327 30,428 38,016 52,062 66,061 81,503 3 years later 21,198 29,648 37,184 51,149 63,872 76,348 4 years later 21,118 29,306 36,272 49,805 59,085 73,992 5 years later 21,399 28,553 35,783 47,366 56,673 75,672 6 years later 21,106 28,370 34,509 45,797 55,861 7 years later 21,013 27,959 33,799 45,245 8 years later 20,854 27,724 33,695 9 years later 20,703 27,623 10 years later 20,668 Cumulative Redundancy (Deficiency) Dollars $ 1,580 $ 4,358 $ 5,019 $ 8,350 $12,385 $10,051 Percentage 7.1% 13.6% 13.0% 15.6% 18.1% 11.7% AS OF AND FOR THE YEARS ENDED DECEMBER 31, (Dollars in Thousands) ------------------------------------------------------------ 1997 1998 1999 2000 2001 -------- -------- -------- -------- -------- UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES, AS STATED $108,928 $136,237 $161,353 $195,464 $250,134 Cumulative Paid as of: 1 year later 26,870 43,769 60,922 70,757 2 years later 56,488 84,048 109,092 3 years later 80,206 115,900 4 years later 95,047 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 105,759 135,984 163,896 208,899 2 years later 103,513 138,245 177,782 3 years later 104,712 146,679 4 years later 109,061 5 years later 6 years later 7 years later 8 years later 9 years later 10 years later Cumulative Redundancy (Deficiency) Dollars $ (133) $(10,442) $(16,429) $(13,435) Percentage (0.1)% (7.7)% (10.2)% (6.9)%
(1) Unpaid loss and loss adjustment expenses differ from the amounts reported in the Consolidated Financial Statements because of the inclusion therein of reinsurance receivables of $52,599, $42,030, $26,710, $16,120, $13,502, $10,919, $9,440, $5,580, $5,539, $1,770, and $1,267 at December 31, 2001, 2000, 1999, 1998, 1997, 1996, 1995, 1994, 1993, 1992, and 1991, respectively. (2) 1998 Unpaid Loss and Loss Adjustment Expenses, as stated, adjusted to include $1,207 unpaid loss and loss adjustment expenses for Mobile USA Insurance Company as of acquisition date. (3) The Company maintains its historical loss records net of reinsurance and therefore is unable to conform the presentation of this table to the financial statements. 10 The cumulative redundancy (deficiency) represents the aggregate change in the reserve estimated over all prior years, and does not present accident year loss development. Therefore, each amount in the table includes the effects of changes in reserves for all prior years. The unpaid loss and loss adjustment expense of the Insurance Subsidiaries, as reported in their Annual Statements prepared in accordance with statutory accounting practices and filed with state insurance departments, differ from those reflected in the Company's financial statements prepared in accordance with generally accepted accounting principles ("GAAP") with respect to recording the effects of reinsurance. Unpaid loss and loss adjustment expenses under statutory accounting practices are reported net of the effects of reinsurance whereas under GAAP these amounts are reported without giving effect to reinsurance. Under GAAP, reinsurance receivables, with a corresponding increase in unpaid loss and loss adjustment expense, have been recorded. (See footnote (2) on Page 9 for amounts). There is no effect on net income or shareholders' equity due to the difference in reporting the effects of reinsurance between statutory accounting practices and GAAP as discussed above. Operating Ratios Statutory Combined Ratio The statutory combined ratio, which is the sum of (a) the ratio of loss and loss adjustment expenses incurred to net earned premiums (loss ratio) and (b) the ratio of policy acquisition costs and other underwriting expenses to net written premiums (expense ratio), is the traditional measure of underwriting experience for insurance companies. Generally, if the combined ratio is below 100%, an insurance company has an underwriting profit, and if it is above 100%, the insurer has an underwriting loss. The following table reflects the consolidated loss, expense and combined ratios of the Insurance Subsidiaries together with the property and casualty industry-wide combined ratios after policyholders' dividends.
For the Years Ended December 31, ----------------------------------------------------------------- 2001 2000 1999 1998 1997 ----- ----- ----- ----- ----- Loss Ratio 60.7% 57.8% 59.7% 54.1% 55.3% Expense Ratio 31.2% 31.3% 33.6% 31.0% 29.1% ----- ----- ----- ----- ----- Combined Ratio 91.9% 89.1% 93.3% 85.1% 84.4% ===== ===== ===== ===== ===== Industry Statutory Combined Ratio after Policyholders Dividends 117.0% 110.1% 107.8% 105.6% 101.6% ===== ===== ===== ===== ===== (1) (2) (2) (2) (2)
(1) Source: Best's Review/Preview PC January 2002 (Estimated 2001). (2) Source: Best's Review/Preview PC January 2002 Premium-to-Surplus Ratio: While there are no statutory provisions governing premium-to-surplus ratios, regulatory authorities regard this ratio as an important indicator as to an insurer's ability to withstand abnormal loss experience. Guidelines established by the National Association of Insurance Commissioners (the "NAIC") provide that an insurer's net premium-to-surplus ratio is satisfactory if it is below 3 to 1. The following table sets forth, for the periods indicated, net written premiums to surplus as regards policyholders' for the Insurance Subsidiaries (statutory basis):
As of and For the Years Ended December 31, -------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) Net Written Premiums (1) $333,817 $263,637 $195,258 $143,036 $110,790 Surplus as regards Policyholders $280,960 $193,292 $179,341 $152,336 $105,985 Premium to Surplus Ratio (1) 1.2 to 1.0 1.4 to 1.0 1.1 to 1.0 1.0 to 1.0 1.0 to 1.0
(1) 1999 includes $11,187 net written premiums for MUSA from January 1, 1999 to date of acquisition. 11 Investments The Company's investment objective is the realization of relatively high levels of investment income while generating competitive after-tax total rates of return within a prudent level of risk and within the constraints of maintaining adequate securities in amount and duration to meet cash requirements of current operations and long-term liabilities, as well as maintaining and improving the Company's A.M. Best and Standard & Poor's ratings. The Company utilizes professional investment managers for its fixed maturity and equity investments, which consist of diversified issuers and issues. At December 31, 2001, the Company had total investments with a carrying value of $673.4 million, and 93.9% of the Company's total investments were 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, with an average rating of "AA". The collateralized mortgage securities and asset backed securities consist of shorter tranche securities possessing favorable pre-payment risk profiles. The remaining 6.1% of the Company's total investments consisted primarily of publicly-traded common stocks. The following table sets forth information concerning the composition of the Company's total investments at December 31, 2001:
Estimated Percent of Market Carrying Carrying Amortized Cost Value Value Value -------------- --------- --------- ---------- (Dollars in Thousands) Fixed Maturities: Obligations of States and Political Subdivisions $104,628 $106,184 $106,184 15.8% U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies 21,024 21,694 21,694 3.2 Corporate and Bank Debt Securities 157,657 160,326 160,326 23.8 Collateralized Mortgage Securities 70,362 70,873 70,873 10.5 Asset Backed Securities 272,655 273,339 273,339 40.6 Equity Securities 34,065 40,992 40,992 6.1 -------- -------- -------- ----- Total Investments $660,391 $673,408 $673,408 100.0% ======== ======== ======== =====
At December 31, 2001, approximately 98.7% of the Insurance Subsidiaries' fixed maturity securities (cost basis) consisted of U.S. government securities or securities rated "1" or "2" by the NAIC. The cost and estimated market value of fixed maturity securities at December 31, 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 $ 26,096 $ 26,703 Due after one year through five years 125,719 127,916 Due after five years through ten years 48,799 50,107 Due after ten years 82,695 83,478 Collateralized Mortgage and Asset Backed Securities 343,017 344,212 -------- -------- Total $626,326 $632,416 ======== ========
Investments of the Insurance Subsidiaries must comply with applicable laws and regulations which prescribe the type, quality and diversification of investments. In general, these laws and regulations permit investments, with specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common equity securities, real estate mortgages and real estate. 12 Regulation General: The Company is subject to extensive supervision and regulation in the states in which it operates. The supervision and regulation relate to numerous aspects of the Company's business and financial condition. The primary purpose of the supervision and regulation is the protection of insurance policyholders and not the Company's 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 the Company can include in the insurance policies it offers; - 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 the Company's products and may present impediments to obtaining rate increases or taking other actions to increase profitability. Also, regulatory authorities have relatively broad discretion to grant, renew or revoke licenses and approvals. If the Company does not have the requisite licenses and approvals or does not comply with applicable regulatory requirements, the insurance regulatory authorities could stop or temporarily suspend the Company from carrying on some or all of its activities. In light of several recent significant property and casualty insurance company insolvencies, it is possible that assessments paid to state guaranty funds may increase. Because the Insurance Subsidiaries are domiciled in Pennsylvania and Florida, the Pennsylvania Department of Insurance and the Florida Department of Insurance have primary authority over the Company. Regulation of Insurance Holding Companies: Pennsylvania and Florida, like many other states, have laws governing insurance holding companies (such as Philadelphia Insurance). Under these laws, a person generally must obtain the applicable Insurance Department's approval to acquire, directly or indirectly, 5% to 10% or more of the outstanding voting securities of Philadelphia Insurance or the Insurance Subsidiaries. Such Department's determination of whether to approve any such acquisition would be based on a variety of factors, including an evaluation of the acquiror's financial stability, the competence of its management, the effect of rates on coverages provided, if any, and whether competition in Pennsylvania or Florida would be reduced. The Pennsylvania and Florida statutes require every Pennsylvania and Florida-domiciled insurer which is a member of an insurance holding company system to register with Pennsylvania or Florida, respectively, by filing and keeping current a registration statement on a form prescribed by the NAIC. The Pennsylvania statute also specifies that at least one-third of the board of directors and each committee thereof, of either the domestic insurer or its publicly owned holding company (if any), must be comprised of outsiders (i.e., persons who are neither officers, employees nor controlling shareholders of the insurer or any affiliate). In addition, the domestic insurer or its publicly held holding company must establish one or more committees comprised solely of outside directors, with responsibility for recommending the selection of independent certified public accountants; reviewing the insurer's financial condition, the scope and results of the independent audit and any internal audit; nominating candidates for director; evaluating the performance of principal officers; and recommending to the board the selection and compensation of principal officers. Under the Florida statute, a majority of the directors must be citizens of the United States. In addition, no Florida insurer may make any contract whereby any person is granted or is to enjoy in fact the management of the insurer to the substantial exclusion of its board of directors or to have the controlling or preemptive right to produce substantially all insurance business for the insurer, unless the contract is filed with and approved by the Florida Insurance Department. An insurer must give the Department written notice of any change of personnel among the directors or principal officers of the insurer within 45 days of such change. The written notice must include all information necessary to allow the Department to determine that the insurer will be in compliance with state statutes. Dividend Restrictions: As an insurance holding company, Philadelphia Insurance will be largely dependent on dividends and other permitted payments from the Insurance Subsidiaries to pay any cash dividends to its shareholders. The ability of the Insurance Subsidiaries to pay dividends to the Company is subject to certain restrictions imposed under Pennsylvania and Florida insurance laws. Accumulated statutory profits of the Insurance Subsidiaries from which dividends 13 may be paid totaled $111.3 million at December 31, 2001. Of this amount, the Insurance Subsidiaries are entitled to pay a total of approximately $27.4 million of dividends in 2002 without obtaining prior approval from the Pennsylvania or Florida Insurance Departments. During 2001 the insurance subsidiaries paid dividends of $13.0 million to PCHC and $3.8 million to Liberty American Insurance Group, Inc., a subsidiary of PCHC. The National Association of Insurance Commissioners: In addition to state-imposed insurance laws and regulations, the Insurance Subsidiaries are subject to the general SAP and reporting formats established by the NAIC. The NAIC also promulgates model insurance laws and regulations relating to the financial and operational regulation of insurance companies. These model laws and regulations generally are not directly applicable to an insurance company unless and until they are adopted by applicable state legislatures or departments of insurance. However, NAIC model laws and regulations have become increasingly important in recent years, due primarily to the NAIC's state regulatory accreditation program. Under this program, states which have adopted certain required model laws and regulations and meet various staffing and other requirements are "accredited" by the NAIC. Such accreditation is the cornerstone of an eventual nationwide regulatory network and there is a certain degree of political pressure on individual states to become accredited by the NAIC. Because the adoption of certain model laws and regulations is a prerequisite to accreditation, the NAIC's initiatives have taken on a greater level of practical importance in recent years. The NAIC accredited both Pennsylvania and Florida under the NAIC Financial Regulation Standards. All the states have adopted the NAIC's financial reporting form, which is typically referred to as the NAIC "Annual Statement", and most states, including Pennsylvania and Florida, generally defer to the NAIC with respect to SAP. In this regard, the NAIC has a substantial degree of practical influence and is able to accomplish certain quasi-legislative initiatives through amendments to the NAIC annual statement and applicable accounting practices and procedures. For instance, in recent years the NAIC has required all insurance companies to have an annual statutory financial audit and an annual actuarial certification as to loss reserves by including such requirements within the annual statement instructions. Capital and Surplus Requirements: PIC's eligibility to write insurance on a surplus lines basis in most jurisdictions is dependent on its compliance with certain financial standards, including the maintenance of a requisite level of capital and surplus and the establishment of certain statutory deposits. In recent years, many jurisdictions have increased the minimum financial standards applicable to surplus lines eligibility. For example, California and certain other states have adopted regulations which require surplus lines companies operating therein to maintain minimum capital of $15 million, calculated as set forth in the regulations. PIC maintains capital to meet these requirements. Risk-Based Capital: Risk-based capital is designed to measure the acceptable amount of capital an insurer should have, based on the inherent specific risks of each insurer. Insurers failing to meet this benchmark capital level may be subject to scrutiny by the insurer's domiciliary insurance department and ultimately rehabilitation or liquidation. Based on the standards currently adopted, the policyholders' surplus of each of the Insurance Subsidiaries at December 31, 2001 is in excess of the prescribed risk-based capital requirements. Insurance Guaranty Funds: The Insurance Subsidiaries are subject to guaranty fund laws which can result in assessments, up to prescribed limits, for losses incurred by policyholders as a result of the impairment or insolvency of unaffiliated insurance companies. Typically, an insurance company is subject to the guaranty fund laws of the states in which it conducts insurance business; however, companies which conduct business on a surplus lines basis in a particular state are generally exempt from that state's guaranty fund laws. Shared Markets: As a condition of its license to do business in various states, PIIC, MUSA and LAIC are required to participate in mandatory property-liability shared market mechanisms or pooling arrangements which provide various insurance coverages to individuals or other entities that otherwise are unable to purchase coverage voluntarily provided by private insurers. In addition, some states require automobile insurers to participate in reinsurance pools for claims that exceed a certain amount. PIIC's participation in such shared markets or pooling mechanisms is generally in proportion to the amount of PIIC's direct writings for the type of coverage written by the specific pooling mechanism in the applicable state. Possible New Legislation, Regulations or Interpretations: A number of new, proposed or potential legislative or industry developments could further increase competition in the insurance 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 the Company's 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; 14 - programs in which state-sponsored entities provide property insurance in catastrophe-prone areas; - changing practices caused by the Internet, which have led to greater competition in the insurance business; and - 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 extent of any federal government role on the Company's business and results of operations. 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 the Company's earnings. Competition The Company competes with a large number of other companies in its selected line of business, including 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 these competitors have greater financial and marketing resources than the Company. Profitability could be adversely affected if business is lost due to competitors offering similar or better products at or below the Company's prices. In addition, a number of new, proposed or potential legislative or industry developments could further increase competition. New competition from these developments could cause the demand for the Company's products to fall, which could adversely affect profitability. The current business climate remains competitive from a solicitation standpoint. The Company will "walk away", if necessary, from writing business that does not meet established underwriting standards and pricing guidelines. Management believes though that the Company's mixed marketing strategy is a strength in that it provides the flexibility to quickly deploy the marketing efforts of the Company's direct production underwriters from soft market segments to market segments with emerging opportunities. Additionally, through the mixed marketing strategy, the Company's production underwriters have established relationships with approximately 6,000 brokers, thus facilitating a regular flow of submissions. Employees As of March 19, 2002, the Company had 592 full-time employees and 23 part-time employees. The Company actively encourages its employees to continue their educational efforts and aids in defraying their educational costs (including 100% of education costs related to the insurance industry). Management believes that the Company's relations with its employees are generally excellent. Item 2. DESCRIPTION OF PROPERTY The Company leases certain office space in Bala Cynwyd, PA which serves as its headquarters location, and also leases 36 offices for its field marketing organization. Item 3. LEGAL PROCEEDINGS In connection with the action filed in the U.S. District Court in the Middle District of Florida by two of the Company's subsidiaries, Liberty American Insurance Group Inc. and Mobile Homeowners Insurance Agency Inc., against Westpoint Underwriters LLC, a managing general agent, two former employees of Liberty American and a third individual (which action was reported in Item 1 of Part II of the Company's Form 10-Q for the period ended March 31, 2001), a federal magistrate judge issued a report and recommendations to the Federal District Court on October 17, 2001. With respect to Liberty American's request for preliminary relief, the findings and recommendations stated that one of the former employees had misappropriated Liberty American's trade secrets by using its software to write WestPoint's software. The magistrate judge recommended against injunctive relief, finding that damages may be available as a remedy. Both Liberty American and the defendant have objected, in part, to the findings, and these objections are now being considered by the court. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2001. 15 PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) The Company's common stock, no par value, trades on The Nasdaq Stock Market under the symbol "PHLY". As of February 22, 2002, there were 397 holders of record and 2,233 beneficial shareholders of the Company's common stock. The high and low sales prices of the common stock, as reported by the National Association of Securities Dealers, were as follows:
2001 2000 ------------------ ------------------ Quarter High Low High Low ------- ------ ------ ------ ------ First 31.922 25.375 16.000 14.250 Second 36.000 24.250 18.090 14.580 Third 37.500 24.350 20.880 15.690 Fourth 41.300 32.900 30.880 20.000
The Company did not declare cash dividends on its common stock in 2001 and 2000, and currently intends to retain its earnings to enhance future growth. The payment of dividends by the Company will be determined by the Board of Directors and will be based on general business conditions and legal and regulatory restrictions. As a holding company, the Company is dependent upon dividends and other permitted payments from its subsidiaries to pay any cash dividends to its shareholders. The ability of the Company's insurance subsidiaries to pay dividends to the Company is subject to regulatory limitations (see Note 3 to the Consolidated Financial Statements). (b) During the three years ended December 31, 2001, the Company did not sell any of its securities which were not registered under the Securities Act of 1933, except as follows: On July 16, 1999 the Company issued an aggregate of 1,037,772 shares of its common stock to the four shareholders of The Jerger Company, Inc. in connection with the merger of The Jerger Company, Inc. into a subsidiary of the Company. This issuance was exempt from registration under Section 4(2) of the Securities Act of 1933 as a result of the limited number of persons to whom the shares were issued and the fact that the shares were issued in a negotiated merger transaction. 16 Item 6. SELECTED FINANCIAL DATA
As of and For the Years Ended December 31, (In Thousands, Except Share and Per Share Data) 2001 2000 1999 1998 1997 ----------- ----------- ----------- ----------- ----------- Operations and Comprehensive Income Statement Data: Gross Written Premiums $ 473,565 $ 361,872 $ 274,918 $ 197,408 $ 159,091 Gross Earned Premiums $ 421,063 $ 328,350 $ 245,978 $ 174,737 $ 150,128 Net Written Premiums $ 333,817 $ 263,429 $ 184,071 $ 143,036 $ 111,797 Net Earned Premiums $ 296,093 $ 227,292 $ 164,915 $ 122,687 $ 100,555 Net Investment Income 32,426 25,803 20,695 15,448 9,703 Net Realized Investment Gain (Loss) 3,357 11,718 5,700 474 (16) Other Income 587 8,981 4,722 219 228 - ------------------------------------------------------------------------------------------------------------------------------ Total Revenue 332,463 273,794 196,032 138,828 110,470 - ------------------------------------------------------------------------------------------------------------------------------ Net Loss and Loss Adjustment Expenses 179,655 131,304 99,410 66,374 55,009 Acquisition Costs and Other Underwriting Expenses 97,020 75,054 53,793 38,422 31,344 Other Operating Expenses 6,841 14,679 8,939 2,212 1,909 - ------------------------------------------------------------------------------------------------------------------------------ Total Losses and Expenses 283,516 221,037 162,142 107,008 88,262 - ------------------------------------------------------------------------------------------------------------------------------ Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust 2,749 7,245 7,245 4,770 -- - ------------------------------------------------------------------------------------------------------------------------------ Income Before Income Taxes 46,198 45,512 26,645 27,050 22,208 Total Income Tax Expense 15,639 14,742 7,802 7,022 5,338 - ------------------------------------------------------------------------------------------------------------------------------ Net Income $ 30,559 $ 30,770 $ 18,843 $ 20,028 $ 16,870 - ------------------------------------------------------------------------------------------------------------------------------ Weighted-Average Common Shares Outstanding 16,528,601 12,177,989 12,501,165 12,249,262 12,193,659 Weighted-Average Share Equivalents Outstanding 656,075 2,411,552 2,614,399 2,680,165 2,736,039 - ------------------------------------------------------------------------------------------------------------------------------ Weighted-Average Shares and Share Equivalents Outstanding 17,184,676 14,589,541 15,115,564 14,929,427 14,929,698 - ------------------------------------------------------------------------------------------------------------------------------ Basic Earnings Per Share $ 1.85 $ 2.53 $ 1.51 $ 1.63 $ 1.38 - ------------------------------------------------------------------------------------------------------------------------------ Diluted Earnings Per Share $ 1.78 $ 2.11 $ 1.25 $ 1.34 $ 1.13 - ------------------------------------------------------------------------------------------------------------------------------ Year End Financial Position: Total Investments and Cash and Cash Equivalents $ 723,318 $ 487,028 $ 420,016 $ 388,059 $ 229,599 Total Assets 1,017,722 730,464 599,051 476,390 292,724 Unpaid Loss and Loss Adjustment Expenses 302,733 237,494 188,063 151,150 122,430 Minority Interest in Consolidated Subsidiaries -- 98,905 98,905 98,905 -- Total Shareholders' Equity 428,692 182,325 161,440 137,483 111,284 Common Shares Outstanding 21,509,723 13,431,408 12,590,908 12,200,563 12,242,431 - ------------------------------------------------------------------------------------------------------------------------------ Insurance Operating Ratios (Statutory Basis): Net Loss and Loss Adjustment Expenses to Net Earned Premiums 60.7% 57.8% 59.7% 54.1% 55.3% Underwriting Expenses to Net Written Premiums 31.2% 31.3% 33.6% 31.0% 29.1% - ------------------------------------------------------------------------------------------------------------------------------ Combined Ratio 91.9% 89.1% 93.3% 85.1% 84.4% ============================================================================================================================== A+ A+ A+ A+ A A.M. Best Rating (Superior) (Superior) (Superior) (Superior) (Excellent)
17 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Operations During 2001 the Company continued its growth, with gross written premium increasing 30.9% to $473.6 million. This growth is attributable to a number of varying factors, the most notable of which were: - - Continued benefits from marketplace disruptions due to rating agency downgrades, insolvencies and merger and acquisition activity. These disruptions have resulted in new independent agency relationships, improved premium rates and policy terms and increased market share in certain of the Company's commercial lines segment niche products; - - The 44.4% growth in the personal lines segment, primarily attributable to the Company's "preferred homeowners" insurance program, which was introduced during 2000 to retirees in gated communities; and - - The 20.0% growth in production from the Company's preferred agent force, which is comprised of independent brokers specializing in various of the Company's product niches. The Company also believes its core strategy of adhering to an underwriting philosophy of sound risk selection and pricing discipline, the mixed marketing platform for its product distribution and creating value added features not typically found in property and casualty products have also contributed to generating premium growth above industry averages, as well as enabling the Company to produce combined ratios (the sum of net loss and loss adjustment expenses and acquisition costs and other underwriting expenses, divided by net earned premiums) well below industry averages. The GAAP combined ratio for the year ended December 31, 2001 was 93.4%, which, once again, was substantially lower than the property and casualty industry as a whole. As noted above, during the second half of 2000 and through the first nine months of 2001 marketplace disruptions resulted in improving premium rates and policy terms. Additionally, the terrorist attacks of September 11, 2001 caused the property and casualty industry to experience significant losses. As a result, the Company anticipates that the rate increases and improving policy terms, which started to occur in the second half of 2000, will now continue, possibly for an extended period of time. To better position itself to take advantage of these improving conditions the Company issued 3.6 million shares of its common stock through a public offering in the fourth quarter of 2001. The $114.5 million in net proceeds from this offering are primarily being utilized to provide additional capital for the Company's insurance subsidiaries and to fund general corporate purposes. Furthermore, as a result of the terrorist attacks of September 11, 2001, the Company has endorsed its commercial insurance polices issued during 2002 with the Insurance Services Office ("ISO") terrorism exclusion in states where approved by the respective Insurance Departments. Currently, not all states have approved this ISO terrorism exclusion, and the Company cannot determine whether the state insurance departments which have not yet approved this exclusion will ultimately do so. In its capacity as primary insurer the Company may have a potential gap in its reinsurance protection and could be exposed to potential losses as a result of any terrorist acts. To mitigate this potential exposure to losses arising from terrorist acts, the Company has purchased reinsurance coverage for terrorism with a $10.0 million aggregate policy limit for 2002. In February 2001, A.M. Best Company reaffirmed the "A+" (Superior) rating for Philadelphia Indemnity Insurance Company, Philadelphia Insurance Company, Mobile USA Insurance Company and Liberty American Insurance Company (collectively the "Insurance Subsidiaries"). 18 Investments Investments consist of diversified issuers and issues, and as of December 31, 2001, approximately 88.7% and 4.8% of the total invested assets (total investments plus cash equivalents) on a cost basis consisted of investments in fixed maturity and equity securities, respectively, versus 84.2% and 5.2%, respectively, at December 31, 2000. During 2001, based upon guidance from the Financial Accounting Standards Board Emerging Issues Task Force (EITF) regarding Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets ("EITF 99-20"), certain of the Company's structured securities were subject to re-evaluation as a result of meeting the recognition for impairment losses in EITF 99-20. This re-evaluation resulted in non-cash realized investment losses of $5.8 million. The Company expects to receive full contract value and recover the writedowns. Any such recovery will be recognized prospectively through net investment income. Also, during 2001 the relative percentage investment in taxable fixed maturity securities versus tax-exempt fixed maturity securities continued to increase due to the Company taking advantage of the more favorable after-tax yields. At the end of 2001, on a cost basis, investment grade taxable fixed maturity securities represented 73.9% of the total invested assets, compared to 66.5% as of the end of 2000. Collateralized mortgage and asset backed securities, on a cost basis, amounted to $70.4 million and $272.7 million, respectively, as of December 31, 2001 and $65.6 and $106.8, respectively, as of December 31 2000. The increased investment in collateralized mortgage and asset backed securities was due to the relatively higher after tax rates of return compared to other investment options within the Company's investment objective. This objective is to generate competitive after-tax total rates of return within a prudent level of risk and the constraints of maintaining adequate securities in amount and duration to meet cash requirements of current operations and long-term liabilities, as well as maintaining and improving the Company's A.M. Best rating. The collateralized mortgage and asset backed investments are shorter tranche securities possessing favorable prepayment risk profiles. The Company utilizes professional investment managers for its investments. Market Risk of Financial Instruments The Company's financial instruments are subject to the market risk of potential losses from adverse changes in market rates and prices. The primary market risks to the Company are equity price risk associated with investments in equity securities and interest rate risk associated with investments in fixed maturities. The Company has established, among other criteria, duration, asset quality and asset allocation guidelines for managing its investment portfolio market risk exposure. The Company's investments are held for purposes other than trading and consist of diversified issuers and issues. The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The information is presented in U.S. dollar equivalents. 19
DECEMBER 31, 2001 EXPECTED MATURITY DATES TOTAL (In thousands, except average interest rate) FAIR 2002 2003 2004 2005 2006 Thereafter TOTAL VALUE ------- ------- -------- ------- ------- ---------- -------- -------- FIXED MATURITIES AVAILABLE FOR SALE: Principal Amount $73,573 $60,291 $112,656 $76,438 $77,866 $220,418 $621,242 $624,050 Book Value $73,629 $60,172 $112,339 $77,283 $78,254 $216,412 $618,089 -- Average Interest Rate 6.38% 5.15% 5.23% 5.83% 5.43% 5.66% 5.61% 4.88% PREFERRED: Principal Amount $ 2,395 $ 2,250 $ 1,000 $ 2,500 -- -- $ 8,145 $ 8,366 Book Value $ 2,400 $ 2,240 $ 1,040 $ 2,557 -- -- $ 8,237 -- Average Interest Rate 5.27% 6.07% 6.84% 6.41% -- -- 6.04% 5.97% SHORT-TERM DEBT: Principal Amount $45,583 -- -- -- -- -- $ 45,583 $ 45,583 Book Value $45,583 -- -- -- -- -- $ 45,583 -- Average Interest Rate 1.87% -- -- -- -- -- 1.87% 1.87%
Certain Critical Accounting Estimates and Judgments - - Investments -- Fair values The carrying amounts for the Company's investments approximates their estimated fair value except for investments in limited partnerships which are valued at cost. The Company measures the fair value of investments based upon quoted market prices or by obtaining quotes from dealers. -- Other than temporary impairment excluding interests in securitized assets The Company performs various analytical procedures with respect to its investments, including identifying any security whose fair value is below its cost. Upon identification of such securities, a detailed review is performed to determine whether a decline in fair value below a security's cost basis is other than temporary. If the Company determines a decline in value to be other than temporary, the cost basis of the security is written down to its fair value with the amount of the write down included in earnings as a realized loss in the period the impairment arose. 20 -- Impairment recognition for investments in securitized assets The Company's impairment evaluation and recognition for interests in securitized assets is conducted in accordance with the guidance provided by EITF 99-20. Under this guidance, impairment losses on securities must be recognized if both the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent (prior) estimation date. If these criteria are met an impairment charge, the difference between the current book value of the security and its fair value, is included in earnings as a realized loss in the period the impairment arose. - - Liability for Unpaid Loss and Loss Adjustment Expenses: The liability for unpaid loss and loss adjustment expenses ($302.7 million and $237.5 million as of December 31, 2001 and 2000, respectively) reflects the Company's best estimate for future amounts needed to pay losses and related settlement expenses with respect to insured events. This liability includes an amount determined on the basis of claim adjusters' evaluations with respect to insured events that have occurred and an amount for losses incurred that have not been reported to the Company. In some cases significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of such to the Company. The method for determining the Company's liability for unpaid loss and loss adjustment expenses includes but is not limited to reviewing past loss experience and considering other factors such as legal, social, and economic developments. The methods of making such estimates and establishing the resulting liabilities are continually reviewed and updated and any adjustments resulting therefrom are made in the accounting period in which the adjustment arose. - - Deferred Acquisition Costs: Policy acquisition costs ($41.5 million and $33.3 million as of December 31, 2001 and 2000, respectively) which include commissions, premium taxes, fees, and certain other costs of underwriting policies, are deferred and amortized over the same period in which the related premiums are earned. Deferred acquisition costs are limited to the estimated amounts recoverable after providing for losses and expenses that are expected to be incurred, based upon historical and current experience. Anticipated investment income is considered in determining whether a premium deficiency exists. The methods of making such estimates and establishing the deferred costs are continually reviewed by the Company, and any adjustments therefrom are made in the accounting period in which the adjustment arose. RESULTS OF OPERATIONS (2001 versus 2000) Premiums: Gross written premiums grew $111.7 million (30.9%) to $473.6 million in 2001 from $361.9 million in 2000; gross earned premiums grew $92.7 million (28.2%) to $421.1 million in 2001 from $328.4 million in 2000; net written premiums increased $70.4 million (26.7%) to $333.8 million in 2001 from $263.4 in 2000; and net earned premiums grew $68.8 million (30.3%) to $296.1 million in 2001 from $227.3 million in 2000. The respective gross written premium increases for the commercial lines, specialty lines and personal lines segments for the years ended December 31, 2001 vs. December 31, 2000 amount to $76.5 million (31.9%), $11.1 million (16.3%) and $24.1 million (44.4%), respectively. The overall growth in gross written premiums is primarily attributable to the following: - - Rating downgrades of certain major competitor property and casualty insurance companies have led to their diminished presence in the Company's commercial and specialty lines business segments and continue to result in additional prospects and increased premium writings, most notably for the Company's various commercial package and non-profit D&O product lines. - - The consolidation of certain competitor property and casualty insurance companies has led to the displacement of certain of their independent agency relationships. This consolidation continues to result in new agency 21 relationship opportunities for the Company. These relationships have resulted in additional prospects and premium writings for the Company's commercial and specialty lines segments. - - Continued expansion of marketing efforts relating to commercial lines and specialty lines products through the Company's field organization and preferred agents. - - Rate increases on renewal business. Overall premium growth in the specialty lines segment has been offset in part by the Company's decision not to renew certain policies in the professional liability product lines due to inadequate pricing levels being experienced as a result of market conditions and/or loss experience emerging at higher than expected levels. The respective net written premium increases for the commercial lines, specialty lines and personal lines segments for the years ended December 31, 2001 vs. December 31, 2000 amount to $60.3 million (36.9%), $1.9 million (2.8%) and $8.2 million (25.5%), respectively. The differing percentage increases in net written premiums versus gross written premiums for the period is primarily due to the various changes in the Company's reinsurance programs. Net Investment Income: Net investment income was $32.4 million for the year ended December 31, 2001 and $25.8 million for the same period of 2000. Total investments grew to $673.4 million at December 31, 2001 from $437.3 million at December 31, 2000. The growth in investment income is attributable to investing net cash flows provided by operating activities and the proceeds of the Company's equity offering received late in the fourth quarter. In addition, the Company increased the percentage invested in taxable investments versus tax exempt investments in order to achieve the incremental after tax net investment income available from taxable investments. The low level of U.S. Treasury yields persisted throughout 2001. This capital markets environment had the effect of both increasing the level of prepayments in certain of the Company's interest rate sensitive investments and causing the Company to slightly shorten its duration position in the expectation of higher future fixed income yields. As a result, the Company's average duration on its fixed income portfolio approximated 2.7 years at December 31, 2001, compared to 3.5 years at December 31, 2000. As a consequence of the above factors, the Company's tax equivalent book yield on its fixed income holdings was 6.00% at December 31, 2001, compared to 7.37% at December 31, 2000. Net Realized Investment Gain: Net realized investment gains were $3.4 million for the year ended December 31, 2001 and $11.7 million for the same period in 2000. The Company realized net investment gains of $8.3 million from the sales of common stock securities and $0.9 million from the sales of fixed maturity securities during the year ended December 31, 2001. These realized net investment gains were offset by $5.8 million in non-cash realized investment losses experienced on certain structured securities as a result of an impairment evaluation in accordance with the recent EITF 99-20 guidance. The proceeds from the sales are being reinvested in fixed maturity securities to increase current investment income and decrease the overall percentage of investments in common stock securities. The net realized investment gains of $11.7 million for the year ended December 31, 2000 were due to sales of certain equity investments which resulted in realized net investment gains amounting to $15.1 million, and were offset by $3.4 million of realized net investment losses from sales of certain fixed income securities. The proceeds from these sales were reinvested principally in fixed maturity securities. Other Income: Other income approximated $0.6 million for the year ended December 31, 2001 and $9.0 million for the same period of 2000. Other income primarily consists of commissions earned on brokered personal lines business. Such commissions earned continued to decrease, as planned, as brokering activities were lessened in 2001 in favor of writing business directly. Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $48.4 million (36.9%) to $179.7 million for the year ended December 31, 2001 from $131.3 million for the same period of 2000 and the loss ratio increased to 60.7% in 2001 from 57.8% in 2000. The year ended December 31, 2001 included a $4.0 million increase to net loss and loss adjustment expenses arising from business interruption, business personal property, business property and workers' compensation exposures relating to the September 11, 2001 terrorist attacks. Excluding this item, net loss and loss adjustment expenses increased by $44.4 million (33.8%). The increase in net loss and loss adjustment expenses was due principally to: - - The 30.3% growth in net earned premiums; and 22 - - Losses emerging at a higher rate on automobile leases expiring in 2001 on residual value policies underwritten in prior years than had been originally anticipated when the initial reserves were estimated. Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $21.9 million (29.2%) to $97.0 million for the year ended December 31, 2001 from $75.1 million for the same period of 2000. This increase was due primarily to the 30.3% growth in net earned premiums, offset by relative changes in the Company's product mix and associated distribution channel expense. Other Operating Expenses: Other operating expenses decreased $7.9 million to $6.8 million for the year ended December 31, 2001 from $14.7 million for the same period of 2000. The decrease in other operating expenses was primarily due to the decrease in brokering activities resulting in a decrease in the amount of broker commissions (see "Other Income" above). Goodwill amortization of $1.5 million per year, both for 2001 and 2000 will cease on January 1, 2002 due to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Income Tax Expense: The Company's effective tax rate for the years ended December 31, 2001 and 2000 was 33.9% and 32.4%, respectively. The effective rates differed from the 35% statutory rate principally due to investments in tax-exempt securities, offset in part by non-deductible goodwill amortization. The increase in the effective tax rate is principally due to a greater investment of cash flows in taxable securities relative to tax-exempt securities. RESULTS OF OPERATIONS (2000 versus 1999) Premiums: Gross written premiums grew $87.0 million (31.6%) to $361.9 million in 2000 from $274.9 million in 1999; gross earned premiums grew $82.4 million (33.5%) to $328.4 million in 2000 from $246.0 million in 1999; net written premiums increased $79.3 million (43.1%) to $263.4 million in 2000 from $184.1 million in 1999; and net earned premiums grew $62.4 million (37.8%) to $227.3 million in 2000 from $164.9 million in 1999. The respective gross written premium increases for the commercial lines, specialty lines and personal lines segments for the years ended December 31, 2000 vs. December 31, 1999 amount to $38.5 million (19.2%), $19.7 million (40.6%) and $28.8 million (113.4%) respectively. The overall growth in gross written premiums is primarily attributable to the following: - - The growth of Liberty, resulting in an increase of $28.8 million in gross manufactured housing, preferred homeowners and National Flood Insurance Program written premiums. - - Recent rating downgrades of certain major competitor property and casualty insurance companies has led to their diminished presence in the Company's commercial and specialty lines business segments and continues to result in additional prospects and increased premium writings most notably for the Company's various commercial package and non-profit D&O product lines. - - The consolidation of certain competitor property and casualty insurance companies has led to the displacement of certain of its independent agency relationships which continues to result in new agency relationships for the Company which have been bringing additional prospects and premium writings for the Company's commercial and specialty lines segments. - - Continued expansion of marketing efforts relating to commercial lines and specialty lines products through the Company's field organization and preferred agents. - - Realized rate increases commencing during the latter part of 2000 on certain renewal business. - - Overall premium growth in the commercial lines segment has been offset in part by the Company's decision not to renew certain policies in the commercial automobile and specialty property product lines due to inadequate pricing levels being experienced as a result of market conditions and/or loss experience emerging at higher than expected levels. 23 The respective net written premium increases for the commercial lines, specialty lines and personal lines segments for the years ended December 31, 2000 vs. December 31, 1999 amount to $34.4 million (26.6%), $26.9 million (65.8%) and $18.1 million (128.6%) respectively. The higher percentage increase in net written premiums versus gross written premiums for the period is primarily due to the Company, effective January 2000, increasing its liability retention on each occurrence from $250,000 to $1.0 million for all specialty lines segment business, thus reducing its reinsurance cost (ceded written premiums) and increasing its retained premiums (net written premiums). Net Investment Income: Net investment income approximated $25.8 million in 2000 and $20.7 million in 1999. Total investments grew to $437.3 million at December 31, 2000 from $393.8 million at December 31, 1999. The growth in investment income is due primarily to investing net cash flows provided from operating activities; the net investable assets acquired in the Company's acquisition of Liberty; the reinvestment of $31.4 million in proceeds from the net decrease in common stock holdings which were reinvested into fixed maturity securities; and the increase in the Company's tax equivalent book yield on its fixed income holdings to 7.37% at December 31, 2000 versus 7.08% at December 31, 1999. The Company's average duration on its fixed income portfolio approximated 3.5 years at December 31, 2000 and 4.0 years at December 31, 1999. Net Realized Investment Gain: Net realized investment gains were $11.7 million for 2000 and $5.7 million for 1999. The Company realized net investment gains of $15.1 million from the sales of common stock equity securities offset by $3.4 million of realized net investment losses from sales of certain fixed maturity securities during the year ended December 2000. The proceeds from these common stock sales were reinvested in fixed maturity securities to increase current investment income, lessen the Company's holdings in certain common stock positions, and decrease the overall percentage of investments in common stock securities. The proceeds realized from the fixed maturity sales were reinvested in fixed maturity securities with higher relative book yields than the fixed income securities sold. The net realized investment gains of $5.7 million for the year ended December 31, 1999 were due to the sales of certain fixed maturity and equity investments. A portion of the proceeds from these sales were utilized for the cash purchase price and repayment of certain obligations of the Liberty acquisition. The remaining proceeds were repositioned within the fixed maturity portfolio. Other Income: Other income approximated $9.0 million for the year ended December 31, 2000 and $4.7 for the same period of 1999. Other income primarily consists of commissions earned by Liberty on brokered personal lines business, and for the year ended December 31, 1999 only included such income from the July 1999 acquisition date to December 31, 1999. Prospectively the Company anticipates commissions earned on brokered personal lines business to significantly decrease as the Company discontinues brokering activities in favor of writing the business directly. Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $31.9 million (32.1%) to $131.3 million in 2000 from $99.4 million in 1999 and the loss ratio decreased to 57.8% in 2000 from 60.3% in 1999. The year ended December 31, 1999 included a $5.0 million increase to unpaid loss and loss adjustment expenses for Nursing Home and Assisted Living commercial multi-peril package policies which had been issued in prior periods and $6.1 million for unpaid loss and loss adjustment expenses related to property catastrophe losses. Excluding these items, net loss and loss adjustment expenses increased by $43.0 million (48.7%) and the loss ratio for the year ending December 31, 1999 was 53.6%. This increase in net loss and loss adjustment expenses was due principally to the following: - - 37.8% growth in net earned premiums; - - The increase in the loss ratio due to the relatively higher net earned premium growth on products (specialty lines) with higher relative loss experience; and - - Losses emerging during 2000 at a higher rate than had been originally anticipated for certain products in the commercial lines segment when the initial reserves were estimated. Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $21.3 million (39.6%), to $75.1 million in 2000 from $53.8 million in 1999. This increase was due primarily to the 37.8% growth in net earned premiums and to relative changes in the Company's product mix and associated distribution expense. 24 Other Operating Expenses: Other operating expenses increased $5.8 million to $14.7 million in 2000 from $8.9 million for 1999. The increase in other operating expenses was primarily due to the inclusion of the operating expenses of Liberty's brokered personal lines business ($4.2 million), and goodwill amortization ($.7 million) arising from the acquisition of Liberty. Such expenses have been incurred for the entire year ending December 31, 2000, while the 1999 expenses include the period from the July 1999 acquisition date to December 31, 1999. Prospectively the Company anticipates operating expenses on brokered personal lines business to significantly decrease as the Company discontinues brokering activities in favor of writing the business directly. Income Tax Expense: The Company's effective tax rates for 2000 and 1999 were 32.4% and 29.3%, respectively. The effective rates differed from the 35% statutory rate principally due to investments in tax-exempt securities offset in part by non-deductible goodwill amortization. The increase in the effective tax rate is principally due to a greater investment of cash flows in taxable securities relative to tax-exempt securities. GROWTH OPPORTUNITIES The Company believes that it can continue its premium growth due to: its national presence via 36 production underwriting offices located across the United States from which the production underwriting organization markets the Company's products and services directly to its customers, as well as coordinating the efforts of the Company's external producers; the evaluation and development of new product opportunities and differentiation of policy and service features; the disruption in the marketplace as a result of consolidation activity and certain distressed situations along with the improving fundamentals (premium rates and policy terms) in the property and casualty industry; and expansion of its personal lines business into new states in addition to seeking premium growth in its current markets. The Company also anticipates cross selling opportunities to arise between its personal and commercial lines business niches as well as cross selling opportunities within its preferred agency base for its portfolio of commercial niche insurance products. Overall future premium growth may be offset in part due to the continuing adverse affects the September 11th terrorist attacks have had on the Company's rental car customers offering its excess liability (SLI) insurance coverage to the business and leisure traveler. This product is sold at the rental car counters through arrangements with a number of the largest rent-a-car companies and protects rent-a-car customers against liability for bodily injury and property damage excess of the statutory coverage provided with the rental vehicle. The SLI product represented approximately 8.0% of the 2001 commercial lines segment total net written premium. The Company believes its unique product features and mixed marketing strategy is a strength, in that it provides the market intelligence and flexibility to quickly deploy the marketing efforts of the Company's direct production underwriters from market segments where pricing is soft to market segments with emerging opportunities. LIQUIDITY AND CAPITAL RESOURCES Philadelphia Consolidated Holding Corp. (PCHC) is a holding company whose principal assets currently consist of 100% of the capital stock of its subsidiaries. The Company's primary sources of funds are dividends from its subsidiaries and payments received pursuant to tax allocation agreements with the insurance subsidiaries. For the year ended December 31, 2001, payments to PCHC pursuant to such tax allocation agreements totaled $18.6 million. The payment of dividends to PCHC from the insurance subsidiaries is subject to certain limitations imposed by the insurance laws of the Commonwealth of Pennsylvania and State of Florida. Accumulated statutory profits or policyholders' surplus of the insurance subsidiaries from which dividends may be paid totaled $111.3 million at December 31, 2001. Of this amount, the insurance subsidiaries are entitled to pay a total of approximately $27.4 million of dividends in 2002 without obtaining prior approval from the Insurance Commissioner of the Commonwealth of Pennsylvania or State of Florida. During 2001 the insurance subsidiaries paid dividends of $13.0 million to PCHC and $3.8 million to Liberty American Insurance Group, Inc., a subsidiary of PCHC. On May 16, 2001, the Company issued 4.0 million common shares to satisfy the stock purchase contract obligation from the Company's 1998 FELINE PRIDESSM 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. 25 On November 27, 2001 the Company closed on its public offering of an aggregate of 3.6 million shares of its common stock. Proceeds from the offering were $114.5 million (after underwriting and associated costs). The Company contributed $70.0 million of the net proceeds to its subsidiaries in 2001, of which $60.0 million was contributed to the Insurance Subsidiaries. The remaining proceeds are presently being held for general corporate purposes. On September 14, 2001, the Company's Board of Directors authorized the repurchase of an additional $15.0 million of the Company's common stock. This authorization is in addition to the previously announced $40.0 million common stock buyback authorization, bringing the total current remaining authorization to $30.1 million. Purchases are made from time to time in the open market or through privately negotiated transactions. Two of the Company's Insurance Subsidiaries are members of the Federal Home Loan Bank of Pittsburgh ("FHLB"). A primary advantage of FHLB membership is the ability of members to access credit products from a reliable capital markets provider. The availability of any one member's access to credit is based upon its FHLB eligible collateral. At December 31, 2001 the Insurance Subsidiaries borrowing capacity was $80.8 million. The Insurance Subsidiaries have utilized a portion of its borrowing capacity to purchase a diversified portfolio in investment grade floating rate securities. These purchases were funded by floating rate FHLB borrowings to achieve a positive spread between the rate of interest on these securities and borrowing rates. The remaining borrowing capacity will provide an immediately available line of credit. Borrowings aggregated $31.3 million at December 31, 2001 and bear interest at adjusted LIBOR and mature twelve months from inception. The weighted-average interest rate on borrowings outstanding as of December 31, 2001 was 2.07%. Under certain reinsurance agreements, the Company is required to maintain investments in trust accounts to secure its reinsurance obligations (primarily the payment of losses and loss adjustment expenses on business it does not write directly). At December 31, 2001, the investment and cash balances in such trust accounts totaled approximately $11.9 million. In addition, various insurance departments of states in which the Company operates require the deposit of funds to protect policyholders within those states. At December 31, 2001, the balance on deposit for the benefit of such policyholders totaled approximately $13.5 million. The Company produced net cash from operations of $115.1 million in 2001, $47.0 million in 2000 and $47.4 million in 1999. Operating cash included cash provided from tax benefits as a result of the exercise of employee stock options amounting to $25.8 million, $0.1 million and $0.3 million for 2001, 2000 and 1999, respectively. Management believes that the Company has adequate liquidity to pay all claims and meet all other cash needs. In the normal course of business, the Company has entered into various reinsurance contracts with unrelated reinsurers. The Company participates in such agreements for the purpose of limiting loss exposure and diversifying business. Reinsurance contracts do not relieve the Company from its obligations to policyholders. To minimize the potential for a write off of amounts due from reinsurers, the Company: evaluates the financial condition of its reinsurers; principally contracts with large reinsurers that are rated at least "A-" (Excellent) by A.M. Best Company; regularly monitors its reinsurance receivables; and collects the obligations of its reinsurers on a timely basis. The insurance subsidiaries, which operate under an intercompany reinsurance pooling agreement, must have certain levels of surplus to support premium writings. Guidelines of the National Association of Insurance Commissioners (the "NAIC") suggest that a property and casualty insurer's ratio of annual statutory net premium written to policyholders' surplus should not exceed 3-to-1. The ratio of combined annual statutory net premium written by the insurance subsidiaries to their combined policyholders' surplus was 1.2-to-1.0 and 1.4-to-1.0 for 2001 and 2000, respectively. Management believes that the policyholders' surplus, which was $281.0 million at December 31, 2001, will be sufficient to support current and anticipated premium writings. Risk-based capital is designed to measure the acceptable amount of capital and surplus an insurer should have, based on the inherent specific risks of each insurer. Insurers failing to meet this benchmark level may be subject to scrutiny by the insurer's domiciliary insurance department and ultimately to rehabilitation or liquidation. Based on the standards currently contained in the applicable Pennsylvania and Florida Insurance Company statutes, the Insurance Subsidiaries' capital and surplus is in excess of the prescribed risk-based capital requirements. The Company has certain contractual obligations and commitments which are summarized below: 26
Payments Due by Period (in thousands) --------------------------------------------------------------------- Certain Contractual Obligations Less than 1 After 5 Total year 1-3 years 4-5 years years ------- ----------- --------- --------- ------- Loans Payable (1) $31,341 $31,341 $ -- $ -- $ -- Operating Leases 11,061 2,709 3,655 3,126 1,571 Other Commercial Commitments (2) 1,100 1,100 -- -- -- ------- ------- ------ ------ ------ Total $43,502 $35,150 $3,655 $3,126 $1,571 ======= ======= ====== ====== ======
(1) Represents 12 month collateralized borrowings from the Federal Home Loan Bank of Pittsburgh, the proceeds from which are invested to achieve a positive spread between the investment and borrowing interest rates. (2) Represents open commitments under certain limited partnership agreements. INFLATION Property and casualty insurance premiums are established before the amount of losses and loss adjusted expenses, or the extent to which inflation may affect such amounts, is known. The Company attempts to anticipate the potential impact of inflation in establishing its premiums and reserves. Substantial future increases in inflation could result in future increases in interest rates, which, in turn, are likely to result in a decline in the market value of the Company's investment portfolio and resulting unrealized losses and/or reductions in shareholders' equity. FORWARD-LOOKING INFORMATION Certain information included in this report and other statements or materials published or to be published by the Company are not historical facts but are forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new and existing products, expectations for market segment and growth, and similar matters. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides the following cautionary remarks regarding important factors which, among others, could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development, results of the Company's business, and the other matters referred to above include, but are not limited to: (i) changes in the business environment in which the Company operates, including inflation and interest rates; (ii) changes in taxes, governmental laws, and regulations; (iii) competitive product and pricing activity; (iv) difficulties of managing growth profitably; (v) catastrophe losses; and (vi) the amount of time and extent of business interruptions and other losses resulting from any future terrorist attacks. 27 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates. The Company does not have any derivative financial instruments. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. The information is presented in U.S. dollar equivalents, which is the Company's reporting currency.
DECEMBER 31, 2001 EXPECTED MATURITY DATES TOTAL (Dollars in thousands, except average interest rate) FAIR 2002 2003 2004 2005 2006 Thereafter TOTAL VALUE ------- ------- -------- ------- ------- ---------- -------- -------- FIXED MATURITIES AVAILABLE FOR SALE: Principal Amount $73,573 $60,291 $112,656 $76,438 $77,866 $220,418 $621,242 $624,050 Book Value $73,629 $60,172 $112,339 $77,283 $78,254 $216,412 $618,089 Average Interest Rate 6.38% 5.15% 5.23% 5.83% 5.43% 5.66% 5.61% 4.88% PREFERRED: Principal Amount $ 2,395 $ 2,250 $ 1,000 $ 2,500 $ 8,145 $ 8,366 Book Value $ 2,400 $ 2,240 $ 1,040 $ 2,557 $ 8,237 Average Interest Rate 5.27% 6.07% 6.84% 6.41% 6.04% 5.97% SHORT-TERM DEBT: Principal Amount $45,583 $ 45,583 $ 45,583 Book Value $45,583 $ 45,583 Average Interest Rate 1.87% 1.87% 1.08%
28 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Philadelphia Consolidated Holding Corp. and Subsidiaries Index to Financial Statements and Schedules
Financial Statements Page - -------------------- ---------- Report of Independent Accountants 30 Consolidated Balance Sheets - As of December 31, 2001 and 2000 31 Consolidated Statements of Operations and Comprehensive Income - For the Years Ended December 31, 2001, 2000 and 1999 32 Consolidated Statements of Changes in Shareholders' Equity - For the Years Ended December 31, 2001, 2000 and 1999 33 Consolidated Statements of Cash Flows - For the Years Ended December 31, 2001, 2000 and 1999 34 Notes to Consolidated Financial Statements 35-50 Financial Statement Schedules: Schedule I Summary of Investments - Other Than Investments in Related Parties As of December 31, 2001 S-1 II Condensed Financial Information of Registrant As of December 31, 2001 and 2000 and For Each of the Three Years in the Period Ended December 31, 2001 S-2 -- S-4 III Supplementary Insurance Information As of and For the Years Ended December 31, 2001, 2000 and 1999 S-5 IV Reinsurance For the Years ended December 31, 2001, 2000 and 1999 S-6 VI Supplementary Information Concerning Property-Casualty Insurance Operations As of and For the Years Ended December 31, 2001, 2000 and 1999 S-7
29 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Philadelphia Consolidated Holding Corp.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial position of Philadelphia Consolidated Holding Corp. and Subsidiaries (the "Company") at December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP Philadelphia, PA February 8, 2002 30 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
As of December 31, -------------------------- 2001 2000 ---------- -------- ASSETS Investments: Fixed Maturities Available for Sale at Market (Amortized Cost $626,326 and $392,439) $ 632,416 $394,733 Equity Securities at Market (Cost $34,065 and $24,087) 40,992 42,553 ---------- -------- Total Investments 673,408 437,286 Cash and Cash Equivalents 49,910 49,742 Accrued Investment Income 6,582 5,726 Premiums Receivable 96,025 69,377 Prepaid Reinsurance Premiums and Reinsurance Receivables 99,601 73,513 Income Taxes Recoverable -- 13,323 Deferred Income Taxes 6,196 909 Deferred Acquisition Costs 41,526 33,324 Property and Equipment, Net 10,082 10,476 Goodwill less Accumulated Amortization of $5,604 and $4,112 25,724 30,809 Other Assets 8,668 5,979 ---------- -------- Total Assets $1,017,722 $730,464 ========== ======== LIABILITIES and SHAREHOLDERS' EQUITY Policy Liabilities and Accruals: Unpaid Loss and Loss Adjustment Expenses $ 302,733 $237,494 Unearned Premiums 197,839 145,484 ---------- -------- Total Policy Liabilities and Accruals 500,572 382,978 Loans Payable 31,341 22,000 Premiums Payable 25,659 20,868 Other Liabilities 31,458 23,388 ---------- -------- Total Liabilities 589,030 449,234 ---------- -------- 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, 21,509,723 and 13,431,408 Shares Issued and Outstanding 268,509 46,582 Notes Receivable from Shareholders (3,373) (2,287) Accumulated Other Comprehensive Income 8,461 13,494 Retained Earnings 155,095 124,536 ---------- -------- Total Shareholders' Equity 428,692 182,325 ---------- -------- Total Liabilities and Shareholders' Equity $1,017,722 $730,464 ========== ========
The accompanying notes are an integral part of the consolidated financial statements. 31 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For the Years Ended December 31, ----------------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Revenue: Net Earned Premiums 296,093 227,292 164,915 Net Investment Income 32,426 25,803 20,695 Net Realized Investment Gain 3,357 11,718 5,700 Other Income 587 8,981 4,722 ----------- ----------- ----------- Total Revenue 332,463 273,794 196,032 ----------- ----------- ----------- Losses and Expenses: Loss and Loss Adjustment Expenses 222,581 175,163 122,491 Net Reinsurance Recoveries (42,926) (43,859) (23,081) ----------- ----------- ----------- Net Loss and Loss Adjustment Expenses 179,655 131,304 99,410 Acquisition Costs and Other Underwriting Expenses 97,020 75,054 53,793 Other Operating Expenses 6,841 14,679 8,939 ----------- ----------- ----------- Total Losses and Expenses 283,516 221,037 162,142 ----------- ----------- ----------- Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust 2,749 7,245 7,245 ----------- ----------- ----------- Income Before Income Taxes 46,198 45,512 26,645 ----------- ----------- ----------- Income Tax Expense (Benefit): Current 18,216 17,666 8,360 Deferred (2,577) (2,924) (558) ----------- ----------- ----------- Total Income Tax Expense 15,639 14,742 7,802 ----------- ----------- ----------- Net Income $ 30,559 $ 30,770 $ 18,843 =========== =========== =========== Other Comprehensive Income (Loss), Net of Tax: Holding Gain (Loss) Arising during Year $ (2,851) $ 7,604 $ (5,205) Reclassification Adjustment (2,182) (7,617) (3,705) ----------- ----------- ----------- Other Comprehensive Loss (5,033) (13) (8,910) ----------- ----------- ----------- Comprehensive Income $ 25,526 $ 30,757 $ 9,933 =========== =========== =========== Per Average Share Data: Basic Earnings Per Share $ 1.85 $ 2.53 $ 1.51 =========== =========== =========== Diluted Earnings Per Share $ 1.78 $ 2.11 $ 1.25 =========== =========== =========== Weighted-Average Common Shares Outstanding 16,528,601 12,177,989 12,501,165 Weighted-Average Share Equivalents Outstanding 656,075 2,411,552 2,614,399 ----------- ----------- ----------- Weighted-Average Shares and Share Equivalents Outstanding 17,184,676 14,589,541 15,115,564 =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 32 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
For the Years Ended December 31, --------------------------------------- 2001 2000 1999 -------- -------- -------- Common Stock: Balance at Beginning of Year $ 46,582 $ 68,859 $ 44,796 Issuance of Shares Pursuant to Public Offering 114,518 -- -- Issuance of Shares Pursuant to Stock Purchase Contracts 98,905 -- -- Issuance of Shares Pursuant to Acquisition Agreement -- -- 25,000 Exercise of Employee Stock Options 6,437 (23,132) (517) Issuance of Shares Pursuant to Stock Purchase Plans 2,067 855 (420) -------- -------- -------- Balance at End of Year 268,509 46,582 68,859 -------- -------- -------- Notes Receivable from Shareholders: Balance at Beginning of Year (2,287) (2,506) (1,680) Notes Receivable Issued Pursuant to Employee Stock Purchase Plan (2,158) (414) (1,445) Collection of Notes Receivable 1,072 633 619 -------- -------- -------- Balance at End of Year (3,373) (2,287) (2,506) -------- -------- -------- Accumulated Other Comprehensive Income, Net of Deferred Income Taxes: Balance at Beginning of Year 13,494 13,507 22,417 Other Comprehensive Loss, Net of Taxes (5,033) (13) (8,910) -------- -------- -------- Balance at End of Year 8,461 13,494 13,507 -------- -------- -------- Retained Earnings: Balance at Beginning of Year 124,536 93,766 74,923 Net Income 30,559 30,770 18,843 -------- -------- -------- Balance at End of Year 155,095 124,536 93,766 -------- -------- -------- Common Stock Held in Treasury: Balance at Beginning of Year -- (12,186) (2,973) Common Shares Repurchased -- (40,766) (12,081) Exercise of Employee Stock Options -- 52,712 975 Issuance of Shares Pursuant to Stock Purchase Plans -- 240 1,893 -------- -------- -------- Balance at End of Year -- -- (12,186) -------- -------- -------- Total Shareholders' Equity $428,692 $182,325 $161,440 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. 33 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
For the Years Ended December 31, ---------------------------------------------- 2001 2000 1999 --------- --------- --------- Cash Flows from Operating Activities: Net Income $ 30,559 $ 30,770 $ 18,843 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Net Realized Investment Gain (3,357) (11,718) (5,700) Depreciation and Amortization Expense 2,528 3,856 3,371 Deferred Income Tax Benefit (2,577) (2,924) (558) Change in Premiums Receivable (26,648) (20,201) (11,154) Change in Other Receivables (26,944) (19,292) (26,159) Change in Deferred Acquisition Costs (8,202) (7,270) (6,720) Change in Income Taxes Recoverable (6,083) (12,504) (211) Change in Other Assets (840) (959) (1,428) Change in Unpaid Loss and Loss Adjustment Expenses 65,239 49,431 33,590 Change in Unearned Premiums 52,355 33,878 30,073 Change in Other Liabilities 13,320 3,740 13,215 Tax Benefit from Exercise of Employee Stock Options 25,799 145 255 --------- --------- --------- Net Cash Provided by Operating Activities 115,149 46,952 47,417 --------- --------- --------- Cash Flows from Investing Activities: Proceeds from Sales of Investments in Fixed Maturities 112,676 122,795 64,968 Proceeds from Maturity of Investments in Fixed Maturities 72,650 22,110 39,728 Proceeds from Sales of Investments in Equity Securities 20,864 50,230 37,013 Cost of Fixed Maturities Acquired (424,852) (208,513) (148,411) Cost of Equity Securities Acquired (22,529) (18,861) (25,686) Payment for Acquisition, Net of Cash Acquired -- -- (7,372) Purchase of Property and Equipment, Net (1,808) (3,184) (1,768) --------- --------- --------- Net Cash Used for Investing Activities (242,999) (35,423) (41,528) --------- --------- --------- Cash Flows from Financing Activities: Net Proceeds from Public Offering of Common Stock 114,518 -- -- Proceeds from Loans Payable 31,341 22,000 -- Repayments on Loans Payable (22,000) -- -- Proceeds from Exercise of Employee Stock Options 3,041 1,853 203 Proceeds from Collection of Notes Receivable 1,072 633 619 Proceeds from Shares Issued Pursuant to Stock Purchase Plans 46 188 27 Cost of Common Stock Repurchased -- (12,691) (12,081) --------- --------- --------- Net Cash Provided (Used) by Financing Activities 128,018 11,983 (11,232) --------- --------- --------- Net Increase (Decrease) in Cash and Cash Equivalents 168 23,512 (5,343) Cash and Cash Equivalents at Beginning of Year 49,742 26,230 31,573 --------- --------- --------- Cash and Cash Equivalents at End of Year $ 49,910 $ 49,742 $ 26,230 ========= ========= ========= Cash Paid During the Year for: Income Taxes $ 7,023 $ 7,760 $ 8,295 Interest 689 200 -- Non-Cash Transactions: Acceptance of Mature Shares for Exercise Cost of Employee Stock Options $ -- $ 6,811 $ -- Issuance of Shares Pursuant to Employee Stock Purchase Plan in Exchange for Notes Receivable $ 2,158 $ 414 $ 1,445 Acquisitions: Fair Value Of Assets Acquired $ -- $ -- $ 77,310 Cash Paid -- -- (25,676) Common Stock Issued -- -- (25,000) --------- --------- --------- Liabilities Assumed $ -- $ -- $ 26,634 ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 34 Philadelphia Consolidated Holding Corp. and Subsidiaries Notes to Consolidated Financial Statements 1. General Information and Significant Accounting Policies Philadelphia Consolidated Holding Corp. ("Philadelphia Insurance"), and its subsidiaries (collectively the "Company") doing business as Philadelphia Insurance Companies, include four property and casualty insurance companies, Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company, which are domiciled in Pennsylvania; and Mobile USA Insurance Company and Liberty American Insurance Company, which are domiciled in Florida (collectively the "Insurance Subsidiaries"); an underwriting manager, Maguire Insurance Agency, Inc.; a managing general agency, Mobile Homeowners Insurance Agencies, Inc; a premium finance company Liberty American Premium Finance Company; and an investment subsidiary, PCHC Investment Corp. The Company designs, markets, and underwrites specialty commercial and personal property and casualty insurance products for select target industries or niches including, among others, nonprofit organizations; the health, fitness and wellness industry; select classes of professional liability; the rental car industry; automobile leasing industry; and personal property and casualty insurance products for the manufactured housing and homeowners markets. All marketing, underwriting, claims management, investment, and general administration is provided by the underwriting manager and managing general agency. Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of the Company prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP"). All significant intercompany balances and transactions have been eliminated in consolidation. The preparation of financial statements requires making estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (a) Investments Fixed maturity investments, classified as Available for Sale, are carried at market value with the change in unrealized appreciation (depreciation) credited or charged directly to shareholders' equity, net of applicable deferred income taxes. Income on fixed maturities is recognized on the accrual basis. The decision to purchase or sell investments is based on management's assessment of various factors such as foreseeable economic conditions, including current interest rates and the interest rate risk, and the liquidity and capital positions of the Company. Investments in fixed maturities are adjusted for amortization of premiums and accretion of discounts to maturity date, except for collateralized mortgage and asset backed securities which are adjusted for amortization of premiums and accretion of discounts over their estimated lives. Certain collateralized mortgage and asset backed securities repayment patterns will change based on interest rate movements and, accordingly, could impact future investment income if the reinvestment of the repayment amounts are at lower interest rates than the underlying securities. Collateralized mortgage and asset backed securities amounted to $70.9 million and $273.3 million, respectively, at December 31, 2001 and $66.8 million and $103.9 million, respectively, at December 31, 2000. The collateralized mortgage and asset backed securities held as of December 31, 2001 and 2000 are shorter tranche securities possessing favorable prepayment risk profiles. Equity securities are carried at market value with the change in unrealized appreciation (depreciation) credited or charged directly to shareholders' equity, net of applicable deferred income taxes. Realized investment gains and losses are calculated on the specific identification basis and recorded as income when the securities are sold. Investments are considered impaired when the Company determines a decline in value to be other than temporary. Accordingly, such a decline is recorded as a charge to income in the period this determination is made. 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 35 relationship exists. Changes in the fair value of derivatives that are not designated as hedges or that do not meet the hedge accounting criteria in SFAS 133 are required to be reported in income. The Company held no derivative financial instruments, nor embedded financial derivatives, as of December 31, 2001 and 2000. 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 asset's 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 $5.8 million for the year ended December 31, 2001. (b) Cash and Cash Equivalents Cash equivalents, consisting of fixed maturity investments with maturities of three months or less when purchased and money market funds, are stated at cost which approximates market value. (c) Deferred Acquisition Costs Policy acquisition costs, which include commissions, premium taxes, fees, and certain other costs of underwriting policies, are deferred and amortized over the same period in which the related premiums are earned. Deferred acquisition costs are limited to the estimated amounts recoverable after providing for losses and expenses that are expected to be incurred, based upon historical and current experience. Anticipated investment income is considered in determining whether a premium deficiency exists. Amortization of policy acquisition costs in the accompanying consolidated statements of operations and comprehensive income was $80.2 million, $60.4 million, and $46.5 million for the years ended December 31, 2001, 2000, and 1999, respectively. (d) Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets. Costs incurred in developing information systems technology are capitalized and included in property and equipment. These costs are amortized over their useful lives from the dates the systems technology becomes operational. Upon disposal of assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in earnings. (e) Goodwill Goodwill amounted to $25.7 million and $30.8 million at December 31, 2001 and 2000, respectively, and was being amortized on a straight line basis over 20 years. 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 adjustment 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 and will also review goodwill and other intangible assets for any impairment or other effects of the new standard. The Company will adopt the provisions of SFAS No. 142 as of January 1, 2002, and does not anticipate a material impact on financial position or results of operations. Goodwill amortization was $1.5 million in 2001, $1.5 million in 2000 and $0.8 million in 1999. (f) Reserves for Unpaid Loss and Loss Adjustment Expenses The liability for unpaid loss and loss adjustment expenses includes an amount determined on the basis of claims adjusters' evaluations and an amount, based on past experience, for losses incurred but not reported. Such liabilities are necessarily based on estimates, and while management believes that the amount is adequate, the ultimate liability may be in excess of, or less than, the amount provided. The methods of making such estimates and establishing the resulting liabilities are continually reviewed and updated and any adjustments resulting therefrom are reflected in operations currently. 36 (g) Premiums Premiums are generally earned on a pro rata basis over the terms of the policies. Premiums applicable to the unexpired terms of the policies in-force are reported as unearned premiums. The Company records an allowance for doubtful accounts for premiums receivable balances estimated to be uncollectible. At December 31, 2001 and 2000 the allowance for doubtful accounts amounted to $1.0 million and $1.4 million, respectively. (h) Reinsurance Ceded In the normal course of business, the Company seeks to reduce the loss that may arise from events that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas of exposure with reinsurers. Amounts recoverable from reinsurers are estimated in a manner consistent with the reinsured policy. Amounts for reinsurance assets and liabilities are reported gross. (i) Assessments The Insurance Subsidiaries are subject to state guaranty fund assessments, which provide for the payment of covered claims or meet other insurance obligations from insurance company insolvencies, and other assessments related to its insurance activities. Each state has enacted legislation establishing guaranty funds and other insurance activity related assessments resulting in a variety of assessment methodologies. Expense for guaranty fund and insurance activity related assessments are recognized when it is probable that an assessment will be imposed, the obligatory event has occurred and the amount of the assessment is reasonably estimated. (j) Income Taxes The Company files a consolidated federal income tax return. Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. (k) Earnings Per Share Basic earnings per share has been calculated by dividing net income by the weighted-average common shares outstanding. Diluted earnings per share has been calculated by dividing net income by the weighted-average common shares outstanding and the weighted-average share equivalents outstanding. (l) Comprehensive Income Components of comprehensive income, as detailed in the Consolidated Statements of Operations and Comprehensive Income, are net of tax. The related tax effect of Holding Gains (Losses) arising during the year was ($1.5) million, $4.1 million and ($2.8) million in 2001, 2000 and 1999, respectively. The related tax effect of Reclassification Adjustments was $1.2 million, $4.1 million, and $2.0 million in 2001, 2000 and 1999, respectively. 2. Acquisition On July 16, 1999, Philadelphia Insurance closed on its acquisition of Liberty (Mobile USA Insurance Company, Liberty American Insurance Company, Mobile Homeowners Insurance Agencies, Inc., and Liberty American Premium Finance Company) for a purchase price of $45.0 million, and a contingent additional amount of up to $5.0 million based upon the earnings for the acquired business. Of the purchase price, $20.0 million was paid in cash and the balance in 1,037,772 shares of common stock of the Company. Based on the Company's current estimate, no additional future amount will be paid. The acquisition was accounted for using the purchase method of accounting. Goodwill resulting from the acquisition amounted to $32.7 million. This amount represents the excess of acquisition costs over the fair value of net assets acquired. 3. Statutory Information Accounting Principles: In December 1998, the National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles guidance, which replaces the Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting as of January 1, 2001. The Codification of Statutory Accounting Principles provides guidance for areas where statutory accounting was previously silent and changed previous statutory accounting in some areas (e.g., deferred income taxes, electronic data processing equipment and software, and uncollected 37 premiums). The Insurance Departments of Pennsylvania and Florida adopted the Codification guidance, effective January 1, 2001. The effect of adoption of the Codification of Statutory Accounting Principles, recorded as a direct increase to the Company's combined statutory unassigned surplus of it's subsidiaries, was $15.7 million. GAAP differs in certain respects from SAP prescribed or permitted by the Insurance Department of the Commonwealth of Pennsylvania and/or the State of Florida. The principal differences between SAP and GAAP are as follows: - - Under SAP, investments in debt securities are carried at amortized cost, while under GAAP, investments in debt securities classified as Available for Sale are carried at fair value. - - Under SAP, policy acquisition costs, such as commissions, premium taxes, fees, and other costs of underwriting policies are charged to current operations as incurred, while under GAAP, such costs are deferred and amortized on a pro rata basis over the period covered by the policy. - - Under SAP, certain assets, designated as "Non-admitted Assets" (such as prepaid expenses) are charged against surplus. - - Under SAP, net deferred income tax assets are admitted following the application of certain criteria, with the resulting admitted deferred tax amount being credited directly to policyholder surplus. - - Under SAP, premiums receivable are considered nonadmitted if determined to be uncollected based upon aging criteria as defined in SAP. Financial Information: The statutory capital and surplus of the Insurance Subsidiaries as of December 31, 2001 and 2000 was $281.0 million and $193.3 million, respectively. Statutory net income for the years ended December 31, 2001, 2000 and 1999 was $28.3 million, $26.2 million, and $19.2 million, respectively. Capital contributions for the years ended December 31, 2001 and 2000 were $73.0 and $0 million, respectively. Dividend Restrictions: The Insurance Subsidiaries are subject to various regulatory restrictions which limit the maximum amount of annual shareholder dividends allowed to be paid. The maximum dividend which the Insurance Subsidiaries may pay to Philadelphia Insurance during 2002 without prior approval is $27.4 million. Dividends paid for the years ended December 31, 2001 and 2000 were $16.8 and $0 million, respectively. Risk-Based Capital: Risk-based capital is designed to measure the acceptable amount of capital an insurer should have based on the inherent specific risks of each insurer. Insurers failing to meet this benchmark capital level may be subject to scrutiny by the insurer's domiciliary insurance department, and ultimately, rehabilitation or liquidation. Based on the standards, the Insurance Subsidiaries capital and surplus at December 31, 2001 is in excess of the prescribed risk-based capital requirements. 4. Investments The Company invests primarily in investment grade fixed maturities which possessed an average quality rating of AA at December 31, 2001. The cost, gross unrealized gains and losses and estimated market value of investments as of December 31, 2001 and 2000 are as follows (in thousands): 38
Gross Gross Estimated Unrealized Unrealized Market Cost (1) Gains Losses Value (2) -------- ---------- ---------- --------- December 31, 2001 Fixed Maturities: Available for Sale U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $ 21,024 $ 670 $ -- $ 21,694 Obligations of States and Political Subdivisions 104,628 2,006 450 106,184 Corporate and Bank Debt Securities 157,657 4,212 1,543 160,326 Collateralized Mortgage Securities 70,362 831 320 70,873 Asset Backed Securities 272,655 2,988 2,304 273,339 - --------------------------------------------------------------------------------------------------------------------- Total Fixed Maturities Available for Sale 626,326 10,707 4,617 632,416 - --------------------------------------------------------------------------------------------------------------------- Equity Securities 34,065 7,239 312 40,992 - --------------------------------------------------------------------------------------------------------------------- Total Investments $660,391 $17,946 $4,929 $673,408 ===================================================================================================================== December 31, 2000 Fixed Maturities: Available for Sale U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies $ 21,719 $ 160 $ 4 $ 21,875 Obligations of States and Political Subdivisions 82,596 4,035 18 86,613 Corporate and Bank Debt Securities 115,684 1,784 1,955 115,513 Collateralized Mortgage Securities 65,637 1,452 269 66,820 Asset Backed Securities 106,803 1,614 4,505 103,912 - --------------------------------------------------------------------------------------------------------------------- Total Fixed Maturities Available for Sale 392,439 9,045 6,751 394,733 - --------------------------------------------------------------------------------------------------------------------- Equity Securities 24,087 18,761 295 42,553 - --------------------------------------------------------------------------------------------------------------------- Total Investments $416,526 $27,806 $7,046 $437,286 =====================================================================================================================
(1) Original cost of equity securities; original cost of fixed maturities adjusted for amortization of premiums and accretion of discounts. (2) Estimated market values have been based on quoted market prices. The Company had no debt or equity investments in a single issuer totaling in excess of 10% of shareholders' equity at December 31, 2001. The cost and estimated market value of fixed maturity securities at December 31, 2001, by remaining contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties. 39
Estimated Market Cost (1) Value (2) -------- --------- Due in One Year or Less $ 26,096 $ 26,703 Due After One Year Through Five Years 125,719 127,916 Due After Five Years through Ten Years 48,799 50,107 Due After Ten Years 82,695 83,478 Collateralized Mortgage and Asset Backed Securities 343,017 344,212 - ------------------------------------------------------------------------------------- $626,326 $632,416 =====================================================================================
(1) Original cost adjusted for amortization of premiums and accretion of discounts. (2) Estimated market values have been based on quoted market prices. The sources of net investment income for the years ended December 31, 2001, 2000, and 1999 are as follows (in thousands):
2001 2000 1999 -------- -------- -------- Fixed Maturities $30,962 $23,396 $18,210 Equity Securities 1,343 1,414 1,169 Cash and Cash Equivalents 1,908 1,961 2,111 - ------------------------------------------------------------------------------ Total Investment Income 34,213 26,771 21,490 Investment Expense (1,787) (968) (795) - ------------------------------------------------------------------------------ Net Investment Income $32,426 $25,803 $20,695 ==============================================================================
There are no material investments in fixed maturity securities that were non-income producing during the years ended December 31, 2001, 2000, and 1999. Investment expense includes $107,000, $182,000, and $212,000, in investment management fees paid to a director of the Company in 2001, 2000, and 1999, respectively. These transactions are in the ordinary course of business at negotiated prices comparable to those of transactions with other investment advisors. Realized pre-tax gains (losses) on the sale of investments for the years ended December 31, 2001, 2000, and 1999 are as follows (in thousands):
2001 2000 1999 ------- ------- ------- Fixed Maturities Gross Realized Gains $ 5,023 $ 242 $ 285 Gross Realized Losses (9,979) (3,607) (1,079) - ----------------------------------------------------------------------- Net Loss (4,956) (3,365) (794) - ----------------------------------------------------------------------- Equity Securities Gross Realized Gains 10,259 18,685 9,300 Gross Realized Losses (1,946) (3,602) (2,806) - ----------------------------------------------------------------------- Net Gain 8,313 15,083 6,494 - ----------------------------------------------------------------------- Total Net Realized Investment Gain $ 3,357 $11,718 $ 5,700 =======================================================================
5. Restricted Assets The Insurance Subsidiaries have investments, principally U.S. Treasury securities, on deposit with the various states in which they are licensed insurers. At December 31, 2001 and 2000, the carrying value of the securities on deposit totaled $13.5 million and $12.5 million, respectively. Additionally, the Insurance Subsidiaries have investments, principally asset backed securities, which collateralize the borrowings from the Federal Home Loan Bank of Pittsburgh, see Note 9. The carrying value of these investments was $33.9 million and $0 million as of December 31, 2001 and 2000, respectively. 40 6. Trust Accounts The Company maintains investments in trust accounts under reinsurance agreements with unrelated insurance companies. These investments collateralize the Company's obligations under the reinsurance agreements. The Company possesses sole responsibility for investment and reinvestment of the trust account assets. All dividends, interest and other income, resulting from investment of these assets are distributed to the Company on a monthly basis. At December 31, 2001 and 2000 the carrying value of these trust fund investments were $11.9 million and $10.9 million, respectively. The Company's share of the investments in the trust accounts is included in investments and cash equivalents, as applicable, in the accompanying consolidated balance sheets. 7. Property and Equipment The following table summarizes property and equipment at December 31, 2001 and 2000 (dollars in thousands):
December 31, -------------------------- Estimated Useful 2001 2000 Lives (Years) -------- -------- ---------------- Furniture, Fixtures and Automobiles $ 3,854 $ 3,351 5 Software, Computer Hardware and Telephone Equipment 14,897 13,767 3-7 Land and Building 3,585 3,580 40 Leasehold Improvements 1,489 1,489 10-12 - ---------------------------------------------------------------------- 23,825 22,187 Accumulated Depreciation and Amortization (13,743) (11,711) - ---------------------------------------------------------------------- Property and Equipment $ 10,082 $ 10,476 ======================================================================
Included in property and equipment are costs incurred in developing or purchasing information systems technology of $6.3 million and $5.4 million in 2001 and 2000, respectively. Amortization of these costs was $0.8 million, $0.6 million and $0.3 million for the years ended December 31, 2001, 2000 and 1999, respectively. Depreciation expense, excluding amortization of capitalized information systems technology costs, was $1.4 million, $1.4 million and $1.5 million, for the years ended December 31, 2001, 2000, and 1999, respectively. The carrying value of property and equipment is reviewed for recoverability based on an evaluation of the estimated useful life of such assets. 8. Liability for Unpaid Loss and Loss Adjustment Expenses Activity in the liability for Unpaid Loss and Loss Adjustment Expenses is summarized as follows (in thousands): 41
2001 2000 1999 -------- -------- -------- Balance at January 1, (1) $237,494 $188,063 $154,473 Less Reinsurance Recoverables (2) 42,030 26,710 17,268 -------- -------- -------- Net Balance at January 1, (3) 195,464 161,353 137,205 -------- -------- -------- Incurred related to: Current Year 166,220 128,761 99,663 Prior Years 13,435 2,543 (253) -------- -------- -------- Total Incurred 179,655 131,304 99,410 -------- -------- -------- Paid related to: Current Year 54,228 36,271 31,493 Prior Years 70,757 60,922 43,769 -------- -------- -------- Total Paid 124,985 97,193 75,262 -------- -------- -------- Net Balance at December 31, 250,134 195,464 161,353 Plus Reinsurance Recoverables 52,599 42,030 26,710 -------- -------- -------- Balance at December 31, $302,733 $237,494 $188,063 ======== ======== ========
(1) 1999 Adjusted to include $3,323 gross unpaid loss and loss adjustment expenses for Mobile USA Insurance Company as of acquisition date. (2) 1999 Adjusted to include $1,148 reinsurance recoverables for Mobile USA Insurance Company as of acquisition date. (3) 1999 Adjusted to include $2,175 net unpaid loss and loss adjustment expenses for Mobile USA Insurance Company as of acquisition date. As a result of changes in estimates of insured events in prior years, the Company increased losses and loss adjustment expenses incurred by $13.4 million in 2001. Such development was primarily due to losses emerging at a higher rate on automobile leases expiring in 2001 on residual value policies underwritten in prior years than had been originally anticipated when the initial reserves were estimated. 9. Loans Payable The Company had aggregate borrowings of $31.3 million and $0 million as of December 31, 2001 and 2000, respectively, from the Federal Home Loan Bank of Pittsburgh. These borrowings bear interest at adjusted LIBOR and mature twelve months from inception. The proceeds from these borrowings were invested in asset backed securities and collateralized mortgage obligations to achieve a positive spread between the rate of interest on these securities and the borrowing rates. The weighted-average interest rate on borrowings outstanding as of December 31, 2001 was 2.07%. In November 2000 the Company, pursuant to a Board of Directors authorization, entered into an unsecured revolving credit facility for aggregate borrowings of up to $22.0 million at any one time outstanding with a maturity date of 364 days after closing. During 2000, $22.0 million of the facility was utilized by the Company to pay a withholding tax liability as a result of the CEO electing to have shares otherwise issuable withheld in satisfaction of the minimum withholding tax attributable to the exercise of stock options. Borrowings under the facility bore interest at adjusted LIBOR and unused commitments under the facility were subject to a fee of 20 basis points per annum. Interest expense amounted to $0.1 million and $0.2 million for the years ended December 31, 2001 and 2000, respectively. During the first quarter 2001 the Company repaid all aggregate borrowings and cancelled the commitment under this revolving credit facility. 10. Income Taxes The composition of deferred tax assets and liabilities and the related tax effects as of December 31, 2001 and 2000 are as follows (in thousands): 42
December 31, ----------------------- 2001 2000 ------- ------- Assets: Loss Reserve Discounting $12,308 $10,252 Excess of Tax Over Financial Reporting Earned Premium 11,492 8,821 Excess of Financial Reporting Over Tax Net Realized Investment 2,029 -- Losses Deferred Compensation 97 777 Other Assets 399 515 - ------------------------------------------------------------------------------------------------ Total Assets 26,325 20,365 ================================================================================================ Liabilities: Deferred Acquisition Costs 14,534 11,663 Unrealized Appreciation of Securities 4,556 7,266 Property and Equipment Basis 548 470 Other Liabilities 491 57 - ------------------------------------------------------------------------------------------------ Total Liabilities 20,129 19,456 - ------------------------------------------------------------------------------------------------ Net Deferred Income Tax Asset $ 6,196 $ 909 ================================================================================================
The following table summarizes the differences between the Company's effective tax rate for financial statement purposes and the federal statutory rate (dollars in thousands):
Amount of Tax Percent ------------- ------- For the year ended December 31, 2001: Federal Tax at Statutory Rate $16,169 35 Nontaxable Municipal Bond Interest and Dividends Received (1,456) (3) Exclusion Nondeductible Goodwill Amortization 523 1 Other, Net 403 1 - ----------------------------------------------------------------------------------------- Income Tax Expense $15,639 34% ========================================================================================= For the year ended December 31, 2000: Federal Tax at Statutory Rate $15,929 35% Nontaxable Municipal Bond Interest and Dividends Received Exclusion (1,884) (4) Nondeductible Goodwill Amortization 522 1 Other, Net 175 -- - ----------------------------------------------------------------------------------------- Income Tax Expense $14,742 32% ========================================================================================= For the year ended December 31, 1999: Federal Tax at Statutory Rate $ 9,326 35% Nontaxable Municipal Bond Interest and Dividends Received Exclusion (1,931) (7) Nondeductible Goodwill Amortization 292 1 Other, Net 115 -- - ----------------------------------------------------------------------------------------- Income Tax Expense $ 7,802 29% =========================================================================================
Income taxes recoverable amounted to $13.3 million at December 31, 2000. Of such amount, $8.6 million of prior year tax payments were received during January 2001. The remaining recoverable amount was applied to 2001. Philadelphia Insurance has entered into tax sharing agreements with each of its subsidiaries. Under the terms of these agreements, the income tax provision is computed as if each subsidiary were filing a separate federal income tax return, including adjustments for the income tax effects of net operating losses and other special tax attributes, regardless of whether those attributes are utilized in the Company's consolidated federal income tax return. 11. Minority Interest in Consolidated Subsidiaries During 1998, the Company issued 10.350 million FELINE PRIDESSM at $10.00 per security and PCHC Financing I, the Company's business trust subsidiary, issued 1,000,000 7.0% Trust Originated Preferred Securities with a stated liquidation amount per trust preferred security equal to $10.00. The 10.350 million FELINE PRIDESSM consisted of 9.350 million units referred to as Income Prides and 1.000 million units referred to as Growth Prides. Each Income Prides consisted of a unit comprised of (a) a purchase contract under which the holder purchased a number of shares of Philadelphia Consolidated Holding Corp. common stock on May 16, 2001 (equal to .3858 shares per FELINE PRIDESSM) under the terms specified in 43 the stock purchase contract and (b) beneficial ownership of a 7.0% Trust Originated Preferred Security issued by PCHC Financing I and representing an undivided beneficial ownership in the assets of PCHC Financing I. Each holder received aggregate cumulative cash distributions at the annual rate of 7.00% of the $10.00 stated amount for the security, payable quarterly in arrears. Each Growth Prides consisted of a unit with a face amount of $10.00 comprised of (a) a purchase contract under which (i) the holder purchased a number of shares of Philadelphia Consolidated Holding Corp. common stock on May 16, 2001 (equal to .3858 shares per FELINE PRIDESSM) under the terms specified in the stock purchase contract and (ii) the Company paid the holder contract adjustment payments at the rate of .50% of the stated amount per annum and (b) a 1/100 undivided beneficial ownership interest in a treasury security having a principal amount at maturity equal to $1,000 and maturing on May 15, 2001. On May 16, 2001, the Company issued 4.0 million common shares to satisfy the stock purchase contract obligation from the Company's 1998 FELINE PRIDESSM 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. 12. Shareholders' Equity Basic and diluted earnings per share are calculated as follows (dollars and share data in thousands, except per share data):
As of and For the Years Ended December 31, --------------------------------------------- 2001 2000 1999 ------- ------- ------- Weighted-Average Common Shares Outstanding 16,529 12,178 12,501 Weighted-Average Share Equivalents Outstanding 656 2,412 2,615 ------- ------- ------- Weighted-Average Shares and Share Equivalents outstanding 17,185 14,590 15,116 ======= ======= ======= Net Income $30,559 $30,770 $18,843 ======= ======= ======= Basic Earnings Per Share $ 1.85 $ 2.53 $ 1.51 ======= ======= ======= Diluted Earnings Per Share $ 1.78 $ 2.11 $ 1.25 ======= ======= =======
During the fourth quarter of 2001, the Company closed on its public offering of an aggregate of 3.6 million shares of its common stock. Proceeds from the offering amounted to $114.5 million (after underwriting and associated costs). The Company contributed $70.0 million of the net proceeds to its subsidiaries in 2001, of which $60.0 million was contributed to the Insurance Subsidiaries. The remaining proceeds are presently being held for general corporate purposes. Under the Company's stock option plan, stock options may be granted for the purchase of common stock at a price not less than the fair market value on the date of grant. Options are primarily exercisable after the expiration of five years following the grant date. Under this plan, the Company has reserved 2,475,000 shares of common stock for issuance pursuant to options granted under the plan. In addition to stock options granted pursuant to the Company's stock option plan, the Company's Board of Directors have granted previous awards of 2,613,492 stock options. During 2000 all such stock options were exercised. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for the Company's compensation instruments is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. The following is a summary of the Company's option activity, including weighted-average option information: 44
2001 2000 1999 ---------------------------- --------------------------- --------------------------- Exercise Exercise Exercise Price Price Price Options Per Option (1) Options Per Option (1) Options Per Option (1) --------- -------------- ---------- -------------- --------- -------------- Outstanding at beginning of year 1,330,075 $12.68 3,835,917 $ 5.55 3,637,167 $ 4.85 Granted 572,500 $27.09 272,500 $18.32 257,500 $15.87 Exercised (392,000) $ 8.09 (2,640,842) $ 2.61 (46,250) $ 4.40 Canceled (57,500) $19.68 (137,500) $18.28 (12,500) $20.43 --------- ---------- --------- Outstanding at end of year 1,453,075 $19.32 1,330,075 $12.68 3,835,917 $ 5.55 ========= ========== ========= Exercisable at end of year 296,950 21,050 2,661,892 Weighted-average fair value of options granted during the year $10.99 $ 7.75 $ 6.76
Exercise Exercisable Outstanding Price Remaining at Exercise At Per Contractual December Price Range of Exercise Prices December Option (1) Life (Years) (1) 31, 2001 Per 31, 2001 Option (1) - ------------------------------------------------------------------------------------------------------ $2.61 to $9.31 296,950 $8.65 4.2 296,950 $8.65 $13.88 to $19.75 441,125 $16.02 7.4 - - $20.50 to $27.00 557,500 $25.01 8.8 - - $27.63 to $34.63 157,500 $29.93 9.6 - - --------- ------- 1,453,075 $19.32 296,950 $8.65 ========= =======
(1) Weighted Average. The Company has established the following non-qualified stock purchase plans: Employee Stock Purchase Plan (the "Stock Purchase Plan"): The aggregate maximum number of shares that may be issued pursuant to the Stock Purchase Plan as amended is 1,000,000. Shares may be purchased under the Stock Purchase Plan by eligible employees during designated one-month offering periods established by the Compensation Committee of the Board of Directors at a purchase price of the lesser of 85% of the fair market value of the shares on the first business day of the offering period or the date the shares are purchased. The purchase price of shares may be paid by the employee over six years pursuant to the execution of a promissory note. The promissory note(s) are collateralized by such shares purchased under the Stock Purchase Plan and are interest free. Under the Stock Purchase Plan, the Company issued 103,855 and 54,463 shares in 2001 and 2000, respectively. The weighted-average fair value of those purchase rights granted in 2001 and 2000 was $3.85 and $3.08, respectively. Directors Stock Purchase Plan ("Directors Plan"): The Directors Plan has been established for the benefit of non-employee Directors. The aggregate maximum number of shares that may be issued pursuant to the Directors Plan is 50,000. Non-employee Directors, during monthly offerings periods, may designate a portion of his or her fees to be used for the purchase of shares under the terms of the Directors Plan at a purchase price of the lesser of 85% of the fair market value of the shares on the first business day of the offering period or the date the shares are purchased. Under the Directors Plan, the Company issued 1,709 and 2,207 shares in 2001 and 2000, respectively. The weighted-average fair value of those purchase rights granted in 2001 and 2000 was $4.56 and $2.64, respectively. Preferred Agents Stock Purchase Plan ("Preferred Agents Plan"): The Preferred Agents Plan has been established for the benefit of eligible Preferred Agents. The aggregate maximum number of shares that may be issued pursuant to the Preferred Agents Plan is 200,000. Eligible Preferred Agents during designated offering periods may either remit cash or have the Company withhold from commissions or other compensation amounts to be used for the purchase of shares under the terms of the Preferred Agents Plan at a purchase price of the lesser of 85% of the fair market value of the shares on the first business day of the offering period or the date the shares are purchased. Under the Preferred Agents Plan, the Company issued 0 and 45 13,528 shares in 2001 and 2000, respectively. The weighted-average fair value of those purchase rights granted in 2000 was $2.48. The following represents pro forma information as if the Company recorded compensation costs using the fair value of the issued compensation instruments (the results may not be indicative of the actual effect on net income in future years) (in thousands, except per average common share data):
2001 2000 1999 ------- ------- ------- Net Income As Reported $30,559 $30,770 $18,843 Assumed Stock Compensation Cost 1,543 947 657 ------- ------- ------- Pro Forma Net Income $29,016 $29,823 $18,186 ======= ======= ======= Diluted Earnings Per Average Common Share as Reported $ 1.78 $ 2.11 $ 1.25 ======= ======= ======= Pro Forma Diluted Earnings Per Average Common Share $ 1.69 $ 2.04 $ 1.20 ======= ======= =======
The fair value of options at date of grant was estimated using the Black-Scholes valuation model with the following weighted-average assumptions:
2001 2000 1999 ---- ---- ---- Expected Stock Volatility 32.0% 30.6% 31.6% Risk-Free Interest Rate 4.7% 6.2% 5.9% Expected Option Life (Years) 6.0 6.0 6.0 Expected Dividends 0.0% 0.0% 0.0%
13. Stock Repurchase Authorization On September 14, 2001, the Company's Board of Directors increased the authorization for the Company to repurchase up to a total of $55.0 million of its common stock. For the three year period ended December 31, 2001, the Company repurchased 1.6 million shares for approximately $24.9 million under this authorization. 14. Reinsurance In the normal course of business, the Company has entered into various reinsurance contracts with unrelated reinsurers. The Company participates in such agreements for the purpose of limiting loss exposure and diversifying business. Reinsurance contracts do not relieve the Company from its obligation to policyholders. The loss and loss adjustment expense reserves ceded under such arrangements were $52.6 million and $42.0 million at December 31, 2001 and 2000, respectively. The Company evaluates the financial condition of its reinsurers to minimize its exposure to losses from reinsurer insolvencies. The percentage of ceded reinsurance reserves (excluding reserves ceded to voluntary and mandatory pool mechanisms) that are with companies rated "A" (Excellent) or better by A.M. Best Company is 97.0% and 99.2% as of December 31, 2001 and 2000, respectively. Additionally, approximately 3%, 4% and 4% of the Company's net written premiums for the years ended December 31, 2001, 2000, and 1999, respectively, were assumed from an unrelated reinsurance company. 46 The effect of reinsurance on premiums written and earned is as follows (in thousands):
Written Earned -------- -------- For the Year Ended December 31, 2001: Direct Business $464,491 $409,814 Reinsurance Assumed 9,074 11,249 Reinsurance Ceded 139,748 124,970 - ------------------------------------------------------------------------ Net Premiums $333,817 $296,093 - ------------------------------------------------------------------------ Percentage Assumed of Net 3.8% ======================================================================== For the Year Ended December 31, 2000: Direct Business $350,603 $319,591 Reinsurance Assumed 11,256 8,747 Reinsurance Ceded 98,430 101,046 - ------------------------------------------------------------------------ Net Premiums $263,429 $227,292 - ------------------------------------------------------------------------ Percentage Assumed of Net 3.8% ======================================================================== For the Year Ended December 31, 1999: Direct Business $271,312 $243,667 Reinsurance Assumed 6,767 4,339 Reinsurance Ceded 94,008 83,091 - ------------------------------------------------------------------------ Net Premiums $184,071 $164,915 - ------------------------------------------------------------------------ Percentage Assumed of Net 2.6% ========================================================================
15. Profit Sharing The Company has a defined contribution Profit Sharing Plan, which includes a 401K feature, covering substantially all employees. Under the plan, employees may contribute up to an annual maximum of the lesser of 15% of eligible compensation or the applicable Internal Revenue Code limit in a calendar year. The Company makes a matching contribution in an amount equal to 75% of the participant's pre-tax contribution, subject to a maximum of 6% of the participant's eligible compensation. The Company may also make annual discretionary profit sharing contributions at each plan year end. Participants are fully vested in the Company's contribution upon completion of four years of service. The Company's total contributions to the plan were $0.6 million, $0.6 million and $0.3 million in 2001, 2000, and 1999, respectively. 16. Commitments and Contingencies The Company is subject to routine legal proceedings in connection with its property and casualty insurance business. The Company is not involved in any pending or threatened legal or administrative proceedings, which management believes can reasonably be expected to have a material adverse effect on the Company's financial condition or results of operations. The Company currently leases office space to serve as its headquarters location and 36 field offices for its production underwriters. In addition, the Company leases certain computer equipment. Rental expense for these operating leases was $2.6 million, $2.2 million and $1.7 million for the years ended December 31, 2001, 2000, and 1999, respectively. At December 31, 2001 the Company has open commitments of $1.1 million under certain limited partnership agreements. The future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2001 were as follows (in thousands):
Year Ending December 31: - ------------------------ 2002 $ 2,709 2003 1,968 2004 1,687 2005 1,660 2006 and Thereafter 3,037 - ------------------------------------------------ Total Minimum Payments Required $11,061 ================================================
47 17. Summary of Quarterly Financial Information - Unaudited The following quarterly financial information for each of the three months ended March 31, June 30, September 30 and December 31, 2001 and 2000 is unaudited. However, in the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary to present fairly the results of operations for such periods, have been made for a fair presentation of the results shown (in thousands, except share and per share data):
Three Months Ended --------------------------------------------------------------------------- March 31, June 30, September 30, December 31, 2001 2001 2001 2001 ----------- ----------- ------------- ------------- Net Earned Premiums $ 66,523 $ 71,703 $ 77,755 $ 80,112 Net Investment Income $ 8,042 $ 8,091 $ 8,238 $ 8,055 Net Realized Investment Gain $ 2,299 $ 318 $ 488 $ 252 Net Loss and Loss Adjustment Expenses $ 39,152 $ 42,866 $ 50,640 $ 46,997 Acquisition Costs and Other Underwriting Expenses $ 22,468 $ 22,695 $ 25,880 $ 25,977 Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities Of Subsidiary Trust $ 1,811 $ 938 $ -- $ -- Net Income $ 7,714 $ 7,736 $ 5,972 $ 9,137 Basic Earnings Per Share $ 0.57 $ 0.50 $ 0.34 $ 0.48 Diluted Earnings Per Share $ 0.54 $ 0.48 $ 0.32 $ 0.46 Weighted-Average Common Shares Outstanding 13,477,940 15,587,962 17,808,317 19,147,755 Weighted-Average Share Equivalents Outstanding 701,604 692,256 704,534 684,796 ----------- ----------- ----------- ----------- Weighted-Average Shares and Share Equivalents Outstanding 14,179,544 16,280,218 18,512,851 19,832,551 =========== =========== =========== ===========
March 31, June 30, September 30, December 31, 2000 2000 2000 2000 ----------- ----------- ------------- ------------ Net Earned Premiums $ 48,627 $ 54,291 $ 59,271 $ 65,103 Net Investment Income $ 6,264 $ 5,832 $ 6,030 $ 7,677 Net Realized Investment Gain $ 93 $ 389 $ 3,556 $ 7,680 Net Loss and Loss Adjustment Expenses $ 28,240 $ 31,973 $ 33,970 $ 37,121 Acquisition Costs and Other Underwriting Expenses $ 16,719 $ 17,317 $ 19,532 $ 21,486 Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust $ 1,811 $ 1,812 $ 1,811 $ 1,811 Net Income $ 5,665 $ 5,802 $ 8,128 $ 11,175 Basic Earnings Per Share $ 0.46 $ 0.48 $ 0.69 $ 0.90 Diluted Earnings Per Share $ 0.38 $ 0.39 $ 0.56 $ 0.78 Weighted-Average Common Shares Outstanding 12,327,797 12,122,135 11,825,698 12,437,348 Weighted-Average Share Equivalents Outstanding 2,496,325 2,581,779 2,603,161 1,838,712 ----------- ----------- ----------- ----------- Weighted-Average Shares and Share Equivalents Outstanding 14,824,122 14,703,914 14,428,859 14,276,060 =========== =========== =========== ===========
48 18. Segment Information The Company's operations are classified into three reportable business segments: The Commercial Lines Underwriting Group which has underwriting responsibility for the Commercial Automobile and Commercial Property and Commercial multi-peril package insurance products; The Specialty Lines Underwriting Group which has underwriting responsibility for the professional liability insurance products; and The Personal Lines Group which designs, markets and underwrites personal property and casualty insurance products for the Manufactured Housing and Homeowners markets. Effective June 30, 2000, due to a change in market focus, the previously reported Specialty Property Underwriting Group segment was restructured resulting in the combination of this Underwriting Group with the Commercial Lines Underwriting Group. Accordingly, prior information has been reclassified to reflect this change. The reportable segments operate solely within the United States. The segments follow the same accounting policies used for the Company's consolidated financial statements as described in the summary of significant accounting policies. Management evaluates a segment's performance based upon certain underwriting results. Following is a tabulation of business segment information for each of the past three years. Corporate information is included to reconcile segment data to the consolidated financial statements (in thousands): 49
Commercial Specialty Personal Lines Lines Lines Corporate Total ---------- --------- -------- --------- ---------- 2001: Gross Written Premiums $315,948 $79,317 $ 78,300 $ -- $ 473,565 ------------------------------------------------------------------------------- Net Written Premiums $223,700 $69,772 $ 40,345 $ -- $ 333,817 ------------------------------------------------------------------------------- Revenue: Net Earned Premiums $189,835 $68,156 $ 38,102 $ -- $ 296,093 Net Investment Income -- -- -- 32,426 32,426 Net Realized Investment Gain -- -- -- 3,357 3,357 Other Income -- -- 2,964 (2,377) 587 ------------------------------------------------------------------------------- Total Revenue 189,835 68,156 41,066 33,406 332,463 ------------------------------------------------------------------------------- Losses and Expenses: Net Loss and Loss Adjustment Expenses 117,429 42,840 19,386 -- 179,655 Acquisition Costs and Other Underwriting Expenses -- -- -- 97,020 97,020 Other Operating Expenses -- -- 1,546 5,295 6,841 ------------------------------------------------------------------------------- Total Losses and Expenses 117,429 42,840 20,932 102,315 283,516 ------------------------------------------------------------------------------- Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust -- -- -- 2,749 2,749 ------------------------------------------------------------------------------- Income Before Income Taxes 72,406 25,316 20,134 (71,658) 46,198 Total Income Tax Expense -- -- -- 15,639 15,639 ------------------------------------------------------------------------------- Net Income $ 72,406 $25,316 $ 20,134 $(87,297) $ 30,559 =============================================================================== Total Assets $ -- $ -- $167,940 $849,782 $1,017,722 =============================================================================== 2000: Gross Written Premiums $239,446 $68,193 $ 54,233 $ -- $ 361,872 ------------------------------------------------------------------------------- Net Written Premiums $163,430 $67,860 $ 32,139 $ -- $ 263,429 ------------------------------------------------------------------------------- Revenue: Net Earned Premiums $142,250 $56,884 $ 28,158 $ -- $ 227,292 Net Investment Income -- -- -- 25,803 25,803 Net Realized Investment Gain -- -- -- 11,718 11,718 Other Income -- -- 11,720 (2,739) 8,981 ------------------------------------------------------------------------------- Total Revenue 142,250 56,884 39,878 34,782 273,794 ------------------------------------------------------------------------------- Losses and Expenses: Net Loss and Loss Adjustment Expenses 85,677 32,448 13,179 -- 131,304 Acquisition Costs and Other Underwriting Expenses -- -- -- 75,054 75,054 Other Operating Expenses -- -- 10,227 4,452 14,679 ------------------------------------------------------------------------------- Total Losses and Expenses 85,677 32,448 23,406 79,506 221,037 ------------------------------------------------------------------------------- Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust -- -- -- 7,245 7,245 ------------------------------------------------------------------------------- Income Before Income Taxes 56,573 24,436 16,472 (51,969) 45,512 Total Income Tax Expense -- -- -- 14,742 14,742 ------------------------------------------------------------------------------- Net Income $ 56,573 $24,436 $ 16,472 $(66,711) $ 30,770 =============================================================================== Total Assets $ -- $ -- $154,874 $575,590 $ 730,464 =============================================================================== 1999: Gross Written Premiums $200,972 $48,532 $ 25,414 $ -- $ 274,918 ------------------------------------------------------------------------------- Net Written Premiums $129,078 $40,936 $ 14,057 $ -- $ 184,071 ------------------------------------------------------------------------------- Revenue: Net Earned Premiums $118,623 $33,433 $ 12,859 $ -- $ 164,915 Net Investment Income -- -- -- 20,695 20,695 Net Realized Investment Gain -- -- -- 5,700 5,700 Other Income -- -- 5,843 (1,121) 4,722 ------------------------------------------------------------------------------- Total Revenue 118,623 33,433 18,702 25,274 196,032 ------------------------------------------------------------------------------- Losses and Expenses: Net Loss and Loss Adjustment Expenses 72,286 17,873 9,251 -- 99,410 Acquisition Costs and Other Underwriting Expenses -- -- -- 53,793 53,793 Other Operating Expenses -- -- 5,938 3,001 8,939 ------------------------------------------------------------------------------- Total Losses and Expenses 72,286 17,873 15,189 56,794 162,142 ------------------------------------------------------------------------------- Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust -- -- -- 7,245 7,245 ------------------------------------------------------------------------------- Income Before Income Taxes 46,337 15,560 3,513 (38,765) 26,645 Total Income Tax Expense -- -- -- 7,802 7,802 ------------------------------------------------------------------------------- Net Income $ 46,337 $15,560 $ 3,513 $(46,567) $ 18,843 =============================================================================== Total Assets $ -- $ -- $ 98,503 $500,548 $ 599,051 ===============================================================================
50 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III Certain information required by Part III is omitted from this Report in that the Company will file a definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information included therein is incorporated herein by reference. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's director and executive officers required by this Item is incorporated by reference to the Proxy Statement under the caption "Management-Directors and Executive Officers". Item 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the Proxy Statement under the captions "Executive Compensation", "Stock Option Grants", "Stock Option Exercises and Holdings" and "Directors Compensation". Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management". Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the Proxy Statement under the caption "Additional Information Regarding the Board". PART IV Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Exhibits 1. The Financial Statements and Financial Statement Schedules listed in the accompanying index on page 29 are filed as part of this Report. 2. Exhibits: The Exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedules are filed as part of, or incorporated by reference into, this Report.
Exhibit No. Description - ----------- ----------- 3.1 * Articles of Incorporation of Philadelphia Insurance, as amended to date. 3.1.1 * Amendment to Articles of Incorporation of Philadelphia Insurance. 3.2 * By-laws of Philadelphia Insurance, as amended to date. 10.1 *(1) Amended and Restated Key Employees' Stock Option Plan. 10.1.1 ********(1) Amended and Restated Key Employees' Stock Option Plan. 10.2 *(1) Key Employees' Stock Bonus Plan. 10.2.1 *(1) Excerpt of Board of Directors and Shareholders Resolution amending Key Employees' Stock Bonus Plan. 10.6 * Casualty Excess of Loss Reinsurance Agreement No. 14P-106,401,402, effective January 1, 1990, with Swiss Re, as amended to date. 10.7 * Property Quota Share Reinsurance Agreement No. 14P-202, effective December 9, 1989, with Swiss Re, as amended to date.
51
Exhibit No. Description - ----------- ----------- 10.8 * Casualty Quota Share Reinsurance Agreement No. 14P-201, effective January 1, 1989, with Swiss Re, as amended to date. 10.9 * Retrocession Contract No. 80101, effective October 1, 1990, with Swiss Re, as amended to date, together with related Casualty Quota Share Reinsurance Agreement No. X21-201, as amended to date. 10.10 * Retrocession Contract No. 81100/81101, effective October 1, 1990, with Swiss Re, as amended to date, together with related Property Quota Share Reinsurance Agreement No. DP2AB, effective October 1, 1990, as amended to date. 10.11 * Retrocession Contract No. 80100/80103, effective October 1, 1990, with Swiss Re, as amended to date, together with related Casualty Quota Share Reinsurance Agreement No. DC2ABC, effective October 1, 1990, as amended to date. 10.12 * Agreement of Reinsurance no. B367, dated June 11, 1991, with General Reinsurance Corporation, as amended to date. 10.13 * Agreement of Reinsurance No. A271, dated July 2, 1993, with General Reinsurance Corporation. 10.14 * General Agency Agreement, effective December 1, 1987, between MIA and Providence Washington Insurance Company, as amended to date, together with related Quota Share Reinsurance Agreements, as amended to date. 10.15 * E & O Insurance Policy effective July 20, 1993. 10.15.1 ******* E & O Insurance Policy effective July 20, 1996. 10.15.2 ********* E & O Insurance Policy effective July 20, 1997. 10.16 * Minutes of the Board of Directors Meeting dated October 20, 1992, and excerpts from the Minutes of the Board of Directors Meeting dated November 16, 1992. 10.17 *(1) Letter dated July 9, 1993 from James J. Maguire, confirming verbal agreements concerning options. 10.18 *(1) James J. Maguire Stock Option Agreements. 10.18.1 ***(1) Amendment to James J. Maguire Stock Option Agreements. 10.19 *(1) Wheelways Salary Savings Plus Plan Summary Plan Description. 10.20 * Key Man Life Insurance Policies on James J. Maguire 10.21 * Reinsurance Pooling Agreement dated August 14, 1992, between PIIC and PIC. 10.22 * Tax Sharing Agreement, dated July 16, 1987, between Philadelphia Insurance and PIC, as amended to date. 10.23 * Tax Sharing Agreement, dated November 1, 1986, between Philadelphia Insurance and PIIC, as amended to date. 10.24 *(1) Management Agreement dated May 20, 1991, between PIIC and MIA, as amended to date. 10.24.1 *******(1) Management Agreement dated May 20, 1991, between PIIC and MIA, as amended September 25, 1996. 10.25 *(1) Management Agreement dated October 23, 1991, between PIC and MIA, as amended to date. 10.25.1 *******(1) Management Agreement dated October 23, 1991, between PIC and MIA, as amended September 25, 1996. 10.26 * General Mutual Release and Settlement of All Claims dated July 2, 1993, with the Liquidator of Integrity Insurance Company. 10.27 * Settlement Agreement and General Release with Robert J. Wilkin, Jr., dated August 18, 1993. 10.28 ** Lease tracking portfolio assignment agreement. 10.29 ****(1) James J. Maguire Split Dollar Life Insurance Agreement, Collateral Assignment and Joint and Last Survivor Flexible Premium Adjustable Life Insurance Policy Survivorship Life. 10.30 ***** Allenbrook Software License Agreement, dated September 26, 1995. 10.31 ***** Sublease Agreement dated August 24, 1995 with CoreStates Bank, N.A. 10.32 ***** Lease Agreement dated August 30, 1995 with The Prudential Insurance Company of America. 10.33 ******(1) Employee Stock Purchase Plan. 10.34 ******(1) Cash Bonus Plan. 10.35 ******(1) Executive Deferred Compensation Plan. 10.36 ********(1) Directors Stock Purchase Plan 10.37 ********* Lease Agreement dated May 8, 1997 with Bala Plaza, Inc. 10.38 ********* Casualty Excess of Loss Reinsurance Agreement effective January 1, 1997, together with Property Per Risk Excess of Loss Reinsurance Agreement effective January 1, 1997 and Property Facultative Excess of Loss Automatic Reinsurance Agreement effective January 1, 1997.
52
Exhibit No. Description - ----------- ----------- 10.39 ********* Automobile Leasing Residual Value Excess of Loss Reinsurance Agreement effective January 1, 1997, together with Second Casualty Excess of Loss Reinsurance Agreement, effective January 1, 1997. 10.40 ********** Inspire Software License Agreement, dated December 31, 1998. 10.41 ********** Lease Agreement dated July 6, 1998 with Bala Plaza, Inc. 10.42 *********** Plan and Agreement of Merger Between Philadelphia Consolidated Holding Corp. and The Jerger Co. Inc. 11 ************ Statement regarding computation of earnings per share. 21 * List of Subsidiaries of the Registrant. 23 ************ Consent of PricewaterhouseCoopers LLP. 24 * Power of Attorney 99.1 ************ Report of Independent Accountants of PricewaterhouseCoopers LLP on Financial Statement Schedules.
* Incorporated by reference to the Exhibit filed with the Registrant's Form S-1 Registration Statement under the Securities Act of 1933 (Registration No. 33-65958). ** Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated by reference. *** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated by reference. **** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 and incorporated by reference. ***** Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference. ****** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 and incorporated by reference. ******* Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference. ******** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 and incorporated by reference. ********* Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. ********** Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. *********** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. ************ Filed herewith. (1) Compensatory Plan or Arrangement, or Management Contract.
(b) Reports on Form 8-K: The Company filed the following reports on Form 8-K during the quarterly period ended December 31, 2001
Date of Report Item Reported October 19, 2001 Supplemental financial data for the three and nine months ended September 30, 2001 and 2000 November 2, 2001 Press Release - Philadelphia Consolidated Holding Corp. announces proposed public offering November 20, 2001 Purchase Agreement by and among Philadelphia Consolidated Holding Corp., James J. Maguire and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Bank of America Securities LLC Press Release - Philadelphia Consolidated Holding Corp. announces pricing of public offering of 4,000,000 shares
53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Philadelphia Consolidated Holding Corp. By: /s/ James J. Maguire --------------------------------------- James J. Maguire Chairman of the Board of Directors And Chief Executive Officer March 25, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- March 25, 2002 /s/ James J. Maguire Chairman of the Board of --------------------------- Directors and Chief Executive James J. Maguire Officer (Principal Executive Officer) /s/ Craig P. Keller Senior Vice President, Secretary, March 25, 2002 --------------------------- Treasurer, and Chief Financial Officer Craig P. Keller (Principal Financial and Accounting Officer) /s/ James J. Maguire, Jr. President & COO, Director March 25, 2002 --------------------------- James J. Maguire, Jr. /s/ Sean S. Sweeney Executive Vice President, Director March 25, 2002 ---------------------------- Sean S. Sweeney /s/ Elizabeth H. Gemmill Director March 25, 2002 --------------------------- Elizabeth H. Gemmill /s/ William J. Henrich, Jr. Director March 25, 2002 ---------------------------- William J. Henrich, Jr. /s/ Paul R. Hertel, Jr. Director March 25, 2002 --------------------------- Paul R. Hertel, Jr. /s/ Thomas J. McHugh Director March 25, 2002 --------------------------- Thomas J. McHugh /s/ Michael J. Morris Director March 25, 2002 --------------------------- Michael J. Morris /s/ Dirk A. Stuurop Director March 25, 2002 --------------------------- Dirk A. Stuurop /s/ J. Eustace Wolfington Director March 25, 2002 --------------------------- J. Eustace Wolfington /s/ James L. Zech Director March 25, 2002 --------------------------- James L. Zech
54 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule I - Summary of Investments - Other than Investments in Related Parties As of December 31, 2001 (Dollars in Thousands)
- ------------------------------------------------------------------------------------------------ COLUMN A COLUMN B COLUMN C COLUMN D Estimated Amount at which Market shown in the Type of Investment Cost * Value Balance Sheet - ------------------------------------------------------------------------------------------------ Fixed Maturities: Bonds: United States Government and Government Agencies and Authorities $ 21,024 $ 21,694 $ 21,694 States, Municipalities and Political Subdivisions 104,628 106,184 106,184 Public Utilities 20,564 20,652 20,652 All Other Corporate Bonds 476,052 479,759 479,759 Redeemable Preferred Stock 4,058 4,127 4,127 -------- -------- -------- Total Fixed Maturities 626,326 632,416 632,416 -------- -------- -------- Equity Securities: Common Stocks: Banks, Trust and Insurance Companies 3,792 5,411 5,411 Industrial, Miscellaneous and all other 30,273 35,581 35,581 -------- -------- -------- Total Equity Securities 34,065 40,992 40,992 -------- -------- -------- Total Investments $660,391 $673,408 $673,408 ======== ======== ========
* Original cost of equity securities; original cost of fixed maturities adjusted for amortization of premiums and accretion of discounts. S-1 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule II Condensed Financial Information of Registrant (Parent Only) Balance Sheets (In Thousands, Except Share Data)
As of December 31, ----------------------- 2001 2000 -------- -------- ASSETS Cash and Cash Equivalents $ -- $ 246 Equity in and Advances to Unconsolidated Subsidiaries (a) 428,578 301,847 Income Taxes Recoverable from affiliates 689 2,320 Other Assets 1 4 -------- -------- Total Assets $429,268 $304,417 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Loans Payable $ -- $ 22,000 Other Liabilities 576 1,187 -------- -------- Total Liabilities 576 23,187 -------- -------- 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, 21,509,723 Shares Issued and Outstanding, and 13,431,408 Shares Issued 268,509 46,582 Notes Receivable from Shareholders (3,373) (2,287) Accumulated Other Comprehensive Income 8,461 13,494 Retained Earnings 155,095 124,536 -------- -------- 428,692 182,325 -------- -------- Total Liabilities and Shareholders' Equity $429,268 $304,417 ======== ========
(a) This has been eliminated in the Company's Consolidated Financial Statements. See Notes to Consolidated Financial Statements included in Item 8, pages 35-50. S-2 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule II, Continued Condensed Financial Information of Registrant (Parent Only) Statements of Operations (In Thousands)
For the Years Ended December 31, ----------------------------------- 2001 2000 1999 ------- ------- -------- Revenue: Dividends from Subsidiaries (a) $21,074 $20,122 $ 65,356 ------- ------- -------- Total Revenue 21,074 20,122 65,356 ------- ------- -------- Other Expenses 1,248 1,077 684 ------- ------- -------- Total Expenses 1,248 1,077 684 ------- ------- -------- Minority Interest: Distributions on Company Mandatorily Redeemable Preferred Securities of Subsidiary Trust 2,749 7,245 7,245 ------- ------- -------- Income, Before Income Taxes and Equity in Earnings of Unconsolidated Subsidiaries 17,077 11,800 57,427 Income Tax Benefit (1,399) (2,913) (2,775) ------- ------- -------- Income, Before Equity in Earnings of Unconsolidated Subsidiaries 18,476 14,713 60,202 Equity in Earnings of Unconsolidated Subsidiaries 12,083 16,057 (41,359) ------- ------- -------- Net Income $30,559 $30,770 $ 18,843 ======= ======= ========
(a) This item has been eliminated in the Company's Consolidated Financial Statements. See Notes to Consolidated Financial Statements included in Item 8, pages 35-50. S-3 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule II, Continued Condensed Financial Information of Registrant (Parent Only) Statements of Cash Flows (In Thousands)
For the Years Ended December 31, ------------------------------------- 2001 2000 1999 --------- -------- -------- Cash Flows From Operating Activities: Net Income $ 30,559 $ 30,770 $ 18,843 Adjustments to Reconcile Net Income to Net Cash Provided (Used) by Operating Activities: Equity in Earnings of Unconsolidated Subsidiaries (12,083) (16,057) 41,359 Change in Other Liabilities (611) 46 (37) Change in Other Assets 3 (1) 11 Change in Income Taxes Recoverable (20,911) 455 (3,450) Tax Benefit from Exercise of Employee Stock Options 25,799 145 255 --------- -------- -------- Net Cash Provided by Operating Activities 22,756 15,358 56,981 --------- -------- -------- Cash Flows Used by Investing Activities: Payment for Acquisition -- -- (25,676) Net Transfers to Subsidiaries (a) (119,679) (27,080) (20,023) --------- -------- -------- Net Cash Used by Investing Activities (119,679) (27,080) (45,699) --------- -------- -------- Cash Flows From Financing Activities: Net Proceeds From Public Offering of Common Stock 114,518 -- -- Proceeds from Loans Payable -- 22,000 -- Repayments on Loans Payable (22,000) -- -- Proceeds from Exercise of Employee Stock Options 3,041 1,853 203 Proceeds from Collection of Notes Receivable 1,072 633 619 Proceeds from Shares Pursuant to Stock Purchase Plans 46 188 27 Cost of Common Stock Repurchased -- (12,691) (12,081) --------- -------- -------- Net Cash Provided (Used) by Financing Activities 96,677 11,983 (11,232) --------- -------- -------- Net Increase (Decrease) in Cash and Equivalents (246) 261 50 Cash and Cash Equivalents at Beginning of Year 246 (15) (65) --------- -------- -------- Cash and Cash Equivalents at End of Year $ -- $ 246 $ (15) ========= ======== ======== Cash Dividends Received From Unconsolidated Subsidiaries $ 21,074 $ 20,122 $ 65,356 ========= ======== ======== Non-Cash Transactions: Acceptance of Mature Shares for Exercise Cost of Employee Stock Options $ -- $ 6,811 $ -- Issuance of Shares Pursuant to Employee Stock Purchase Plan in exchange for Notes Receivable $ 2,158 $ 414 $ 1,445 Acquisitions: Fair Value Of Assets Acquired $ -- $ -- $ 77,310 Cash Paid -- -- (25,676) Common Stock Issued -- -- (25,000) --------- -------- -------- Liabilities Assumed $ -- $ -- $ 26,634 ========= ======== ========
(a) This item has been eliminated in the Company's Consolidated Financial Statements. See Notes to Consolidated Financial Statements included in Item 8, pages 35-50. S-4 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule III - Supplementary Insurance Information As of and For the Year Ended December 31, 2001, 2000 and 1999 (In Thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F Future Policy Benefits, Other Policy Deferred Policy Losses, Claims Claims and Acquisition and Loss Unearned Benefits Premium Segment Costs Expenses Premiums Payable Revenue - ------- --------------- -------------- -------- ------------ -------- 2001: Commercial Lines $ -- $212,134 $124,522 $189,835 Specialty Lines -- 82,735 39,725 68,156 Personal Lines -- 7,864 33,592 38,102 Corporate 41,526 -- -- -- ------- -------- -------- -------- Total $41,526 $302,733 $197,839 $296,093 ======= ======== ======== ======== 2000: Commercial Lines $ -- $161,801 $ 84,418 $142,250 Specialty Lines -- 67,260 35,549 56,884 Personal Lines -- 8,433 25,517 28,158 Corporate 33,324 -- -- -- ------- -------- -------- -------- Total $33,324 $237,494 $145,484 $227,292 ======= ======== ======== ======== 1999: Commercial Lines $ -- $144,917 $ 62,962 $118,623 Specialty Lines -- 35,314 27,236 33,433 Personal Lines -- 7,832 21,408 12,859 Corporate 26,054 -- -- -- ------- -------- -------- -------- Total $26,054 $188,063 $111,606 $164,915 ======= ======== ======== ======== COLUMN A COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K Benefits, Amortization Claims, of Deferred Net Losses, and Policy Other Investment Settlement Acquisition Operating Premiums Segment Income Expenses Costs Expenses Written - ------- ---------- ----------- ------------ --------- -------- 2001: Commercial Lines $ -- $117,429 $ -- $ -- $223,700 Specialty Lines -- 42,840 -- -- 69,772 Personal Lines -- 19,386 -- 1,546 40,345 Corporate 32,426 -- 80,239 5,295 -- ------- -------- ------- ------- -------- Total $32,426 $179,655 $80,239 $ 6,841 $333,817 ======= ======== ======= ======= ======== 2000: Commercial Lines $ -- $ 85,677 $ -- $ -- $163,430 Specialty Lines -- 32,448 -- -- 67,860 Personal Lines -- 13,179 -- 10,227 32,139 Corporate 25,803 -- 60,415 4,452 -- ------- -------- ------- ------- -------- Total $25,803 $131,304 $60,415 $14,679 $263,429 ======= ======== ======= ======= ======== 1999: Commercial Lines $ -- $ 72,286 $ -- $ -- $129,078 Specialty Lines -- 17,873 -- -- 40,936 Personal Lines -- 9,251 -- 5,938 14,057 Corporate 20,695 -- 46,451 3,001 -- ------- -------- ------- ------- -------- Total $20,695 $ 99,410 $46,451 $ 8,939 $184,071 ======= ======== ======= ======= ========
S-5 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule IV - Reinsurance Earned Premiums For the Years Ended December 31, 2001, 2000 and 1999 (Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - -------------------------------------------------------------------------------------------------------- Ceded to Assumed Percentage of Gross Other from Other Amount Amount Companies Companies Net Amount Assumed to Net - -------------------------------------------------------------------------------------------------------- 2001 Property and Casualty Insurance $409,814 $124,970 $11,249 $296,093 3.8% ======================================================================================================== 2000 Property and Casualty Insurance $319,591 $101,046 $ 8,747 $227,292 3.8% ======================================================================================================== 1999 Property and Casualty Insurance $243,667 $ 83,091 $ 4,339 $164,915 2.6% ========================================================================================================
S-6 Philadelphia Consolidated Holding Corp. and Subsidiaries Schedule VI - Supplemental Information Concerning Property - Casualty Insurance Operations As of and For the Years Ended December 31, 2001, 2000 and 1999 (Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------- Reserve for Unpaid Deferred Claims and Policy Claim Discount if Net Net Affiliation with Acquisition Adjustment any deducted Unearned Earned Investment Registrant Costs Expenses in Column C Premiums Premiums Income COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G Consolidated Property - Casualty Entities December 31, 2001 $41,526 $302,733 $0 $197,839 $296,093 $32,426 December 31, 2000 $33,324 $237,494 $0 $145,484 $227,292 $25,803 December 31, 1999 $26,054 $188,063 $0 $111,606 $164,915 $20,695 - ----------------------------------------------------------------------------------------------------------- Claims and Claims Adjustment Expenses Incurred Related to Paid Claims (1) (2) Amortization of and Claim Affiliation with Current Prior deferred policy Adjustment Net Written Registrant Year Year acquisition costs Expenses Premiums COLUMN A COLUMN H COLUMN I COLUMN J COLUMN K Consolidated Property - Casualty Entities December 31, 2001 $166,220 $13,435 $80,239 $124,985 $333,817 December 31, 2000 $128,761 $2,543 $60,415 $97,193 $263,429 December 31, 1999 $99,663 ($253) $46,451 $75,262 $184,071
S-7 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES Exhibit Index For the Year Ended December 31, 2001
Exhibit No. Page No. Description - ----------- -------- ----------- 3.1 * Articles of Incorporation of Philadelphia Insurance, as amended to date. 3.1.1 * Amendment to Articles of Incorporation of Philadelphia Insurance. 3.2 * By-laws of Philadelphia Insurance, as amended to date. 10.1 *(1) Amended and Restated Key Employees' Stock Option Plan. 10.1.1 ********(1) Amended and Restated Key Employers' Stock Option Plan. 10.2 *(1) Key Employees' Stock Bonus Plan. 10.2.1 *(1) Excerpt of Board of Directors and Shareholders Resolution amending Key Employees' Stock Bonus Plan. 10.6 * Casualty Excess of Loss Reinsurance Agreement No. 14P- 106,401,402, effective January 1, 1990, with Swiss Re, as amended to date. 10.7 * Property Quota Share Reinsurance Agreement No. 14P-202, effective December 9, 1989, with Swiss Re, as amended to date. 10.8 * Casualty Quota Share Reinsurance Agreement No. 14P-201, effective January 1, 1989, with Swiss Re, as amended to date. 10.9 * Retrocession Contract No. 80101, effective October 1, 1990, with Swiss Re, as amended to date, together with related Casualty Quota Share Reinsurance Agreement No. X21-201, as amended to date. 10.10 * Retrocession Contract No. 81100/81101, effective October 1, 1990, with Swiss Re, as amended to date, together with related Property Quota Share Reinsurance Agreement No. DP2AB, effective October 1, 1990, as amended to date. 10.11 * Retrocession Contract No. 80100/80103, effective October 1, 1990, with Swiss Re, as amended to date, together with related Casualty Quota Share Reinsurance Agreement No. DC2ABC, effective October 1, 1990, as amended to date. 10.12 * Agreement of Reinsurance no. B367, dated June 11, 1991, with General Reinsurance Corporation, as amended to date. 10.13 * Agreement of Reinsurance No. A271, dated July 2, 1993, with General Reinsurance Corporation. 10.14 * General Agency Agreement, effective December 1, 1987, between MIA and Providence Washington Insurance Company, as amended to date, together with related Quota Share Reinsurance Agreements, as amended to date. 10.15 * E & O Insurance Policy effective July 20, 1993. 10.15.1 ******* E & O Insurance Policy effective July 20, 1996. 10.15.2 ********* E & O Insurance Policy effective July 20, 1997. 10.16 * Minutes of the Board of Directors Meeting dated October 20, 1992, and excerpts from the Minutes of the Board of Directors Meeting dated November 16, 1992.
(E-1) P. 62
Exhibit No. Page No. Description - ----------- -------- ----------- 10.17 *(1) Letter dated July 9, 1993 from James J. Maguire, confirming verbal agreements concerning options. 10.18 *(1) James J. Maguire Stock Option Agreements. 10.18.1 ***(1) Amendment to James J. Maguire Stock Option Agreements. 10.19 *(1) Wheelways Salary Savings Plus Plan Summary Plan Description. 10.20 * Key Man Life Insurance Policies on James J. Maguire 10.21 * Reinsurance Pooling Agreement dated August 14, 1992, between PIIC and PIC. 10.22 * Tax Sharing Agreement, dated July 16, 1987, between Philadelphia Insurance and PIIC, as amended to date. 10.23 * Tax Sharing Agreement, dated November 1, 1986, between Philadelphia Insurance and PIIC, as amended to date. 10.24 *(1) Management Agreement dated May 20, 1991, between PIIC and MIA, as amended to date. 10.24.1 *******(1) Management Agreement dated May 20, 1991, between PIIC and MIA, as amended September 25, 1996. 10.25 *(1) Management Agreement dated October 23, 1991, between PIC and MIA, as amended to date. 10.25.1 *******(1) Management Agreement dated October 23, 1991, between PIC and MIA, as amended September 25, 1996. 10.26 * General Mutual Release and Settlement of All Claims dated July 2, 1993, with the Liquidator of Integrity Insurance Company. 10.27 * Settlement Agreement and General Release with Robert J. Wilkin, Jr., dated August 18, 1993. 10.28 ** Lease tracking portfolio assignment agreement. 10.29 ****(1) James J. Maguire Split Dollar Life Insurance Agreement, Collateral Assignment and Joint and Last Survivor Flexible Premium Adjustable Life Insurance Policy Survivorship Life. 10.30 ***** Allenbrook Software License Agreement, dated September 26, 1995. 10.31 ***** Sublease Agreement dated August 24, 1995 with CoreStates Bank, N.A. 10.32 ***** Lease Agreement dated August 30, 1995 with The Prudential Insurance Company of America. 10.33 ******(1) Employee Stock Purchase Plan. 10.34 ******(1) Cash Bonus Plan. 10.35 ******(1) Executive Deferred Compensation Plan. 10.36 ********(1) Directors Stock Purchase Plan. 10.37 ********* Lease Agreement dated May 8, 1997 with Bala Plaza, Inc. 10.38 ********* Casualty Excess of Loss Reinsurance Agreement effective January 1, 1997, together with Property Per Risk Excess of Loss Reinsurance Agreement effective January 1, 1997 and Property Facultative Excess of Loss Automatic Reinsurance Agreement effective January 1, 1997. 10.39 ********* Automobile Leasing Residual Value Excess of Loss Reinsurance Agreement effective January 1, 1997, together with Second Casualty Excess of Loss Reinsurance Agreement, effective January 1, 1997. 10.40 ********** Inspire Software License Agreement, dated December 31, 1998.
(E-2) P. 63
Exhibit No. Page No. Description - ----------- -------- ----------- 10.41 ********** Lease Agreement dated July 6, 1998 with Bala Plaza, Inc. 10.42 *********** Plan and Agreement of Merger Between Philadelphia Consolidated Holding Corp. and The Jerger Co. Inc. 11 ************ Page 67 of 71 Statement regarding computation of earnings per share. 21 * List of Subsidiaries of the Registrant. 23 ************ Page 69 of 71 Consent of PricewaterhouseCoopers LLP 24 * Power of Attorney 99.1 ************ Page 71 of 71 Report of Independent Accountants of PricewaterhouseCoopers LLP on Financial Statement Schedules.
* Incorporated by reference to the Exhibit filed with the Registrant's Form S-1 Registration Statement under the Securities Act of 1933 (Registration No. 33-65958). ** Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated by reference. *** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1994 and incorporated by reference. **** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1995 and incorporated by reference. ***** Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated by reference. ****** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1996 and incorporated by reference. ******* Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 and incorporated by reference. ******** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997 and incorporated by reference. ********* Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. ********** Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1998. *********** Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. ************ Filed herewith. (1) Compensatory Plan or Arrangement, or Management Contract. (b) Reports on Form 8-K: The Company filed the following reports on Form 8-K during the quarterly period ended December 31, 2001
Date of Report Item Reported - -------------- ------------- October 19, 2001 Supplemental financial data for the three and nine months ended September 30, 2001 and 2000 November 2, 2001 Press Release - Philadelphia Consolidated Holding Corp. announces proposed public offering November 20, 2001 Purchase Agreement by and among Philadelphia Consolidated Holding Corp., James J. Maguire and Merrill Lynch & Co., Merrill Lynch, Pierce,
(E-3) P. 64
Date of Report Item Reported - -------------- ------------- Fenner & Smith Incorporated and Bank of America Securities LLC Press Release - Philadelphia Consolidated Holding Corp. announces pricing of public offering of 4,000,000 shares
(E-4) P. 65 EX-11 3 w58688ex11.txt COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11 Philadelphia Consolidated Holding Corp. and Subsidiaries Computation of Earnings Per Share (Dollars and Share Data in Thousands, Except Per Share Data)
As of and For the Years Ended December 31, ------------------------------------------ 2001 2000 1999 ------- ------- ------- Weighted-Average Common Shares Outstanding 16,529 12,178 12,501 Weighted-Average Share Equivalents Outstanding 656 2,412 2,615 ------- ------- ------- Weighted-Average Shares and Share Equivalents Outstanding 17,185 14,590 15,116 ======= ======= ======= Net Income $30,559 $30,770 $18,843 ======= ======= ======= Basic Earnings Per Share $1.85 $2.53 $1.51 ===== ===== ===== Diluted Earnings Per Share $1.78 $2.11 $1.25 ===== ===== =====
EX-23 4 w58688ex23.txt CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Forms S-3 (No. 333-49271, No. 333-49271-01 and No. 333-78127) and Forms S-8 (No. 333-39794, No. 333-29643 and No. 333-29647) of Philadelphia Consolidated Holding Corp. of our reports dated February 8, 2002 relating to the consolidated financial statements and financial statement schedules, which appear in this Form 10-K. /s/ PricewaterhouseCoopers LLP Philadelphia, PA March 25, 2002 EX-99.1 5 w58688ex99-1.txt REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL ST. EXHIBIT 99.1 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Philadelphia Consolidated Holding Corp.: Our audits of the consolidated financial statements of Philadelphia Consolidated Holding Corp. and Subsidiaries appearing in this Form 10-K also included an audit of the financial statement schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. /s/ PricewaterhouseCoopers LLP Philadelphia, PA February 8, 2002 -----END PRIVACY-ENHANCED MESSAGE-----