-----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, CD3BJ8VhKrgPJtTnZKGvULiJcspAgjDAOGRGVvp6daQe+TwMF3plM24RpvaC29Pv edi3MZdoBddMvrnPKpe6iQ== 0000950123-02-004722.txt : 20020506 0000950123-02-004722.hdr.sgml : 20020506 ACCESSION NUMBER: 0000950123-02-004722 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020506 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHILADELPHIA CONSOLIDATED HOLDING CORP CENTRAL INDEX KEY: 0000909109 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 232202671 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-22280 FILM NUMBER: 02635157 BUSINESS ADDRESS: STREET 1: ONE BALA PLAZA STREET 2: SUITE 100 CITY: WYNNEWOOD STATE: PA ZIP: 19004 BUSINESS PHONE: 6106428400 MAIL ADDRESS: STREET 1: ONE BALA PLAZA STREET 2: SUITE 100 CITY: BALA CYNWYD STATE: PA ZIP: 19004 FORMER COMPANY: FORMER CONFORMED NAME: MAGUIRE HOLDING CORP DATE OF NAME CHANGE: 19930714 10-Q 1 w60334e10-q.txt PHILADELPHIA CONSOLIDATED HOLDING CORP. FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 2002 COMMISSION FILE NUMBER 0-22280 PHILADELPHIA CONSOLIDATED HOLDING CORP. --------------------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2202671 ------------ ---------- (State of Incorporation) (IRS Employer Identification No.) ONE BALA PLAZA, SUITE 100 BALA CYNWYD, PENNSYLVANIA 19004 (610) 617-7900 -------------------------------------------------- (Address, including zip code and telephone number, including area code, of registrant's principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO: [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of May 2, 2002. Preferred Stock, $.01 par value, no shares outstanding Common Stock, no par value, 21,558,995 shares outstanding PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES INDEX FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002 Part I - Financial Information Item 1. Financial Statements: Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 3 Consolidated Statements of Operations and Comprehensive Income - For the three months ended March 31, 2002 and 2001 4 Consolidated Statements of Changes in Shareholders' Equity - For the three months ended March 31, 2002 and year ended December 31, 2001 5 Consolidated Statements of Cash Flows - For the three months ended March 31, 2002 and 2001 6 Notes to Consolidated Financial Statements 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 Part II - Other Information 14 Signatures 15 2 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
As of --------------------------- March 31, December 31, 2002 2001 ----------- ----------- (Unaudited) ASSETS INVESTMENTS: FIXED MATURITIES AVAILABLE FOR SALE AT MARKET (AMORTIZED COST $672,876 AND $626,326) ...... $ 673,163 $ 632,416 EQUITY SECURITIES AT MARKET (COST $51,709 AND $34,065) ................................ 58,147 40,992 ----------- ----------- TOTAL INVESTMENTS ......................... 731,310 673,408 CASH AND CASH EQUIVALENTS .......................... 49,514 49,910 ACCRUED INVESTMENT INCOME .......................... 6,553 6,582 PREMIUMS RECEIVABLE ................................ 90,676 96,025 PREPAID REINSURANCE PREMIUMS AND REINSURANCE RECEIVABLES ............................... 100,985 99,601 DEFERRED INCOME TAXES .............................. 9,853 6,196 DEFERRED ACQUISITION COSTS ......................... 43,940 41,526 PROPERTY AND EQUIPMENT, NET ........................ 10,310 10,082 GOODWILL ........................................... 25,724 25,724 OTHER ASSETS ....................................... 6,266 8,668 ----------- ----------- TOTAL ASSETS .............................. $ 1,075,131 $ 1,017,722 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY POLICY LIABILITIES AND ACCRUALS: UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES ........... $ 324,584 $ 302,733 UNEARNED PREMIUMS .................................. 215,173 197,839 ----------- ----------- TOTAL POLICY LIABILITIES AND ACCRUALS ..... 539,757 500,572 LOANS PAYABLE ...................................... 31,341 31,341 PREMIUMS PAYABLE ................................... 26,116 25,659 OTHER LIABILITIES .................................. 41,415 31,458 ----------- ----------- TOTAL LIABILITIES ......................... 638,629 589,030 ----------- ----------- 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, 21,559,095 AND 21,509,723 SHARES ISSUED AND OUTSTANDING ...... 269,471 268,509 NOTES RECEIVABLE FROM SHAREHOLDERS ................. (3,112) (3,373) ACCUMULATED OTHER COMPREHENSIVE INCOME ............. 4,371 8,461 RETAINED EARNINGS .................................. 165,772 155,095 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY ................ 436,502 428,692 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,075,131 $ 1,017,722 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 3 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (Unaudited)
For the Three Months Ended March 31, ----------------------------- 2002 2001 ------------ ------------ REVENUE: NET EARNED PREMIUMS ......................... $ 89,244 $ 66,523 NET INVESTMENT INCOME ....................... 8,855 8,042 NET REALIZED INVESTMENT GAIN ................ 47 2,299 OTHER INCOME ................................ 1 53 ------------ ------------ TOTAL REVENUE ............................ 98,147 76,917 ------------ ------------ LOSSES AND EXPENSES: LOSS AND LOSS ADJUSTMENT EXPENSES ........... 65,611 45,538 NET REINSURANCE RECOVERIES .................. (12,562) (6,386) ------------ ------------ NET LOSS AND LOSS ADJUSTMENT EXPENSES ....... 53,049 39,152 ACQUISITION COSTS AND OTHER UNDERWRITING EXPENSES ................................. 27,821 22,468 OTHER OPERATING EXPENSES .................... 1,484 2,032 ------------ ------------ TOTAL LOSSES AND EXPENSES ................ 82,354 63,652 ------------ ------------ MINORITY INTEREST: DISTRIBUTIONS ON COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST ......................... -- 1,811 ------------ ------------ INCOME BEFORE INCOME TAXES ..................... 15,793 11,454 ------------ ------------ INCOME TAX EXPENSE (BENEFIT): CURRENT ..................................... 6,571 4,777 DEFERRED .................................... (1,455) (1,037) ------------ ------------ TOTAL INCOME TAX EXPENSE ................. 5,116 3,740 ------------ ------------ NET INCOME ............................... $ 10,677 $ 7,714 ============ ============ OTHER COMPREHENSIVE LOSS, NET OF TAX: HOLDING LOSS ARISING DURING PERIOD .......... $ (4,059) $ (591) RECLASSIFICATION ADJUSTMENT ................. (31) (1,494) ------------ ------------ OTHER COMPREHENSIVE LOSS .................... (4,090) (2,085) ------------ ------------ COMPREHENSIVE INCOME ........................... $ 6,587 $ 5,629 ============ ============ PER AVERAGE SHARE DATA: BASIC EARNINGS PER SHARE .................... $ 0.50 $ 0.57 ============ ============ DILUTED EARNINGS PER SHARE .................. $ 0.48 $ 0.54 ============ ============ WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING ................................. 21,528,091 13,477,940 WEIGHTED-AVERAGE SHARE EQUIVALENTS OUTSTANDING ................................. 724,311 701,604 ------------ ------------ WEIGHTED-AVERAGE SHARES AND SHARE EQUIVALENTS OUTSTANDING ..................... 22,252,402 14,179,544 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 4 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS) (Unaudited)
For the Three For the Months Ended Year Ended March 31, December 31, 2002 2001 ------------- ------------ COMMON STOCK: BALANCE AT BEGINNING OF YEAR ...................... $ 268,509 $ 46,582 ISSUANCE OF SHARES PURSUANT TO PUBLIC OFFERING .... -- 114,518 ISSUANCE OF SHARES PURSUANT TO STOCK PURCHASE CONTRACTS ............................. -- 98,905 EXERCISE OF EMPLOYEE STOCK OPTIONS, NET OF TAX .... 982 6,437 ISSUANCE OF SHARES PURSUANT TO STOCK PURCHASE PLANS ................................. (20) 2,067 --------- --------- BALANCE AT END OF PERIOD .................... 269,471 268,509 --------- --------- NOTES RECEIVABLE FROM SHAREHOLDERS: BALANCE AT BEGINNING OF YEAR ...................... (3,373) (2,287) NOTES RECEIVABLE FORFEITED (ISSUED) PURSUANT TO STOCK PURCHASE PLAN ......................... 31 (2,158) COLLECTION OF NOTES RECEIVABLE .................... 230 1,072 --------- --------- BALANCE AT END OF YEAR ...................... (3,112) (3,373) --------- --------- ACCUMULATED OTHER COMPREHENSIVE INCOME: BALANCE AT BEGINNING OF YEAR ...................... 8,461 13,494 OTHER COMPREHENSIVE LOSS, NET OF TAXES ............ (4,090) (5,033) --------- --------- BALANCE AT END OF YEAR ...................... 4,371 8,461 --------- --------- RETAINED EARNINGS: BALANCE AT BEGINNING OF YEAR ...................... 155,095 124,536 NET INCOME ........................................ 10,677 30,559 --------- --------- BALANCE AT END OF YEAR ...................... 165,772 155,095 --------- --------- TOTAL SHAREHOLDERS' EQUITY .................. $ 436,502 $ 428,692 ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 5 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (Unaudited)
For the Three Months Ended March 31, -------------------- 2002 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME ............................................. $ 10,677 $ 7,714 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: NET REALIZED INVESTMENT GAIN ........................... (47) (2,299) DEPRECIATION AND AMORTIZATION EXPENSE .................. 196 605 DEFERRED INCOME TAX BENEFIT ............................ (1,455) (1,037) CHANGE IN PREMIUMS RECEIVABLE .......................... 5,349 1,268 CHANGE IN OTHER RECEIVABLES ............................ (1,355) (1,710) CHANGE IN DEFERRED ACQUISITION COSTS ................... (2,414) (2,417) CHANGE IN INCOME TAXES PAYABLE ......................... 3,719 10,986 CHANGE IN OTHER ASSETS ................................. 494 905 CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES .............................................. 21,851 12,392 CHANGE IN UNEARNED PREMIUMS ............................ 17,334 12,669 CHANGE IN OTHER LIABILITIES ............................ (753) 4,123 TAX BENEFIT FROM EXERCISE OF EMPLOYEE STOCK OPTIONS ....................................... 573 693 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES ...... 54,169 43,892 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: PROCEEDS FROM SALES OF INVESTMENTS IN FIXED MATURITIES ...................................... 13,941 11,777 PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED MATURITIES ...................................... 26,807 3,865 PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY SECURITIES ....................................... 253 6,593 COST OF FIXED MATURITIES ACQUIRED ...................... (77,492) (58,436) COST OF EQUITY SECURITIES ACQUIRED ..................... (17,955) (2,022) PURCHASE OF PROPERTY AND EQUIPMENT ..................... (769) (493) -------- -------- NET CASH USED BY INVESTING ACTIVITIES .......... (55,215) (38,716) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: REPAYMENTS ON LOANS PAYABLE ............................ -- (22,000) EXERCISE OF EMPLOYEE STOCK OPTIONS ..................... 410 760 PROCEEDS FROM SHARES ISSUED PURSUANT TO STOCK PURCHASE PLANS ................................ 10 14 COLLECTION OF NOTES RECEIVABLE ......................... 230 184 -------- -------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 650 (21,042) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS ................. (396) (15,866) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .......... 49,910 49,742 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ................ $ 49,514 $ 33,876 ======== ======== CASH PAID DURING THE PERIOD FOR: INCOME TAXES ........................................... $ 2,200 $ -- INTEREST ............................................... $ 129 $ 130 NON-CASH TRANSACTIONS: ISSUANCE OF SHARES (FORFEITURES) PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR NOTES RECEIVABLE ...................................... $ (31) $ (70)
The accompanying notes are an integral part of the consolidated financial statements. 6 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Basis of Presentation The consolidated financial statements as of and for the three months ended March 31, 2002 and 2001 are unaudited, but in the opinion of management, have been prepared on the same basis as the annual audited consolidated financial statements and reflect all adjustments, consisting of only normal recurring accruals, necessary for a fair statement of the information set forth therein. The results of operations for the three months ended March 31, 2002 are not necessarily indicative of the operating results to be expected for the full year or any other period. These financial statements should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K as of and for the year ended December 31, 2001. 2. Investments 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. At March 31, 2002, the Company held no derivative financial instruments nor embedded financial derivatives. 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. The Company's impairment evaluation and recognition for interests in securitized assets is conducted in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board. 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, calculated as 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. 3. Goodwill The Company adopted the provisions of Statement of Financial Accounting Standards No. 142 (" SFAS No. 142"), "Goodwill and Other Intangible Assets" on January 1, 2002. 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 ceased goodwill amortization on January 1, 2002. Goodwill amortization for the three months ended March 31, 2001 amounted to $0.4 million. 4. Loans Payable As of March 31, 2002, the Company had aggregate borrowings of $31.3 million from the Federal Home Loan Bank. These borrowings bear interest at adjusted LIBOR and mature twelve months from inception. The proceeds from these borrowings were invested in collateralized mortgage obligation and asset backed securities to achieve a positive spread between the rate of interest on these securities and the borrowing rates. 7 5. Earnings Per Share Earnings per common share has been calculated by dividing net income for the period by the weighted average number of common shares and common share equivalents outstanding during the period. Following is the computation of earnings per share for the three months ended March 31, 2002 and 2001, respectively (in thousands):
As of and For the Three Months Ended March 31, ------------------ 2002 2001 ------- ------- Weighted-Average Common Shares Outstanding ....... 21,528 13,478 Weighted-Average Share Equivalents Outstanding ... 724 702 ------- ------- Weighted-Average Shares and Share Equivalents Outstanding ..................................... 22,252 14,180 ======= ======= Net Income ....................................... $10,677 $ 7,714 ======= ======= Basic Earnings per Share ......................... $ 0.50 $ 0.57 ======= ======= Diluted Earnings per Share ....................... $ 0.48 $ 0.54 ======= =======
6. Income Taxes The effective tax rate differs from the 35% marginal tax rate principally as a result of tax-exempt interest income, the dividend received deduction and other differences in the recognition of revenues and expenses for tax and financial reporting purposes. 7. 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 Losses arising during the three months ended March 31, 2002 and 2001 was ($2.2) million and ($0.3) million, respectively. The related tax effect of Reclassification Adjustments for the three months ended March 31, 2002 and 2001 was $0 million and ($0.8) million. 8. 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. The reportable segments operate solely within the United States. The segments follow the same accounting policies used for the Company's consolidated financial statements. Management evaluates a segment's performance based upon underwriting results. Following is a tabulation of business segment information for the three months ended March 31, 2002 and 2001. Corporate information is included to reconcile segment data to the consolidated financial statements (in thousands): 8
Commercial Specialty Personal Lines Lines Lines Corporate Total ---------- ---------- ---------- ---------- ---------- March 31, 2002: Gross Written Premiums $ 90,559 $ 24,428 $ 21,480 $ -- $ 136,467 ---------- ---------- ---------- ---------- ---------- Net Written Premiums $ 74,863 $ 22,773 $ 11,864 $ -- $ 109,500 ---------- ---------- ---------- ---------- ---------- Revenue: Net Earned Premiums $ 61,070 $ 18,935 $ 9,239 $ -- $ 89,244 Net Investment Income -- -- -- 8,855 8,855 Net Realized Investment Gain -- -- -- 47 47 Other Income -- -- 570 (569) 1 ---------- ---------- ---------- ---------- ---------- Total Revenue 61,070 18,935 9,809 8,333 98,147 ---------- ---------- ---------- ---------- ---------- Losses and Expenses: Net Loss and Loss Adjustment Expenses 36,657 11,666 4,726 -- 53,049 Acquisition Costs and Other Underwriting Expenses -- -- -- 27,821 27,821 Other Operating Expenses -- -- 19 1,465 1,484 ---------- ---------- ---------- ---------- ---------- Total Losses and Expenses 36,657 11,666 4,745 29,286 82,354 ---------- ---------- ---------- ---------- ---------- Income Before Income Taxes 24,413 7,269 5,064 (20,953) 15,793 Total Income Tax Expense -- -- -- 5,116 5,116 ---------- ---------- ---------- ---------- ---------- Net Income $ 24,413 $ 7,269 $ 5,064 $ (26,069) $ 10,677 ========== ========== ========== ========== ========== Total Assets $ -- $ -- $ 174,093 $ 901,038 $1,075,131 ========== ========== ========== ========== ========== March 31, 2001: Gross Written Premiums $ 60,390 $ 20,584 $ 23,060 $ -- $ 104,034 ---------- ---------- ---------- ---------- ---------- Net Written Premiums $ 41,810 $ 17,886 $ 17,391 $ -- $ 77,087 ---------- ---------- ---------- ---------- ---------- Revenue: Net Earned Premiums $ 41,418 $ 15,856 $ 9,249 $ -- $ 66,523 Net Investment Income -- -- -- 8,042 8,042 Net Realized Investment Gain -- -- -- 2,299 2,299 Other Income -- -- 905 (852) 53 ---------- ---------- ---------- ---------- ---------- Total Revenue 41,418 15,856 10,154 9,489 76,917 ---------- ---------- ---------- ---------- ---------- Losses and Expenses: Net Loss and Loss Adjustment Expenses 24,413 10,018 4,721 -- 39,152 Acquisition Costs and Other Underwriting Expenses -- -- -- 22,468 22,468 Other Operating Expenses -- -- 389 1,643 2,032 ---------- ---------- ---------- ---------- ---------- Total Losses and Expenses 24,413 10,018 5,110 24,111 63,652 ---------- ---------- ---------- ---------- ---------- Minority Interest: Distributions on Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust -- -- -- 1,811 1,811 ---------- ---------- ---------- ---------- ---------- Income Before Income Taxes 17,005 5,838 5,044 (16,433) 11,454 Total Income Tax Expense -- -- -- 3,740 3,740 ---------- ---------- ---------- ---------- ---------- Net Income $ 17,005 $ 5,838 $ 5,044 $ (20,173) $ 7,714 ========== ========== ========== ========== ========== Total Assets $ -- $ -- $ 162,533 $ 582,393 $ 744,926 ========== ========== ========== ========== ==========
9 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) GENERAL Although the Company's financial performance is dependent upon its own specific business characteristics, certain risk factors can affect the profitability of the Company. These include, but are not limited to: - - Industry factors - Historically the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical patterns of soft markets followed by hard markets. The Company's strategy is to focus on underwriting profits and accordingly the Company's marketing organization is being directed into those niche businesses that exhibit the greatest potential for underwriting profits. - - Competition - The Company competes in the property and casualty business with other domestic and international insurers having greater financial and other resources than the Company. - - Regulation - The Company's insurance subsidiaries are subject to a substantial degree of regulatory oversight, which generally is designed to protect the interests of policyholders, as opposed to shareholders. - - Inflation - Property and casualty insurance premiums are established before the amount of losses and loss adjustment expenses, or the extent to which inflation may affect such amounts is known. - - Investment Risk - Substantial future increases in interest rates could result in a decline in the market value of the Company's investment portfolio and resulting losses and/or reduction in shareholders' equity. - - Catastrophe Exposure - The Company's insurance subsidiaries issue insurance policies which provide coverage for commercial and personal property and casualty risks. It is possible that a catastrophic event could greatly increase claims under the insurance policies the insurance subsidiaries issue. Catastrophes may result from a variety of events or conditions, including hurricanes, windstorms, earthquakes, hail and other severe weather conditions and may include terrorist events. It is possible that a catastrophic event could adversely impact profitability. RESULTS OF OPERATIONS (THREE MONTHS ENDED MARCH 31, 2002 VS. MARCH 31, 2001) Premiums: Gross written premiums grew $32.5 million (31.3%) to $136.5 million for the three months ended March 31, 2002 from $104.0 million for the same period of 2001; gross earned premiums grew $27.9 million (30.6%) to $119.1 million for the three months ended March 31, 2002 from $91.2 million for the same period of 2001; net written premiums increased $32.4 million (42.0%) to $109.5 million for the three months ended March 31, 2002 from $77.1 million for the same period of 2001; and net earned premiums grew $22.7 million (34.1%) to $89.2 million in 2002 from $66.5 million in 2001. The respective gross written premium increases (decreases) for commercial lines, specialty lines and personal lines segments for the three months ended March 31, 2002 vs. March 31, 2001 amount to $30.2 million (50.0%), $3.8 million (18.7%) and ($1.6) million (6.9%) 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 10 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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 overall premium decrease for the personal lines segment was due principally to the Company's decision not to write new business or renew certain policies in designated areas of Florida in the Company's manufactured housing product line based on an evaluation of property exposures. This decrease has been partially offset by an increase in premiums for the Company's homeowners product line for which new and renewal policies are being added in select areas. The respective net written premium increases (decreases) for commercial lines, specialty lines and personal lines segments for the three months ended March 31, 2002 vs. March 31, 2001 amount to $33.1 million (79.1%), $4.9 million (27.3%) and ($5.5) million (31.8%) respectively. The differing percentage increases (decreases) 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 approximated $8.9 million for the three months ended March 31, 2002 and $8.0 million for the same period of 2001. Total investments grew to $731.3 million at March 31, 2002 from $474.7 million at March 31, 2001. The growth in investment income is due to investing net cash flows provided from operating activities and the proceeds of the Company's equity offering received during the fourth quarter of 2001. The capital market environment during 2001 (low U.S. Treasury yields) 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 average duration position in the expectation of higher future fixed income yields. As a result, the Company's average duration in its fixed income portfolio approximated 3.17 years at March 31, 2002, compared to 3.37 years at March 31, 2001 and the Company's tax equivalent book yield on its fixed income holdings was 6.15% at March 31, 2002, compared to 7.07% at March 31, 2001. Net Realized Investment Gain: Net realized investment gains were $47,000 for the three months ended March 31, 2002 and $2.3 million for the same period in 2001. The Company realized net investment gains of $2.3 million from the sales of common stock equity securities during the three months ended March 31, 2001. 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. Other Income: Other income approximated $1,000 for the three months ended March 31, 2002 and $100,000 for the same period of 2001. Other income primarily consisted of commissions earned on brokered personal lines business. Such commissions earned decreased as brokering activities were discontinued in favor of writing business directly. However, the Company is seeking to increase brokering activities in the future as it is not writing new business or renewing certain policies in designated areas of Florida for the Company's manufactured housing product as a result of its property exposures in these areas and related catastrophe loss considerations. Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $13.8 million (35.2%) to $53.0 million for the three months ended March 31, 2002 from $39.2 million for the same period of 2001 and the loss ratio increased to 59.4% in 2002 from 58.9% in 2001. This increase in net loss and loss adjustment expenses was due principally to the 34.1% growth in net earned premiums. 11 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $5.3 million (23.6%) to $27.8 million for the three months ended March 31, 2002 from $22.5 million for the same period of 2001. This increase was due primarily to the 34.1% 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 $0.5 million to $1.5 million for the three months ended March 31, 2002 from $2.0 million for the same period of 2001. The decrease in other operating expenses was primarily due to the discontinuance of goodwill amortization effective January 1, 2002. Income Tax Expense: The Company's effective tax rate for the three months ended March 31, 2002 and 2001 was 32.4% and 32.7%, respectively. The effective rates differed from the 35% statutory rate principally due to investments in tax-exempt securities. The decrease in the effective tax rate is principally due to a greater investment of cash flows in tax-exempt securities relative to taxable securities. LIQUIDITY AND CAPITAL RESOURCES For the three months ended March 31, 2002, the Company's investments experienced unrealized investment depreciation of $4.1 million, net of the related deferred tax benefit of $2.2 million. At March 31, 2002, the Company had total investments with a carrying value of $731.3 million, of which 92.0% consisted of investments in investment grade fixed maturity securities, including U.S. treasury securities and obligations of U.S. government corporations and agencies, obligations of states and political subdivisions, corporate debt securities, collateralized mortgage securities and asset backed securities. The collateralized mortgage securities and asset backed securities consist of short tranche securities possessing favorable pre-payment risk profiles. The remaining 8.0% of the Company's total investments consisted primarily of publicly traded common stock securities. The Company produced net cash from operations of $54.2 million and $43.9 million, respectively, for the three months ended March 31, 2002 and 2001. Management believes that the Company has adequate ability to pay all claims and meet all other cash needs. Risk-based capital is designed to measure the acceptable amount of capital an insurer should have based on the inherent specific risks of each insurer. Insurers failing to meet this benchmark capital level may be subject to scrutiny by the insurer's domiciliary insurance department and ultimately rehabilitation or liquidation. Based on the standards currently adopted, the Company's insurance subsidiaries' capital and surplus is in excess of the prescribed risk-based capital requirements. 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; and (v) catastrophe losses. 12 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There is no material change to the Quantitative and Qualitative market risk disclosure from the Company's Form 10-K for the fiscal year ended December 31, 2001. 13 PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities and Use of Proceeds Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other information Not applicable. Item 6. Exhibits and Reports on Form 8-K a. Not applicable. b. The Company filed the following report on Form 8-K during the quarterly period ended March 31, 2002:
Date of Report Item Reported ---------------- -------------------------------------- February 5, 2002 February 5, 2002 Investor Presentation
14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PHILADELPHIA CONSOLIDATED HOLDING CORP. --------------------------------------- Registrant Date May 6, 2002 /s/ James J. Maguire ------------------------ ------------------------------------- James J. Maguire Chairman of the Board of Directors, and Chief Executive Officer (Principal Executive Officer) Date May 6, 2002 /s/ Craig P. Keller ------------------------ ------------------------------------- Craig P. Keller Senior Vice President, Secretary, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) 15 -----END PRIVACY-ENHANCED MESSAGE-----