<PAGE> 1
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from__________ to __________
COMMISSION FILE NUMBER: 0-22280
PHILADELPHIA CONSOLIDATED HOLDING CORP.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2202671
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
ONE BALA PLAZA, SUITE 100
BALA CYNWYD, PENNSYLVANIA 19004
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 617-7900
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 17,
1997 as reported on the NASDAQ National Market System, was $113,498,083. Shares
of Common Stock held by each executive officer and director and by each person
who owns 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 17, 1997, Registrant had outstanding 6,082,810 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of Annual Report to Shareholders for the Year Ended December 31,
1996 are incorporated into Parts II and IV.
(2) Portions of the definitive Proxy Statement for Registrant's 1997 Annual
Meeting of Shareholders to be held May 8, 1997 are incorporated by
reference in Part III.
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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") and Philadelphia Insurance
Company ("PIC"), collectively; and (iv) "MIA" refers to Maguire Insurance
Agency, Inc. Philadelphia Insurance was incorporated in Pennsylvania in 1984, to
serve as a holding company for its three wholly owned subsidiaries (PIIC, PIC,
MIA). The Company designs, markets and underwrites specialty commercial property
and casualty insurance products for select classes of business. Marketing is
done through the Company's production underwriting organization from 37 field
offices located across the United States including telemarketing staffs located
in the Company's regional offices and Philadelphia home office. In addition to
direct sales, the Company accepts business from independent insurance brokers.
In 1996, approximately 55% of written premium was produced through approximately
3,000 broker relationships.
The Company has reported growth in net income in each year from 1992
to 1996. Net income has been generated from both underwriting operations and
investing activities. The Company has produced underwriting profits as a result
of supplementing historically profitable product lines with growth in certain
excess liability products, commercial multi-peril lines, and selected expansion
into professional liability coverages while maintaining underwriting and pricing
discipline.
The Insurance Subsidiaries have been assigned an "A" (Excellent)
Best's Rating by A.M. Best Company. According to A.M. Best, the "A" (Excellent)
rating is issued to companies that demonstrated excellent financial strength and
ability to meet its obligations to policyholders. A.M. Best ratings are based
upon factors relevant to policyholders and are not directed toward the
protection of investors. Also, in December 1996, the Insurance Subsidiaries were
assigned an "A" claims paying ability rating by Standard & Poor's. According to
Standard & Poor's, insurers rated "A" offer good financial security for
policyholders. The Company believes that the "A" ratings assigned by A.M. Best
and Standard & Poor's are important factors in marketing its products.
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PRODUCT LINES
The following table sets forth, for the years ended December 31,
1996, 1995 and 1994, the gross premiums produced on the Company's insurance
products and the relative percentages that such premiums represented.
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------
1996 1995 1994
---- ---- ----
Dollars Percentage Dollars Percentage Dollars Percentage
------- ---------- ------- ---------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross Premiums Produced (1)
Rent-A-Car
Auto Liability.............................. $60,499 44.5% $ 57,912 55.9% $54,027 59.9%
Auto Physical Damage........................ 749 .6 1,006 1.0 1,399 1.6
Commercial Multiple Peril................... 87 .1 178 .2 206 .2
-------- ----- -------- ----- ------- -----
61,335 45.2 59,096 57.1 55,632 61.7
-------- ----- -------- ----- ------- -----
Non-Profit Sector
Commercial Multiple Peril................... 35,196 25.9 21,391 20.7 17,395 19.3
Excess Liability............................ 2,893 2.1 1,143 1.1 965 1.1
-------- ----- -------- ----- ------- -----
38,089 28.0 22,534 21.8 18,360 20.4
-------- ----- -------- ----- ------- -----
Automobile Leasing
Commercial Multiple Peril................... 9,305 6.8 5,566 5.4 2,157 2.4
Auto Liability ............................. 2,981 2.2 3,197 3.1 3,971 4.4
Auto Physical Damage........................ 1,324 1.0 1,426 1.4 1,189 1.3
-------- ----- -------- ----- ------- -----
13,610 10.0 10,189 9.9 7,317 8.1
-------- ----- -------- ----- ------- -----
Health & Fitness
Commercial Multiple Peril................... 4,649 3.4 2,708 2.6 1,205 1.3
-------- ----- -------- ----- ------- -----
Professional Liability Sector
Liability................................... 16,686 12.3 8,755 8.4 7,290 8.1
-------- ----- -------- ----- ------- -----
Vocational and Specialty Training Schools
Commercial Multiple Peril................... 1,000 0.7 57 -- -- --
-------- ----- -------- ----- ------- -----
Other......................................... 454 0.4 186 0.2 387 0.4
-------- ----- -------- ----- ------- -----
Total......................................... $135,823 100.0% $103,525 100.0% $90,191 100.0%
======== ===== ======== ===== ======= =====
</TABLE>
(1) Gross premiums produced include all gross premiums produced on direct
business and gross premiums produced on fronted business.
Rent-A-Car: The Company offers statutory and excess liability and
physical damage automobile policies for rental car companies and their
customers, as well as excess liability coverages up to $5.0 million protecting
the rental company only.
In keeping with its general marketing philosophy, the Company
includes a number of features in its rental car products and services in an
attempt to differentiate them from the competition. Such features include:
catastrophic comprehensive coverage for losses due to fire, lightning,
windstorm, hail, flood, earthquake and other specified causes (but not
automobile collision); subrogation services on self-insured physical damage; and
monthly loss runs.
Non-Profit Sector: The Company offers a package policy to non-profit
organizations, primarily social service agencies. The Company's package policy
for non-profit organizations provides a combination of liability and property
(including automobile) coverages. Liability coverage is comprehensive, with
primary limits up to $1.0 million and excess limits typically up to $5.0
million, extending to premises, fund-raising events and, where applicable,
social workers professional liability (written on an occurrence form). Property
coverages insure against all risks to buildings and contents which are normally
insured against by these types of policies. Automobile coverages protect against
losses arising from the use of owned, non-owned and hired automobiles.
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The Company's other principal non-profit sector products include: a
package policy for Homeowner's Associations which provides a combination of
comprehensive liability and property coverages to address the unique
requirements of single-family homeowner associations, including liability
coverage for their board of directors; a package program for Assisted Living and
Residential Care Facilities which expands contents coverage to address personal
property of the residents along with coverage enhancements for the common ground
areas of the facility.
Automobile Leasing: The Company offers a full range of liability and
physical damage coverages for automobile leasing companies and their customers.
For the driver (the lessee of the vehicle), this coverage includes primary
liability coverage with optional limits up to $1.0 million combined single
limit, and primary physical damage coverage on the vehicle. For the owner (the
lessor of the vehicle), contingent and excess liability coverage up to $5.0
million is made available by the Company over the primary liability layer,
protecting lessors in the event of a loss when the primary coverage is absent or
inadequate. The Company also offers contingent physical damage coverage, which
protects the insured against damage to the leased vehicle if there is no primary
physical damage coverage. Other products offered to leasing companies include
interim primary liability and physical damage coverage, which protects the
lessor/owner of the vehicle before it is delivered to the lessee and after it is
returned by the lessee at the conclusion of the lease; residual value coverage
which guarantees the value of the leased vehicle at the termination of the
lease; and guaranteed asset protection coverage which protects the lessor and
lessee or borrower for the difference between the leased or financed vehicle's
actual cash value and the lease or loan net value in instances where the vehicle
is stolen or damaged beyond repair.
Health & Fitness: The Company offers a package of coverages including
property, general liability, automobile and special events coverages. Liability
coverage is comprehensive, with primary limits up to $1.0 million and excess
limits up to $5.0 million, extending to the insured entity and certified
professionals. Property coverages insure against damage to equipment and
improvements. Automobile coverages protect against losses to business and/or
personal vehicles. Special Events coverage outside the establishment is included
for the insured entity and professional instructors or consultants.
Professional Liability Sector: The Company's Insurance Agents Errors
and Omissions policies are independently filed with non-Insurance Services
Office ("ISO") claims made forms. The policy offers professional liability
coverage for the independent insurance agent. Primary limits are up to $10.0
million. Typical policies provide coverage of $1.0 million.
The Company's Directors & Officers liability policies are written on
independently filed, non-ISO claims made forms. Management believes that these
policies have a number of features that distinguish them from those of its
competitors, including a sixty-day discovery period without separate charge,
coverage for volunteers and coverage against liability for employment
discrimination and sexual harassment. The policies exclude punitive damages and
exclude prior acts under certain circumstances. Primary coverage under these
policies is available up to $10.0 million. Typical policies provide coverage of
$1.0 million.
The Company's other principal professional liability products
include: an errors and omissions policy for management and marketing
consultants; and a non profit professional liability policy providing a broader
level of coverage than provided under the Company's D & O policy. These
professional liability products are written on independently filed, non ISO,
claims made forms and provide primary coverage up to $10.0 million.
Vocational and Specialty Training Schools: The Company's program
provides a comprehensive property-casualty package product to junior and
community colleges and vocational training facilities. Additional available
coverage enhancements provide errors and omissions protection to the school for
allegations relating to technical training and career counseling.
Other Products: During 1996, the Company introduced Executive
Safeguard, a proprietary package policy which includes Directors and Officers
Liability; Employment Practices Liability, Fiduciary Liability, and
Kidnap/Ransom insurance for public and private companies. In addition, the
Company has developed and is currently marketing special programs for the
following industries: Guides and Outfitters, Marriage and Family Counselors,
Condo Associations, Home Health Care, Para-Transit Commercial Auto Liability,
and Lawyer's Errors and Omissions Liability.
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The following table provides the geographic distribution of the
Company's risks insured as represented by direct earned premiums for all product
lines for the year ended December 31, 1996. No other state accounted for more
than 2% of total direct earned premiums for all product lines for the year ended
December 31, 1996.
<TABLE>
<CAPTION>
State Direct Earned Premiums Percent of Total
----- ---------------------- ----------------
<S> <C> <C>
California.................... $ 24,216,663 20.64%
Florida....................... 17,646,367 15.04
New York...................... 7,608,807 6.48
Texas......................... 5,753,745 4.90
Illinois...................... 5,576,759 4.75
Pennsylvania.................. 4,826,187 4.11
Oklahoma...................... 4,747,078 4.05
New Jersey.................... 4,317,344 3.68
Massachusetts................. 4,304,428 3.67
Ohio.......................... 4,133,325 3.52
Alabama....................... 2,643,455 2.25
North Carolina................ 2,489,122 2.12
Other......................... 29,091,074 24.79
------------- ------
Total Direct Earned Premiums.. $117,354,354 100.0%
============ ======
</TABLE>
UNDERWRITING AND PRICING
The Company's underwriting function was reorganized during 1996 into
three independent divisions: The Specialty Lines division ("Specialty Lines"),
the Commercial Lines division ("Commercial Lines"), and the Regional
Underwriting division ("Regional Underwriting"). Each division's primary
responsibilities include: pricing all business, managing the risk selection
process, providing customer service, and monitoring loss ratios by product and
by insured.
Specialty Lines consists of 12 underwriters who report to the Vice
President of Specialty Lines Underwriting. Specialty Lines markets and
underwrites the Company's various professional liability product lines and is
operationally structured into regional and product teams. Commercial Lines
consists of 17 underwriters who report to the Assistant Vice President of
Commercial Lines Underwriting. Commercial Lines is operationally structured into
underwriting product teams which service and price specific programs. Regional
Underwriting has seven Vice Presidents each managing a geographic territory
under the supervision of the Senior Vice President. Each region is serviced by
production underwriting units which are located in strategically placed offices.
By managing the underwriting process and selecting good accounts at the local
level, the Company believes it can achieve consistent profitable underwriting
results and offer speed and quality service. The Company's production
underwriters apply their specialized training and field experience to routinely
screen out risks which do not meet the Company's underwriting criteria.
Underwriters are encouraged to pursue continuing education, CPCU or other
professional designations.
The Company uses a combination of ISO coverage forms and rates and
independently filed forms and rates. Coverage forms and rates are independently
developed in situations where the line of business is not supported by ISO or
where management believes the ISO forms and rates do not adequately address the
risk. Departures from ISO forms are also used to differentiate the Company's
products from its competitors' products and are independently filed.
The Company attempts to follow conservative underwriting and pricing
practices. When necessary, the Company is willing to sharply curtail or
discontinue a product deemed to present unacceptable risks. Written underwriting
guidelines are maintained, and updated regularly, for all classes of business
underwritten. Adherence to underwriting guidelines is maintained through
underwriting audits. Product price levels are measured utilizing a price
monitoring system which measures the aggregate price level of the book of
business. This system is intended to assist management and underwriters in
recognizing and correcting price deterioration before it results in underwriting
losses.
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REINSURANCE
The Company renegotiated its reinsurance program, effective January
1, 1997. The overall reinsurance program, as explained below, remains
substantially unchanged from the reinsurance program in place prior to January
1, 1997 with respect to retentions and coverages. However, the Company did
realize more favorable reinsurance rates as a result of the renegotiation.
Effective January 1, 1997, the reinsurance program has been placed principally
with Swiss Re America, an "A" (Excellent) rated company by A.M. Best Company.
The Company has had a reinsurance relationship with Swiss Re America since 1989.
Prior to January 1, 1997, the reinsurance program had been placed principally
with three reinsurers of which Swiss Re America was a participant.
The Company's casualty reinsurance agreement with Swiss Re America
(the "Reinsurer") provides that the Company bears the first $500,000 layer of
liability on each occurrence with the Reinsurer bearing the remaining
contractual liability to policy limits of $1.0 million. Casualty risks in excess
of $1.0 million up to $6.0 million are reinsured under a casualty treaty
("Excess Treaty") placed through a reinsurance broker. Kemper Re, NAC Re, and
SCOR Re participate on the Excess Treaty at 50%, 25%, and 25%, respectively.
Each of these reinsurers are rated "A-" (Excellent) or better by A.M. Best
Company. Facultative reinsurance is placed for each casualty risk in excess of
$6.0 million.
The Company also has excess casualty reinsurance agreements with the
Reinsurer providing an additional $5.0 million layer for protection from
exposures such as extra contractual obligations and judgments in excess of
policy limits. Additionally, the Company has an errors and omissions policy
which provides an additional $5.0 million of coverage with respect to these
exposures.
The Company's property reinsurance agreement provides that the
Company bears the first $500,000 layer of loss on each risk with the Reinsurer
bearing the next $1.5 million layer of loss on each risk subject to a maximum of
$3.5 million recoverable from a single occurrence. The Company has an automatic
facultative arrangement for each property risk in excess of $2.0 million up to
$20.0 million.
The Company seeks to limit the risk of a reinsurer's default in a
number of ways. First, the Company principally contracts with large reinsurers
that are rated at least "A-" (Excellent) by A.M. Best. Second, the Company seeks
to collect the obligations of its reinsurers on a timely basis. This collection
effort is supported by a reinsurance recoverable system that is regularly
monitored. Finally, the Company typically does not write casualty policies in
excess of $10.0 million nor property policies in excess of $20.0 million.
In addition to the reinsurance arrangements discussed above, the
Company assumes reinsurance on policies produced by the Company but written by
another unaffiliated insurer. The Company markets and underwrites these policies
in the same manner as it does direct business. For the year ended December 31,
1996 the Company recorded approximately 4% of net written under this
arrangement.
The Company periodically 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
The Company's marketing effort is designed to assure a systematic and
disciplined approach to developing business which the Company anticipates to be
profitable. The Company's most important distribution channel is its production
underwriting organization. The production underwriting's organization is
currently comprised of 90 employees located in 37 field offices in major markets
across the country. The Field offices are focused daily on interacting with
prospective and existing insureds. In addition to direct marketing,
relationships with approximately 3,000 brokers have been formed either as a
result of the broker having a relationship with the insured, or through seeking
the Company's expertise in one of its specialty products.
Business relationships also have been formed with brokers ("Preferred
Agents") specializing in certain of the Company's business niches, thereby
increasing the distribution of the Company's niche products. The Company
anticipates that new relationships with Preferred Agents will continue to be
formed throughout 1997. The brokerage business is managed by the field office
personnel, while services after the sale (e.g., billings, claim services,
audits, etc.) are managed by Home Office personnel. This mixed marketing concept
not only provides the flexibility to work with the broker and/or policyholder
but also provides the flexibility to seize emerging market opportunities.
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The Company supplements its marketing efforts through trade shows,
direct mailings and national advertisements placed in trade magazines serving
industries in which the Company specializes.
In 1996, approximately 85% of the Company's expiring insurance
policies were renewed. Management attributes this renewal rate in large part to
continuing personal contacts between the Company's production underwriters and
servicing staff and its policyholders.
PRODUCT DEVELOPMENT
The Company continually evaluates new product opportunities,
consistent with its strategic focus on selected market niches. Direct contacts
between the Company's field and home office personnel and its customers have
produced a number of new product ideas. All new product ideas are presented to
the Product Development Committee (the "Committee") for consideration. This
Committee, currently composed of the Company's two most senior executives, as
well as officers from the underwriting and claims 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 are typically handled outside the Company's main reinsurance treaties
and may involve lower retentions than customarily utilized. After a new product
is approved for test marketing, the Committee monitors its success based on
specified criteria (e.g., underwriting results, sales success, product demand
and competitive pressures). If expectations are not realized, the Committee
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 the earliest juncture, service insureds and minimize
fraud. Claim files are regularly audited by claims supervisors and the Company's
reinsurers in an attempt to ensure that claims are being processed properly and
that reserves are being set at appropriate levels. Claims examiners are expected
to set conservative reserves, an important factor in the Company's reserve
development over the years. See "Loss and Loss Adjustment Expenses".
The Company maintains a Special Investigations Unit to investigate
suspicious claims and to serve as a clearinghouse for information concerning
fraudulent practices primarily within the rental car industry. Working closely
with a variety of industry contacts, including attorneys, investigators and
rental car company fraud units, this unit has uncovered a number of fraudulent
claims.
LOSS AND LOSS ADJUSTMENT EXPENSES
The Company is liable for losses and loss adjustment expenses under
its insurance policies and reinsurance treaties. While the Company's
professional liability policies are written on claims-made forms and while
claims on its other policies are generally reported promptly after the
occurrence of an insured loss, in many cases several years may elapse between
the occurrence of an insured loss, the reporting of the loss to the Company and
the Company's payment of the loss. The Company reflects its liability for the
ultimate payment of all incurred losses and loss adjustment expenses by
establishing loss and loss adjustment expense reserves, which are balance sheet
liabilities representing estimates of future amounts needed to pay claims and
related expenses with respect to insured events that have occurred.
When a claim involving a probable loss is reported, the Company
establishes a case reserve for the estimated amount of the Company's ultimate
loss and loss adjustment expense. This estimate reflects an informed judgment,
based on the Company's reserving practices and the experience of the Company's
claims staff. Management also establishes reserves on an aggregate basis to
provide for losses incurred but not reported ("IBNR"), as well as future
development on claims reported to the Company.
As part of the reserving process, historical data are reviewed and
consideration is given to the anticipated effect of various factors, including
known and anticipated legal developments, changes in societal attitudes,
inflation and economic conditions. Reserve amounts are necessarily based on
management's estimates and judgments; as new data become available and are
reviewed, these estimates and judgments are revised, resulting in increases or
decreases to existing reserves. To verify the adequacy of its reserves, the
Company engages independent actuarial consultants to perform interim loss
reserve analyses and annual certifications.
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The following table sets forth a reconciliation of beginning and
ending reserves for unpaid loss and loss adjustment expenses, net of amounts for
reinsured losses and loss adjustment expenses, for the years indicated. As a
result of changes in estimates of insured events of prior years, the Company
reduced losses and loss adjustment expenses incurred by $965,000, $925,000, and
$111,000 in 1996, 1995, and 1994, respectively. Such favorable development was
due to losses emerging at a lesser rate than had been originally anticipated
when the initial reserves for the applicable accident years were estimated.
<TABLE>
<CAPTION>
As of and For the Years Ended December 31,
------------------------------------------
1996 1995 1994
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Unpaid loss and loss adjustment expenses at
beginning of year (1) .............................................. $ 68,246 $ 53,595 $ 38,714
-------- -------- --------
Provision for losses and loss adjustment expenses for current
year claims ........................................................ 41,083 34,152 31,120
Decrease in estimated ultimate losses and loss adjustment
expenses for prior year claims ..................................... (965) (925) (111)
-------- -------- --------
Total incurred losses and loss adjustment expenses .................. 40,118 33,227 31,009
-------- -------- --------
Loss and loss adjustment expense payments for claims attributable to:
Current year ..................................................... 7,427 6,186 5,336
Prior years ...................................................... 15,214 12,390 10,792
-------- -------- --------
Total payments ...................................................... 22,641 18,576 16,128
-------- -------- --------
Unpaid loss and loss adjustment expenses at end of year (1) .... $ 85,723 $ 68,246 $ 53,595
======== ======== ========
</TABLE>
(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
$10,919, $9,440 and $5,580 at December 31, 1996, 1995 and 1994,
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 1986 through 1996. 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.
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<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
(Dollars in Thousands)
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UNPAID LOSS AND LOSS
ADJUSTMENT EXPENSES, AS
STATED ....................... $ 14 $4,940 $10,615 $12,198 $15,930 $22,248 $31,981 $38,714 $53,595 $68,246 $85,723
CUMULATIVE PAID AS OF:
1 YEAR LATER ................. 7 1,375 2,955 3,354 4,286 6,698 9,865 10,792 12,391 15,214
2 YEARS LATER ................ 7 2,481 4,832 6,249 8,084 12,485 16,290 19,297 23,139
3 YEARS LATER ................ 14 3,025 6,584 8,807 10,838 16,288 21,253 24,991
4 YEARS LATER ................ 15 3,582 7,813 10,155 12,907 17,780 24,299
5 YEARS LATER ................ 20 3,771 8,341 11,217 13,211 19,406
6 YEARS LATER ................ 20 3,881 8,748 11,497 13,792
7 YEARS LATER ................ 20 3,922 8,704 11,760
8 YEARS LATER ................ 20 3,911 8,696
9 YEARS LATER ................ 20 3,916
10 YEARS LATER ............... 20
UNPAID LOSS AND LOSS
ADJUSTMENT EXPENSES
RE-ESTIMATED AS OF
END OF YEAR:
1 YEAR LATER ................. 7 4,472 9,535 12,628 15,953 22,056 30,538 38,603 52,670 67,281
2 YEARS LATER ................ 18 4,056 9,825 12,644 15,712 21,327 30,428 38,016 52,062
3 YEARS LATER ................ 22 3,932 9,645 12,424 14,822 21,198 29,648 37,184
4 YEARS LATER ................ 15 3,924 9,437 11,947 14,811 21,118 29,306
5 YEARS LATER ................ 26 3,970 9,053 11,836 14,841 21,399
6 YEARS LATER ................ 20 4,010 8,859 12,060 14,593
7 YEARS LATER ................ 20 3,952 8,770 12,008
8 YEARS LATER ................ 20 3,926 8,783
9 YEARS LATER ................ 20 3,947
10 YEARS LATER ............... 20
CUMULATIVE REDUNDANCY
(DEFICIENCY)
DOLLARS .................... (6) $ 992 $ 1,832 $ 190 $ 1,337 $ 849 $ 2,675 $ 1,530 $ 1,533 $ 965
PERCENTAGE ................. -42.6% 20.1% 17.3% 1.6% 8.4% 3.8% 8.4% 4.0% 2.9% 1.4%
</TABLE>
(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 $10,919, $9,440, $5,580, $5,539, $1,770, $1,267,
$1,672, $1,591 and $2,095 at December 31, 1996, 1995, 1994, 1993, 1992, 1991,
1990, 1989 and 1988, respectively.
(2) The Company maintains its historical loss records net of reinsurance and
therefore is unable to conform the presentation of this table to the financial
statements.
9
<PAGE> 10
The cumulative redundancy or 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 PIIC and PIC, 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 in accordance with Statement of Financial Accounting Standards
("SFAS") No. 113. Under GAAP, reinsurance receivables, with an offsetting
increase in unpaid loss and loss adjustment expense, have been recorded. (See
footnote (1) on Page 9 for amounts). There is no effect on net income or
shareholders' equity due to the difference in reporting the effects of
reinsurance between statutory accounting practices and GAAP as discussed above.
OPERATING RATIOS
Statutory Combined Ratio
The statutory combined ratio, which is the sum of (a) the ratio of
loss and loss adjustment expenses incurred to net earned premiums (loss ratio)
and (b) the ratio of policy acquisition costs and other underwriting expenses to
net written premiums (expense ratio), is the traditional measure of underwriting
experience for insurance companies. Generally, if the combined ratio is below
100%, an insurance company has an underwriting profit and if it is above 100%,
the insurer has an underwriting loss.
The following table reflects the consolidated loss, expense and
combined ratios of the Insurance Subsidiaries together with the property and
casualty industry-wide combined ratios after policyholders' dividends.
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Loss Ratio..................................................... 55.7% 57.1% 59.5% 56.5% 57.1%
Expense Ratio.................................................. 31.1% 29.6% 29.9% 34.5% 38.7%
----- ----- ----- ----- -----
Combined Ratio................................................. 86.8% 86.7% 89.4% 91.0% 95.8%
===== ===== ===== ===== =====
Industry Combined Ratio after Policyholders' Dividends ....... 107.0% 106.4% 108.3% 106.8% 115.6%
===== ===== ===== ===== =====
(1) (2) (2) (2) (2)
</TABLE>
(1) Source: Best's Review, January 1997 Issue (Estimate 1996).
-------------
(2) Source: Best's Aggregates & Averages, 1996 Edition.
----------------------------
10
<PAGE> 11
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 premium-to-surplus ratio is satisfactory if it is
below 3 to 1.
The following table sets forth, for the periods indicated, net
written premiums to policyholders' surplus for the Insurance Subsidiaries:
<TABLE>
<CAPTION>
As of and For the Years Ended December 31,
------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Net Written Premiums...................... $83,994 $62,072 $55,398 $40,645 $36,168
Policyholders' surplus.................... $81,906 $67,500 $56,027 $51,197 $20,347
Premium to Surplus Ratio.................. 1.0 to 1.0 .9 to 1.0 1.0 to 1.0 .8 to 1.0 1.8 to 1.0
</TABLE>
INVESTMENTS
At December 31, 1996, the Company had total investments with a
carrying value of $168.6 million, substantially all of which were held by the
Insurance Subsidiaries. At December 31, 1996, 83.8% of the Company's total
investments were investment grade fixed maturity securities, including U.S.
Treasury Securities and Obligations of U.S. Government Corporations and
Agencies, Obligations of States and Political Subdivisions and Corporate Debt
Securities. The remaining 16.2% of the Company's total investments consisted
primarily of publicly traded common stock securities.
The following table sets forth information concerning the composition
of the Company's total investments at December 31, 1996:
<TABLE>
<CAPTION>
Estimated Percent of
Market Carrying
Amortized Cost Value Carrying Value Value
-------------- ----- -------------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed Maturities:
Obligations of States and Political
Subdivisions ................... $105,682 $108,887 $108,887 64.6%
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies ...... 20,450 20,557 20,557 12.2
Corporate Debt Securities ......... 11,625 11,792 11,792 7.0
Equity Securities ................... 19,648 27,342 27,342 16.2
-------- -------- -------- -----
Total .......................... $157,405 $168,578 $168,578 100.0%
======== ======== ======== =====
</TABLE>
At December 31, 1996, 100% of the Company's fixed maturity securities
consisted of U.S. Government securities or securities rated "1" or "2" by the
NAIC; 96.0% of the fixed maturity securities were rated "A" or better (with no
security rated lower than "BBB-") by Standard & Poor's Corporation.
11
<PAGE> 12
The cost and estimated market value of fixed maturity securities at
December 31, 1996, by remaining 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:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Market Value
---- ------------
(Dollars in Thousands)
<S> <C> <C>
Due in one year or less.................... $ - $ -
Due after one year through five years...... 31,956 32,405
Due after five years through ten years..... 76,625 78,217
Due after ten years........................ 29,176 30,614
-------- --------
Total................................. $137,757 $141,236
======== ========
</TABLE>
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.
The Company's investment policy seeks to maximize after-tax
investment return, within the constraints of maintaining adequate securities in
amount and duration to meet cash requirements of current operating as well as
longer-term liabilities, as well as maintaining and improving the Company's A.M.
Best and Standard & Poor's ratings. The Company employs professional investment
managers for its fixed maturity and equity investments. The portfolio consists
of diversified issuers and issues and as of December 31, 1996 approximately 82%
of the total portfolio consisted of investments in fixed maturity securities.
As a result of the Company's earnings growth and favorable market
spreads between tax-exempt and taxable fixed maturity securities, the Company
continues to invest in tax-exempt securities. The Company has also continued to
increase its total investments in quality growth oriented mid and large-cap
equity securities seeking to achieve diversification and capital appreciation in
the portfolio.
REGULATION
General: Insurance companies are subject to supervision and
regulation in the states in which they transact business. Such supervision and
regulation, designed primarily for the protection of policyholders and not
shareholders, relates to most aspects of an insurance company's business and
includes such matters as authorized lines of business; underwriting standards;
financial condition standards; licensing of insurers; investment standards;
premium levels; policy provisions; the filing of annual and other financial
reports prepared on the basis of Statutory Accounting Practices ("SAP"); the
filing and form of actuarial reports; the establishment and maintenance of
reserves for unearned premiums; losses and loss adjustment expenses;
transactions with affiliates; dividends; changes in control; and a variety of
other financial and nonfinancial matters. Because the Insurance Subsidiaries are
domiciled in Pennsylvania, the Pennsylvania Department of Insurance (the
"Department") has primary authority over the Company.
Regulation of Insurance Holding Companies: Pennsylvania, like many
other states, has laws governing insurance holding companies (such as
Philadelphia Insurance). Under the Pennsylvania law, a person generally must
obtain the Department's approval to acquire, directly or indirectly, 10% or more
of the outstanding voting securities of Philadelphia Insurance or either
Insurance Subsidiary. The Department's determination of whether to approve any
such acquisition is based on a variety of factors, including an evaluation of
the acquiror's financial stability, the competence of its management and whether
competition in Pennsylvania would be reduced.
The Pennsylvania statute requires every Pennsylvania-domiciled
insurer which is a member of an insurance holding company system to register
with the Department by filing and keeping current a registration statement on a
form prescribed by the NAIC.
12
<PAGE> 13
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.
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 Pennsylvania insurance laws, which currently require that dividends
be paid from profits and afford the Department 30 days to disapprove the payment
of "extraordinary dividends" from a domestic property and casualty insurer to
its shareholders (i.e., dividends over a twelve-month period that exceed the
greater of (a) 10% of policyholders' surplus shown on the latest Annual
Statement filed with the Department, or (b) the net income for the period
covered by such statement but in no event to exceed the amount of unassigned
funds (i.e., retained earnings plus or minus net unrealized gains or losses). In
addition, the law specifies factors to be considered by the Department to allow
it to determine that policyholders' surplus after the payment of dividends is
reasonable in relation to an insurance company's outstanding liabilities and
adequate to its financial needs. Such factors include, for example, the size of
the company, the extent to which its business is diversified among several lines
of insurance, the number and size of risks insured, the nature and extent of the
company's reinsurance, and the adequacy of the company's reserves. Accumulated
statutory profits of the Insurance Subsidiaries from which dividends may be paid
totaled $35.6 million at December 31, 1996. Of this amount, the Insurance
Subsidiaries are entitled to pay a total of approximately $9.6 million of
dividends in 1997 without obtaining prior approval from the Department.
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 Pennsylvania under the NAIC
Financial Regulation Standards in March 1994.
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, 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 at December 31, 1996 is in excess
of the prescribed risk-based capital requirements.
13
<PAGE> 14
Insurance Guaranty Funds: The Insurance Subsidiaries are subject to
guaranty fund laws which can result in assessments, up to prescribed limits, for
losses incurred by policyholders as a result of the impairment or insolvency of
unaffiliated insurance companies. Typically, an insurance company is subject to
the guaranty fund laws of the states in which it conducts insurance business;
however, companies which conduct business on a surplus lines basis in a
particular state are generally exempt from that state's guaranty fund laws.
During the five years ended December 31, 1996, the amount of such guaranty fund
assessments paid by the Company was not material.
Shared Markets: As a condition of its license to do business in
various states, PIIC is required to participate in mandatory property-liability
shared market mechanisms or pooling arrangements which provide various insurance
coverages to individuals or other entities that otherwise are unable to purchase
coverage voluntarily provided by private insurers. In addition, some states
require automobile insurers to participate in reinsurance pools for claims that
exceed a certain amount. PIIC's participation in such shared markets or pooling
mechanisms is generally in amounts related to the amount of PIIC's direct
writings for the type of coverage written by the specific pooling mechanism in
the applicable state.
Possible New Legislation or Regulations: New regulations and
legislation have been (and are being) proposed from time to time to limit damage
awards; to bring the industry under regulation by the federal government; to
control premiums, policy terminations and other policy terms; and to impose new
taxes and assessments. It is not possible to predict whether any of these
proposals will be adopted in any jurisdictions and, if so, in what form or in
what jurisdictions. Accordingly, the impact of these initiatives on the Company
is impossible to predict.
COMPETITION
The commercial property and casualty insurance industry is highly
competitive. Many of the Company's existing and potential competitors are
larger, have considerably greater financial and other resources, have greater
experience in the insurance industry and offer a broader line of insurance
products than the Company. Not only does the Company compete with other
insurers, it also competes with new forms of insurance organizations such as
risk retention groups and self-insurance mechanisms.
Overall, the current business climate remains competitive from a
pricing standpoint in certain of the Company's niches. In the context of the
current environment, the Company will not sacrifice pricing guidelines for
premium volume and will "walk away" from writing business that does not meet
underwriting or pricing guidelines. Management believes, though, that the
Company's marketing strategy is a strength in this market environment, in that
it provides the flexibility to quickly deploy the marketing efforts of the
Company's direct production underwriters from soft market segments to market
segments with emerging opportunities. Additionally, through the mixed marketing
strategy, the Company's production underwriters have established relationships
with approximately 3,000 brokers, thus increasing distribution and assuring a
regular flow of submissions.
EMPLOYEES
As of March 17, 1997, the Company had 222 full-time employees and 18
part-time employees. The Company actively encourages its employees to continue
their educational efforts and aids in defraying their educational costs
(including 100% of education costs related to the insurance industry).
Management believes that the Company's relations with its employees are
generally excellent.
FORWARD-LOOKING INFORMATION
From time-to-time, the Company may publish statements which 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 similiar 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; and (iv) difficulties of managing
growth profitably.
14
<PAGE> 15
Item 2. PROPERTIES
The Company leases certain office space in Bala Cynwyd, PA which
serves as its headquarters location and also leases 36 field offices for its
field office personnel. Additionally, the Company entered into an agreement to
lease its previous headquarters building, which it owns, in Wynnewood, PA.
Item 3. LEGAL PROCEEDINGS
The Company is not subject to any material pending legal proceedings
other than ordinary routine litigation incidental to its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1996.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
During the fourth quarter of 1996, the Company did not sell any of its
securities which were not registered under the Securities Act of 1933.
The balance of the information required by this Item is incorporated
by reference to page 28 of the Company's 1996 Annual Report to
Shareholders.
Item 6. SELECTED FINANCIAL DATA
The information required by this Item is incorporated by reference to
page 4 of the Company's 1996 Annual Report to Shareholders.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this Item is incorporated by reference to
pages 7 through 10 of the Company's 1996 Annual Report to
Shareholders.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is incorporated by reference to
pages 11 through 22 of the Company's 1996 Annual Report to
Shareholders.
Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in that the
registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later that 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's director and executive
officers required by this Item is incorporated by reference to the
Proxy Statement under the caption "Management-Directors and Executive
Officers".
15
<PAGE> 16
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 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) The following documents are filed as a part of this Report.
1. Financial Statements: The following Consolidated Financial
Statements of Philadelphia Consolidated Holding Corp. and
Subsidiaries and Report of Independent Accountants are
incorporated by reference to pages 11 through 22 of the
Registrant's 1996 Annual Report to Shareholders:
Consolidated Balance Sheets - As of December 31, 1996 and
1995
Consolidated Statements of Operations - For the Years
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Changes in Shareholders'
Equity - For the Years ended December 31, 1996, 1995
and 1994
Consolidated Statements of Cash Flows - For the Years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Accountants
2. Financial Statement Schedules: The following financial
statement schedules of Philadelphia Consolidated Holding
Corp. and Subsidiaries As of and For the Years Ended
December 31, 1996, 1995 and 1994 are filed as part of this
Report and should be read in conjunction with the
Consolidated Financial Statements of Philadelphia
Consolidated Holding Corp. and Subsidiaries.
<TABLE>
<CAPTION>
Schedule Page
-------- ----
<S> <C> <C>
I Summary of Investments - Other than Investments in
Related Parties As of December 31, 1996 S-1
II Condensed Financial Information of Registrant As of
December 31, 1996 and 1995 and For Each of the
Three Years in the Period Ended December 31, 1996 S-2--S-4
IV Reinsurance For the Years ended December 31, 1996,
1995 and 1994 S-5
VI Supplemental Information Concerning Property-
Casualty Insurance Operations As of and For the
Years Ended December 31, 1996, 1995 and 1994 S-6
</TABLE>
Schedules not listed above have been omitted because they
are not applicable or are not required or the information
required to be set forth therein is included in the
Consolidated Financial Statements or Notes thereto.
16
<PAGE> 17
3. 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.
10.2 * (1) Key Employees' Stock Bonus Plan.
10.2.1 * (1) Excerpt of Board of Directors and Shareholders
Resolution amending Key Employees' Stock Bonus Plan.
10.3 * Purchase Agreement dated October 20, 1986, regarding
the Debentures.
10.4 * Term Loan Agreement dated as of October 27, 1992, with
CoreStates Bank, N.A., as amended to date.
10.5 * Offer Memorandum and related documents with respect to
the Debentures.
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.
10.16 * 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.
17
<PAGE> 18
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.
11 ******* Statement regarding computation of earnings per share.
13 ******* 1996 Annual Report to Shareholders. Except for the
portions expressly incorporated by reference, this
report is not deemed to be filed as part of this Annual
Report on Form 10-K.
21 * List of Subsidiaries of the Registrant.
23 ******* Consent of Coopers & Lybrand L.L.P.
24 * Power of Attorney
99.1 ******* Report of Independent Accountants of Coopers & Lybrand
L.L.P. 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 herewith.
(1) Compensatory Plan or Arrangement, or Management Contract.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1996.
18
<PAGE> 19
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, President,
and Chief Executive Officer
March 21, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following person on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James J. Maguire Chairman of the Board of March 21, 1997
- ------------------------------------ Directors, President and Chief Executive
James J. Maguire Officer (Principal Executive Officer)
/s/ Craig P. Keller Vice President, Secretary March 21, 1997
- ------------------------------------ and Chief Financial Officer
Craig P. Keller (Principal Financial and
Accounting Officer)
/s/ Sean S. Sweeney Senior Vice President, Director March 21, 1997
- ------------------------------------
Sean S. Sweeney
/s/ William J. Henrich, Jr. Director March 21, 1997
- ------------------------------------
William J. Henrich, Jr.
/s/ Paul R. Hertel, Jr. Director March 21, 1997
- ------------------------------------
Paul R. Hertel, Jr.
/s/ Roger L. Larson Director March 21, 1997
- ------------------------------------
Roger L. Larson
/s/ Thomas J. McHugh Director March 21, 1997
- ------------------------------------
Thomas J. McHugh
/s/ Michael J. Morris Director March 21, 1997
- ------------------------------------
Michael J. Morris
Director March 21, 1997
- ------------------------------------
J. Eustace Wolfington
</TABLE>
19
<PAGE> 20
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Schedule I - Summary of Investments - Other than Investments in Related Parties
As of December 31, 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D
Estimated Amount at which
Market shown in the
Type of Investment Cost * Value Balance Sheet
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States Government and Government
Agencies and Authorities $ 20,450 $ 20,557 $ 20,557
States, Municipalities and Political Subdivisions 105,682 108,887 108,887
Public Utilities 349 344 344
All Other Corporate Bonds 9,853 10,069 10,069
Redeemable Preferred Stock 1,423 1,379 1,379
-------- -------- --------
Total Fixed Maturities 137,757 141,236 141,236
-------- -------- --------
Equity Securities:
Common Stocks:
Banks, Trust and Insurance Companies 5,556 7,133 7,133
Industrial, Miscellaneous and all other 14,092 20,209 20,209
-------- -------- --------
Total Equity Securities 19,648 27,342 27,342
-------- -------- --------
Total Investments $157,405 $168,578 $168,578
======== ======== ========
</TABLE>
* Original cost of equity securities; original cost of fixed maturities
adjusted for amortization of premiums and accretion of discounts.
S-1
<PAGE> 21
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Schedule II
Condensed Financial Information of Registrant
(Parent Only)
Balance Sheets
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
As of December 31,
-------------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Investments:
Fixed Maturities Available for Sale at Market $ 30 $ 30
Equity Securities at Market -- 2,006
-------- --------
TOTAL INVESTMENTS 30 2,036
Cash and Cash Equivalents 345 173
Mortgage Loans (a) 1,125 1,125
Equity in and Advances to Unconsolidated Subsidiaries (a) 84,072 64,905
Goodwill less Accumulated Amortization of $1,313 and $1,120 771 964
Other Assets 10 1
-------- --------
TOTAL ASSETS $ 86,353 $ 69,204
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Income Taxes Payable $ 536 $ 581
Deferred Income Taxes -- 157
Other Liabilities 175 150
-------- --------
TOTAL LIABILITIES 711 888
-------- --------
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; 6,039,806 and 5,813,851 Shares Issued and
Outstanding 41,167 39,057
Notes Receivable from Shareholders (924) --
Unrealized Investment Appreciation (Depreciation), Net of
Deferred Income Taxes 7,374 4,608
Retained Earnings 38,025 24,651
-------- --------
TOTAL SHAREHOLDERS' EQUITY 85,642 68,316
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 86,353 $ 69,204
======== ========
</TABLE>
(a)These items have been eliminated in the Company's
Consolidated Financial Statements.
See Notes to Consolidated Financial Statements included in the 1996
Annual Report to Shareholders.
S-2
<PAGE> 22
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Schedule II, Continued
Condensed Financial Information of Registrant
(Parent Only)
Statements of Operations
(In Thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue:
Dividends from Subsidiaries (a) $ -- $ 6,000 $ --
Net Investment Income 11 63 109
Net Realized Investment Gain, (Loss) (b) 672 (10) 3
------- ------- -------
TOTAL REVENUE 683 6,053 112
------- ------- -------
Expenses:
Goodwill Amortization 79 89 98
Other 417 291 168
------- ------- -------
TOTAL EXPENSES 496 380 266
------- ------- -------
Income, (Loss) Before Income Taxes and Equity in Earnings of
Unconsolidated Subsidiaries 187 5,673 (154)
Income Tax Expense (Benefit) 74 (125) (44)
------- ------- -------
Income, (Loss) Before Equity in Earnings of Unconsolidated
Subsidiaries 113 5,798 (110)
Equity in Earnings of Unconsolidated Subsidiaries 13,261 4,032 6,083
------- ------- -------
NET INCOME $13,374 $ 9,830 $ 5,973
======= ======= =======
</TABLE>
(a) This item has been eliminated in the Company's Consolidated Financial
Statements.
(b) $665 and $3 of this amount has been eliminated in the Company's
Consolidated Financial Statements for 1996 and 1994, respectively.
See Notes to Consolidated Financial Statements included in the 1996
Annual Report to Shareholders.
S-3
<PAGE> 23
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Schedule II, Continued
Condensed Financial Information of Registrant
(Parent Only)
Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 13,374 $ 9,830 $ 5,973
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Net Realized Investment (Gain), Loss (672) 10 (3)
Equity in Earnings of Unconsolidated Subsidiaries (13,261) (4,032) (6,083)
Goodwill Amortization 79 89 98
Change in Other Liabilities 25 150 (68)
Change in Other Assets (9) (38) 105
Change in Income Taxes Payable (88) (343) (731)
-------- -------- --------
Net Cash Provided (Used) by Operating Activities (552) 5,666 (709)
-------- -------- --------
Cash Flows From Investing Activities:
Proceeds From Sales of Investments in Equity Securities 2,335 2,139 349
Cost of Fixed Maturities Available for Sale Acquired -- (30) --
Cost of Equity Securities Acquired (119) (509) (221)
Net Transfers (to) From Subsidiaries (a) (2,678) (7,118) 606
-------- -------- --------
Net Cash Provided (Used) by Investing Activities (462) (5,518) 734
-------- -------- --------
Cash Flows From Financing Activities:
Exercise of Employee Stock Options 979 -- --
Collection of Notes Receivable 207 -- --
-------- -------- --------
Net Cash Provided by Financing Activities 1,186 -- --
-------- -------- --------
Net Increase in Cash and Equivalents 172 148 25
Cash and Cash Equivalents at Beginning of Year 173 25 --
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR 345 $ 173 $ 25
======== ======== ========
Cash Dividends Received From Unconsolidated Subsidiaries $ -- $ 6,000 $ --
======== ======== ========
Non-Cash Transactions:
Issuance of Shares Pursuant to Employee Stock Purchase Plan $ 1,131 $ -- $ --
Notes Receivable Issued Pursuant to Employee Stock Purchase Plan $ (1,131) $ -- $ --
</TABLE>
(a) These items have been eliminated in the Company's Consolidated
Financial Statements.
See Notes to Consolidated Financial Statements included in the 1996
Annual Report to Shareholders.
S-4
<PAGE> 24
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Schedule IV - Reinsurance
Earned Premiums
For the Years Ended December 31, 1996, 1995, and 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -----------------------------------------------------------------------------------------------------------------------------------
Ceded to Assumed Percentage of
Gross Other from Other Amount Assumed
Amount Companies Companies Net Amount to Net
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
Property and Casualty Insurance $117,354 $49,770 $4,466 $72,050 6.2%
===================================================================================================================================
1995
Property and Casualty Insurance $ 92,046 $41,319 $7,461 $58,188 12.8%
===================================================================================================================================
1994
Property and Casualty Insurance $ 76,577 $32,572 $8,080 $52,085 15.5%
===================================================================================================================================
</TABLE>
S-5
<PAGE> 25
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Schedule VI - Supplemental Information Concerning Property -
Casualty Insurance Operations
As of and For the Years Ended December 31, 1996, 1995, and 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Reserve for
Deferred Unpaid
Policy Claims and Discount if Net Net
Affiliation with Acquisition Claim any deducted Unearned Earned Investment
Registrant Costs Adjustment in Column C Premiums Premiums Income
Expenses
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Property
- - Casualty Entities
December 31, 1996 $9,033 $96,642 $0 $33,154 $72,050 $7,910
December 31, 1995 $5,157 $77,686 $0 $18,119 $58,188 $6,506
December 31, 1994 $3,911 $59,175 $0 $13,446 $52,085 $4,902
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Claims and Claims Adjustment
Expenses Incurred Related to
Amortization of
deferred policy Paid Claims and
(1) (2) acquisition costs Claim
Affiliation with Current Prior Adjustment Net Written
Registrant Year Year Expenses Premiums
COLUMN A COLUMN H COLUMN I COLUMN J COLUMN K
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Consolidated Property
- - Casualty Entities
December 31, 1996 $41,083 ($965) $22,210 $22,641 $83,994
December 31, 1995 $34,152 ($925) $17,105 $18,576 $62,072
December 31, 1994 $31,120 ($111) $15,541 $16,128 $55,398
</TABLE>
S-6
<PAGE> 1
[Markel Logo]
Evanston Insurance Company Policy No. IC-700654
SHAND MORAHAN PLAZA Prev. No. IC-700549
EVANSTON, ILLINOIS 60201 Prod. No. 24769
DECLARATIONS - INSURANCE COMPANIES PROFESSIONAL AND
DIRECTORS & OFFICERS LIABILITY INDEMNITY INSURANCE
Claims Made and Reported Coverage: This insurance is limited to liability for
only those CLAIMS THAT ARE FIRST MADE AGAINST THE INSURED DURING THE POLICY
PERIOD OR THE OPTIONAL EXTENSION PERIOD, IF PURCHASED, AND REPORTED TO THE
INSURER DURING THE POLICY PERIOD OR THE OPTIONAL EXTENSION PERIOD, IF PURCHASED,
OR WITHIN SIXTY (60) DAYS AFTER THE EXPIRATION OF THE POLICY PERIOD OR OPTIONAL
EXTENSION PERIOD, IF PURCHASED.
THIS POLICY CONTAINS PROVISIONS THAT REDUCE THE LIMITS OF LIABILITY STATED IN
THE POLICY BY THE COSTS OF LEGAL DEFENSE AND PERMIT LEGAL DEFENSE COSTS TO BE
APPLIED AGAINST THE DEDUCTIBLE.
1. Authorized to act on behalf of Insureds in accordance with GENERAL
CONDITIONS 8, Authorization:
NAME OF ENTITY: PHILADELPHIA CONSOLIDATED HOLDING CORPORATION
PRINCIPAL BUSINESS ADDRESS: ONE BALA PLAZA, SUITE 100
BALA CYNWYD, PA 19004
2. POLICY PERIOD: From July 20, 1996 to July 20, 1997
12:01 A.M. Standard Time at the address of the named
entity stated above.
3. INSURED ENTITIES AND ADDRESSES
A. Coverage A Insured Entities
PHILADELPHIA CONSOLIDATED HOLDING CORPORATION
ONE BALA PLAZA, SUITE 100
BALA CYNWYD, PA 19004
B. Coverage B Company Insured Entities:
N/A
C. Coverage C Insured Entities:
1 . Employee Benefit Plans:
N/A
2. Sponsoring Employers:
N/A
Page 1 of 3
A Markel Company
<PAGE> 2
Policy No. IC-700654
<TABLE>
<S> <C>
4. LIMITS OF LIABILITY
A. For Coverage A (Errors and Omissions Liability):
Insurer"s Participation in Loss: 100%
SUBJECT TO: Each Claim Limit: $ 5,000,000
Policy Period Aggregate Limit: $ 5,000,000
B. For Coverage B (Directors & Officers Liability):
Insurer"s Participation in Loss: N/A
SUBJECT TO: Each Claim Limit: N/A
Policy Period Aggregate Limit: N/A
C. For Coverage C (Fiduciary Liability):
Each Claim Limit: N/A
Policy Period Aggregate Limit: N/A
5. DEDUCTIBLES:
A. For Coverage A (Errors and Omissions Liability): Each Claim: $ 250,000
B. For Coverage B (Directors & Officers Liability):
1. Individual Liability Coverage, Section THE COVERAGE
2(a): Each Claim-Each Director or Officer: N/A
but in no event exceeding in the aggregate Each
Claim-All Directors and Officers N/A
2. Company Reimbursement Coverage, Section THE COVERAGE
2(b): Each Claim: N/A
C. For Coverage C (Fiduciary Liability): Each Claim: N/A
6. PREMIUM FOR POLICY PERIOD PAID FOR THE FOLLOWING COVERAGES:
Errors and Omissions
PREMIUM: $ 157,035.00
Surplus Lines Tax 3.00%: $ 4,711.05
TOTAL: $ 161,746.05
</TABLE>
Page 2 of 3
A Markel Company
<PAGE> 3
Policy No. IC-700654
7. OPTIONAL EXTENSION PERIOD:
A. Premium:
50.00% of total annual premium as provided in THE COVERAGE 13
of the policy, to be paid only if the Insured meets the
eligibility requirements and exercises the option. Such
premium shall be deemed fully earned at the commencement of
the Optional Extension Period.
B. Days:
60 days of Optional Extension Period as provided in THE
COVERAGE 13.
8. ENDORSEMENTS ATTACHED AT POLICY INCEPTION:
1. Insured Entities - Coverage A
2. Amendment of Insured - Holding Company
3. Pending and Prior Litigation Exclusion
4. Insurance Agents, Insurance Brokers/Agency Exclusion
5. Amendment of Professional Services
6. Amendment of Coverage
7. Clarification of Coverage
ALL CLAIMS TO BE REPORTED DIRECTLY TO
Shand Morahan & Company, Inc.
Shand Morahan Plaza
Evanston, Illinois 60201
(847) 866-2800
---------------------------------
Authorized Representative
Date Printed: August 27, 1996
Page 3 of 3
A Markel Company
<PAGE> 4
[Markel Logo]
EVANSTON INSURANCE COMPANY
EVANSTON, ILLINOIS
ENDORSEMENT
Named Insured: Policy No.: IC-700654
PHILADELPHIA CONSOLIDATED HOLDING Endorsement No.: 1
CORPORATION Effective Date: July 20, 1996
INSURED ENTITIES - COVERAGE A
It is agreed that Item 3.A. of the Declarations is amended by the addition of
the following:
3. INSURED ENTITIES AND ADDRESSES:
A. Coverage A Insured Entities:
Philadelphia Insurance Companies
Philadelphia Insurance Company
Philadelphia Indemnity Insurance Company
Maguire Insurance Agency
J. Maguire Brokerage
Maguire Insurance Agency Inc. of Texas
All other terms and conditions remain unchanged.
-------------------------
Authorized Representative
<PAGE> 5
EVANSTON INSURANCE COMPANY
[MARKEL LOGO] EVANSTON, ILLINOIS
ENDORSEMENT
Named Insured: Policy No.: IC-700654
PHILADELPHIA CONSOLIDATED HOLDING Endorsement No.: 2
CORPORATION Effective Date : July 20, 1996
AMENDMENT OF INSURED - HOLDING COMPANY
It is agreed that THE INSURED 1. is amended to include the following:
1. The Coverage A Insured, which whenever used in this policy means:
(f) the entity(ies) scheduled below and any director, officer or
employee thereof, solely for liability imposed by reason of
acts, errors and omissions by any entity described in l(a),
l(b), l(c) or l(d) above, in the performance of Professional
Services for which coverage is afforded under THE COVERAGE 1.,
Coverage A, Errors and Omissions Liability and Claims Made and
Reported Clause.
SCHEDULE
Maguire Holding Corporation
All other terms and conditions remain unchanged.
-------------------------
Authorized Representative
<PAGE> 6
EVANSTON INSURANCE COMPANY
[MARKEL LOGO] EVANSTON, ILLINOIS
ENDORSEMENT
Named Insured: Policy No.: IC-700654
PHILADELPHIA CONSOLIDATED HOLDING Endorsement No.: 3
CORPORATION Effective Date: July 20, 1996
PENDING AND PRIOR LITIGATION EXCLUSION
It is understood and agreed that this Policy shall not apply to any Claim
(including derivative or representative actions) made against the Insured:
(i) based upon, arising out of, in consequence of, or in any way
involving any prior and/or pending litigation as of June 1,
1990; or
(ii) any fact, circumstance or situation underlying or alleged in
such litigation.
All other terms and conditions remain unchanged.
-------------------------
Authorized Representative
<PAGE> 7
EVANSTON INSURANCE COMPANY
[MARKEL LOGO] EVANSTON, ILLINOIS
ENDORSEMENT
Named Insured: Policy No.: IC-700654
PHILADELPHIA CONSOLIDATED HOLDING Endorsement No.: 4
CORPORATION Effective Date: July 20, 1996
INSURANCE AGENTS, INSURANCE BROKERS/AGENCY EXCLUSION
It is agreed that THE EXCLUSIONS 4. is amended by the addition of the following:
1. With respect to all Coverages, this policy does not apply to
any Claims or portion thereof made against any Insured:
(k) based upon, arising out of, related to, directly or
indirectly resulting from or in consequence of, or in
any way involving the insolvency, receivership,
bankruptcy, liquidation or financial inability to
pay, of any insurance company in which any Insured
has placed or obtained coverage for a client or
account.
All other terms and conditions remain unchanged.
-------------------------
Authorized Representative
<PAGE> 8
EVANSTON INSURANCE COMPANY
[MARKEL LOGO] EVANSTON, ILLINOIS
ENDORSEMENT
Named Insured: Policy No.: IC-700654
PHILADELPHIA CONSOLIDATED HOLDING Endorsement No.: 5
CORPORATION Effective Date: July 20, 1996
AMENDMENT OF PROFESSIONAL SERVICES
In consideration of the premium charged for this policy it is hereby understood
and agreed that THE COVERAGE 6. Professional Services is amended to include the
following:
policy rescissions, cancellations and credit and investigatory
activities, insurance agency and insurance brokers activities, tracking
services
All other terms and conditions remain unchanged.
-------------------------
Authorized Representative
<PAGE> 9
EVANSTON INSURANCE COMPANY
[MARKEL LOGO] EVANSTON, ILLINOIS
ENDORSEMENT
Named Insured: Policy No.: IC-700654
PHILADELPHIA CONSOLIDATED HOLDING Endorsement No.: 6
CORPORATION Effective Date: July 20, 1996
AMENDMENT OF COVERAGE
It is understood and agreed that this policy will respond regardless of the
presence or absence of reinsurance.
All other terms and conditions remain unchanged.
-------------------------
Authorized Representative
<PAGE> 10
EVANSTON INSURANCE COMPANY
[MARKEL LOGO] EVANSTON, ILLINOIS
ENDORSEMENT
Named Insured: Policy No.: IC-700654
PHILADELPHIA CONSOLIDATED HOLDING Endorsement No.: 7
CORPORATION Effective Date: July 20, 1996
CLARIFICATION OF COVERAGE
As respects any Claim under this policy and losses as defined by this policy, it
is not our intent to subrogate against reinsurers under any treaty or
facultative insurance utilized by Coverage A. Insureds.
All other terms and conditions remain unchanged.
-------------------------
Authorized Representative
<PAGE> 11
[Markel Logo]
[SHAND MORAHAN & COMPANY, INC. letterhead]
Shand Morahan Plaza, Evanston, Illinois 60201
(847) 866-2800 Fax (847) 866-0778
Underwriting Manager
A Markel Company
Submitted by Agency______________________________________
Surplus Lines License No. Address_____________________________________
- ------------------------- City/State_____________ Zip Code___________
RENEWAL APPLICATION FOR INSURANCE COMPANIES PROFESSIONAL AND
DIRECTORS AND OFFICERS LIABILITY INDEMNITY INSURANCE
(CLAIMS MADE AND REPORTED BASIS)
1. This application must be signed and dated, and not completed earlier
than 45 days before proposed effective date.
2. Answer all questions. If a questions is not applicable, state NOT
APPLICABLE. If the answer to any questions is none, state NONE. If
space is insufficient to answer any question fully, attach a separate
sheet.
3. All questions MUST be completed in full with regard to each entity
sought to be insured.
4. Complete ONLY those parts of this application applicable to those
coverages for which the Applicant seeks coverage.
5. If coverage for Fiduciary Liability (Coverage C) is desired, please
request application from the Underwriters for completion.
6. The information disclosed in this application will be held in
confidence by the Underwriting Manager.
(PLEASE TYPE OR PRINT IN INK)
- --------------------------------------------------------------------------------
PART I (GENERAL INFORMATION TO BE COMPLETED BY APPLICANT IN ADDITION TO PARTS
FOR COVERAGES SOUGHT)
- --------------------------------------------------------------------------------
1. Full name of Applicant: Philadelphia Consolidated Holding Corp. and
----------------------------------------------------
Subsidiaries
------------
2. Principal business address: One Bala Plaza Suite 100 Bala Cynwyd PA 19004
-------------------------------------------------
(Street) (City) (State) (Zip Code)
3. State of incorporation or charter formation: Pennsylvania
---------------------------------
4. Nature of business of Applicant: Property & Casualty Insurers with Direct
--------------------------------------------
Sales Force
-----------
5. Applicant has continuously been in
business since: Agency 1962 / P & C Insurer 1986
-----------------------------------------
(Month) (Year)
6. Common Stock:
(a) Total number of shares outstanding: 6,024,657 (as of 6/30/96)
----------------------------------
(b) Total number of shareholders: 99 holders of record; 526 beneficial
---------------------------------------
holders (as of 2/21/96)
-----------------------
(c) Total number of shares directly or beneficially owned by its
directors: 2,220,008
-------------
(d) Total number of shares owned directly or beneficially by officers
who are not directors: 93,885
--------------
(e) Give names and percentage owned by any shareholder(s) holding
directly or beneficially 10% or more of the
common stock (if none, so indicate.): James J. Maguire -- 32.9%
--------------------------------
(f) Is the stock publicly traded? Yes -- NASDAQ
-------------
1
<PAGE> 12
7. Total number of subsidiaries more than 50% owned (including
subsidiaries of subsidiaries): 4 (four)
---------
8. Provide the following information on each subsidiary (including
subsidiaries of subsidiaries): Use separate sheet if necessary. Attach
a copy of the organization chart.
(a) Name of Parent: Philadelphia Consolidated Holding Corp.
----------------------------------------------
(b) Name of Subsidiary: Philadelphia Indemnity Insurance Company,
------------------------------------------
Philadelphia Insurance Company
------------------------------------------
(c) Percentage of ownership: 100%
-------------------------------------
(d) Description of Operations: Property and Casualty Insurance
-----------------------------------
Companies
-----------------------------------
(e) Name of parent organization: ------
----------------------------------
9. The following officer is designated to give/receive notices to/from the
insurer as respects notice of cancellation, payment and return of
premiums and payment of deductibles and other notices as required by
the policy:
- --------------------------------------------------------------------------------
(Name) (Title) (Entity)
10. Proposed effective date:
-----------------------------------------------
PART II (TO BE COMPLETED BY APPLICANT FOR COVERAGE "A" ERRORS AND OMISSIONS
LIABILITY INSURANCE)
1. (a) Amount of Insurance desired:
---------------------------------------------
(b) Deductible desired:
------------------------------------------------------
(Should a policy of insurance ultimately be issued, limits and deductible
in policy will govern coverage.)
<TABLE>
<CAPTION>
Last Full Year Current Year (Estimate)
<S> <C> <C> <C>
2. Total direct written premium for all entities: -------------- -------------
3. Total net written premium for all entities: -------------- -------------
4. Safety engineering and loss control inspections:
</TABLE>
A. Annual number of safety engineering and loss control
inspections performed by applicant:
--------------------------------------------------------------
B. Does the Applicant contract outside safety engineering or loss
control inspection services? [ ] Yes [ ] No.
If yes, what percentage of such inspections are handled by
outside safety engineering and loss control services?
Please attach a copy of standard contract.
-------------
C. Number of safety engineering and loss control personnel
employed:
-----------------------------------------------------
<PAGE> 13
7. Total number of subsidiaries more than 50% owned (including
subsidiaries of subsidiaries):
---------------------------------------
8. Provide the following information on each subsidiary (including
subsidiaries of subsidiaries): Use separate sheet if necessary. Attach
a copy of the organization chart.
(a) Name of Parent: Maguire Insurance Agency
-------------------------------------------------------
(b) Name of Subsidiary: J. Maguire Brokerage
---------------------------------------------------
(c) Percentage of ownership: 100%
---------------------------------------------
(d) Description of Operations: Property and Casualty Insurance Broker
-------------------------------------------
(e) Name of parent organization: Philadelphia Consolidated Holding Corp.
-----------------------------------------
9. The following officer is designated to give/receive notices to/from the
insurer as respects notice of cancellation, payment and return of
premiums and payment of deductibles and other notices as required by
the policy:
-----------------------------------------------------------------------
(Name) (Title) (Entity)
10. Proposed effective date:
---------------------------------------------
- --------------------------------------------------------------------------------
PART II (TO BE COMPLETED BY APPLICANT FOR COVERAGE "A" ERRORS AND OMISSIONS
LIABILITY INSURANCE)
- --------------------------------------------------------------------------------
1. (a) Amount of Insurance desired:
------------------------------------------
(b) Deductible desired:
---------------------------------------------------
(Should a policy of insurance ultimately be issued, limits and
deductible in policy will govern coverage.)
<TABLE>
<CAPTION>
<S> <C> <C>
Last Full Year Current Year (Estimate)
2. Total direct written premium for all entities: --------------- ----------------------
3. Total net written premium for all entities: ---------------- ----------------------
</TABLE>
4. Safety engineering and loss control inspections:
A. Annual number of safety engineering and loss control
inspections performed by applicant:
---------------------------------
B. Does the Applicant contract outside safety engineering or loss
control inspection services? Yes [ ] No [ ].
If yes, what percentage of such inspections are handled by outside
safety engineering and loss control services?
Please attach a copy of standard contract.
-----------------
C. Number of safety engineering and loss control personnel employed:
-------------------
<PAGE> 14
7. Total number of subsidiaries more than 50% owned (including
subsidiaries of subsidiaries):
----------------------------------------
8. Provide the following information on each subsidiary (including
subsidiaries of subsidiaries): Use separate sheet if necessary. Attach
a copy of the organization chart.
(a) Name of Parent:
---------------------------------------------------
(b) Name of Subsidiary:
------------------------------------------------
(c) Percentage of ownership:
-------------------------------------------
(d) Description of Operations:
-----------------------------------------
(e) Name of parent organization:
-----------------------------------------
9. The following officer is designated to give/receive notices to/from the
insurer as respects notice of cancellation, payment and return of
premiums and payment of deductibles and other notices as required by
the policy:
William J. Benecke Vice President Claims
-----------------------------------------------------------------------
(Name) (Title) (Entity)
10. Proposed effective date: July 20, 1996
-----------------------------------------------
- --------------------------------------------------------------------------------
PART II (TO BE COMPLETED BY APPLICANT FOR COVERAGE "A" ERRORS AND
OMISSIONS LIABILITY INSURANCE)
- --------------------------------------------------------------------------------
1. (a) Amount of Insurance desired: 3,000,000 5,000,000 option
--------------------------------------
(b) Deductible desired: 250,000 500,000 option
-----------------------------------------------
(Should a policy of insurance ultimately be issued, limits and deductible in
policy will govern coverage.)
<TABLE>
<CAPTION>
<S> <C> <C>
Last Full Year Current Year (Estimate)
2. Total direct written premium for all entities: 97,518,561 133,188,000
-------------- ----------------
3. Total net written premium for all entities: 62,071,745 85,567,000
-------------- ----------------
</TABLE>
4. Safety engineering and loss control inspections:
A. Annual number of safety engineering and loss control
inspections performed by applicant:
None
--------------------------------------------------------------------
B. Does the Applicant contract outside safety engineering or loss
control inspection services? Yes [ ] No [ ].
If yes, what percentage of such inspections are handled by outside
safety engineering and loss control services?
100% Please attach a copy of standard contract. No Contract
-----------
C. Number of safety engineering and loss control personnel employed:
None
----------------
2
<PAGE> 15
5. Claim Services:
Approximate total numbers of claims handled annually by line:
<TABLE>
<CAPTION>
Current Year
Last Full Year Annualized Next Year (Est.)
-------------- ---------- ----------------
<S> <C> <C> <C>
1995 1996 1997
ALBI 1782 2020 2222
---- ---- ----
ALPD 1768 1802 1982
---- ---- ----
ALPHD 995 1000 1128
---- ---- ----
GIL 606 620 744
---- ---- ----
WC 0 0 0
---- ---- ----
Misc. Casualty -125 138 165
---- ---- ----
Fire & Allied Incl. Inland Marine 593 650 715
---- ---- ----
Life 0 0 0
---- ---- ----
A&H 0 0 0
---- ---- ----
Other (specify) 0 0 0
---- ---- ----
Total 5863 6230 6956
---- ---- ----
</TABLE>
B. Please provide percentage of claims handled in home office: 100% ; in field
------
offices: 0 .
---
C. Total number of claims handling personnel in home office: 28 ; in field
---
offices: 0 .
---
D. Does the Applicant contract outside adjustment services? [X] Yes [ ] No.
If yes, what percentage of claims are handled by outside adjustment
services? N/A Please attach copy of standard contract.
--------
WE USE OUTSIDE ADJUSTMENT SERVICES FOR INVESTIGATIVE PURPOSES ONLY AS
NEEDED. WE HAVE NO CONTRACT WITH ANY ONE FIRM.
6. Policies in force
Approximate total number of policies in force by line:
<TABLE>
<CAPTION>
Current
Year
Last Full Year Annualized Next Year (Est.)
1995 1996 1997 (30% growth)
---- ---- ----
<S> <C> <C> <C>
Fire & Allied Lines Including Inland Marine
---- ---- ----
Commercial Multi-Peril 2781 2845 3699
---- ---- ----
Medical Malpractice
---- ---- ----
Workers Compensation
---- ---- ----
General Liability
---- ---- ----
Private Passenger Auto
---- ---- ----
Commercial Auto 1312 860 1100
---- ---- ----
Fidelity/Surety
---- ---- ----
Other (Describe) 3906 4408 5731
---- ---- ----
Umbrella
Professional Liability
</TABLE>
3
<PAGE> 16
Policies in force (cont'd)
<TABLE>
<CAPTION>
Current Year
Last Full Year Annualized Next Year (Est.)
-------------- ---------- ----------------
<S> <C> <C> <C>
1995 1996 1997
-------------- ---------- -----------
Life
i. Group
-------------- ----------- -----------
ii. Individual
-------------- ----------- -----------
iii. Annuities
-------------- ----------- -----------
Group Accident & Health
-------------- ----------- -----------
All other A&H
-------------- ----------- -----------
TOTAL 7,999 8,113 10, 530
-------------- ----------- -----------
</TABLE>
7. Professional services performed:
<TABLE>
<CAPTION>
Yes No Annual Revenue
<S> <C> <C> <C>
A. Agency & brokerage operation [X] [ ]
------------------
B. Insurance consulting [ ] [X]
------------------
C. Captive management [ ] [X]
------------------
D Loss control, safety engineering for non-policyholders [ ] [X]
------------------
E. Claims handling for non-policyholders [ ] [X]
------------------
F. Rehabilitation services for non-policyholders [ ] [X]
------------------
G. Insurance pool management [ ] [X]
------------------
H Premium financing [ ] [X]
------------------
I Data processing services [ ] [X]
------------------
J Financial planning [ ] [X]
------------------
K. Investment advisory activities [ ] [X]
------------------
L. Pension consulting [ ] [X]
------------------
M. Third party benefit administration [ ] [X]
------------------
N Real estate syndication [ ] [X]
------------------
0. Property management [ ] [X]
------------------
P. Stockbroker/broker dealer activities [ ] [X]
------------------
Q. Title agent [ ] [X]
------------------
R. Escrow agent [ ] [X]
------------------
</TABLE>
S. Please describe any other services performed;
-----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4
<PAGE> 17
8. State the following regarding your facultative or treaty reinsurance
contracts with respect to coverage of punitive and exemplary damages
with regard to:
(a) The Applicant:
(i) Silent [ ] Yes [X] No
(ii) Specifically included [X] Yes [ ] No
(iii) Specifically excluded [ ] Yes [X] No
(b) The Applicant"s Directors
(i) Silent [X] Yes [ ] No
(ii) Specifically included [ ] Yes [ ] No
(iii) Specifically excluded [ ] Yes [ ] No
9. Claims against Applicant
A. Are there established procedures for handling claims or suits against
the Applicant for errors and omissions, extra contractual liability or
punitive damages? [X] Yes [ ] No. If so, please describe. (Attach a
separate sheet if necessary.) See attached. All department managers are
-----------------------------------------
instructed to report any claim, threatened or actual lawsuit naming the
-----------------------------------------------------------------------
company to the Vice President of Claims.
---------------------------------------
1. When were such procedures established? 1992
-----------------
2. Person responsible for monitoring such claims or suits:
Name William J. Benecke
------------------------
Title Vice President, Claims
------------------------
Department Claims
------------------------
3. What are the procedures for branch or field offices to report such
claims or suits? (Attach a separate sheet if necessary.)
Same
------------------------------------------------------------------
------------------------------------------------------------------
------------------------------------------------------------------
B. Is a written company directive for such procedures in effect? [X] Yes
[ ] No. If so, please attach a copy.
C. Have all claims (as defined by the policy) known to the applicant been
reported to Shand Morahan & Company, Inc.? [X] Yes [ ] No. If no,
please provide details.
10. The undersigned authorized agent of the person(s) and entity(ies)
proposed for this insurance for the purpose of this Renewal Application
declares that to the best of its/his knowledge the statements herein
are true; and it is understood and agreed that this Renewal Application
is a supplement to the application (including any supplement[s]
thereto) dated June 21, 1993, and all prior Renewal Application(s)
(including any supplements thereto) together with this Renewal
Application Constitutes the complete application which shall be the
basis of the policy and which will be attached to and become a part of
the policy, if issued.
5
<PAGE> 18
11. Attached and made a part of this application by reference is one copy
of the Applicant's most recent Annual Report and Statement of Condition
to Stockholders.
Shand Morahan & Company, Inc., underwriting manager for the insurer, is hereby
authorized to make any investigation and inquiry in connection with this
application as it deems necessary.
The undersigned hereby authorizes the release of claim information from any
prior insurer to Shand Morahan & Company, Inc., underwriting manager for the
insurer.
PLEASE REVIEW THE POLICY CAREFULLY. Except to such extent as may be otherwise in
the policy, the coverage for which application is being made is limited to
liability for only THOSE CLAIMS THAT ARE FIRST MADE AGAINST THE INSURED DURING
THE POLICY PERIOD AND REPORTED TO THE INSURER DURING THE POLICY PERIOD OR WITHIN
60 DAYS AFTER THE EXPIRATION OF THE POLICY PERIOD.
Signature of Applicant*
James J. Maguire
----------------------------------------------------
Must be Signed by Chairman of the Board or President
(within 45 days of the proposed effective date)
Title: Chairman CEO
---------------------------------------------
Affiliation: ---
---------------------------------------
Date: July 12, 1996
---------------------------------------------
*SIGNING THIS FORM DOES NOT BIND THE APPLICANT OR THE INSURER OR THE
UNDERWRITING MANAGER TO COMPLETE THE INSURANCE. Application MUST be currently
signed and dated to be considered for quotation.
6
<PAGE> 19
PART III (To Be Completed By Applicant For COVERAGE "B" DIRECTORS AND OFFICERS
LIABILITY INDEMNITY INSURANCE
1 . (a) Amount of Insurance desired:
------------------------------------------
(b) Deductible desired:
---------------------------------------------------
(Should a policy of insurance ultimately be issued, limits and
deductible in policy will govern coverage.)
2. Unless such information is contained in the latest Annual Report,
please submit a list of:
(a) Names, dates of election or appointment, and affiliations of
all directors of the Applicant;
(b) Affiliations of all directors of the Applicant in which said
directors directly or indirectly have a 10% or more ownership
interest;
(c) Names, dates of election or appointment, and official titles
of all officers of the Applicant;
(d) Retirement Age.
3. Is the Applicant presently involved in, or is it presently considering
or contemplating any merger, consolidation, acquisition, tender offer
or divestment or sale of its stock in excess of 10% of the total stock
outstanding? [ ] Yes [ ] No. If yes, provide details.
----------------------------------------------------------------------
----------------------------------------------------------------------
4. Has the Applicant been involved in any merger, consolidation,
acquisition, tender offer, or divestment or sale of its stock in excess
of 10% of the total stock outstanding within the last five years? [ ]
Yes [ ] No. If yes, provide details.
----------------------------------------------------------------------
----------------------------------------------------------------------
5. Has the Applicant ever received a Cease and Desist Order from any
supervisory authority? [ ] Yes [ ] No. If yes, give details:
----------------------------------------------------------------------
----------------------------------------------------------------------
Attach a copy of your latest examination report as performed by State
Insurance Dept(s).
6. Has any director or officer in the past 5 years been charged or
convicted of any criminal act, or is any director or officer presently
the subject of a pending criminal proceeding? [ ] Yes [ ] No. If yes,
please provide details.
----------------------------------------------------------------------
----------------------------------------------------------------------
7. Has the Applicant during the last five years made any claim in excess
of $10,000 under its blanket bond and/or excess fidelity policy? [ ]
Yes [ ] No. If so, provide details.
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
----------------------------------------------------------------------
7
<PAGE> 20
8. Have there been any changes in senior management (Board Chairman,
President, Executive Officers or the like) in the last three years? [ ]
Yes [ ] No. If so, please provide details._____________________________
_______________________________________________________________________
9. No fact, circumstance or situation indicating the probability of a
claim or action against which indemnification would be afforded by the
proposed insurance is now known by any person(s) or entity(ies)
proposed for this insurance other than that which is disclosed in this
application. It is agreed by all concerned that if there be knowledge
of any fact, circumstance, or situation, any claim subsequently
emanating therefrom shall be excluded from coverage under the proposed
insurance.
10. The undersigned authorized agent of the person(s) and entity(ies)
proposed for this insurance for the purpose of this Renewal Application
declares that to the best of its/his knowledge the statements herein
are true; and it is understood and agreed that this Renewal Application
is a supplement to the application (including any supplement[s]
understood thereto) dated___________________, 19__, and all prior
Renewal Application(s) (including any supplement(s) thereto) together
with this Renewal Application constitutes the complete application
which shall be the basis of the policy and which will be attached to
and become a part of the policy, if issued.
11. Attached and made a part of this application by reference is one of
each of the following: Applicant's most recent Annual Report and
Statement of Condition to Stockholders or Policyholders, certified
provisions of the Charter or By-laws covering indemnification of
directors and officers, and Notice to Stockholders or Policyholders,
and Proxy Statement for either the last or the next annual meeting, and
latest annual and most recent periodic report(s) filed with the
Securities and Exchange Commission, if any.
Shand Morahan & Company, Inc., underwriting manager for the insurer, is hereby
authorized to make any investigation and inquiry in connection with the
application as it deems necessary.
The undersigned hereby authorizes the release of claim information from any
prior insurer to Shand Morahan & Company, Inc., underwriting manager for the
insurer.
PLEASE REVIEW THE POLICY CAREFULLY. Except to such extent as may be otherwise in
the policy, the coverage for which application is being made is limited to
liability for only THOSE CLAIMS THAT ARE FIRST MADE AGAINST THE INSURED DURING
THE POLICY PERIOD AND REPORTED TO THE INSURER DURING THE POLICY PERIOD OR WITHIN
60 DAYS AFTER THE EXPIRATION OF THE POLICY PERIOD.
Signature of Applicant*
____________________________________________________
Must be Signed by Chairman of the Board or President
(within 45 days of the proposed effective date)
Title:___________________________
Affiliation:_____________________
Date:____________________________
*SIGNING THIS FORM DOES NOT BIND THE APPLICANT OR THE INSURER OR THE
UNDERWRITING MANAGER TO COMPLETE THE INSURANCE. Application MUST be currently
signed and dated to be considered for quotation.
8
<PAGE> 21
PHILADELPHIA INSURANCE COMPANIES
LITIGATION PROCEDURES
When lawsuits are received in the Claims Department of the Philadelphia
Insurance Companies, the following should occur:
1. A Claims Assistant should immediately locate the appropriate claim
file.
2. If the Claim Assistant cannot locate the appropriate file, the lawsuit
should immediately be given to a Claims Supervisor.
3. If the file can be located, the lawsuit should be attached to the file
and given to a Claims Supervisor.
4. The Claims Supervisor will immediately review the lawsuit and provide
written instructions (recommendations) to the Claims Examiner.
5. The Claims Supervisor will immediately tender the file, suit, and
recommendations to the Claims Examiner. A claims conference between the
Supervisor and Examiner, at a minimum, is recommended. Where more
complex issues or large demands are involved, a conference with the
Claims Manager is required.
6. Whenever a lawsuit is served upon the organization, and an entity of
the organization is named as a defendant, the suit and file must be
brought to the Manager's immediate attention. No exceptions!
7. No Claims Examiner has the authority to pursue appearance and answer
extensions without having first discussed the lawsuit with a Claims
Supervisor or Manager. (Many jurisdictions are going to fast track suit
processing. In some of these jurisdictions, a lengthy extension works
to the benefit of the Plaintiff because it substantially reduces our
discovery time frame. When an extension is obtained, claim files should
be put on a tight diary period by both the Claims Examiner and
Supervisor.)
8. No Claims Examiner has the authority to assign Defense Counsel until
the lawsuit is reviewed by a Claims Supervisor. (Should an examiner not
receive written handling recommendations within a timely manner, (24 to
48 hours) immediate notification to the Claims Manager is required.)
9. It is recommended a claims Supervisor offer the Claims Examiner an
opportunity to provide his/her handling recommendations before written
instructions/recommendations are provided by the Claims Supervisor.
This activity promotes learning and growth, but in no way should it
affect the timely processing of a lawsuit.
10. The Claims Manager (Claims Supervisors in his/her absence) is the only
individual with authority to assign a new defense firm to represent the
interests of the Philadelphia Insurance Companies or its insured.
(Control of this manner is handled by requiring the "New Lawfirm Cover
Letter" be signed by the Claims Manager. It is imperative management
have an opportunity to evaluate perspective lawfirms before they become
involved in litigation for our organization.)
11. The appropriate Defense and Billing Guidelines should be distributed to
all newly selected lawfirms.
12. The appropriate Defense Budget and Plan forms should be attached to all
defense assignment letters.
<PAGE> 22
Phone: (215) 925-7656
Fax: (215) 923-0342
PAUL HERTEL & COMPANY
INCORPORATED
INSURANCE
243 CHESTNUT STREET
PHILADELPHIA, PA 19106-1208
COVER NOTE
NO.: Policy IC-700654
DATE: July 22, 1996
THIS IS TO STATE THAT INSURANCE HAS BEEN ARRANGED AS FOLLOWS:
INSURED: Philadelphia Consolidated Holding Corporation
TERM: July 20, 1996 to July 20, 1997
COVERAGE: Insurance Companies Professional Liability Insurance
LIMITS OF LIABILITY: $5,000,000 Each Claim/Aggregate
DEDUCTIBLE: $250,000 Each Claim
CARRIER: Evanston Insurance Company
PREMIUM: $157,035.00 Annually
/s/ Paul R. Hertel, Jr.
---------------------------
(Authorized Representative)
Errors & Omissions Excepted
PREMIUM PAYABLE ON PRESENTATION
<PAGE> 23
SHAND MORAHAN & COMPANY, INC.
INSURANCE COMPANIES PROFESSIONAL AND
DIRECTORS & OFFICERS LIABILITY INDEMNITY
INSURANCE POLICY
Underwriting Manager: Shand, Morahan & Company, Inc., Shand Morahan Plaza,
Evanston, Illinois 60201
[Logo]
Insurer:
[MARKEL LOGO] EVANSTON INSURANCE COMPANY
(A stock insurance company, herein called the Insurer, which except in Illinois
is a non-admitted insurer, writing pursuant to the surplus lines laws and not
under the jurisdiction of the Insurance Commissioner.) Shand Morahan Plaza
Evanston, Illinois 60201
<PAGE> 24
CONDITIONS PRECEDENT
As conditions precedent to the availability of any coverage under this policy:
with respect to Coverages A, B, and C, coverage shall be afforded for only those
Coverages listed in Item 6. of the Declarations; the payment of the premium must
be made when due; and the application attached hereto and all information in
whatever form communicated by the Insured to the Insurer must be correct to the
best of the Insured's knowledge, Subject to this policy's Declarations and all
the terms of this insurance, the Insurer and Insured agree as follows:
INTEGRATION OF DOCUMENT
All the provisions of this policy applicable to those Coverages listed in Item
6. of the Declarations are intended to be read together as one integrated
document. No applicable provision nor any part thereof is intended to be
separable from the balance of the applicable policy provisions. The meaning of
each applicable provision of this policy is created by what is written in such
provision and by what is written in the balance of the applicable policy
provisions, and the Insurer issues this policy to the Insured in contemplation
of the foregoing method of giving meaning to the policy.
If any applicable provision of this policy is held to be void by a court of
competent jurisdiction, then the balance of the applicable provisions of this
policy shall still be interpreted in accordance with the preceding paragraph.
USE OF SINGULAR AND PLURAL
In this policy, the use of a defined term in the singular shall be deemed a
proper use even though such term may be referring to more than one of what it
defines. The necessary grammatical changes required to make the defined terms of
this policy apply in the plural sense when such terms are used singularly shall
in all instances be assumed as though in each case fully expressed.
THE INSURED
The unqualified word "Insured," whenever used in this policy, means:
1. The Coverage A Insured, which whenever used in this policy means:
(a) any entity named in Item 3.A. of the Declarations;
(b) any insurance entity which is created subsequent to the
inception date of this policy by any entity named in Item 3.A.
of the Declarations and which is more than fifty (50) percent
owned by any entity named in Item 3.A. of the Declarations,
PROVIDED:
(i) written notice, together with a completed application
and pro forma financial statement for such newly
created entity, shall be given to the Insurer within
sixty (60) days of the creation of such entity; and
(ii) premium adjustment and coverage revision shall be
effected as may be required by the Insurer;
(c) any person who was or now is a director and/or officer of any
entity described in Item 1(a) or 1(b) hereinabove, solely
while acting within the scope of his duties as director and/or
officer of any entity described in Item 1(a) or 1(b)
hereinabove;
(d) any person who was or now is an employee of any entity
described in Item 1(a) or 1(b) hereinabove solely while
acting within the scope of his duties as employee of any
entity described in Item 1(a) or 1(b) hereinabove;
(e) any estate, heir, legal representative or assign of any person
described in Item 1(c) or 1(d) hereinabove in the event of
such person's death, incapacity or bankruptcy but only for
such person's liability as is otherwise covered herein.
2. The Coverage B Company Insured, which whenever used in this policy
means:
(a) any entity named in Item 3.B. of the Declarations;
(b) any entity which is created subsequent to the inception date
of this policy by any entity named in Item 3.B. of the
Declarations and which is more than fifty (50) percent owned
by any entity named in Item 3.B. of the Declarations,
PROVIDED:
(i) written notice, together with a completed application
and pro forma financial statement for such newly
created entity, shall be given to the Insurer within
sixty (60) days of the creation of such entity; and
(ii) premium adjustment and coverage revision shall be
effected as may be required by the Insurer.
3. The Coverage B Individual Insured, which whenever used in this policy
means:
(a) any person who was or now is a director and/or officer of the
Coverage B Company Insured;
(b) any estate, heir, legal representative or assign of any person
described in Item 3(a) hereinabove in the event of such
person's death, incapacity or bankruptcy but only for such
person's liability as is otherwise covered herein.
1
<PAGE> 25
4. The Coverage C Insured, which whenever used in this policy means:
(a) any Employee Benefit Plan named in Item 3.C.1. of the
Declarations;
(b) any sponsoring employer named in Item 3.C.2. of the
Declarations;
(c) any person who was or now is a director and/or officer, or
employee of any entity described in Item 4(b) hereinabove, but
only with respect to any such person's acts as a fiduciary of
any Coverage C Insured as described in Item 4(a) hereinabove;
(d) any estate, heir, legal representative or assign of any person
described in Item 4(c) hereinabove in the event of such
person's death, incapacity or bankruptcy but only for such
person's liability as is otherwise covered herein.
THE COVERAGE
1. COVERAGE A, ERRORS AND OMISSIONS LIABILITY AND CLAIMS MADE AND REPORTED
CLAUSE: The Insurer agrees to indemnify the Coverage A Insured for the amount of
Loss which such Coverage A Insured shall have sustained resulting from any Claim
which alleges any act, error or omission by or on behalf of the Coverage A
Insured in the performance of Professional Services and which is FIRST MADE
AGAINST THE COVERAGE A INSURED DURING THE POLICY PERIOD OR THE OPTIONAL
EXTENSION PERIOD, IF PURCHASED, AND REPORTED TO THE INSURER DURING THE POLICY
PERIOD OR THE OPTIONAL EXTENSION PERIOD, IF PURCHASED, OR WITHIN SIXTY (60) DAYS
AFTER THE EXPIRATION OF THE POLICY PERIOD OR OPTIONAL EXTENSION PERIOD, IF
PURCHASED.
2. COVERAGE B, DIRECTORS' AND OFFICERS' LIABILITY AND CLAIMS MADE AND REPORTED
CLAUSE:
(a) Individual Liability Coverage: The Insurer agrees to indemnify
the Coverage B Individual Insureds for the amount of Loss,
except for the amount of such Loss which the Coverage B
Company Insured shall indemnify the Coverage 6 Individual
Insureds, which such Coverage B Individual Insureds shall have
sustained resulting from any Claim which alleges any act,
error, omission, misstatement, misleading statement, or
neglect or breach of duty by the Coverage B Individual
Insureds solely in their capacities as directors and/or
officers of the Coverage B Company Insured and which is FIRST
MADE AGAINST THE COVERAGE B INDIVIDUAL INSUREDS DURING THE
POLICY PERIOD OR THE OPTIONAL EXTENSION PERIOD, IF PURCHASED,
AND REPORTED TO THE INSURER DURING THE POLICY PERIOD OR THE
OPTIONAL EXTENSION PERIOD, IF PURCHASED, OR WITHIN SIXTY (60)
DAYS AFTER THE EXPIRATION OF THE POLICY PERIOD OR OPTIONAL
EXTENSION PERIOD, IF PURCHASED.
(b) Company Reimbursement Coverage: The Insurer agrees to
indemnify the Coverage B Company Insured for the amount of
Loss for which the Coverage B Company Insured has lawfully
indemnified or was obligated by law to indemnify the Coverage
B Individual Insureds resulting from any Claim which alleges
any act, error, omission, misstatement, misleading statement,
or neglect or breach of duty by the Coverage B Individual
Insureds solely in their capacities as directors and/or
officers of the Coverage B Company Insured and which is FIRST
MADE AGAINST THE COVERAGE B INDIVIDUAL INSUREDS DURING THE
POLICY PERIOD OR THE OPTIONAL EXTENSION PERIOD, IF PURCHASED,
AND REPORTED TO THE INSURER DURING THE POLICY PERIOD OR THE
OPTIONAL EXTENSION PERIOD, IF PURCHASED, OR WITHIN SIXTY (60)
DAYS AFTER THE EXPIRATION OF THE POLICY PERIOD OR OPTIONAL
EXTENSION PERIOD, IF PURCHASED.
3. COVERAGE C, FIDUCIARY LIABILITY AND CLAIMS MADE AND REPORTED CLAUSE: The
Insurer agrees to indemnify the Coverage C Insured for the amount of Loss which
such Coverage C Insured shall have sustained resulting from any Claim which
alleges any breach of responsibility, obligation or duty imposed upon the
Coverage C Insured in connection with the Employee Benefit Plan: (a) under the
Employee Retirement Income Security Act of 1974 (including amendments thereto
and regulations promulgated thereunder); or (b) under statutory or common law of
any state, municipality or any other governmental subdivision, or possession or
territory of the United States of America imposing or imputing comparable
responsibilities, obligations or duties as those imposed under the Employee
Retirement Income Security Act of 1974 (including amendments thereto and
regulations promulgated thereunder) and which is FIRST MADE AGAINST THE COVERAGE
C INSURED DURING THE POLICY PERIOD OR THE OPTIONAL EXTENSION PERIOD, IF
PURCHASED, AND REPORTED TO THE INSURER DURING THE POLICY PERIOD OR THE OPTIONAL
EXTENSION PERIOD, IF PURCHASED, OR WITHIN SIXTY (60) DAYS AFTER THE EXPIRATION
OF THE POLICY PERIOD OR OPTIONAL EXTENSION PERIOD, IF PURCHASED.
4. CLAIM (a) means, whenever used in this policy, any adjudicatory proceeding
commenced against the Insured seeking money damages in which the Insured may be
subjected to a binding adjudication of liability for such damages; and (b) is
considered first made under the applicable Coverage when the corresponding
Insured first receives notice of the Claim from a claimant, his legal
representative or agent.
5. EMPLOYEE BENEFIT PLAN means, whenever used in this policy, any pension,
profit sharing, health and welfare or other employee benefit plan or trust
listed in Item 3.C.1. of the Declarations and established for the sole benefit
of the directors, officers and/or employees of any entity named in Item 3.C.2.
of the Declarations.
Employee Benefit Plan shall not mean or include any multi-employer plan or
trust.
6. PROFESSIONAL SERVICES means, whenever used in this policy, claims handling
and adjusting, safety inspections, loss control, safety engineering services,
premium financing operations, insurance consulting, actuarial consulting, risk
management, insurance pool management, personal injury rehabilitation
operations, and subrogation and salvage operations.
7. LOSS means, whenever used in this policy, compensatory damages, punitive
damages except as otherwise provided herein, settlements, Claim Expenses
Incurred by the Insured, and Claim Expenses Incurred by the Insurer, provided
always that Loss shall not include: (a) matters which are uninsurable under the
law pursuant to which this policy shall be construed; (b) under Coverages B and
C, punitive damages and any multiplication, including trebling, of damages; (c)
benefits paid or payable to a participant of or beneficiary of the Employee
Benefit Plan if benefits are or may lawfully be paid by the Employee Benefit
Plan; (d) contributions paid or payable to the Employee Benefit Plan pursuant to
any obligation of the Insured referred to in THE INSURED 4(b) to fund the
Employee Benefit Plan; (e) fines, penalties imposed by law, or taxes; (f) any
obligation assumed by the Insured as an insurer or reinsurer under any policy or
contract or treaty of insurance, reinsurance, suretyship, annuity, or endowment;
and (g) the return or payment of premium or commission monies.
2
<PAGE> 26
8. CLAIM EXPENSES INCURRED BY THE INSURED means, whenever used in this policy,
reasonable amounts paid by the Insured in the defense of that portion of any
Claim for which coverage is afforded under this policy, including costs of
investigation, court costs, costs of attachment and similar bonds and costs of
appeals. Provided always that Claim Expenses Incurred by the Insured does not
include (a) salary charges of employees or officials of the entities referred to
in THE INSURED, or (b) salary or administration or overhead charges, or charges
of any kind or character whatsoever attributable to any in-house counsel or
captive out of house counsel for the entities referred to in THE INSURED.
9. CLAIM EXPENSES INCURRED BY THE INSURER (IF THE INSURER EXERCISES ITS OPTION
TO DEFEND AS SET FORTH IN THE COVERAGE 11 OF THIS POLICY) means, whenever used
in this policy: (a) fees charged by any lawyer designated by the Insurer; (b)
all other fees and expenses resulting from the investigation, adjustment,
defense and appeal of a Claim and incurred by the Insurer; and (c) premiums on
appeal bonds and premiums on bonds to release attachments in any Claim for an
amount not in excess of the applicable limit of liability of this policy, but
the Insurer shall have no obligation to apply for or furnish any such bonds;
provided always that Claim Expenses Incurred by the Insurer shall not include
salary charges of regular employees or officials of the Insurer or any
supervisory counsel retained by the Insurer.
10. POLICY PERIOD means, whenever used in this policy, the period from the
inception date of this policy to the policy expiration date as set forth in the
Declarations, or its earlier termination date, if any.
11. OPTION TO DEFEND: With respect to Coverages A, B, and C, it shall be the
Insured's duty to defend Claims made against them, provided however that, the
Insurer shall have the option but not the duty to defend Claims made against the
Insured for which insurance is afforded by this policy. If the Insurer exercises
its Option to Defend, the Insurer shall not be obligated to defend or continue
to defend any Claim made against the Insured after the applicable limit of the
Insurer's liability has been exhausted by payment of Loss.
12. DISCOVERY CLAUSE: If prior to the effective date of cancellation or
non-renewal of this policy the Insured first becomes aware of a specific act,
error, omission, misstatement, misleading statement, neglect or breach of duty,
breach of responsibility, obligation or duty which is reasonably expected to
result in a Claim which falls within the scope of coverage of this policy, then
the Insured may provide written notice to the Insurer containing the information
listed below. If such written notice is received by the Insurer prior to the
effective date of cancellation or non-renewal of this policy, then any Claim
subsequently made against the Insured arising out of such conduct shall be
deemed for the purpose of this insurance to have been made on the date on which
such written notice is received by the Insurer. The Insured shall cooperate
fully with the Insurer, and any investigation conducted by the Insurer or its
representatives shall be subject to the terms set forth in this policy as
applicable to a Claim.
It is a condition precedent to the coverage afforded by this Discovery Clause
that written notice be given to the Insurer containing the following
information:
(a) the specific act, error, omission, misstatement, misleading
statement, neglect or breach of duty, breach of
responsibility, obligation or duty;
(b) the date(s) of such conduct;
(c) the injury or damage which has or may result from such
conduct;
(d) the identity(ies) of the Insured(s) who may be the subject of
the Claim;
(e) the identity(ies) of any potential claimant(s);
(f) the anticipated location(s) of any such Claim; and
(g) the circumstances by which the Insured first became aware of
the potential Claim.
13. OPTIONAL EXTENSION PERIOD: If the Insurer cancels or refuses to renew this
policy, for reasons other than non-payment of premium and/or deductible amount
or non-compliance with the terms and conditions of this policy, then the entity
named in Item 1. of the Declarations shall have an option to purchase an
extension of the coverage which is granted by this policy on the day immediately
prior to the commencement of such extension. Upon payment of an additional
premium calculated at that percentage shown in Item 7.A. of the Declarations of
the total annual premium for this policy, the coverage granted by this policy
shall apply to any Claim first made against the Insured during the number of
days as stated in Item 7.B. of the Declarations following immediately upon the
effective date of such cancellation or non-renewal. Any such Claim must be
reported to the Insurer during the period of days as stated in Item 7.B. of the
Declarations or within sixty (60) days after the expiration of such period, AND
any such Claim must arise out of an act, error, omission, misstatement,
misleading statement, neglect or breach of duty, breach of responsibility,
obligation or duty committed before the effective date of such cancellation or
non-renewal and otherwise covered by this policy. This period of days as stated
in Item 7.B. of the Declarations and as described in this paragraph shall be
referred to as the "Optional Extension Period." If, however, this insurance is
succeeded within 30 days of the cancellation or expiration date by similar
CLAIMS MADE insurance coverage for which the prior acts provision has a
retroactive date which is the same as or earlier than that provided under this
policy, the succeeding insurance shall be deemed to be a renewal hereof, and in
consequence, the entity named in Item 1. of the Declarations shall have no right
to purchase an Optional Extension Period.
The quotation of a different premium, deductible(s), limit(s) of liability
and/or renewal terms for this policy or the refusal of the Insurer to offer
terms to effect a premium adjustment and/or coverage revision applicable to any
newly created entity pursuant to THE INSURED 1(b) or 2(b) for this policy does
not constitute a cancellation or refusal to renew for the purposes of this
provision.
As a condition precedent to the right to purchase the Optional Extension Period,
the full premium for this policy and any deductibles that are due must have been
paid when they became due.
The right to purchase the Optional Extension Period shall terminate unless
written notice is given to the Insurer within thirty (30) days after the
effective date of cancellation, or, in the event of a refusal to renew, within
thirty (30) days after the Policy Period ends, together with full payment of the
premium for the Optional Extension Period. If such notice and premium payment
are not so given to the Insurer, the entity named in Item 1. of the Declarations
shall not at a later date be able to exercise the right to purchase the Optional
Extension Period.
In the event of the purchase of the Optional Extension Period, the entire
premium therefor shall be deemed fully earned at its commencement and in the
event the Optional Extension Period is terminated before its term for any
reason, the Insurer shall not be liable to return any portion of the premium
paid for the Optional Extension Period.
The fact that this policy may be extended by virtue of the exercise of the
Optional Extension Period shall not in any way increase the applicable limits of
liability set forth in the Declarations and described in the section LIMITS OF
LIABILITY.
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<PAGE> 27
14. WITH RESPECT TO COVERAGES A, B, AND C, CHANGE IN OWNERSHIP OR
AFFILIATION OF ANY INSURED ENTITY:
(a) If more than one entity is insured hereunder and if any
Insured which is a mutual insurance company, ceases during the
Policy Period to be affiliated with the other Insured
entity(ies); or
(b) If more than one entity is insured hereunder and if any
Insured which is a subsidiary of any Insured, ceases during
the Policy Period to be such a subsidiary;
Then coverage hereunder shall not apply to any Claim arising out of any act,
error, omission, misstatement, misleading statement, neglect or breach of duty
or breach of responsibility, obligation or duty by or on behalf of such entity
which ceases to be affiliated with the other Insured entity(ies) or which ceases
to be a subsidiary of any Insured, happening subsequent to the events described
in (a) and (b) hereinabove.
The term "subsidiary" used in (b) hereinabove shall mean any entity more than
fifty (50) percent of whose outstanding securities, representing the present
right to vote for the election of directors of such entity, are owned by another
entity alone or by another entity in combination with one or more of its
subsidiaries. The term subsidiary shall include any subsidiary of any subsidiary
THE EXCLUSIONS
1. WITH RESPECT TO COVERAGE A, THIS POLICY DOES NOT APPLY TO ANY CLAIM OR
PORTION THEREOF MADE AGAINST ANY COVERAGE A INSURED:
(a) arising out of or resulting from the financial inability to
pay claims or to perform Professional Services;
(b) by any pool or association (including any officer, employee or
director thereof) in which the Coverage A Insured is a
participant or by any participant (including any officer
employee or director thereof) in any such pool or association
involving the business or operations of such pool or
association;
(c) for liability assumed under any contract or agreement, except
liability which would have attached to the Insured even in the
absence of such contract or agreement;
(d) based upon, arising out of, related to, directly or indirectly
resulting from or in consequence of, or in any way involving
the inadequacy of claim reserves of the Coverage A Insured or
of any entity to which the Coverage A Insured provides
Professional Services;
(e) arising out of express warranties, guarantees or
representations made in connection with safety inspections,
loss control and/or safety engineering services;
(f) based upon, arising out of, related to, directly or indirectly
resulting from or in consequence of, or in any way involving
the Employee Retirement Income Security Act of 1974 (or
amendments thereto or any regulations promulgated thereunder),
or similar provisions of any Federal, State or Local statutory
law or common law;
(g) based upon, arising out of, related to, directly or indirectly
resulting from or in consequence of, or in any way involving
any employee benefit plan established for the benefit of the
directors, officers and/or employees of the entity named in
Item 1. of the Declarations or of any subsidiary and/or
affiliate thereof.
2. WITH RESPECT TO COVERAGE B, THIS POLICY DOES NOT APPLY TO ANY CLAIM OR
PORTION THEREOF MADE AGAINST ANY COVERAGE B INDIVIDUAL INSURED:
(a) based upon, arising out of, related to, directly or
indirectly resulting from or in consequence of, or in any way
involving Professional Services;
(b) based upon, arising out of, related to, directly or indirectly
resulting from or in consequence of, or in any way involving
the Employee Retirement Income Security Act of 1974 (or
amendments thereto or any regulations promulgated thereunder),
or similar provisions of any Federal, State or Local
statutory, law or common law;
(c) based upon, arising out of, related to, directly or indirectly
resulting from or in consequence of, or in any way involving
any employee benefit plan established for the benefit of the
directors, officers and/or employees of the entity named in
Item 1. of the Declarations or of any subsidiary and/or
affiliate thereof;
(d) arising out of or in any way involving the conduct of business
of any Coverage B Company Insured as:
(i) an investment company; or
(ii) an investment advisor, counselor or manager; or
(iii) a general distributor for any investment company or
any real estate investment trust;
(e) based upon, arising out of, or in any way involving the
Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.,
Section 1961, et seq.;
(f) based upon, arising out of, related to, directly or indirectly
resulting from or in consequence of, or in any way involving
any Coverage B Individual Insured's duties as director,
officer, or employee of any entity other than any Coverage B
Company Insured, even if directed or requested to serve as
director, officer or employee of such other entity.
3. WITH RESPECT TO COVERAGE C, THIS POLICY DOES NOT APPLY TO ANY CLAIM OR
PORTION THEREOF MADE AGAINST ANY COVERAGE C INSURED:
(a) based upon, arising out of, related to, directly or indirectly
resulting from or in consequence of, or in any way involving
liability of others assumed by any Coverage C Insured under
any contract or agreement, either oral or in writing, except
in accordance with the terms of the Instrument or Declaration
of Trust pursuant to which the Employee Benefit Plan is
established;
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<PAGE> 28
(b) brought pursuant to Title IV, Sub-title D of the Employee
Retirement Income Security Act of 1974 (or any amendments
thereto), or under statutory or common law of any state,
municipality or any other governmental subdivision, or
possession, or territory of the United States of America
imposing comparable responsibilities, obligations, liabilities
or duties as those imposed under Title IV, Sub-title D of the
Employee Retirement Income Security Act of 1974 (including
amendments thereto and regulations promulgated thereunder);
(c) for the return by the Insured of any remuneration paid to them
if payment of such remuneration shall be held by the Court to
have been illegal.
4. WITH RESPECT TO ALL COVERAGES, THIS POLICY SHALL NOT APPLY TO ANY
CLAIM OR PORTION THEREOF MADE AGAINST ANY INSURED:
(a) based upon, arising out of, related to, directly or indirectly
resulting from or in consequence of, or in any way involving
bodily injury, sickness, disease, or death of any person,
provided however, this exclusion shall not apply to any Claim
based upon or arising out of allegations of negligence against
the Coverage A Insured in the performance of Professional
Services by the Coverage A Insured;
(b) based upon, arising out of, related to, directly or indirectly
resulting from or in consequence of, or in any way involving
damage to or destruction of any tangible property including
loss of use thereof, provided however, this exclusion shall
not apply to any Claim based upon or arising out of
allegations of negligence against the Coverage A Insured in
the performance of Professional Services by the Coverage A
Insured;
(c) based upon or attributable to the Insured gaining any personal
profit or advantage to which he/she was not legally entitled;
(d) by reason of any criminal act;
(e) by reason of any dishonest or fraudulent act or omission,
provided, however, that this exclusion shall not apply to any
Claim seeking both compensatory and punitive damages based
upon or arising out of allegations of both fraud and bad faith
in the performance of Professional Services;
(f) based upon, arising out of, related to, directly or indirectly
resulting from or in consequence of, or in any way involving:
(i) any subject of any notice given prior to the
effective date of this policy under any other policy;
or
(ii) any act, error, omission, misstatement, misleading
statement, neglect or breach of duty or breach of
responsibility, obligation or duty, matter, fact,
circumstance, situation, transaction, casualty, or
event which in any way involves or is in any way
related to any subject of any notice given prior to
the effective date of this policy under any other
policy;
(g) based upon, arising out of, related to, directly or indirectly
resulting from or in consequence of, or in any way involving
libel), slander or defamation, however, this exclusion shall
not apply to Coverage A;
(h) by or in the right of any other Insured under this policy,
provided however, this exclusion shall not apply:
(i) to any Claim made by any Coverage B Individual
Insured against any other Coverage B Individual
Insured; or
(ii) to any Claim made derivatively by any shareholder
(other than an Insured under this policy) or
policyholder (other than an Insured under this
policy) for the benefit of such entity where such
shareholder or policyholder is acting totally without
the solicitation or assistance of, or participation
of, or intervention of:
(aa) any Insured under this policy; or
(bb) any affiliate of any Insured under this
policy; or
(cc) any regulatory or supervisory agency or
authority; or
(dd) any insolvency fund; or
(ee) any receiver, conservator, trustee,
liquidator, rehabilitator or any similar
official of the Insured;
(i) by or in the right of any person or entity whose actual or
alleged, direct or indirect injury and/or damage is based
upon, arises out of, is related to, directly or indirectly
results from or in consequence of, or in any way involves the
toxic nature of any substance or of any seepage, pollutant,
contaminant or waste material of any kind, nature or quantity;
(j) by, for, or on behalf of, either directly or indirectly, any
reinsurer of any contract, risk or program of the Insured.
Any fact pertaining to any person or entity insured under this policy shall not
be imputed to any other person or entity insured under this policy for the
purpose of determining the applicability of Exclusions 4(c), (d) and (e)
hereinabove.
THE TERRITORY
The insurance afforded by this policy applies worldwide, provided that Claim is
made within the United States, its territories and possessions, Canada or Puerto
Rico.
LIMITS OF LIABILITY
1. LIMIT OF LIABILITY - EACH CLAIM:
(a) With respect to Coverage A and Coverage B individually, the
Insurer shall be liable to pay the applicable percentage of
participation in Loss as stated in Item 4. of the
Declarations, in excess of the amount of the applicable
deductible as stated in Item 5. of the Declarations, up to the
applicable limit of liability as stated in Item 4. of the
Declarations for each Claim first made during the Policy
Period or the Optional Extension Period, if purchased, and
reported to the Insurer during the Policy Period or the
Optional Extension Period, if purchased, or within sixty (60)
days after the expiration of the Policy Period or the Optional
Extension Period, if purchased.
(b) With respect to Coverage C, the Insurer shall be liable to pay
100% of Loss in excess of the amount of the applicable
deductible set forth in Item 5. of the Declarations, up to the
applicable limit of liability set forth in Item 4. of the
Declarations for each Claim first made during the Policy
Period or Optional Extension Period, if purchased, and
reported to the Insurer during the Policy Period or the
Optional Extension Period, if purchased, or within sixty (60)
days after the expiration of the Policy Period or Optional
Extension Period, if purchased.
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2. LIMIT OF LIABILITY - AGGREGATE:
(a) With respect to Coverage A and Coverage B individually,
subject to Item 1. hereinabove, Limit of Liability - Each
Claim, the total liability of the Insurer for Loss shall not
exceed the applicable aggregate limit of liability as stated
in Item 4. of the Declarations as a result of all Claims first
made during the Policy Period and the Optional Extension
Period, if purchased, and reported to the Insurer during the
Policy Period and the Optional Extension Period, if purchased,
or within sixty (60) days after the expiration of the Policy
Period or the Optional Extension Period, if purchased.
(b) With respect to Coverage C, subject to Item 1. hereinabove,
Limit of Liability - Each Claim, the total liability of the
Insurer for all Loss shall not exceed the applicable amount
set forth in Item 4. of the Declarations as aggregate as a
result of all Claims first made during the Policy Period and
the Optional Extension Period, if purchased, and reported to
the Insurer during the Policy Period and the Optional
Extension Period, if purchased, or within sixty (60) days
after the expiration of the Policy Period or Optional
Extension Period, if purchased.
3. DEDUCTIBLE:
(a) With respect to Coverage A and Coverage C individually, the
applicable deductible amount set forth in the Declarations
shall be paid by the Insured and shall be applicable to each
Claim and shall include all Loss.
(b) With respect to Coverage B, the applicable deductible amounts
set forth in Item 5.B. of the Declarations shall be applicable
to each Claim subject to Coverage under the specific
provisions of THE COVERAGE section referenced in Item 5.B. of
the Declarations. With respect to the Individual Liability
Coverage referenced in Item 5.B.1. of the Declarations, the
deductible shall apply to each Claim and each director or
officer and shall be subject to the amount stated in the
Declarations to apply as "aggregate Each Claim-All Directors
and Officers." Such deductible shall include all Loss.
(c) With respect to Coverages A, B, and C, it is agreed that the
applicable deductible amount(s) shall be retained net by the
Insured for its own account.
4. LIMIT OF LIABILITY AND DEDUCTIBLE - ALL COVERAGES: With respect to Coverages
A, B, and C, it is the intent of the Insurer that such Coverages be mutually
exclusive. If, however, it is determined that more than one purchased Coverage
applies to any one Claim, then the limit of liability with respect to such Claim
shall be that each-Claim-limit-of-liability available under the single,
purchased, applicable Coverage having the higher(est) limit of liability
available for such Claim and not the sum of the available each Claim limits of
liability. Only the deductible applicable to the Coverage having the higher(est)
limit of liability available for such Claim shall be applicable to such Claim.
In the event that each of two or more purchased, applicable Coverages has the
same limit of liability available for such Claim which limit is an amount higher
than that available under any other purchased, applicable Coverage, the limit of
liability of only one applicable, purchased Coverage shall apply and not the sum
of the limits of the purchased, applicable Coverages; and in such event only the
deductible of one Coverage shall apply which shall not be a larger amount than
the lower(est) of the deductibles applicable to the purchased, applicable
Coverages having the same available limits.
In such event the amount of Loss incurred for such Claim shall be applied to
reduce the available aggregate limits of liability of the applicable, purchased
Coverages in proportion to the amount of the available aggregate limit of
liability for each applicable, purchased Coverage relative to the sum of the
available aggregate limits of liability for all applicable, purchased Coverages.
5. CONSENT TO SETTLEMENTS AND CLAIM EXPENSES INCURRED BY THE INSURED:
(a) The Insurer shall not settle any Claim without the consent of
the Insured, but the Insurer shall have, at all times, the
right to recommend a settlement of any Claim, whether or not
it exercises the Option to Defend. If the Insured shall
unreasonably refuse to settle such Claim pursuant to the
Insurer's recommendations, then the Insurer's liability in
regard to such Claim shall be subject to the limits of
liability and shall not exceed the amount for which the Claim
could have been settled and any Claim Expenses Incurred by the
Insured and any Claim Expenses Incurred by the Insurer, both
up to the date of the Insured's refusal to settle the Claim;
(b) Subject to item (c) below, the Insured shall not settle any
Claim or incur any Claim expenses without the Insurer's
consent; such consent not to be unreasonably withheld;
(c) The Insured may settle without the Insurer's consent any Claim
for any amount within the applicable deductible amount set
forth in the Declarations, provided however, that the
settlement amount and the Claim Expenses Incurred by the
Insured and/or the Claim Expenses Incurred by the Insurer (if
the defense option is exercised by the Insurer) do not exceed
the amount of the applicable deductible set forth in the
Declarations.
6. MULTIPLE INSUREDS, CLAIMS AND CLAIMANTS: The inclusion herein of more
than one Insured or the making of Claims by more than one person or organization
shall not operate to increase the Insurer's limit of liability as to each
Coverage listed in Item 6. of the Declarations. Furthermore, as to the
Coverage(s) listed in Item 6. of the Declarations, two or more Claims arising
out of the same act, error, omission, misstatement, misleading statement,
neglect or breach of duty or breach of responsibility, obligation or duty or a
series of related acts, errors, omissions, misstatements, misleading statements,
neglects or breaches of duty or breaches of responsibility, obligation or duty
shall be treated as a single Claim. All such Claims whenever made, shall be
considered first made on the date on which the earliest Claim arising out of
such act, error, omission, misstatement, misleading statement, neglect or breach
of duty or breach of responsibility, obligation or duty was first made, and all
such Claims shall be subject and limited to the same limit of liability.
7. LIMIT OF LIABILITY FOR CLAIM EXPENSES INCURRED BY THE INSURER AND FOR
CLAIM EXPENSES INCURRED BY THE INSURED: Subject to THE COVERAGE 11, and to the
Insured's obligation to pay the deductible as set forth in Item 3 hereinabove,
all Claim Expenses Incurred by the Insurer subsequent to the exercise of its
Option to Defend the Insured and all Claim Expenses Incurred by the Insured
prior to the Insurer's exercise of its Option to Defend the Insured shall be a
part of and shall not be in addition to the applicable limit of liability.
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<PAGE> 30
CLAIMS
1. NOTICE OF CLAIM: If a Claim is made against the Insured, then the Insured
shall immediately forward to the Insurer every demand, notice, summons or other
process received by the Insured or by their representatives. In any event,
within sixty (60) days after the expiration of the Policy Period or the Optional
Extension Period, if purchased, such Claim must be reported to the Insurer or to
SHAND, MORAHAN & COMPANY, INC., Shand Morahan Plaza, Evanston, Illinois 60201,
on behalf of the Insurer.
2. ASSISTANCE AND COOPERATION OF THE INSURED: The Insured shall cooperate with
the Insurer in providing information requested by the Insurer with regard to any
Claim reported under this policy. Where the Insurer has NOT exercised its Option
to Defend pursuant to THE COVERAGE 11, the Insured shall, on request of the
Insurer, permit counsel designated by the Insurer at its own expense to
participate on its own behalf in the investigation, settlement and/or defense of
any Claim. Where the Insurer has exercised its Option to Defend, the Insured
shall cooperate with the Insurer in the investigation, settlement and defense of
any Claim.
3. SUBROGATION: In the event of any payment under this policy, the Insurer shall
be subrogated to the extent of such payment to all the Insured's rights of
recovery therefor against any person or organization and the Insured shall
execute and deliver instruments and papers and do whatever else is necessary to
secure such rights. The Insured shall do nothing after the Claim to prejudice
such rights.
Any amount so recovered, whether effected by the Insurer or by the Insured,
shall be applied net of the expense of such recovery as follows: (a) first, to
the satisfaction of the Insured's Loss (including Claim Expenses Incurred by the
Insured) which is in excess of the amount of the limit of liability under this
policy and which is in excess of any amount paid by any insurer under any other
policy; (b) second, to the Insurer as reimbursement of amounts paid under this
policy; (c) third, to any insurer under any other policy as reimbursement of
amounts paid under any such policy: and (d) fourth, to the Insured in
satisfaction of any applicable deductible and any percentage of Loss paid by the
Insured.
4. ACTION AGAINST THE INSURER: No action shall lie against the Insurer unless,
as a condition precedent thereto, the Insured shall have fully complied with all
the terms of this policy, nor until the amount of the Insured's obligation to
pay shall have been fully and finally determined either by judgment against the
Insured after actual trial or by written agreement of the Insured, the claimant
and the Insurer.
Any person or organization or the legal representative thereof who has secured
such judgment or written agreement shall thereafter be entitled to recover under
this policy to the extent of the insurance afforded by this policy.
Nothing contained in this policy shall give any person or organization any right
to join the Insurer as a co-defendant in any Claim against the Insured to
determine the Insured's liability. Bankruptcy or insolvency of the Insured or
of the Insured's estate shall not relieve the Insurer of any of its obligations
hereunder.
5. FALSE OR FRAUDULENT CLAIMS: If any Insured shall commit fraud in proffering
any Claim as regards amount or otherwise, this insurance shall become void as to
such Insured from the date such fraudulent Claim is proffered.
GENERAL CONDITIONS
1. NOTICES TO THE INSURER: All notices to be given to the Insurer as provided
for in THE INSURED 1(b) and 2(b); THE COVERAGE 12, 13, and 14; and CLAIMS 1 of
this policy shall be directed to SHAND, MORAHAN & COMPANY INC., Shand Morahan
Plaza, Evanston, Illinois 60201.
2. CANCELLATION:
(a) This policy may be cancelled as an entirety by the entity
named in Item 1. of the Declarations by surrender thereof to
the Insurer or to SHAND, MORAHAN & COMPANY, INC., Shand
Morahan Plaza, Evanston, Illinois 60201, or by mailing to the
aforementioned, written notice stating when thereafter such
cancellation shall be effective. The mailing of notice as
aforesaid shall be sufficient notice and the effective date of
cancellation stated in the notice shall become the end of the
Policy Period. Delivery of such written notice shall be
equivalent to mailing.
(b) This policy may be cancelled as an entirety by the Insurer or
by SHAND, MORAHAN & COMPANY, INC., by mailing to the entity
named in Item 1. of the Declarations, at the address stated in
the Declarations, written notice stating when, not less than
sixty (60) days thereafter, such cancellation shall be
effective. However, if the Insurer cancels the policy because
the Insured has failed to pay a premium or deductible when
due, this policy may be cancelled by the Insurer by mailing a
written notice of cancellation to such entity stating when,
not less than ten (10) days thereafter, such cancellation
shall be effective. The mailing of notice as aforementioned
shall be sufficient notice and the effective date of
cancellation stated in the notice shall become the end of the
Policy Period. Delivery of such written notice by the Insurer,
or SHAND, MORAHAN & COMPANY, INC., shall be equivalent to
mailing.
If this policy is cancelled pursuant to item (a) above, the earned premium shall
be computed at the customary short rate. If this policy is cancelled pursuant to
item (b) above, earned premium shall be computed pro rata. Premium adjustment
may be made either at the time cancellation is effected or as soon as
practicable thereafter, but payment or tender of unearned premium is not a
condition precedent to cancellation.
3. APPLICATION. By acceptance of this policy, the Insureds agree as
follows:
(a) that the particulars and statements contained in the
application, a copy of which is attached hereto, and any
material submitted therewith (which shall be on file with the
Insurer and be deemed attached hereto, as if physically
attached hereto), are true and are the basis of this policy
and are to be considered as incorporated into and constituting
a part of this policy;
(b) that the statements in the application or in any materials
submitted therewith are their representations, that they shall
be deemed material to the acceptance of the risk or the hazard
assumed by the Insurer under this policy, and that this policy
is issued in reliance upon the truth of such representations;
and
(c) that in the event that the application, including materials
submitted therewith, contains misrepresentations made with the
actual intent to deceive, or contains misrepresentations which
materially affect either the acceptance of the risk or the
hazard assumed by the Insurer under this policy, this policy
in its entirety shall be void and of no effect whatsoever.
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<PAGE> 31
4. NONSEVERABILITY OF CONTRACT: Other than as provided in the exception
applicable to Exclusions 4(c), (d) and (e), this policy shall be deemed to be a
single unitary contract and not a severable contract of insurance or a series of
individual contracts of insurance with each Insured.
5. CHANGES: Notice to any agent or knowledge possessed by any agent or other
person acting on behalf of the Insurer shall not effect a waiver or a change in
any part of this policy or estop the Insurer from asserting any right under the
terms of the policy. The terms of this policy shall not be waived or changed,
except by written endorsement issued to form a part of this policy, and this
policy embodies all agreements existing between the Insureds and the Insurer or
any of its agents relating to this insurance.
6. OTHER INSURANCE: This insurance shall be in excess of the amount of the
deductible and any other valid and collectible insurance available to the
Insured whether the other insurance is stated to be primary, pro rata,
contributory, excess, contingent or otherwise, unless the other insurance is
written only as specific excess insurance over the limits of liability provided
by this policy.
7. ASSIGNMENT OF INTEREST: Assignment of interest under this policy shall not
bind the Insurer unless its consent is endorsed hereon.
8. AUTHORIZATION: By acceptance of this policy, the entity named in Item 1. of
the Declarations agrees to act on behalf of all Insureds with respect to the
giving of all notice to and from the Insurer as provided herein: the exercise of
the Optional Extension Period; the cancellation of this policy, in whole or in
part; the payment of premiums and deductibles when due; and the receiving of any
return premiums that may become due under this policy; and the Insureds agree
that such entity shall act on their behalf.
9. AUDIT: The Insurer may examine and audit the Insured's books and records at
any time during the Policy Period and within three years after the final
termination of this policy, as far as they relate to the subject matter of this
policy.
10. SERVICE OF SUIT: Except with respect to any policy issued in Illinois or
Washington, D.C., it is agreed that in the event of the failure of the Insurer
to pay any amount claimed to be due hereunder, the Insurer at the request of the
Insured will submit to the jurisdiction of any court of competent jurisdiction
within the United States and will comply with all requirements necessary to give
such court jurisdiction, and all matters arising hereunder shall be determined
in accordance with the law and practice of such court, It is further agreed that
service of process in such suit may be made upon PETERSON, ROSS, SCHLOERB &
SEIDEL, Suite 7300, 200 East Randolph Drive, Chicago, Illinois 60601, and that
in any suit instituted against it upon this contract, the Insurer will abide by
the final decision of such court or of any appellate court in the event of an
appeal.
The above named are authorized and directed to accept service of process on
behalf of the Insurer in any such suit and/or upon the request of the Insured
that they will enter a general appearance upon the Insurer's behalf in the event
such a suit shall be instituted.
Further, pursuant to any state, territory or district of the United States which
makes provision therefor, the Insurer hereon hereby designates the
Superintendent, Commissioner or Director of Insurance or other officer specified
for that purpose in the statute, or his successor or successors in office, as
their true and lawful attorney, upon whom may be served any lawful process in
any action, suit or proceeding instituted by or on behalf of the Insured or any
beneficiary hereunder arising out of this contract of insurance, and hereby
designates the above-named person to whom the said officer is authorized to mail
such process or a true copy thereof.
IN WITNESS WHEREOF, the Insurer has caused this policy to be signed by its
President and Secretary, but this policy shall not be valid unless countersigned
on the Declarations page by a duly authorized representative of the Insurer.
/s/ Edgar W. Phoebus
- --------------------- -------------------
Secretary President
8
<PAGE> 32
NUCLEAR ENERGY LIABILITY
EXCLUSION ENDORSEMENT (BROAD FORM)
This endorsement modifies the provisions of this policy.
It is agreed that:
1. THIS POLICY DOES NOT APPLY:
A. Under any Liability Coverage, to bodily injury or property damage:
(1) with respect to which an Insured under this policy is also an
Insured under a nuclear energy liability policy issued by
Nuclear Energy Liability Insurance Association, Mutual Atomic
Energy Liability Underwriters or Nuclear Insurance Association
of Canada, or would be an Insured under any such policy but
for its termination upon exhaustion of its limit of liability;
or
(2) resulting from the hazardous properties of nuclear material
and with respect to which (a) any person or organization is
required to maintain financial protection pursuant to the
Atomic Energy Act of 1954, or any law amendatory thereof, or
(b) the Insured is, or had this policy not been issued would
be, entitled to indemnity from the United States of America,
or any agency thereof, under any agreement entered into by the
United States of America, or any agency thereof, with any
person or organization.
B. Under any Medical Payments Coverage, or any Supplementary Payments
provision relating to first aid, to expenses incurred with respect to
bodily injury resulting from the hazardous properties of nuclear
material and arising out of the operation of a nuclear facility by any
person or organization.
C. Under any Liability Coverage, to bodily injury or property damage
resulting from the hazardous properties of nuclear material, if:
(1) the nuclear material (a) is at any nuclear facility owned by,
or operated by or on behalf of, an Insured or (b) has been
discharged or dispersed therefrom;
(2) the nuclear material is contained in spent fuel or waste at
any time possessed, handled, used, processed, stored,
transported or disposed of by or on behalf of an Insured; or
(3) the bodily injury or property damage arises out of the
furnishing by an Insured of services, materials, parts or
equipment in connection with the planning, construction,
maintenance, operation or use of any nuclear facility, but if
such facility is located within the United States of America,
its territories or possessions, or Canada, this exclusion (3)
applies only to property damage to such nuclear facility and
any property thereat.
2. AS USED IN THIS ENDORSEMENT:
"hazardous properties" include radioactive, toxic or explosive properties;
"nuclear material" means source material, special nuclear material or by-product
material;
"source material", "special nuclear material", and "by-product material" have
the meanings given them in the Atomic Energy Act of 1954 or in any law
amendatory thereof;
"spent fuel" means any fuel element or fuel component, solid or liquid, which
has been used or exposed to radiation in a nuclear reactor;
"waste" means any waste material (1) containing by-product material and (2)
resulting from the operation by any person or organization of any nuclear
facility within the definition of nuclear facility under paragraph (a) or (b)
thereof;
"nuclear facility" means
(a) any nuclear reactor,
(b) any equipment or device designed or used for (1) separating
the isotopes of uranium or plutonium, (2) processing or
utilizing spent fuel, or (3) handling, processing or packaging
waste,
(c) any equipment or device used for the processing, fabricating
or alloying of special nuclear material if at any time the
total amount of such material in the custody of the Insured at
the premises where such equipment or device is located
consists of or contains more than 25 grams of plutonium or
uranium 233 or any combination thereof, or more than 250 grams
of uranium 235,
(d) any structure, basin, excavation, premises or place prepared
or used for the storage or disposal of waste,
and includes the site on which any of the foregoing is located, all operations
conducted on such site and all premises used for such operations;
"nuclear reactor" means any apparatus designed or used to sustain nuclear
fission in a self-supporting chain reaction or to contain a critical mass of
fissionable material;
"property damage" includes all forms of radioactive contamination of property.
<PAGE> 1
AMENDMENT
TO MANAGEMENT AGREEMENT
THIS AMENDMENT amends as of September 25, 1996 the Management Agreement
("Agreement") made May 20, 1991, as amended, by and between Philadelphia
Indemnity Insurance Company ("PIIC") and Maguire Insurance Agency, Inc.
("Maguire").
WITNESSETH:
WHEREAS, Maguire performs a variety of services for PIIC under the
Agreement;
WHEREAS, PIIC and Maguire desire to modify certain terms of the
Agreement;
NOW, THEREFORE, PIIC and Maguire, intending to be legally bound hereby,
agree as follows:
1. It is acknowledged that the compensation for services provided
by Maguire, beginning in 1994 and for each year thereafter,
per "Amendment No. 1 to Management Agreement" were based upon
budgeted expenses. To the extent these expenses deviate
materially from actual expenses the parties agree to
reasonably adjust the compensation.
2. The due date for premium remittance from Maguire to PIIC as
stated in Paragraph 2J of the Agreement shall be 90 days after
the end of the month for the "All Other Class" of business.
3. The term of the Agreement as stated in Paragraph 8 is extended
for an additional five (5) years.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals as of the day and year first above written.
PHILADELPHIA INDEMNITY INSURANCE COMPANY
By: /s/ James J. Maguire
--------------------------------------
James J. Maguire, President
Attest: /s/ Sean S. Sweeney
--------------------------------------
Sean S. Sweeney, Senior Vice President
MAGUIRE INSURANCE AGENCY, INC
By: /s/ James J. Maguire
--------------------------------------
James J. Maguire, President
Attest: /s/ Sean S. Sweeney
--------------------------------------
Sean S. Sweeney, Senior Vice President
<PAGE> 1
AMENDMENT
TO MANAGEMENT AGREEMENT
THIS AMENDMENT amends as of September 25, 1996 the Management Agreement
("Agreement") made October 23, 1991, as amended, by and between Philadelphia
Insurance Company and ("PIC") and Maguire Insurance Agency, Inc. ("Maguire").
WITNESSETH:
WHEREAS, Maguire performs a variety of services for PIC under the
Agreement;
WHEREAS, PIC and Maguire desire to modify certain terms of the
Agreement;
NOW, THEREFORE, PIC and Maguire, intending to be legally bound hereby,
agree as follows:
1. It is acknowledged that the compensation for services provided
by Maguire, beginning in 1994 and for each year thereafter,
per "Amendment No. 1 to Management Agreement" were based upon
budgeted expenses. To the extent these expenses deviate
materially from actual expenses the parties agree to
reasonably adjust the compensation.
2. The due date for premium remittance from Maguire to PIC as
stated in Paragraph 2J of the Agreement shall be 90 days after
the end of the month for the "All Other Class" of business.
3. The term of the Agreement as stated in Paragraph 8 is extended
for an additional five (5) years.
4. The authority, right, duty or obligation of Maguire to arrange
for reinsurance on behalf of PIC is terminated.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands
and seals as of the day and year first above written.
PHILADELPHIA INSURANCE COMPANY
By: /s/ James J. Maguire
--------------------------------------
James J. Maguire, President
Attest: /s/ Sean S. Sweeney
--------------------------------------
Sean S. Sweeney, Senior Vice President
MAGUIRE INSURANCE AGENCY, INC
By: /s/ James J. Maguire
--------------------------------------
James J. Maguire, President
Attest: /s/ Sean S. Sweeney
--------------------------------------
Sean S. Sweeney, Senior Vice President
<PAGE> 1
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Computation of Earnings Per Share
(Dollars and Share Data in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
As of and For the Years Ended December 31,
------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Weighted Average Shares Outstanding 5,940 5,814 5,814
Weighted Average Stock Options
Outstanding 1,859 1,599 1,608
Assumed Shares Repurchased (672) (575) (784)
-------- -------- --------
Weighted Average Shares and Share
Equivalents Outstanding 7,127 6,838 6,638
======== ======== ========
Net Income $ 13,374 $ 9,830 $ 5,973
======== ======== ========
Net Income Per Share $ 1.88 $ 1.44 $ 0.90
======== ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 13
[LOGO] PHILADELPHIA INSURANCE COMPANIES
================================================================================
[PICTURE]
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Corporate Profile.......................................................2
Message from the Chairman & CEO.........................................3
Selected Financial Data.................................................4
Management's Discussion and Analysis....................................7
Financial Section......................................................11
Underwriting & Marketing...............................................23
Offices & Regions......................................................26
Board of Directors,
Shareholder Information & Officers.....................................27
</TABLE>
1
<PAGE> 2
CORPORATE PROFILE [LOGO]
===============================================================================
Philadelphia Consolidated Holding Corp. (the "Company") (Nasdaq National Market:
PHLY) is an insurance holding company with assets of $226,000,000. The Company's
history dates back to the incorporation of one of its subsidiaries in 1962. The
Company wholly owns the following three subsidiary companies:
PHILADELPHIA INDEMNITY INSURANCE COMPANY
A Pennsylvania domiciled commercial property and casualty insurance company
licensed as an admitted carrier in 48 states.
PHILADELPHIA INSURANCE COMPANY
A Pennsylvania domiciled commercial property and casualty insurance company
which is approved in 36 states as a surplus lines company.
MAGUIRE INSURANCE AGENCY, INC.
A captive underwriting manager founded in 1962 by James J. Maguire, the
Company's Chairman, President and CEO. The underwriting manager writes insurance
only for the account of the Company's two insurance subsidiaries.
A.M. BEST RATING
The Company's two insurance subsidiaries are pooled for risk assumption and
accumulated surplus. A.M. Best Company has assigned the insurance subsidiaries
an "A" (EXCELLENT) rating.
STANDARD & POOR'S RATING
In 1996 Standard & Poor's assigned an "A" CLAIMS PAYING ABILITY rating to the
insurance subsidiaries, noting that insurers rated "A" offer good financial
security. Standard & Poor's indicated that the rating "was based on the
Companies' focused business strategy, excellent operating performance and
superior capital position.
COMPANY BUSINESS
The Company designs, markets and underwrites commercial property and casualty
insurance products for select classes of business. Marketing is done through the
Company's direct production underwriting staff from 37 regional offices located
in major United States markets. Telemarketing staffs in the Company's regional
offices and Philadelphia home office market various Professional Liability
Products.
In addition to direct sales, the Company also accepts business from independent
insurance brokers. In 1996, 55% of total written premium was produced through
approximately 3,000 broker relationships.
2
<PAGE> 3
[LOGO] MESSAGE FROM THE CHAIRMAN & CEO
===============================================================================
TO OUR SHAREHOLDERS, CLIENTS AND EMPLOYEES.
This year marks our thirty-fourth year in business and our third full year as a
public company. Shareholder value was created not only in calculable ratios and
financial measurements, but also through the outstanding performance of our
people in the various disciplines of the Company.
The Company recorded its best year ever in 1996! Gross written premiums
increased 31.4% to $136.9 million while an impressive 86.5% combined ratio was
maintained for the second consecutive year. Net income for the year was $13.4
million with shareholders' equity increasing 25.3% to $85.6 million ($14.18 per
share) and return on equity (ROE) reaching 18.8%. These are impressive numbers
by any measure or standard, but of equal importance was the overall development
of our Company and its employees which will prepare us for continued growth now
and into the 21st Century.
The competition for profitable business was as fierce in 1996 as it has been
for the past several years. Competing for accounts by quoting the lowest price
seems to be standard practice. Our marketing strategy emphasizes relationship
selling, service and a superior product which has neutralized irresponsible
price competition. By staffing 37 field offices across the United States with
competent production underwriters, who not only know how to select good business
but also know what not to submit for quotation, we've been able to seek out and
solicit quality insurance risks either directly or through the insureds'
brokers. Another key component to our 86.5% combined ratio is grounded in the
methodology of pricing and quoting business which is controlled by our home
office underwriting staff. There is no authority for agents or brokers to price
or quote accounts. The Company also maintains a "PRICE MONITOR SYSTEM" which
measures the pricing of each product and its pure loss results regularly.
Through mixed marketing and controlled underwriting, we've created a constant
flow of profitable premium from renewals and new account submissions. In 1996,
the Company reviewed 16,000 new submissions and successfully sold 6,000 (38%)
resulting in new gross written premium of $38 million. Equally impressive was
our retention of existing accounts which averaged a remarkable 85%.
INVESTMENTS
Our investment strategy during the past several years has remained relatively
unchanged. The carrying value of the investment portfolio at year end was $172.7
million, with 63.1% of the portfolio invested in municipal bonds, 17.9% in
government and corporate bonds, 15.8% in common and 0.8% in preferred stocks and
2.4% in cash equivalents.
Our philosophy with respect to the fixed maturity portfolio is to buy
investment grade securities and ladder maturities over 10 years. Currently, 96%
of the fixed maturity securities are "A" rated or better by Standard & Poor's.
The common stock portfolio consists of quality long-term growth investments.
During 1996, cash flows from operations were $37.6 million of which $31.0
million had been invested in the Company's investment portfolio by year end. At
year end the investment portfolio had $11.2 million of unrealized gains,
produced $7.9 million net income and had a duration of 4.6 years. In 1997, our
philosophy will remain basically unchanged.
SHAREHOLDERS FIRST
At Philadelphia Insurance Companies we believe in "paying" our Shareholders
first. The Company, through the Compensation Committee of the Board, has
developed a bonus compensation model rewarding its officers and management only
after established profitability goals are met.
[PHOTO OF JAMES J. MAGUIRE/Chairman, President & CEO]
LOOKING AHEAD:
Our goal in 1997 and into the 21st Century is continued profitable growth of
15% to 20% which can be realized in our niche businesses plus the addition of a
few new programs. As we wind down the Company's business pursuits of the 20th
Century, and reflect on all the changes we've seen and have been part of, I'm
convinced that our Future hinges on the ability to execute, on what I believe,
are the four keys to customer satisfaction: COVERAGE, RELATIONSHIP, SERVICE and
PRICE. In delivering coverage, our goal is to provide a differentiated product.
Service must be timely and mistake-free and pricing obviously is expected to be
competitive but with value-added, thus eliminating the need to be the lowest
price. Finally, I believe customers today want to do business with a product
educated representative who is technologically literate. For these reasons, a
major focus of the Company is and will be the streamlining of work flow,
educating our representatives and introducing the very latest technology - our
ALLENBROOK SYSTEM - to support work flow, service and management information.
Thank you for your support and trust!
/s/ JAMES J. MAGUIRE
- -------------------------------------
James J. Maguire
Chairman, President & CEO
3
<PAGE> 4
SELECTED FINANCIAL DATA [LOGO]
===============================================================================
SELECTED FINANCIAL DATA
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
As of and For the Years Ended December 31,
--------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATIONS STATEMENT DATA:
Gross Written Premiums .................... $ 136,855 $104,180 $ 89,099 $ 57,085 $ 37,202
Gross Earned Premiums ..................... $ 121,820 $ 99,507 $ 84,657 $ 53,506 $ 36,121
Net Written Premiums ...................... $ 83,994 $ 62,072 $ 55,398 $ 40,645 $ 36,168
Net Earned Premiums ....................... $ 72,050 $ 58,188 $ 52,085 $ 37,484 $ 35,290
Net Investment Income ..................... 7,910 6,506 4,902 3,269 3,232
Net Realized Investment Gain (Loss) ....... 260 181 (1,697) 1,327 606
Other Income .............................. 282 309 314 1,169 1,532
- -----------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE ......................... 80,502 65,184 55,604 43,249 40,660
- -----------------------------------------------------------------------------------------------------------------------
Net Loss and Loss Adjustment
Expenses ................................ 40,118 33,227 31,009 21,165 20,174
Acquisition Costs and
Other Underwriting Expenses .............. 22,210 17,105 15,541 12,991 13,794
Other Operating Expenses .................. 1,386 2,564 1,347 3,038 2,848
Interest Expense .......................... -- - -- 459 637
Accretion of Redemption
Premium on Debentures ................... -- - -- -- 710
- -----------------------------------------------------------------------------------------------------------------------
TOTAL LOSSES AND EXPENSES ............. 63,714 52,896 47,897 37,653 38,163
- -----------------------------------------------------------------------------------------------------------------------
Income Before Income
Taxes and Extraordinary Item ............ 16,788 12,288 7,707 5,596 2,497
Total Income Tax Expense .............. 3,414 2,458 1,734 1,364 1,090
- -----------------------------------------------------------------------------------------------------------------------
Income Before
Extraordinary Item ...................... 13,374 9,830 5,973 4,232 1,407
Extraordinary Item,
Net of Tax Benefit ...................... -- -- -- -- (463)
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME ............................ $ 13,374 $ 9,830 $ 5,973 $ 4,232 $ 944
- -----------------------------------------------------------------------------------------------------------------------
Weighted Average Shares and Share
Equivalents Used in Computation
of Net Income ........................ 7,126,624 6,838,353 6,637,802 4,408,847 3,701,613
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME
PER COMMON SHARE ........................ $ 1.88 $ 1.44 $ 0.90 $ 0.96 $ 0.32
YEAR END FINANCIAL POSITION:
Total Investments and Cash
and Cash Equivalents .................. $ 180,061 $140,086 $ 105,720 $ 90,441 $ 47,480
Total Assets ............................ 225,938 174,148 140,718 116,135 69,692
Unpaid Loss and Loss
Adjustment Expenses ................... 96,642 77,686 59,175 44,253 33,751
Notes Payable ........................... -- -- -- -- 10,000
Total Shareholders' Equity .............. 85,642 68,316 52,600 49,018 5,429
Common Shares Outstanding ............... 6,039,806 5,813,851 5,813,851 5,813,851 2,551,021
- -----------------------------------------------------------------------------------------------------------------------
INSURANCE OPERATING RATIOS
(STATUTORY BASIS):
Net Loss and Loss Adjustment
Expenses to Net Earned Premiums ....... 55.7% 57.1% 59.5% 56.5% 57.1%
Underwriting Expenses to
Net Written Premiums .................. 31.1% 29.6% 29.9% 34.5% 38.7%
- -----------------------------------------------------------------------------------------------------------------------
Combined Ratio ............................ 86.8% 86.7% 89.4% 91.0% 95.8%
=======================================================================================================================
A.M. Best Rating .......................... A A A A- B+
(Excellent) (Excellent) (Excellent) (Excellent) (Very Good)
</TABLE>
4
<PAGE> 5
[LOGO] INVESTMENT PORTFOLIO
================================================================================
(In Thousands)
<TABLE>
<CAPTION>
As of and For the Years Ended December 31,
---------------------------------------------------------------
1996 1995 1994
----------------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENTS(1)
FIXED MATURITIES:
Municipal Debt......................... $ 108,887 63.1% $ 94,506 69.9% $ 67,158 64.4%
U.S. Treasuries and U.S.
Government Corporations
and Agencies ........................ 20,557 11.9 14,842 11.0 6,157 5.9
Investment Grade Corporate Debt........ 10,413 6.0 10,135 7.5 4,345 4.2
Redeemable Preferred Stock ............ 1,379 .8 2,365 1.7 2,244 2.2
EQUITY SECURITIES:
Common Stock .......................... 27,342 15.8 12,343 9.1 7,745 7.4
Non-Redeemable Preferred Stock ........ - - 215 .2 1,607 1.5
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS ......................... 168,578 97.6 134,406 99.4 89,256 85.6
CASH EQUIVALENTS ........................ 4,094 2.4 825 .6 15,010 14.4
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS and Cash Equivalents .... $ 172,672 100.0% $ 135,231 100.0% $ 104,266 100.0%
=============================================================================================================
Net Investment Income ..................... $7,910 $6,506 $4,902
Net Realized Investment Gain (Loss)........ 260 181 (1,697)
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT GAIN ..................... $8,170 $6,687 $3,205
=============================================================================================================
Total Investment Gain, Net of Tax
Net Investment Income ................. $6,890 $5,597 $4,363
Net Realized Investment Gain (Loss).... 172 119 (1,120)
- -------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT Gain, Net of Tax ......... $7,062 $5,716 $3,243
=============================================================================================================
</TABLE>
(1) Stated at carrying values.
[1996 INVESTMENT PORTFOLIO PIE CHART]
Corporation Debt 6.0%
Cash Equivalents 2.4%
Common Stock 15.8%
Municipal Debt 63.1%
Preferred Stock .8%
U.S. Government Securities 11.9%
5
<PAGE> 6
GROSS PREMIUMS PRODUCED [LOGO]
===============================================================================
GROSS PREMIUMS PRODUCED BY REGION
(in Millions)
<TABLE>
<CAPTION>
1996 1995 1994 1993
------- ------- ------ ------
<S> <C> <C> <C> <C>
Southeast $ 28.7 $ 22.4 $ 21.3 $ 11.1
Northeast 15.6 11.7 8.4 9.2
Mid-Atlantic 13.7 8.5 7.6 6.9
West 14.0 9.2 8.0 6.6
North Central 9.0 6.8 5.3 5.4
Southwest 8.0 5.0 3.6 3.1
Central 3.4 2.4 2.2 1.8
House/Telemarketing 43.4 37.3 33.8 16.3
---------------------------------------------------------------------------
TOTAL $135.8 $103.3 $ 90.2 $ 60.4
===========================================================================
</TABLE>
The United States is divided into seven regions with 37 sales offices. The
goal of the Company is to spread its risks throughout the United States. Field
offices provide marketing, preliminary underwriting and client services.
GROSS PREMIUMS PRODUCED
($'s IN MILLIONS)
[GRAPH]
1993........... $ 60.1
1994........... $ 90.2
1995........... $103.3
1996........... $135.8
6
<PAGE> 7
[LOGO] MANAGEMENT'S DISCUSSION AND ANALYSIS
===============================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
OPERATIONS:
The Company continued to realize profitable growth in 1996 through remaining
focused in its niche markets, growing written premiums while maintaining
underwriting and pricing discipline and diversifying written premium growth
through the addition of new products.
The Company's financial performance has been determined principally by levels
of premiums, mix of policies sold, investment income, losses and loss adjustment
expenses (LAE), and expenses related to marketing and operations. The Company
consistently has incurred losses and LAE lower than the commercial property and
casualty insurance industry as a whole. At the same time, the Company has
generated growth in written premiums.
The Company has reported growth in net income in each year from 1992 to 1996.
Net income has been generated from both underwriting operations and investing
activities. The Company has been able to produce increasing underwriting profits
as a result of supplementing historically profitable product lines with growth
in certain excess liability products, commercial multi-peril lines and selected
expansion into professional liability coverages.
The insurance subsidiaries are rated "A" (Excellent) by A.M. Best Company.
Also, in December 1996, Standard & Poor's assigned an "A" claims paying ability
rating to the Company's insurance subsidiaries.
INVESTMENTS:
The Company's investment policy seeks to maximize after tax investment return,
within the constraints of maintaining adequate securities in amount and duration
to meet cash requirements of current operating as well as longer-term
liabilities, as well as maintaining and improving the Company's A.M. Best and
Standard & Poor's ratings. The Company employs professional investment managers
for its fixed maturity and equity investments. The portfolio consists of
diversified issuers and issues and as of December 31, 1996 approximately 82% of
the total portfolio consisted of investments in fixed maturity securities.
As a result of the Company's earnings growth and favorable market spreads
between tax-exempt and taxable fixed maturity securities, the Company continues
to invest in tax-exempt securities. At the end of 1996, state and municipal
securities represented 63.1% of the total investment portfolio. The Company has
also continued to increase its total investments in quality growth oriented mid
and large-cap equity securities seeking to achieve diversification and capital
appreciation in the portfolio. At December 31, 1996, equity securities comprised
15.8% of the investment portfolio.
The Company had no derivative financial instruments, real estate or mortgages
in the investment portfolio as of December 31, 1996.
RESULTS OF OPERATIONS
(1996 VERSUS 1995)
Premiums: Gross written premiums grew $32.7 million (31.4%) to $136.9 million
in 1996 from $104.2 million in 1995; gross earned premiums grew $22.3 million
(22.4%) to $121.8 million in 1996 from $99.5 million in 1995; net written
premiums increased $21.9 million (35.3%) to $84.0 million in 1996 from $62.1
million in 1995; and net earned premiums grew $13.9 million (23.9%) to $72.1
million in 1996 from $58.2 million in 1995. The overall growth in premiums and
the varying growth rates for gross written premiums, gross earned premiums, net
written premiums and net earned premiums are attributable to a number of
factors:
- - Overall premium growth is primarily attributable to the following
factors:
- The prior year's growth in the field production underwriting
organization enabling expansion of the Company's marketing efforts to
non-profit organizations, the health and fitness industry and
selected professional liability products.
- The introduction of the Company's Preferred Agent Plan, wherein,
business relationships were formed with brokers specializing in
certain of the Company's business niches thereby increasing the
distribution of the Company's niche products.
- Continued favorable market conditions for certain leasing products.
7
<PAGE> 8
MANAGEMENT DISCUSSION AND ANALYSIS [LOGO]
===============================================================================
- - Overall premium growth has been offset in part by designed reductions in
premiums from certain rental products due primarily to inadequate pricing
levels which are currently being experienced as a result of market
competition. However, the Company anticipates an improvement in these market
conditions in the near future. Additionally, there have been recent
consolidations in the car rental industry the effect of which on the rental
car insurance market, if any, are not known at this time.
Net Investment Income: Net investment income approximated $7.9 million in 1996
and $6.5 million in 1995. The increase of $1.4 million (21.5%) is due primarily
to the increase in total investments as a result of cash flows provided from
operating activities.
Net Realized Investment Gain (Loss): Net realized investment gains were $.3
million in 1996 compared to $.2 million in 1995.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses
increased $6.9 million (20.8%) to $40.1 million in 1996 from $33.2 million in
1995 and the loss ratio decreased to 55.7% in 1996 from 57.1% in 1995. The
increase in net loss and loss adjustment expenses was due primarily to the 23.9%
growth in net earned premiums. Additionally, since there was relatively higher
net earned premium growth on products with low loss experience, the percentage
increase in net loss and loss adjustment expenses (20.8%) was lower than the
23.9% net earned premium growth.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other
underwriting expenses increased $5.1 million (29.8%), to $22.2 million in 1996
from $17.1 million in 1995. The increase in acquisition costs and other
underwriting expenses exceeds the 23.9% growth in net earned premiums, due
primarily to increased commission expense as a result of the Company beginning
to market its niche products through preferred brokers.
Other Operating Expenses: Other operating expenses decreased $1.2 million
(46.2%), to $1.4 million in 1996 compared to $2.6 million in 1995 principally
due to additional expenses related to the opening of new field offices in 1995.
Income Tax Expense: The Company's effective tax rates for 1996 and 1995 were
20.3% and 20.0%, respectively. The effective rates differed from the 34%
statutory rate principally due to investment income earned on tax-exempt
securities.
RESULTS OF OPERATIONS
(1995 VERSUS 1994)
Premiums: Gross written premiums grew $15.1 million (16.9%) to $104.2 million
in 1995 from $89.1 million in 1994; gross earned premiums grew $14.8 million
(17.5%) to $99.5 million in 1995 from $84.7 million in 1994; net written
premiums increased $6.7 million (12.1%) to $62.1 million in 1995 from $55.4
million in 1994; and net earned premiums grew $6.1 million (11.7%) to $58.2
million in 1995 from $52.1 million in 1994. The overall growth in premiums and
the varying growth rates for gross written premiums, gross earned premiums, net
written premiums and net earned premiums are attributable to a number of
factors:
- - Overall premium growth is primarily attributed to: the growth in the field
production underwriting organization enabling expansion of the Company's
marketing efforts to non-profit organizations, the health and fitness
industry and selected professional liability products; and favorable market
conditions for certain leasing products.
- - Overall premium growth has been offset in part by a continued decrease in
premiums from certain rental products due primarily to inadequate pricing
levels which are currently being experienced as a result of market
competition. Consistent with the Company's conservative underwriting and
pricing guidelines the underwriting of these rental products has been
curtailed. The Company does not anticipate an improvement in these market
conditions will occur in the foreseeable future.
Net Investment Income: Net investment income approximated $6.5 million in 1995
and $4.9 million 1994. The increase of $1.6 million (32.7%) is due primarily to
the increase in total investments as a result of cash flows provided from
operating activities.
Net Realized Investment Gain (Loss): Net realized investment gains were $.2
million in 1995 compared to net realized investment losses of $1.7 million in
1994. In response to the prevailing interest rate environment, the Company sold
certain investment securities at a loss during the fourth quarter of 1994 to
recover approximately $600,000 in federal capital gains taxes paid in prior
years.
8
<PAGE> 9
[LOGO]
MANAGEMENT'S DISCUSSION AND ANALYSIS
================================================================================
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses
increased $2.2 million (7.1%) to $33.2 million in 1995 from $31.0 million in
1994 and the loss ratio decreased to 57.1% in 1995 from 59.5% in 1994. The
increase in net loss and loss adjustment expenses was due primarily to the 11.7%
growth in net earned premiums. Additionally, since there was relatively higher
net earned premium growth on products with low loss experience, the percentage
increase in net loss and loss adjustment expenses (7.1%) was lower than the
11.7% net earned premium growth.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other
underwriting expenses increased $1.6 million (10.3%), to $17.1 million in 1995
from $15.5 million in 1994. The increase in acquisition costs and other
underwriting expenses was due primarily to the 11.7% growth in net earned
premiums, offset in part by a continued reduction in fronting fees and changes
in product mix.
Other Operating Expenses: Other operating expenses increased $1.3 million
(100%), to $2.6 million in 1995 compared to $1.3 million in 1994 primarily due
to expenses related to the hiring of additional production underwriters and the
opening of new field offices.
Income Tax Expense: The Company's effective tax rates for 1995 and 1994 were
20.0% and 22.5%, respectively. The effective rates differed from the 34%
statutory rate principally due to investments in tax-exempt securities.
GROWTH OPPORTUNITIES
Program/product development continues to be a primary focus of the Company.
During 1996, several new programs were "test marketed" and will be introduced in
1997. In addition to these new programs, the Company formed a business
relationship with E.B.I., the Workers' Compensation Specialty subsidiary of
Orion Capital, which enhanced current coverage offerings. This relationship will
facilitate the solicitation of business in certain existing market niches.
Business relationships were also formed with brokers ("Preferred Agents")
specializing in current product lines adding to growth in existing market
niches. It is anticipated that new relationships with Preferred Agents will
continue to be formed in 1997.
The Company renegotiated its reinsurance program, effective January 1, 1997.
Although the overall reinsurance program remained substantially unchanged, the
Company was able to realize more favorable reinsurance rates.
Overall, the current business climate remains competitive from a pricing
standpoint in certain of the Company's niches. In the context of the current
environment, the Company will not sacrifice pricing guidelines for premium
volume and will "walk away" from writing business that does not meet
underwriting or pricing guidelines. This strategy has occurred with certain
products in the Company's rent a car niche over the last two years. Management
believes, though, that the Company's mixed marketing strategy is a strength in
this market environment, in that, it provides the flexibility to quickly deploy
the marketing efforts of the Company's direct production underwriters from soft
market segments to market segments with emerging opportunities. Additionally,
through the mixed marketing strategy, the Company's production underwriters have
established relationships with approximately 3,000 brokers, thus increasing
distribution and assuring a regular flow of submissions.
LIQUIDITY AND CAPITAL RESOURCES
The Company is a holding company whose principal assets currently consist of
100% of the capital stock of two insurance subsidiaries and Maguire Insurance
Agency, Inc. The Company's primary sources of funds are dividends from its
subsidiaries and payments to it pursuant to tax allocation agreements with the
two insurance subsidiaries. For the year ended December 31, 1996, payments to
the Company pursuant to such tax allocation agreements totaled $4.1 million. The
payment of dividends to the Company from its insurance subsidiaries is subject
to certain limitations imposed by the insurance laws of the Commonwealth of
Pennsylvania. Statutory profits of the Company's insurance subsidiaries from
which dividends may be paid totaled $35.6 million at December 31, 1996. Of this
amount, the insurance subsidiaries are entitled to pay approximately $9.6
million of dividends in 1997 without obtaining prior approval from the Insurance
Commissioner of the Commonwealth of Pennsylvania.
9
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS [LOGO]
================================================================================
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 LAE on business it does not write directly). At
December 31, 1996, the investment and cash balances in such trust accounts
totaled approximately $26.1 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, 1996, the balance on deposit
for the benefit of such policyholders totaled approximately $7.1 million.
The Company has no material commitments for capital expenditures as of
December 31, 1996.
The Company has produced net cash from operations of $37.6 million in 1996,
$25.2 million in 1995 and $23.4 million in 1994. Management believes that the
Company has adequate liquidity to pay all claims and meet all other cash needs.
The Company's insurance subsidiaries, which operate under a pooling
agreement, require capital to support premium writings. Guidelines of the
National Association of Insurance Commissioners (the "NAIC") suggests that a
property and casualty insurer's ratio of annual statutory net premium written to
policyholders' surplus should not exceed 3 to 1. For 1996 and 1995, the ratio
of combined annual statutory net premium written by the insurance subsidiaries
to their combined policyholders'surplus was approximately 1.0 to 1 and .9 to 1,
respectively. Management believes that the policyholders' surplus, which was
$81.9 million at December 31, 1996 will be sufficient to support current and
anticipated premium writings. The NAIC also requires property and casualty
insurers to meet risk-based capital standards. 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, policyholders' surplus at December 31, 1996 is in
excess of the prescribed risk-based capital requirements.
INFLATION
Property and casualty insurance premiums are established before the amount of
losses and LAE, 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 interest
rates could result in a decline in the market value of the Company's investment
portfolio and resulting unrealized losses and/or reductions in shareholders'
equity.
10
<PAGE> 11
[LOGO] CONSOLIDATED BALANCE SHEETS
================================================================================
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
(in Thousands, Except Share Data)
<TABLE>
<CAPTION>
As of December 31,
-------------------
ASSETS 1996 1995
----- --------
<S> <C> <C>
Investments:
Fixed Maturities Available for Sale at Market
(Amortized Cost $137,757 and $117,740)
(including $24,867 and $30,648 in Trust Accounts). $ 141,236 $121,848
Equity Securities At Market (Cost $19,648 and $9,685)
(including $0 and $118 in Trust Accounts).......... 27,342 12,558
--------- --------
Total Investments ..................................... 168,578 134,406
Cash and Cash Equivalents
(including $1,224 and $3,048 in Trust Accounts) ..... 11,483 5,680
Accrued Investment Income ............................. 2,626 2,172
Premiums Receivable ................................... 8,112 7,898
Prepaid Reinsurance Premiums and
Reinsurance Receivables ............................. 18,078 12,785
Deferred Acquisition Costs ............................ 9,033 5,157
Property and Equipment ................................ 5,226 3,868
Goodwill - Less Accumulated Amortization
of $1,313 and $1,120 ................................ 771 964
Deferred Income Taxes ................................. -- 4
Other Assets .......................................... 2,031 1,214
--------- --------
TOTAL ASSETS .......................................... $ 225,938 $174,148
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy Liabilities and Accruals:
Unpaid Loss And Loss Adjustment Expenses ............ $ 96,642 $ 77,686
Unearned Premiums ................................... 33,154 18,119
--------- --------
Total Policy Liabilities and Accruals ................. 129,796 95,805
Premiums Payable ...................................... 698 2,445
Payable for Investment Purchases ...................... -- 1,017
Other Liabilities ..................................... 7,614 6,051
Deferred Income Taxes ................................. 1,240 -
Income Taxes Payable .................................. 948 514
--------- --------
TOTAL LIABILITIES ..................................... 140,296 105,832
--------- --------
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, 6,039,806 and
5,813,851 Shares Issued and Outstanding ........... 41,167 39,057
Notes Receivable from Shareholders .................. (924) -
Unrealized Investment Appreciation (Depreciation),
Net of Deferred Income Taxes ...................... 7,374 4,608
Retained Earnings ................................... 38,025 24,651
--------- --------
TOTAL SHAREHOLDERS' EQUITY ............................ 85,642 68,316
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.. .......... $ 225,938 $174,148
========= ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
11
<PAGE> 12
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Gross Earned Premiums ...................... $ 121,820 $ 99,507 $ 84,657
Ceded Earned Premiums ...................... (49,770) (41,319) (32,572)
----------- ----------- -----------
Net Earned Premiums ........................ 72,050 58,188 52,085
Net Investment Income ...................... 7,910 6,506 4,902
Net Realized Investment Gain (Loss) ........ 260 181 (1,697)
Other Income ............................... 282 309 314
----------- ----------- -----------
TOTAL REVENUE ............................ 80,502 65,184 55,604
----------- ----------- -----------
Losses and Expenses:
Loss and Loss Adjustment Expenses .......... 44,720 40,661 34,020
Net Reinsurance Recoveries ................. (4,602) (7,434) (3,011)
----------- ----------- -----------
Net Loss And Loss Adjustment Expenses ...... 40,118 33,227 31,009
Acquisition Costs and Other
Underwriting Expenses .................... 22,210 17,105 15,541
Other Operating Expenses ................... 1,386 2,564 1,347
----------- ----------- -----------
TOTAL LOSSES AND EXPENSES ................ 63,714 52,896 47,897
----------- ----------- -----------
Income Before Income Taxes .................. 16,788 12,288 7,707
----------- ----------- -----------
Income Tax Expense (Benefit):
Current .................................... 3,596 2,760 2,902
Deferred ................................... (182) (302) (1,168)
----------- ----------- -----------
TOTAL INCOME TAX EXPENSE ................. 3,414 2,458 1,734
----------- ----------- -----------
NET INCOME ............................... $ 13,374 $ 9,830 $ 5,973
=========== =========== ===========
Per Average Common Share Data:
NET INCOME ............................... $ 1.88 $ 1.44 $ 0.90
=========== =========== ===========
Weighted Average Shares and Share Equivalents
Used in Computation of Net Income
Per Common Share ........................... 7,126,624 6,838,353 6,637,802
=========== =========== ===========
</TABLE>
REVENUE
($'s IN MILLIONS)
1994..........$55.6
1995..........$65.2
1996..........$80.5
NET INCOME
($'s IN MILLIONS)
1994..........$ 6.0
1995..........$ 9.8
1996..........$13.4
The accompanying notes are an integral part of the consolidated financial
statements.
12
<PAGE> 13
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
================================================================================
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Common Shares:
Balance at Beginning of Year .................... 5,813,851 5,813,851 5,813,851
Issuance of Shares
Pursuant to Employee Stock Purchase Plan ...... 78,455 - -
Pursuant to Employee Stock Option Plan ........ 147,500 - -
----------- ----------- -----------
BALANCE AT END OF YEAR ...................... 6,039,806 5,813,851 5,813,851
=========== =========== ===========
Common Stock:
Balance at Beginning of Year .................... $ 39,057 $ 39,096 $ 39,101
Issuance of Shares
Pursuant to Employee Stock Purchase Plan ...... 1,131 - -
Exercise of Employee Stock Options .............. 979 - -
Other ........................................... - (39) (5)
----------- ----------- -----------
BALANCE AT END OF YEAR ...................... 41,167 39,057 39,096
----------- ----------- -----------
Notes Receivable from Shareholders:
Balance at Beginning of Year .................... - - (97)
Notes Receivable Issued
Pursuant to Employee Stock Purchase Plan ...... (1,131) - -
Collection of Notes Receivable .................. 207 - 97
----------- ----------- -----------
BALANCE AT END OF YEAR ...................... (924) - -
----------- ----------- -----------
Unrealized Investment Appreciation (Depreciation),
Net of Deferred Income Taxes:
Balance at Beginning of Year .................. 4,608 (1,317) 1,166
Change in Unrealized Investment Appreciation
(Depreciation), Net of Deferred Income Taxes 2,766 5,925 (2,483)
----------- ----------- -----------
BALANCE AT END OF YEAR ...................... 7,374 4,608 (1,317)
----------- ----------- -----------
Retained Earnings:
Balance at Beginning of Year .................... 24,651 14,821 8,848
Net Income ...................................... 13,374 9,830 5,973
----------- ----------- -----------
BALANCE AT END OF YEAR ...................... 38,025 24,651 14,821
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY .................. $ 85,642 $ 68,316 $ 52,600
=========== =========== ===========
</TABLE>
SHAREHOLDERS' EQUITY
($'s IN MILLIONS)
1994............$52.6
1995............$68.3
1996............$85.6
The accompanying notes are an integral part of the consolidated financial
statements.
13
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
(In Thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net Income ......................................... $ 13,374 $ 9,830 $ 5,973
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Net Realized Investment (Gain) Loss ............ (260) (181) 1,697
Depreciation and Amortization Expense .......... 930 951 875
Deferred Income Tax Benefit .................... (182) (302) (1,168)
Change in Premiums Receivable .................. (214) 860 599
Change in Other Receivables .................... (5,747) (5,748) (1,323)
Change in Deferred Acquisition Costs ........... (3,876) (1,246) (1,004)
Change in Other Assets ......................... (817) (363) (185)
Change in Unpaid Loss and
Loss Adjustment Expenses ..................... 18,956 18,511 14,922
Change in Unearned Premiums .................... 15,035 4,673 4,442
Change in Premiums Payable and Other Liabilities (184) (1,696) (842)
Change in Income Taxes Payable ................. 548 (53) (614)
-------- -------- --------
Net Cash Provided by Operating Activities .... 37,563 25,236 23,372
-------- -------- --------
Cash Flows from Investing Activities:
Proceeds from Sales of Investments in
Fixed Maturities Available for Sale .............. 2,594 12,543 11,668
Proceeds from Maturity of Investments in
Fixed Maturities Available for Sale .............. 9,476 1,272 3,061
Proceeds from Sale of Investments in
Fixed Maturities Held to Maturity ................ - 915 -
Proceeds from Maturity of Investments in
Fixed Maturities Held to Maturity ................ - 932 511
Proceeds from Sales of Investments in
Equity Securities ................................ 2,168 5,655 967
Cost of Fixed Maturities
Available for Sale Acquired ...................... (32,783) (47,101) (29,970)
Cost of Fixed Maturities
Held to Maturity Acquired ........................ - (301) (10,414)
Cost of Equity Securities Acquired ................. (12,412) (5,616) (2,089)
Other - Net ........................................ - (3,000) 3,000
Purchase of Property and Equipment ................. (1,989) (1,319) (455)
-------- -------- --------
Net Cash Used for Investing Activities ....... (32,946) (36,020) (23,721)
-------- -------- --------
Cash Flows from Financing Activities:
Exercise of Employee Stock Options ................. 979 - -
Collection of Notes Receivable ..................... 207
-------- -------- --------
Net Cash Provided by Financing Activities .... 1,186 - -
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents . 5,803 (10,784) (349)
Cash and Cash Equivalents at Beginning of Year ....... 5,680 16,464 16,813
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............. $ 11,483 $ 5,680 $ 16,464
======== ======== ========
Cash Paid During the Year for:
Income Taxes ....................................... $ 3,024 $ 3,323 $ 3,542
Non-Cash Transactions:
Issuance of Shares Pursuant to
Employee Stock Purchase Plan ..................... $ 1,131 $ $ -
Notes Receivable Issued Pursuant to
Employee Stock Purchase Plan ..................... $ (1,131) $ - $ -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
14
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
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 two Pennsylvania domiciled property and casualty
insurance companies, Philadelphia Indemnity Insurance Company and Philadelphia
Insurance Company ("Insurance Subsidiaries"), and an underwriting manager
Maguire Insurance Agency, Inc. The Company designs, markets and underwrites
specialty commercial property and casualty insurance products for the rent a car
industry, automobile leasing industry, non-profit organizations, the health,
fitness and wellness industry and selected classes of professional liability.
All marketing, underwriting, claims management, investment and general
administration is provided by the underwriting manager.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
prepared in conformity with generally accepted accounting principles. All
significant intercompany balances and transactions have been eliminated in
consolidation. The preparation of financial statements requires making estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Certain
prior years' amounts have been reclassified for comparative purposes.
(A) INVESTMENTS
Investments classified as Available for Sale are carried at market value with
the change in unrealized appreciation (depreciation) credited or charged
directly to shareholders' equity, net of applicable deferred income taxes.
A tax exempt debt security was sold from the Held to Maturity category on
April 16, 1995 at its market value of $915,000 due to a significant
deterioration of the issuer's creditworthiness evidenced by the Standard and
Poor's rating downgrade from BBB- to B on April 11, 1995. The amortized cost of
this security was $972,000 resulting in a realized investment loss of $57,000 at
the date of sale.
During 1995 implementation guidance for Statement of Financial Accounting
Standards (SFAS) No. 115 was adopted. Upon adoption, the appropriateness of the
classifications for all securities held was reassessed. This reassessment
resulted in reclassifying all securities in the Held to Maturity category to the
Available for Sale category. The aggregate market value, amortized cost and
unamortized unrealized loss on these securities was $25,601,000, $24,690,000,
and $243,000, respectively. The reclassification from this one-time reassessment
pursuant to the initial adoption of the implementation guidance does not call
into question the intent to potentially hold other debt securities to maturity
in the future.
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. The Company's investments in fixed maturities which
have been classified as Available for Sale are those securities that the Company
anticipates would be available to be sold in response to changes in the factors
discussed above.
Investments in fixed maturities are adjusted for amortization of premiums and
accretion of discounts to maturity date. Income is recognized on the accrual
basis.
Equity securities are carried at market value with the change in unrealized
appreciation (depreciation) credited or charged directly to shareholders'
equity, net of applicable deferred income taxes.
Realized investment gains and losses are calculated on the specific
identification basis and recorded as income when the securities are sold.
(B) CASH AND CASH EQUIVALENTS
Cash equivalents, consisting of fixed maturity investments with maturities of
three months or less when purchased and money market funds, are stated at cost
which approximates market value.
(C) DEFERRED ACQUISITION COSTS
Policy acquisition costs, which include commissions, premium taxes, fees and
other costs of underwriting policies, are deferred and amortized over the same
period in which the related premiums are earned. Deferred acquisition costs are
limited to the estimated amounts recoverable after providing for losses and
expenses that are expected to be incurred, based upon historical and current
experience, as the premiums are earned. Amortization of policy acquisition costs
in the accompanying consolidated statements of operations was $22,210,000,
$17,105,000, and $15,541,000 for the years ended December 31, 1996, 1995 and
1994, 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
15
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
the dates the systems technology become 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
Acquisition costs in excess of the fair value of the net assets acquired are
being amortized on a straight-line basis over 20 years.
(F) RESERVES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
The liability for unpaid loss and loss adjustment expenses includes an amount
determined on the basis of claims adjusters' evaluations and an amount, based on
past experience, for losses incurred but not reported. Such liabilities are
necessarily based on estimates, and while management believes that the amount is
adequate, the ultimate liability may be in excess of, or less than, the amount
provided. The methods of making such estimates and establishing the resulting
liabilities are continually reviewed and updated and any adjustments resulting
therefrom are reflected in operations currently.
(G) UNEARNED PREMIUMS
Premiums are generally earned on a pro rata basis over the terms of the
policies. Premiums applicable to the unexpired terms of the policies in-force
are reported as unearned premiums.
(H) REINSURANCE CEDED
In the normal course of business, the Company seeks to reduce the loss that
may arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with reinsurers. Amounts
recoverable from reinsurers are estimated in a manner consistent with the
reinsured policy. Amounts for reinsurance assets and liabilities are reported
gross.
(I) 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 (see Note
8).
(J) 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.
2. STATUTORY INFORMATION
Accounting Practices: The Philadelphia Indemnity Insurance Company ("PIIC")
and the Philadelphia Insurance Company ("PIC") are domiciled in the Commonwealth
of Pennsylvania. PIIC and PIC are required to report to certain regulatory
agencies on the basis of Statutory Accounting Practices ("SAP"). The statutory
financial statements are prepared in accordance with accounting practices
prescribed or permitted by the Insurance Department of the Commonwealth of
Pennsylvania. Prescribed statutory accounting practices include a variety of
publications of the National Association of Insurance Commissioners (NAIC), as
well as Commonwealth laws, regulations and general administrative rules.
Permitted Statutory Accounting Practices encompass all accounting practices not
so prescribed.
Generally accepted accounting principles (GAAP) differ in certain respects
from SAP prescribed or permitted by the Insurance Department of the Commonwealth
of Pennsylvania. 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 values.
Under SAP, policy acquisition costs, such as commissions, premium taxes,
fees, and other costs of underwriting policies are charged to current
operations as incurred, whereas, the related written premium is included in
earnings on a pro rata basis over the period covered by the policy;
Under SAP, certain assets, designated as "Non-admitted Assets" (such as
prepaid expenses) are charged against surplus;
Under SAP, federal income taxes are only provided on taxable income for which
income taxes are currently payable, while under GAAP, deferred income taxes
are provided with respect to temporary differences.
Under SAP, certain reserves are established in amounts which differ from
amounts which would be provided in conformity with GAAP.
Financial Information: The statutory capital and surplus of PIIC as of
December 31, 1996 and 1995 was $60,175,000 and $51,235,000, respectively.
Statutory net income of PIIC for the years ended December 31, 1996, 1995 and
1994 was $5,626,000, $5,416,000 and $2,813,000, respectively.
The statutory capital and surplus of PIC as of Decernber 31,1996 and 1995 was
$21,732,000, and $16,314,000, respectively. Statutory net income of PIC for the
years ended December 31, 1996,1995 and 1994 was $3,629,000, $3,587,000 and
$2,111,000, 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 PIIC may pay to
Philadelphia Insurance during 1997 without prior approval is $6,017,000 and the
maximum dividend which PIC may pay to Philadelphia Insurance during 1997 without
prior approval is $3,629,000.
16
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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, PIIC's and
PIC's capital and surplus at December 31, 1996 is in excess of the prescribed
risk-based capital requirements.
3. INVESTMENTS
The Company invests primarily in investment grade fixed maturities, the
majority of which are rated "A" or better by Standard and Poor's. The cost,
gross unrealized gains and losses, estimated market value and carrying value of
investments as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED MARKET CARRYING
COST(1) GAINS LOSSES VALUE(2) VALUE
------- ---------- ---------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
December 31, 1996:
Fixed Maturities:
Available for Sale
U.S. Treasury Securities
and Obligations of
U.S. Government
Corporations and Agencies $ 20,450 $ 159 $ 52 $ 20,557 $ 20,557
Obligations of States and
Political Subdivisions 105,682 3,369 164 108,887 108,887
Corporate Debt Securities 11,625 236 69 11,792 11,792
- --------------------------------------------------------------------------------------------------------
Total Fixed Maturities
Available for Sale 137,757 3,764 285 141,236 141,236
- --------------------------------------------------------------------------------------------------------
Equity Securities 19,648 7,930 236 27,342 27,342
- --------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $157,405 $11,694 $521 $168,578 $168,578
========================================================================================================
December 31, 1995:
Fixed Maturities:
Available for Sale
U.S. Treasury Securities
and Obligations of
U.S. Government
Corporations and Agencies $ 14,594 $ 276 $ 28 $ 14,842 $ 14,842
Obligations of States and
Political Subdivisions 91,002 3,642 137 94,506 94,506
Corporate Debt Securities 12,144 443 88 12,500 12,500
- --------------------------------------------------------------------------------------------------------
Total Fixed Maturities
Available for Sale 117,740 4,361 253 121,848 121,848
- --------------------------------------------------------------------------------------------------------
Equity Securities 9,685 2,906 33 12,558 12,558
- --------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $127,425 $ 7,267 $286 $134,406 $134,406
========================================================================================================
</TABLE>
(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, 1996.
The cost and estimated market value of fixed maturity securities at December
31, 1996, by remaining contractual maturity, are shown 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.
<TABLE>
<CAPTION>
ESTIMATED
MARKET
COST(1) VALUE(2)
------- ---------
(In Thousands)
<S> <C> <C>
Due in One Year or Less - -
Due After One Year
Through Five Years 31,956 32,405
Due After Five Years
Through Ten Years 76,625 78,217
Due After Ten Years 29,176 30,614
- -------------------------------------------------
$137,757 $141,236
=================================================
</TABLE>
(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, 1996,
1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fixed Maturities:
Available for Sale $7,377 $4,583 $3,356
Held to Maturity - 1,366 997
Equity Securities 257 217 289
Cash and Cash Equivalents 422 479 380
--------------------------------------------------------------------------
Total Investment Income 8,056 6,645 5,022
Investment Expense (146) (139) (120)
--------------------------------------------------------------------------
NET INVESTMENT INCOME $7,910 $6,506 $4,902
==========================================================================
</TABLE>
There are no investments in fixed maturity securities that were non-income
producing during the years ended December 31,1996, 1995 and 1994. Investment
expense includes $60,000,$84,000 and $84,000 in advisory fees paid to a related
party in 1996, 1995 and 1994, respectively.
17
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Realized pre-tax gains (losses) on the sale of investments for the years ended
December 31, 1996, 1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ----- -------
<S> <C> <C> <C>
Fixed Maturities:
Available for Sale
Gross Realized Gains $ 47 $ 403 $ 49
Gross Realized Losses (28) (43) (1,762)
----------------------------------------------------
Net Gain (Loss) 19 360 (1,713)
----------------------------------------------------
Held to Maturity
Gross Realized Losses - (57) -
----------------------------------------------------
Net Loss - (57) -
----------------------------------------------------
Equity Securities
Gross Realized Gains 280 223 78
Gross Realized Losses (39) (345) (62)
----------------------------------------------------
Net Gain (Loss) 241 (122) 16
----------------------------------------------------
TOTAL NET REALIZED
INVESTMENT Gain (Loss) $ 260 $ 181 $(1,697)
====================================================
</TABLE>
4. RESTRICTED ASSETS
PIIC and PIC have investments, principally U.S. Treasury securities on
deposit with the various states in which they are licensed insurers. At
December 31, 1996 and 1995 the carrying value on deposit totaled $7,070,000 and
$7,181,000 respectively.
5. TRUST ACCOUNTS
The Company is required to maintain certain investments in trust accounts
under reinsurance agreements with unrelated insurance companies that cede
insurance risks to the Company. At December 31, 1996 and 1995, the Company had
investments with a carrying value of $2,868,000 and $6,573,000, respectively, in
trust accounts pursuant to a terminated quota share reinsurance agreement. Under
the terms of this agreement, net premiums received by the Company were invested
and held in a trust account to pay future claims. Interest income on these
investments is distributed to the parties to the quota share agreement on a
quarterly basis. The Company receives its interest in net trust investments in
accordance with a formula that specifies certain percentages of funds to be
released over a five-year period as losses are settled.
The Company also maintains investments in trust accounts under current
reinsurance agreements with unrelated insurance companies. These investments
collateralize the Company's obligations under the reinsurance agreements. The
Company possesses sole responsibility for investment and reinvestment of the
trust account assets. All dividends, interest and other income resulting from
investment of these assets are owned by the Company, and are distributed on a
monthly basis. At December 31, 1996 and 1995, the carrying value of these trust
fund investments were $23,223,000 and $27,241,000, 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.
6. PROPERTY AND EQUIPMENT
The following table summarizes property and equipment at December 31, 1996 and
1995 (in thousands):
<TABLE>
<CAPTION>
December 31,
------------ Estimated Useful
1996 1995 Lives (years)
------- -------- ----------------
<S> <C> <C> <C>
Furniture, Fixtures
and Automobiles $ 2,256 $ 2,047 5-7
Computer and
Telephone
Equipment 6,004 4,860 3-7
Land and Building 2,272 2,269 40
Leasehold Improvements 812 179 12
------------------------------------------------------------
11,344 9,355
Accumulated
Depreciation and
Amortization (6,118) (5,487)
------------------------------------------------------------
PROPERTY AND EQUIPMENT $ 5,226 $ 3,868
============================================================
</TABLE>
Included in property and equipment are costs incurred in developing or
purchasing information systems technology of $2,447,600 and $1,968,100 in 1996
and 1995, respectively. Amortization of these costs was $100,100, $115,000 and
$215,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Depreciation expense excluding amortization of capitalized information systems
technology costs was $530,000, $395,000 and $355,900 for the years ended
December 31, 1996, 1995 and 1994, respectively.
7. 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):
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at January 1 $ 77,686 $ 59,175 $ 44,253
Less Reinsurance Recoverables 9,440 5,580 5,539
-------- -------- --------
Net Balance at January 1 68,246 53,595 38,714
-------- -------- --------
Incurred related to:
Current Year 41,083 34,152 31,120
Prior Years (965) (925) (111)
-------- -------- --------
Total Incurred 40,118 33,227 31,009
-------- -------- --------
Paid related to:
Current Year 7,427 6,186 5,336
Prior Years 15,214 12,390 10,792
-------- -------- --------
Total Paid 22,641 18,576 16,128
-------- -------- --------
Net Balance at December 31 85,723 68,246 53,595
Plus Reinsurance Recoverables 10,919 9,440 5,580
-------- -------- --------
Balance at December 31 $ 96,642 $ 77,686 $ 59,175
======== ======== ========
</TABLE>
As a result of changes in estimates of insured events of prior years, the
Company reduced losses and loss adjustment expenses
18
<PAGE> 19
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
incurred by $965,000, $925,000, and $111,000 in 1996, 1995, and 1994,
respectively. Such favorable development was due to losses emerging at a lesser
rate than had been originally anticipated when the initial reserves for the
applicable accident years were estimated.
8. INCOME TAXES
The composition of deferred tax assets and liabilities and the related tax
effects as of December 31,1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
December 3l,
-----------------
1996 1995
---- ----
<S> <C> <C>
Assets:
Effect of Loss Reserve Discounting $ 4,725 $3,989
Excess of Tax Over Financial
Reporting Earned Premium 1,922 1,110
Other Assets 127 -
- ------------------------------------------------------
Total Assets 6,774 5,099
======================================================
Liabilities:
Deferred Policy Acquisition Costs,
Deductible for Tax 3,074 1,756
Property and Equipment Basis 416 240
Tax Effect of Unrealized
Appreciation of Securities 3,798 2,372
Other Liabilities 726 727
- ------------------------------------------------------
Total Liabilities 8,014 5,095
- ------------------------------------------------------
Net Deferred Income Tax Asset
(Liability) $(1,240) $ 4
======================================================
</TABLE>
The following table summarizes the differences between the Company's
effective tax rate for financial statement purposes and the Federal statutory
rate (in thousands):
<TABLE>
<CAPTION>
Amount of Tax Percent
------------- -------
<S> <C> <C>
For the year ended December 3l, 1996:
Federal Tax at Statutory Rate $ 5,708 34%
Nontaxable Municipal Bond Interest
and Dividends Received Exclusion (1,670) (10)
Other, Net (624) (4)
- ----------------------------------------------------------
INCOME TAX EXPENSE $ 3,414 20%
==========================================================
For the year ended December 3l, 1995:
Federal Tax at Statutory Rate $ 4,178 34%
Nontaxable Municipal Bond Interest
and Dividends Received Exclusion (1,303) (11)
Other, Net (417) (3)
- ----------------------------------------------------------
INCOME TAX EXPENSE $ 2,458 20%
==========================================================
For the year ended December 3l, 1994:
Federal Tax at Statutory Rate $ 2,620 34%
Nontaxable Municipal Bond Interest
and Dividends Received Exclusion (1,128) (14)
Other, Net 242 3
- ----------------------------------------------------------
INCOME TAX EXPENSE $ 1,734 23%
==========================================================
</TABLE>
As of December 31,1996, the Company has approximately $1.3 million in net
operating loss carryforwards, which expire in 2000 and 2001, available to offset
future taxable income. Utilization of the loss carryforwards is limited to an
annual amount of $336,000. For financial reporting purposes, the tax benefit of
any utilization of these operating loss carryforwards is applied to reduce
goodwill ($114,000 in 1996) and does not reduce income tax expense.
Philadelphia Insurance has entered into tax sharing agreements with each of
its subsidiaries. Under the terms of these agreements, the income tax provision
is computed as if each subsidiary were filing a separate federal income tax
return including adjustments for the income tax effects of net operating losses
and other special tax attributes regardless of whether those attributes are
utilized in the Company's consolidated federal income tax return.
9. 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 $10,919,000 and $9,440,000 at December 31, 1996 and 1995, respectively. The
Company evaluates the financial condition of its reinsurers to minimize its
exposure to losses from reinsurer insolvencies. Approximately 97% and 96% of the
ceded reinsurance reserves as of December 31, 1996 and 1995 respectively, are
with 4 companies rated 'A' (Excellent) or better by A.M. Best Company.
Additionally, approximately 4%, 11 % and 10% of the Company's net written
premiums for the years ended December 31, 1996, 1995 and 1994 respectively, were
assumed from an unrelated reinsurance company.
The effect of reinsurance on premiums written and earned is as follows (in
thousands):
<TABLE>
<CAPTION>
Written Earned
-------- --------
<S> <C> <C>
For the Year Ended December 31, 1996:
Direct Business $132,611 $117,354
Reinsurance Assumed 4,244 4,466
Reinsurance Ceded 52,861 49,770
- --------------------------------------------------------------------
NET PREMIUMS $ 83,994 $ 72,050
- --------------------------------------------------------------------
Percentage Assumed of Net 6.2%
====================================================================
For the Year Ended December 31, 1995:
Direct Business $ 97,519 $ 92,046
Reinsurance Assumed 6,661 7,461
Reinsurance Ceded 42,108 41,319
- --------------------------------------------------------------------
NET PREMIUMS $ 62,072 $ 58,188
- --------------------------------------------------------------------
Percentage Assumed of Net 12.8%
====================================================================
For the Year Ended December 31, 1994:
Direct Business $ 83,638 $ 76,577
Reinsurance Assumed 5,461 8,080
Reinsurance Ceded 33,701 32,572
- --------------------------------------------------------------------
NET PREMIUMS $ 55,398 $ 52,085
- --------------------------------------------------------------------
Percentage Assumed of Net 15.5%
====================================================================
</TABLE>
19
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO]
================================================================================
10. SHAREHOLDERS' EQUITY
The Company has established non-qualified stock bonus and stock option plans.
Under the stock bonus plan, the Company has granted a total of 68,750 shares to
certain officers of the Company, of which all such shares have been issued and
are vested.
Under the Company's stock option plan, stock options may be granted for the
purchase of common stock at a price not less than the fair market value on the
date of grant. Options are generally exercisable pro rata over a five year
period, except for options issued in 1996 and 1995 which are exercisable after
the expiration of five years following the grant date. Under this plan, the
Company has reserved 637,500 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 1,306,746
stock options.
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does
not require companies to record compensation cost for stock-based employee
compensation plans at a fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related Interpretations. Accordingly, compensation cost for the
Company's compensation instruments is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
The following is a summary of the Company's option activity, including
weighted average option information:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------- --------------------------- ----------------------------
Exercise Exercise Exercise
Price Price Price
Options Per Option(1) Options Per Option(1) Options Per Option(1)
------------------------------- --------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,600,321 $ 5.68 1,592,371 $ 5.62 1,623,996 $ 5.72
Granted 458,950 $16.77 21,700 $12.21 15,000 $ 9.71
Exercised (146,250) $ 6.65 (10,000) $ 8.94 (625) $ 5.21
Canceled (126,875) $16.09 (3,750) $ 9.88 (46,000) $ 10.46
--------- --------- ---------
Outstanding at end of year 1,786,146 $ 7.71 1,600,321 $ 5.68 1,592,371 $ 5.62
========= ========= =========
Exercisable at end of year 1,409,609 1,539,696 1,529,159
Weighted-average fair value of
options granted during this year $5.73 $4.28
</TABLE>
<TABLE>
<CAPTION>
Outstanding Exercise Remaining Exercisable Exercise
at December Price Contractual at December Price
Range of Exercise Prices 31, 1996 Per Option(1) Life (Years) 31,1996 Per Option(1)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.21 1,361,746 $ 5.21 6.1 1,345,859 $ 5.21
$9.50 to $14.63 90,450 $11.14 4.5 63,750 $10.89
$16.25 to $18.63 333,950 $16.95 9.2 - -
--------- ---------
1,786,146 $ 7.71 1,409,609 $ 5.47
========= =========
</TABLE>
(1) Weighted Average Exercise Price Per Option.
20
<PAGE> 21
[LOGO] NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
On May 9,1996 the Company's shareholders approved a non-qualified Employee
Stock Purchase Plan (the "Stock Purchase Plan"). The aggregate maximum number of
shares that may be issued pursuant to the Stock Purchase Plan is 250,000. 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 (6) 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 26,072 and 50,583 shares in 1996 and 1995, respectively. The
weighted average fair value of those purchase rights granted in 1996 and 1995
was $3.02 and $3.04, respectively.
Since the Company has adopted the disclosure-only provisions of SFAS No. 123,
no compensation cost has been recognized for the Company's compensation
instruments. The following represents pro forma information as if the Company
recorded compensation costs using the fair value of the issued compensation
instruments (the results may not be indicative of the actual effect on net
income in future years):
<TABLE>
<CAPTION>
1996 1995
------- ------
(In Thousands)
<S> <C> <C>
Net Income As Reported $13,374 $9,830
Assumed Stock Compensation Cost 281 22
------- ------
Pro Forma Net Income $13,093 $9,808
======= ======
Net Income Per Average Common
Share As Reported $ 1.88 $ 1.44
======= ======
Pro Forma Net Income Per
Average Common Share $ 1.84 $ 1.43
======= ======
</TABLE>
The fair value of options at date of grant was estimated using the Black-
Scholes valuation model with the following weighted average assumptions:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Expected Stock Volatility 20.0% 19.3%
Risk Free Interest Rate 5.8% 6.4%
Expected Option Life-Years 6.0 6.0
Expected Dividends 0.0% 0.0%
</TABLE>
11. PROFIT SHARING
The Company has a defined contribution Profit Sharing Plan, which
includes a 40lk 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
25% of the participant's pretax 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 at all times in their contributions, and are fully vested in
the Company's contribution upon completion of 7 years of service. The Company's
contributions to the plan were $322,400, $267,500, and $185,700 in 1996, 1995
and 1994, respectively.
12. 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 might have a material adverse effect on the Company's financial
condition or results of operations.
The Company currently leases office space to serve its headquarters
location and 36 field offices for its production underwriters. Rental expense
for these operating leases was $736,700, $187,800 and $123,500 for the years
ended December 31, 1996, 1995 and 1994, respectively.
At December 31, 1996, the future minimum rental payments required under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year as of December 31, 1996 were as follows:
<TABLE>
<S> <C>
Years ending December 31:
1997 $ 919,000
1998 864,000
1999 807,000
2000 778,000
2001 and Thereafter 1,592,000
--------------------------------------
TOTAL MINIMUM
PAYMENTS REQUIRED $4,960,000
======================================
</TABLE>
21
<PAGE> 22
REPORT OF INDEPENDENT ACCOUNTANTS [LOGO]
================================================================================
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF PHILADELPHIA CONSOLIDATED HOLDING
CORP.:
We have audited the accompanying consolidated balance sheets of Philadelphia
Consolidated Holding Corp. and Subsidiaries as of December 31, 1996 and 1995 and
the related consolidated statements of operations, changes in shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Philadelphia Consolidated Holding Corp. and Subsidiaries as of December 31, 1996
and 1995 and the consolidated results of their operations and their cash flows
for each of the three years in the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
----------------------------
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 7, 1997
22
<PAGE> 23
UNDERWRITING & MARKETING
================================================================================
UNDERWRITING
There are three independent underwriting divisions which support each other.
Collectively, their primary responsibility is to price all business, manage the
risk selection process, provide customer service and monitor loss ratios by
product and by account.
THE SPECIALTY LINES DIVISION
The Specialty Lines Division markets and underwrites Directors and Officers
Liability to Non- profit Organizations, Errors and Omissions Liability for
Property Casualty Insurance Agents and Brokers, Miscellaneous Professional
Liability for various professionals including consultants, counselors and
lawyers. During 1996 the division also introduced EXECUTIVE SAFEGUARD(R)* a
proprietary package policy which includes Directors and Officers Liability,
Employment Practices Liability, Fiduciary Liability and Kidnap/Ransom insurance
for public and private companies. There are certain risks within these broad
categories that we've identified and believe, offer substantial growth
opportunities at profitable margins. James J. Maguire, Jr. ("Jamie"), manages
the Specialty Lines Division which seeks growth through professional
underwriting, superior service and product innovation. Prior to his joining
"PHLY" in June of this year, Jamie spent nine years in Specialty Lines as an
underwriting manager with Great American Insurance Companies and as an Assistant
Vice President with American International Group.
[PHOTOGRAPH JAMES J. MAGUIRE, JR.
VICE PRESIDENT]
THE COMMERCIAL LINES DIVISION
The Commercial Lines Division is operationally structured into underwriting
product teams which service and price specific programs. Each program offers a
comprehensive package policy, including Automobile and General Liability,
Property and Crime Insurance plus Professional Liability specific to each
industry (Example - Health and Fitness instructors or Social Service
Counselors).
[PHOTOGRAPH CHRISTOPHER J. MAGUIRE
ASSISTANT VICE PRESIDENT]
Our largest program is a Social Service Package for NonProfit Organizations
which has been developed over a ten year period and represents forty-three
million dollars of annual premium. Our Company is endorsed as the recommended
insurance underwriter by a half-dozen national associations.
Other program business includes Assisted Living, Day Care Centers, Nursing
Homes, Paratransit Fleets, Private and Vocational Schools, Gated Communities and
last but not least, the Leasing and Rent A Car Industry wherein our Company has
pioneered coverage innovation for the past twenty-five years.
THE REGIONAL UNDERWRITING DIVISION
The Regional Underwriting Division has seven Vice Presidents each managing a
geographic territory under the supervision of Sean S. Sweeney. These
underwriting units are located in offices across the U.S.A. and are linked by
computer, through a Client Server System with the home office data files. By
managing the underwriting process and selecting good accounts at the local level
we can produce consistent, profitable underwriting results and offer speed and
quality service. Local underwriting also unbundles the administrative "log jams"
that central control can sometimes cause, creates a national larger pool of
qualified talent upon which to draw, eliminates time zone service constraints
and finally, helps to identify those exposures, laws and/or coverage amendments
which are unique to a geographic locale.
PRODUCT DEVELOPMENT
Product Development is also part of the regional offices' responsibility. They
participate in and recommend to management new product ideas and enhancements to
existing programs. Although not readily apparent in our 1996 results, the
changes to contracts and the addition of new coverages during the year made a
substantial contribution to our continuing growth. There are also several new
programs which have been in the "test marketing" stage throughout 1996 which the
Company will introduce in 1997. In October we entered into a unique business
partnership with Orion Capital through E.B.I., their Workers' Compensation
Specialty Company. Prior to this partnership our lack of workers' compensation
capability was a marketing impediment in solicitation of nursing homes and
certain large specialty school accounts. With the E.B.I. relationship we are now
able to offer our clients workers' compensation which helps us gain access to
the account balance.
23
<PAGE> 24
UNDERWRITING & MARKETING
================================================================================
MARKETING
We continue to be a product driven organization and "broker friendly." Each
underwriting office has a clearly defined data base of prospects which are
systematically contacted. Our marketing emphasis focuses on establishing a
relationship with both the policyholder and/or his broker. Our renewal retention
rate has been approximately 85% for the last 4 years, largely because we focus
on understanding the needs of the brokers and insureds. Once a transaction has
been consummated we focus on solidifying our relationship via speed of service
and product differentiation. We utilize a mixed marketing approach that includes
PRODUCTION UNDERWRITERS, PREFERRED AGENTS AND INSURANCE BROKERS.
[PHOTOGRAPH SEAN S. SWEENEY, CPCU
SR. VICE PRESIDENT]
PRODUCTION UNDERWRITING OFFICES
Our 37 field underwriting offices are strategically located to service the
major markets across the United States with responsibility for marketing, risk
selection and service to existing accounts.
In 1996, the Company initiated a plan to improve speed and quality of service
with the installation of the Allenbrook System. This new system which is
completely integrated and Windows based, runs in a client server environment and
enables us to quote, price and issue policies and endorsements at the Regional
Off ices with single point data entry. The system couples centralized
underwriting and pricing integrity with local servicing capability. By
empowering our Regional Offices with local service capability we're confident
that brokers and policyholders will find the quality and speed of service more
efficient thus stimulating more business for Philadelphia Insurance Companies.
Each state has different regulations that can impact underwriting decisions.
Our local off ices monitor these regulations and provide intelligence vis-a-vis
their impact. We combine this underwriting expertise with marketing persistence
to assure quality risk selection.
Through local interaction with policyholders and brokers, our production
underwriters have been trained to understand the differences between good and
marginal accounts. In addition, agents and brokers are encouraged to become part
of the underwriting equation thus contributing to our goal of account
profitability. The idea of agents and brokers contributing to underwriting
profitability was the foundation of the "PREFERRED AGENTS PROGRAM."
PREFERRED AGENTS
Just as we are niche underwriters there are brokers who do the same. In 1996,
we instituted a marketing campaign to unearth these brokers and create a
business relationship. What's unique about the Preferred Agent Plan is that for
many years as a specialist we competed with these same brokers, have grown to
respect their expertise, and in 1996, initiated a plan to have them join forces
with us. In a sense their book of business was pre-underwritten, because we had
been evaluating these risks for submission purposes over the years. The synergy
of specialists working together in this case created a positive underwriting
result because both parties understand the risk. A tremendous amount of
marketing momentum has been created since the introduction of this plan and we
believe there is a growth opportunity for years to come. Thus far we have
generated 28 new relationships and over $12,000,000 of new premium.
BROKERS
With a focus on being "broker friendly" we have increased the number of broker
relationships to 3,000.
We provide them with marketing support, timely quotes and value-added coverage
enhancements. Once our underwriting staff accepts and quotes an account and the
risk is thereafter bound, we continue this support with prompt policy issuance
and pro-active training on risk avoidance. All programs include interest-free
monthly direct bill as well as 800 claims service. This enables independent
brokers to focus on customer service without increasing their overhead. In our
relationships with brokers, we try to increase their operating efficiencies
through target marketing. With a clearly defined class of business and premier
products that fit the needs of the policyholder, we can assist in the qualifying
process to assure that our proposal is presented to the prospective insured in a
professional fashion. In many cases our underwriters are available to assist in
the presentation. On a monthly basis, we monitor loss ratios and hit ratios to
optimize our relationships with brokers. Our monthly minimum success rate of
submissions to sales is over 20%. A key strength in achieving this goal is the
positive relationship forged by our local offices with local brokers.
24
<PAGE> 25
[LOGO] UNDERWRITING & MARKETING
================================================================================
PRODUCT PROMOTION
The Company utilizes a multi-faceted distribution strategy to assure a regular
flow of submissions as well as enabling the Company to seize emerging market
opportunities. All production underwriting efforts are supported by: direct
mail; print media advertising; industry trade shows and telemarketing. A new
advertising campaign was developed in 1996 which featured our products and their
uniqueness. It has been extremely successful and should continue to generate
positive marketing activity.
The foundation has been laid to continue solid growth in each of our
underwriting divisions.
SPECIALTY LINES
With the arrival of James J. Maguire, Jr. (Jamie) to lead our Specialty Lines
Division we have significantly expanded the products and niche industries
serviced. Jamie's underwriting experience and expertise have enabled us to
broaden our target market in existing niches and to develop new products. A
clear illustration of the success we have experienced in broadening our target
market is with the Insurance Agents Errors and Omissions product. Our initial
focus had been the small non-standard personal auto agents. We broadened our
focus to include large regional brokers, Managing General Agents, Wholesalers
and Insurance Underwriters. Miscellaneous professional liability, another core
product, has been expanded from Management, Marketing and Computer Consultants
to include Title Agents, Mortgage Brokers, Claims Examiners and a host of other
professions.
The new Executive Safeguard Directors and Officers Liability program is
available to both private and public companies and has a wide range of unique
coverage features that truly differentiates us from the competition. Our
Non-Profit Directors and Officers liability policy has also been upgraded to
meet the needs of a more competitive market place.
COMMERCIAL AUTO
A founding principle of our company is not to jeopardize underwriting profit
for the sake of premium volume. The discipline required to execute this
principle is evident in the commercial auto division. The division maintained
underwriting profitability in 1996 while falling short of its premium goals.
Fortunately, it appears this philosophy is starting to pay off as a few of our
competitors seem to be exiting the market. Also, new legislative statutes
regarding secondary liability and financial responsibility shifting are
improving the overall environment for our commercial auto division. We are
refocusing our marketing efforts based on the positive legal climate, with the
anticipation of favorable results.
NEW PROGRAMS
Product development is a continuous effort by company management. Our strategy
in evaluating new programs is to consider books of business only from retail
agents with over $500,000 of annual premium and a potential target market of
over 3,000 prospects.
We have developed special programs for the following industries in 1997:
1. Outfitters and Guides
2. Marriage and Family Counselors
3. Condo Associations
4. Home Health Care
5. Para Transit Commercial Auto Liability
6. Lawyer's Errors and Omissions Liability
We understand the importance of constantly having new ideas in the "pipeline"
to provide us with additional opportunities. Product development and new
programs are an important part of the future of our Company.
INFORMATION TECHNOLOGY
Douglas J. Platt initiated the installation of our company-wide information
network in the fourth quarter of 1995. The foundation of this network is the
Allenbrook Processing System that runs in a Client Server Environment. At year
end 1996 we're about sixty-five percent operational. The system currently is
100% operational in our Specialty Lines Division and processes our rating,
quoting, issuing of laser printed policies, billings, cancellations and
endorsements. Additionally, it provides management reports, such as premium and
claims activity at the policy level, commission processing, general ledger and
reinsurance feeds. With the company-wide information network, our regional
offices are as close to the home office as a stroke on their computer keyboards.
Other important benefits of this installation include the elimination of the
year 2000 data calculation problem, a flexible language tool set which will
facilitate rapid product development and a relational data base structured query
capability for quick assimilation of ad hoc management reports. The energy
expended today in this initiative will play a key role in speed and quality of
future service plus pay for itself through expense savings.
[PHOTOGRAPH DOUGLAS J. PLATT
VICE PRESIDENT]
24
<PAGE> 26
OFFICES & REGIONS
================================================================================
SALES OFFICES AND REGIONS
The Company markets its insurance products through 37 sales offices.
CORPORATE HEADQUARTERS
One Bala Plaza, Suite 100
Bala Cynwyd, PA 19004
Tel (610) 617-7900
Fax (610) 617-7940
NORTHWEST REGION
MASSACHUSETTS
* North Easton, MA
CONNECTICUT
Manchester, CT
MAINE
Scarborough, ME
NEW YORK
+ Mamaroneck, NY
Rochester, NY
MID-ATLANTIC REGION
CENTRAL PA/MARYLAND
* Lancaster, PA
+ Columbia, MD
PENNSYLVANIA/NEW JERSEY
Bala Cynwyd, PA
Hamilton, NJ
VIRGINIA
Falls Church, VA
WESTERN PA/OHIO
+ Brooklyn Heights, OH
Columbus, OH
+ Pittsburgh, PA
SOUTHEAST REGION
FLORIDA
* Winter Park, FL
CAROLINAS
Ft. Mill, SC
GEORGIA
Marietta, GA
KENTUCKY
Louisville, KY
SOUTHWEST REGION
COLORADO
* Littleton, CO
ARIZONA
Mesa, AZ
NEW MEXICO
Albuquerque, NM
OKLAHOMA
Tulsa, OK
TEXAS
Austin, TX
Dallas, TX
CENTRAL REGION
KANSAS/MISSOURI
* Independence, MO
St. Louis, MO
IOWA
West Des Moines, IA
NORTH CENTRAL REGION
ILLINOIS
* Naperville, IL
INDIANA
Indianapolis, IN
MICHIGAN
Manchester, MI
MINNESOTA
Minneapolis, MN
WISCONSIN
Menomonee Falls, WI
WESTERN REGION
CALIFORNIA
* Sacramento, CA
San Francisco, CA
San Juan Capistrano, CA
HAWAII
+ Honolulu, HI
OREGON
Beaverton, OR
WASHINGTON
Seattle, WA
* Regional Sales Office
+ New Office
26
<PAGE> 27
[LOGO] BOARD OF DIRECTORS
================================================================================
FIRST ROW (seated left to right): ROGER L. LARSON; JAMES J. MAGUIRE;
WILLIAM J. HENRICH, JR.
BACK ROW (standing left to right): PAUL R. HERTEL, JR.; THOMAS J. MCHUGH;
SEAN S. SWEENEY; J. EUSTACE WOLFINGTON; MICHAEL J. MORRIS
BOARD OF DIRECTORS
<TABLE>
<S> <C>
JAMES J. MAGUIRE ROGER L. LARSON
CHAIRMAN, PRESIDENT & CEO Former Regional manager
PHILADELPHIA CONSOLIDATED HOLDING CORP. SEARS, ROEBUCK AND CO.
SEAN S. SWEENEY THOMAS J. MC HUGH
SENIOR VICE PRESIDENT President
PHILADELPHIA CONSOLIDATED HOLDING CORP. McHUGH ASSOCIATES, INC.
Investment Consultants
WILLIAM J. HENRICH, JR.
Senior Partner MICHAEL J. MORRIS
DILWORTH, PAXSON, KALISH & KAUFFMAN Former President
Legal Services TRANSPORT INTERNATIONAL POOL CORPORATION
Transport Services
PAUL R. HERTEL, JR.
Chairman J. EUSTACE WOLFINGTON
PAUL HERTEL & COMPANY INC. President
Insurance HALF A CAR,INC.
Automobile Lease Consultants
</TABLE>
27
<PAGE> 28
SHAREHOLDER INFORMATION & OFFICERS [LOGO]
===============================================================================
MARKET AND DIVIDEND
INFORMATION FOR COMMON STOCK
The Company's common stock, no par value, trades on The Nasdaq Stock Market
under the symbol "PHLY." As of February 6, 1997, there were 173 holders of
record and 444 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:
<TABLE>
<CAPTION>
1996 1995
----------------- ----------------
Quarter High Low High Low
------- ---- --- ---- ---
<S> <C> <C> <C> <C>
First 21.000 16.250 13.250 12.250
Second 22.500 18.250 14.625 12.000
Third 21.750 16.750 21.875 14.125
Fourth 24.250 21.250 21.000 16.250
</TABLE>
The Company did not declare cash dividends on its common stock in 1996 and 1995,
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, 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 2 to the
Consolidated Financial Statements).
SUBSIDIARIES
Philadelphia Indemnity Insurance Company
Philadelphia Insurance Company
Maguire Insurance Agency, Inc.
AUDITORS
COOPERS & LYBRAND L.L.P.
Philadelphia, PA
SEC FORM 10-K
A COPY OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION MAY BE OBTAINED WITHOUT CHARGE BY WRITTEN REQUEST TO:
JOSEPH J. BARNHOLT
Assistant Vice President
One Bala Plaza, Suite 100
Bala Cynwyd, PA 19004
TRANSFER AGENT & REGISTRAR
AMERICAN STOCK
TRANSFER & TRUST CO.
6201 15th Avenue
Brooklyn, NY 11219
(718) 921-8275
COMMON STOCK
Listed: NASDAQ
Quoted: (PHLY)
Newspaper: PhilConHldg
ANNUAL MEETING
Date: Thursday, May 8, 1997
Time: 10:00 a.m.
Place: Marriott West
111 West Crawford Avenue
West Conshohocken, PA 19428
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
OFFICERS
<S> <C> <C> <C>
JAMES J. MAGUIRE
Chairman, President, & CEO DOUGLAS J. PLATT CHARLES E. BROGAN ROBERT POTTLE
Vice President, Vice President, Vice President,
SEAN S. SWEENEY Information Technologies Mid-Atlantic Region North Central Region
Senior Vice President,
Director of Marketing JOSEPH J. BARNHOLT PHILLIP D. ELDRIDGE LAWRENCE G. SOLO
Assistant Vice President, Vice President, Vice President,
CRAIG P. KELLER Financial Services Southeast Region Southwest Region
Vice President, Secretary
& CFO EDWARD M. HORNING PATRICK J. McKEON PHILIP W. TWIETMEYER
Assistant Vice President, Vice President, Marketing Vice President, Marketing
WILLIAM J. BENECKE Information Technologies
Vice President, Claims ROBERT O. O'LEARY, JR. STEPHEN E. WESTHEAD
CHRISTOPHER J. MAGUIRE Vice President, Vice President,
JACK T. CARBALLO Assistant Vice President, Northeast Region Central Region
Vice President, Administration Underwriting
CHARLES K. EADONE
JAMES J. MAGUIRE, JR. JEAN M. PITTMAN Vice President,
Vice President, Underwriting Assistant Vice President, Westerm Region
Information Technologies
</TABLE>
28
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement of
Philadelphia Consolidated Holding Corp. on Form S-8 (File No. 33-81346) of our
reports dated February 7, 1997 on our audits of the consolidated financial
statements and financial statement schedules of Philadelphia Consolidated
Holding Corp. and Subsidiaries as of December 31, 1996 and 1995 and for each of
the three years in the period ended December 31, 1996, which report is
incorporated by reference in this Annual Report on Form 10-K.
/s/ COOPERS & LYBRAND L.L.P.
- ----------------------------
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 26, 1997
<PAGE> 1
EXHIBIT 99.1
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Philadelphia Consolidated
Holding Corp. and Subsidiaries as of December 31, 1996 and 1995 and for each of
the three years in the period ended December 31, 1996 has been incorporated by
reference in this Form 10-K from page 22 of the 1996 Annual Report to
Shareholders of Philadelphia Consolidated Holding Corp. and Subsidiaries. In
connection with our audits of such consolidated financial statements, we have
also audited the related financial statement schedules as of December 31, 1996
and 1995 and for each of the three years in the period ended December 31, 1996
listed in the Index to Financial Statement Schedules on page 16 of this Form
10-K.
In our opinion, the financial statement schedules as of December 31, 1996 and
1995 and for each of the three years in the period ended December 31, 1996
referred to above, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
- ----------------------------
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 7, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 141,236
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 27,342
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 168,578
<CASH> 11,483
<RECOVER-REINSURE> 1,433
<DEFERRED-ACQUISITION> 9,033
<TOTAL-ASSETS> 225,938
<POLICY-LOSSES> 96,642
<UNEARNED-PREMIUMS> 33,154
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 41,167
<OTHER-SE> 44,475
<TOTAL-LIABILITY-AND-EQUITY> 225,938
72,050
<INVESTMENT-INCOME> 7,910
<INVESTMENT-GAINS> 260
<OTHER-INCOME> 282
<BENEFITS> 40,118
<UNDERWRITING-AMORTIZATION> 22,210
<UNDERWRITING-OTHER> 1,386
<INCOME-PRETAX> 16,788
<INCOME-TAX> 3,414
<INCOME-CONTINUING> 13,374
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,374
<EPS-PRIMARY> 1.88
<EPS-DILUTED> 1.86
<RESERVE-OPEN> 68,246<F1>
<PROVISION-CURRENT> 41,083
<PROVISION-PRIOR> (965)
<PAYMENTS-CURRENT> 7,427
<PAYMENTS-PRIOR> 15,214
<RESERVE-CLOSE> 85,723<F1>
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES DIFFER FROM THE AMOUNTS REPORTED IN
THE CONSOLIDATED FINANCIAL STATEMENTS BECAUSE OF THE INCLUSION HEREIN OF
REINSURANCE RECEIVABLES OF $10,919 AND $9,440 AT DECEMBER 31, 1996 AND 1995,
RESPECTIVELY.
</FN>
</TABLE>
