<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1997
COMMISSION FILE NUMBER 0-22280
PHILADELPHIA CONSOLIDATED HOLDING CORP.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2202671
(State of Incorporation) (IRS Employer Identification No.)
ONE BALA PLAZA, SUITE 100
BALA CYNWYD, PENNSYLVANIA 19004
(610) 617-7900
(Address, including zip code and telephone number,
including area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 7, 1997.
Preferred Stock, $.01 par value, no shares outstanding
Common Stock, no par value, 12,239,431 shares outstanding
1
<PAGE> 2
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
<S> <C>
Part I - Financial Information
Consolidated Balance Sheets - September 30, 1997 and
December 31, 1996 3
Consolidated Statements of Operations - For the three and nine
months ended September 30, 1997 and 1996 4
Consolidated Statements of Changes in Shareholders' Equity - For the
nine months ended September 30, 1997 and year ended
December 31, 1996 5
Consolidated Statements of Cash Flows - For the nine
months ended September 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Results of Operations and
Financial Condition 8-10
Part II - Other Information 11
Signatures 12
Exhibits 13
</TABLE>
2
<PAGE> 3
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
As of
----------------------------
September 30, December 31,
1997 1996
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
INVESTMENTS:
FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $163,337 AND $137,757)(including $20,974 and
$24,867 in Trust Accounts) ................................. $ 168,056 $ 141,236
EQUITY SECURITIES AT MARKET (COST $28,669 AND $19,648) ..... 43,913 27,342
--------- ---------
TOTAL INVESTMENTS ....................................... 211,969 168,578
CASH AND CASH EQUIVALENTS (including $760 and $1,224 in Trust
Accounts) .................................................... 2,942 11,483
ACCRUED INVESTMENT INCOME ..................................... 2,338 2,626
PREMIUMS RECEIVABLE ........................................... 16,135 8,112
PREPAID REINSURANCE PREMIUMS AND
REINSURANCE RECEIVABLES .................................... 17,794 18,078
DEFERRED ACQUISITION COSTS .................................... 9,863 9,033
PROPERTY AND EQUIPMENT ........................................ 5,810 5,226
GOODWILL-LESS ACCUMULATED AMORTIZATION OF
$1,364 AND $1,313 .......................................... 720 771
OTHER ASSETS .................................................. 3,372 2,031
--------- ---------
TOTAL ASSETS ............................................ $ 270,943 $ 225,938
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
POLICY LIABILITIES AND ACCRUALS:
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES ................... $ 115,416 $ 96,642
UNEARNED PREMIUMS .......................................... 40,406 33,154
--------- ---------
TOTAL POLICY LIABILITIES AND ACCRUALS ...................... 155,822 129,796
PREMIUMS PAYABLE .............................................. 384 698
OTHER LIABILITIES ............................................. 6,545 7,614
DEFERRED INCOME TAXES ......................................... 3,369 1,240
INCOME TAXES PAYABLE .......................................... 497 948
--------- ---------
TOTAL LIABILITIES .......................................... 166,617 140,296
--------- ---------
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, 6,119,739 AND 6,039,806 SHARES ISSUED
AND OUTSTANDING ............................................ 42,764 41,167
NOTES RECEIVABLE FROM SHAREHOLDERS ......................... (1,520) (924)
UNREALIZED INVESTMENT APPRECIATION (DEPRECIATION),
NET OF DEFERRED INCOME TAXES ............................... 12,975 7,374
RETAINED EARNINGS .......................................... 50,107 38,025
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ................................. 104,326 85,642
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................. $ 270,943 $ 225,938
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE> 4
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUE:
GROSS EARNED PREMIUMS ............... $ 40,934 $ 37,854 $ 111,617 $ 91,380
CEDED EARNED PREMIUMS ............... (14,442) (17,531) (37,574) (38,050)
----------- ----------- ----------- -----------
NET EARNED PREMIUMS ................. 26,492 20,323 74,043 53,330
NET INVESTMENT INCOME ............... 2,535 2,041 7,150 5,772
NET REALIZED INVESTMENT GAIN ........ 156 140 125 235
OTHER INCOME ........................ 57 79 171 203
----------- ----------- ----------- -----------
TOTAL REVENUE ................... 29,240 22,583 81,489 59,540
----------- ----------- ----------- -----------
LOSSES AND EXPENSES:
LOSS AND LOSS ADJUSTMENT EXPENSES ... 16,561 13,590 45,964 33,794
NET REINSURANCE RECOVERIES .......... (2,132) (1,470) (5,222) (3,911)
----------- ----------- ----------- -----------
NET LOSS AND LOSS ADJUSTMENT EXPENSES 14,429 12,120 40,742 29,883
ACQUISITION COSTS AND OTHER
UNDERWRITING EXPENSES ............ 8,429 5,920 23,233 16,863
OTHER OPERATING EXPENSES ............ 430 58 1,609 956
----------- ----------- ----------- -----------
TOTAL LOSSES AND EXPENSES ....... 23,288 18,098 65,584 47,702
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES ............ 5,952 4,485 15,905 11,838
----------- ----------- ----------- -----------
INCOME TAX EXPENSE (BENEFIT):
CURRENT ............................. 2,155 1,059 4,881 2,778
DEFERRED ............................ (671) (36) (1,058) (174)
----------- ----------- ----------- -----------
TOTAL INCOME TAX EXPENSE ........ 1,484 1,023 3,823 2,604
----------- ----------- ----------- -----------
NET INCOME ............................ $ 4,468 $ 3,462 $ 12,082 $ 9,234
=========== =========== =========== ===========
PER AVERAGE COMMON SHARE DATA:
NET INCOME .......................... $ 0.59 $ 0.49 $ 1.62 $ 1.30
=========== =========== =========== ===========
WEIGHTED AVERAGE SHARES AND SHARE
EQUIVALENTS USED IN COMPUTATION OF
NET INCOME PER COMMON SHARE ........... 7,519,737 7,091,936 7,447,324 7,091,333
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE> 5
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
For the Nine Months For the Year Ended
Ended September 30, December 31,
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
COMMON SHARES:
BALANCE AT BEGINNING OF PERIOD ................ 6,039,806 5,813,851
ISSUANCE OF SHARES
PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN .... 39,808 78,455
PURSUANT TO EMPLOYEE STOCK OPTION PLAN ...... 40,125 147,500
----------- -----------
BALANCE AT END OF PERIOD .................. 6,119,739 6,039,806
=========== ===========
COMMON STOCK:
BALANCE AT BEGINNING OF PERIOD ................ $ 41,167 $ 39,057
ISSUANCE OF SHARES
PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN .... 906 1,131
EXERCISE OF EMPLOYEE STOCK OPTIONS, NET OF TAX
BENEFIT ....................................... 691 979
----------- -----------
BALANCE AT END OF PERIOD .................. 42,764 41,167
----------- -----------
NOTES RECEIVABLE FROM SHAREHOLDERS:
BALANCE AT BEGINNING OF PERIOD ................ (924) --
NOTES RECEIVABLE ISSUED
PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN .... (882) (1,131)
COLLECTION OF NOTES RECEIVABLE ................ 286 207
----------- -----------
BALANCE AT END OF PERIOD .................. (1,520) (924)
----------- -----------
UNREALIZED INVESTMENT APPRECIATION (DEPRECIATION),
NET OF DEFERRED INCOME TAXES:
BALANCE AT BEGINNING OF PERIOD ................ 7,374 4,608
CHANGE IN UNREALIZED INVESTMENT APPRECIATION
(DEPRECIATION), NET OF DEFERRED INCOME TAXES 5,601 2,766
----------- -----------
BALANCE AT END OF PERIOD .................. 12,975 7,374
----------- -----------
RETAINED EARNINGS:
BALANCE AT BEGINNING OF PERIOD ................ 38,025 24,651
NET INCOME .................................... 12,082 13,374
----------- -----------
BALANCE AT END OF PERIOD .................. 50,107 38,025
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ................ $ 104,326 $ 85,642
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE> 6
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME ........................................ $ 12,082 $ 9,234
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES:
NET REALIZED INVESTMENT GAIN ................... (125) (235)
DEPRECIATION AND AMORTIZATION EXPENSE .......... 900 675
DEFERRED INCOME TAX BENEFIT .................... (1,058) (174)
CHANGE IN PREMIUMS RECEIVABLE .................. (8,023) (1,404)
CHANGE IN OTHER RECEIVABLES .................... 572 (5,242)
CHANGE IN DEFERRED ACQUISITION COSTS ........... (830) (3,584)
CHANGE IN OTHER ASSETS ......................... (1,341) (529)
CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES ..................................... 18,774 15,162
CHANGE IN UNEARNED PREMIUMS .................... 7,252 12,294
CHANGE IN PREMIUMS PAYABLE AND OTHER
LIABILITIES .................................. (1,383) 720
CHANGE IN INCOME TAXES PAYABLE ................. (451) (295)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ... 26,369 26,622
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITY SECURITIES ............................ 3,318 2,594
PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITY SECURITIES ............................... 7,285 8,406
PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES ....................................... 4,069 1,735
COST OF FIXED MATURITY SECURITIES ACQUIRED ........ (36,297) (23,658)
COST OF EQUITY SECURITIES ACQUIRED ................ (12,939) (8,820)
PURCHASE OF PROPERTY AND EQUIPMENT ................ (1,347) (1,713)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES ........ (35,911) (21,456)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
EMPLOYEE STOCK OPTIONS,
NET OF TAX BENEFIT ............................. 691 932
COLLECTION OF NOTES RECEIVABLE .................... 286 171
PROCEEDS FROM SHARES PURSUANT TO EMPLOYEE
STOCK PURCHASE PLAN ............................ 24 --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES ... 1,001 1,103
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ......................................... (8,541) 6,269
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..... 11,483 5,680
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........... $ 2,942 $ 11,949
======== ========
CASH PAID DURING THE PERIOD FOR:
INCOME TAXES ...................................... $ 5,005 $ 2,130
NON-CASH TRANSACTIONS:
ISSUANCE OF SHARES PURSUANT TO EMPLOYEE
STOCK PURCHASE PLAN ............................ $ 882 $ 1,181
NOTES RECEIVABLE ISSUED PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN ................... $ (882) $ (1,181)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE> 7
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated financial statements as of and for the nine months ended
September 30, 1997 and 1996 are unaudited, but in the opinion of management,
have been prepared on the same basis as the annual audited consolidated
financial statements and reflect all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the information set
forth therein. The results of operations for the nine months ended September
30, 1997 are not necessarily indicative of the operating results to be
expected for the full year or any other period.
These financial statements should be read in conjunction with the financial
statements and notes as of and for the year ended December 31, 1996 included
in the Company's Annual Report on Form 10-K.
2. 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.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share",
specifying the computation, presentation, and disclosure requirements for
earnings per share for entities with publicly held common stock. Under SFAS
No. 128, entities shall present basic and diluted per-share amounts for
income from continuing operations and for net income on the face of the
income statement. The objective of basic earnings per share is to measure the
performance of an entity over the reporting period and the objective of
diluted earnings per share should be consistent with the basic earnings per
share objective while giving effect to all dilutive potential common shares
that were outstanding during the period. The provisions of this statement are
effective for financial statements for interim and annual periods ending
after December 15, 1997. The company plans to adopt the provisions of SFAS
No. 128 as of December 31, 1997 and restate all prior period earnings per
share data to conform with the provisions of this Statement. The calculated
amount of basic and diluted earnings per share for the three and nine months
ended September 30, 1997 was $0.73 and $0.59, and $1.97 and $1.62,
respectively.
3. Income Taxes
The effective tax rate differs from the 34% marginal tax rate principally as
a result of interest exempt from tax, the dividend received deduction and
other differences in the recognition of revenues and expenses for tax and
financial reporting purposes.
4. Subsequent Event - Shareholders' Equity
On October 16, 1997, the Board of Directors declared a two-for-one stock
split to shareholders of record on October 27, 1997 for distribution on
November 5, 1997.
7
<PAGE> 8
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
GENERAL
Although the Company's financial performance is dependent upon its own specific
business characteristics, certain risk factors can affect the profitability of
the Company. These include:
- - Industry factors - Historically the financial performance of the commercial
property and casualty insurance industry has tended to fluctuate in cyclical
patterns of soft markets followed by hard markets. In the current
environment, insurance industry pricing in general continues to be soft;
however, the Company's strategy is to focus on underwriting profits and
accordingly the Company's marketing organization is being directed into those
niche businesses that exhibit the greatest potential for underwriting
profits.
- - Competition - The Company competes in the commercial property and casualty
business with other domestic and international insurers having greater
financial and other resources than the Company.
- - Regulation - The Company's insurance subsidiaries are subject to a
substantial degree of regulatory oversight, which generally is designed to
protect the interests of policyholders, as opposed to shareholders and can
impact the Company's underwriting and marketing decisions.
- - Inflation - Commercial property and casualty insurance premiums are
established before the amount of losses and loss adjustment expenses, or the
extent to which inflation may effect such amounts is known.
- - Investment Risk - Substantial future increases in interest rates could result
in a decline in the market value of the Company's investment portfolio and
resulting losses and/or reduction in shareholders' equity.
RESULTS OF OPERATIONS (NINE MONTHS ENDED SEPTEMBER 30, 1997 VS SEPTEMBER 30,
1996)
Premiums: Gross written premiums grew $15.2 million (14.7%) to $118.9
million for the nine months ended September 30, 1997 from $103.7 million for the
same period of 1996; gross earned premiums grew $20.3 million (22.2%) to $111.6
million for the nine months ended September 30, 1997 from $91.3 million for the
same period of 1996; net written premiums increased $21.1 million (33.7%) to
$83.7 million for the nine months ended September 30, 1997 from $62.6 million
for the same period of 1996; and net earned premiums grew $20.7 million (38.8%)
to $74.0 million in 1997 from $53.3 million in 1996. 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: continued marketing
efforts of commercial auto, commercial package, and specialty lines products
along with the continued development of the Company's Preferred Agent Plan,
wherein business relationships are formed with brokers specializing in
certain of the Company's business niches thereby increasing the distribution
of the Company's niche products.
- - Net written and net earned premiums grew at higher rates than gross written
and gross earned premiums primarily due to the renegotiation of the Company's
reinsurance program effective January 1, 1997 whereby more favorable
reinsurance rates were realized while substantially the same retentions and
coverages were maintained.
Net Investment Income: Net investment income approximated $7.2 million
for the nine months ended September 30, 1997 and $5.8 million for the same
period of 1996. Total investments on a cost basis grew to $192.0 million at
September 30, 1997 from $146.5 million at September 30, 1996, primarily due to
the investment of cash flows provided from operating activities.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment
expenses increased $10.8 million (36.1%) to $40.7 million for the nine months
ended September 30, 1997 from $29.9 million for the same period of 1996. The
increase in net loss and loss adjustment expenses was due primarily to the 38.8%
growth in net earned premiums. The loss ratio decreased to 55.0% in 1997 from
56.1% in 1996.
8
<PAGE> 9
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(continued)
Acquisition Costs and Other Underwriting Expenses: Acquisition costs and
other underwriting expenses increased $6.3 million (37.3%) to $23.2 million for
the nine months ended September 30, 1997 from $16.9 million for the same period
of 1996. This increase was due primarily to the 38.8% growth in net earned
premiums.
Income Tax Expense: The Company's effective tax rate for the nine months
ended September 30, 1997 and 1996 was 24.0% and 22.0%, respectively. The
effective rates differed from the 34% statutory rate principally due to
investments in tax-exempt securities and the dividend received deduction.
RESULTS OF OPERATIONS (THREE MONTHS ENDED SEPTEMBER 30, 1997 VS SEPTEMBER 30,
1996)
Premiums: Gross written premiums decreased $1.0 million (2.2%) to $44.8
million for the three months ended September 30, 1997 from $45.8 million for the
same period of 1996; gross earned premiums grew $3.0 million (7.9%) to $40.9
million for the three months ended September 30, 1997 from $37.9 million for the
same period of 1996; net written premiums increased $4.2 million (16.2%) to
$30.1 million for the three months ended September 30, 1997 from $25.9 million
for the same period of 1996; and net earned premiums grew $6.2 million (30.5%)
to $26.5 million in 1997 from $20.3 million in 1996. The overall change in gross
written premiums and the varying growth rates for gross earned premiums, net
written premiums, and net earned premiums are attributable to a number of
factors:
- - The decrease in gross written premiums is primarily attributable to: greater
than anticipated price competition in the Company's commercial auto and
commercial package niches; the curtailment of writings in California and
Florida for a Specialty Lines errors and ommissions product due to
experienced unfavorable risk exposures; a reduced volume in a commercial auto
product that is sold at rental car agency counters; and a decrease in
assigned premiums from an involuntary market mechanism. The Company has
redirected its marketing efforts in the specialty lines niche to states which
present more favorable underwriting opportunities as well as re-underwriting
its errors and ommissions product to reduce the size and risk profile of the
product. In addition, the Company is re-evaluating its pricing guidelines in
the commercial package niche relative to the current competitive market
environment but will not sacrifice underwriting targets solely for premium
growth. The Company does not anticipate an improvement in pricing conditions
for several of its products in the commercial auto niche which has resulted
in the Company not renewing accounts due to unfavorable profitability
prospects.
- - Net written and net earned premiums grew at higher rates than gross written
and gross earned premiums primarily due to the renegotiation of the Company's
reinsurance program effective January 1, 1997 whereby more favorable
reinsurance rates were realized while substantially the same retentions and
coverages were maintained.
- - In the third quarter 1996, a revision in the Company's supplemental liability
reinsurance programs, in the third quarter of 1996 retroactive to January 1,
1996. While this change increased by $1.3 million the written and earned
premiums the Company ceded in 1996, (and hence lowered new written and earned
premiums), an offsetting ceding commission which lowered acquisition costs
and other underwriting expenses was received by the Company. Of this $1.3
million amount, $.4 million pertained to the three months ended September 30,
1996.
Net Investment Income: Net investment income approximated $2.5 million
for the three months ended September 30, 1997 and $2.0 million for the same
period of 1996. Total investments on a cost basis grew to $192.0 million at
September 30, 1997 from $146.5 million at September 30, 1996, primarily due to
the investment of cash flows provided from operating activities.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment
expenses increased $2.3 million (19.0%) to $14.4 million in the third quarter of
1997 from $12.1 million in the third quarter of 1996 and the Company's statutory
loss ratio decreased to 54.4% in 1997 from 59.6% in 1996. However, if net earned
premiums for the third quarter of 1996 were restated for the first and second
quarter 1996 increase in ceded earned premiums due to the retroactive change in
the supplemental liability reinsurance programs (see Premiums), the statutory
loss ratio is 57.1% for the three months ended September 30, 1996 (see
Acquisition Costs and Other Underwriting Expenses). The increase in net loss and
loss adjustment expenses was due primarily to the growth (24.8% restated for
retroactive reinsurance change) in net earned premiums which resulted
principally from increased production and in part from the lower cost of
reinsurance (see Premiums).
9
<PAGE> 10
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(continued)
Acquisition Costs and Other Underwriting Expenses: Acquisition costs and
other underwriting expenses increased $2.5 million (42.4%) to $8.4 million for
the three months ended September 30, 1997 from $5.9 million for the same period
of 1996. However, if acquisition costs and other underwriting expenses for the
third quarter of 1996 were restated for the first and second quarter 1996
increase in ceding commissions due to the retroactive change in the supplemental
liability reinsurance programs (see Premiums) applicable within the period,
acquisition costs and other underwriting expenses would have increased by 23.6%.
The 23.6% (restated) increase in acquisition costs and other underwriting
expenses was due primarily to the growth (24.8% restated for retroactive
reinsurance change) in net earned premiums.
Income Tax Expense: The Company's effective tax rate for the three
months ended September 30, 1997 and 1996 was 24.9% and 22.8%, respectively. The
effective rates differed from the 34% statutory rate principally due to
investments in tax-exempt securities and the dividend received deduction.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30, 1997, the Company's investments
experienced unrealized investment appreciation of $5.6 million, net of the
related deferred tax expense of $3.0 million. The change in unrealized
appreciation (depreciation), is primarily due to changes in market interest
rates and conditions during the period. At September 30, 1997, 100% of the
Company's fixed maturity securities consisted of U.S. Government securities or
securities rated "1" or "2" by the NAIC, 96.4% were rated "A-" or better (with
no security rated lower than "BBB-") by Standard & Poor's Corporation.
The Company produced net cash from operations of $26.4 million and $26.6
million, respectively, for the nine months ended September 30, 1997 and 1996.
Management believes that the Company has adequate ability to pay all claims and
meet all other cash needs.
Risk-based capital is designed to measure the acceptable amount of
capital an insurer should have based on the inherent specific risks of each
insurer. Insurers failing to meet this benchmark capital level may be subject to
scrutiny by the insurer's domiciliary insurance department and ultimately
rehabilitation or liquidation. Based on the standards currently adopted, the
Company's insurance subsidiaries' capital and surplus is well in excess of the
prescribed risk-based capital requirements.
10
<PAGE> 11
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other information.
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit No. Page No. Description
----------- -------- -----------
11.00 Computation of Earnings Per Share.
b. The Company has not filed any reports on Form 8-K during the
quarter for which this report is filed.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHILADELPHIA CONSOLIDATED HOLDING CORP.
---------------------------------------
Registrant
Date November 7, 1997 /s/ James J. Maguire
----------------- ---------------------------------------------
James J. Maguire
Chairman of the Board of Directors, President
and Chief Executive Officer
(Principal Executive Officer)
Date November 7, 1997 /s/ Craig P. Keller
----------------- ---------------------------------------------
Craig P. Keller
Vice President, Secretary and
Chief Financial Officer (Principal Financial
and Accounting Officer)
12
<PAGE> 1
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Dollars and Share Data in Thousands, except Per Share Data)
(Unaudited)
<TABLE>
<CAPTION>
As of and for the As of and for the
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted Average Shares Outstanding 6,112 6,027 6,089 5,906
Weighted Average Stock Options Outstanding 1,741 1,801 1,759 1,882
Assumed Shares Repurchased (333) (736) (401) (697)
-------- -------- -------- --------
Weighted Average Shares and Share
Equivalents Outstanding 7,520 7,092 7,447 7,091
======== ======== ======== ========
Net Income $ 4,468 $ 3,462 $ 12,082 $ 9,234
======== ======== ======== ========
Net Income per Share $ 0.59 $ 0.49 $ 1.62 $ 1.30
======== ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 168,056
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 43,913
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 211,969
<CASH> 2,942
<RECOVER-REINSURE> 1,409
<DEFERRED-ACQUISITION> 9,863
<TOTAL-ASSETS> 270,943
<POLICY-LOSSES> 115,416
<UNEARNED-PREMIUMS> 40,406
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 42,764
<OTHER-SE> 61,562
<TOTAL-LIABILITY-AND-EQUITY> 270,943
74,043
<INVESTMENT-INCOME> 7,150
<INVESTMENT-GAINS> 125
<OTHER-INCOME> 171
<BENEFITS> 40,742
<UNDERWRITING-AMORTIZATION> 23,233
<UNDERWRITING-OTHER> 1,609
<INCOME-PRETAX> 15,905
<INCOME-TAX> 3,823
<INCOME-CONTINUING> 12,082
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,082
<EPS-PRIMARY> 1.62
<EPS-DILUTED> 1.60
<RESERVE-OPEN> 85,723<F1>
<PROVISION-CURRENT> 40,742
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 6,268
<PAYMENTS-PRIOR> 17,820
<RESERVE-CLOSE> 102,377<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 $13,039 and $10,919 at September 30, 1997 and
December 31, 1996, respectively.
</FN>
</TABLE>
