<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 June 30, 1998
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 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 August 7, 1998.
Preferred Stock, $.01 par value, no shares outstanding Common Stock, no par
value, 12,315,966 shares outstanding
<PAGE> 2
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
<TABLE>
<S> <C>
Part I - Financial Information
Consolidated Balance Sheets - June 30, 1998 and
December 31, 1997 3
Consolidated Statements of Operations - For the three
and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Comprehensive Income - For
the three and six months ended June 30, 1998 and 1997 5
Consolidated Statements of Changes in Shareholders' Equity - For the
six months ended June 30, 1998 and year ended
December 31, 1997 6
Consolidated Statements of Cash Flows - For the six
months ended June 30, 1998 and 1997 7
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Results of Operations and
Financial Condition 9-11
Part II - Other Information 12-13
Signatures 14
Exhibits 15
</TABLE>
2
<PAGE> 3
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
As of
-----------------------
June 30, December 31,
1998 1997
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
INVESTMENTS:
FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $228,833 AND $165,052) .................. $ 234,076 $ 170,678
EQUITY SECURITIES AT MARKET (COST $42,098
AND $29,501) ............................................ 65,357 46,988
--------- ---------
TOTAL INVESTMENTS ..................................... 299,433 217,666
CASH AND CASH EQUIVALENTS ................................. 61,969 11,933
ACCRUED INVESTMENT INCOME ................................. 3,579 2,786
PREMIUMS RECEIVABLE ....................................... 21,146 15,269
PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES.............................................. 20,489 18,573
DEFERRED ACQUISITION COSTS ................................ 12,803 10,970
PROPERTY AND EQUIPMENT .................................... 6,049 5,797
OTHER ASSETS .............................................. 5,430 5,132
--------- ---------
TOTAL ASSETS .................................... $ 430,898 $ 288,126
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
POLICY LIABILITIES AND ACCRUALS:
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES .................. $ 134,856 $ 122,430
UNEARNED PREMIUMS ......................................... 49,497 42,116
--------- ---------
TOTAL POLICY LIABILITIES AND ACCRUALS ................. 184,353 164,546
PAYABLE FOR SECURITY PURCHASES ............................ 9,043 --
OTHER LIABILITIES ......................................... 7,102 7,948
DEFERRED INCOME TAXES ..................................... 6,018 4,348
--------- ---------
TOTAL LIABILITIES ..................................... 206,516 176,842
--------- ---------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES:
COMPANY OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY TRUST .................. 98,992 --
--------- ---------
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, 12,306,020 AND
12,242,431 SHARES ISSUED AND OUTSTANDING................. 44,178 42,788
NOTES RECEIVABLE FROM SHAREHOLDERS ........................ (1,568) (1,422)
UNREALIZED INVESTMENT APPRECIATION
(DEPRECIATION), NET OF DEFERRED INCOME TAXES ............. 18,526 15,023
RETAINED EARNINGS ......................................... 64,254 54,895
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ............................ 125,390 111,284
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............. $ 430,898 $ 288,126
========= =========
</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 Six Months
Ended June 30, Ended June 30,
------------------------------- ------------------------------
1998 1997 1998 1997
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUE:
NET WRITTEN PREMIUMS.............................. $32,724 $26,378 $62,678 $53,597
CHANGE IN NET UNEARNED PREMIUMS
(INCREASE)..................................... (3,062) (1,215) (6,101) (6,046)
------- ------- ------- -------
NET EARNED PREMIUMS............................... 29,662 25,163 56,577 47,551
NET INVESTMENT INCOME............................. 3,730 2,404 6,430 4,615
NET REALIZED INVESTMENT GAIN (LOSS)............... 96 (59) 99 (31)
OTHER INCOME...................................... 57 57 114 114
------ ------ ------ ------
TOTAL REVENUE................................... 33,545 27,565 63,220 52,249
------ ------ ------ ------
LOSSES AND EXPENSES:
LOSS AND LOSS ADJUSTMENT EXPENSES................. 17,563 16,018 33,627 29,403
NET REINSURANCE RECOVERIES........................ (1,614) (2,186) (2,820) (3,090)
------- ------- ------- -------
NET LOSS AND LOSS ADJUSTMENT EXPENSES............. 15,949 13,832 30,807 26,313
ACQUISITION COSTS AND OTHER
UNDERWRITING EXPENSES........................ 9,187 7,858 17,406 14,804
OTHER OPERATING EXPENSES.......................... 652 656 1,185 1,179
------ ------ ----- -----
TOTAL LOSSES AND EXPENSES....................... 25,788 22,346 49,398 42,296
------ ------ ------ ------
MINORITY INTEREST: DISTRIBUTIONS ON
COMPANY OBLIGATED MANDATORILY
REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST..................................... 1,217 - 1,217 -
----- ----- ------ -----
INCOME BEFORE INCOME TAXES........................... 6,540 5,219 12,605 9,953
----- ----- ------ -----
INCOME TAX EXPENSE (BENEFIT):
CURRENT........................................... 1,743 1,164 3,463 2,726
DEFERRED.......................................... (44) 63 (217) (387)
----- ----- ------ -----
TOTAL INCOME TAX EXPENSE........................ 1,699 1,227 3,246 2,339
----- ----- ----- -----
NET INCOME...................................... $4,841 $3,992 $9,359 $7,614
====== ====== ====== ======
PER AVERAGE SHARE DATA:
BASIC EARNINGS PER SHARE(1)....................... $0.39 $0.33 $0.76 $0.63
========== =========== ========== ==========
DILUTED EARNINGS PER SHARE(1)..................... $0.32 $0.27 $0.62 $0.51
========== =========== ========== ==========
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING(1).................................... 12,297,633 12,175,688 12,280,403 12,154,570
WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING(1).................................... 2,839,746 2,674,216 2,826,063 2,631,366
--------- --------- --------- ---------
WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING(1)........................ 15,137,379 14,849,904 15,106,466 14,785,936
========== ========== ========== ==========
</TABLE>
(1) 1997 share information restated to reflect a two-for-one split of the
Company's common stock distributed in November 1997.
The accompanying notes are an integral part of the
consolidated financial statements.
4
<PAGE> 5
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------- --------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET INCOME ................................. $ 4,841 $ 3,992 $ 9,359 $ 7,614
-------- -------- -------- --------
OTHER COMPREHENSIVE INCOME, NET OF TAX:
HOLDING GAIN (LOSS) ARISING DURING PERIOD,
NET OF TAX ............................... (174) (4,713) 3,567 2,936
RECLASSIFICATION ADJUSTMENT, NET OF TAX .. (62) -- (64) --
-------- -------- -------- --------
OTHER COMPREHENSIVE INCOME ................. (236) (4,713) 3,503 2,936
-------- -------- -------- --------
COMPREHENSIVE INCOME ....................... $ 4,605 ($ 721) $ 12,862 $ 10,550
======== ======== ======== ========
</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 CHANGES
IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
For the Six Months For the Year Ended
Ended June 30, December 31,
1998 1997
------------------ -----------------
(Unaudited)
<S> <C> <C>
COMMON SHARES:
BALANCE AT BEGINNING OF PERIOD(1) ........................ 12,242,431 12,079,612
ISSUANCE OF SHARES
PURSUANT TO EMPLOYEE STOCK PURCHASE PLAN ............... 31,489 78,569
PURSUANT TO EMPLOYEE STOCK OPTION PLAN ................. 32,100 84,250
------------ ------------
BALANCE AT END OF PERIOD ............................. 12,306,020 12,242,431
============ ============
COMMON STOCK:
BALANCE AT BEGINNING OF PERIOD ........................... $ 42,788 $ 41,167
PURCHASE CONTRACTS OF COMMON STOCK ....................... 558 --
ISSUANCE OF SHARES PURSUANT TO EMPLOYEE
STOCK PURCHASE PLAN .................................... 486 898
EXERCISE OF EMPLOYEE STOCK OPTIONS, NET OF
TAX BENEFIT ............................................ 346 723
------------ ------------
BALANCE AT END OF PERIOD ............................. 44,178 42,788
------------ ------------
NOTES RECEIVABLE FROM SHAREHOLDERS:
BALANCE AT BEGINNING OF PERIOD ........................... (1,422) (924)
NOTES RECEIVABLE ISSUED PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN ........................... (473) (873)
COLLECTION OF NOTES RECEIVABLE ........................... 327 375
------------ ------------
BALANCE AT END OF PERIOD ............................. (1,568) (1,422)
------------ ------------
UNREALIZED INVESTMENT APPRECIATION (DEPRECIATION),
NET OF DEFERRED INCOME TAXES:
BALANCE AT BEGINNING OF PERIOD ......................... 15,023 7,374
CHANGE IN UNREALIZED INVESTMENT APPRECIATION
(DEPRECIATION), NET OF DEFERRED INCOME TAXES ......... 3,503 7,649
------------ ------------
BALANCE AT END OF PERIOD ............................. 18,526 15,023
------------ ------------
RETAINED EARNINGS:
BALANCE AT BEGINNING OF PERIOD ........................... 54,895 38,025
NET INCOME ............................................... 9,359 16,870
------------ ------------
BALANCE AT END OF PERIOD ............................. 64,254 54,895
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ........................... $ 125,390 $ 111,284
============ ============
</TABLE>
(1) 1997 share information restated to reflect a two for one split of the
Company's common stock distributed in November 1997.
The accompanying notes are an integral part of the
consolidated financial statements.
6
<PAGE> 7
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
---------------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME ..................................... $ 9,359 $ 7,614
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
NET REALIZED INVESTMENT (GAIN) LOSS .......... (99) 31
DEPRECIATION AND AMORTIZATION EXPENSE ........ 621 612
DEFERRED INCOME TAX BENEFIT .................. (217) (387)
CHANGE IN PREMIUMS RECEIVABLE ................ (5,877) (4,934)
CHANGE IN OTHER RECEIVABLES .................. (2,709) 1,198
CHANGE IN DEFERRED ACQUISITION COSTS ......... (1,833) (616)
CHANGE IN OTHER ASSETS ....................... (92) 52
CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES ..................................... 12,426 11,949
CHANGE IN UNEARNED PREMIUMS .................. 7,381 3,435
CHANGE IN OTHER LIABILITIES .................. (520) (1,695)
CHANGE IN INCOME TAXES PAYABLE ............... (115) (405)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.. 18,325 16,854
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITIES AVAILABLE FOR SALE .............. 10,712 1,461
PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITIES AVAILABLE FOR SALE .............. 6,670 2,220
PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES ................................. 2,733 2,524
COST OF FIXED MATURITIES AVAILABLE FOR
SALE ACQUIRED .............................. (72,234) (19,068)
COST OF EQUITY SECURITIES ACQUIRED ............. (15,499) (6,456)
PURCHASE OF PROPERTY AND EQUIPMENT ............. (907) (1,027)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES ...... (68,525) (20,346)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM OFFERING OF COMPANY OBLIGATED
MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUST .......................... 99,550 --
EXERCISE OF EMPLOYEE STOCK OPTIONS, NET
OF TAX BENEFIT ............................... 346 412
COLLECTION OF NOTES RECEIVABLE ................. 327 122
PROCEEDS FROM SHARES PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN ................. 13 --
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES.. 100,236 534
--------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................... 50,036 (2,958)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .. 11,933 11,483
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........ $ 61,969 $ 8,525
========= =========
CASH PAID DURING THE PERIOD FOR:
INCOME TAXES ................................... $ 3,275 $ 2,992
NON-CASH TRANSACTIONS:
ISSUANCE OF SHARES PURSUANT TO EMPLOYEE
STOCK PURCHASE PLAN IN EXCHANGE FOR
NOTES RECEIVABLE ............................. $ 473 $ 540
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
7
<PAGE> 8
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 six months
ended June 30, 1998 and 1997 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 six months ended June 30, 1998 are not necessarily
indicative of the operating results to be expected for the full year or
any other period. Certain prior year amounts have been reclassified for
comparative purposes.
These financial statements should be read in conjunction with the
financial statements and notes as of and for the year ended December
31, 1997 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.
3. Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." This statement establishes standards for the
reporting and display of comprehensive income and its components.
Comprehensive income includes all changes in equity during a period,
except those resulting from investments by owners and distributions to
owners.
The deferred tax expense (benefit) for Holding Gain (Loss) arising for
the three and six months ended June 30, 1998 and 1997 amounted to
($94,000) and ($2,538,000), respectively, and $1,921,000 and
$1,581,000, respectively. The income tax expense for the
Reclassification Adjustment for the three and six months ended June 30,
1998 amounted to $34,000 and $35,000, respectively.
4. Income Taxes
The effective tax rate differs from the 35% marginal tax rate
principally as a result of interest exempt from tax, the dividend
received deduction and other differences in the recognition of revenues
and expenses for tax and financial reporting purposes.
5. Minority Interest in Consolidated Subsidiaries: Company Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust
The Company closed on its FELINE PRIDES(SM) and Trust Preferred
Securities offering on May 4, 1998. FELINE PRIDES(SM) are units
consisting of a contract under which the holder is obligated to
purchase common stock from the Company approximately three years
following the May 4, 1998 closing date and beneficial ownership of
either (1) interest bearing preferred securities issued by a business
trust subsidiary of the Company or (2) U.S. Treasury securities.
Proceeds to the Company, from the sales of 10,350,000 FELINE PRIDES(SM)
and 1,000,000 7.00% Trust Originated Preferred Securities were $99.6
million. These amounts include 1,350,000 Income Prides, a component of
the FELINE PRIDES(SM), purchased pursuant to the exercise of the
underwriters' over allotment option.
8
<PAGE> 9
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.
- 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 (SIX MONTHS ENDED JUNE 30, 1998 VS JUNE 30, 1997)
Premiums: Gross written premiums grew $11.7 million (15.8%) to $85.8
million for the six months ended June 30, 1998 from $74.1 million for the same
period of 1997; gross earned premiums grew $7.7 million (10.9%) to $78.4 million
for the six months ended June 30, 1998 from $70.7 million for the same period of
1997; net written premiums increased $9.1 million (17.0%) to $62.7 million for
the six months ended June 30, 1998 from $53.6 million for the same period of
1997; and net earned premiums grew $9.0 million (18.9%) to $56.6 million in 1998
from $47.6 million in 1997. 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 the following factors:
- - Overall premium growth is primarily attributable to: expanded marketing
efforts relating to commercial auto, commercial package, and specialty
lines products through the increase in the Company's proprietary field
organization to a total of 114 professionals, production underwriters
and customer service representatives; and the continued development and
growth of the Company's Preferred Agent Program, initiated in 1996,
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 Investment Income: Net investment income approximated $6.4 million
for the six months ended June 30, 1998 and $4.6 million for the same period of
1997. Total investments grew to $299.4 million at June 30, 1998 from $192.6
million at June 30, 1997, primarily due to investing the proceeds from the
Company's Feline Prides(SM) securities offering and cash flows provided from
operating activities.
9
<PAGE> 10
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(continued)
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment
expenses increased $4.5 million (17.1%) to $30.8 million for the six months
ended June 30, 1998 from $26.3 million for the same period of 1997 and the loss
ratio decreased to 54.5% in 1998 from 55.3% in 1997. The increase in net loss
and loss adjustment expenses was due primarily to the 18.9% growth in net earned
premiums.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs
and other underwriting expenses increased $2.6 million (17.6%) to $17.4 million
for the six months ended June 30, 1998 from $14.8 million for the same period of
1997. This increase was due primarily to the 18.9% growth in net earned premiums
offset in part by changes in product and distribution mix.
Income Tax Expense: The Company's effective tax rate for the six months
ended June 30, 1998 and 1997 was 25.8% and 23.5%, respectively. The effective
rates differed from the 35% statutory rate principally due to investments in
tax-exempt securities. The increase in the effective tax rate is principally due
to a greater investment of cash flows in taxable securities relative to tax
exempt securities during 1997.
RESULTS OF OPERATIONS (THREE MONTHS ENDED JUNE 30, 1998 VS JUNE 30, 1997)
Premiums: Gross written premiums grew $6.0 million (15.2%) to $45.5 million for
the three months ended June 30, 1998 from $39.5 million for the same period of
1997; gross earned premiums grew $2.8 million (7.3%) to $40.9 million for the
three months ended June 30, 1998 from $38.1 million for the same period of
1997; net written premiums increased $6.3 million (23.9%) to $32.7 million for
the three months ended June 30, 1998 from $26.4 million for the same period of
1997; and net earned premiums grew $4.5 million (17.9%) to $29.7 million in
1998 from $25.2 million in 1997. 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 similar factors as
addressed in the Premiums caption of the results of operations (six months
ended June 30, 1998 vs. June 30, 1997).
Net Investment Income: Net investment income approximated $3.7 million
for the three months ended June 30, 1998 and $2.4 million for the same period of
1997. Total investments grew to $299.4 million at June 30, 1998 from $192.6
million at June 30, 1997, primarily due to investing the proceeds from the
Company's Feline Prides(SM) securities offering and cash flows provided from
operating activities.
10
<PAGE> 11
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
(continued)
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment
expenses increased $2.1 million (15.2%) to $15.9 million in the second quarter
1998 from $13.8 million in the second quarter of 1997 and the loss ratio
decreased to 53.8% in 1998 from 55.0% in 1997. The increase in net loss and loss
adjustment expenses was due primarily to the 17.9% growth in net earned
premiums.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs
and other underwriting expenses increased $1.3 million (16.5%) to $9.2 million
for the three months ended June 30, 1998 from $7.9 million for the same period
of 1997. This increase was due primarily to the 17.9% growth in net earned
premiums.
Income Tax Expense: The Company's effective tax rate for the three
months ended June 30, 1998 and 1997 was 26.0% and 23.5%, respectively. The
effective rates differed from the 35% statutory rate principally due to
investments in tax-exempt securities. The increase in the effective tax rate is
principally due to a greater investment of cash flows in taxable securities
relative to tax exempt securities during 1997.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 1998 the Company's investments
experienced unrealized investment appreciation of $3.5 million, net of the
related deferred tax expense of $1.9 million. At June 30, 1998, 93.6% of the
Company's fixed maturity securities consisted of U.S. Government securities or
securities rated "1" or "2" by the NAIC, 90.3% were rated "A-" or better (with
no security rated lower than "BB-") by Standard & Poor's Corporation.
On May 4, 1998, the Company realized proceeds of $99.6 million, from
its FELINE PRIDES(SM) and Trust Preferred securities offering. This amount
included the exercise of the underwriters' over allotment option. The offering
consisted of 9,350,000 units of Income prides with a stated amount of $10.00,
1,000,000 units of Growth prides with a face amount equal to the stated amount,
and 1,000,000 units of separate Trust Preferred securities with a stated amount
of $10.00. Of the proceeds, $20.0 million was contributed to the Company's
insurance subsidiaries. The company anticipates using the remaining proceeds
for general corporate purposes, which may include acquisitions, (including,
without limitation, acquisitions of programs or books of business), capital
expenditures, additional capital contributions to its subsidiaries and the
repurchase by the Company of its common stock. The investment of the proceeds
by the Company and the insurance subsidiaries is being made in accordance with
prevailing investment policies. Additionally, the Company is obligated to make
cash distributions at a rate of 7.0% of the stated amount per annum for the
Income prides and the separate Trust Preferred securities, commencing May 4,
1998 through May 15, 2001 and payable quarterly in arrears.
On August 3, 1998, the Company's Board of Directors authorized the
repurchase of up to $10.0 million of the Company's Common Stock. The purchases
will be made from time to time in the open market or through privately
negotiated transactions. The decision to authorize the stock repurchase was
based on the strong relative value currently represented by the company's stock.
The Company produced net cash from operations of $18.3 million and
$16.9 million, respectively, for the six months ended June 30, 1998 and 1997.
Management believes that the Company has adequate ability to pay all claims and
meet all other cash needs.
Risk-based capital is designed to measure the acceptable amount of
capital an insurer should have based on the inherent specific risks of each
insurer. Insurers failing to meet this benchmark capital level may be subject to
scrutiny by the insurer's domiciliary insurance department and ultimately
rehabilitation or liquidation. Based on the standards currently adopted, the
Company's insurance subsidiaries' capital and surplus is in excess of the
prescribed risk-based capital requirements.
11
<PAGE> 12
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
At the Company's annual meeting of shareholders held on May 7, 1998,
the following members were elected to the Board of Directors:
William J. Henrich, Jr.
Paul R. Hertel, Jr.
Roger L. Larson
James J. Maguire
James J. Maguire, Jr.
Thomas J. McHugh
Michael J. Morris
Sean S. Sweeney
J. Eustace Wolfington
9,280,661 affirmative votes were received for the election of all
Directors, except for Mr. Henrich, for which 8,970,413 affirmative
votes were cast.
The following other matter was approved at the Annual Meeting
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
------------- ---------------- --------------
<S> <C> <C> <C>
Approval of the Appointment of PriceWaterhouse-
Coopers L.L.P. 9,297,452 1,489 4,595
</TABLE>
Item 5. Other information
None.
12
<PAGE> 13
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit No. Page No. Description
----------- -------- -----------
11.0 15 Computation of Earnings
per Share
b. The Company filed the following reports on Form 8-K during the
quarterly period ended June 30, 1998:
Date of Report Item Reported
-------------- -------------------------------------------
April 13, 1998 - Press Release dated April 13, 1998 - RE:
Upgrading of the Company's insurance
subsidiaries A.M. Best rating to "A+"
(Superior).
April 13, 1998 - Press Release dated April 16, 1998 - RE:
First Quarter Results - March 31, 1998. Also
filed was the Company's Consolidated Balance
Sheets as of March 31, 1998 and December 31,
1997, and the Consolidated Statements of
Operations for the three months ended March
31, 1998 and 1997.
May 4, 1998 - Press Release dated May 4, 1998 - RE:
Philadelphia Consolidated Holding Corp.
Announces Closing of FELINE PRIDES(SM)
Offering.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHILADELPHIA CONSOLIDATED HOLDING CORP.
Registrant
Date August 11, 1998 /s/ James J. Maguire
---------------- ------------------------
James J. Maguire
Chairman of the Board of Directors, President
and Chief Executive Officer
(Principal Executive Officer)
Date August 11 1998 /s/ Craig P. Keller
-------------- -----------------------
Craig P. Keller
Vice President, Secretary, Treasurer and
Chief Financial Officer (Principal Financial
and Accounting Officer)
14
<PAGE> 1
Exhibit 11
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 Three As of and For the Six
Months Ended June 30, Months Ended June 30
------------------------ -------------------------
1998 1997(1) 1998 1997(1)
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted Average Common Shares Outstanding .... 12,298 12,176 12,280 12,155
Weighted Average Share Equivalents Outstanding 2,840 2,674 2,826 2,631
------- ------- ------- -------
Weighted Average Shares and Share
Equivalents Outstanding ...................... 15,138 14,850 15,106 14,786
======= ======= ======= =======
Net Income .................................... $ 4,841 $ 3,992 $ 9,359 $ 7,614
======= ======= ======= =======
Basic Earnings per Share ...................... $ 0.39 $ 0.33 $ 0.76 $ 0.63
======= ======= ======= =======
Diluted Earnings per Share .................... $ 0.32 $ 0.27 $ 0.62 $ 0.51
======= ======= ======= =======
</TABLE>
(1) 1997 share information restated to reflect a two-for-one split of the
Company's common stock distributed in November 1997.
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 234,076
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 65,357
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 299,433
<CASH> 61,969
<RECOVER-REINSURE> 1,690
<DEFERRED-ACQUISITION> 12,803
<TOTAL-ASSETS> 430,898
<POLICY-LOSSES> 134,856
<UNEARNED-PREMIUMS> 49,497
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 44,178
<OTHER-SE> 81,212
<TOTAL-LIABILITY-AND-EQUITY> 430,898
56,577
<INVESTMENT-INCOME> 6,430
<INVESTMENT-GAINS> 99
<OTHER-INCOME> 114
<BENEFITS> 30,807
<UNDERWRITING-AMORTIZATION> 17,406
<UNDERWRITING-OTHER> 1,185
<INCOME-PRETAX> 12,605
<INCOME-TAX> 3,246
<INCOME-CONTINUING> 9,359
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,359
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.62
<RESERVE-OPEN> 108,928<F1>
<PROVISION-CURRENT> 30,807
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 4,199
<PAYMENTS-PRIOR> 14,751
<RESERVE-CLOSE> 120,785<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 $14,071 AND $13,502 AT JUNE 30, 1998 AND DECEMBER
31, 1997.
</FN>
</TABLE>
