<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, 2000
COMMISSION FILE NUMBER 0-22280
PHILADELPHIA CONSOLIDATED HOLDING CORP.
---------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
PENNSYLVANIA 23-2202671
------------ ----------
(State of Incorporation) (IRS Employer Identification No.)
</TABLE>
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 3, 2000.
Common Stock, no par value, 11,935,162 shares outstanding,
<PAGE> 2
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
<TABLE>
<S> <C>
Part I - Financial Information
Consolidated Balance Sheets - June 30, 2000 and
December 31, 1999 3
Consolidated Statements of Operations and Comprehensive
Income - For the three and six months ended
June 30, 2000 and 1999 4
Consolidated Statements of Changes in Shareholders' Equity -
For the six months ended June 30, 2000 and year ended
December 31, 1999 5
Consolidated Statements of Cash Flows - For the six
months ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7-9
Management's Discussion and Analysis of Results of Operations and
Financial Condition 10-14
Part II - Other Information 15
Signatures 16
Exhibits 17
</TABLE>
2
<PAGE> 3
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(Unaudited)
<TABLE>
<CAPTION>
As of
-------------------------
June 30, December 31,
2000 1999
--------- -----------
<S> <C> <C>
ASSETS
INVESTMENTS:
FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $351,751 AND $331,774) .................... $ 341,664 $ 321,018
EQUITY SECURITIES AT MARKET (COST $47,390 AND $41,231) ...... 81,718 72,768
--------- ---------
TOTAL INVESTMENTS ....................................... 423,382 393,786
CASH AND CASH EQUIVALENTS ................................... 18,589 26,230
ACCRUED INVESTMENT INCOME ................................... 5,347 5,027
PREMIUMS RECEIVABLE ......................................... 55,369 49,176
PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES ............................................... 66,777 54,920
DEFERRED ACQUISITION COSTS .................................. 30,227 26,054
PROPERTY AND EQUIPMENT ...................................... 10,150 9,277
GOODWILL LESS ACCUMULATED AMORTIZATION OF $3,366 AND $2,620.. 28,055 28,801
OTHER ASSETS ................................................ 5,921 5,780
--------- ---------
TOTAL ASSETS .......................................... $ 643,817 $ 599,051
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
POLICY LIABILITIES AND ACCRUALS:
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES .................... $ 210,373 $ 188,063
UNEARNED PREMIUMS ........................................... 127,106 111,606
--------- ---------
TOTAL POLICY LIABILITIES AND ACCRUALS ................... 337,479 299,669
PREMIUMS PAYABLE ............................................ 23,179 22,223
OTHER LIABILITIES ........................................... 14,649 14,762
DEFERRED INCOME TAXES ....................................... 1,339 2,052
--------- ---------
TOTAL LIABILITIES ..................................... 376,646 338,706
--------- ---------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES:
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY DEBENTURES
OF COMPANY .................................................. 98,905 98,905
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
PREFERRED STOCK, $.01 PAR VALUE,
10,000,000 SHARES AUTHORIZED,
NONE ISSUED AND OUTSTANDING ...............................
COMMON STOCK, NO PAR VALUE,
50,000,000 SHARES AUTHORIZED, 13,381,924 SHARES
ISSUED..................................................... 68,745 68,859
NOTES RECEIVABLE FROM SHAREHOLDERS .......................... (1,864) (2,506)
ACCUMULATED OTHER COMPREHENSIVE INCOME ...................... 15,757 13,507
RETAINED EARNINGS ........................................... 105,233 93,766
LESS COST OF COMMON STOCK HELD IN TREASURY,
1,287,622 AND 791,016 SHARES .............................. (19,605) (12,186)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY .............................. 168,266 161,440
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .............. $ 643,817 $ 599,051
========= =========
</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,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUE:
NET WRITTEN PREMIUMS .............................. $ 59,684 $ 45,482 $ 117,812 $ 88,287
CHANGE IN NET UNEARNED PREMIUMS
(INCREASE) ..................................... (5,393) (6,329) (14,894) (12,370)
------------ ------------ ------------ ------------
NET EARNED PREMIUMS ............................... 54,291 39,153 102,918 75,917
NET INVESTMENT INCOME ............................. 5,832 4,996 12,096 9,850
NET REALIZED INVESTMENT GAIN ...................... 389 5,683 482 5,193
OTHER INCOME ...................................... 2,532 5,257
------------ ------------ ------------ ------------
TOTAL REVENUE ................................... 63,044 49,832 120,753 90,960
------------ ------------ ------------ ------------
LOSSES AND EXPENSES:
LOSS AND LOSS ADJUSTMENT EXPENSES ................. 37,895 24,981 78,141 47,496
NET REINSURANCE RECOVERIES ........................ (5,922) (3,366) (17,928) (5,619)
------------ ------------ ------------ ------------
NET LOSS AND LOSS ADJUSTMENT EXPENSES ............. 31,973 21,615 60,213 41,877
ACQUISITION COSTS AND OTHER
UNDERWRITING EXPENSES ........................ 17,317 12,087 34,036 23,864
OTHER OPERATING EXPENSES .......................... 3,431 777 6,241 1,296
------------ ------------ ------------ ------------
TOTAL LOSSES AND EXPENSES ....................... 52,721 34,479 100,490 67,037
------------ ------------ ------------ ------------
MINORITY INTEREST: DISTRIBUTIONS ON COMPANY OBLIGATED
MANDATORILY
REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST .. 1,812 1,812 3,623 3,623
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES ........................... 8,511 13,541 16,640 20,300
------------ ------------ ------------ ------------
INCOME TAX EXPENSE (BENEFIT):
CURRENT ........................................... 4,402 4,418 7,067 6,463
DEFERRED .......................................... (1,693) (117) (1,894) (340)
------------ ------------ ------------ ------------
TOTAL INCOME TAX EXPENSE ........................ 2,709 4,301 5,173 6,123
------------ ------------ ------------ ------------
NET INCOME ...................................... $ 5,802 $ 9,240 $ 11,467 $ 14,177
============ ============ ============ ============
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
HOLDING GAIN (LOSS) ARISING DURING PERIOD .......... (91) (3,849) 2,563 (4,612)
RECLASSIFICATION ADJUSTMENT ....................... (253) (3,694) (313) (3,375)
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS) ................. (344) (7,543) 2,250 (7,987)
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME ................................. $ 5,458 $ 1,697 $ 13,717 $ 6,190
============ ============ ============ ============
PER AVERAGE SHARE DATA:
BASIC EARNINGS PER SHARE .......................... $ 0.48 $ 0.76 $ 0.94 $ 1.16
============ ============ ============ ============
DILUTED EARNINGS PER SHARE ........................ $ 0.39 $ 0.61 $ 0.78 $ 0.94
============ ============ ============ ============
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING ....................................... 12,122,135 12,236,221 12,224,966 12,222,880
WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING ....................................... 2,581,779 2,863,849 2,533,853 2,845,212
------------ ------------ ------------ ------------
WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING ........................... 14,703,914 15,100,070 14,758,819 15,068,092
============ ============ ============ ============
</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)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months For the Year Ended
Ended June 30, December 31,
2000 1999
--------- ---------
<S> <C> <C>
COMMON STOCK:
BALANCE AT BEGINNING OF PERIOD .............. $ 68,859 $ 44,796
ISSUANCE OF SHARES PURSUANT TO ACQUISITION
AGREEMENT ................................. 25,000
ISSUANCE OF SHARES PURSUANT TO EMPLOYEE
STOCK PURCHASE PLAN ....................... (420)
EXERCISE OF EMPLOYEE STOCK OPTIONS, NET OF
TAX BENEFIT ............................... (116) (517)
SHARES FORFEITED PURSUANT TO EMPLOYEE
STOCK PURCHASE PLAN ....................... 2
--------- ---------
BALANCE AT END OF PERIOD ................ 68,745 68,859
========= =========
NOTES RECEIVABLE FROM SHAREHOLDERS:
BALANCE AT BEGINNING OF PERIOD .............. (2,506) (1,680)
NOTES RECEIVABLE ISSUED PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN .............. (1,445)
SHARES FORFEITED PURSUANT TO EMPLOYEE
STOCK PURCHASE PLAN ....................... 318
COLLECTION OF NOTES RECEIVABLE .............. 324 619
--------- ---------
BALANCE AT END OF PERIOD ................ (1,864) (2,506)
--------- ---------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
BALANCE AT BEGINNING OF PERIOD ............ 13,507 22,417
OTHER COMPREHENSIVE INCOME, NET OF TAXES... 2,250 (8,910)
--------- ---------
BALANCE AT END OF PERIOD ................ 15,757 13,507
--------- ---------
RETAINED EARNINGS:
BALANCE AT BEGINNING OF PERIOD .............. 93,766 74,923
NET INCOME .................................. 11,467 18,843
--------- ---------
BALANCE AT END OF PERIOD ................ 105,233 93,766
--------- ---------
COMMON STOCK HELD IN TREASURY:
BALANCE AT BEGINNING OF PERIOD .............. (12,186) (2,973)
COMMON SHARES REPURCHASED ................... (7,333) (12,081)
ISSUANCE OF SHARES PURSUANT TO EMPLOYEE
STOCK PURCHASE PLAN ....................... 1,893
ISSUANCE OF SHARES PURSUANT TO DIRECTOR
STOCK PURCHASE PLAN ....................... 15
EXERCISE OF EMPLOYEE STOCK OPTIONS, NET OF
TAX BENEFIT ............................... 219 975
SHARES FORFEITED PURSUANT TO EMPLOYEE STOCK
PURCHASE PLAN ............................. (320)
--------- ---------
BALANCE AT END OF PERIOD ................ (19,605) (12,186)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY .............. $ 168,266 $ 161,440
========= =========
</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 Six Months Ended June 30,
--------------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME ........................................... $ 11,467 $ 14,177
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
NET REALIZED INVESTMENT GAIN ....................... (482) (5,193)
DEPRECIATION AND AMORTIZATION EXPENSE .............. 1,894 1,150
DEFERRED INCOME TAX BENEFIT ........................ (1,894) (340)
CHANGE IN PREMIUMS RECEIVABLE ...................... (6,193) (3,212)
CHANGE IN OTHER RECEIVABLES ........................ (12,177) (6,096)
CHANGE IN DEFERRED ACQUISITION COSTS ............... (4,173) (3,881)
CHANGE IN OTHER ASSETS ............................. (141) (386)
CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES ........................................... 22,310 10,850
CHANGE IN UNEARNED PREMIUMS ........................ 15,500 16,645
CHANGE IN OTHER LIABILITIES ........................ 844 1,788
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...... 26,955 25,502
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITIES AVAILABLE FOR SALE .................... 42,156 57,901
PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITIES AVAILABLE FOR SALE .................... 14,745 17,850
PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES ....................................... 11,117 21,616
COST OF FIXED MATURITIES SECURITIES AVAILABLE FOR
SALE ACQUIRED .................................... (78,090) (76,970)
COST OF EQUITY SECURITIES ACQUIRED ................... (15,736) (13,274)
PURCHASE OF PROPERTY AND EQUIPMENT ................... (1,897) (1,389)
-------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES.. (27,705) 5,734
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
EXERCISE OF EMPLOYEE STOCK OPTIONS, NET
OF TAX BENEFIT ..................................... 103 373
ISSUANCE OF SHARES PURSUANT TO DIRECTOR
STOCK PURCHASE PLAN .............................. 15
COLLECTION OF NOTES RECEIVABLE ....................... 324 310
PROCEEDS FROM SHARES PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN ....................... 24
COST OF COMMON STOCK REPURCHASED ..................... (7,333)
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (6,891) 707
-------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ..................................... (7,641) 31,943
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........ 26,230 31,573
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............. $ 18,589 $ 63,516
======== ========
CASH PAID DURING THE PERIOD FOR:
INCOME TAXES ......................................... $ 5,422 $ 3,334
NON-CASH FINANCING TRANSACTIONS:
ISSUANCE OF SHARES (FORFEITURES) PURSUANT TO
EMPLOYEE STOCK PURCHASE PLAN IN EXCHANGE FOR
NOTES RECEIVABLE ................................... $ (318) $ 489
</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 six months ended
June 30, 2000 and 1999 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, 2000 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, 1999
included in the Company's Annual Report on Form 10-K.
2. Acquisitions
On July 16, 1999, Philadelphia Consolidated Holding Corp. (the "Company")
closed on its acquisition of Liberty American Insurance Group, Inc.
("Liberty") for a purchase price of $45.0 million, and a contingent
additional amount of up to $5.0 million based upon the future earnings for
the acquired business. Of the purchase price, $20.0 million was paid in
cash and the balance in 1,037,772 shares of common stock of the Company.
Any contingent additional amount will be paid in cash. The acquisition is
being accounted for using the purchase method of accounting.
3. Goodwill
Goodwill resulting from the acquisition of Liberty amounted to $29.2
million. This amount represents the excess of acquisition costs over the
fair value of net assets acquired. Goodwill is being amortized on a
straight-line basis over 20 years.
4. 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.
5. 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.
6. Comprehensive Income
Components of comprehensive income, as detailed in the Consolidated
Statements of Operations and Comprehensive Income, are net of tax. The
related tax effect of Holding Gains (Losses) arising during the six and
three months ended June 30, 2000 and 1999 was $1.4 million and ($2.5)
million respectively, and ($.1) million and ($2.1) million respectively.
The related tax effect of Reclassification Adjustments for the six and
three months ended June 30, 2000 and 1999 was ($.2) million and ($1.8)
million respectively, and ($.1) million and ($2.0) million respectively.
7. Segment Information
The Company has divided its operations into three reportable segments: The
Commercial Lines Underwriting Group which has underwriting responsibility
for the Commercial Automobile, Commercial Property and Commercial
multi-peril package insurance products; The Specialty Lines Underwriting
Group which has underwriting responsibility for the professional liability
insurance products; and The Personal Lines Group
7
<PAGE> 8
which designs, markets and underwrites personal property and casualty
insurance products for the Manufactured Housing and Homeowners markets.
Effective this quarter, due to a change in market focus, the previously
reported Specialty Property Underwriting Group segment was restructured
resulting in the combination of this Underwriting Group with the Commercial
Lines Underwriting Group. Accordingly, prior information has been
reclassified to reflect this change. The reportable segments operate solely
within the United States. The segments follow the same accounting policies
used for the Company's consolidated financial statements. Management
evaluates a segment's performance based upon underwriting results.
Following is a tabulation of business segment information for the six and
three months ended June 30, 2000 and 1999. Corporate information is
included to reconcile segment data to the consolidated financial statements
(in thousands):
<TABLE>
<CAPTION>
Six Months Ended,
-------------------------------------------------------------------
Commercial Specialty Personal
Lines Lines Lines Corporate Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
June 30, 2000:
Gross Written Premiums $ 103,861 $ 33,598 $ 29,530 $ 166,989
-------------------------------------------------------------------
Net Written Premiums $ 66,648 $ 34,668 $ 16,496 $ 117,812
-------------------------------------------------------------------
Revenue:
Net Earned Premiums $ 64,473 $ 25,348 $ 13,097 $ 102,918
Net Investment Income 12,096 12,096
Net Realized Investment Gain (Loss) 482 482
Other Income 10,802 (5,545) 5,257
-------------------------------------------------------------------
Total Revenue 64,473 25,348 23,899 7,033 120,753
-------------------------------------------------------------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 37,576 15,892 6,745 60,213
Acquisition Costs and Other Underwriting
Expenses 4,430 29,606 34,036
Other Operating Expenses 7,988 (1,747) 6,241
-------------------------------------------------------------------
Total Losses and Expenses 37,576 15,892 19,163 27,859 100,490
-------------------------------------------------------------------
Minority Interest: Distributions on Company
Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust 3,623 3,623
-------------------------------------------------------------------
Income Before Income Taxes 26,897 9,456 4,736 (24,449) 16,640
Total Income Tax Expense 5,173 5,173
-------------------------------------------------------------------
Net Income $ 26,897 $ 9,456 $ 4,736 $ (29,622) $ 11,467
===================================================================
Total Assets $ 138,259 $ 505,558 $ 643,817
===================================================================
June 30, 1999:
Gross Written Premiums $ 93,028 $ 22,562 $ 5,493 $ 121,083
-------------------------------------------------------------------
Net Written Premiums $ 64,408 $ 18,935 $ 4,944 $ 88,287
-------------------------------------------------------------------
Revenue:
Net Earned Premiums $ 58,809 $ 14,772 $ 2,336 $ 75,917
Net Investment Income 9,850 9,850
Net Realized Investment Gain 5,193 5,193
-------------------------------------------------------------------
Total Revenue 58,809 14,772 2,336 15,043 90,960
-------------------------------------------------------------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 32,334 8,340 1,203 41,877
Acquisition Costs and Other Underwriting
Expenses 23,864 23,864
Other Operating Expenses 1,296 1,296
-------------------------------------------------------------------
Total Losses and Expenses 32,334 8,340 1,203 25,160 67,037
-------------------------------------------------------------------
Minority Interest: Distributions on Company
Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust 3,623 3,623
-------------------------------------------------------------------
Income Before Income Taxes 26,475 6,432 1,133 (13,740) 20,300
Total Income Tax Expense 6,123 6,123
-------------------------------------------------------------------
Net Income $ 26,475 $ 6,432 $ 1,133 $ (19,863) $ 14,177
===================================================================
Total Assets $ 509,557 $ 509,557
===================================================================
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Three Months Ended,
-------------------------------------------------------------------
Commercial Specialty Personal
Lines Lines Lines Corporate Total
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
June 30, 2000:
Gross Written Premiums $ 59,091 $ 17,367 $ 13,385 $ 89,843
-------------------------------------------------------------------
Net Written Premiums $ 37,755 $ 16,602 $ 5,327 $ 59,684
-------------------------------------------------------------------
Revenue:
Net Earned Premiums $ 33,845 $ 13,627 $ 6,819 $ 54,291
Net Investment Income 5,832 5,832
Net Realized Investment Gain (Loss) 389 389
Other Income 7,113 (4,581) 2,532
-------------------------------------------------------------------
Total Revenue 33,845 13,627 13,932 1,640 63,044
-------------------------------------------------------------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 19,943 8,534 3,496 31,973
Acquisition Costs and Other Underwriting
Expenses 2,684 14,633 17,317
Other Operating Expenses 5,703 (2,272) 3,431
-------------------------------------------------------------------
Total Losses and Expenses 19,943 8,534 11,883 12,361 52,721
-------------------------------------------------------------------
Minority Interest: Distributions on
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust 1,812 1,812
-------------------------------------------------------------------
Income Before Income Taxes 13,902 5,093 2,049 (12,533) 8,511
Total Income Tax Expense 2,709 2,709
-------------------------------------------------------------------
Net Income $ 13,902 $ 5,093 $ 2,049 $ (15,242) $ 5,802
===================================================================
Total Assets $ 138,259 $ 505,558 $ 643,817
===================================================================
June 30, 1999:
Gross Written Premiums $ 47,861 $ 11,648 $ 3,484 $ 62,993
-------------------------------------------------------------------
Net Written Premiums $ 32,429 $ 9,844 $ 3,209 $ 45,482
-------------------------------------------------------------------
Revenue:
Net Earned Premiums $ 30,256 $ 7,490 $ 1,407 $ 39,153
Net Investment Income 4,996 4,996
Net Realized Investment Gain 5,683 5,683
-------------------------------------------------------------------
Total Revenue 30,256 7,490 1,407 10,679 49,832
-------------------------------------------------------------------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 16,671 4,219 725 21,615
Acquisition Costs and Other Underwriting
Expenses 12,087 12,087
Other Operating Expenses 777 777
-------------------------------------------------------------------
Total Losses and Expenses 16,671 4,219 725 12,864 34,479
-------------------------------------------------------------------
Minority Interest: Distributions on
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust 1,812 1,812
-------------------------------------------------------------------
Income Before Income Taxes 13,585 3,271 682 (3,997) 13,541
Total Income Tax Expense 4,301 4,301
-------------------------------------------------------------------
Net Income $ 13,585 $ 3,271 $ 682 $ (8,298) $ 9,240
===================================================================
Total Assets $ 509,557 $ 509,557
===================================================================
</TABLE>
9
<PAGE> 10
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
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 property and casualty
business with other domestic and international insurers having greater
financial and other resources than the Company.
- Regulation - The Company's insurance subsidiaries are subject to a
substantial degree of regulatory oversight, which generally is designed
to protect the interests of policyholders, as opposed to shareholders.
- Inflation - Property and casualty insurance premiums are established
before the amount of losses and loss adjustment expenses, or the extent
to which inflation may 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.
- Catastrophe Exposure - The Company's insurance subsidiaries issue
insurance policies which provide coverage for commercial and personal
property and casualty risks. It is possible that a catastrophic event
could greatly increase claims under these insurance policies.
RESULTS OF OPERATIONS (SIX MONTHS ENDED JUNE 30, 2000 VS JUNE 30, 1999)
Premiums: Gross written premiums grew $45.9 million (37.9%) to $167.0
million for the six months ended June 30, 2000 from $121.1 million for the same
period of 1999; gross earned premiums grew $46.9 million (44.8%) to $151.7
million for the six months ended June 30, 2000 from $104.8 million for the same
period of 1999; net written premiums increased $29.5 million (33.4%) to $117.8
million for the six months ended June 30, 2000 from $88.3 million for the same
period of 1999; and net earned premiums grew $27.0 million (35.6%) to $102.9
million in 2000 from $75.9 million in 1999.
The respective gross written and net written premium increases for commercial
lines and specialty lines products for the six months ended June 30, 2000 vs.
1999 amount to $11.6 million and $7.1 million for commercial lines products, and
$11.0 million and $15.7 million for specialty lines products. Overall premium
growth in the commercial lines segment has been offset in part by the Company's
decision not to renew certain policies in the commercial automobile and
specialty property niches due to inadequate pricing levels being experienced as
a result of market conditions and/or loss experience emerging at higher than
expected levels. The overall growth in premiums are attributable to a number of
factors:
- The acquisition of Liberty, resulting in an increase of $24.0 million and
$11.6 million in gross and net manufactured housing, preferred homeowners
and National Flood Insurance Program written premiums, respectively.
- Displacement of agency relationships in the marketplace due to the
consolidation of certain competitor property and casualty insurance
companies resulting in additional prospects and business.
- Recent rating agency downgrades of certain property and casualty insurance
companies resulting in their diminished presence in the company's product
niches resulting in additional prospects and business.
10
<PAGE> 11
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
- Continued expansion of marketing efforts relating to commercial lines and
specialty lines products through the Company's field organization and
preferred agents.
- Modest pricing increases on select casualty renewal business.
Net Investment Income: Net investment income approximated $12.1 million
for the six months ended June 30, 2000 and $9.9 million for the same period of
1999. Total investments grew to $423.4 million at June 30, 2000 from $349.6
million at June 30, 1999. The growth in investment income is due to investing
net cash flows provided from operating activities, the reinvesting of the net
proceeds from equity security sales in fixed maturity securities, and the net
investable assets acquired in the Company's acquisition of Liberty.
Net Realized Investment Gain: Net realized investment gains were $0.5
million for the six months ended June 30, 2000 and $5.2 million for the same
period in 1999. During the quarter ended June 30, 1999 the Company sold certain
fixed maturity and equity investments which resulted in net realized gains of
$5.7 million. The proceeds from these sales were utilized for the cash purchase
price and repayment of certain obligations at the July 16, 1999 closing of the
Liberty acquisition. The remaining proceeds were invested in fixed maturity
securities in order to lessen the Company's holdings in certain common stock
positions and increase current investment income.
Other Income: Other income approximated $5.3 million for the six months
ended June 30, 2000 and $0.0 for the same period of 1999. This increase is
primarily attributed to commissions earned on personal lines brokered business
arising from the acquisition of Liberty.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment
expenses increased $18.3 million (43.7%) to $60.2 million for the six months
ended June 30, 2000 from $41.9 million for the same period of 1999 and the loss
ratio increased to 58.5% in 2000 from 55.2% in 1999. The increase in net loss
and loss adjustment expenses was due principally to the 35.6% growth in net
earned premiums and in part to the relative growth in the professional liability
and specialty property product lines which incur higher relative loss
experience.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs
and other underwriting expenses increased $10.1 million (42.3%) to $34.0 million
for the six months ended June 30, 2000 from $23.9 million for the same period of
1999. This increase was due primarily to the 35.6% growth in net earned premiums
and in part to the higher acquisition costs as a result of the relative changes
in the Company's product and associated distribution channel mix (see Results of
Operations "Premiums").
Other Operating Expenses: Other operating expenses increased $4.9
million to $6.2 million for the six months ended June 30, 2000 from $1.3 million
for the same period of 1999. The increase in other operating expenses was
primarily due to the operating expenses of the Company's brokered personal lines
business ($3.9 million), and goodwill amortization ($.8 million), both arising
from the acquisition of Liberty.
Income Tax Expense: The Company's effective tax rate for the six months
ended June 30, 2000 and 1999 was 31.1% and 30.2%, respectively. The effective
rates differed from the 35% statutory rate principally due to investments in
tax-exempt securities offset in part by non-deductible goodwill amortization.
The increase in the effective tax rate is principally due to a greater
investment of cash flows in taxable securities relative to tax-exempt
securities.
RESULTS OF OPERATIONS (THREE MONTHS ENDED JUNE 30, 2000 VS JUNE 30, 1999)
Premiums: Gross written premiums grew $26.8 million (42.5%) to $89.8
million for the three months ended June 30, 2000 from $63.0 million for the same
period of 1999; gross earned premiums grew $26.4 million (48.5%) to $80.8
million for the three months ended June 30, 2000 from $54.4 million for the same
period of 1999; net written premiums increased $14.2 million (31.2%) to $59.7
million for the three months ended June 30, 2000 from $45.5 million for the same
period of 1999; and net earned premiums grew $15.1 million (33.2%) to $54.3
million in 2000 from $39.2 million in 1999.
11
<PAGE> 12
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
The respective gross written and net written premium increases for
commercial lines and specialty lines products for the three months ended June
30, 2000 vs. 1999 amount to $11.8 million and $8.3 million for commercial lines
products, and $5.7 million and $6.8 million for specialty lines products.
Overall premium growth in the commercial lines segment has been offset in part
by the Company's decision not to renew certain policies in its commercial
automobile and specialty property product niches due to inadequate pricing
levels being experienced as a result of market conditions and/or loss experience
emerging at higher than expected levels. The overall growth in premiums are
attributable to a number of factors:
- The acquisition of Liberty, resulting in an increase of $9.9 million and
$2.1 million in gross and net manufactured housing, preferred homeowners
and National Flood Insurance Program written premiums, respectively.
- Displacement of agency relationships in the marketplace due to the
consolidation of certain competitor property and casualty insurance
companies resulting in additional prospects and business.
- Recent rating agency down grades of certain property and casualty insurance
companies resulting in their diminished presence in the company's product
niches resulting in additional prospects and business.
- Continued expansion of marketing efforts relating to commercial lines and
specialty lines products through the Company's field organization and
preferred agents.
- Modest pricing increases on select casualty renewal business.
Net Investment Income: Net investment income approximated $5.8 million
for the three months ended June 30, 2000 and $5.0 million for the same period of
1999. Total investments grew to $423.4 million at June 30, 2000 from $349.6
million at June 30, 1999. The growth in investment income is due to investing
net cash flows provided from operating activities, the reinvesting of the
proceeds from equity security sales in fixed maturity securities, and the net
investable assets acquired in the Company's acquisition of Liberty.
Net Realized Investment Gain: Net realized investment gains were $0.4
million for the three months ended June 30, 2000 and $5.7 million for the same
period in 1999. During the quarter ended June 30, 1999 the Company sold certain
fixed maturity and equity investments which resulted in net realized gains of
$5.7 million. The proceeds from these sales were utilized for the cash purchase
price and repayment of certain obligations at the July 16, 1999 closing of the
Liberty acquisition. The remaining proceeds were invested in fixed maturity
securities in order to increase current investment income and to lessen the
Company's holdings in certain common stock positions.
Other Income: Other income approximated $2.5 million for the three
months ended June 30, 2000 and $0.0 for the same period of 1999. This increase
is primarily attributed to commissions earned on personal lines brokered
business arising from the acquisition of Liberty.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment
expenses increased $10.4 million (48.1%) to $32.0 million for the three months
ended June 30, 2000 from $21.6 million for the same period of 1999 and the loss
ratio increased to 58.9% in 2000 from 55.2% in 1999. The increase in net loss
and loss adjustment expenses was due principally to the 33.2% growth in net
earned premiums and in part to the relative growth in the professional liability
product line which incurs higher relative loss experience.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs
and other underwriting expenses increased $5.2 million (43.0%) to $17.3 million
for the three months ended June 30, 2000 from $12.1 million for the same period
of 1999. This increase was due primarily to the 33.2% growth in net earned
premiums and in part to the higher acquisition costs as a result of the relative
changes in the Company's product and associated distribution channel mix (see
Results of Operations "Premiums").
Other Operating Expenses: Other operating expenses increased $2.6
million to $3.4 million for the three months ended June 30, 2000 from $0.8
million for the same period of 1999. The increase in other operating expenses
was primarily due to the operating expenses of the Company's brokered personal
lines business ($2.0 million), and goodwill amortization ($0.4 million), both
arising from the acquisition of Liberty.
12
<PAGE> 13
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Income Tax Expense: The Company's effective tax rate for the three
months ended June 30, 2000 and 1999 was 31.8% and 31.8%, respectively. The
effective rates differed from the 35% statutory rate principally due to
investments in tax-exempt securities offset in part by non-deductible goodwill
amortization.
LIQUIDITY AND CAPITAL RESOURCES
For the six months ended June 30, 2000 the Company's investments
experienced unrealized investment appreciation of $2.3 million, net of the
related deferred tax expense of $1.2 million. At June 30, 2000, the Company had
total investments with a carrying value of $423.4 million, of which 80.7%
consisted of investments in investment grade fixed maturity securities,
including U.S. treasury securities and obligations of U.S. government
corporations and agencies, obligations of states and political subdivisions,
corporate debt securities, collateralized mortgage securities and asset backed
securities. The collateralized mortgage securities and asset backed securities
consist of short tranche securities possessing favorable pre-payment risk
profiles. The remaining 19.3% of the Company's total investments consisted
primarily of publicly traded common stock securities.
At its July 20, 2000 meeting, the Company's Board of Directors
authorized the repurchase of an additional $10.0 million of the Company's common
stock. This authorization is in addition to the previously announced $30.0
million common stock buyback authorization. The purchases are made from time to
time in the open market or through privately negotiated transactions. The
Company purchased 806,400 shares of its common stock during the six months ended
June 30, 2000 for $12.4 million under its stock buyback authorization.
During the second quarter 2000, the Company extended the lease
agreement for its headquarters office space through February 2008. The aggregate
future minimum rental payments for the additional 5 year lease term approximate
$6.0 million.
The Company produced net cash from operations of $27.0 million and
$25.5 million, respectively, for the six months ended June 30, 2000 and 1999.
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.
YEAR 2000 ISSUES
Many existing computer programs use only two digits, instead of four,
to identify a year in the date field. These programs were designed and developed
without considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create incorrect results on
or after the Year 2000. The "Year 2000" issue affects computer and information
technology systems, as well as non-information technology systems which include
embedded technology such as micro-processors and micro-controllers (or
micro-chips) that have date sensitive programs that may not properly recognize
the year 2000 or beyond. As of August 1, 2000 the Company has not experienced
any Year 2000 issues with respect to either computer and information technology
systems, or non-information technology systems.
The Company issues professional liability coverage, including directors
and officers liability, and commercial multi-peril insurance policies. Coverage
under certain of these policies may cover losses suffered by insureds as a
result of the Year 2000 issues. Professional liability policies are written on a
"claim made and reported" basis. Since early 1997 approximately 50% of these
policies have included a Year 2000 exclusion endorsement. The Company includes a
Year 2000 exclusion endorsement on virtually all new or renewing professional
liability policies providing coverage effective January 1, 1999 and thereafter.
On occasion, for
13
<PAGE> 14
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
qualifying accounts, the Company's underwriters may remove the exclusion after
receipt and review of a satisfactory supplemental application (which includes a
warranty statement) and other underwriting information. With respect to
commercial multi-peril policies, the Company believes that it should not be held
liable for claims arising from the Year 2000 issue under comprehensive general
liability policies. However, the Company cannot determine whether or to what
extent courts may find liability for such claims. Additionally, expenses could
be incurred to contest Year 2000 issue coverage claims, even if the Company
prevails in its position. As a result, it cannot presently be determined what,
if any, insurance exposure ultimately exists for Year 2000 issue claims.
However, no Year 2000 issue claims have been reported to the Company as of
August 1, 2000. There can be no assurance that such Year 2000 issues will not
materially adversely affect the Company.
FORWARD-LOOKING INFORMATION
Certain information included in this report and other statements or
materials published or to be published by the Company are not historical facts
but are forward-looking statements relating to such matters as anticipated
financial performance, business prospects, technological developments, new and
existing products, expectations for market segment and growth, the impact of
Year 2000 issues, and similar matters. In connection with the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, the Company
provides the following cautionary remarks regarding important factors which,
among others, could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. The risks and uncertainties that may
affect the operations, performance, development, results of the Company's
business, and the other matters referred to above include, but are not limited
to: (i) changes in the business environment in which the Company operates,
including inflation and interest rates; (ii) changes in taxes, governmental
laws, and regulations; (iii) competitive product and pricing activity; (iv)
difficulties of managing growth profitably; (v) catastrophe losses; and (vi) the
impact of Year 2000 issues, including the matters referred to above.
14
<PAGE> 15
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
At the Company's annual meeting of shareholders held on May 4, 2000,
the following members were elected to the Board of Directors:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
William J. Henrich, Jr. 7,461,515 3,700
Paul R. Hertel, Jr. 7,461,515 3,700
Roger L. Larson 7,461,515 3,700
James J. Maguire 7,461,515 3,700
James J. Maguire, Jr. 7,461,515 3,700
Thomas J. McHugh 7,461,515 3,700
Michael J. Morris 7,461,515 3,700
Dirk A. Stuurop 7,461,515 3,700
Sean S. Sweeney 7,461,515 3,700
J. Eustace Wolfington 7,461,515 3,700
</TABLE>
The following other matters were approved at the Annual Meeting:
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
--------- ------------- -----------
<S> <C> <C> <C>
Approval of an Amendment to the Company's Employee Stock
Purchase Plan to increase the number of shares subject
to purchase under the plan from 500,000 to 1,000,000
shares 7,234,624 182,267 48,324
Approval of the Appointment of PricewaterhouseCoopers
LLP as Independent Auditors for the Fiscal Year Ending
December 31, 2000 7,464,545 600 70
</TABLE>
Item 5. Other information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
11.0 Computation of Earnings Per Share
</TABLE>
b. The Company has not filed any reports on Form 8-K during the quarter
for which this report is filed.
15
<PAGE> 16
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
<TABLE>
<S> <C>
Date August 8, 2000 /s/ James J. Maguire
------------------------ -------------------------------------------
James J. Maguire
Chairman of the Board of Directors,
and Chief Executive Officer
(Principal Executive Officer)
Date August 8, 2000 /s/ Craig P. Keller
------------------------ -------------------------------------------
Craig P. Keller
Senior Vice President, Secretary,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting
Officer)
</TABLE>
16
<PAGE> 17
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
----------------------- ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Weighted-Average Common Shares Outstanding 12,122 12,236 12,225 12,223
Weighted-Average Share Equivalents Outstanding 2,582 2,864 2,534 2,845
-------- -------- -------- --------
Weighted-Average Shares and Share
Equivalents Outstanding 14,704 15,100 14,759 15,068
======== ======== ======== ========
Net Income $ 5,802 $ 9,240 $ 11,467 $ 14,177
======== ======== ======== ========
Basic Earnings per Share $ 0.48 $ 0.76 $ 0.94 $ 1.16
======== ======== ======== ========
Diluted Earnings per Share $ 0.39 $ 0.61 $ 0.78 $ 0.94
======== ======== ======== ========
</TABLE>
17
