<PAGE> 1
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from__________ to __________
COMMISSION FILE NUMBER: 0-22280
PHILADELPHIA CONSOLIDATED HOLDING CORP.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2202671
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
ONE BALA PLAZA, SUITE 100
BALA CYNWYD, PENNSYLVANIA 19004
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 617-7900
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on March 27,
2000 as reported on the NASDAQ National Market System, was $77,618,227. Shares
of Common Stock held by each executive officer and director and by each person
who is known by the Registrant to beneficially own 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 27, 2000, Registrant had outstanding 12,250,101 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the definitive Proxy Statement for Registrant's 2000 Annual
Meeting of Shareholders to be held May 4, 2000 are incorporated by
reference in Part III.
The Exhibit Index is located on Page 57 of 67.
1
<PAGE> 2
PART I
Item 1. BUSINESS
GENERAL
As used in this Annual Report on Form 10-K, (i) "Philadelphia
Insurance" refers to Philadelphia Consolidated Holding Corp., (ii) the "Company"
refers to Philadelphia Insurance and its subsidiaries, doing business as
Philadelphia Insurance Companies; (iii) the "Insurance Subsidiaries" refers to
Philadelphia Indemnity Insurance Company ("PIIC"), Philadelphia Insurance
Company ("PIC"), Mobile USA Insurance Company ("MUSA") and Liberty American
Insurance Company ("LAIC"), collectively; (iv) "MIA" refers to Maguire Insurance
Agency, Inc., a captive underwriting manager; (v) "MHIA" refers to Mobile
Homeowners Insurance Agencies, Inc., a managing general agency; (vi) "Premium
Finance" refers to MHIA Premium Finance Company; and (vii) "PCHC Investment"
refers to PCHC Investment Corp., an investment holding company. Philadelphia
Insurance was incorporated in Pennsylvania in 1984, to serve as a holding
company for PIIC, PIC and MIA. On July 16, 1999 Philadelphia Insurance closed on
its acquisition of Liberty American Insurance Group, Inc. ("Liberty") (formerly
The Jerger Co., Inc.) and its subsidiaries. Liberty consists of MUSA, LAIC, MHIA
and Premium Finance.
During 1999, the Company continued its growth through adherence to its
core philosophies of specialization, mixed marketing and profitable
underwriting. 1999 gross written premiums increased 39.3% to $274.9 million, and
the GAAP basis combined ratio (the sum of the net loss and loss adjustment
expenses and acquisition costs and other underwriting expenses divided by net
earned premiums) was 92.9%, which, once again, was substantially lower than the
property and casualty industry as a whole.
Through the acquisition of Liberty, the Company acquired approximately
$32.0 million of annual mobile homeowners and homeowners gross written premium
and $49.0 million of brokered personal lines business. Furthermore, this
acquisition provides the platform for the Company's entry into the personal
lines property and casualty business.
In September 1999, the Board of Directors authorized the repurchase of
an additional $20.0 million of the Company's common stock. This authorization is
in addition to the initial $10.0 million stock buyback authorization. As of
December 31, 1999 approximately $15.2 million of common stock had been
repurchased since the initial authorization.
As previously reported, the Company exited the nursing home and
assisted living niche during the fourth quarter 1998. In spite of the Company's
early recognition of the difficult market conditions, i.e., a heightened
litigious climate and adverse development in jury verdicts, and its subsequent
decision to quickly exit this business, the Company recorded an after-tax charge
of $3.3 million in September 1999 to increase net unpaid loss and loss
adjustment expenses. This charge was necessitated by higher than expected
incidence and amount of claims which were noted in the third quarter 1999.
During the third and fourth quarters of 1999 hurricanes and other storm events
adversely affected both the Company's commercial and personal property books of
business, resulting in after tax losses of approximately $4.0 million.
Subsequent to the acquisition of Liberty, A.M. Best Company reaffirmed
the "A+" (superior) pooled rating for PIIC and PIC and assigned the "A+"
(superior) pooled rating to MUSA and LAIC. PIIC and PIC have also been assigned
an "A" claims paying ability rating by Standard and Poor's. MUSA and LAIC have
not sought such rating from Standard and Poor's.
BUSINESS STRATEGY
The Company designs, markets and underwrites specialty commercial and
personal property and casualty insurance products incorporating value-added
coverages and services for select target markets or niches. A mixed marketing
strategy is utilized, wherein, the Company's production underwriting
organization markets the Company's insurance products directly to the insureds,
and also through designated broker representatives, and a network of preferred
agents. The Company's production underwriting organization, consisting of 185
professionals at year end 1999, operating from 40 regional offices located
across the United States and includes telemarketing staffs at its regional
offices and the Philadelphia home office.
2
<PAGE> 3
Business Segments
The Company's operations are classified into four reportable business
segments: The Commercial Lines Underwriting Group ("Commercial Lines") which
has underwriting responsibility for the Commercial Automobile and Commercial
multi-peril package insurance products; The Specialty Lines Underwriting Group
("Specialty Lines") which has underwriting responsibility for the professional
liability insurance products; The Specialty Property Underwriting Group
("Special Property & Inland Marine") which has underwriting responsibility
for the large property and inland marine insurance products; and The Personal
Lines Group ("Personal Lines") which designs, markets and underwrites personal
property and casualty insurance products for the mobile homeowners and
homeowners markets.
The following table sets forth, for the years ended December 31, 1999,
1998 and 1997, the gross written premiums for each of the Company's reportable
business segments and the relative percentages that such premiums represented.
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
Dollars Percentage Dollars Percentage Dollars Percentage
------- ---------- ------- ---------- ------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial Lines Underwriting Group...... $ 179,330 65.2% $ 162,058 82.1% $ 138,343 86.7%
Specialty Lines Underwriting Group........ 48,532 17.7 30,396 15.4 20,748 13.3%
Personal Lines Group...................... 25,414 9.2 3,850 1.9
Specialty Property Underwriting Group..... 21,642 7.9 1,104 .6
---------- --------- ---------- --------- ---------- ------
Total..................................... $ 274,918 100.0% $ 197,408 100.0% $ 159,091 100.0%
========== ========= ========== ========= ========== ======
</TABLE>
Commercial Lines:
Commercial Automobile and Commercial Excess: The Company has provided
Commercial Automobile Products to the leasing and rent-a-car industries for over
35 years. Products offered to the rent-a-car industry include coverage for the
business owner's property, dual interest liability, and physical damage on the
rental vehicle.
Additionally, through arrangements with a number of the largest
rent-a-car companies, the Company also offers its commercial excess product at
the rental car counter to rent-a-car customers protecting them against liability
for bodily injury and property damage, which is excess of the statutory coverage
provided with the rental vehicle and primary over the renter's personal
automobile insurance coverage.
In keeping with its marketing philosophy, the Company includes a number
of special features in its rental car products and services in an attempt to
differentiate them from the competition. Such features include: catastrophic
comprehensive coverage for losses due to fire, lightning, windstorm, hail,
flood, earthquake and other specified causes; subrogation services on
self-insured physical damage; liability deductibles; and self-insured retention
programs.
The Company also offers a full range of liability and physical damage
coverages to automobile leasing companies and their customers. For the driver
(the lessee), coverages include both primary liability and physical damage
coverage on the vehicle. For the owner (the lessor), coverages include
contingent and excess liability over the primary liability layer which protects
lessors in the event of a loss when the primary coverage is absent or inadequate
and contingent physical damage coverage. Additional products offered to leasing
companies include interim primary liability and physical damage coverage, which
protects the lessor of the vehicle before and after it is delivered to the
lessee; residual value coverage which guarantees the value of the leased vehicle
at the termination of the lease; and guaranteed asset protection coverage which
protects the lessor and lessee for the difference between the leased vehicle's
actual cash value and the lease or loan net value in instances where the vehicle
is stolen or damaged beyond repair.
3
<PAGE> 4
Commercial Package: The Company has been providing Commercial Multi Peril
Package Policies ("Package Programs") to specific targeted niche markets for
over 10 years. Among the organizations to which the Company offers its specialty
niche package programs are non-profit, health and fitness, homeowners
associations, and most recently, condominium associations, and day care
facilities. The package policies provide a combination of comprehensive
liability, property, automobile, and workers compensation coverage with limits
up to $1.0 million for casualty, $100.0 million for property, and umbrella
limits on an optional basis up to $10.0 million. Policies are further tailored
to include special value-added features addressing unique aspects of each of the
above niche markets - differentiating the Company's product offerings from those
of its competitors.
Specialty Lines:
The Company has been providing specialty professional liability
products for approximately ten years, specializing in non-ISO, proprietary
policies developed primarily for the professional liability, employment
practices and directors & officers liability markets. The professional liability
products provide errors and omissions coverage for lawyers, accountants,
insurance agents and other miscellaneous professions. The directors and officers
product is offered to non-profit, for-profit and financial institutions. The
Company focuses on maintaining a high renewal retention, improving current
products, developing new products and staffing field offices with experienced
underwriters. The Company periodically introduces coverage enhancements to its
policies, designed to improve and differentiate the coverage offered. The
Company has taken significant steps to regionalize its underwriting. By having a
local underwriting presence, policyholders can benefit from quicker service and
easier access to their underwriter. Furthermore, the Company is able to draw
from other regional markets to fill its highly specialized personnel needs.
Specialty Property & Inland Marine:
The Company established a Specialty Property & Inland Marine
underwriting organization during 1998 specializing in large property risks and
inland marine insurance. Products include the Ultimate Cover Policy which is
designed to insure a wide range of business entities from shopping centers to
hotels to educational. The Company believes that the Ultimate Cover Policy not
only provides the opportunity to market to new insureds, but also provides the
opportunity to round out existing product offerings and create cross-selling
opportunities. With respect to inland marine products, the concentration of
effort is on the larger segments of the inland marine market including
builders' risk and contractors' equipment. In addition, the expertise currently
exists to manuscript coverage forms for the unusual, "one-of-a-kind-type"
account.
Personal Lines:
The Company entered the personal lines property and casualty business
through the acquisition of Liberty. The Company produces and underwrites
specialized mobile homeowners and homeowners property and casualty business,
principally in Florida and also in Arizona and Nevada. The Company also produces
business in the "National Federal Flood Insurance Program", and brokers certain
mobile homeowners and homeowners business to insurance companies outside the
consolidated group. The Company has initially targeted thirteen new states for
expansion as well as geographic diversification of its personal lines business
during 2000.
The following table provides the geographic distribution of the
Company's risks insured as represented by direct earned premiums for all
reportable business segments for the year ended December 31, 1999. No other
state accounted for more than 2% of total direct earned premiums for all
product lines for the year ended December 31, 1999 (dollars in thousands).
<TABLE>
<CAPTION>
State Direct Earned Premiums Percent of Total
----- ---------------------- ----------------
<S> <C> <C>
Florida.................................... $44,665 18.3%
California................................. 34,515 14.2
New York................................... 15,851 6.5
Texas...................................... 11,920 4.9
New Jersey................................. 10,755 4.4
Pennsylvania............................... 10,138 4.2
Illinois................................... 9,320 3.8
Ohio....................................... 8,289 3.4
Massachusetts.............................. 7,231 3.0
North Carolina............................. 5,842 2.4
Washington................................. 4,926 2.0
Other...................................... 80,215 32.9
------- ----
Total Direct Earned Premiums............... $243,667 100.0%
======== ======
</TABLE>
4
<PAGE> 5
Underwriting and Pricing
The Company's business segments have been organized around its four
underwriting divisions: Commercial Lines, Specialty Lines, Specialty Property &
Inland Marine and Personal Lines. Each underwriting division's responsibilities
include: pricing, managing the risk selection process, and monitoring loss
ratios by product and insured.
The Commercial Lines underwriting group, which has underwriting
responsibility for the Company's commercial automobile and commercial package
products, currently consists of home office underwriters that are supported by
underwriting assistants, raters, and other policy administration personnel. The
Commercial Lines underwriters and support staff are organized into geographic
underwriting teams responsible for underwriting and servicing specific
commercial automobile and commercial package products. Each underwriting team
is under the direction of a Senior Underwriter who reports to the Vice
President of Commercial Lines Underwriting.
The Specialty Lines underwriting group, which has underwriting
responsibility for the Company's professional liability products, consists of
15 home office underwriters and 9 regional underwriters who report to the
Assistant Vice President of Specialty Lines underwriting, and are supported by
underwriting assistants. The Specialty Lines underwriters have responsibility
for underwriting specific professional liability products within designated
Company marketing regions. The Specialty Lines underwriters located in regional
offices work closely with the marketing department to generate profitable
business.
The Specialty Property & Inland Marine underwriting group, which has
authority for the Company's large property and inland marine products,
currently consists of seven home office professionals. In addition, the
Company has strategically placed ten underwriting teams within the Company's
existing field offices. These regional underwriters have total responsibility
for sales, underwriting, policy issuance, and overall management of the book
of business. All regional and home office Specialty Property & Inland Marine
underwriters report to the Vice President of Specialty Property & Inland
Marine Underwriting. The Company believes that by delivering excellent service
on a local basis, relationship building will be enhanced.
The Personal Lines Group, which has responsibility for the Company's
mobile homeowners and homeowners business, is located in Pinellas Park, Florida.
The underwriting staff consists of seven professionals who are under the
direction of the Chief Underwriting Officer.
The Company uses a combination of Insurance Services Office, Inc.
("ISO") coverage forms and rates and independently filed forms and rates.
Coverage forms and rates are independently developed in situations where the
line of business is not supported by ISO or where management believes the ISO
forms and rates do not adequately address the risk. Departures from ISO forms
are also used to differentiate the Company's products from its competitors'
products and are independently filed.
The Company attempts to follow conservative underwriting and pricing
practices. When necessary, the Company is willing to reunderwrite, sharply
curtail or discontinue a product deemed to present unacceptable risks. Written
underwriting guidelines are maintained, and updated regularly, for all classes
of business underwritten. Adherence to underwriting guidelines is maintained
through underwriting audits. Product price levels are measured utilizing a price
monitoring system which measures the aggregate price level of the book of
business. This system is intended to assist management and underwriters in
promptly recognizing and correcting price deterioration.
Reinsurance
The Company has entered into various reinsurance agreements for the
purpose of limiting loss exposure and diversifying business. The Company's
casualty excess of loss reinsurance agreement provides that the Company bears
the first layer of liability on each occurrence (varying from $0.1 million to
$1.0 million based upon the specific product) with its reinsurer bearing the
remaining contractual liability up to $1.0 million. Casualty risks in excess of
$1.0 million up to $11.0 million are reinsured under a casualty treaty ("Excess
Treaty") placed through a reinsurance broker with several reinsurers.
Facultative reinsurance (reinsurance which is provided on an individual risk
basis) is placed for each casualty risk in excess of $11.0 million.
The Company also has an excess casualty reinsurance agreement which
provides an additional $5.0 million of coverage for protection from exposures
such as extra-contractual obligations and judgments in excess of policy limits.
Additionally, an errors and omissions insurance policy provides an additional
$5.0 million of coverage with respect to these exposures.
5
<PAGE> 6
The Company's property excess of loss reinsurance treaty provides that
the Company bears the first layer of loss on each risk (varying from $0.1
million to $0.5 million based upon the specific product) with the reinsurers
bearing the next layer of loss up to $10.0 million on each risk. The Company has
an automatic facultative excess of loss cover for each property risk in excess
of $10.0 million up to $100.0 million. Additionally, the Company has property
catastrophe reinsurance for its commercial and personal property books of
business. Under its commercial property catastrophe reinsurance agreements, the
Company bears the first $2.0 million in catastrophe losses, per event, with the
reinsurers bearing the next $18.0 million of loss. Under its personal property
catastrophe reinsurance agreement, the Company bears the first $2.0 million in
catastrophe losses, per event, with reinsurers bearing the next $135.0 million.
Based upon the various modeling methods utilized by the Company to estimate its
probable maximum loss, the Company currently maintains catastrophe reinsurance
coverage for the 250 year storm event on both its commercial and personal lines
business.
Effective January 1, 2000, the Company entered into a three-year
aggregate stop loss reinsurance agreement commencing with the 2000 accident
year. The agreement includes all the business written by the Company. Under the
terms of the agreement, the reinsurer provides reinsurance protection for a
certain aggregate dollar limit for losses and loss adjustment expenses in excess
of a predetermined loss ratio (the sum of losses and loss adjustment expenses
divided by earned premiums).
The Company seeks to limit the risk of a reinsurer's default in a
number of ways. First, the Company principally contracts with large reinsurers
that are rated at least "A-" (Excellent) by A.M. Best. Second, the Company seeks
to collect the obligations of its reinsurers on a timely basis. This collection
effort is supported by a reinsurance recoverable system that is regularly
monitored. Finally, the Company typically does not write casualty policies in
excess of $10.0 million or property policies in excess of $50.0 million.
The Company regularly assesses its reinsurance needs and seeks to
improve the terms of its reinsurance arrangements as market conditions permit.
Such improvements may involve increases in retentions, modifications in premium
rates, changes in reinsurers and other matters.
Marketing and Distribution
Proactive risk selection based on sound underwriting criteria and
relationship selling in clearly defined target markets continues to be the
foundation of the Company's marketing plan. Within this framework, the Company's
marketing effort is designed to assure a systematic and disciplined approach to
developing business which is anticipated to be profitable. The Company's most
important distribution channel is its production underwriting organization. The
production underwriting organization is currently comprised of 185 professionals
located in 40 field offices in major markets across the country. The field
offices are focused daily on interacting with prospective and existing insureds.
In addition to this direct marketing, relationships with approximately 4,000
brokers have been formed either as a result of the broker having a relationship
with the insured, or through seeking the Company's expertise in one of its
specialty products. This mixed marketing concept not only provides the
flexibility to work with the broker and/or policyholder but also provides the
flexibility to seize emerging market opportunities.
The Company has initially targeted thirteen new states for expansion of
its personal lines business during 2000. The Company believes it can further
grow and geographically diversify this business through leveraging its existing
production underwriter channel of distribution, as well as through its
e-commerce initiative, whereby agents can access the Company's internet web
site for rating, quoting, issuing and billing of this business.
The Company's preferred agent program, wherein business relationships
are formed with brokers specializing in certain of the Company's business
niches, has grown to 69 preferred agent relationships at year end 1999. The
Company anticipates increasing the number of these relationships in 2000 thereby
further increasing the distribution of the Company's niche products.
The Company also anticipates some cross selling opportunities to arise
between its personal and commercial lines business niches, wherein the Company's
commercial lines agency base (in certain instances) also possess personal lines
mobile homeowners and homeowners books of business which may now be solicited by
the Company. The Company also is pursuing cross selling opportunities within its
preferred agency base for its portfolio of commercial niche insurance products.
6
<PAGE> 7
The Company supplements its marketing efforts through trade shows,
direct mailings and national advertisements placed in trade magazines serving
industries in which the Company specializes, and links to industry web sites.
Product Development
The Company continually evaluates new product opportunities, consistent
with its strategic focus on selected market niches. Direct contacts between the
Company's field and home office personnel and its customers have produced a
number of new product ideas. All new product ideas are presented to the Product
Development Committee (the "Committee") for consideration. The Committee,
currently composed of the Company's Executive Vice President, as well as
officers from the underwriting, claims and compliance departments, meets
regularly to review the feasibility of products from a variety of perspectives,
including underwriting risk, marketing and distribution, reinsurance, long-term
viability and consistency with the Company's culture and philosophy. For each
new product, an individualized test market plan is prepared, addressing such
matters as the appropriate distribution channel (e.g., a limited number of
selected production underwriters), an appropriate cap on premiums to be
generated during the test market phase and reinsurance requirements for the test
market phase. Test market products may involve lower retentions than customarily
utilized. After a new product is approved for test marketing, the Company
monitors its success based on specified criteria (e.g., underwriting results,
sales success, product demand and competitive pressures). If expectations are
not realized, the Company either moves to improve results by initiating
adjustments or abandons the product.
Claims Management and Administration
In accordance with its emphasis on underwriting profitability, the
Company actively manages claims under its policies in an effort to investigate
reported incidents at an early stage, service insureds and minimize fraud. Claim
files are regularly audited by claims supervisors and the Company's reinsurers
in an attempt to ensure that claims are being processed properly and that
reserves are being set at appropriate levels. Claims examiners are expected to
set conservative reserves, an important factor in the Company's reserve
development over the years. See "Loss and Loss Adjustment Expenses."
The Company maintains a Special Investigations Unit to investigate
suspicious claims and to serve as a clearinghouse for information concerning
fraudulent practices primarily within the rental car industry. Working closely
with a variety of industry contacts, including attorneys, investigators and
rental car company fraud units, this unit has uncovered a number of fraudulent
claims.
Loss and Loss Adjustment Expenses
The Company is liable for losses and loss adjustment expenses under its
insurance policies and reinsurance treaties. While the Company's professional
liability policies are written on claims-made forms and while claims on its
other policies are generally reported promptly after the occurrence of an
insured loss, in many cases several years may elapse between the occurrence of
an insured loss, the reporting of the loss to the Company and the Company's
payment of the loss. The Company reflects its liability for the ultimate payment
of all incurred losses and loss adjustment expenses by establishing loss and
loss adjustment expense reserves, which are balance sheet liabilities
representing estimates of future amounts needed to pay claims and related
expenses with respect to insured events that have occurred.
When a claim involving a probable loss is reported, the Company
establishes a case reserve for the estimated amount of the Company's ultimate
loss and loss adjustment expense. This estimate reflects an informed judgment,
based on the Company's reserving practices and the experience of the Company's
claims staff. Management also establishes reserves on an aggregate basis to
provide for losses incurred but not reported ("IBNR"), as well as future
development on claims reported to the Company.
As part of the reserving process, historical data are reviewed and
consideration is given to the anticipated effect of various factors, including
known and anticipated legal developments, changes in societal attitudes,
inflation and economic conditions. Reserve amounts are necessarily based on
management's estimates and judgments; as new data become available and are
reviewed, these estimates and judgments are revised, resulting in increases or
decreases to existing reserves. To verify the adequacy of its reserves, the
Company engages independent actuarial consultants to perform interim loss
reserve analyses and annual certifications.
The following table sets forth a reconciliation of beginning and ending
reserves for unpaid loss and loss adjustment expenses, net of amounts for
reinsured losses and loss adjustment expenses, for the years indicated. As a
result of changes in estimates of insured events of prior years, the Company
reduced losses and loss adjustment expenses incurred by $0.3
7
<PAGE> 8
million, $3.2 million and $1.7 million in 1999, 1998 and 1997, respectively.
Such favorable development was due to losses emerging at a lesser rate than had
been originally anticipated when the initial reserves for the applicable
accident years were estimated. The favorable development includes a $5.0 million
increase to net unpaid loss and loss adjustment expense during 1999 for the
Company's nursing home and assisted living policies. This increase was
necessitated by higher than expected incidence and amounts of claims. The
Company exited this business during 1998.
<TABLE>
<CAPTION>
As of and For the Years Ended December 31,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Unpaid loss and loss adjustment expenses at
beginning of year (1) ...................................... $ 137,205 $ 108,928 $ 85,723
--------- --------- ---------
Provision for losses and loss adjustment expenses for current
year claims ................................................ 99,663 69,544 56,725
Decrease in estimated ultimate losses and loss adjustment
expenses for prior year claims .............................. (253) (3,170) (1,716)
--------- --------- ---------
Total incurred losses and loss adjustment expenses .......... 99,410 66,374 55,009
--------- --------- ---------
Loss and loss adjustment expense payments for claims
attributable to:
Current year ................................................ 31,493 13,402 9,512
Prior years ................................................. 43,769 26,870 22,292
--------- --------- ---------
Total payments .............................................. 75,262 40,272 31,804
--------- --------- ---------
Unpaid loss and loss adjustment expenses at end of year (2) . $ 161,353 $ 135,030 $ 108,928
========= ========= =========
</TABLE>
(1) 1999 balance adjusted to include $2,175 net unpaid loss and
loss adjustment expenses for MUSA as of acquisition date.
(2) Unpaid loss and loss adjustment expenses differ from the
amounts reported in the Consolidated Financial Statements
because of the inclusion therein of reinsurance receivables of
$26,710, $16,120 and $13,502 at December 31, 1999, 1998 and
1997, respectively.
The following table presents the development of unpaid loss and loss
adjustment expenses, net of amounts for reinsured losses and loss adjustment
expenses, from 1989 through 1999. The top line of the table shows the estimated
reserve for unpaid loss and loss adjustment expenses at the balance sheet date
for each of the indicated years. These figures represent the estimated amount of
unpaid loss and loss adjustment expenses for claims arising in the current year
and all prior years that were unpaid at the balance sheet date, including IBNR
losses. The table also shows the re-estimated amount of the previously recorded
unpaid loss and loss adjustment expenses based on experience as of the end of
each succeeding year. The estimate changes as more information becomes known
about the frequency and severity of claims for individual years.
8
<PAGE> 9
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
(Dollars in Thousands)
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
UNPAID LOSS
AND LOSS
ADJUSTMENT
EXPENSES,
AS STATED $12,198 $15,930 $22,248 $31,981 $38,714 $53,595 $68,246 $85,723 $108,928 $136,237 $161,353
Cumulative
Paid as of:
1 year later 3,354 4,286 6,698 9,865 10,792 12,391 15,214 22,292 26,870 43,769
2 years later 6,249 8,084 12,485 16,290 19,297 23,139 31,410 38,848 56,488
3 years later 8,807 10,838 16,288 21,253 24,991 33,511 40,637 52,108
4 years later 10,155 12,907 17,780 24,299 28,903 38,461 47,994
5 years later 11,217 13,211 19,406 25,793 30,558 42,366
6 years later 11,497 13,792 19,898 26,321 32,748
7 years later 11,760 14,074 20,246 27,252
8 years later 11,902 14,329 20,625
9 years later 11,905 14,343
10 years later 11,899
Unpaid Loss
and Loss
Adjustment
Expenses
re-estimated
as of End
of Year:
1 year later 12,628 15,953 22,056 30,538 38,603 52,670 67,281 84,007 105,759 135,984
2 years later 12,644 15,712 21,327 30,428 38,016 52,062 66,061 81,503 103,513
3 years later 12,424 14,822 21,198 29,648 37,184 51,149 63,872 76,348
4 years later 11,947 14,811 21,118 29,306 36,272 49,805 59,085
5 years later 11,836 14,841 21,399 28,553 35,783 47,366
6 years later 12,060 14,593 21,106 28,370 34,509
7 years later 12,008 14,606 21,013 27,959
8 years later 12,039 14,596 20,854
9 years later 12,039 14,525
10 years later 12,023
Cumulative
Redundancy
Dollars $175 $1,405 $1,394 $4,022 $4,205 $6,229 $9,161 $9,375 $5,415 $253
Percentage 1.4% 8.8% 6.3% 12.6% 10.9% 11.6% 13.4% 10.9% 5.0% 0.2%
</TABLE>
(1) Unpaid loss and loss adjustment expenses differ from the amounts
reported in the Consolidated Financial Statements because of the
inclusion therein of reinsurance receivables of $26,710, $16,120,
$13,502, $10,919, $9,440, $5,580, $5,539, $1,770, $1,267, $1,672 and
$1,591 at December 31, 1999, 1998, 1997, 1996, 1995, 1994, 1993, 1992,
1991, 1990, and 1989, respectively.
(2) 1998 Unpaid Loss and Loss Adjustment Expenses, As Stated, adjusted to
include $1,207 unpaid loss and loss adjustment expenses for Mobile USA
Insurance Company as of acquisition date.
(3) The Company maintains its historical loss records net of reinsurance
and therefore is unable to conform the presentation of this table to
the financial statements.
9
<PAGE> 10
The cumulative redundancy represents the aggregate change in the
reserve estimated over all prior years, and does not present accident year loss
development. Therefore, each amount in the table includes the effects of changes
in reserves for all prior years.
The unpaid loss and loss adjustment expense of the Insurance
Subsidiaries, as reported in their Annual Statements prepared in accordance with
statutory accounting practices and filed with state insurance departments,
differ from those reflected in the Company's financial statements prepared in
accordance with generally accepted accounting principles ("GAAP") with respect
to recording the effects of reinsurance. Unpaid loss and loss adjustment
expenses under statutory accounting practices are reported net of the effects of
reinsurance whereas under GAAP these amounts are reported without giving effect
to reinsurance. Under GAAP, reinsurance receivables, with a corresponding
increase in unpaid loss and loss adjustment expense, have been recorded. (See
footnote (1) on Page 9 for amounts). There is no effect on net income or
shareholders' equity due to the difference in reporting the effects of
reinsurance between statutory accounting practices and GAAP as discussed above.
Operating Ratios
Statutory Combined Ratio
The statutory combined ratio, which is the sum of (a) the ratio of loss
and loss adjustment expenses incurred to net earned premiums (loss ratio) and
(b) the ratio of policy acquisition costs and other underwriting expenses to net
written premiums (expense ratio), is the traditional measure of underwriting
experience for insurance companies. Generally, if the combined ratio is below
100%, an insurance company has an underwriting profit, and if it is above 100%,
the insurer has an underwriting loss.
The following table reflects the consolidated loss, expense and
combined ratios of the Insurance Subsidiaries together with the property and
casualty industry-wide combined ratios after policyholders' dividends.
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Loss Ratio ............................................... 59.7% 54.1% 55.3% 55.7% 57.1%
Expense Ratio ............................................ 33.6% 31.0% 29.1% 31.1% 29.6%
------ ------ ------ ------ ------
Combined Ratio ........................................... 93.3% 85.1% 84.4% 86.8% 86.7%
====== ====== ====== ====== ======
Industry Combined Ratio after Policyholders" Dividends ... 107.5% 105.6% 101.6% 105.8% 106.4%
====== ====== ====== ====== ======
(1) (2) (2) (2) (2)
</TABLE>
(1) Source: Best's Review/Preview PC 2000 (Estimated 1999).
(2) Source: Best's Review/Preview PC 2000
Premium-to-Surplus Ratio:
While there are no statutory provisions governing premium-to-surplus
ratios, regulatory authorities regard this ratio as an important indicator as to
an insurer's ability to withstand abnormal loss experience. Guidelines
established by the National Association of Insurance Commissioners (the "NAIC")
provide that an insurer's net premium-to-surplus ratio is satisfactory if it is
below 3 to 1.
The following table sets forth, for the periods indicated, net written
premiums to policyholders' surplus for the Insurance Subsidiaries (statutory
basis):
<TABLE>
<CAPTION>
As of and For the Years Ended December 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ------------- ------------ ------------ ------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Net Written Premiums (1) .................... $195,258 $143,036 $111,797 $83,994 $62,072
Policyholders' Surplus ...................... $179,341 $152,336 $105,985 $81,906 $67,500
Premium to Surplus Ratio (1) ................ 1.1 to 1.0 1.0 to 1.0 1.0 to 1.0 1.0 to 1.0 .9 to 1.0
</TABLE>
(1) 1999 includes $11,187 net written premiums for MUSA from January 1,
1999 to date of acquisition.
10
<PAGE> 11
Investments
The Company's investment objective continues to be the realization of
relatively high levels of investment income while generating competitive
after-tax total rates of return within a prudent level of risk and within the
constraints of maintaining adequate securities in amount and duration to meet
cash requirements of current operations and long-term liabilities, as well as
maintaining and improving the Company's A.M. Best and Standard & Poor's ratings.
The Company utilizes professional investment managers for its fixed maturity and
equity investments, which consist of diversified issuers and issues.
At December 31, 1999, the Company had total investments with a carrying
value of $393.8 million. At December 31, 1999, 81.6% of the Company's total
investments were investment grade fixed maturity securities, including U.S.
treasury securities and obligations of U.S. government corporations and
agencies, obligations of states and political subdivisions, 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
18.4% of the Company's total investments consisted primarily of publicly-traded
common stocks.
The following table sets forth information concerning the composition
of the Company's total investments at December 31, 1999:
<TABLE>
<CAPTION>
Estimated Percent of
Market Carrying Carrying
Amortized Cost Value Value Value
-------------- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed Maturities:
Obligations of States and Political
Subdivisions .................. $123,317 $122,323 $122,323 31.1%
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies ..... 17,902 17,585 17,585 4.5
Corporate and Bank Debt Securities 102,672 96,533 96,533 24.5
Collateralized Mortgage Securities 48,521 46,764 46,764 11.9
Asset Backed Securities ............ 39,362 37,813 37,813 9.6
Equity Securities .................. 41,231 72,768 72,768 18.4
-------- -------- -------- -----
Total Investments .................. $373,005 $393,786 $393,786 100.0%
======== ======== ======== =====
</TABLE>
At December 31, 1999, all of the Insurance Subsidiaries' fixed maturity
securities consisted of U.S. government securities or securities rated "1" or
"2" by the NAIC; these fixed maturities possessed an average quality rating of
AA.
The cost and estimated market value of fixed maturity securities at
December 31, 1999, by remaining original contractual maturity, are set forth
below. Expected maturities may differ from contractual maturities because
certain borrowers have the right to call or prepay obligations, with or without
call or prepayment penalties:
<TABLE>
<CAPTION>
Amortized Cost Estimated Market Value
----------------- ---------------------------
(Dollars in Thousands)
<S> <C> <C>
Due in one year or less ........................... $ 2,319 $ 2,325
Due after one year through five years ............. 55,792 55,141
Due after five years through ten years ............ 123,467 120,524
Due after ten years ............................... 62,313 58,451
Collateralized Mortgage and Asset Backed Securities 87,883 84,577
-------- --------
Total ............................................. $331,774 $321,018
======== ========
</TABLE>
Investments of the Insurance Subsidiaries must comply with applicable
laws and regulations which prescribe the type, quality and diversification of
investments. In general, these laws and regulations permit investments, with
specified limits and subject to certain qualifications, in federal, state and
municipal obligations, corporate bonds, preferred and common equity securities,
real estate mortgages and real estate.
11
<PAGE> 12
Regulation
General: Insurance companies are subject to supervision and regulation
in the states in which they transact business. Such supervision and regulation,
designed primarily for the protection of policyholders and not shareholders,
relates to most aspects of an insurance company's business and includes such
matters as authorized lines of business; underwriting standards; financial
condition standards; licensing of insurers; investment standards; premium
levels; policy provisions; the filing of annual and other financial reports
prepared on the basis of Statutory Accounting Practices ("SAP"); the filing and
form of actuarial reports; the establishment and maintenance of reserves for
unearned premiums; losses and loss adjustment expenses; transactions with
affiliates; dividends; changes in control; and a variety of other financial and
non-financial matters. Because the Insurance Subsidiaries are domiciled in
Pennsylvania and Florida, the Pennsylvania Department of Insurance and the
Florida Department of Insurance have primary authority over the Company.
Regulation of Insurance Holding Companies: Pennsylvania and Florida,
like many other states, have laws governing insurance holding companies (such as
Philadelphia Insurance). Under these laws, a person generally must obtain the
applicable Insurance Department's approval to acquire, directly or indirectly,
10% or more of the outstanding voting securities of Philadelphia Insurance or
the Insurance Subsidiaries. Such Department's determination of whether to
approve any such acquisition would be based on a variety of factors, including
an evaluation of the acquiror's financial stability, the competence of its
management and whether competition in Pennsylvania or Florida would be reduced.
The Pennsylvania and Florida statutes require every Pennsylvania and
Florida-domiciled insurer which is a member of an insurance holding company
system to register with Pennsylvania or Florida, respectively, by filing and
keeping current a registration statement on a form prescribed by the NAIC.
The Pennsylvania statute also specifies that at least one-third of the
board of directors and each committee thereof, of either the domestic insurer or
its publicly owned holding company (if any), must be comprised of outsiders
(i.e., persons who are neither officers, employees nor controlling shareholders
of the insurer or any affiliate). In addition, the domestic insurer or its
publicly held holding company must establish one or more committees comprised
solely of outside directors, with responsibility for recommending the selection
of independent certified public accountants; reviewing the insurer's financial
condition, the scope and results of the independent audit and any internal
audit; nominating candidates for director; evaluating the performance of
principal officers; and recommending to the board the selection and compensation
of principal officers.
Under the Florida statute, a majority of the directors must be citizens
of the United States. In addition, no Florida insurer may make any contract
whereby any person is granted or is to enjoy in fact the management of the
insurer to the substantial exclusion of its board of directors or to have the
controlling or preemptive right to produce substantially all insurance business
for the insurer, unless the contract is filed with and approved by the Florida
Insurance Department. An insurer must give the Department written notice of any
change of personnel among the directors or principal officers of the insurer
within 45 days of such change. The written notice must include all information
necessary to allow the Department to determine that the insurer will be in
compliance with state statutes.
Dividend Restrictions: As an insurance holding company, Philadelphia
Insurance will be largely dependent on dividends and other permitted payments
from the Insurance Subsidiaries to pay any cash dividends to its shareholders.
The ability of the Insurance Subsidiaries to pay dividends to the Company is
subject to certain restrictions imposed under Pennsylvania and Florida insurance
laws. Accumulated statutory profits of the Insurance Subsidiaries from which
dividends may be paid totaled $82.7 million at December 31, 1999. Of this
amount, the Insurance Subsidiaries are entitled to pay a total of approximately
$22.2 million of dividends in 2000 without obtaining prior approval from the
Pennsylvania or Florida Insurance Departments. During the fourth quarter of
1999, Philadelphia Insurance Company paid a $17.5 million dividend to
Philadelphia Insurance which was subsequently contributed to Liberty American
Insurance Company and Mobile USA Insurance Company in the amounts of $11.3
million and $6.2 million, respectively, to reallocate Policyholders' surplus
among the Insurance Subsidiaries.
The National Association of Insurance Commissioners: In addition to
state-imposed insurance laws and regulations, the Insurance Subsidiaries are
subject to the general SAP and reporting formats established by the NAIC. The
NAIC also promulgates model insurance laws and regulations relating to the
financial and operational regulation of insurance companies. These model laws
and regulations generally are not directly applicable to an insurance company
unless and until they are adopted by applicable state legislatures or
departments of insurance. However, NAIC model laws and regulations have become
increasingly important in recent years, due primarily to the NAIC's state
regulatory accreditation program. Under this program, states which have adopted
certain required model laws and regulations and meet various staffing and other
requirements are "accredited" by the NAIC. Such accreditation is the cornerstone
of an eventual nationwide regulatory network and there is a certain degree of
political pressure on individual states to become accredited by the NAIC.
Because
12
<PAGE> 13
the adoption of certain model laws and regulations is a prerequisite to
accreditation, the NAIC's initiatives have taken on a greater level of practical
importance in recent years. The NAIC accredited both Pennsylvania and Florida
under the NAIC Financial Regulation Standards.
All the states have adopted the NAIC's financial reporting form, which
is typically referred to as the NAIC "Annual Statement" and most states,
including Pennsylvania and Florida, generally defer to the NAIC with respect to
SAP. In this regard, the NAIC has a substantial degree of practical influence
and is able to accomplish certain quasi-legislative initiatives through
amendments to the NAIC annual statement and applicable accounting practices and
procedures. For instance, in recent years the NAIC has required all insurance
companies to have an annual statutory financial audit and an annual actuarial
certification as to loss reserves by including such requirements within the
annual statement instructions.
Capital and Surplus Requirements: PIC's eligibility to write insurance
on a surplus lines basis in most jurisdictions is dependent on its compliance
with certain financial standards, including the maintenance of a requisite level
of capital and surplus and the establishment of certain statutory deposits. In
recent years, many jurisdictions have increased the minimum financial standards
applicable to surplus lines eligibility. For example, California and certain
other states have adopted regulations which require surplus lines companies
operating therein to maintain minimum capital of $15 million, calculated as set
forth in the regulations. PIC maintains capital to meet these requirements.
Risk-Based Capital: Risk-based capital is designed to measure the
acceptable amount of capital an insurer should have based on the inherent
specific risks of each insurer. Insurers failing to meet this benchmark capital
level may be subject to scrutiny by the insurer's domiciliary insurance
department and ultimately rehabilitation or liquidation. Based on the standards
currently adopted, the policyholders' surplus of each of the Insurance
Subsidiaries at December 31, 1999 is in excess of the prescribed risk-based
capital requirements.
Insurance Guaranty Funds: The Insurance Subsidiaries are subject to
guaranty fund laws which can result in assessments, up to prescribed limits, for
losses incurred by policyholders as a result of the impairment or insolvency of
unaffiliated insurance companies. Typically, an insurance company is subject to
the guaranty fund laws of the states in which it conducts insurance business;
however, companies which conduct business on a surplus lines basis in a
particular state are generally exempt from that state's guaranty fund laws.
During the five years ended December 31, 1999, the amount of such guaranty fund
assessments paid by the Company was not material.
Shared Markets: As a condition of its license to do business in various
states, PIIC is required to participate in mandatory property-liability shared
market mechanisms or pooling arrangements which provide various insurance
coverages to individuals or other entities that otherwise are unable to purchase
coverage voluntarily provided by private insurers. In addition, some states
require automobile insurers to participate in reinsurance pools for claims that
exceed a certain amount. PIIC's participation in such shared markets or pooling
mechanisms is generally in amounts related to the amount of PIIC's direct
writings for the type of coverage written by the specific pooling mechanism in
the applicable state.
Possible New Legislation, Regulations or Interpretations: New
regulations and legislation have been (and are being) proposed from time to time
to limit damage awards; to bring the industry under regulation by the federal
government; to control premiums, policy terminations and other policy terms; and
to impose new taxes and assessments. It is not possible to determine whether any
of these proposals will be adopted in any jurisdictions and, if so, in what form
or in what jurisdictions. In addition, the Company could be affected by
interpretations of state insurance regulators with respect to licensing
requirements applicable to the product distribution method currently utilized by
the rent a car companies that are customers of the Company. The impact of these
initiatives on the Company can not be determined.
Competition
The property and casualty insurance industry is highly competitive.
Many of the Company's existing and potential competitors are larger, have
considerably greater financial and other resources, have greater experience in
the insurance industry and offer a broader line of insurance products than the
Company. Not only does the Company compete with other insurers, it also competes
with new forms of insurance organizations such as risk retention groups and
self-insurance mechanisms.
Overall, due to the abundance of capital in the insurance industry, the
current business climate remains competitive from a solicitation and pricing
standpoint. In the context of the current environment, the Company will not
sacrifice pricing guidelines for premium volume and will "walk away", if
necessary, from writing business that does not meet established underwriting
standards and pricing guidelines. Management believes, though, that the
Company's mixed marketing strategy is a strength in this market environment, in
that it provides the flexibility to quickly deploy the marketing efforts of the
Company's direct production underwriters from soft market segments to market
segments with emerging opportunities.
13
<PAGE> 14
Additionally, through the mixed marketing strategy, the Company's production
underwriters have established relationships with approximately 4,000 brokers,
thus facilitating a regular flow of submissions.
Employees
As of March 21, 2000, the Company had 544 full-time employees and 18
part-time employees. The Company actively encourages its employees to continue
their educational efforts and aids in defraying their educational costs
(including 100% of education costs related to the insurance industry).
Management believes that the Company's relations with its employees are
generally excellent.
Item 2. DESCRIPTION OF PROPERTY
The Company leases certain office space in Bala Cynwyd, PA which serves
as its headquarters location and also leases 40 field offices for its
field marketing organization. In July 1999, the Company acquired the
principal executive offices of Liberty, located in Pinellas Park,
Florida.
Item 3. LEGAL PROCEEDINGS
The Company is not subject to any material pending legal proceedings
other than ordinary routine litigation incidental to its business.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of 1999.
14
<PAGE> 15
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
(a) The Company's common stock, no par value, trades on The Nasdaq Stock
Market under the symbol "PHLY". As of February 22, 2000, there were 392
holders of record and 1,461 beneficial shareholders of the Company's
common stock. The high and low sales prices of the common stock, as
reported by the National Association of Securities Dealers, were as
follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------------
Quarter High Low High Low
------------ ------------- -------------- -----------------
<S> <C> <C> <C> <C>
First 24.094 19.563 21.750 16.750
Second 25.375 21.000 24.375 20.000
Third 24.375 12.688 23.000 18.625
Fourth 16.313 13.688 23.688 19.375
</TABLE>
The Company did not declare cash dividends on its common stock in 1999
and 1998, and currently intends to retain its earnings to enhance
future growth. The payment of dividends by the Company will be
determined by the Board of Directors and will be based on general
business conditions and legal and regulatory restrictions.
As a holding company, the Company is dependent upon dividends and other
permitted payments from its subsidiaries to pay any cash dividends to
its shareholders. The ability of the Company's insurance subsidiaries
to pay dividends to the Company is subject to regulatory limitations
(see Note 3 to the Consolidated Financial Statements).
(b) During the three years ended December 31, 1999, the Company did not
sell any of its securities which were not registered under the
Securities Act of 1933 except as follows:
On July 16, 1999 the Company issued an aggregate of 1,037,772 shares of
its common stock to the four (4) shareholders of The Jerger Company,
Inc. in connection with the merger of The Jerger Company, Inc. into a
subsidiary of the Company. This issuance was exempt from registration
under Section 4(2) of the Securities Act of 1933 as a result of the
limited number of persons to whom the shares were issued and the fact
that the shares were issued in a negotiated merger transaction.
15
<PAGE> 16
Item 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
As of and For the Years Ended December 31,
-----------------------------------------------------------------------------
(In Thousands, Except Share and Per Share Data)
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operations and Comprehensive Income
Statement Data:
Gross Written Premiums ............. $ 274,918 $ 197,408 $ 159,091 $ 136,855 $ 104,180
Gross Earned Premiums .............. $ 245,978 $ 174,737 $ 150,128 $ 121,820 $ 99,507
Net Written Premiums ............... $ 184,071 $ 143,036 $ 111,797 $ 83,994 $ 62,072
Net Earned Premiums ................ $ 164,915 $ 122,687 $ 100,555 $ 72,050 $ 58,188
Net Investment Income .............. 20,695 15,448 9,703 7,910 6,506
Net Realized Investment Gain (Loss) 5,700 474 (16) 260 181
Other Income ....................... 4,722 219 228 282 309
------------ ------------ ------------ ------------ ------------
Total Revenue ...................... 196,032 138,828 110,470 80,502 65,184
------------ ------------ ------------ ------------ ------------
Net Loss and Loss Adjustment
Expenses ........................... 99,410 66,374 55,009 40,118 33,227
Acquisition Costs and Other
Underwriting Expenses .............. 53,793 38,422 31,344 22,210 17,105
Other Operating Expenses ........... 8,939 2,212 1,909 1,386 2,564
------------ ------------ ------------ ------------ ------------
Total Losses and Expenses .......... 162,142 107,008 88,262 63,714 52,896
------------ ------------ ------------ ------------ ------------
Minority Interest: Distributions on
Company Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust .................. 7,245 4,770
------------ ------------ ------------ ------------ ------------
Income Before Income Taxes ......... 26,645 27,050 22,208 16,788 12,288
Total Income Tax Expense ........... 7,802 7,022 5,338 3,414 2,458
------------ ------------ ------------ ------------ ------------
Net Income ......................... $ 18,843 $ 20,028 $ 16,870 $ 13,374 $ 9,830
------------ ------------ ------------ ------------ ------------
Weighted-Average Common Shares
Outstanding (1) .................... 12,501,165 12,249,262 12,193,659 11,879,506 11,627,702
Weighted-Average Share Equivalents
Outstanding (1) .................... 2,614,399 2,680,165 2,736,039 2,373,742 2,049,004
------------ ------------ ------------ ------------ ------------
Weighted-Average Shares and Share
Equivalents Outstanding (1) ........ 15,115,564 14,929,427 14,929,698 14,253,248 13,676,706
------------ ------------ ------------ ------------ ------------
Basic Earnings Per Share (1)(2) .... $ 1.51 $ 1.63 $ 1.38 $ 1.13 $ 0.85
------------ ------------ ------------ ------------ ------------
Diluted Earnings Per Share(1)(2) ... $ 1.25 $ 1.34 $ 1.13 $ 0.94 $ 0.72
------------ ------------ ------------ ------------ ------------
Year End Financial Position:
Total Investments and Cash
and Cash Equivalents ............... $ 420,016 $ 388,059 $ 229,599 $ 180,061 $ 140,086
Total Assets ....................... 599,051 476,390 292,724 231,725 177,203
Unpaid Loss and Loss Adjustment
Expenses ........................... 188,063 151,150 122,430 96,642 77,686
Minority Interest in Consolidated
Subsidiaries ....................... 98,905 98,905
Total Shareholders' Equity ......... 161,440 137,483 111,284 85,642 68,316
Common Shares Outstanding(1) ....... 12,590,908 12,200,563 12,242,431 12,079,612 11,627,702
------------ ------------ ------------ ------------ ------------
Insurance Operating Ratios
(Statutory Basis):
Net Loss and Loss Adjustment
Expenses to Net Earned Premiums .... 59.7% 54.1% 55.3% 55.7% 57.1%
Underwriting Expenses to Net
Written Premiums ................... 33.6% 31.0% 29.1% 31.1% 29.6%
============ ============ ============ ============ ============
Combined Ratio ..................... 93.3% 85.1% 84.4% 86.8% 86.7%
============ ============ ============ ============ ============
A.M. Best Rating ................... A+ A+ A A A
(Superior) (Superior) (Excellent) (Excellent) (Excellent)
</TABLE>
(1) 1996 and 1995 share data restated to reflect a two-for-one split of the
Company's common stock distributed in November 1997.
(2) 1996 and 1995 earnings per share amounts restated in accordance with
the provisions of SFAS No. 128 adopted as of December 31, 1997.
16
<PAGE> 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Operations
1999 was an eventful year for the Company. The Company continued its track
record of growth through adherence to its core philosophies of specialization,
mixed marketing and profitable underwriting. 1999 gross written premiums
increased 39.3% to $274.9 million, and the GAAP basis combined ratio (the sum of
the net loss and loss adjustment expenses and acquisition costs and other
underwriting expenses divided by net earned premiums) was 92.9%, which once
again, was substantially lower than the property and casualty industry as a
whole.
In July 1999 the Company closed on its acquisition of Liberty American Insurance
Group, Inc. ("Liberty") (formerly The Jerger Company, Inc.) and subsidiaries
which include: two personal lines property and casualty insurance companies,
Mobile USA Insurance Company and Liberty American Insurance Company; a managing
general agency, Mobile Homeowners Insurance Agencies, Inc.; and a premium
finance company, MHIA Premium Finance Company. Through the acquisition, the
Company acquired approximately $32.0 million of annual mobile homeowners,
homeowners and National Flood Insurance Program ("NFIP") gross written premium
and $49.0 million of annual brokered personal lines business. Furthermore, this
acquisition provides the platform for the Company's entry into the personal
lines property and casualty business.
In September 1999, the Board of Directors authorized the repurchase of an
additional $20.0 million of the Company's common stock. This authorization is in
addition to the initial $10.0 million stock buyback authorization. As of
December 31, 1999 approximately $15.2 million of common stock had been
repurchased since the initial authorization.
As previously reported, the Company exited the nursing home and assisted living
niche during the fourth quarter 1998. In spite of the Company's early
recognition of the difficult market conditions, i.e., a heightened litigious
climate and adverse development in jury verdicts, and its subsequent decision to
quickly exit this business, the Company recorded an after tax charge of $3.3
million in September 1999 to increase net unpaid loss and loss adjustment
expenses. This charge was necessitated by higher than expected incidence and
amount of claims which were noted in the third quarter 1999.
During the third and fourth quarters of 1999, hurricanes and other storm events
adversely affected both the Company's commercial and personal property books of
business resulting in after-tax losses of approximately $4.0 million.
Subsequent to the acquisition discussed above, A.M. Best Company reaffirmed the
"A+" (superior) rating for Philadelphia Indemnity Insurance Company and
Philadelphia Insurance Company and assigned an "A+" (superior) rating to Mobile
USA Insurance Company and Liberty American Insurance Company. Philadelphia
Indemnity Insurance Company and Philadelphia Insurance Company have been
assigned an "A" claims paying ability rating by Standard and Poor's.
Acquisition
As noted previously in the "Operations" section, the Company closed on its
acquisition of Liberty on July 16, 1999. The purchase price paid at closing
consisted of $25.0 million in the Company's common stock (1,037,772 shares) plus
$20.0 million in cash. The purchase also includes a contingent cash payment of
up to $5.0 million based upon the combined earnings of 1999 and 2000 of the
acquired business.
Liberty is a producer and underwriter of highly specialized mobile homeowners
and homeowners property and casualty business primarily in Florida, and also in
Arizona and Nevada. For the year ended December 31, 1999, Liberty produced $81.0
million of mobile homeowners, homeowners and NFIP annual gross written premiums
of which $32.0 million was written by either Mobile USA Insurance Company or
Philadelphia Indemnity Insurance Company and $49.0 million was brokered to
insurance companies outside the consolidated group.
The Company has initially targeted thirteen new states for expansion of its
personal lines business during 2000. The Company believes it can further grow
and diversify this business through leveraging its existing production
underwriter channel of distribution, which consists of 185 professionals located
in 40 offices across the country, as well as through its e-commerce initiative,
whereby, agents can access the Company's Internet Web site for rating, quoting,
issuing and billing of this business.
17
<PAGE> 18
Investments
The Company's investment objective continues to be the realization of relatively
high levels of investment income while generating competitive after-tax total
rates of return within a prudent level of risk and within the constraints of
maintaining adequate securities in amount and duration to meet cash requirements
of current operations and long-term liabilities, as well as maintaining and
improving the Company's A.M. Best and Standard & Poor's ratings. The Company
utilizes professional investment managers for its fixed maturity and equity
investments. These investments consist of diversified issuers and issues, and as
of December 31, 1999, approximately 83.9% of the total invested assets, on a
cost basis, (total investments plus cash equivalents) consisted of investments
in fixed maturity securities versus 78.6% at December 31, 1998.
The Company increased its relative percentage investments in fixed maturity
securities during 1999 through the investing of cash flows from operations and
the reinvestment of proceeds from equity sales. During 1999 the relative
percentage investment in taxable fixed maturity securities increased due to the
more favorable after-tax yields as compared to tax-exempt fixed maturity
securities. At the end of 1999, on a cost basis, investment grade taxable fixed
maturity securities represented 52.7% of the total invested assets, compared to
46.9% as of the end of 1998. The Company decreased its relative percentage of
total investments in equity securities during 1999, through the sale of certain
common stocks. The decision to sell equity investments was made to lessen the
Company's holdings in certain common stock positions as well as to decrease the
overall relative exposure to equity investments. At December 31, 1999, common
stocks, on a cost basis, comprised 10.4% of invested assets, compared to 12.3%
at the end of 1998.
Collateralized mortgage and asset backed securities, on a cost basis, amounted
to $48.5 million and $39.4 million, respectively, as of December 31, 1999 and
$42.8 and $46.4, respectively, as of December 31 1998. These securities are
short tranche securities possessing favorable prepayment risk profiles.
RESULTS OF OPERATIONS
(1999 versus 1998)
Premiums: Gross written premiums grew $77.5 million (39.3%) to $274.9 million in
1999 from $197.4 million in 1998; gross earned premiums grew $71.3 million
(40.8%) to $246.0 million in 1999 from $174.7 million in 1998; net written
premiums increased $41.1 million (28.7%) to $184.1 million in 1999 from $143.0
million in 1998; and net earned premiums grew $42.2 million (34.4%) to $164.9
million in 1999 from $122.7 million in 1998. The overall growth in premiums is
attributable to a number of factors including:
- - Expansion of marketing efforts relating to commercial lines, specialty
lines and specialty property and inland marine products through the
increase in the Company's field organization of approximately 20% to a
total of 185 professionals as well as the increase in the Company's
preferred agents (16 new relationships in 1999) wherein business
relationships are formed with brokers specializing in certain of the
Company's business niches. The respective gross written and net written
premium increases for commercial lines, specialty lines and specialty
property and inland marine products for the year ended December 31,
1999 vs. 1998 amount to $17.3 million and $5.1 million for commercial
lines, $18.1 million and $14.8 million for specialty lines, and $20.5
million and $10.5 million for specialty property and inland marine.
- - The acquisition of Liberty resulted in an increase of $21.6 million and
$10.6 million in gross and net mobile homeowners, homeowners and NFIP
written premiums, respectively.
Overall premium growth has been offset in part by the Company's decision not to
renew policies in the nursing home and assisting living niches due to inadequate
pricing levels being experienced as a result of market conditions (refer to
"Operations" section) and loss experience emerging at higher than expected
levels. As a result, the aggregate total gross written and net written premiums
for the nursing home and assisting living facility products decreased by $9.1
million and $8.3 million, respectively.
Net Investment Income: Net investment income approximated $20.7 million in 1999
and $15.4 million in 1998. Total investments grew to $393.8 million at December
31, 1999 from $356.5 million at December 31, 1998. The growth in investment
income is due to investing the proceeds from the Company's May 1998 FELINE
PRIDESSM security offering for the entire year, net cash flows provided from
operating activities, and the investable assets acquired in the Company's
acquisition.
18
<PAGE> 19
Net Realized Investment Gain: Net realized investment gains were $5.7 million
for 1999 and $0.5 million for 1998. The increase is attributable to the sale of
equity investments. The decision to sell equity investments was made to lessen
the Company's holdings in certain common stock positions and decrease the
Company's relative exposure to equity investments. The proceeds from these sales
were principally reinvested in fixed maturity investments to increase current
investment income.
Other Income: Other income increased $4.5 million to $4.7 million for 1999 from
$0.2 million for 1998. This increase is due to the acquisition of Liberty, and
is primarily attributed to commissions earned on personal lines brokered
business.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses
increased $33.0 million (49.7%) to $99.4 million in 1999 from $66.4 million in
1998 and the loss ratio increased to 60.3% in 1999 from 54.1% in 1998. The
increase in net loss and loss adjustment expenses was due to the following: a
$5.0 million increase to unpaid loss and loss adjustment expenses for Nursing
Home and Assisted Living commercial multi peril package policies which had been
written in prior periods due to an increase in the incidence and amount of
claims under the general liability coverage of these policies; $6.1 million in
loss and loss adjustment expenses for property catastrophe losses resulting from
Hurricane Floyd, Hurricane Irene and Arizona storms occurring during the third
and fourth quarters; and a 34.4% growth in net earned premiums.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other
underwriting expenses increased $15.4 million (40.1%), to $53.8 million in 1999
from $38.4 million in 1998. This increase was due primarily to the 34.4% growth
in net earned premiums and to relative changes in the Company's product and
distribution mix.
Other Operating Expenses: Other operating expenses increased $6.7 million to
$8.9 million from $2.2 million for 1998. The increase in other operating
expenses was due to the following: operating expenses of the agency operations
of Liberty ($5.6 million); and goodwill amortization due to the acquisition of
Liberty ($0.7 million).
Income Tax Expense: The Company's effective tax rates for 1999 and 1998 were
29.3% and 26.0%, 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 and greater
net investment gains on the sale of securities in 1999 vs. 1998.
RESULTS OF OPERATIONS
(1998 versus 1997)
Premiums: Gross written premiums grew $38.3 million (24.1%) to $197.4 million in
1998 from $159.1 million in 1997; gross earned premiums grew $24.6 million
(16.4%) to $174.7 million in 1998 from $150.1 million in 1997; net written
premiums increased $31.2 million (27.9%) to $143.0 million in 1998 from $111.8
million in 1997; and net earned premiums grew $22.1 million (22.0%) to $122.7
million in 1998 from $100.6 million in 1997. The overall growth in premiums are
attributable to a number of factors including:
- - Expansion of marketing efforts relating to commercial auto, commercial
package, and specialty lines products through the increase in the Company's
field organization to a total of 160 professionals.
- - The continued development and growth of the Company's Preferred Agent
Program (18 new preferred relationships formed in 1998), 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.
- - The addition of a new Specialty Property and Inland Marine underwriting
organization during the fourth quarter of 1998 as well as several other new
programs during the year.
Overall premium growth has been offset in part by the loss of accounts in
certain market niches due to inadequate pricing levels being experienced as a
result of market competition. Consistent with its underwriting focus, the
Company has maintained pricing levels for its insurance products reflective of
its underwriting assessment. As a result, loss in premium writings will occur
due to inadequate pricing levels.
Net Investment Income: Net investment income approximated $15.4 million in 1998
and $9.7 million in 1997. Total investments grew to $356.5 million at December
31, 1998 from $217.7 million at December 31, 1997, primarily due to investing
the proceeds from the Company's FELINE PRIDESSM security offering and cash flows
provided from operating activities.
19
<PAGE> 20
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses
increased $11.4 million (20.7%) to $66.4 million in 1998 from $55.0 million in
1997 and the loss ratio decreased to 54.1% in 1998 from 54.7% in 1997. The
increase in net loss and loss adjustment expenses was due primarily to the 22.0%
growth in net earned premiums.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other
underwriting expenses increased $7.1 million (22.7%), to $38.4 million in 1998
from $31.3 million in 1997. This increase was due primarily to the 22.0% growth
in net earned premiums.
Income Tax Expense: The Company's effective tax rates for 1998 and 1997 were
26.0% and 24.0%, 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 and greater
net investment gains on the sale of securities in 1998 vs. 1997.
GROWTH OPPORTUNITIES
The acquisition of Liberty provides the platform for the Company to enter the
personal lines property and casualty insurance business. During 1999, Liberty
produced $81.0 million of mobile homeowners, homeowners, NFIP annual gross
written premiums of which $32.0 million was written by either Mobile USA
Insurance Company or Philadelphia Indemnity Insurance Company and $49.0 million
was brokered to insurance companies outside of the consolidated group. During
the year 2000 the Company anticipates rolling over previously brokered mobile
homeowners business along with growing the brokered homeowners business and NFIP
on which it receives commission income.
In addition, the Company has initially targeted thirteen new states for
expansion of its personal lines business during 2000. The Company believes it
can further grow and diversify this business through leveraging its existing
production underwriter channel of distribution, which consists of 185
professionals located in 40 offices across the country, as well as through its
e-commerce initiative, whereby, agents can access the Company's Internet Web
site for rating, quoting, issuing and billing of this business.
The Company continued to grow its field organization during 1999 to
approximately 185 professionals, including production underwriters and customer
service representatives. It is anticipated that the Company's field organization
will continue to prospect the Company's existing niches for profitable new
business. The Company also grew its Preferred Agents by 16 to 69 during 1999,
further increasing the distribution of the Company's niche products.
The Company also anticipates some cross selling opportunities to arise between
its personal and commercial lines business niches, wherein certain of the
Company's commercial lines agents also possess personal lines mobile homeowners
and homeowners books of business which may now be solicited by the Company. The
Company also is pursuing cross selling opportunities within its preferred agency
base for its portfolio of commercial niche insurance products.
Management believes that its mixed marketing strategy and specialization is a
strength, in that it provides the market intelligence and flexibility to quickly
deploy the marketing efforts of the Company's direct production underwriters
from market segments where pricing is soft to market segments with emerging
opportunities. Additionally, through the mixed marketing strategy, the Company's
production underwriters have established relationships with approximately 4,000
brokers, thus facilitating a regular flow of submissions.
LIQUIDITY AND CAPITAL RESOURCES
Philadelphia Consolidated Holding Corp. (PCHC) is a holding company whose
principal assets currently consist of 100% of the capital stock of its
subsidiaries. The Company's primary sources of funds are dividends from its
subsidiaries and payments received pursuant to tax allocation agreements with
the insurance subsidiaries. For the year ended December 31, 1999, payments to
PCHC pursuant to such tax allocation agreements totaled $7.4 million. The
payment of dividends to PCHC from the insurance subsidiaries is subject to
certain limitations imposed by the insurance laws of the Commonwealth of
Pennsylvania and State of Florida. Accumulated statutory profits of the
insurance subsidiaries from which dividends may be paid totaled $82.7 million at
December 31, 1999. Of this amount, the insurance subsidiaries are entitled to
pay a total of approximately $22.2 million of dividends in 2000 without
obtaining prior approval from the Insurance Commissioner of the Commonwealth of
Pennsylvania or State of Florida. After the acquisition of Liberty, the
insurance subsidiaries entered into an intercompany reinsurance pooling
agreement. During the fourth quarter of 1999, in order to allocate policyholder
surplus amongst the insurance subsidiaries to support their respective
participation percentages in this intercompany reinsurance
20
<PAGE> 21
pooling agreement, Philadelphia Insurance Company paid a $17.5 million dividend
to PCHC which PCHC subsequently contributed to Liberty American Insurance
Company and Mobile USA Insurance Company in the amounts of $11.3 million and
$6.2 million, respectively.
On May 4, 1998, the consolidated capitalization of the Company increased by
approximately $99.0 million from the sale of FELINE PRIDESSM and Trust Preferred
securities. The sales of FELINE PRIDESSM 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. The Company utilized $25.7
million of the net proceeds during 1999 for its acquisition of Liberty,
contributed $33.1 million of the net proceeds to its subsidiaries in 1998, of
which, $20.0 million was contributed to the insurance subsidiaries.
Additionally, during 1998 and 1999 $15.2 million was utilized by the Company to
buy back its common stock under its stock buy-back authorization. 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 Company is obligated to make cash distributions through May
15, 2001, at a rate of 7.0% of the stated amount per annum for the Income Prides
and the separate Trust Preferred securities and contract adjustment payments at
the rate of .50% per annum of the $10.00 stated amount to the holders of the
Growth Prides.
Under certain reinsurance agreements, the Company is required to maintain
investments in trust accounts to secure its reinsurance obligations (primarily
the payment of losses and loss adjustment expenses on business it does not write
directly). At December 31, 1999, the investment and cash balances in such trust
accounts totaled approximately $13.0 million. In addition, various insurance
departments of states in which the Company operates require the deposit of funds
to protect policyholders within those states. At December 31, 1999, the balance
on deposit for the benefit of such policyholders totaled approximately $12.3
million.
The Company produced net cash from operations of $47.2 million in 1999, $49.8
million in 1998 and $38.0 million in 1997. Management believes that the Company
has adequate liquidity to pay all claims and meet all other cash needs.
The insurance subsidiaries, which operate under an intercompany reinsurance
pooling agreement, must have certain levels of policyholders' surplus to support
premium writings. Guidelines of the National Association of Insurance
Commissioners (the "NAIC") suggest that a property and casualty insurer's ratio
of annual statutory net premium written to policyholders' surplus should not
exceed 3-to-1. The ratio of combined annual statutory net premium written by the
insurance subsidiaries to their combined policyholders' surplus was 1.1-to-1.0
and 1.0-to-1.0 for 1999 and 1998, respectively. Management believes that the
policyholders' surplus, which was $179.3 million at December 31, 1999, will be
sufficient to support current and anticipated premium writings.
Risk-based capital is designed to measure the acceptable amount of capital and
surplus an insurer should have, based on the inherent specific risks of each
insurer. Insurers failing to meet this benchmark level may be subject to
scrutiny by the insurer's domiciliary insurance department and ultimately
rehabilitation or liquidation. Based on the standards currently contained in the
applicable Pennsylvania and Florida Insurance Company statutes, the insurance
subsidiaries' capital and surplus is in excess of the prescribed risk-based
capital requirements.
Year 2000 Readiness Disclosure
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 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.
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 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.
21
<PAGE> 22
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 March 15, 2000. There can be no assurance that such Year 2000
issues will not materially adversely affect the Company.
INFLATION
Property and casualty insurance premiums are established before the amount of
losses and loss adjusted expenses, or the extent to which inflation may affect
such amounts, is known. The Company attempts to anticipate the potential impact
of inflation in establishing its premiums and reserves. Substantial future
increases in inflation could result in future increases in interest rates,
which, in turn, are likely to result in a decline in the market value of the
Company's investment portfolio and resulting unrealized losses and/or reductions
in shareholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 ("SFAS 137"). SFAS 137 defers the provisions of SFAS 133 until January 1,
2001. The provisions of SFAS 133 require, among other things, that all
derivatives be recognized in the consolidated balance sheets as either assets or
liabilities and measured at fair value. The corresponding derivative gains and
losses should be reported based upon the hedge relationship, if such a
relationship exists. Changes in the fair value of derivatives that are not
designated as hedges or that do not meet the hedge accounting criteria in SFAS
133 are required to be reported in income. The Company will adopt the provisions
of SFAS No. 133 as of January 1, 2001. At December 31, 1999 the Company held no
derivative financial instruments.
In December 1998, the NAIC adopted the "NAIC Accounting Practices and Procedures
Manual for Property and Casualty Insurance Companies, for Life, Accident and
Health Insurance Companies, and for Health Maintenance Organizations"
("Accounting Practices and Procedures Manual") as submitted by the NAIC
Accounting Practices and Procedures Task Force. This comprehensive guide to
Statutory Accounting Principles is effective January 1, 2001. While this manual
is intended to establish a comprehensive basis of accounting recognized and
adhered to, it is not intended to pre-empt state legislative and regulatory
authority. The Company will adopt the standards of the Accounting Practices and
Procedures Manual as of January 1, 2001 as applied to statutory reporting, and
is presently assessing its impact on financial position and results of
operations of the insurance subsidiaries.
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.
22
<PAGE> 23
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The table below provides information about the Company's financial instruments
that are sensitive to changes in interest rates. The Company does not have any
derivative financial instruments. For debt obligations, the table presents
principal cash flows and related weighted average interest rates by expected
maturity dates. The information is presented in U.S. dollar equivalents, which
is the Company's reporting currency.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
EXPECTED MATURITY DATES TOTAL
(Dollars in thousands, except average interest rate) FAIR
2000 2001 2002 2003 2004 Thereafter TOTAL VALUE
--------- --------- --------- -------- --------- ---------- ---------- ---------
FIXED MATURITIES AVAILABLE
FOR SALE:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Amount $10,600 $31,650 $41,200 $23,030 $37,150 $181,250 $324,880 $319,065
Book Value $11,050 $31,700 $41,530 $22,920 $37,390 $184,969 $329,559
Average Interest Rate 5.42% 6.64% 6.15% 6.70% 6.59% 6.27% 6.33% 6.97%
PREFERRED:
Principal Amount $2,060 $2,060 $1,953
Book Value $2,215 $2,215
Average Interest Rate 7.61% 7.61% 6.58%
SHORT-TERM DEBT:
Principal Amount $16,380 $16,380 $16,340
Book Value $16,350 $16,350
Average Interest Rate 5.37% 5.37% 5.37%
</TABLE>
23
<PAGE> 24
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Philadelphia Consolidated Holding Corp. and Subsidiaries
Index to Financial Statements and Schedules
<TABLE>
<CAPTION>
Financial Statements Page
<S> <C>
Report of Independent Accountants 25
Consolidated Balance Sheets - As of December 31, 1999 and 1998 26
Consolidated Statements of Operations and Comprehensive Income
- For the Years Ended December 31, 1999, 1998 and 1997 27
Consolidated Statements of Changes in Shareholders' Equity - For the
Years Ended December 31, 1999, 1998 and 1997 28
Consolidated Statements of Cash Flows - For the Years Ended December 31,
1999, 1998 and 1997 29
Notes to Consolidated Financial Statements 30-45
Financial Statement Schedules:
Schedule
I Summary of Investments - Other Than Investments in
Related Parties As of December 31, 1999 S-1
II Condensed Financial Information of Registrant As of December
31, 1999 and 1998 and For Each of the Three Years in the
Period Ended December 31, 1999 S-2 -- S-4
III Supplementary Insurance Information As of and For the Years Ended
December 31, 1999, 1998 and 1997 S-5
IV Reinsurance For the Years ended December 31, 1999, 1998 and 1997 S-6
VI Supplemental Information Concerning Property-
Casualty Insurance Operations As of and For the Years Ended
December 31, 1999, 1998 and 1997 S-7
</TABLE>
24
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Philadelphia Consolidated Holding
Corp.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income, changes in
shareholders' equity and cash flows present fairly, in all material respects,
the financial position of Philadelphia Consolidated Holding Corp. and
Subsidiaries (the "Company") at December 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 11, 2000
25
<PAGE> 26
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
As of December 31,
1999 1998
--------- ---------
ASSETS
<S> <C> <C>
Investments:
Fixed Maturities Available for Sale at Market
(Amortized Cost $331,774 and $278,557) ................. $ 321,018 $ 283,718
Equity Securities at Market (Cost $41,231 and $43,441) .... 72,768 72,768
--------- ---------
Total Investments................. ................. 393,786 356,486
Cash and Cash Equivalents ................................. 26,230 31,573
Accrued Investment Income ................................. 5,027 3,771
Premiums Receivable ....................................... 49,176 34,961
Prepaid Reinsurance Premiums and
Reinsurance Receivables ............................... 54,920 22,892
Deferred Acquisition Costs ................................ 26,054 16,853
Property and Equipment .................................... 9,277 4,877
Goodwill less Accumulated Amortization of $2,620 and $1,669 28,801 416
Other Assets .............................................. 5,780 4,561
--------- ---------
Total Assets ....................................... $ 599,051 $ 476,390
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy Liabilities and Accruals:
Unpaid Loss and Loss Adjustment Expenses .............. $ 188,063 $ 151,150
Unearned Premiums ..................................... 111,606 64,787
--------- ---------
Total Policy Liabilities and Accruals ..................... 299,669 215,937
Premiums Payable .......................................... 22,223 7,192
Other Liabilities ......................................... 14,762 9,463
Deferred Income Taxes ..................................... 2,052 7,410
--------- ---------
Total Liabilities .................................. 338,706 240,002
--------- ---------
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 and 12,330,825 Shares Issued ... 68,859 44,796
Notes Receivable from Shareholders ...................... (2,506) (1,680)
Accumulated Other Comprehensive Income .................. 13,507 22,417
Retained Earnings ....................................... 93,766 74,923
Less Cost of Common Stock Held in Treasury,
791,016 and 130,262 Shares ............................ (12,186) (2,973)
--------- ---------
Total Shareholders' Equity ......................... 161,440 137,483
--------- ---------
Total Liabilities and Shareholders' Equity ......... $ 599,051 $ 476,390
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
26
<PAGE> 27
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Revenue:
<S> <C> <C> <C>
Net Written Premiums ............................... $ 184,071 $ 143,036 $ 111,797
Change in Net Unearned Premium Reserve (Increase) .. (19,156) (20,349) (11,242)
------------ ------------ ------------
Net Earned Premiums ................................ 164,915 122,687 100,555
Net Investment Income .............................. 20,695 15,448 9,703
Net Realized Investment Gain (Loss) ................ 5,700 474 (16)
Other Income ....................................... 4,722 219 228
------------ ------------ ------------
Total Revenue..................................... 196,032 138,828 110,470
------------ ------------ ------------
Losses and Expenses:
Loss and Loss Adjustment Expenses .................. 122,491 74,074 61,839
Net Reinsurance Recoveries ......................... (23,081) (7,700) (6,830)
------------ ------------ ------------
Net Loss and Loss Adjustment Expenses .............. 99,410 66,374 55,009
Acquisition Costs and Other
Underwriting Expenses ........................... 53,793 38,422 31,344
Other Operating Expenses ........................... 8,939 2,212 1,909
------------ ------------ ------------
Total Losses and Expenses ...................... 162,142 107,008 88,262
------------ ------------ ------------
Minority Interest: Distributions on Company Obligated
Mandatorily Redeemable Preferred Securities of
Subsidiary Trust ..................................... 7,245 4,770
------------ ------------ ------------
Income Before Income Taxes ........................... 26,645 27,050 22,208
------------ ------------ ------------
Income Tax Expense (Benefit):
Current ............................................ 8,360 7,941 6,521
Deferred ........................................... (558) (919) (1,183)
------------ ------------ ------------
Total Income Tax Expense ....................... 7,802 7,022 5,338
------------ ------------ ------------
Net Income ..................................... $ 18,843 $ 20,028 $ 16,870
============ ============ ============
Other Comprehensive Income (Loss), Net of Tax:
Holding Gain (Loss) Arising during Year .............. $ (5,205) $ 7,702 $ 7,649
Reclassification Adjustment........................... (3,705) (308)
------------ ------------ ------------
Other Comprehensive Income (Loss) .................... (8,910) 7,394 7,649
------------ ------------ ------------
Comprehensive Income ................................. $ 9,933 $ 27,422 $ 24,519
============ ============ ============
Per Average Share Data:
Basic Earnings Per Share ........................... $ 1.51 $ 1.63 $ 1.38
============ ============ ============
Diluted Earnings Per Share ......................... $ 1.25 $ 1.34 $ 1.13
============ ============ ============
Weighted-Average Common Shares Outstanding ........... 12,501,165 12,249,262 12,193,659
Weighted-Average Share Equivalents Outstanding ....... 2,614,399 2,680,165 2,736,039
------------ ------------ ------------
Weighted-Average Shares and Share Equivalents
Outstanding ........................................ 15,115,564 14,929,427 14,929,698
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
27
<PAGE> 28
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
Common Stock:
<S> <C> <C> <C>
Balance at Beginning of Year .............................. $ 44,796 $ 42,788 $ 41,167
Issuance of Shares Pursuant to Acquisition Agreement .... 25,000
Issuance of Shares Pursuant to Employee Stock Purchase
Plan .................................................... (420) 853 898
Exercise of Employee Stock Options, Net of Tax Benefit .. (517) 597 723
Purchase Contracts of Common Stock ..................... 558
--------- --------- ---------
Balance at End of Year .................................... 68,859 44,796 42,788
--------- --------- ---------
Notes Receivable from Shareholders:
Balance at Beginning of Year ............................ (1,680) (1,422) (924)
Notes Receivable Issued Pursuant to Employee
Stock Purchase Plan ..................................... (1,445) (828) (873)
Collection of Notes Receivable .......................... 619 570 375
--------- --------- ---------
Balance at End of Year .................................... (2,506) (1,680) (1,422)
--------- --------- ---------
Accumulated Other Comprehensive Income,
Net of Deferred Income Taxes:
Balance at Beginning of Year ............................ 22,417 15,023 7,374
Other Comprehensive Income, Net of Taxes ................ (8,910) 7,394 7,649
--------- --------- ---------
Balance at End of Year .................................... 13,507 22,417 15,023
--------- --------- ---------
Retained Earnings:
Balance at Beginning of Year ............................ 74,923 54,895 38,025
Net Income .............................................. 18,843 20,028 16,870
--------- --------- ---------
Balance at End of Year .................................... 93,766 74,923 54,895
--------- --------- ---------
Common Stock Held in Treasury:
Balance at Beginning of Year ............................ (2,973)
Common Shares Repurchased ............................... (12,081) (3,100)
Issuance of Shares Pursuant to Employee Stock Purchase
Plan .................................................... 1,893
Exercise of Employee Stock Options, Net of Tax Benefit .. 975 127
--------- --------- ---------
Balance at End of Year .................................... (12,186) (2,973)
--------- --------- ---------
Total Shareholders' Equity ................................ $ 161,440 $ 137,483 $ 111,284
========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE> 29
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Years Ended December 31,
-------------------------------------------
1999 1998 1997
--------- --------- ---------
Cash Flows from Operating Activities:
<S> <C> <C> <C>
Net Income .................................................... $ 18,843 $ 20,028 $ 16,870
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Net Realized Investment (Gain) Loss .......................... (5,700) (474) 16
Depreciation and Amortization Expense ........................ 3,371 1,277 1,232
Deferred Income Tax Benefit .................................. (558) (919) (1,183)
Change in Premiums Receivable ................................ (11,154) (12,500) (7,157)
Change in Other Receivables .................................. (26,159) (5,318) (655)
Change in Deferred Acquisition Costs ......................... (6,720) (5,883) (1,937)
Change in Other Assets ....................................... (1,639) 522 (3,345)
Change in Unpaid Loss and Loss Adjustment Expenses ........... 33,590 28,847 25,788
Change in Unearned Premiums .................................. 30,073 22,671 8,962
Change in Other Liabilities .................................. 13,215 1,533 (575)
--------- --------- ---------
Net Cash Provided by Operating Activities .................. 47,162 49,784 38,016
--------- --------- ---------
Cash Flows from Investing Activities:
Proceeds from Sales of Investments in Fixed
Maturities Available for Sale .............................. 64,968 50,874 5,564
Proceeds from Maturity of Investments in Fixed
Maturities Available for Sale .............................. 39,728 36,736 9,305
Proceeds from Sales of Investments in Equity
Securities ................................................. 37,013 19,440 5,896
Proceeds from Sale of Real Estate ............................ 1,987
Cost of Fixed Maturities Available for Sale
Acquired ................................................... (148,411) (199,024) (42,309)
Cost of Equity Securities Acquired ........................... (25,686) (35,610) (15,536)
Payment for Acquisition, Net of Cash Acquired ................ (7,372)
Purchase of Property and Equipment, Net ...................... (1,768) (2,229) (1,609)
--------- --------- ---------
Net Cash Used for Investing Activities ..................... (41,528) (127,826) (38,689)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from Offering of Company Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trust ........ 99,463
Exercise of Employee Stock Options, Net of Tax Benefit ....... 458 724 723
Collection of Notes Receivable ............................... 619 570 375
Proceeds from Shares Issued Pursuant to Employee Stock
Purchase Plan .............................................. 27 25 25
Cost of Common Stock Repurchased ............................. (12,081) (3,100)
--------- --------- ---------
Net Cash Provided (Used) by Financing Activities ........... (10,977) 97,682 1,123
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents ......... (5,343) 19,640 450
Cash and Cash Equivalents at Beginning of Year ............... 31,573 11,933 11,483
--------- --------- ---------
Cash and Cash Equivalents at End of Year ..................... $ 26,230 $ 31,573 $ 11,933
========= ========= =========
Cash Paid During the Year for:
Income Taxes ................................................. $ 8,295 $ 7,546 $ 7,158
Non-Cash Transactions:
Issuance of Shares Pursuant to Employee
Stock Purchase Plan in Exchange for Notes Receivable ......... $ 1,445 $ 828 $ 873
Acquisitions
Fair Value Of Assets Acquired $ 77,310
Cash Paid (25,676)
Common Stock Issued (25,000)
----------
Liabilities Assumed $ 26,634
==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE> 30
Philadelphia Consolidated Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
1. General Information and Significant Accounting Policies
Philadelphia Consolidated Holding Corp. ("Philadelphia Insurance"), and its
subsidiaries (collectively the "Company") doing business as Philadelphia
Insurance Companies, include four property and casualty insurance companies,
Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company,
which are domiciled in Pennsylvania; and Mobile USA Insurance Company and
Liberty American Insurance Company, which are domiciled in Florida (collectively
the "Insurance Subsidiaries"); an underwriting manager, Maguire Insurance
Agency, Inc.; a managing general agency, Mobile Homeowners Insurance Agencies,
Inc; a premium finance company MHIA Premium Finance Company; and an investment
subsidiary, PCHC Investment Corp. The Company designs, markets, and underwrites
specialty commercial and property and casualty insurance products for select
target industries or niches including, among others, the rent-a-car industry;
automobile leasing industry; nonprofit organizations; the health, fitness and
wellness industry; selected classes of professional liability; and personal
property and casualty insurance products for the mobile homeowners and
homeowners markets. All marketing, underwriting, claims management, investment,
and general administration is provided by the underwriting manager and managing
general agency.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company
prepared in conformity with generally accepted accounting principles. All
significant intercompany balances and transactions have been eliminated in
consolidation. The preparation of financial statements requires making estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Certain
prior years' amounts have been reclassified for comparative purposes.
(a) Investments
Investments classified as Available for Sale are carried at market value with
the change in unrealized appreciation (depreciation) credited or charged
directly to shareholders' equity, net of applicable deferred income taxes.
Income on fixed maturities is recognized on the accrual basis.
The decision to purchase or sell investments is based on management's assessment
of various factors such as foreseeable economic conditions, including current
interest rates and the interest rate risk, and the liquidity and capital
positions of the Company.
Investments in fixed maturities are adjusted for amortization of premiums and
accretion of discounts to maturity date, except for collateralized mortgage and
asset backed securities which are adjusted for amortization of premiums and
accretion of discounts over their estimated lives. Certain collateralized
mortgage and asset backed securities repayment patterns will change based on
interest rate movements and, accordingly, could impact future investment income
if the reinvestment of the repayment amounts are at lower interest rates than
the underlying securities. Collateralized mortgage and asset backed securities
amounted to $46.8 million and $37.8 million, respectively, at December 31, 1999
and $42.8 million and $46.4 million, respectively, at December 31, 1998. The
collateralized mortgage and asset back securities held as of December 31, 1999
and 1998 are short tranche securities possessing favorable prepayment risk
profiles.
Equity securities are carried at market value with the change in unrealized
appreciation (depreciation) credited or charged directly to shareholders'
equity, net of applicable deferred income taxes.
Realized investment gains and losses are calculated on the specific
identification basis and recorded as income when the securities are sold.
(b) Cash and Cash Equivalents
Cash equivalents, consisting of fixed maturity investments with maturities of
three months or less when purchased and money market funds, are stated at cost
which approximates market value.
30
<PAGE> 31
(c) Deferred Acquisition Costs
Policy acquisition costs, which include commissions, premium taxes, fees, and
other costs of underwriting policies, are deferred and amortized over the same
period in which the related premiums are earned. Deferred acquisition costs are
limited to the estimated amounts recoverable after providing for losses and
expenses that are expected to be incurred, based upon historical and current
experience. Amortization of policy acquisition costs in the accompanying
consolidated statements of operations was $46.5 million, $30.0 million, and
$25.0 million for the years ended December 31, 1999, 1998, and 1997,
respectively.
(d) Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets.
Costs incurred in developing information systems technology are capitalized and
included in property and equipment. These costs are amortized over their useful
lives from the dates the systems technology becomes operational. Upon disposal
of assets, the cost and related accumulated depreciation are removed from the
accounts and the resulting gain or loss is included in earnings.
(e) Goodwill
Goodwill amounted to $28.8 million and $0.4 million at December 31, 1999 and
1998, respectively. Goodwill is being amortized on a straight line basis over 20
years. The carrying value of goodwill is reviewed for recoverability based on
the undiscounted cash flows of the businesses acquired over the remaining
amortization period. Should the review indicate that goodwill is not
recoverable, the Company would recognize an impairment loss.
Goodwill amortization was $0.8 million in 1999, $0.1 million in 1998 and $0.1
million in 1997. Goodwill and related amortization has increased due to the
acquisition of Liberty American Insurance Group, Inc. ("Liberty"), (formerly the
Jerger Company, Inc.)
(f) Reserves for Unpaid Loss and Loss Adjustment Expenses
The liability for unpaid loss and loss adjustment expenses includes an amount
determined on the basis of claims adjusters' evaluations and an amount, based on
past experience, for losses incurred but not reported. Such liabilities are
necessarily based on estimates, and while management believes that the amount is
adequate, the ultimate liability may be in excess of, or less than, the amount
provided. The methods of making such estimates and establishing the resulting
liabilities are continually reviewed and updated and any adjustments resulting
therefrom are reflected in operations currently.
(g) Unearned Premiums
Premiums are generally earned on a pro rata basis over the terms of the
policies. Premiums applicable to the unexpired terms of the policies in-force
are reported as unearned premiums.
(h) Reinsurance Ceded
In the normal course of business, the Company seeks to reduce the loss that may
arise from events that cause unfavorable underwriting results by reinsuring
certain levels of risk in various areas of exposure with reinsurers. Amounts
recoverable from reinsurers are estimated in a manner consistent with the
reinsured policy.
Amounts for reinsurance assets and liabilities are reported gross.
(i) Assessments
The Insurance Subsidiaries are subject to state guaranty fund assessments, which
provide for the payment of covered claims or meet other insurance obligations
from insurance company insolvencies, and other assessments related to its
insurance activities. Each state has enacted legislation establishing guaranty
funds and other insurance activity related assessments resulting in a variety of
assessment methodologies. Expense for guaranty fund and insurance activity
related assessments are recognized when it is probable that an assessment will
be imposed, the obligatory event has occurred and the amount of the assessment
is reasonably estimated.
31
<PAGE> 32
(j) Income Taxes
The Company files a consolidated federal income tax return. Deferred income
taxes are recognized for the tax consequences of temporary differences by
applying enacted statutory tax rates applicable to the differences between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred taxes for a change in tax rates is
recognized in income in the period that includes the enactment date.
(k) Earnings Per Share
Basic earnings per share has been calculated by dividing net income by the
weighted-average common shares outstanding. Diluted earnings per share has been
calculated by dividing net income by the weighted-average common shares
outstanding and the weighted-average share equivalents outstanding.
(l) 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 year was ($2.8) million, $4.1
million and $4.1 million in 1999, 1998 and 1997, respectively. The related tax
effect of Reclassification Adjustments was $2.0 million and $0.2 million in 1999
and 1998, respectively.
2. Acquisition
On July 16, 1999, Philadelphia Insurance closed on its acquisition of Liberty
(Mobile USA Insurance Company, Liberty American Insurance Company, Mobile
Homeowners Insurance Agencies, Inc., and MHIA Premium Finance Company) 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. Goodwill resulting from the acquisition amounted to $29.2
million. This amount represents the excess of acquisition costs over the fair
value of net assets acquired.
3. Statutory Information
Accounting Principles: The Insurance Subsidiaries are required to report to
certain regulatory agencies on the basis of Statutory Accounting Practices
("SAP"). The statutory financial statements are prepared in accordance with
accounting practices prescribed or permitted by the Insurance Departments of the
Commonwealth of Pennsylvania and the State of Florida. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners ("NAIC"), as well as Commonwealth and
State laws, regulations, and general administrative rules. Permitted Statutory
Accounting Practices encompass all accounting practices not so prescribed.
Generally accepted accounting principles ("GAAP") differ in certain respects
from SAP prescribed or permitted by the Insurance Department of the Commonwealth
of Pennsylvania and the State of Florida. The principal differences between SAP
and GAAP are as follows:
- Under SAP, investments in debt securities are carried at
amortized cost, while under GAAP, investments in debt
securities classified as Available for Sale are carried at
fair value.
- Under SAP, policy acquisition costs, such as commissions,
premium taxes, fees, and other costs of underwriting policies
are charged to current operations as incurred, while under
GAAP, such costs are deferred and amortized on a pro rata
basis over the period covered by the policy.
- Under SAP, certain assets, designated as "Non-admitted Assets"
(such as prepaid expenses) are charged against surplus.
- Under SAP, federal income taxes are only provided on taxable
income for which income taxes are currently payable, while
under GAAP, deferred income taxes are provided with respect to
temporary differences.
- Under SAP, certain reserves are established in amounts which
differ from amounts which would be provided in conformity with
GAAP.
32
<PAGE> 33
Financial Information: The statutory capital and surplus of the Insurance
Subsidiaries as of December 31, 1999 and 1998 was $179.3 million and $152.3
million (excluding Mobile USA Insurance Company and Liberty American Insurance
Company), respectively. Statutory net income for the year ended December 31,
1999 including Mobile USA Insurance Company and Liberty American Insurance
Company from acquisition to December 31, 1999, was $19.2 million. Net income for
the years ended December 31, 1998 and 1997 was $16.1 million and $14.3 million,
respectively. Capital contributions for the years ended December 31, 1999 and
1998 were $17.5 million and $25.5 million, respectively.
Dividend Restrictions: The Insurance Subsidiaries are subject to various
regulatory restrictions which limit the maximum amount of annual shareholder
dividends allowed to be paid. The maximum dividend which the Insurance
Subsidiaries may pay to Philadelphia Insurance during 2000 without prior
approval is $22.2 million. Dividends paid for the years ended December 31, 1999
and 1998 were $17.5 million and $0, respectively.
Risk-Based Capital: Risk-based capital is designed to measure the acceptable
amount of capital an insurer should have based on the inherent specific risks of
each insurer. Insurers failing to meet this benchmark capital level may be
subject to scrutiny by the insurer's domiciliary insurance department, and
ultimately, rehabilitation or liquidation. Based on the standards, the Insurance
Subsidiaries capital and surplus at December 31, 1999 is in excess of the
prescribed risk-based capital requirements.
4. Investments
The Company invests primarily in investment grade fixed maturities which
possessed an average quality rating of AA at December 31, 1999. The cost, gross
unrealized gains and losses, estimated market value and carrying value of
investments as of December 31, 1999 and 1998 are as follows (in thousands):
33
<PAGE> 34
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Market Carrying
Cost (1) Gains Losses Value (2) Value
-------- ----- ------ --------- -----
<S> <C> <C> <C> <C> <C>
December 31, 1999
Fixed Maturities:
Available for Sale
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $ 17,902 $ 26 $ 343 $ 17,585 $ 17,585
Obligations of States and
Political Subdivisions 123,317 1,460 2,454 122,323 122,323
Corporate and Bank Debt Securities 102,672 180 6,319 96,533 96,533
Collateralized Mortgage Securities 48,521 47 1,804 46,764 46,764
Asset Backed Securities 39,362 1,549 37,813 37,813
-------- -------- -------- -------- --------
Total Fixed Maturities
Available for Sale 331,774 1,713 12,469 321,018 321,018
-------- -------- -------- -------- --------
Equity Securities 41,231 32,130 593 72,768 72,768
-------- -------- -------- -------- --------
Total Investments $373,005 $ 33,843 $ 13,062 $393,786 $393,786
======== ======== ======== ======== ========
December 31, 1998
Fixed Maturities:
Available for Sale
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies $ 7,706 $ 212 $ $ 7,918 $ 7,918
Obligations of States and
Political Subdivisions 112,196 5,069 70 117,195 117,195
69,532 1,011 1,152 69,391 69,391
Corporate and Bank Debt Securities
Collateralized Mortgage Securities 42,755 174 109 42,820 42,820
Asset Backed Securities 46,368 213 187 46,394 46,394
-------- -------- -------- -------- --------
Total Fixed Maturities
Available for Sale 278,557 6,679 1,518 283,718 283,718
-------- -------- -------- -------- --------
Equity Securities 43,441 29,769 442 72,768 72,768
-------- -------- -------- -------- --------
Total Investments $321,998 $ 36,448 $ 1,960 $356,486 $356,486
======== ======== ======== ======== ========
</TABLE>
(1) Original cost of equity securities; original cost of fixed maturities
adjusted for amortization of premiums and accretion of discounts.
(2) Estimated market values have been based on quoted market prices.
The Company had no debt or equity investments in a single issuer totaling in
excess of 10% of shareholders' equity at December 31, 1999.
The cost and estimated market value of fixed maturity securities at December 31,
1999, by remaining contractual maturity, are shown below (in thousands).
Expected maturities may differ from contractual maturities because certain
borrowers have the right to call or prepay obligations with or without call or
prepayment penalties.
34
<PAGE> 35
<TABLE>
<CAPTION>
Estimated
Market
Cost (1) Value (2)
-------- ---------
<S> <C> <C>
Due in One Year or Less $ 2,319 $ 2,325
Due After One Year Through Five Years 55,792 55,141
Due After Five Years through Ten Years 123,467 120,524
Due After Ten Years 62,313 58,451
Collateralized Mortgage and Asset Backed Securities 87,883 84,577
-------- --------
$331,774 $321,018
======== ========
</TABLE>
(1) Original cost adjusted for amortization of premiums and accretion of
discounts.
(2) Estimated market values have been based on quoted market prices.
The sources of net investment income for the years ended December 31, 1999,
1998, and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fixed Maturities Available for Sale $ 18,210 $ 13,404 $ 8,978
Equity Securities 1,169 634 480
Cash and Cash Equivalents 2,111 1,983 602
-------- -------- --------
Total Investment Income 21,490 16,021 10,060
Investment Expense (795) (573) (357)
-------- -------- --------
Net Investment Income $ 20,695 $ 15,448 $ 9,703
======== ======== ========
</TABLE>
There are no investments in fixed maturity securities that were non-income
producing during the years ended December 31, 1999, 1998, and 1997. Investment
expense includes $212,000, $189,000, and $164,000, in investment management fees
paid to a director of the Company in 1999, 1998, and 1997, respectively. These
transactions are in the ordinary course of business at negotiated prices
comparable to those of transactions with other investment advisors.
Realized pre-tax gains (losses) on the sale of investments for the years ended
December 31, 1999, 1998, and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Fixed Maturities Available for Sale
Gross Realized Gains $ 285 $ 1,090 $ 22
Gross Realized Losses (1,079) (89) (52)
------- ------- -------
Net Gain (Loss) (794) 1,001 (30)
------- ------- -------
Equity Securities
Gross Realized Gains 9,300 1,641 628
Gross Realized Losses (2,806) (2,284) (614)
------- ------- -------
Net Gain (Loss) 6,494 (643) 14
------- ------- -------
Gross Realized Gain on Sale of Real Estate 116
------- ------- -------
Total Net Realized
Investment Gain (Loss) $ 5,700 $ 474 $ (16)
======= ======= =======
</TABLE>
5. Restricted Assets
The Insurance Subsidiaries have investments, principally U.S. Treasury
securities, on deposit with the various states in which they are licensed
insurers. At December 31, 1999 and 1998 the carrying value on deposit totaled
$12.3 million and $11.0 million, respectively.
6. Trust Accounts
The Company is required to maintain certain investments in trust accounts under
reinsurance agreements with unrelated insurance companies that cede insurance
risks to the Company. At December 31, 1999 and 1998, the Company had investments
with a carrying value of $2.4 million and $2.3 million, respectively, in trust
accounts pursuant to a terminated
35
<PAGE> 36
quota share reinsurance agreement. Under the terms of this agreement, net
premiums received by the Company were invested and held in a trust account to
pay future claims. Interest income on these investments is distributed to the
parties to the quota share agreement on a quarterly basis. The Company receives
its interest in net trust investments in accordance with a formula that
specifies certain percentages of funds to be released over a five-year period as
losses are settled.
The Company also maintains investments in trust accounts under current
reinsurance agreements with unrelated insurance companies. These investments
collateralize the Company's obligations under the reinsurance agreements. The
Company possesses sole responsibility for investment and reinvestment of the
trust account assets. All dividends, interest and other income, resulting from
investment of these assets are owned by the Company, and are distributed on a
monthly basis. At December 31, 1999 and 1998 the carrying value of these trust
fund investments were $10.6 million and $8.9 million, respectively.
The Company's share of the investments in the trust accounts is included in
investments and cash equivalents, as applicable, in the accompanying
consolidated balance sheets.
7. Property and Equipment
The following table summarizes property and equipment at December 31, 1999 and
1998 (dollars in thousands):
<TABLE>
<CAPTION>
Estimated Useful
December 31, Lives (Years)
------------ -------------
1999 1998
---- ----
<S> <C> <C> <C>
Furniture, Fixtures and Automobiles $ 3,291 $ 2,676 5
Software, Computer Hardware and
Telephone Equipment 11,325 8,890 3 - 7
Land and Building 3,574 150 40
Leasehold Improvements 1,366 1,247 10 - 12
-------- --------
19,556 12,963
Accumulated Depreciation and
Amortization (10,279) (8,086)
-------- ---------
Property and Equipment $ 9,277 $ 4,877
======== ========
</TABLE>
Included in property and equipment are costs incurred in developing or
purchasing information systems technology of $3.5 million and $2.7 million in
1999 and 1998, respectively. Amortization of these costs was $0.3 million, $0.2
million and $0.2 million for the years ended December 31, 1999, 1998 and 1997,
respectively. Depreciation expense, excluding amortization of capitalized
information systems technology costs, was $1.5 million, $1.2 million and $0.9
million, for the years ended December 31, 1999, 1998, and 1997, respectively.
36
<PAGE> 37
8. Liability for Unpaid Loss and Loss Adjustment Expenses
Activity in the liability for Unpaid Loss and Loss Adjustment Expenses is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance at January 1, (1) $ 154,473 $ 122,430 $ 96,642
Less Reinsurance Recoverables (2) 17,268 13,502 10,919
---------- ---------- ----------
Net Balance at January 1, (3) 137,205 108,928 85,723
---------- ---------- ----------
Incurred related to:
Current Year 99,663 69,544 56,725
Prior Years (253) (3,170) (1,716)
----------- ----------- -----------
Total Incurred 99,410 66,374 55,009
---------- ---------- ----------
Paid related to:
Current Year 31,493 13,402 9,512
Prior Years 43,769 26,870 22,292
---------- ---------- ----------
Total Paid 75,262 40,272 31,804
---------- ---------- ----------
Net Balance at December 31, 161,353 135,030 108,928
Plus Reinsurance Recoverables 26,710 16,120 13,502
---------- ---------- ----------
Balance at December 31, $ 188,063 $ 151,150 $ 122,430
========== ========== ==========
</TABLE>
(1) Adjusted to include $3,323 gross unpaid loss and loss adjustment expenses
for Mobile USA Insurance Company as of acquisition date.
(2) Adjusted to include $1,148 reinsurance recoverables for Mobile USA Insurance
Company as of acquisition date.
(3) Adjusted to include $2,175 net unpaid loss and loss adjustment expenses for
Mobile USA Insurance Company as of acquisition date.
As a result of changes in estimates of insured events of prior years, the
Company reduced losses and loss adjustment expenses incurred by $0.3 million,
$3.2 million and $1.7 million in 1999, 1998 and 1997, respectively. Such
favorable development was due to losses emerging at a lesser rate than had been
originally anticipated when the initial reserves for the applicable accident
years were estimated. The favorable development includes a $5.0 million increase
to net unpaid loss and loss adjustment expense during 1999 for the Company's
nursing home and assisted living policies. This increase was necessitated by
higher than expected incidence and amount of claims.
The Company exited this business during 1998.
9. Income Taxes
The composition of deferred tax assets and liabilities and the related tax
effects as of December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1999 1998
---- ----
<S> <C> <C>
Assets:
Effect of Loss Reserve Discounting $ 7,998 $ 6,853
Excess of Tax Over Financial Reporting Earned Premium 6,276 4,131
Other Assets 652 127
======= =======
Total Assets 14,926 11,111
======= =======
Liabilities:
Deferred Policy Acquisition Costs, Deductible for Tax 9,119 5,899
Tax Effect of Unrealized Appreciation of Securities 7,304 12,070
Property and Equipment Basis 347 550
Other Liabilities 208 2
------- -------
Total Liabilities 16,978 18,521
======= =======
Net Deferred Income Tax Liability $ 2,052 $ 7,410
======= =======
</TABLE>
37
<PAGE> 38
The following table summarizes the differences between the Company's effective
tax rate for financial statement purposes and the federal statutory rate
(dollars in thousands):
<TABLE>
<CAPTION>
Amount of Tax Percent
------------- -------
<S> <C> <C>
For the year ended December 31, 1999:
Federal Tax at Statutory Rate $ 9,326 35%
Nontaxable Municipal Bond Interest and Dividends Received Exclusion (1,931) (7)
Nondeductible Goodwill Amortization 292 1
Other, Net 115
------- -------
Income Tax Expense $ 7,802 29%
======= =======
For the year ended December 31, 1998:
Federal Tax at Statutory Rate $ 9,468 35%
Nontaxable Municipal Bond Interest and Dividends Received Exclusion (1,944) (7)
Other, Net (502) (2)
------- -------
Income Tax Expense $ 7,022 26%
======= =======
For the year ended December 31, 1997:
Federal Tax at Statutory Rate $ 7,773 35%
Nontaxable Municipal Bond Interest and Dividends Received Exclusion (1,812) (8)
Other, Net (623) (3)
------- -------
Income Tax Expense $ 5,338 24%
======= =======
</TABLE>
As of December 31, 1999, the Company has approximately $0.3 million in net
operating loss carryforwards, which expire in 2000 and 2001, available to offset
future taxable income. Utilization of the loss carryforwards is limited to an
annual amount of $0.3 million. For financial reporting purposes, the tax benefit
of any utilization of these operating loss carryforwards is applied to reduce
goodwill ($0.1 million in 1999) and does not reduce income tax expense.
Philadelphia Insurance has entered into tax sharing agreements with each of its
subsidiaries. Under the terms of these agreements, the income tax provision is
computed as if each subsidiary were filing a separate federal income tax return,
including adjustments for the income tax effects of net operating losses and
other special tax attributes, regardless of whether those attributes are
utilized in the Company's consolidated federal income tax return.
10. Minority Interest in Consolidated Subsidiaries
During 1998, the Company issued 10.350 million FELINE PRIDESSM at $10.00 per
security and PCHC Financing I, the Company's business trust subsidiary, issued
1,000,000 7.0% Trust Originated Preferred Securities with a stated liquidation
amount per trust preferred security equal to $10.00. The 10.350 million FELINE
PRIDESSM consisted of 9.350 million units referred to as Income Prides and 1.000
million units referred to as Growth Prides. Each Income Prides consists of a
unit comprised of (a) a purchase contract under which the holder will purchase a
number of shares of Philadelphia Consolidated Holding Corp. common stock no
later than May 16, 2001 (ranging from .3858 to .4706 shares per FELINE PRIDESSM)
under the terms specified in the stock purchase contract and (b) beneficial
ownership of a 7.0% Trust Originated Preferred Security issued by PCHC Financing
I and representing an undivided beneficial ownership in the assets of PCHC
Financing I. Each holder will receive aggregate cumulative cash distributions at
the annual rate of 7.00% of the $10.00 stated amount for the security, payable
quarterly in arrears. Each Growth Prides consists of a unit with a face amount
of $10.00 comprised of (a) a purchase contract under which (i) the holder will
purchase a number of shares of Philadelphia Consolidated Holding Corp. common
stock no later than May 16, 2001 (ranging from .3858 to .4706 shares per FELINE
PRIDESSM) under the terms specified in the stock purchase contract and (ii) the
Company will pay the holder contract adjustment payments at the rate of .50% of
the stated amount per annum and (b) a 1/100 undivided beneficial ownership
interest in a treasury security having a principal amount at maturity equal to
$1,000 and maturing on May 15, 2001. The applicable distribution rate on the
trust originated securities that remain outstanding during the period May 16,
2001 through May 16, 2003, will be reset so that the market value of the Trust
Originated Preferred Securities will be equal to 100.5 percent of the stated
amount. The Company may limit the reset rate to be no higher than the rate on
the two-year benchmark treasury plus 255 basis points. The guarantee by the
Company is a full and unconditional guarantee on a subordinated unsecured basis
with respect to the Trust Originated Preferred Securities, but will not apply to
any payment of distributions except to the extent the Trust shall have funds
available therefor.
38
<PAGE> 39
Proceeds from the offering were approximately $99.0 million (after underwriting
and associated costs). The proceeds from the sale of the Growth Prides were used
to purchase the underlying securities to be transferred to the holders of the
Growth Prides pursuant to the terms thereof. All the proceeds from the sale of
the Trust Preferred Securities that were not components of the Income Prides and
all of the proceeds from the sale of the Income Prides were invested by PCHC
Financing I in debentures of the Company. The debentures account for
substantially all the assets of PCHC Financing I. The debentures, whose
principal amount is $106.7 million, mature on May 16, 2003 and pay interest
initially at the rate of 7.0% per annum until May 15, 2001 and at the reset rate
thereafter. The Company utilized $25.7 million of the net proceeds during 1999
for its acquisition of Liberty, and contributed $33.1 million of the net
proceeds to its subsidiaries in 1998, of which $20.0 million was contributed to
the Insurance Subsidiaries. Additionally, $15.2 million was utilized by the
Company to buy back its common stock under its stock buy-back authorization. The
Company anticipates utilizing the remaining proceeds for general corporate
purposes which may include acquisitions, capital expenditures, and the
repurchase by the Company of its common stock.
11. Shareholders' Equity
The Company has established non-qualified stock bonus and stock option plans.
Under the stock bonus plan, the Company has granted a total of 137,500 shares to
certain officers of the Company, of which all such shares have been issued and
are vested.
Under the Company's stock option plan, stock options may be granted for the
purchase of common stock at a price not less than the fair market value on the
date of grant. Options outstanding as of December 31, 1994 are exercisable over
a four-to-five-year vesting period. Options issued in the years 1995 and
subsequent are exercisable after the expiration of five years following the
grant date. Under this plan, the Company has reserved 2,475,000 shares of common
stock for issuance pursuant to options granted under the plan.
In addition to stock options granted pursuant to the Company's stock option
plan, the Company's Board of Directors have granted previous awards of 2,613,492
stock options.
SFAS No. 123, "Accounting for Stock-Based Compensation", encourages, but does
not require, companies to record compensation cost for stock-based employee
compensation plans at a fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed
in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, compensation cost for the
Company's compensation instruments is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock.
The following is a summary of the Company's option activity, including
weighted-average option information:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------------- ------------------------------ ------------------------------
Exercise Exercise Exercise
Price Price Price
Per Per Per
Options Option(1) Options Option(1) Options Option(1)
------------ -------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 3,637,167 $ 4.85 3,473,042 $ 3.85 3,572,292 $ 3.86
Granted 257,500 $ 15.87 256,125 $ 19.07 5,000 $ 16.38
Exercised (46,250) $ 4.40 (68,600) $ 4.53 (84,250) $ 4.42
Canceled (12,500) $ 20.43 (23,400) $ 12.00 (20,000) $ 6.00
---------- ---------- ----------
Outstanding at end of year 3,835,917 $ 5.55 3,637,167 $ 4.85 3,473,042 $ 3.85
========== ========== ==========
Exercisable at end of year 2,661,892 2,708,142 2,768,792
Weighted-average fair
value of options granted
during the year $6.76 $7.69 $6.38
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
Exercise Exercisable Exercise
Outstanding Price Remaining at Price
At December Per Contractual December Per
Range of Exercise Prices 31, 1999 Option(1) Life (Years) (1) 31, 1999 Option(1)
- ------------------------ -------- --------- ---------------- -------- ---------
<S> <C> <C> <C> <C> <C>
$2.61 2,646,892 $ 2.61 3.1 2,646,892 $ 2.61
$4.75 to $9.31 682,900 $ 8.40 6.1 15,000 $ 4.75
$13.88 to $15.00 212,500 $ 14.45 9.9
$16.38 to $19.75 201,125 $ 18.53 8.4
$20.50 to $24.56 92,500 $ 21.63 8.8
---------- ----------
3,835,917 $ 5.55 2,661,892 $ 2.62
========== ==========
</TABLE>
(1) Weighted Average.
The Company has established a non-qualified Employee Stock Purchase Plan (the
"Stock Purchase Plan"). The aggregate maximum number of shares that may be
issued pursuant to the Stock Purchase Plan is 500,000. Shares may be purchased
under the Stock Purchase Plan by eligible employees during designated one-month
offering periods established by the Compensation Committee of the Board of
Directors at a purchase price of the lesser of 85% of the fair market value of
the shares on the first business day of the offering period or the date the
shares are purchased. The purchase price of shares may be paid by the employee
over six years pursuant to the execution of a promissory note. The promissory
note(s) are collateralized by such shares purchased under the Stock Purchase
Plan and are interest free. Under the Stock Purchase Plan, the Company issued
112,228 and 51,794 shares in 1999 and 1998, respectively. The weighted-average
fair value of those purchase rights granted in 1999 and 1998 was $2.52 and
$2.70, respectively.
In addition, the Company has also established a non-qualified Directors Stock
Purchase Plan ("Directors Plan") for the benefit of non-employee Directors. The
aggregate maximum number of shares that may be issued pursuant to the Directors
Plan is 50,000. Non-employee Directors, during monthly offerings periods, may
designate a portion of his or her fees to be used for the purchase of shares
under the terms of the Directors Plan at a purchase price of the lesser of 85%
of the fair market value of the shares on the first business day of the offering
period or the date the shares are purchased. No shares have been issued pursuant
to the Directors Plan as of December 31, 1999.
Since the Company has adopted the disclosure-only provisions of SFAS No. 123, no
compensation cost has been recognized for the Company's compensation
instruments. The following represents pro forma information as if the Company
recorded compensation costs using the fair value of the issued compensation
instruments (the results may not be indicative of the actual effect on net
income in future years) (in thousands, except per average common share data):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Income As Reported $ 18,843 $ 20,028 $ 16,870
Assumed Stock Compensation Cost 657 453 354
--------- --------- --------
Pro Forma Net Income $ 18,186 $ 19,575 $ 16,516
========= ========= ========
Diluted Earnings Per Average Common Share as Reported $ 1.25 $ 1.34 $ 1.13
========= ========= ========
Pro Forma Diluted Earnings Per Average Common Share $ 1.20 $ 1.31 $ 1.11
========= ========= ========
</TABLE>
The fair value of options at date of grant was estimated using the Black-Scholes
valuation model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected Stock Volatility 31.6% 29.5% 25.9%
Risk-Free Interest Rate 5.9% 5.3% 5.8%
Expected Option Life-Years 6.0 6.0 6.0
Expected Dividends 0.0% 0.0% 0.0%
</TABLE>
40
<PAGE> 41
12. Stock Repurchase Authorization
On September 9, 1999, the Company's Board of Directors increased the
authorization for the Company to repurchase up to a total of $30.0 million of
its common stock. As of December 31, 1999, the Company had repurchased 1.0
million shares for approximately $15.2 million under this authorization.
13. Reinsurance
In the normal course of business, the Company has entered into various
reinsurance contracts with unrelated reinsurers. The Company participates in
such agreements for the purpose of limiting loss exposure and diversifying
business. Reinsurance contracts do not relieve the Company from its obligation
to policyholders.
The loss and loss adjustment expense reserves ceded under such arrangements were
$26.7 million and $16.1 million at December 31, 1999 and 1998, respectively. The
Company evaluates the financial condition of its reinsurers to minimize its
exposure to losses from reinsurer insolvencies. The percentage of ceded
reinsurance reserves (excluding reserves ceded to voluntary and mandatory pool
mechanisms) that are with companies rated "A" (Excellent) or better by A.M. Best
Company is 100% as of December 31, 1999 and 1998, respectively. Additionally,
approximately 4%, 1% and 2% of the Company's net written premiums for the years
ended December 31, 1999, 1998, and 1997, respectively, were assumed from an
unrelated reinsurance company.
The effect of reinsurance on premiums written and earned is as follows (in
thousands):
<TABLE>
<CAPTION>
Written Earned
<S> <C> <C>
For the Year Ended December 31, 1999:
Direct Business $271,312 $243,667
Reinsurance Assumed 6,767 4,339
Reinsurance Ceded 94,008 83,091
-------- --------
Net Premiums $184,071 $164,915
======== ========
Percentage Assumed of Net 2.6%
========
For the Year Ended December 31, 1998:
Direct Business $195,697 $173,555
Reinsurance Assumed 1,712 1,181
Reinsurance Ceded 54,373 52,049
-------- --------
Net Premiums $143,036 $122,687
======== ========
Percentage Assumed of Net 1.0%
========
For the Year Ended December 31, 1997:
Direct Business $157,060 $147,514
Reinsurance Assumed 2,031 2,614
Reinsurance Ceded 47,294 49,573
-------- --------
Net Premiums $111,797 $100,555
======== ========
Percentage Assumed of Net 2.6%
========
</TABLE>
14. Profit Sharing
The Company has a defined contribution Profit Sharing Plan, which includes a
401K feature, covering substantially all employees. Under the plan, employees
may contribute up to an annual maximum of the lesser of 15% of eligible
compensation or the applicable Internal Revenue Code limit in a calendar year.
The Company makes a matching contribution in an amount equal to 50% of the
participant's pre-tax contribution, subject to a maximum of 6% of the
participant's eligible compensation. The Company may also make annual
discretionary profit sharing contributions at each plan year end. Participants
are fully vested in the Company's contribution upon completion of seven years of
service. The Company's total contributions to the plan were $0.3 million, $0.4
million and $0.5 million in 1999, 1998, and 1997, respectively.
41
<PAGE> 42
15. Commitments and Contingencies
The Company is subject to routine legal proceedings in connection with its
property and casualty insurance business. The Company is not involved in any
pending or threatened legal or administrative proceedings, which management
believes can reasonably be expected to have a material adverse effect on the
Company's financial condition or results of operations.
The Company currently leases office space to serve as its headquarters location
and 40 field offices for its production underwriters. In addition, the Company
leases certain computer equipment. Rental expense for these operating leases was
$1.7 million, $1.2 million and $0.9 million for the years ended December 31,
1999, 1998, and 1997, respectively.
At December 31, 1999, the future minimum rental payments required under
operating leases that have initial or remaining non-cancelable lease terms in
excess of one year as of December 31, 1999 were as follows (in thousands):
<TABLE>
<S> <C>
Year Ending December 31:
2000 $1,674
2001 1,280
2002 1,084
2003 214
2004 and Thereafter 6
================================ =========
Total Minimum Payments Required $4,258
================================ =========
</TABLE>
16. Summary of Quarterly Financial Information - Unaudited
The following quarterly financial information for each of the three months ended
March 31, June 30, September 30 and December 31, 1999 and 1998 is unaudited.
However, in the opinion of management, all adjustments (consisting of normal
recurring adjustments) necessary to present fairly the results of operations for
such periods, have been made for a fair presentation of the results shown (in
thousands, except share and per share data):
42
<PAGE> 43
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999
-------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net Earned Premiums $ 36,764 $ 39,153 $ 45,208 $ 43,790
Net Investment Income $ 4,854 $ 4,996 $ 5,411 $ 5,434
Net Realized Investment Gain (Loss) $ (490) $ 5,683 $ 48 $ 459
Net Loss and Loss Adjustment Expenses $ 20,262 $ 21,615 $ 32,652 $ 24,881
Acquisition Costs and Other
Underwriting Expenses $ 11,777 $ 12,087 $ 14,958 $ 14,971
Minority Interest:
Distributions on Company Obligated
Mandatorily Redeemable Preferred
Securities of Subsidiary Trust $ 1,811 $ 1,812 $ 1,811 $ 1,811
Net Income $ 4,937 $ 9,240 $ 612 $ 4,054
Basic Earnings Per Share $0.40 $0.76 $0.05 $0.32
Diluted Earnings Per Share $0.33 $0.61 $0.04 $0.27
Weighted-Average Common Shares Outstanding 12,209,391 12,236,221 12,964,320 12,585,504
Weighted-Average Share Equivalents Outstanding 2,823,711 2,863,849 2,688,167 2,476,611
----------- ----------- ------------ -----------
Weighted-Average Shares and Share Equivalents
Outstanding 15,033,102 15,100,070 15,652,487 15,062,115
=========== =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
-------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net Earned Premiums $ 26,915 $ 29,662 $ 32,165 $ 33,945
Net Investment Income $ 2,700 $ 3,730 $ 4,446 $ 4,572
Net Realized Investment Gain (Loss) $ 3 $ 96 $ 1,609 $ (1,234)
Net Loss and Loss Adjustment Expenses $ 14,858 $ 15,949 $ 17,438 $ 18,129
Acquisition Costs and Other
Underwriting Expenses $ 8,219 $ 9,187 $ 10,159 $ 10,857
Minority Interest:
Distributions on Company Obligated
Mandatorily Redeemable Preferred
Securities of Subsidiary Trust $ $ 1,217 $ 1,742 $ 1,811
Net Income $ 4,518 $ 4,841 $ 6,076 $ 4,593
Basic Earnings Per Share $0.37 $0.39 $0.50 $0.38
Diluted Earnings Per Share $0.30 $0.32 $0.41 $0.31
Weighted-Average Common Shares Outstanding 12,262,983 12,297,633 12,248,331 12,188,540
Weighted-Average Share Equivalents Outstanding 2,790,988 2,839,746 2,713,348 2,822,910
----------- ----------- ------------ -----------
Weighted-Average Shares and Share Equivalents
Outstanding 15,053,971 15,137,379 14,961,679 15,011,450
=========== =========== ============ ===========
</TABLE>
17. Segment Information
The Company's operations are classified into four reportable business segments:
The Commercial Lines Underwriting Group which has underwriting responsibility
for the Commercial Automobile and Commercial multi-peril package insurance
products; The Specialty Lines Underwriting Group which has underwriting
responsibility for the professional liability insurance products; The Specialty
Property Underwriting Group which has underwriting responsibility for the large
property and Inland Marine insurance products; and The Personal Lines Group
which designs, markets and underwrites personal property and casualty insurance
products for the Mobile Homeowners and Homeowners markets. The reportable
segments operate solely within the United States.
43
<PAGE> 44
The segments follow the same accounting policies used for the Company's
consolidated financial statements as described in the summary of significant
accounting policies. Management evaluates a segment's performance based upon
certain underwriting results.
Following is a tabulation of business segment information for each of the past
three years. Corporate information is included to reconcile segment data to the
consolidated financial statements (in thousands):
44
<PAGE> 45
<TABLE>
<CAPTION>
Commercial Specialty Personal Specialty
1999: Lines Lines Lines Property Corporate Total
----- ----- ----- -------- --------- -----
<S> <C> <C> <C> <C> <C>
Gross Written Premiums $ 179,330 $ 48,532 $ 25,414 $ 21,642 $ 274,918
--------- --------- --------- --------- --------- ---------
Net Written Premiums $ 117,575 $ 40,936 $ 14,057 $ 11,503 $ 184,071
--------- --------- --------- --------- --------- ---------
Revenue:
Net Earned Premiums $ 111,019 $ 33,433 $ 12,859 $ 7,604 $ $ 164,915
Net Investment Income 1,546 19,149 20,695
Net Realized Investment Gain (Loss) (3) 5,703 5,700
Other Income 5,843 (1,121) 4,722
--------- --------- --------- --------- --------- ---------
Total Revenue 111,019 33,433 20,245 7,604 23,731 196,032
--------- --------- --------- --------- --------- ---------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 66,544 17,873 9,251 5,742 99,410
Acquisition Costs and Other Underwriting
Expenses 2,521 51,272 53,793
Other Operating Expenses 8,939 8,939
--------- --------- --------- --------- --------- ---------
Total Losses and Expenses 66,544 17,873 11,772 5,742 60,211 162,142
--------- --------- --------- --------- --------- ---------
Minority Interest: Distributions on
Company
Obligated Mandatorily Redeemable
Preferred
Securities of Subsidiary Trust 7,245 7,245
--------- --------- --------- --------- --------- ---------
Income Before Income Taxes 44,475 15,560 8,473 1,862 (43,725) 26,645
Total Income Tax Expense 7,802 7,802
--------- --------- --------- --------- --------- ---------
Net Income $ 44,475 $ 15,560 $ 8,473 $ 1,862 $ (51,527) $ 18,843
========= ========= ========= ========= ========= =========
Total Assets $ 98,503 $ 500,548 $ 599,051
========= ========= ========= ========= ========= =========
1998:
Gross Written Premiums $ 162,058 $ 30,396 $ 3,850 $ 1,104 $ 197,408
--------- --------- --------- --------- --------- ---------
Net Written Premiums $ 112,497 $ 26,095 $ 3,433 $ 1,011 $ 143,036
--------- --------- --------- --------- --------- ---------
Revenue:
Net Earned Premiums $ 101,954 $ 20,024 $ 624 $ 85 $ 122,687
Net Investment Income 15,448 15,448
Net Realized Investment Gain 474 474
Other Income 219 219
--------- --------- --------- --------- --------- ---------
Total Revenue 101,954 20,024 624 85 16,141 138,828
--------- --------- --------- --------- --------- ---------
Losses and Expenses:
Net Loss and Loss Adjustment Expenses 54,179 11,764 356 75 66,374
Acquisition Costs and Other Underwriting
Expenses 38,422 38,422
Other Operating Expenses 2,212 2,212
--------- --------- --------- --------- --------- ---------
Total Losses and Expenses 54,179 11,764 356 75 40,634 107,008
--------- --------- --------- --------- --------- ---------
Minority Interest: Distributions on
Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust 4,770 4,770
--------- --------- --------- --------- --------- ---------
Income Before Income Taxes 47,775 8,260 268 10 (29,263) 27,050
Total Income Tax Expense 7,022 7,022
--------- --------- --------- --------- --------- ---------
Net Income $ 47,775 $ 8,260 $ 268 $ 10 $ (36,285) $ 20,028
========= ========= ========= ========= ========= =========
Total Assets $ 476,390 $ 476,390
========= ========= ========= ========= ========= =========
1997:
Gross Written Premiums $ 138,343 $ 20,748 $ 159,091
--------- --------- --------- --------- --------- --------
Net Written Premiums $ 92,614 $ 19,183 $ 111,797
--------- --------- --------- --------- --------- --------
Revenue:
Net Earned Premiums $ 84,615 $ 15,940 $ 100,555
Net Investment Income 9,703 9,703
Net Realized Investment Loss (16) (16)
Other Income 228 228
--------- --------- --------- --------- --------- --------
Total Revenue 84,615 15,940 9,915 110,470
--------- --------- --------- --------- --------- --------
Losses and Expenses:
Net Loss and Loss Adjustment
Expenses 45,553 9,456 55,009
Acquisition Costs and Other
Underwriting Expenses 31,344 31,344
Other Operating Expenses 1,909 1,909
--------- --------- --------- --------- --------- --------
Total Losses and Expenses 45,553 9,456 33,253 88,262
--------- --------- --------- --------- --------- --------
Income Before Income Taxes 39,062 6,484 (23,338) 22,208
Total Income Tax Expense 5,338 5,338
--------- --------- --------- --------- --------- --------
Net Income $ 39,062 $ 6,484 $ (28,676) $ 16,870
========= ========= ========= ========= ========= ========
Total Assets $ 292,724 $ 292,724
========= ========= ========= ========= ========= ========
</TABLE>
45
<PAGE> 46
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report in that the
registrant will file a definitive proxy statement pursuant to Regulation 14A
(the "Proxy Statement") not later that 120 days after the end of the fiscal year
covered by this Report, and certain information included therein is incorporated
herein by reference.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's director and executive
officers required by this Item is incorporated by reference to the
Proxy Statement under the caption "Management-Directors and Executive
Officers".
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the Proxy Statement under the captions "Executive Compensation", "Stock
Option Grants", "Stock Option Exercises and Holdings" and "Directors
Compensation".
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the Proxy Statement under the caption "Security Ownership of Certain
Beneficial Owners and Management".
Item 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the Proxy Statement under the caption "Additional Information Regarding
the Board".
PART IV
Item 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements and Exhibits
1. The Financial Statements and Financial Statement Schedules listed in
the accompanying index on page 24 are filed as part of this Report.
2. Exhibits: The Exhibits listed on the accompanying Index to Exhibits
immediately following the financial statement schedules are filed as part of, or
incorporated by reference into, this Report.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 * Articles of Incorporation of Philadelphia Insurance, as amended to date.
3.1.1 * Amendment to Articles of Incorporation of Philadelphia Insurance.
3.2 * By-laws of Philadelphia Insurance, as amended to date.
10.1 * (1) Amended and Restated Key Employees' Stock Option Plan.
10.1.1 ********(1) Amended and Restated Key Employees' Stock Option Plan.
10.2 * (1) Key Employees' Stock Bonus Plan.
10.2.1 * (1) Excerpt of Board of Directors and Shareholders Resolution amending Key Employees' Stock
Bonus Plan.
10.6 * Casualty Excess of Loss Reinsurance Agreement No. 14P-106,401,402, effective January 1, 1990,
with Swiss Re, as amended to date.
</TABLE>
46
<PAGE> 47
<TABLE>
<S> <C>
10.7 * Property Quota Share Reinsurance Agreement No. 14P-202, effective December 9, 1989,
with Swiss Re, as amended to date.
10.8 * Casualty Quota Share Reinsurance Agreement No. 14P-201, effective January 1, 1989,
with Swiss Re, as amended to date.
10.9 * Retrocession Contract No. 80101, effective October 1, 1990, with Swiss Re, as amended
to date, together with related Casualty Quota Share Reinsurance Agreement No. X21-201,
as amended to date.
10.10 * Retrocession Contract No. 81100/81101, effective October 1, 1990, with Swiss Re, as
amended to date, together with related Property Quota Share Reinsurance Agreement No.
DP2AB, effective October 1, 1990, as amended to date.
10.11 * Retrocession Contract No. 80100/80103, effective October 1, 1990, with Swiss Re, as
amended to date, together with related Casualty Quota Share Reinsurance Agreement No.
DC2ABC, effective October 1, 1990, as amended to date.
10.12 * Agreement of Reinsurance no. B367, dated June 11, 1991, with General Reinsurance
Corporation, as amended to date.
10.13 * Agreement of Reinsurance No. A271, dated July 2, 1993, with General Reinsurance
Corporation.
10.14 * General Agency Agreement, effective December 1, 1987, between MIA and Providence Washington
Insurance Company, as amended to date, together with related Quota Share Reinsurance Agreements,
as amended to date.
10.15 * E & O Insurance Policy effective July 20, 1993.
10.15.1 ******* E & O Insurance Policy effective July 20, 1996.
10.15.2 ********* E & O Insurance Policy effective July 20, 1997.
10.16 * Minutes of the Board of Directors Meeting dated October 20, 1992, and excerpts from
the Minutes of the Board of Directors Meeting dated November 16, 1992.
10.17 * (1) Letter dated July 9, 1993 from James J. Maguire, confirming verbal agreements
concerning options.
10.18 * (1) James J. Maguire Stock Option Agreements.
10.18.1 *** (1) Amendment to James J. Maguire Stock Option Agreements.
10.19 * (1) Wheelways Salary Savings Plus Plan Summary Plan Description.
10.20 * Key Man Life Insurance Policies on James J. Maguire
10.21 * Reinsurance Pooling Agreement dated August 14, 1992, between PIIC and PIC.
10.22 * Tax Sharing Agreement, dated July 16, 1987, between Philadelphia Insurance and PIC, as amended to date.
10.23 * Tax Sharing Agreement, dated November 1, 1986, between Philadelphia Insurance and
PIIC, as amended to date.
10.24 * (1) Management Agreement dated May 20, 1991, between PIIC and MIA, as
amended to date.
10.24.1 *******(1) Management Agreement dated May 20, 1991, between PIIC and MIA, as amended September 25, 1996.
10.25 * (1) Management Agreement dated October 23, 1991, between PIC and MIA, as amended to date.
10.25.1 *******(1) Management Agreement dated October 23, 1991, between PIC and MIA, as amended
September 25, 1996.
10.26 * General Mutual Release and Settlement of All Claims dated July 2, 1993, with the
Liquidator of Integrity Insurance Company.
10.27 * Settlement Agreement and General Release with Robert J. Wilkin, Jr., dated August 18,
1993.
10.28 ** Lease tracking portfolio assignment agreement.
10.29 **** (1) James J. Maguire Split Dollar Life Insurance Agreement, Collateral Assignment and
Joint and Last Survivor Flexible Premium Adjustable Life Insurance Policy Survivorship Life.
10.30 ***** Allenbrook Software License Agreement, dated September 26, 1995.
10.31 ***** Sublease Agreement dated August 24, 1995 with CoreStates Bank, N.A.
10.32 ***** Lease Agreement dated August 30, 1995 with The Prudential Insurance Company of America.
10.33 ******(1) Employee Stock Purchase Plan.
10.34 ******(1) Cash Bonus Plan.
10.35 ******(1) Executive Deferred Compensation Plan.
10.36 ********(1) Directors Stock Purchase Plan
10.37 ********* Lease Agreement dated May 8, 1997 with Bala Plaza, Inc.
10.38 ********* Casualty Excess of Loss Reinsurance Agreement effective January 1, 1997, together with Property
Per Risk Excess of Loss Reinsurance Agreement effective January 1, 1997 and Property Facultative
Excess of Loss Automatic Reinsurance Agreement effective January 1, 1997.
</TABLE>
47
<PAGE> 48
<TABLE>
<S> <C>
10.39 ********* Automobile Leasing Residual Value Excess of Loss Reinsurance Agreement effective January 1,
1997, together with Second Casualty Excess of Loss Reinsurance Agreement, effective January 1,
1997.
10.40 ********** Inspire Software License Agreement, dated December 31, 1998.
10.41 ********** Lease Agreement dated July 6, 1998 with Bala Plaza, Inc.
10.42 *********** Plan and Agreement of Merger Between Philadelphia Consolidated Holding Corp. and The
Jerger Co. Inc.
11 ************ Statement regarding computation of earnings per share.
21 * List of Subsidiaries of the Registrant.
23 ************ Consent of PricewaterhouseCoopers LLP.
24 * Power of Attorney
99.1 ************ Report of Independent Accountants of PricewaterhouseCoopers LLP on Financial Statement
Schedules.
</TABLE>
<TABLE>
<S> <C>
* Incorporated by reference to the Exhibit filed with the Registrant's Form S-1 Registration
Statement under the Securities Act of 1933 (Registration No. 33-65958).
** Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31,
1993 and incorporated by reference.
*** Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1994 and
incorporated by reference.
**** Filed as an Exhibit to the Company"s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1995 and
incorporated by reference.
***** Filed as an Exhibit to the Company"s Annual Report on Form 10-K for the year ended December 31,
1995 and incorporated by reference.
****** Filed as an Exhibit to the Company"s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1996 and
incorporated by reference.
******* Filed as an Exhibit to the Company's Annual Report on Form 10-K for the year ended December 31,
1996 and incorporated by reference.
******** Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997 and
incorporated by reference.
********* Filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1997.
********** Filed as an Exhibit to the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
*********** Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1999.
************ Filed herewith.
(1) Compensatory Plan or Arrangement, or Management Contract.
</TABLE>
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1999.
48
<PAGE> 49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Philadelphia Consolidated Holding Corp.
By: /s/ James J. Maguire
-------------------------
James J. Maguire
Chairman of the Board of Directors
and Chief Executive Officer
March 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ James J. Maguire Chairman of the Board of March 27, 2000
-------------------------------- Directors and Chief Executive
James J. Maguire Officer (Principal Executive Officer)
/s/ Craig P. Keller Senior Vice President, Secretary, Treasurer, March 27, 2000
-------------------------------- and Chief Financial Officer
Craig P. Keller (Principal Financial and
Accounting Officer)
/s/ James J. Maguire, Jr. President & COO, Director March 27, 2000
--------------------------------
James J. Maguire, Jr.
/s/ Sean S. Sweeney Executive Vice President, Director March 27, 2000
--------------------------------
Sean S. Sweeney
/s/ William J. Henrich, Jr. Director March 27, 2000
--------------------------------
William J. Henrich, Jr.
/s/ Paul R. Hertel, Jr. Director March 27, 2000
--------------------------------
Paul R. Hertel, Jr.
/s/ Roger L. Larson Director March 27, 2000
--------------------------------
Roger L. Larson
Thomas J. McHugh Director March 27, 2000
--------------------------------
Thomas J. McHugh
/s/ Michael J. Morris Director March 27, 2000
--------------------------------
Michael J. Morris
Dirk A. Stuurop Director March 27, 2000
--------------------------------
Dirk A. Stuurop
/s/ J. Eustace Wolfington Director March 27, 2000
--------------------------------
J. Eustace Wolfington
</TABLE>
49
<PAGE> 50
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule I - Summary of Investments - Other than Investments in Related Parties
As of December 31, 1999
(Dollars in Thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
Estimated Amount at which
Market shown in the Balance
Type of Investment Cost * Value Sheet
- ------------------ ------ ----- -----
Fixed Maturities:
Bonds:
<S> <C> <C> <C>
United States Government and Government
Agencies and Authorities $ 43,752 $ 42,500 $ 42,500
States, Municipalities and Political Subdivisions 123,317 122,323 122,323
Public Utilities 5,015 4,776 4,776
All Other Corporate Bonds 157,475 149,466 149,466
Redeemable Preferred Stock 2,215 1,953 1,953
--------- -------- --------
Total Fixed Maturities 331,774 321,018 321,018
--------- -------- --------
Equity Securities:
Common Stocks:
Public Utilities 438 479 479
Banks, Trust and Insurance Companies 2,718 6,007 6,007
Industrial, Miscellaneous and all other 38,075 66,282 66,282
--------- -------- --------
Total Equity Securities 41,231 72,768 72,768
--------- -------- --------
Total Investments $ 373,005 $393,786 $393,786
--------- -------- --------
</TABLE>
* Original cost of equity securities; original cost of fixed maturities
adjusted for amortization of premiums and accretion of discounts.
S-1
<PAGE> 51
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II
Condensed Financial Information of Registrant
(Parent Only)
Balance Sheets
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
As of December 31,
------------------
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and Cash Equivalents $ (15) $ (65)
Equity in and Advances to Unconsolidated Subsidiaries (a) 258,722 238,292
Income Taxes Recoverable 2,775
Other Assets 3 14
--------- ---------
Total Assets $ 261,485 $ 238,241
========= =========
LIABILITIES AND SHAREHOLDERS" EQUITY
Income Taxes Payable $ $ 675
Other Liabilities 1,140 1,178
--------- ---------
Total Liabilities 1,140 1,853
--------- ---------
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 and 12,330,825 Shares Issued 68,859 44,796
Notes Receivable from Shareholders (2,506) (1,680)
Accumulated Other Comprehensive Income 13,507 22,417
Retained Earnings 93,766 74,923
Less Cost of Common Stock held in Treasury,
791,016 and 130,262 Shares (12,186) (2,973)
--------- ---------
Total Shareholders" Equity 161,440 137,483
--------- ---------
Total Liabilities and Shareholders" Equity $ 261,485 $ 238,241
========= =========
</TABLE>
(a) These items have been eliminated in the Company's Consolidated Financial
Statements.
See Notes to Consolidated Financial Statements included in Item 8, pages 30-45.
S-2
<PAGE> 52
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II, Continued
Condensed Financial Information of Registrant
(Parent Only)
Statements of Operations
(In Thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
--------------------------------
1999 1998 1997
---- ---- ----
Revenue:
<S> <C> <C> <C>
Dividends from Subsidiaries (a) $ 65,356 $ 5,470 $
Net Investment Income 2,598 10
Net Realized Investment Loss (b) (671)
-------- -------- --------
Total Revenue 65,356 7,397 10
-------- -------- --------
Other Expenses 684 725 540
-------- -------- --------
Total Expenses 684 725 540
-------- -------- --------
Minority Interest: Distributions on Company
Mandatorily Redeemable Preferred Securities of Subsidiary Trust 7,245 4,770
-------- -------- --------
Income, (Loss) Before Income Taxes and Equity in Earnings of
Unconsolidated Subsidiaries 57,427 1,902 (530)
Income Tax Expense (Benefit) (2,775) 675 (162)
-------- -------- --------
Income, (Loss) Before Equity in Earnings of Unconsolidated
Subsidiaries 60,202 1,227 (368)
Equity in Earnings of Unconsolidated Subsidiaries (41,359) 18,801 17,238
-------- -------- --------
Net Income $ 18,843 $ 20,028 $ 16,870
======== ======== ========
</TABLE>
(a) These items have been eliminated in the Company's Consolidated Financial
Statements.
(b) $31 of this amount has been eliminated in the Company's Consolidated
Financial Statements for 1998.
See Notes to Consolidated Financial Statements included in Item 8, pages 30-45.
S-3
<PAGE> 53
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II, Continued
Condensed Financial Information of Registrant
(Parent Only)
Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------------
1999 1998 1997
---- ---- ----
Cash Flows From Operating Activities:
<S> <C> <C> <C>
Net Income $ 18,843 $ 20,028 $ 16,870
Adjustments to Reconcile Net Income to Net
Cash Provided (Used) by Operating Activities:
Net Realized Investment Loss 671
Amortization Expense (Income) (145) 68
Equity in Earnings of Unconsolidated Subsidiaries 41,359 (18,801) (17,238)
Change in Other Liabilities (37) 1,019 (16)
Change in Other Assets 11 575 10
Change in Income Taxes Recoverable (2,775)
Change in Income Taxes Payable (675) 837 (584)
--------- --------- ---------
Net Cash Provided (Used) by Operating Activities 56,726 4,184 (890)
--------- --------- ---------
Cash Flows Used by Investing Activities:
Proceeds From Maturity of Investments in Fixed
Maturities Available for Sale 569
Proceeds From Sales of Investments in Equity Securities 2,427
Cost of Fixed Maturities Available for Sale Acquired (62,753)
Cost of Equity Securities Acquired (13,721)
Payment for Acquisition (25,676)
Net Transfers to Subsidiaries (a) (20,023) (28,450) (581)
--------- --------- ---------
Net Cash Used by Investing Activities (45,699) (101,928) (581)
--------- --------- ---------
Cash Flows From Financing Activities:
Proceeds From Offering of Company Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary
Trust 99,463
Exercise of Employee Stock Options, Net of Tax Benefit 458 724 723
Collection of Notes Receivable 619 570 375
Proceeds from Shares Pursuant to Employee Stock Purchase Plan 27 25 25
Cost of Common Stock Repurchased (12,081) (3,100)
--------- --------- ---------
Net Cash Provided (Used) by Financing Activities (10,977) 97,682 1,123
--------- --------- ---------
Net Increase (Decrease) in Cash and Equivalents 50 (62) (348)
Cash and Cash Equivalents at Beginning of Year (65) (3) 345
--------- --------- ---------
Cash and Cash Equivalents at End of Year $ (15) $ (65) $ (3)
========= ========= =========
Cash Dividends Received From Unconsolidated Subsidiaries $ 65,356 $ 5,470 $
========= ========= =========
Non-Cash Transactions:
Issuance of Shares Pursuant to Employee Stock Purchase Plan in exchange
for Notes Receivable $ 1,445 $ 828 $ 873
Acquisitions
Fair Value of Assets Acquired $ 77,310
Cash Paid (25,676)
Common Stock Issued (25,000)
---------
Liabilities Assumed $ 26,634
=========
</TABLE>
(a) This item has been eliminated in the Company's Consolidated Financial
Statements.
See Notes to Consolidated Financial Statements included in Item 8, pages 30-45.
S-4
<PAGE> 54
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule III - Supplementary Insurance Information
As of and For the Year Ended December 31, 1999, 1998 and 1997
(In Thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
Future
Policy
Benefits,
Deferred Losses, Other Policy
Policy Claims and Claims and Net
Acquisition Loss Unearned Benefits Premium Investment
Segment Costs Expenses Premiums Payable Revenue Income
1999:
<S> <C> <C> <C> <C> <C> <C>
Commercial Lines $ $143,180 $ 53,279 $111,019 $
Specialty Lines 35,314 27,236 33,433
Personal Lines 7,832 21,408 12,859 1,546
Specialty Property 1,737 9,683 7,604
Corporate 26,054 19,149
-------- -------- -------- -------- --------
Total $ 26,054 $188,063 $111,606 $164,915 $ 20,695
======== ======== ======== ======== ========
1998:
Commercial Lines $ $125,656 $ 42,882 $101,954 $
Specialty Lines 24,981 18,086 20,024
Personal Lines 461 2,809 624
Specialty Property 52 1,010 85
Corporate 16,853 15,448
-------- -------- -------- -------- --------
Total $ 16,853 $151,150 $ 64,787 $122,687 $ 15,448
======== ======== ======== ======== ========
1997
Commercial Lines $ 84,615 $
Specialty Lines 15,940
Personal Lines
Specialty Property
Corporate 9,703
-------- --------
Total $100,555 $ 9,703
======== ========
</TABLE>
<TABLE>
<CAPTION>
COLUMN A COLUMN H COLUMN I COLUMN J COLUMN K
Benefits, Amortization
Claims, of Deferred
Losses, and Policy Other
Settlement Acquisition Operating Premiums
Segment Expenses Costs Expenses Written
1999:
<S> <C> <C> <C> <C>
Commercial Lines $ 66,544 $ $ $117,575
Specialty Lines 17,873 40,936
Personal Lines 9,251 14,057
Specialty Property 5,742 11,503
Corporate 46,451 8,939
-------- ---------- ---------- --------
Total $ 99,410 $ 46,451 $ 8,939 $184,071
======== ========== ========== ========
1998:
Commercial Lines $ 54,179 $ $ $112,497
Specialty Lines 11,764 26,095
Personal Lines 356 3,433
Specialty Property 75 1,011
Corporate 30,034 2,212
-------- ---------- ---------- --------
Total $ 66,374 $ 30,034 $ 2,212 $143,036
======== ========== ========== ========
1997
Commercial Lines $ 45,553 $ $ $ 92,614
Specialty Lines 9,456 19,183
Personal Lines
Specialty Property
Corporate 25,034 1,909
-------- ---------- ---------- --------
Total $ 55,009 $ 25,034 $ 1,909 $111,797
======== ========== ========== ========
</TABLE>
S-5
<PAGE> 55
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule IV - Reinsurance
Earned Premiums
For the Years Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
Ceded to Assumed from Percentage of
Gross Other Other Amount Assumed to
Amount Companies Companies Net Amount Net
------ --------- --------- ---------- ---
1999
<S> <C> <C> <C> <C> <C>
Property and Casualty Insurance $ 243,667 $83,091 $4,339 $164,915 2.6%
1998
Property and Casualty Insurance $ 173,555 $52,049 $1,181 $122,687 1.0%
1997
Property and Casualty Insurance $ 147,514 $49,573 $2,614 $100,555 2.6%
</TABLE>
S-6
<PAGE> 56
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule VI - Supplemental Information Concerning Property -
Casualty Insurance Operations As of and For the Years
Ended December 31, 1999, 1998 and 1997
(Dollars in Thousands)
<TABLE>
<CAPTION>
Reserve for
Deferred Unpaid
Policy Claims and Discount if Net
Affiliation with Acquisition Claim any Unearned Earned
Registrant Costs Adjustment deducted in Premiums Premiums
Expenses Column C
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
<S> <C> <C> <C> <C> <C>
Consolidated
Property
- - Casualty Entities
December 31, 1999 $ 26,054 $ 188,063 $ 0 $ 111,606 $ 164,915
December 31, 1998 $ 16,853 $ 151,150 $ 0 $ 64,787 $ 122,687
December 31, 1997 $ 10,970 $ 122,430 $ 0 $ 42,116 $ 100,555
</TABLE>
Claims and Claims Adjustment
Expenses Incurred Related to
<TABLE>
<CAPTION>
Amortization of
deferred policy Paid Claims
Net (1) (2) acquisition costs and Claim
Investment Current Prior Adjustment Net Written
Income Year Year Expenses Premiums
COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
Consolidated
Property
- - Casualty Entities
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 $ 20,695 $ 99,663 $ (253) $ 46,451 $ 75,262 $ 184,071
December 31, 1998 $ 15,448 $ 69,544 $(3,170) $ 30,034 $ 40,272 $ 143,036
December 31, 1997 $ 9,703 $ 56,725 $(1,716) $ 25,034 $ 31,804 $ 111,797
</TABLE>
S-7
<PAGE> 57
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Exhibit Index
For the Year Ended December 31, 1999
<TABLE>
<CAPTION>
Exhibit No. Page No. Description
- ----------- -------- -----------
<S> <C> <C>
3.1 * Articles of Incorporation of Philadelphia Insurance, as
amended to date.
3.1.1 * Amendment to Articles of Incorporation of Philadelphia
Insurance.
3.2 * By-laws of Philadelphia Insurance, as amended to date.
10.1 * (1) Amended and Restated Key Employees' Stock Option Plan.
10.1.1 ********(1) Amended and Restated Key Employers' Stock Option Plan.
10.2 * (1) Key Employees' Stock Bonus Plan.
10.2.1 * (1) Excerpt of Board of Directors and Shareholders Resolution
amending Key Employees' Stock Bonus Plan.
10.6 * Casualty Excess of Loss Reinsurance Agreement No. 14P-
106,401,402, effective January 1, 1990, with Swiss Re, as
amended to date.
10.7 * Property Quota Share Reinsurance Agreement No. 14P-202,
effective December 9, 1989, with Swiss Re, as amended to
date.
10.8 * Casualty Quota Share Reinsurance Agreement No. 14P-201,
effective January 1, 1989, with Swiss Re, as amended to date.
10.9 * Retrocession Contract No. 80101, effective October 1, 1990,
with Swiss Re, as amended to date, together with related
Casualty Quota Share Reinsurance Agreement No. X21-201,
as amended to date.
10.10 * Retrocession Contract No. 81100/81101, effective October 1,
1990, with Swiss Re, as amended to date, together with
related Property Quota Share Reinsurance Agreement No.
DP2AB, effective October 1, 1990, as amended to date.
10.11 * Retrocession Contract No. 80100/80103, effective October 1,
1990, with Swiss Re, as amended to date, together with
related Casualty Quota Share Reinsurance Agreement No.
DC2ABC, effective October 1, 1990, as amended to date.
10.12 * Agreement of Reinsurance no. B367, dated June 11, 1991,
with General Reinsurance Corporation, as amended to date.
10.13 * Agreement of Reinsurance No. A271, dated July 2, 1993,
with General Reinsurance Corporation.
10.14 * General Agency Agreement, effective December 1, 1987,
between MIA and Providence Washington Insurance
Company, as amended to date, together with related Quota
Share Reinsurance Agreements, as amended to date.
10.15 * E & O Insurance Policy effective July 20, 1993.
10.15.1 ******* E & O Insurance Policy effective July 20, 1996.
10.15.2 ********* E & O Insurance Policy effective July 20, 1997.
10.16 * Minutes of the Board of Directors Meeting dated October 20,
1992, and excerpts from the Minutes of
the Board of Directors Meeting dated
November 16, 1992.
</TABLE>
(E-1)
P. 57
<PAGE> 58
<TABLE>
<S> <C>
10.17 * (1) Letter dated July 9, 1993 from James J. Maguire, confirming
verbal agreements concerning options.
10.18 * (1) James J. Maguire Stock Option Agreements.
10.18.1 *** (1) Amendment to James J. Maguire Stock Option Agreements.
10.19 * (1) Wheelways Salary Savings Plus Plan Summary Plan
Description.
10.20 * Key Man Life Insurance Policies on James J. Maguire
10.21 * Reinsurance Pooling Agreement dated August 14, 1992,
between PIIC and PIC.
10.22 * Tax Sharing Agreement, dated July
16, 1987, between Philadelphia
Insurance and PIIC, as amended to
date.
10.23 * Tax Sharing Agreement, dated
November 1, 1986, between Philadelphia
Insurance and PIIC, as amended to
date.
10.24 * (1) Management Agreement dated May 20, 1991, between PIIC
and MIA, as amended to date.
10.24.1 *******(1) Management Agreement dated
May 20, 1991, between PIIC and MIA, as
amended September 25, 1996.
10.25 * (1) Management Agreement dated October 23, 1991, between
PIC and MIA, as amended to date.
10.25.1 *******(1) Management Agreement dated
October 23, 1991, between PIC and MIA,
as amended September 25, 1996.
10.26 * General Mutual Release and Settlement of All Claims dated
July 2, 1993, with the Liquidator of Integrity Insurance
Company.
10.27 * Settlement Agreement and General Release with Robert J.
Wilkin, Jr., dated August 18, 1993.
10.28 ** Lease tracking portfolio assignment agreement.
10.29 **** (1) James J. Maguire Split Dollar Life Insurance Agreement,
Collateral Assignment and Joint and
Last Survivor Flexible Premium
Adjustable Life Insurance Policy
Survivorship Life.
10.30 ***** Allenbrook Software License Agreement, dated September
26, 1995.
10.31 ***** Sublease Agreement dated August 24, 1995 with CoreStates
Bank, N.A.
10.32 ***** Lease Agreement dated August 30, 1995 with The Prudential
Insurance Company of America.
10.33 ******(1) Employee Stock Purchase Plan.
10.34 ******(1) Cash Bonus Plan.
10.35 ******(1) Executive Deferred Compensation Plan.
10.36 ********(1) Directors Stock Purchase Plan.
10.37 ********* Lease Agreement dated May 8, 1997 with Bala Plaza, Inc.
10.38 ********* Casualty Excess of Loss Reinsurance Agreement effective
January 1, 1997, together with
Property Per Risk Excess of Loss
Reinsurance Agreement effective
January 1, 1997 and Property
Facultative Excess of Loss Automatic
Reinsurance Agreement effective
January 1, 1997.
10.39 ********* Automobile Leasing Residual Value Excess of Loss
Reinsurance Agreement effective January 1, 1997, together
with Second Casualty Excess of Loss Reinsurance
Agreement, effective January 1, 1997.
10.40 ********** Inspire Software License Agreement, dated
December 31, 1998.
</TABLE>
(E-2)
P. 58
<PAGE> 59
<TABLE>
<S> <C>
10.41 ********** Lease Agreement dated July 6, 1998 with Bala Plaza, Inc.
10.42 *********** Plan and Agreement of Merger Between Philadelphia
Consolidated Holding Corp. and The Jerger Co. Inc.
11 ************ Page 60 of 67 Statement regarding computation of earnings per share.
21 * List of Subsidiaries of the Registrant.
23 ************ Page 62 of 67 Consent of PricewaterhouseCoopers LLP
24 * Power of Attorney
27 ************ Page 64 of 67 Financial Data Schedule
99.1 ************ Page 66 of 67 Report of Independent Accountants of
PricewaterhouseCoopers LLP on
Financial Statement Schedules.
</TABLE>
* Incorporated by reference to the Exhibit filed with the
Registrant's Form S-1 Registration Statement under the Securities
Act of 1933 (Registration No. 33-65958).
** Filed as an Exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1993 and incorporated by
reference.
*** Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1994 and
incorporated by reference.
**** Filed as an Exhibit to the Company"s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1995 and
incorporated by reference.
***** Filed as an Exhibit to the Company"s Annual Report on Form 10-K
for the year ended December 31, 1995 and incorporated by
reference.
****** Filed as an Exhibit to the Company"s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1996 and
incorporated by reference.
******* Filed as an Exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1996 and incorporated by
reference.
******** Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1997 and
incorporated by reference.
********* Filed as an Exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1997.
********** Filed as an Exhibit to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
*********** Filed as an Exhibit to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1999.
************ Filed herewith.
(1) Compensatory Plan or Arrangement, or Management Contract.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1999.
(E-3)
P. 59
<PAGE> 1
Philadelphia Consolidated Holding Corp. and Subsidiaries
Computation of Earnings Per Share
(Dollars and Share Data in Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
As of and For the Years Ended December 31,
------------------------------------------------------------
1999 1998 1997
--------------- -------------- -------------
<S> <C> <C> <C>
Weighted-Average Common Shares Outstanding 12,501 12,249 12,194
Weighted-Average Share Equivalents Outstanding 2,615 2,680 2,736
----- ----- -----
Weighted-Average Shares and Share Equivalents Outstanding
15,116 14,929 14,930
------ ------ ------
Net Income $18,843 $20,028 $16,870
======= ======= =======
Basic Earnings Per Share $1.51 $1.63 $1.38
----- ----- -----
Diluted Earnings Per Share $1.25 $1.34 $1.13
===== ===== =====
</TABLE>
Page 61 of 65
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No. 33-96604, No. 333-29643 and No. 333-29647) of
Philadelphia Consolidated Holding Corp. of our reports dated February 11, 2000
relating to the consolidated financial statements and financial statement
schedules which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 321,018
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 72,768
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 393,786
<CASH> 26,230
<RECOVER-REINSURE> 6,266
<DEFERRED-ACQUISITION> 26,054
<TOTAL-ASSETS> 599,051
<POLICY-LOSSES> 188,063
<UNEARNED-PREMIUMS> 111,606
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 68,859
<OTHER-SE> 92,581
<TOTAL-LIABILITY-AND-EQUITY> 599,051
164,915
<INVESTMENT-INCOME> 20,695
<INVESTMENT-GAINS> 5,700
<OTHER-INCOME> 4,722
<BENEFITS> 99,410
<UNDERWRITING-AMORTIZATION> 53,793
<UNDERWRITING-OTHER> 8,939
<INCOME-PRETAX> 26,645
<INCOME-TAX> 7,802
<INCOME-CONTINUING> 18,843
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,843
<EPS-BASIC> 1.51
<EPS-DILUTED> 1.25
<RESERVE-OPEN> 137,205<F1><F2>
<PROVISION-CURRENT> 99,663
<PROVISION-PRIOR> (253)
<PAYMENTS-CURRENT> 31,493
<PAYMENTS-PRIOR> 43,769
<RESERVE-CLOSE> 161,353<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 RECEIVEABLES OF $26,710 AND $16,120 AT DECEMBER 31, 1999 AND 1998,
RESPECTIVELY.
<F2>ADJUSTED TO INCLUDE $2,175 NET UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES FOR
MOBILE USA INSURANCE COMPANY AS OF ACQUISITION DATE.
</FN>
</TABLE>
<PAGE> 1
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Philadelphia Consolidated Holding Corp.:
Our audits of the consolidated financial statements of Philadelphia Consolidated
Holding Corp. and Subsidiaries appearing in this Form 10-K also included an
audit of the financial statement schedules listed in the index on page 24 of
this Form 10-K. In our opinion, the financial statement schedules present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 11, 2000
