(2) 1996 and 1995 earnings per share amounts restated in accordance with the provisions of SFAS No. 128 adopted as of December 31, 1997.
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.
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'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.
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:
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:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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:
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.
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):
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.
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.
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 following table summarizes property and equipment at December 31, 1999 and 1998 (dollars in thousands):
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.
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.
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.
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 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.
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):