The Company also generates revenue from its investment portfolio, which approximated $1.2 billion at December 31, 2003 and generated $43.4 million in gross pretax investment income during 2003. The Company utilizes external independent professional investment managers with the objective of realizing relatively high levels of investment income while generating competitive after tax total rates of return within duration and credit quality targets.
The Company also believes its core strategy of adhering to an underwriting philosophy of sound risk selection and pricing discipline, the mixed marketing platform for its product distribution and the creation of value added features not typically found in property and casualty products have also contributed to generating premium growth above industry averages, as well as enabling the Company to produce combined ratios (the sum of net loss and loss adjustment expenses and acquisition costs and other underwriting expenses, divided by net earned premiums) well below industry averages.
The GAAP combined ratio for the year ended December 31, 2003 was 91.3%, which, once again, was substantially lower than the property and casualty industry as a whole. Included in the 2003 calendar year net loss and loss adjustment expenses was $44.6 million of prior accident year development, of which, $38.8 million was attributable to the Company's run-off residual value line of business. The following table illustrates the 2003 calendar year and accident year loss ratios by segment.
The Company's investment objective is 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 rating. The Company utilizes external independent professional investment managers for its fixed maturity and equity investments. These investments consist of diversified issuers and issues, and as of December 31, 2003, approximately 87.8% and 6.6% of the total invested assets (total investments plus cash equivalents) on a cost basis consisted of investments in fixed maturity and equity securities, respectively, versus 90.2% and 5.6%, respectively, at December 31, 2002.
During 2003 the relative percentage investment in tax-exempt fixed maturity securities versus taxable fixed maturity securities increased, due to the Company taking advantage of the more favorable after-tax yields. At the end of 2003, on a cost basis, investment grade tax-exempt fixed maturity securities represented 39.2% of the total invested assets, compared to 30.3% as of the end of 2002.
and the first quarter of 2003. The Company primarily attributes these other than temporary declines in fair value to the uncertain economic climate, the overhang of corporate governance issues, and the high profile bankruptcies occurring during 2002 into early 2003.
The following table presents certain information with respect to individual securities with a significant unrealized loss position as of December 31, 2003.
During 2003 the Company recorded impairment losses of $1.1 million, $0.1 million, $0.5 million for the Batterson Park CBO I CLC 144A, Conseco Fin SEC Corp SER 2000-4M2, and Greentree Financial Corp 99-2-B1 securities, respectively. Based upon the Company's impairment evaluation as of December 31, 2003 utilizing cash flow assumptions of the supporting collateral, estimated default and recovery rates it was concluded that the remaining unrealized losses in the significant unrealized losses by security table are not other than temporary.
During 2003 the Company's gross loss on the sale of fixed maturity and equity securities amounted to $0.7 million and $0.8 million, respectively. The fair value of the fixed maturity and equity securities at the time of sale was $20.1 million and $4.4 million, respectively. During 2002 the Company's gross loss on the sale of fixed maturity and equity securities amounted to $0.3 million and $3.2 million, respectively. The fair value of the fixed maturity and equity securities at the time of sale was $31.6 million and $14.1 million, respectively. The decision to sell these securities was based upon management's assessment of economic conditions.
in value for an equity investment has persisted continuously for nine months, the cost basis of the security is written down to its fair value. The factors considered in reaching the conclusion that a decline below cost is other-than-temporary include, but are not limited to, whether: the issuer is in financial distress; the investment is secured; a significant credit rating action has occurred; scheduled interest payments have been delayed or missed; changes in laws and/or regulations have impacted an issuer or industry. The amount of any write down is included in earnings as a realized loss in the period the impairment arose (see Investments).
During 2003 the Company increased the liability for unpaid loss and loss adjustment expenses by $51.7 million ($44.6 million net of reinsurance recoverables), primarily for accident years 1997 through 2001. This increase in the liability for unpaid loss and loss adjustment expense, net of reinsurance recoverables, was primarily due to the following:
- The Company entering into an agreement with U.S. Bank, N.A. d/b/a Firstar Bank ("Firstar") for residual value insurance policies purchased by Firstar. Under the terms of the agreement, the Company paid Firstar $27.5 million in satisfaction of any and all claims made or which could have been made by Firstar under the residual value policies. The Company increased the gross and net reserves for loss and loss adjustment expenses from $21.7 million to $27.5 million.
- $4.2 million ($4.7 million net of reinsurance recoverables) and $26.4 million ($20.3 million net of reinsurance recoverables) of favorable development in professional liability products and commercial package products, respectively, due to conservative initial loss estimates combined with favorable product pricing.
The Company has no off-balance sheet arrangements (as that term is defined in Item 303(a) (4) of Regulation S-K) that have or are reasonably likely to have a current or as of December 31, 2003, future effect on it financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors as of December 31, 2003.
- - In-force policy counts have increased 22.8% and 39.7% for the commercial and specialty lines segments, respectively, primarily as a result of the factors discussed above. Policy counts were approximately the same for the personal lines segment as a result of restricting new business and not renewing certain business to manage overall property exposures and the related catastrophe loss considerations. Firming prices in the property and casualty industry resulted in weighted average rate increases on renewal business approximating 4.3%, 10.2%, and 9.4% for the commercial, specialty and personal lines segments, respectively.
- - The Company entering into a Quota Share reinsurance agreement (effective April 1, 2003) covering all of the Company's lines of business. Under this agreement, the Company cedes 22% of its net written premium (including 22% of the net unearned premium reserves at April 1, 2003) and loss and loss adjustment expenses. The Company also receives a provisional commission of 33.0% adjusted pro-rata based upon the ratio of losses incurred to premiums earned. Pursuant to this reinsurance agreement the Company withholds the reinsurance premium reduced by the reinsurers' expense allowance and the Company's ceding commission allowance in a Funds Held Payable to Reinsurer
account. This Funds Held Payable to Reinsurer account is also reduced by ceded paid losses and loss adjustment expenses under this agreement, and increased by an interest credit. During the year ended December 31, 2003, the Company ceded $191.8 million of written premium, which included unearned premium reserves of $63.6 million at April 1, 2003.
The total return, which includes the effects of both income and price returns on securities, of the Company's fixed income portfolio was 4.36% and 9.09% for the years ended December 31, 2003 and 2002, respectively, and was similar to the Lehman Brothers Intermediate Aggregate Bond Index ("the Index") total return of 3.81% and 9.51% for the same periods, respectively. The Company expects some variation in its portfolio's total return compared to the index because of the differing sector, security and duration composition of its portfolio compared to the index.
Net Realized Investment Gain (Loss): Net realized investment gains (losses) were $0.8 million for the year ended December 31, 2003 and ($3.4) million for the same period in 2002. The Company realized net investment gains of $7.1 million and $4.0 million from the sale of fixed maturity and equity securities, respectively, for the year ended December 31, 2003, and $4.0 million and $6.3 million in non-cash realized investment losses for fixed maturity and common stock investments, respectively, as a result of the Company's impairment evaluations.
The Company realized $3.4 million in net investment gains from the sale of fixed maturity securities and $3.1 million in net investment losses from the sale of common stock equity securities for the year ended December 31, 2002. Additionally, $2.1 million and $1.6 million in non-cash realized investment losses were recorded for common stock and fixed maturity investments, respectively as a result of the Company's impairment evaluations.
As of December 31, 2003, the Company has estimated a total liability for gross and net unpaid loss and loss adjustment expenses for the residual value policies of $30.3 million. The residual value policies provide coverage guaranteeing the value of a leased automobile at the lease termination, which can be up to five years from lease inception. As part of the Company's monitoring and evaluation process, a consulting firm was engaged during the second quarter of 2003 to aid in evaluating the ultimate potential loss exposure under these policies. Based upon the result of the indications and
subsequent evaluation by the Company and changes in the Company's assumptions relating to future frequency and severity of losses, the estimate for unpaid loss and loss adjustment expenses was increased by $33.0 million. The Company primarily attributes this deterioration to the following factors that led to a softening of prices in the used car market subsequent to the September 11, 2001 terrorist attacks: prolonged 0% new car financing rates and other incentives which increased new car sales and the volume of trade-ins, daily rental units being sold into the market earlier and in greater numbers than expected further adding to the oversupply of used cars; and the overall general economic conditions. As of December 31, 2003, approximately 22,000 leases were outstanding under the Company's residual value policies.
The respective gross written premium increases for the commercial lines, specialty lines and personal lines segments for the years ended December 31, 2002 vs. December 31, 2001 amount to $157.9 million (50.0%), $30.0 million (37.8%) and $2.2 million (2.8%), respectively. The overall growth in gross written premiums is primarily attributable to the following:
- - As a result of firming prices in the property and casualty industry, rate increases on renewal business have approximated 16.0%, 26.0%, and 8.0% for the commercial, specialty and the personal lines segments, respectively. Additionally, in force policy counts have increased 43.0% and 13.0% for the commercial and specialty lines segments, respectively, primarily as a result of the factors discussed above. Policy counts have decreased approximately 7.0% for the personal lines segment as a result of restricting new business and not renewing certain business to manage overall property exposures and the related catastrophe loss considerations.
Net Realized Investment Gain (Loss): Net realized investment gains (losses) were ($3.4) million for the year ended December 31, 2002 and $3.4 million for the same period in 2001. The Company realized net investment losses of $3.1 million from the sales of common stock equity securities and $3.4 million in net investment gains from the sale of fixed maturity securities during the year ended December 31, 2002. Additionally, $2.1 million and $1.6 million in non-cash realized investment losses were recorded for common stock and fixed maturity investments, respectively, as a result of the Company's impairment evaluation (see Investments). The Company realized net investment gains of $8.3 million from the sales of common stock equity securities and $0.9 million from the sales of fixed maturity securities during the year ended December 31, 2001. These realized net investment gains were offset by $5.8 million in non-cash realized investment losses experienced on certain securities as a result of the Company's impairment evaluation (see Investments). The proceeds from the sales were reinvested in fixed maturity securities to increase current investment income and decrease the overall percentage of investments in common stock securities.
a lesser extent brokered commercial lines business. The Company is seeking to increase brokering activities in its personal lines segment, as it is restricting new business and not renewing certain policies in designated areas of Florida as a result of its property exposures in these areas and the related catastrophe loss considerations.
Acquisition Costs and Other Underwriting Expenses: Acquisition costs and other underwriting expenses increased $32.9 million (33.9%) to $129.9 million for the year ended December 31, 2002 from $97.0 million for the same period of 2001. This increase was due primarily to the 42.2% growth in net earned premiums, offset in part by:
Income Tax Expense: The Company's effective tax rate for the year ended December 31, 2002 and 2001 was 31.4% and 33.9%, respectively. The effective rates differed from the 35% statutory rate principally due to investments in tax-exempt securities and in part due to the discontinuance of goodwill amortization. The decrease in the effective tax rate is principally due to a greater investment of cash flows in tax-exempt securities relative to taxable securities.
The NAIC's risk-based capital method is designed to measure the acceptable amount of capital and surplus an insurer should have based on the inherent specific risks of each insurer. The adequacy of a company's actual capital and surplus is evaluated by a comparison to the risk-based capital results. Insurers failing to meet minimum risk-based capital requirements may be subject to scrutiny by the insurer's domiciliary insurance department and ultimately rehabilitation or liquidation. As of December 31, 2003, PIIC, PIC, MUSA and LAIC exceeded their minimum risk-based capital requirements of $107.6 million, $13.1 million, $15.3 million and $14.9 million, respectively, by 218%, 134%, 40% and 48%, respectively.
The Company has certain contractual obligations and commitments as of December 31, 2003 which are summarized below:
In May 2003, the Financial Accounting Standards Board "FASB" issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments With Characteristics of both Liabilities and Equity", which establishes standards for how an issuer classifies and measures financial instruments characteristics of both liabilities and equity. With the exception of certain financial measurement criteria deferred indefinitely by the FASB, SFAS No. 150 was adopted in fiscal 2003. The implementation of SFAS No. 150 had no impact on the Company's financial condition or results of operations.
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, 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) claims development and the adequacy of our liability for unpaid loss and loss adjustment expenses; (vi)
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 at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The carrying amount for the Company's investments approximates their estimated fair value. The Company measures the fair value of investments based upon quoted market prices or by obtaining quotes from third party broker-dealers. Material assumptions and factors utilized by such broker-dealers in pricing these securities include: future cash flows, constant default rates, recovery rates and any market clearing activity that may have occurred since the prior month-end pricing period. The Company's total investments include $13.7 million in securities for which there is no readily available independent market price.
The Company regularly performs various analytical procedures with respect to its investments, including identifying any security whose fair value is below its cost. Upon identification of such securities, a detailed review is performed for all securities, except interests in securitized assets, meeting predetermined thresholds, to determine whether such decline is other than temporary. If the Company determines a decline in value to be other than temporary, the cost basis of the security is written down to its fair value with the amount of the write down included in earnings as a realized loss in the period the impairment arose. This evaluation resulted in non-cash realized investment losses of $1.0 million and $2.1 million for the years ended December 31, 2003 and December 31, 2002, respectively. No impairment losses were recorded for the year ended December 31, 2001.
Additionally, the Company's impairment evaluation and recognition for interests in securitized assets is conducted in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board. Under this guidance, impairment losses on securities must be recognized if both the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent (prior) estimation date. If these criteria are met, an impairment charge, calculated as the difference between the current book value of the security and its fair value, is included in earnings as a realized loss in the period the impairment arose. This re-evaluation resulted in non-cash realized investment losses of $9.3 million, $1.6 million and $5.8 million for the years ended December 31, 2003, 2002 and 2001, respectively.
The Company held no derivative financial instruments, nor embedded financial derivatives, as of December 31, 2003 and 2002.
liability is necessarily a complex imprecise process, requiring the use of informed estimates and judgments using data currently available. The liability includes an amount determined on the basis of claim adjusters' evaluations with respect to insured events that have occurred and an amount for losses incurred that have not been reported to the Company. In some cases significant periods of time, up to several years or more, may elapse between the occurrence of an insured loss and the reporting of such to the Company. The method for determining the Company's liability for unpaid loss and loss adjustment expenses includes, but is not limited to, reviewing past loss experience and considering other factors such as legal, social, and economic developments. The methods of making such estimates and establishing the resulting liabilities are regularly reviewed and updated and any adjustments therefrom are made in the accounting period in which the adjustment arose. If the Company's ultimate losses, net of reinsurance, prove to differ substantially from the amounts recorded at December 31, 2003, the related adjustments could have a material adverse impact on the Company's financial condition, and results of operations.
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. The Company records an allowance for doubtful accounts for premiums receivable balances estimated to be uncollectible. At December 31, 2003 and 2002 the allowance for doubtful accounts amounted to $2.2 million and $1.7 million, respectively.
The Company continues to maintain its accounting for stock-based compensation in accordance with APB No. 25, but has adopted the disclosure provisions of SFAS No. 148. 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):
Accounting Principles: GAAP differs in certain respects from Statutory Accounting Principles ("SAP") prescribed or permitted by the Insurance Department of the Commonwealth of Pennsylvania and/or the State of Florida. The principal differences between SAP and GAAP are as follows:
- - 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.
Risk-Based Capital: Risk-based capital is a method developed by the National Association of Insurance Commissioners ("NAIC") designed to measure the acceptable amount of capital and surplus an insurer should have based on the inherent specific risks of each insurer. The adequacy of a company's actual capital and surplus is evaluated by a comparison to the risk-based capital results. Insurers failing to meet minimum risk-based capital requirements may be subject to scrutiny by the
insurer's domiciliary insurance department and ultimately rehabilitation or liquidation. As of December 31, 2003, PIIC, PIC, MUSA and LAIC exceeded their minimum risk-based capital requirement of $107.6 million, $13.1 million, $15.3 million and $14.9 million, respectively, by 218%, 134%, 40% and 48%, respectively.
(2) Estimated market values have been based on quoted market prices or quotes from third party broker-dealers..
The following table (in thousands) identifies the period of time securities with an unrealized loss at December 31, 2003 have continuously been in an unrealized loss position. Included in the amounts displayed in the table are $6.5 million of unrealized losses due to non-investment grade fixed maturity securities having a fair value of $15.6 million. No issuer of securities or industry represents more than 4.4% and 15.5%, respectively, of the total estimated fair value, or 18.1% and 39.7%, respectively, of the total gross unrealized loss included in the table below. As previously discussed, there are certain risks and uncertainties inherent in the Company's impairment methodology, such as the financial condition of specific industry sectors and the resultant effect on underlying security collateral values. Should the Company subsequently determine a decline in the fair value below the cost basis to be other than temporary, the security would be written down to its fair value and the difference would be included in earnings as a realized loss for the period such determination was made.
Based upon the Company's impairment evaluation as of December 31, 2003, it was concluded that the remaining unrealized losses in the table above are not other than temporary.
The cost and estimated market value of fixed maturity securities at December 31, 2003, 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.
There was one fixed maturity security with a carrying value of $0.6 million which was non-income producing for the year ended December 31, 2003. Investment expense includes $15,400, $77,000, and $107,000, in investment management fees paid to a director of the Company in 2003, 2002, and 2001, respectively. These transactions are in the ordinary course of business at negotiated prices comparable to those of transactions with other investment advisors.
The Company maintains investments in trust accounts under 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 distributed to the Company on a monthly basis. At December 31, 2003 and 2002 the carrying value of these trust fund investments were $1.7 million.
The following table summarizes property and equipment at December 31, 2003 and 2002 (dollars in thousands):
The following table provides a reconciliation of the prior three year's ended December 31 reported net income to adjusted net income had SFAS No. 142 been applied at the beginning of fiscal 2001 (in thousands, except per share amounts):
-- The Company increased the estimated gross and net loss for unreported claims incurred and related claim adjustment expenses on residual value polices issued during the years 1998 through 2002 by $38.8 million. As of December 31, 2003 the Company's total liability for gross and net unpaid loss and loss adjustment expenses for these policies is estimated to be $30.3 million. The residual value policies provide coverage guaranteeing the value of a leased automobile at the lease termination, which can be up to five years from lease inception. The increase in the estimated gross and net loss was a result of:
- $19.6 million ($13.7 million net of reinsurance recoverables) of development in professional liability products as a result of case reserves developing greater than anticipated from the year-end 2002 ultimate loss estimate; $18.1 million ($11.1 million net of reinsurance recoverables) of development in the automobile and general liability coverages for commercial package products due to losses developing beyond the underlying pricing assumptions; and $5.8 million ($6.0 million net of reinsurance recoverables) of development in the
The Company also increased the liability for unpaid loss and loss adjustment expenses on the Commercial Automobile Excess Liability Insurance ("Excess Liability") product sold to rental car companies (Commercial Lines Underwriting Segment) primarily for the 2000 and 2001 accident years by $6.9 million ($4.9 million net of reinsurance). As of December 31, 2001 the Company had estimated a total liability for unpaid loss and loss adjustment expenses for the Excess Liability policies issued in these years of $23.0 million ($21.6 million net of reinsurance). Excess Liability provides automobile liability coverage in excess of the state mandated limits which are provided by the rental car company. During the third quarter of 2002, pursuant to a routine underwriting review focusing on price adequacy and loss experience, the Company non-renewed a significant Excess Liability customer as a result of an unacceptable underwriting risk profile. This adverse loss development was primarily due to pricing inadequacy and the adverse loss experience of this customer. Additionally, the Company has experienced a delay in both the reporting of claims and the claim litigation discovery process as a result of this policyholder and another Excess Liability policyholder filing for Chapter 11 during the third quarter 2002 and fourth quarter 2001, respectively.
During 1998, the Company issued 10.350 million FELINE PRIDES(SM) 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 PRIDES(SM) consisted of 9.350 million units referred to as Income Prides and 1.000 million units referred to as Growth Prides. Each Income Prides consisted of a unit comprised of (a) a purchase contract under which the holder purchased a number of shares of Philadelphia Consolidated Holding Corp. common stock on May 16, 2001 (equal to .3858 shares per FELINE PRIDES(SM) 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 received 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 consisted of a unit with a face amount of $10.00 comprised of (a) a purchase contract under which (i) the holder purchased a number of shares of Philadelphia Consolidated Holding Corp. common stock on May 16, 2001 (equal to ..3858 shares per FELINE PRIDES(SM) under the terms specified in the stock purchase contract and (ii) the Company paid 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 following table presents certain information regarding the Company's stock option plan.
Directors Stock Purchase Plan ("Directors Plan"): The Directors Plan has been established 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. Under the Directors Plan, the Company issued 3,325 and 2,237 shares in 2003 and 2002, respectively. The weighted-average fair value of those purchase rights granted in 2003 and 2002 was $5.96 and $5.63, respectively.
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 75% 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 four years of service. The Company's total contributions to the plan were $0.9 million, $0.8 million and $0.6 million in 2003, 2002, and 2001, respectively.
The Company sponsors an unfunded nonqualified key employee deferred compensation plan. Under the plan deferred compensation benefits are provided through deferrals of base salary and bonus compensation ("Employee Deferrals") and discretionary contributions by the Company ("Employer Contributions") for a select group of management and highly compensated employees of the Company and its subsidiaries. Each participant is permitted to specify an investment or investments from among permissible investments which shall be the basis for determining the gain or loss adjustment applicable to such participant's plan deferral account. A participant's interest in the portion of his or her plan deferral account that is attributable to Employee Deferrals are fully vested at all times. That portion of a participant's plan deferral account attributable to Employer Contributions generally will vest over the course of a five year period beginning on the last day of the first year after the plan year for which the Employer Contribution was made. The amounts in each participant's plan deferral account represent an obligation of the Company to pay the participant at some time in the future. The Company had a deferred compensation obligation pursuant to the plan amounting to $1.8 million and $0.7 million as of December 31, 2003 and 2002, respectively.
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, 2003 were as follows (in thousands):
At December 31, 2003 the Company has open commitments of $2.3 million under certain limited partnership and information technology development agreements.
The following quarterly financial information for each of the three months ended March 31, June 30, September 30 and December 31, 2003 and 2002 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):
(1) Net Realized Investment (Gain) Loss for the three months ended March 31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003 includes non-cash realized losses of $1.5 million, $1.7 million, $0.4 million and $6.7 million, respectively, as a result of impairment evaluations.
(3) During the three months ended June 30, 2002, a 2001 accident year aggregate stop loss reinsurance program was commuted. As a result of this commutation, net earned premiums and net income increased by $3.6 million and $2.3 million, respectively.
(4) Net Realized Investment Gain (Loss) for the three months ended June 30, 2002, September 30, 2002 and December 31, 2002 includes non-cash realized losses of $1.2 million, $0.3 million, and $2.2 million, respectively, as a result of impairment evaluations.
The Company's operations are classified into three reportable business segments which are organized around its three underwriting divisions: The Commercial Lines Underwriting Group which has underwriting responsibility for the Commercial Automobile and Commercial Property and Commercial multi-peril package insurance products; The Specialty Lines Underwriting Group which has underwriting responsibility for the professional liability insurance products; and The Personal Lines Group which designs, markets and underwrites personal property and casualty insurance products for the Manufactured Housing and Homeowners markets. Each business segment's responsibilities include: pricing, managing the risk selection process, and monitoring the loss ratios by product and insured. The reportable segments operate solely within the United States and have not been aggregated.