The Company leases certain office space in Bala Cynwyd, PA which serves as its headquarters location and also leases 36 offices for its field marketing organization.
(1) 1996 share data restated to reflect a two-for-one split of the Company's common stock distributed in November 1997.
The Company continued its track record of growth through adherence to its core philosophies of specialization, mixed marketing and profitable underwriting. 2000 gross written premiums increased 31.6% to $361.9 million; 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 90.8%, which, once again, was substantially lower than the property and casualty industry as a whole; total assets increased to $730.5 million; and shareholders' equity increased to $182.3 million.
Written premium growth occurred in all three of the Company's operating segments, including most notably the personal lines segment which grew to 15% of total gross written premium, or $54.2 million from the approximately $32.0 million of annualized manufactured housing, homeowners and national flood insurance program gross written premiums which were acquired through the 1999 acquisition of Liberty American Insurance Group, Inc. ("Liberty"). This growth occurred primarily from writing business directly which had previously been brokered to other insurance companies by Liberty due to its pre acquisition surplus limitations. The introduction of a new "preferred homeowners" insurance program targeted to retirees in gated communities with newer constructed homes and a program for newly constructed manufactured homes on private property also contributed to the growth.
Also, during 2000 the relative percentage investment in taxable fixed maturity securities versus tax-exempt fixed maturity securities continued to increase due to the Company taking advantage of the more favorable after-tax yields. At the end of 2000, on a cost basis, investment grade taxable fixed maturity securities represented 66.5% of the total invested assets, compared to 52.7% as of the end of 1999.
Collateralized mortgage and asset backed securities, on a cost basis, amounted to $65.6 million and $106.8 million, respectively, as of December 31, 2000 and $48.5 and $39.4, respectively, as of December 31 1999. The increased investment in collateralized mortgage and asset backed securities was due to the relatively higher after tax rates of return compared to other investment options within the Company's investment objective of generating competitive after-tax total rates of return within a prudent level of risk and 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 collateralized mortgage and asset backed investments are shorter tranche securities possessing favorable prepayment risk profiles. The Company utilizes professional investment managers for its investments.
Premiums: Gross written premiums grew $87.0 million (31.6%) to $361.9 million in 2000 from $274.9 million in 1999; gross earned premiums grew $82.4 million (33.5%) to $328.4 million in 2000 from $246.0 million in 1999; net written premiums increased $79.3 million (43.1%) to $263.4 million in 2000 from $184.1 million in 1999; and net earned premiums grew $62.4 million (37.8%) to $227.3 million in 2000 from $164.9 million in 1999.
Net Investment Income: Net investment income approximated $25.8 million in 2000 and $20.7 million in 1999. Total investments grew to $437.3 million at December 31, 2000 from $393.8 million at December 31, 1999. The growth in investment income is due primarily to investing net cash flows provided from operating activities; the net investable assets acquired in the Company's acquisition of Liberty; the reinvestment of $31.4 million in proceeds from the net decrease in common stock holdings which were reinvested into fixed maturity securities; and the increase in the Company's tax equivalent book yield on its fixed income holdings to 7.37% at December 31, 2000 versus 7.08% at December 31, 1999. The Company's average duration on its fixed income portfolio approximated 3.5 years at December 31, 2000 and 4.0 years at December 31, 1999.
- - The increase in the loss ratio due to the relatively higher net earned premium growth on products (specialty lines) with higher relative loss experience; and
Other Operating Expenses: Other operating expenses increased $5.8 million to $14.7 million in 2000 from $8.9 million for 1999. The increase in other operating expenses was primarily due to the inclusion of the operating expenses of Liberty's brokered personal lines business ($4.2 million), and goodwill amortization ($.7 million) arising from the acquisition of Liberty. Such expenses have been incurred for the entire year ending December 31, 2000, while the 1999 expenses include the period from the July 1999 acquisition date to December 31, 1999. Prospectively the Company anticipates operating expenses on brokered personal lines business to significantly decrease as the Company discontinues brokering activities in favor of writing the business directly.
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 PRIDES(SM) security offering for the entire year, net cash flows provided from operating activities, and the investable assets acquired in the Company's acquisition.
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.
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, 2000, payments to PCHC pursuant to such tax allocation agreements totaled $12.3 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 $96.6 million at December 31, 2000. Of this amount, the insurance subsidiaries are entitled to pay a total of approximately $24.6 million of dividends in 2001 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 among the insurance subsidiaries to support their respective participation percentages in this intercompany reinsurance 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.
The Company produced net cash from operations of $47.0 million in 2000, $47.4 million in 1999 and $50.2 million in 1998. 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
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, Liberty American Premium Finance Company; and an investment subsidiary, PCHC Investment Corp. The Company designs, markets, and underwrites specialty commercial and personal 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; select classes of professional liability; and personal property and casualty insurance products for the manufactured housing and homeowners markets. All marketing, underwriting, claims management, investment, and general administration is provided by the underwriting manager and managing general agency.
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 $4.1 million, ($2.8) million and $4.1 million in 2000, 1999 and 1998, respectively. The related tax effect of Reclassification Adjustments was $4.1 million, $2.0 million, and $0.2 million in 2000, 1999 and 1998, respectively.
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 Liberty American 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. Additionally, goodwill was increased $3.5 million as of December 31, 2000 as an estimate for the contingent additional amount pending final determination of this amount. The 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 $32.7 million. This amount represents the excess of acquisition costs over the fair value of net assets acquired.
- 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 reserves are established in amounts which differ from amounts which would be provided in conformity with GAAP.
Financial Information: The statutory capital and surplus of the Insurance Subsidiaries as of December 31, 2000 and 1999 was $193.3 million and $179.3 million, respectively. Statutory net income for the years ended December 31, 2000, 1999 and 1998 was $26.2 million, $19.2 million, and $16.1 million, respectively. Capital contributions for the years ended December 31, 2000 and 1999 were $0 and $17.5 million, respectively.
The Company had no debt or equity investments in a single issuer totaling in excess of 10% of shareholders' equity at December 31, 2000.
The sources of net investment income for the years ended December 31, 2000, 1999, and 1998 are as follows (in thousands):
There are no investments in fixed maturity securities that were non-income producing during the years ended December 31, 2000, 1999, and 1998. Investment expense includes $182,000, $212,000, and $189,000, in investment management fees paid to a director of the Company in 2000, 1999, and 1998, respectively. These transactions are in the ordinary course of business at negotiated prices comparable to those of transactions with other investment advisors.
The carrying value of property and equipment is reviewed for recoverability based on an evaluation of the estimated useful life of such assets.
(2) 1999 Adjusted to include $1,148 reinsurance recoverables for Mobile USA Insurance Company as of acquisition date.
The composition of deferred tax assets and liabilities and the related tax effects as of December 31, 2000 and 1999 are as follows (in thousands):
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.
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 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 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 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 PRIDES(SM)) 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.
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. For the three year period ended December 31, 2000, $27.8 million was utilized by the Company to repurchase its common stock under its stock repurchase authorization.
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 granted prior to January 1, 1995 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.
Employee Stock Purchase Plan (the "Stock Purchase Plan"): The aggregate maximum number of shares that may be issued pursuant to the Stock Purchase Plan as amended is 1,000,000. 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 54,463 and 112,228 shares in 2000 and 1999, respectively. The weighted-average fair value of those purchase rights granted in 2000 and 1999 was $3.08 and $2.52, respectively.
The fair value of options at date of grant was estimated using the Black-Scholes valuation model with the following weighted-average assumptions:
On July 20, 2000, the Company's Board of Directors increased the authorization for the Company to repurchase up to a total of $40.0 million of its common stock. For the three year period ended December 31, 2000, the Company repurchased 1.8 million shares for approximately $27.8 million under this authorization.
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 $0.6 million, $0.3 million and $0.4 million in 2000, 1999, and 1998, respectively.
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.