(2) 1996 earnings per share amounts restated in accordance with the provisions of SFAS No. 128 adopted as of December 31, 1997.
In July 2000, the Board of Directors authorized the repurchase of an additional $10.0 million of the Company's common stock. This authorization was in addition to the previous $30.0 million stock repurchase authorization. As of December 31, 2000 approximately $27.8 million of common stock had been repurchased since the initial authorization.
For 2001, A.M. Best Company reaffirmed the "A+" (Superior) rating for Philadelphia Indemnity Insurance Company, Philadelphia Insurance Company, Mobile USA Insurance Company and Liberty American Insurance Company. Additionally, Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company had been assigned an "A" claims paying ability rating by Standard and Poor's for 2000.
Investments consist of diversified issuers and issues, and as of December 31, 2000, approximately 84.2% and 5.2% of the total invested assets, on a cost basis, (total investments plus cash equivalents) consisted of investments in fixed maturity and equity securities, respectively, versus 83.9% and 10.4%, respectively, at December 31, 1999.
During 2000 the Company reduced the relative percentages of total investments in equity holdings through the sale of certain positions in the common stock portfolio realizing approximately $15.1 million in pretax realized investment gains. The decision to sell certain common stock positions was based on the valuation of the individual stock positions and the increased volatility in the overall equity markets. The proceeds from these common stock sales were reinvested in the fixed maturity portfolio. Additionally, the Company increased its relative percentage investments in fixed maturity securities during 2000 through the investing of cash flows from operations.
The respective gross written premium increases for the commercial lines, specialty lines and personal lines segments for the years ended December 31, 2000 vs. December 31, 1999 amount to $38.5 million (19.2%), $19.7 million (40.6%) and $28.8 million (113.4%) respectively. The overall growth in gross written premiums is primarily attributable to the following:
- - Recent rating downgrades of certain major competitor property and casualty insurance companies has led to their diminished presence in the Company's commercial and specialty lines business segments and continues to result in additional prospects and increased premium writings most notably for the Company's various commercial package and non-profit D&O product lines.
- - Overall premium growth in the commercial lines segment has been offset in part by the Company's decision not to renew certain policies in the commercial automobile and specialty property product lines due to inadequate pricing levels being experienced as a result of market conditions and/or loss experience emerging at higher than expected levels.
Net Loss and Loss Adjustment Expenses: Net loss and loss adjustment expenses increased $31.9 million (32.1%) to $131.3 million in 2000 from $99.4 million in 1999 and the loss ratio decreased to 57.8% in 2000 from 60.3% in 1999. The year ended December 31, 1999 included 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 issued in prior periods and $6.1 million for unpaid loss and loss adjustment expenses related to property catastrophe losses. Excluding these items, net loss and loss adjustment expenses increased by $43.0 million (48.7%) and the loss ratio for the year ending December 31, 1999 was 53.6%. This increase in net loss and loss adjustment expenses was due principally to the following:
- - 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.
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.
The Company believes that it can continue its premium growth in its commercial and specialty lines segments due to the disruption in the market place caused by consolidation activity and certain distressed situations along with the improving fundamentals in the property and casualty industry, resulting in the opportunity for rate increases. The Company also believes its unique product features and mixed marketing strategy 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, Liberty, the Company's platform for its personal lines property and casualty business, is targeting its new preferred homeowners product and expansion of its personal lines business into new states as sources of premium growth in addition to seeking premium growth in its current markets.
The Company also anticipates cross selling opportunities to arise between its personal and commercial lines business niches as well as cross selling opportunities within its preferred agency base for its portfolio of commercial niche insurance products.
In November 2000, the Company entered into an unsecured revolving credit facility for aggregate borrowings of up to $22.0 million. During 2000, $22.0 million of the facility was utilized by the Company to pay a withholding tax liability as a result of the CEO electing to have shares otherwise issuable pursuant to the exercise by the CEO of various stock options withheld in satisfaction of the minimum withholding tax attributable to the exercise of the stock options. As a result of the stock option exercise, the Company generated a $22.5 million tax benefit of which $8.6 million of prior year tax payments were received during January 2001. During the first quarter 2001 the Company repaid all aggregate borrowings under this revolving credit facility utilizing the aforementioned $8.6 million tax recovery along with the settlement of other intercompany tax balances.
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, 2000, the investment and cash balances in such trust accounts totaled approximately $10.9 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, 2000, the balance on deposit for the benefit of such policyholders totaled approximately $12.5 million.
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 1.4-to-1.0 and 1.0-to-1.0 for 2000 and 1999, respectively. Management believes that the policyholders' surplus, which was $193.3 million at December 31, 2000, will be sufficient to support current and anticipated premium writings.
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.
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 adopted the provisions of SFAS No. 133 as of January 1, 2001. At December 31, 2000 and 1999, the Company held no derivative financial instruments nor imbedded financial derivatives. The Company's FELINE PRIDES(SM) have been grandfathered under the current accounting guidance and are therefore not subject to the provisions of SFAS No. 133. The Company does not currently utilize derivatives in its investment or risk management strategy.
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 was 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 adopted 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.
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.
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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, 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.
February 7, 2001, except for certain information in Note 9 as to which the date is February 20, 2001
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.
Investments are considered impaired when the Company determines a decline in value to be other than temporary. Accordingly, a decline is recorded as a charge to income in the period this determination is made.
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 and comprehensive income was $60.4 million, $46.5 million, and $30.0 million for the years ended December 31, 2000, 1999, and 1998, respectively.
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.
Goodwill amounted to $30.8 million and $28.8 million at December 31, 2000 and 1999, 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 $1.5 million in 2000, $0.8 million in 1999, and $0.1 million in 1998. Goodwill was increased $3.5 million as of December 31, 2000 as an estimate of the contingent additional purchase price for the Liberty acquisition.
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, 2000 the Company held no derivative financial instruments nor imbedded financial derivatives. The Company's FELINE PRIDES(SM) have been grandfathered under the current accounting guidance and are therefore not subject to the provisions of SFAS No. 133. The Company does not currently utilize derivatives in its investment or risk management strategy.
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, as applicable. 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/or the State of Florida. The principal differences between SAP and GAAP are as follows:
- Under SAP, certain assets, designated as "Non-admitted Assets" (such as prepaid expenses) are charged against surplus.
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 2001 without prior approval is $24.6 million. Dividends paid for the years ended December 31, 2000 and 1999 were $0 and $17.5 million, 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, 2000 is in excess of the prescribed risk-based capital requirements.
The Company invests primarily in investment grade fixed maturities which possessed an average lowest quality rating of AA at December 31, 2000. The cost, gross unrealized gains and losses, estimated market value and carrying value of investments as of December 31, 2000 and 1999 are as follows (in thousands):
The cost and estimated market value of fixed maturity securities at December 31, 2000, 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.
Realized pre-tax gains (losses) on the sale of investments for the years ended December 31, 2000, 1999, and 1998 are as follows (in thousands):
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, 2000 and 1999, the carrying value on deposit totaled $12.5 million and $12.3 million, respectively.
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, 2000 and 1999 the carrying value of these trust fund investments were $10.9 million and $10.6 million, respectively.
The following table summarizes property and equipment at December 31, 2000 and 1999 (dollars in thousands):
Included in property and equipment are costs incurred in developing or purchasing information systems technology of $5.4 million and $3.5 million in 2000 and 1999, respectively. Amortization of these costs was $0.6 million, $0.3 million and $0.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. Depreciation expense, excluding amortization of capitalized information systems technology costs, was $1.4 million, $1.5 million and $1.2 million, for the years ended December 31, 2000, 1999, and 1998, respectively.
Activity in the liability for Unpaid Loss and Loss Adjustment Expenses is summarized as follows (in thousands):
As a result of changes in estimates of insured events in prior years, the Company increased losses and loss adjustment expenses incurred by $2.5 million in 2000. Such development was primarily due to losses emerging at a higher rate for the 1997 and 1998 accident years than had been originally anticipated for certain products in the commercial lines segment when the initial reserves were estimated.
During the first quarter 2001 the Company repaid all aggregate borrowings and cancelled the commitment under this revolving credit facility.
Income taxes recoverable amounted to $13.3 million and $0.8 million at December 31, 2000 and 1999, respectively. Of the 2000 amount, $8.6 million of prior year tax payments were received during January 2001. The Company anticipates carrying forward the remaining recoverable amount to reduce future taxable income. Such carryforwards expire in 2020.
Preferred Agents Stock Purchase Plan ("Preferred Agents Plan"): The Preferred Agents Plan has been established for the benefit of eligible Preferred Agents. The aggregate maximum number of shares that may be issued pursuant to the Preferred Agents Plan is 200,000. Eligible Preferred Agents during designated offering periods may either remit cash or have the Company withhold from commissions or other compensation amounts to be used for the purchase of shares under the terms of the Preferred Agents 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 Preferred Agents Plan, the Company issued 13,528 shares in 2000. The weighted-average fair value of those purchase rights granted in 2000 was $2.48.
The loss and loss adjustment expense reserves ceded under such arrangements were $42.0 million and $26.7 million at December 31, 2000 and 1999, 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 99.2% and 100.0% as of December 31, 2000 and 1999, respectively. Additionally, approximately 4%, 4% and 1% of the Company's net written premiums for the years ended December 31, 2000, 1999, and 1998, respectively, were assumed from an unrelated reinsurance company.
At December 31, 2000, 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, 2000 were as follows (in thousands):
The following quarterly financial information for each of the three months ended March 31, June 30, September 30 and December 31, 2000 and 1999 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):