homeowners and rental dwelling policies providing windstorm coverage which expired between June 15, 2007 and December 31, 2007. This reduction was imposed to reduce our exposure to catastrophe wind losses.
For structured securities where the possibility of credit loss is other than remote, changes in expected cash flows are recognized on the prospective method over the remaining life of the security. Under the prospective method, revisions to cash flows are reflected in a higher or lower effective yield in future periods and there are no adjustments to the security’s book value. Various assumptions are used to estimate projected cash flows and projected book yields based upon the most recent month end market prices. These assumptions include, but are not limited to, prepayment rates, default rates, and loss severities.
The most significant actuarial assumptions used in determining our loss reserves are:
Increase/(Decrease) to actuarially determined reserve estimate gross of reinsurance and before taxes ($ millions):
Pre-tax share-based compensation expense related to stock options and SARS was $9.9 million and $7.3 million, for the years ended December 31, 2007 and 2006, respectively. Pre-tax share-based compensation expense related to restricted stock grants and employee and director stock purchase plans was $5.6 million and $2.7 million for the years ended December 31, 2007 and 2006, respectively.
The specialty lines segment in-force policy counts increased by 26.2% for the year ended December 31, 2007.
An increase in price competition during the twelve months ended December 31, 2007, particularly with respect to the following:
These increases were offset in part by a decrease in state insurance guaranty fund assessments.
Income Tax Expense: Our effective tax rate for the years ended December 31, 2006 and 2005 was 33.5% and 34.9%, respectively. The effective rate for 2006 differed from the 35% statutory rate principally due to investments in tax-exempt securities. The effective tax rate for 2005 differed from the 35% statutory rate principally due to investments in tax-exempt securities, offset by the non-deductible goodwill impairment loss.
are spread across multiple vintages (origination year of underlying collateral pool), and
Under certain reinsurance agreements, we are required to maintain investments in trust accounts to secure our reinsurance obligations (primarily the payment of losses and loss adjustment expenses on business we do not write directly). As of December 31, 2007, the investment and cash balances in such trust accounts totaled approximately $1.3 million. In addition, various insurance departments of states in which we operate require the deposit of funds to protect policyholders within those states. As of December 31, 2007, the balance on deposit for the benefit of such policyholders totaled approximately $15.7 million.
Our Insurance Subsidiaries, which operate under intercompany reinsurance pooling agreements, must have certain levels of surplus to support premium writings. Guidelines of the National Association of Insurance Commissioners (“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 our Insurance Subsidiaries to their combined policyholders’ surplus was 1.1-to-1.0 and 1.3-to-1.0 for 2007 and 2006, respectively.
Consolidated Statements of Changes in Shareholders’ Equity - For the Years Ended December 31, 2007, 2006 and 2005
Supplementary Information Concerning Property-Casualty Insurance Operations As of and For the Years Ended December 31, 2007, 2006 and 2005
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, statements of changes in shareholders’ equity, and statements of cash flows, present fairly, in all material respects, the financial position of Philadelphia Consolidated Holding Corp. and its subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index appearing under Item 15 present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying index appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
The Company regularly performs impairment reviews with respect to its investments. For investments other than interests in securitized assets, these reviews include identifying any security whose fair value is below its cost and an analysis of securities meeting predetermined impairment thresholds to determine whether such decline is other than temporary. If the Company does not intend to hold a security to maturity or 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 investment loss in the period the impairment arose. This evaluation resulted in non-cash realized investment losses of $7.9 million, $8.8 million and $2.2 million for the years ended December 31, 2007, 2006 and 2005, respectively. The Company’s impairment review also includes an impairment evaluation for interests in securitized assets conducted in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board. This evaluation resulted in no non-cash realized investment losses for the years ended December 31, 2007, 2006 or 2005.
The Company’s preferred agents are eligible to receive profit sharing based upon achieving minimum premium production thresholds and profitability results for their business placed during a particular contract year with the Company. The ultimate amount of profit sharing may not be known until the final contractual loss evaluation of the profit sharing is completed 6.5 years after the contract year business has been written. The Company estimates the liability for this profit sharing based upon the contractual provisions of the profit sharing agreement and the Company’s actual historical profit sharing payout. As of December 31, 2007, the Company accrued a profit sharing liability of $33.7 million, of which $32.2 million relates to business written for contract years commencing January 1, 2004 and subsequent. As of December 31, 2006, the Company accrued a profit sharing liability of $21.9 million, of which $20.6 million relates to business written for contract years commencing January 1, 2003 and subsequent.
The following table identifies the period of time securities with an unrealized loss as of December 31, 2007 have continuously been in an unrealized loss position. None of the amounts displayed in the table are due to non-investment grade fixed maturity securities. No issuer of securities or industry represents more than 3.8% and 19.9%, respectively, of the total estimated fair value, or 9.0% and 20.5%, respectively, of the total gross unrealized loss included in the table below. The industry concentration as a percentage of total estimated fair value represents investments in a geographically diversified pool of investment grade Municipal securities issued by states, political subdivisions, and public authorities under general obligation and/or special district/purpose issuing authority. The industry concentration as a percentage of the total gross unrealized loss primarily represents investments in equity securities issued by companies in the Diversified Financial Services industry.
During 2006, the Company’s gross loss on the sale of fixed maturity and equity securities amounted to $1.7 million and $7.0 million, respectively. The fair value of the fixed maturity and equity securities at the time of sale was $185.2 million and $40.5 million, respectively. During 2005, the Company’s gross loss on the sale of fixed maturity and equity securities amounted to $0.9 million and $5.5 million, respectively. The fair value of the fixed maturity and equity securities at the time of sale was $63.6 million and $56.5 million, respectively.
General liability and commercial automobile and commercial property coverages due to better than expected case incurred loss development, primarily as a result of both claim frequency and severity emergence being less than anticipated.
Two of the Company’s insurance subsidiaries are members of the Federal Home Loan Bank of Pittsburgh (“FHLB”). A primary advantage of FHLB membership is the ability of members to access credit products from a reliable capital markets provider. The availability of any one member’s access to credit is based upon its FHLB eligible collateral. The borrowing capacity will provide an immediately available line of credit. As of December 31, 2007 and 2006, the insurance subsidiaries had no borrowings outstanding, and the unused borrowing capacity was $708.4 million as of December 31, 2007.
The Credit Agreement contains various representations, covenants and events of default typical for credit facilities of this type. As of December 31, 2007, the Company was in compliance with all covenants contained in the Credit Agreement.
The Company and other insurance companies writing residential property policies in Florida must participate in the Florida Hurricane Catastrophe Fund (“FHCF”). If the FHCF does not have sufficient funds to pay its ultimate reimbursement obligations to participating insurance companies, it has the authority to issue bonds, which are funded by assessments on generally all property and casualty premiums in Florida. By law, these assessments are the obligation of insurance policyholders, which insurance companies must collect. The FHCF assessments are limited to 6% of premiums per year beginning the first year in which reimbursements require bonding, and up to a total of 10% of premiums per year for assessments in the second and subsequent years, if required to fund additional bonding. Upon the order of the Florida Office of Insurance Regulation (“FLOIR”), companies are required to collect the FHCF assessments directly from their policyholders and remit them to the FHCF as they are collected.
Net Realized Investment Gain (Loss) for the three months ended March 31, 2007, June 30, 2007, September 30, 2007 and December 31, 2007 includes non-cash realized losses of $2.5 million, $0.1 million, $1.1 million, and $4.2 million, respectively, as a result of impairment evaluations.