UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|
|
|
þ
|
|
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
|
For the Quarterly Period Ended September 30, 2008
Commission File Number 0-22280
PHILADELPHIA CONSOLIDATED HOLDING CORP.
(Exact name of registrant as specified in its charter)
|
|
|
PENNSYLVANIA
|
|
23-2202671
|
|
|
|
(State of Incorporation)
|
|
(IRS Employer Identification No.)
|
One Bala Plaza, Suite 100
Bala Cynwyd, Pennsylvania 19004
(610) 617-7900
(Address, including zip code and telephone number,
including area code, of registrants principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES:
þ
NO:
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act.
(Check only):
|
|
|
|
|
|
|
Large accelerated filer:
þ
|
|
Accelerated Filer:
o
|
|
Non-accelerated Filer:
o
|
|
Smaller reporting company:
o
|
|
|
|
(Do not check if a smaller reporting company)
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
YES:
o
NO:
þ
Indicate the number of shares outstanding of each of the issuers classes of common stock as of
October 31, 2008.
Common Stock, no par value, 71,788,892 shares outstanding
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX
For the Quarterly Period Ended September 30, 2008
|
|
|
|
|
Part I Financial Information
|
|
|
|
|
|
Item 1. Financial Statements:
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
4
|
|
|
|
|
|
5
|
|
|
|
|
|
6
|
|
|
|
|
|
7 - 28
|
|
|
|
|
|
29 - 51
|
|
|
|
|
|
52
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
54
|
|
|
|
|
|
54
|
|
|
|
|
|
54
|
|
|
|
|
|
55
|
|
|
|
|
|
55
|
|
|
|
|
|
55
|
|
|
|
|
|
55
|
|
|
|
|
|
56
|
|
2
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
September 30,
|
|
|
|
|
|
|
2008
|
|
|
December 31,
|
|
|
|
(Unaudited)
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
|
|
INVESTMENTS:
|
|
|
|
|
|
|
|
|
FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $2,863,583 AND $2,639,471)
|
|
$
|
2,778,992
|
|
|
$
|
2,659,197
|
|
EQUITY SECURITIES AT MARKET (COST $357,918
AND $322,877)
|
|
|
352,053
|
|
|
|
356,026
|
|
|
|
|
|
|
|
|
|
TOTAL INVESTMENTS
|
|
|
3,131,045
|
|
|
|
3,015,223
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
|
152,050
|
|
|
|
106,342
|
|
ACCRUED INVESTMENT INCOME
|
|
|
31,249
|
|
|
|
24,964
|
|
PREMIUMS RECEIVABLE
|
|
|
433,958
|
|
|
|
378,217
|
|
PREPAID
REINSURANCE PREMIUMS AND REINSURANCE RECEIVABLES
|
|
|
376,263
|
|
|
|
280,110
|
|
DEFERRED INCOME TAXES
|
|
|
115,303
|
|
|
|
42,855
|
|
DEFERRED ACQUISITION COSTS
|
|
|
205,838
|
|
|
|
184,446
|
|
PROPERTY AND EQUIPMENT, NET
|
|
|
20,870
|
|
|
|
26,330
|
|
OTHER ASSETS
|
|
|
349,879
|
|
|
|
41,451
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
4,816,455
|
|
|
$
|
4,099,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
POLICY LIABILITIES AND ACCRUALS:
|
|
|
|
|
|
|
|
|
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
|
|
$
|
1,733,936
|
|
|
$
|
1,431,933
|
|
UNEARNED PREMIUMS
|
|
|
962,472
|
|
|
|
847,485
|
|
|
|
|
|
|
|
|
TOTAL POLICY LIABILITIES AND ACCRUALS
|
|
|
2,696,408
|
|
|
|
2,279,418
|
|
PREMIUMS PAYABLE
|
|
|
97,196
|
|
|
|
97,674
|
|
OTHER LIABILITIES
|
|
|
416,079
|
|
|
|
175,373
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
3,209,683
|
|
|
|
2,552,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK, $.01 PAR VALUE, 10,000,000 SHARES AUTHORIZED,
NONE ISSUED AND OUTSTANDING
|
|
|
|
|
|
|
|
|
COMMON
STOCK, NO PAR VALUE 125,000,000 SHARES AUTHORIZED, 71,783,778 AND
72,087,287 SHARES ISSUED AND OUTSTANDING ,
|
|
|
412,184
|
|
|
|
423,379
|
|
NOTES RECEIVABLE FROM SHAREHOLDERS
|
|
|
(21,487
|
)
|
|
|
(19,595
|
)
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
(58,796
|
)
|
|
|
34,369
|
|
RETAINED EARNINGS
|
|
|
1,274,871
|
|
|
|
1,109,320
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
|
1,606,772
|
|
|
|
1,547,473
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
|
|
$
|
4,816,455
|
|
|
$
|
4,099,938
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
3
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months
|
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET EARNED PREMIUMS
|
|
$
|
408,512
|
|
|
$
|
359,149
|
|
|
$
|
1,180,937
|
|
|
$
|
1,015,182
|
|
NET INVESTMENT INCOME
|
|
|
33,273
|
|
|
|
30,199
|
|
|
|
97,577
|
|
|
|
85,694
|
|
NET REALIZED INVESTMENT GAIN (LOSS)
|
|
|
(17,852
|
)
|
|
|
2,817
|
|
|
|
(40,759
|
)
|
|
|
32,638
|
|
OTHER INCOME
|
|
|
870
|
|
|
|
980
|
|
|
|
5,877
|
|
|
|
2,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL REVENUE
|
|
|
424,803
|
|
|
|
393,145
|
|
|
|
1,243,632
|
|
|
|
1,136,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSSES AND EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS AND LOSS ADJUSTMENT EXPENSES
|
|
|
330,726
|
|
|
|
146,389
|
|
|
|
820,218
|
|
|
|
479,142
|
|
NET REINSURANCE RECOVERIES
|
|
|
(96,887
|
)
|
|
|
(1,584
|
)
|
|
|
(169,690
|
)
|
|
|
(35,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS AND LOSS ADJUSTMENT EXPENSES
|
|
|
233,839
|
|
|
|
144,805
|
|
|
|
650,528
|
|
|
|
443,899
|
|
ACQUISITION COSTS AND OTHER
UNDERWRITING EXPENSES
|
|
|
117,640
|
|
|
|
101,252
|
|
|
|
347,275
|
|
|
|
299,902
|
|
OTHER OPERATING EXPENSES
|
|
|
4,314
|
|
|
|
2,992
|
|
|
|
12,279
|
|
|
|
9,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LOSSES AND EXPENSES
|
|
|
355,793
|
|
|
|
249,049
|
|
|
|
1,010,082
|
|
|
|
752,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
69,010
|
|
|
|
144,096
|
|
|
|
233,550
|
|
|
|
383,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (BENEFIT):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
|
|
|
24,931
|
|
|
|
53,198
|
|
|
|
90,281
|
|
|
|
146,528
|
|
DEFERRED
|
|
|
(5,888
|
)
|
|
|
(5,346
|
)
|
|
|
(22,282
|
)
|
|
|
(19,908
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL INCOME TAX EXPENSE
|
|
|
19,043
|
|
|
|
47,852
|
|
|
|
67,999
|
|
|
|
126,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
49,967
|
|
|
$
|
96,244
|
|
|
$
|
165,551
|
|
|
$
|
256,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS), NET
OF TAX:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HOLDING LOSS ARISING DURING PERIOD
|
|
$
|
(63,044
|
)
|
|
$
|
21,727
|
|
|
$
|
(119,658
|
)
|
|
$
|
18,688
|
|
RECLASSIFICATION ADJUSTMENT
|
|
|
11,604
|
|
|
|
(1,831
|
)
|
|
|
26,493
|
|
|
|
(21,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
(51,440
|
)
|
|
|
19,896
|
|
|
|
(93,165
|
)
|
|
|
(2,527
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS)
|
|
$
|
(1,473
|
)
|
|
$
|
116,140
|
|
|
$
|
72,386
|
|
|
$
|
254,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PER AVERAGE SHARE DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME BASIC
|
|
$
|
0.71
|
|
|
$
|
1.37
|
|
|
$
|
2.36
|
|
|
$
|
3.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME DILUTED
|
|
$
|
0.68
|
|
|
$
|
1.30
|
|
|
$
|
2.27
|
|
|
$
|
3.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING
|
|
|
69,996,068
|
|
|
|
70,457,765
|
|
|
|
70,084,248
|
|
|
|
70,323,834
|
|
WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING
|
|
|
3,602,386
|
|
|
|
3,599,654
|
|
|
|
2,884,758
|
|
|
|
3,856,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING
|
|
|
73,598,454
|
|
|
|
74,057,419
|
|
|
|
72,969,006
|
|
|
|
74,180,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
4
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
September 30, 2008
|
|
|
For the Year Ended
|
|
|
|
(Unaudited)
|
|
|
December 31, 2007
|
|
COMMON SHARES:
|
|
|
|
|
|
|
|
|
BALANCE AT BEGINNING OF YEAR
|
|
|
72,087,287
|
|
|
|
70,848,482
|
|
ISSUANCE OF SHARES PURSUANT TO
STOCK PURCHASE PLANS, NET
|
|
|
853,897
|
|
|
|
491,416
|
|
ISSUANCE OF SHARES PURSUANT TO STOCK
BASED COMPENSATION PLANS
|
|
|
195,794
|
|
|
|
747,389
|
|
LESS: TREASURY SHARES ACQUIRED
|
|
|
(1,353,200
|
)
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT END OF PERIOD
|
|
|
71,783,778
|
|
|
|
72,087,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMON STOCK:
|
|
|
|
|
|
|
|
|
BALANCE AT BEGINNING OF YEAR
|
|
$
|
423,379
|
|
|
$
|
376,986
|
|
ISSUANCE OF SHARES PURSUANT TO STOCK
PURCHASE PLANS, NET
|
|
|
5,067
|
|
|
|
16,448
|
|
EFFECTS OF ISSUANCE OF SHARES PURSUANT TO STOCK
BASED COMPENSATION PLANS
|
|
|
26,639
|
|
|
|
29,155
|
|
OTHER
|
|
|
|
|
|
|
790
|
|
LESS: COST OF TREASURY SHARES ACQUIRED
|
|
|
(42,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT END OF PERIOD
|
|
|
412,184
|
|
|
|
423,379
|
|
|
|
|
|
|
|
|
|
NOTES RECEIVABLE FROM SHAREHOLDERS:
|
|
|
|
|
|
|
|
|
BALANCE AT BEGINNING OF YEAR
|
|
|
(19,595
|
)
|
|
|
(17,074
|
)
|
NOTES RECEIVABLE ISSUED PURSUANT TO
EMPLOYEE STOCK PURCHASE PLANS
|
|
|
(4,883
|
)
|
|
|
(8,466
|
)
|
COLLECTION OF NOTES RECEIVABLE
|
|
|
2,968
|
|
|
|
5,945
|
|
OTHER
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT END OF PERIOD
|
|
|
(21,487
|
)
|
|
|
(19,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF DEFERRED INCOME TAXES:
|
|
|
|
|
|
|
|
|
BALANCE AT BEGINNING OF YEAR
|
|
|
34,369
|
|
|
|
24,848
|
|
OTHER COMPREHENSIVE INCOME (LOSS),
|
|
|
|
|
|
|
|
|
NET OF TAXES
|
|
|
(93,165
|
)
|
|
|
9,521
|
|
|
|
|
|
|
|
|
BALANCE AT END OF PERIOD
|
|
|
(58,796
|
)
|
|
|
34,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RETAINED EARNINGS:
|
|
|
|
|
|
|
|
|
BALANCE AT BEGINNING OF YEAR
|
|
|
1,109,320
|
|
|
|
782,507
|
|
NET INCOME
|
|
|
165,551
|
|
|
|
326,813
|
|
|
|
|
|
|
|
|
BALANCE AT END OF PERIOD
|
|
|
1,274,871
|
|
|
|
1,109,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS EQUITY
|
|
$
|
1,606,772
|
|
|
$
|
1,547,473
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
5
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
165,551
|
|
|
$
|
256,625
|
|
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
NET REALIZED INVESTMENT (GAIN) LOSS
|
|
|
40,759
|
|
|
|
(32,638
|
)
|
GAIN ON SALE OF PROPERTY AND EQUIPMENT
|
|
|
(1,174
|
)
|
|
|
|
|
AMORTIZATION OF INVESTMENT PREMIUMS, NET OF DISCOUNT
|
|
|
7,779
|
|
|
|
4,414
|
|
AMORTIZATION OF INTANGIBLE ASSETS
|
|
|
3,104
|
|
|
|
2,217
|
|
DEPRECIATION
|
|
|
6,517
|
|
|
|
5,755
|
|
DEFERRED INCOME TAX BENEFIT
|
|
|
(22,282
|
)
|
|
|
(19,908
|
)
|
CHANGE IN PREMIUMS RECEIVABLE
|
|
|
(55,741
|
)
|
|
|
(59,645
|
)
|
CHANGE IN PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES, NET OF FUNDS HELD PAYABLE TO REINSURER
|
|
|
(96,153
|
)
|
|
|
(4,051
|
)
|
CHANGE IN ACCRUED INVESTMENT INCOME
|
|
|
(6,285
|
)
|
|
|
(4,220
|
)
|
CHANGE IN DEFERRED ACQUISITION COSTS
|
|
|
(21,392
|
)
|
|
|
(29,339
|
)
|
CHANGE IN INCOME TAXES PAYABLE
|
|
|
(6,646
|
)
|
|
|
8,085
|
|
CHANGE IN OTHER ASSETS
|
|
|
(27,684
|
)
|
|
|
8,459
|
|
CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
|
|
|
302,003
|
|
|
|
111,596
|
|
CHANGE IN UNEARNED PREMIUMS
|
|
|
114,987
|
|
|
|
112,484
|
|
CHANGE IN OTHER LIABILITIES
|
|
|
12,434
|
|
|
|
36,503
|
|
FAIR VALUE OF STOCK BASED COMPENSATION
|
|
|
12,664
|
|
|
|
11,341
|
|
EXCESS TAX BENEFIT FROM ISSUANCE OF SHARES PURSUANT TO
STOCK BASED COMPENSATION PLANS
|
|
|
(5,737
|
)
|
|
|
(4,368
|
)
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
422,704
|
|
|
|
403,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
PROCEEDS FROM SALES OF INVESTMENTS IN FIXED MATURITIES
|
|
|
91,336
|
|
|
|
185,559
|
|
PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED MATURITIES
|
|
|
206,772
|
|
|
|
183,600
|
|
PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY SECURITIES
|
|
|
55,837
|
|
|
|
213,854
|
|
COST OF FIXED MATURITIES ACQUIRED
|
|
|
(678,871
|
)
|
|
|
(725,502
|
)
|
COST OF EQUITY SECURITIES ACQUIRED
|
|
|
(111,979
|
)
|
|
|
(241,526
|
)
|
PROCEEDS FROM SALE OF PROPERTY AND EQUIPMENT, NET
|
|
|
3,825
|
|
|
|
|
|
PURCHASE OF PROPERTY AND EQUIPMENT, NET
|
|
|
(3,708
|
)
|
|
|
(5,569
|
)
|
PAYMENT FOR ACQUISITION OF GILLINGHAM & ASSOCIATES INC.,
|
|
|
|
|
|
|
|
|
NET OF CASH ACQUIRED
|
|
|
(32,881
|
)
|
|
|
|
|
PURCHASE OF OTHER INTANGIBLES
|
|
|
(11,159
|
)
|
|
|
(12,726
|
)
|
|
|
|
|
|
|
|
NET CASH USED FOR INVESTING ACTIVITIES
|
|
|
(480,828
|
)
|
|
|
(402,310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
REPAYMENTS ON LOANS
|
|
|
(45,000
|
)
|
|
|
|
|
PROCEEDS FROM LOANS
|
|
|
175,558
|
|
|
|
|
|
PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS
|
|
|
7,287
|
|
|
|
4,604
|
|
PROCEEDS FROM COLLECTION OF SHAREHOLDER NOTES RECEIVABLE
|
|
|
2,969
|
|
|
|
3,574
|
|
PROCEEDS FROM SHARES ISSUED PURSUANT TO STOCK PURCHASE PLANS
|
|
|
182
|
|
|
|
269
|
|
EXCESS TAX BENEFIT FROM ISSUANCE OF SHARES PURSUANT TO
STOCK BASED COMPENSATION PLANS
|
|
|
5,737
|
|
|
|
4,368
|
|
COST OF COMMON STOCK REPURCHASED
|
|
|
(42,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
103,832
|
|
|
|
12,815
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
45,708
|
|
|
|
13,815
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
106,342
|
|
|
|
108,671
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
152,050
|
|
|
$
|
122,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH TRANSACTIONS:
|
|
|
|
|
|
|
|
|
ISSUANCE OF SHARES PURSUANT TO EMPLOYEE STOCK
PURCHASE PLANS IN EXCHANGE FOR NOTES RECEIVABLE
|
|
$
|
4,883
|
|
|
$
|
3,287
|
|
The accompanying notes are an integral part of the consolidated financial statements.
6
PHILADELPHIA
CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The consolidated financial statements for the quarterly period ended September 30, 2008 are
unaudited, but in the opinion of management have been prepared on the same basis as the annual
audited consolidated financial statements and reflect all adjustments, consisting of normal
recurring adjustments and accruals, necessary for a fair statement of the information set forth
therein. The results of operations for the nine months ended September 30, 2008 are not
necessarily indicative of the operating results to be expected for the full year or any other
period.
These consolidated financial statements should be read in conjunction with the financial
statements and notes included in the Companys Annual Report on Form 10-K as of and for the year
ended December 31, 2007.
2. Fair Value Measurements
On January 1, 2008, the Company adopted the provisions of Financial Accounting Standards Board
(FASB) Statement No. 157
Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value
and provides a consistent framework for measuring items at fair value as previously permitted by
existing accounting pronouncements. SFAS 157 provides a fair value hierarchy which
prioritizes the quality of inputs used when measuring items at fair value and requires expanded
disclosures for fair value measurements.
On February 12, 2008, SFAS 157 was amended by FASB Staff Position No. FAS 157-2 Effective
Date
of FASB Statement No. 157
(FSP FAS 157-2). FSP FAS 157-2 delayed the effective date of SFAS
157 for non-financial assets and non-financial liabilities which are measured at fair value on a
nonrecurring basis. Non-financial assets and non-financial liabilities which are measured at
fair value on a recurring basis (i.e. at least annually) are not subject to this deferral. This
deferral is effective until fiscal years beginning after November 15, 2008 and interim periods
within those fiscal years. At that time, provisions of SFAS 157 will apply to non-financial
assets and non-financial liabilities which are measured at fair value on a non-recurring basis.
As of September 30, 2008, the Company has no non-financial assets or non-financial liabilities
that are measured at fair value on a recurring basis. The Company is currently evaluating the
impact of measuring non-financial assets and non-financial liabilities on a non-recurring basis.
On October 10, 2008, SFAS 157 was amended by FASB Staff Position No. FAS 157-3
Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active
(FSP FAS 157-3).
FSP FAS 157-3, effective immediately, clarifies the application of SFAS 157 in inactive markets.
It also clarifies that the use of internal management assumptions about future cash flows,
which are discounted with appropriate risk adjusted discount rates, is an acceptable fair value
measurement technique when relevant observable market information does not exist. However, FSP
FAS 157-3 reiterates that the objective of fair value measurements under SFAS 157 is to
determine the price that would be received by a holder of a financial asset in an orderly
transaction between market participants, which is defined as the exit price, that is not a
forced liquidation or distressed sale at the measurement date. As of September 30, 2008, the
Company has fully adopted the provisions of FSP FAS 157-3, which did not have a significant
impact on the Companys financial statements or disclosures.
The Companys financial assets consist of its investments in fixed maturity and equity
securities, and cash equivalents. The Company accounts for its fixed maturity and equity
securities assets at fair value under FASB Statement No. 115
Accounting for Certain Investments
in Debt and Equity Securities
(SFAS 115). No cumulative effect adjustment to the opening
balance of retained earnings as of January 1, 2008 was required as the result of the adoption of
SFAS 157. As of September 30, 2008, the Company has no liabilities required to be measured at
fair value in accordance with the provisions of SFAS 157.
7
SFAS 157 Valuation Techniques:
SFAS 157 provides three acceptable valuation techniques that should be used to measure fair
value. The following is a brief description of these valuation techniques:
Market Approach Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities to measure fair value.
Income Approach Uses valuation techniques to convert future amounts (i.e. cash flows or
earnings) to a single discounted present value amount to measure fair value.
Cost Approach Uses the cost that would currently be required to replace the service
capacity of an asset (current replacement cost) to measure fair value.
Fair Value Hierarchy to SFAS 157 Valuation Techniques:
The SFAS 157 fair value hierarchy provides three priority levels to the inputs used in the
valuation techniques described above when determining a fair value measurement. The following
represents a brief description of the three priority levels to the inputs in the fair value
hierarchy:
Level 1 Represents inputs that are observable unadjusted quoted market prices for
identical financial assets in active markets.
Level 2 Represents inputs that are observable unadjusted quoted market prices for similar
assets or liabilities in active markets, quoted market prices for identical assets in
inactive markets, inputs other than quoted market prices that are observable for the asset
such as interest rates or yield curves, or other inputs derived principally from or
corroborated from other observable market information.
Level 3 Represents inputs that are unobservable, including the Companys own
determinations of the assumptions that a market participant would use in pricing the asset.
The fair value hierarchy gives the highest priority to observable inputs represented by quoted
prices in active markets for identical assets or liabilities (Level 1 input) and the lowest
priority to unobservable inputs primarily based upon a Companys own internal determinations of
the assumptions that a market participant would use in pricing the asset or liability (Level 3
input). The Company determines a market to be active if securities have traded on it within
the last 7 business days.
SFAS 157 Recurring Fair Value Measurements:
The following is a description of the Companys recurring fair value measurements and
categorization of the inputs used in the recurring fair value measurements of its financial
assets included in its Consolidated Balance Sheets as of September 30, 2008:
Fixed Maturity Securities The Companys fixed maturity securities consist of investments
in US treasury securities and obligations of US government corporations and agencies,
obligations of states and political subdivisions, corporate and bank debt securities, asset
backed securities, mortgage pass-through securities, and collateralized mortgage
obligations. The fair value of the Companys fixed maturity securities is primarily
determined using quoted market prices in active markets (US treasury securities) or Matrix
Pricing. Matrix pricing relies on observable inputs from active markets other than
quoted market prices including, but not limited to, benchmark securities and yields, latest
reported trades, quotes from brokers or dealers, issuer spreads, bids, offers, and other
relevant reference data to determine fair value. Matrix pricing is used to measure the
fair value of fixed maturity securities where obtaining individual quoted market prices is
impractical. The Company also holds one investment grade asset backed security which is
measured using broker pricing obtained from the lead manager of the issue. The broker
pricing used to measure this security relies on unobservable inputs and assumptions and may
include the brokers evaluation of, collateral performance including payment speeds,
delinquencies, defaults and recoveries, and
8
any market clearing activity or liquidity circumstances in the security or benchmark
securities that may have occurred since the prior pricing period. The Company classifies
the fair value measurement of its investments in US treasury securities within Level 1 of
the fair value hierarchy. The Company classifies the fair value measurement of all other
fixed maturity securities within Level 2 of the fair value hierarchy, with the exception
of the one asset backed security described above, which is classified within Level 3 of the
fair value hierarchy due to the Companys reliance on the brokers unobservable inputs
when determining its fair value. The Companys external fixed maturity investment manager
also assists the Company with the categorization of these inputs within the SFAS 157 fair
value hierarchy based upon their internal SFAS 157 policies and procedures, approved by
their internal pricing committee.
Equity Securities The Companys equity securities consist of investments in the common
stock of companies traded on active or inactive stock exchange markets, an investment in an
international equity fund owning international equity securities, and investments in limited
partnerships. The fair value of the Companys equity securities is determined as follows:
Investments in Common Stock The closing price of one share of the common stock
traded on active or inactive exchange markets at the measurement date. The Company
classifies the fair value measurement of its investments in common stock within Level
1 or Level 2 of the fair value hierarchy.
Investment in an international equity fund The net asset value of the fund at the
measurement date obtained from the investment manager, calculated using the value of
the assets owned and liabilities incurred at the measurement date multiplied by the
Companys percentage of ownership in the fund. The Company assumes a market
participant would consider the calculation of the value of the Companys percentage
of ownership of the net asset value of the fund to be its fair value at the
measurement date. The Company classifies the fair value measurement of its
investment in an international equity fund within Level 3 of the fair value
hierarchy.
Investments in limited partnerships The net asset value of the limited partnership
at the measurement date obtained from the investment manager, calculated using the
value of the assets owned and liabilities incurred at the measurement date multiplied
by the Companys percentage of ownership in the limited partnership. The Company
assumes a market participant would consider the value resulting from the calculation
of the Companys percentage of ownership of the net asset value of the limited
partnerships to be its fair value at the measurement date. The Company classifies
the fair value measurement of its investments in limited partnerships within Level 3
of the fair value hierarchy.
Cash Equivalents The Companys cash equivalents consist of investments in money market
mutual funds traded on active exchange markets and short-term Federal Home Loan Bank
(FHLB) discount notes offered through the FHLB discount window, regularly scheduled FHLB
Office of Finance auctions or through financial institution secondary market trading desks.
The fair value of the Companys investments in money market mutual funds is determined using
closing prices of the money market mutual funds traded on active exchange markets at the
measurement date. The Company classifies the fair value measurement of its investments in
money market mutual funds within Level 1 of the fair value hierarchy. The fair value of
the Companys investments in short-term FHLB discount notes is determined based on
observable market inputs available from the FHLB Office of Finance. The Company classifies
the fair value measurement of its short-term discount notes within Level 2 of the fair
value hierarchy.
In the event that the inputs utilized to measure a financial asset at fair value fall within
different levels of the fair value hierarchy, the Company uses the lowest level of the most
significant input utilized to categorize the measurement within the fair value hierarchy.
Consequently, a fair value measurement categorized as having Level 3 inputs may also contain
Level 1 or Level 2 inputs. The Company has consistently applied these valuation techniques
during the nine months ended September 30, 2008.
The following table represents the Companys fair value hierarchy for all assets measured on a
recurring basis as of September 30, 2008:
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of September 30, 2008 Utilizing:
|
(In Thousands)
|
|
|
Quoted Prices
|
|
|
|
|
|
|
|
|
|
|
Active Markets
|
|
|
|
|
|
Significant
|
|
|
|
|
Identical Assets
|
|
Significant Other
|
|
Unobservable
|
|
|
|
|
Observable Inputs
|
|
Observable Inputs
|
|
Inputs
|
|
|
Description
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Total
|
|
US Treasury Securities and
Obligations of US Government
Corporations and Agencies
|
|
$
|
9,460
|
|
|
$
|
4,001
|
|
|
$
|
|
|
|
$
|
13,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of States and
Political
Subdivisions
|
|
|
|
|
|
|
1,681,310
|
|
|
|
|
|
|
|
1,681,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Bank Debt
Securities
|
|
|
|
|
|
|
144,807
|
|
|
|
|
|
|
|
144,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Backed Securities
|
|
|
|
|
|
|
250,376
|
|
|
|
8,978
|
|
|
|
259,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Pass-Through Securities
|
|
|
|
|
|
|
408,689
|
|
|
|
|
|
|
|
408,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized Mortgage
Obligations
|
|
|
|
|
|
|
271,371
|
|
|
|
|
|
|
|
271,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities
Available
For Sale at Market
|
|
$
|
9,460
|
|
|
$
|
2,760,554
|
|
|
$
|
8,978
|
|
|
$
|
2,778,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities at Market
|
|
|
313,085
|
|
|
|
11,705
|
|
|
|
27,263
|
|
|
|
352,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents
|
|
|
109,201
|
|
|
|
73,980
|
|
|
|
|
|
|
|
183,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value Measurements
|
|
$
|
431,746
|
|
|
$
|
2,846,239
|
|
|
$
|
36,241
|
|
|
$
|
3,314,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Fair Value
Measurements
|
|
|
13.0
|
%
|
|
|
85.9
|
%
|
|
|
1.1
|
%
|
|
|
100.0
|
%
|
|
On at least a quarterly basis, the Company reviews the fair value hierarchy classifications
for its financial assets measured at fair value on a recurring basis. Changes in the
observability of the inputs used to calculate the fair value of these financial assets may
result in a reclassification of these financial assets within the fair value hierarchy. Any
significant reclassifications impacting Level 3 inputs of the fair value hierarchy will be
reported as transfers in or out of the Level 3 category as of the beginning of the quarter in
which the reclassification occurred. Gains or losses for assets categorized with Level 3
inputs may include changes in fair value that are attributable to both observable Level 1 and
Level 2 inputs and unobservable Level 3 inputs.
Fair Value Measurements Utilizing Level 3 Inputs:
The $9.0 million of asset backed securities measured utilizing Level 3 inputs included in the
table above represents one security as described previously.
The $27.3 million of equity securities measured utilizing Level 3 inputs included in the table
above primarily consists of a $23.3 million investment in an international equity fund owning
international equity securities, and $3.8 million of investments in limited partnerships.
The following tables represent a summary of the changes in the fair value of the Companys
assets measured on a recurring basis using Level 3 inputs as of and for the three and nine
months ended September 30, 2008:
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Utilizing Significant Unobservable (Level 3) Inputs:
|
(In Thousands)
|
|
|
|
|
|
|
Collateralized
|
|
|
|
|
|
|
Asset Backed
|
|
Mortgage
|
|
Equity
|
|
|
|
|
Securities
|
|
Obligations
|
|
Securities
|
|
Total
|
|
For The Three Months Ended September 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance as of July 1, 2008:
|
|
$
|
19,161
|
|
|
$
|
|
|
|
$
|
22,394
|
|
|
$
|
41,555
|
|
Total gains or loss (realized/unrealized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
Included in Other Comprehensive Income
|
|
|
(208
|
)
|
|
|
|
|
|
|
(7,232
|
)
|
|
|
(7,440
|
)
|
Purchases, issuances, settlements
|
|
|
(26
|
)
|
|
|
(10
|
)
|
|
|
12,101
|
|
|
|
12,065
|
|
Transfers in and/or out of Level 3
|
|
|
(9,949
|
)
|
|
|
14
|
|
|
|
|
|
|
|
(9,935
|
)
|
|
Ending Balance as of September 30, 2008:
|
|
$
|
8,978
|
|
|
$
|
|
|
|
$
|
27,263
|
|
|
$
|
36,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Nine Months Ended September 30,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance as of January 1, 2008:
|
|
$
|
10,511
|
|
|
$
|
121
|
|
|
$
|
11,505
|
|
|
$
|
22,137
|
|
Total gains or loss (realized/unrealized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
1
|
|
|
|
(16
|
)
|
|
|
(795
|
)
|
|
|
(810
|
)
|
Included in Other Comprehensive Income
|
|
|
(1,043
|
)
|
|
|
47
|
|
|
|
(9,094
|
)
|
|
|
(10,090
|
)
|
Purchases, issuances, settlements
|
|
|
9,796
|
|
|
|
(26
|
)
|
|
|
25,647
|
|
|
|
35,417
|
|
Transfers in and/or out of Level 3
|
|
|
(10,287
|
)
|
|
|
(126
|
)
|
|
|
|
|
|
|
(10,413
|
)
|
|
Ending Balance as of September 30, 2008:
|
|
$
|
8,978
|
|
|
$
|
|
|
|
$
|
27,263
|
|
|
$
|
36,241
|
|
Realized gains and losses included in earnings for the three and nine months ended September 30,
2008 are reported as net realized investment gain (loss). During the three and nine months
ended September 30, 2008, the Company recorded $4,000 and $810,000, respectively, of net
realized investment losses on its assets measured at fair value on a recurring basis utilizing
Level 3 inputs within the net realized investment gain (loss) line of revenues.
For the three and nine months ended September 30, 2008, the Company has not included any gains
or losses in earnings that are attributable to the change in unrealized gains or losses relating
to assets still held as of September 30, 2008. Due to the fact that the Companys investment
portfolio is classified as available for sale under SFAS 115, unrealized gains and losses are
recorded as a component of other comprehensive income rather than earnings.
SFAS 159 Fair Value Option for Eligible Financial Assets and Liabilities:
On January 1, 2008, the provisions of Statement No. 159 The Fair Value Options for Financial
Assets and Financial Liabilities (SFAS 159) also became effective. The purpose of SFAS 159
is to expand the use of fair value measurements by providing entities with the option of
measuring certain financial assets and liabilities at fair value, which were previously measured
on a basis other than fair value under existing accounting pronouncements. The Company did not
elect the fair value option under SFAS 159 for any of its eligible financial instruments as of
September 30, 2008.
3. Investments
As a result of the systemic financial, credit and liquidity crises impacting financial and
capital markets across the world and virtually all asset classes, the Company expects fixed
income and equity markets, in general, to continue to experience more volatility than during
most prior historical reporting periods. As of September 30, 2008, the Company had $7.5 million
in non-cash realized fixed maturity security investment losses and $34.7 million in non-cash
realized equity security investment losses relating to these market conditions as a result of
the Companys impairment evaluations. The Company expects that ongoing volatility in these
sectors, in particular, and in spread related sectors, in general, will continue to impact the
prices of securities held in the
11
Companys average AA+ rated investment portfolio, including its average AAA rated structured
securities portfolio.
Impairment Reviews as of September 30, 2008:
The Company regularly performs impairment reviews with respect to its investments. There are
certain risks and uncertainties inherent in the Companys impairment methodology, including, but
not limited to, the financial condition of specific industry sectors and the resultant effect on
any such underlying security collateral values and changes in accounting, tax, and/or regulatory
requirements which may have an effect on either, or both, the investor and/or the issuer. 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, for investments other than interests in securitized assets, resulted
in non-cash realized investment losses of $18.8 million and $1.1 million, respectively, for the
three months ended September 30, 2008 and 2007, and $42.2 million and $3.7 million,
respectively, for the nine months ended September 30, 2008 and 2007. The Companys 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 FASB. As a
result of the Companys impairment evaluation for investments in securitized assets, there were
no non-cash realized investment losses recorded for the three or nine months ended September 30,
2008 or 2007.
The following table identifies the period of time securities with an unrealized loss as of
September 30, 2008 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 3.5% and 22.3%, respectively, of the total estimated
fair value, or 6.3% and 18.9%, 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.
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
|
|
$
|
727
|
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
727
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of States and
Political Subdivisions
|
|
|
1,059,676
|
|
|
|
50,305
|
|
|
|
157,596
|
|
|
|
16,478
|
|
|
|
1,217,272
|
|
|
|
66,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Bank Debt Securities
|
|
|
104,961
|
|
|
|
7,708
|
|
|
|
5,397
|
|
|
|
355
|
|
|
|
110,358
|
|
|
|
8,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Backed Securities
|
|
|
240,745
|
|
|
|
10,982
|
|
|
|
12,983
|
|
|
|
1,573
|
|
|
|
253,728
|
|
|
|
12,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Pass-Through Securities
|
|
|
212,878
|
|
|
|
2,577
|
|
|
|
24,312
|
|
|
|
671
|
|
|
|
237,190
|
|
|
|
3,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized Mortgage Obligations
|
|
|
100,352
|
|
|
|
4,756
|
|
|
|
20,249
|
|
|
|
1,719
|
|
|
|
120,601
|
|
|
|
6,475
|
|
|
Total Fixed Maturities
Available for Sale
|
|
|
1,719,339
|
|
|
|
76,336
|
|
|
|
220,537
|
|
|
|
20,796
|
|
|
|
1,939,876
|
|
|
|
97,132
|
|
|
Equity Securities
|
|
|
156,327
|
|
|
|
33,011
|
|
|
|
|
|
|
|
|
|
|
|
156,327
|
|
|
|
33,011
|
|
|
Total Investments
|
|
$
|
1,875,666
|
|
|
$
|
109,347
|
|
|
$
|
220,537
|
|
|
$
|
20,796
|
|
|
$
|
2,096,203
|
|
|
$
|
130,143
|
|
|
The Companys impairment evaluation as of September 30, 2008 for fixed maturities available for
sale excluding interests in securitized assets resulted in the following conclusions:
U.S.
Treasury Securities and Obligations of U.S. Government
Agencies:
The unrealized losses on the Companys investments in U.S. Treasury Securities and
Obligations of U.S. Government Agencies which have ratings of Aaa/AAA are attributable to
the general level of interest rates. Of the 29 investment positions held, approximately
10.3% were in an unrealized loss position as of September 30, 2008.
Obligations of States and Political Subdivisions:
The unrealized losses on the Companys investments in long term tax exempt securities which
have ratings of A1/A to Aaa/AAA, except for one security which has a rating of Baa3/BBB-, are attributable to changes both in market spreads and
in the level of Treasury yields. Of the 990 investment positions held, approximately 66.2%
were in an unrealized loss position. The contractual terms of the investments do not permit
the issuer to settle the securities at a price less than the amortized cost of the
investments. Therefore, it is expected that the securities would not be settled at a price
less than the amortized cost of the investments.
Corporate and Bank Debt Securities:
The unrealized losses on the Companys long term investments in Corporate bonds which have
ratings from Baa3/BBB to Aaa/AAA, except for one security which has a rating of Ca/CCC and
matured on October 6, 2008, are attributable primarily to changes in market spreads. Of the
64 investment positions held, approximately 70.3% were in an unrealized loss position. The
contractual terms of the investments do not permit the issuer to settle the securities at a
price less than the amortized cost of the investments. Therefore, it is expected that the
securities would not be settled at a price less than the amortized cost of the investments.
The Companys impairment evaluation as of September 30, 2008 for interests in securitized assets
resulted in the following conclusions:
Asset Backed Securities:
The unrealized losses on the Companys investments in Asset Backed Securities which have
ratings of Baa2/BBB to Aaa/AAA are attributable primarily to changes in market spreads. Of
the 114 investment
13
positions held, approximately 90.4% were in an unrealized loss position. The contractual
terms of the investments do not permit the issuer to settle the security at a price less
than the amortized cost of the investments. Therefore, it is expected that the securities
would not be settled at a price less than the amortized cost of the investments.
Mortgage Pass-Through Securities:
The unrealized losses on the Companys investments in U.S. government agency issued Mortgage
Pass-Through Securities which have ratings of Aaa/AAA are attributable primarily to changes
in market spreads. Of the 128 investment positions held, approximately 44.5% were in an
unrealized loss position. The contractual terms of the investments do not permit the issuer
to settle the security at a price less than the amortized cost of the investments.
Therefore, it is expected that the securities would not be settled at a price less than the
amortized cost of the investments.
Collateralized Mortgage Obligations:
The unrealized losses on the Companys investments in Collateralized Mortgage Obligations
which have ratings of Aa2/AA+ to Aaa/AAA are attributable primarily to changes in market
spreads. Of the 165 investment positions held, approximately 41.8% were in an unrealized
loss position. The contractual terms of the investments do not permit the issuer to settle
the security at a price less than the amortized cost of the investments. Therefore, it is
expected that the securities would not be settled at a price less than the amortized cost of
the investments.
The Companys impairment evaluation as of September 30, 2008 for equity securities resulted in
the conclusion that the Company does not consider the equity securities remaining in an
unrealized loss position to be other than temporarily impaired. Of the 3,114 investment
positions held, approximately 45.7% were in an unrealized loss position.
Structured Securities Investment Portfolio:
The fair value of the Companys structured securities investment portfolio (Asset Backed,
Mortgage Pass-Through and Collateralized Mortgage Obligation securities) amounted to $939.4
million as of September 30, 2008. AAA rated securities represented approximately 98.2% of the
September 30, 2008 structured securities portfolio. Approximately $688.8 million of the
structured securities investment portfolio is backed by residential collateral, consisting of:
|
|
|
$407.8 million of U.S. government agency backed Mortgage Pass-Through Securities;
|
|
|
|
|
$195.9 million of U.S. government agency backed Collateralized Mortgage Obligations;
|
|
|
|
|
$67.9 million of non-U.S. government agency Collateralized Mortgage Obligations backed
by pools of prime loans (generally consists of loans made to the highest credit quality
borrowers with Fair Isaac Corporation (FICO) scores generally greater than 720);
|
|
|
|
|
$14.4 million of structured securities backed by pools of ALT A loans (loans with less
than normal documentation and borrowers with FICO scores in the approximate range of 650 to
the low 700s); and
|
|
|
|
|
$2.8 million of structured securities backed by pools of subprime loans (loans with low
documentation, higher combined loan-to-value ratios and borrowers with FICO scores capped
at approximately 650).
|
The Companys $17.2 million ALT-A and subprime loan portfolio includes 19 securities with net
unrealized losses of $1.6 million as of September 30, 2008. These securities have the following
characteristics:
|
|
|
first to pay or among the first cash flow tranches of their respective transactions;
|
|
|
|
|
weighted average life of 1.6 years;
|
|
|
|
|
spread across multiple vintages (origination year of underlying collateral pool); and
|
|
|
|
|
an average AAA rating, with one holding experiencing a rating downgrade by Moodys
during the current quarter to A2 from Aaa based on increased delinquencies and lower
coverage levels. Based on the Companys analysis of the collateral underlying the
security, the Company expects to receive full return of its investment.
|
14
The Companys ALT-A and subprime loan portfolio has paid down to $17.2 million as of September
30, 2008 from $27.6 million as of December 31, 2007, and $35.7 million as of September 30, 2007.
As of September 30, 2008, the Company holds no investments in Collateralized Debt Obligations or
Net Interest Margin securities.
Amortized Cost of Structured Securities:
For mortgage and asset-backed securities (structured securities) of high credit quality rated
AA- and higher, changes in expected cash flows are recognized using the retrospective method.
Under the retrospective method, the effective yield on a security is recalculated each period
based upon future expected and past actual cash flows. The securitys book value is restated
based upon the most recently calculated effective yield, assuming such yield had been in effect
from the securitys purchase date. The retrospective method results in an increase or decrease
to investment income (amortization of premium or discount) at the time of each recalculation.
Future expected cash flows consider various prepayment assumptions, as well as current market
conditions. These assumptions include, but are not limited to, prepayment rates, default rates,
and loss severities.
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 securitys 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.
Cash flow assumptions for structured securities are obtained from a primary market provider of
such information. These assumptions represent a market based best estimate of the amount and
timing of estimated principal and interest cash flows based on current information and events.
Prepayment assumptions for asset/mortgage backed securities consider a number of factors in
estimating the prepayment activity, including, but not limited to, seasonality (the time of the
year), refinancing incentive (current level of interest rates), economic activity (including
housing turnover) and burnout/seasoning (term and age of the underlying collateral).
Municipal Bond Portfolio:
The Companys average AA+ rated $1,681.3 million municipal bond portfolio includes $1,046.3
million of insured securities, or 62.2% of the Companys total municipal bond portfolio. The
average underlying rating of the insured portion of the Companys municipal bond portfolio is AA
and the average underlying rating of the uninsured portion of the Companys municipal bond
portfolio is AA+. The following table represents the Companys insured bond portfolio by
monoline insurer as of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value of
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Insured Municipal
|
|
|
Percentage of
|
|
|
Underlying Rating of
|
|
|
|
Bonds
|
|
|
Municipal Bond
|
|
|
Insured Municipal
|
|
Monoline Insurer
|
|
(In Thousands)
|
|
|
Portfolio
|
|
|
Bonds
|
|
Financial Security Assurance, Inc.
|
|
$
|
341,014
|
|
|
|
20.3
|
%
|
|
AA
|
MBIA, Inc.
|
|
|
308,069
|
|
|
|
18.3
|
|
|
AA
|
FGIC Corporation.
|
|
|
208,117
|
|
|
|
12.4
|
|
|
AA-
|
AMBAC Financial Group, Inc.
|
|
|
178,252
|
|
|
|
10.6
|
|
|
AA-
|
Berkshire Hathaway Assurance
Company
|
|
|
4,696
|
|
|
|
0.3
|
|
|
|
A+
|
|
XL Capital, LTD.
|
|
|
4,157
|
|
|
|
0.2
|
|
|
|
A
|
|
Assured Guaranty Corp.
|
|
|
1,966
|
|
|
|
0.1
|
|
|
|
A
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,046,271
|
|
|
|
62.2
|
%
|
|
AA
|
15
At the time of purchase, each municipal bond is evaluated with regard to certain
characteristics, including, but not limited to, the issuer, the underlying obligation and/or the
revenue pledge/collateral. The presence of any financial guarantee insurance is not an
attribute used in the purchase decision. The Company considers the financial guarantee
insurance to be additional protection. As of September 30, 2008, the Company had no
impairments or surveillance issues related to these insured municipal bonds.
Impairment Reviews as of December 31, 2007:
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Fair Value
|
|
Losses
|
|
Fair Value
|
|
Losses
|
|
|
|
Fair Value
|
|
|
Losses
|
|
|
(In Thousands)
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,670
|
|
|
$
|
21
|
|
|
|
|
|
|
$
|
5,670
|
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of States and
Political Subdivisions
|
|
|
294,719
|
|
|
|
2,377
|
|
|
|
203,427
|
|
|
|
1,006
|
|
|
|
|
|
|
|
498,146
|
|
|
|
3,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Bank Debt Securities
|
|
|
7,835
|
|
|
|
33
|
|
|
|
58,709
|
|
|
|
570
|
|
|
|
|
|
|
|
66,544
|
|
|
|
603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Backed Securities
|
|
|
50,574
|
|
|
|
138
|
|
|
|
13,989
|
|
|
|
81
|
|
|
|
|
|
|
|
64,563
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Pass-Through Securities
|
|
|
68,691
|
|
|
|
366
|
|
|
|
128,382
|
|
|
|
1,493
|
|
|
|
|
|
|
|
197,073
|
|
|
|
1,859
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized Mortgage Obligations
|
|
|
30,731
|
|
|
|
236
|
|
|
|
65,252
|
|
|
|
725
|
|
|
|
|
|
|
|
95,983
|
|
|
|
961
|
|
|
Total Fixed Maturities
Available for Sale
|
|
|
452,550
|
|
|
|
3,150
|
|
|
|
475,429
|
|
|
|
3,896
|
|
|
|
|
|
|
|
927,979
|
|
|
|
7,046
|
|
|
Equity Securities
|
|
|
118,095
|
|
|
|
22,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,095
|
|
|
|
22,159
|
|
|
Total Investments
|
|
$
|
570,645
|
|
|
$
|
25,309
|
|
|
$
|
475,429
|
|
|
$
|
3,896
|
|
|
|
|
|
|
$
|
1,046,074
|
|
|
$
|
29,205
|
|
|
The Companys impairment evaluation as of December 31, 2007 for fixed maturities available for
sale excluding interests in securitized assets resulted in the following conclusions:
US Treasury Securities and Obligations of U.S. Government Agencies:
The unrealized losses on the Companys Aaa/AAA rated investments in U.S. Treasury Securities
and Obligations of U.S. Government Agencies are attributable to interest rate fluctuations
since the date of purchase. Of the 30 investment positions held, approximately 26.7% were in
an unrealized loss position. The contractual terms of the investments do not permit the issuer
to settle the securities at a price less than the amortized cost of the investments.
Therefore, it is expected that the securities would not be settled at a price less than the
amortized cost of the investments.
Obligations of States and Political Subdivisions:
The unrealized losses on the Companys investments in long term tax exempt securities which
have ratings of A1/A+ to Aaa/AAA are attributable to the spread widening. Of the 873
investment positions held, approximately 32.8% were in an unrealized loss position. The
contractual terms of the investments do not
16
permit the issuer to settle the securities at a price less than the amortized cost of the
investments. Therefore, it is expected that the securities would not be settled at a price
less than the amortized cost of the investments.
Corporate and Bank Debt Securities:
The unrealized losses on the Companys long term investments in Corporate bonds which have
ratings from Baa3/BBB to Aaa/AAA are attributable to the spread widening. Of the 73
investment positions held, approximately 79.5% were in an unrealized loss position. The
contractual terms of the investments do not permit the issuer to settle the securities at a
price less than the amortized cost of the investments. Therefore, it is expected that the
securities would not be settled at a price less than the amortized cost of the investments.
The Companys impairment evaluation as of December 31, 2007 for interests in securitized assets
resulted in the following conclusions:
Asset Backed Securities:
The unrealized losses on the Companys investments in Asset Backed Securities which have
ratings from A2/A to Aaa/AAA are attributable to the spread widening. Of the 116 investment
positions held, approximately 40.5% were in an unrealized loss position. The contractual terms
of the investments do not permit the issuer to settle the security at a price less than the
amortized cost of the investments. Therefore, it is expected that the securities would not be
settled at a price less than the amortized cost of the investments.
Mortgage Pass-Through Securities:
The unrealized losses on the Companys investments in U.S. Government Agency Issued Mortgage
Pass-Through Securities which have ratings of Aaa/AAA are attributable to the spread widening.
Of the 150 investment positions held the average rating was Aaa/AAA and approximately 38.7%
were in an unrealized loss position. The contractual terms of the investments do not permit
the issuer to settle the security at a price less than the amortized cost of the investments.
Therefore, it is expected that the securities would not be settled at a price less than the
amortized cost of the investments.
Collateralized Mortgage Obligations:
The unrealized losses on the Companys investments in Collateralized Mortgage Obligations
which have ratings of Aa2/AA+ to Aaa/AAA are attributable to the spread widening. Of the 172
investment positions held the average rating was Aaa/AAA and approximately 41.3% were in an
unrealized loss position. The contractual terms of the investments do not permit the issuer
to settle the security at a price less than the amortized cost of the investments. Therefore,
it is expected that the securities would not be settled at a price less than the amortized
cost of the investments.
The Companys impairment evaluation as of December 31, 2007 for equity securities resulted in
the conclusion that the Company does not consider the equity securities to be other than
temporarily impaired. Of the 2,674 investment positions held, approximately 38.4% were in an
unrealized loss position.
Receivables and Payables for Financial Security Sales and Purchases:
As of September 30, 2008 and December 31, 2007, included in Other Assets in the Consolidated
Balance Sheets were $232.4 million and $0.4 million, respectively, of receivables related to
unsettled financial security sales. As of September 30, 2008 and December 31, 2007, included
in Other Liabilities in the Consolidated Balance Sheets were $103.0 million and $0.2 million,
respectively, of payables related to unsettled financial security purchases.
4. Restricted Assets
The Insurance Subsidiaries have investments, principally U.S. Treasury securities and
Obligations of States and Political Subdivisions, on deposit with the various states in which
they are licensed insurers. As of September 30, 2008 and December 31, 2007, the carrying value
of the securities on deposit totaled $15.1 million and $15.7 million, respectively.
17
Additionally, as of September 30, 2008 the Insurance Subsidiaries had $130.6 million of
borrowings outstanding with the FHLB. These borrowings are collateralized by investments,
principally asset backed securities, with a carrying value of $131.2 million as of September 30,
2008. As of December 31, 2007, the Insurance Subsidiaries had no borrowings outstanding or
investments pledged as collateral to FHLB.
5. Liability for Unpaid Loss and Loss Adjustment Expenses
The liability for unpaid loss and loss adjustment expenses reflects the Companys best estimate
for future amounts needed to pay losses and related settlement expenses with respect to insured
events. The process of establishing the liability for property and casualty unpaid loss and loss
adjustment expenses is a complex and imprecise process, requiring the use of informed estimates
and judgments. The liability includes an amount determined on the basis of claim adjusters
evaluations with respect to insured events that have been reported to the Company and an amount
for losses incurred that have not yet 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 it to the Company.
Estimates for unpaid loss and loss adjustment expenses are based on managements assessment of
known facts and circumstances, review of past loss experience and settlement patterns and
consideration of other internal and external factors. These factors include, but are not
limited to, the Companys growth, changes in the Companys operations, and legal, social, and
economic developments. These estimates are reviewed regularly and any resulting adjustments are
made in the accounting period in which the adjustment arose. If the Companys ultimate losses,
net of reinsurance, prove to differ substantially from the amounts recorded as of September 30,
2008, the related adjustments could have a material adverse impact on the Companys financial
condition and results of operations.
Catastrophe Losses:
During the three and nine months ended September 30, 2008, the Company experienced catastrophe
losses attributable to Hurricane Ike impacting its commercial lines segment. Under the
Companys catastrophe reinsurance program, the Company had a $20.0 million pre-tax per
occurrence loss retention for its commercial lines catastrophe losses. For the three and nine
months ended September 30, 2008, the Companys estimated gross and net retained catastrophe
losses attributable to Hurricane Ike were $120.0 million and $21.7 million, respectively.
Changes in Estimated Net Unpaid Loss and Loss Adjustment Expenses for Prior Accident Years:
During the three months ended September 30, 2008, the Company increased (decreased) the
estimated net unpaid loss and loss adjustment expenses for accident years 2007 and prior by the
following amounts:
|
|
|
|
|
(In Millions)
|
|
Net Increase (Decrease)
|
|
Accident Year 2007
|
|
$
|
8.4
|
|
Accident Year 2006
|
|
|
(6.3
|
)
|
Accident Year 2005
|
|
|
(7.1
|
)
|
Accident Years 2004 and prior
|
|
|
(7.2
|
)
|
|
|
|
|
Total
|
|
$
|
(12.2
|
)
|
|
|
|
|
For accident year 2007, the increase in estimated net unpaid loss and loss adjustment expenses
was principally due to higher loss estimates for commercial automobile liability, involuntary
pools and commercial property coverages. The higher loss estimate in commercial automobile
liability and commercial property coverages was due to higher than expected case incurred loss
development, primarily as a result of claim severity being greater than anticipated. Loss
estimates for involuntary pools are reported to the Company by multiple residual market
entities, and reasons for higher or lower estimates vary by entity. These higher loss estimates
were partially offset by lower loss estimates for commercial general liability coverages. The
lower estimate in commercial general liability was due to lower than expected case incurred loss
development, primarily as a result of claim frequency being less than anticipated.
18
For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment expenses
was principally due to lower loss estimates for commercial general liability, and management and
professional liability coverages due to better than expected case incurred loss development,
primarily as a result of claim severity being less than anticipated. These lower loss estimates
were partially offset by higher loss estimates for commercial automobile coverages due to higher
than expected case incurred loss development, primarily as a result of claim severity being
greater than anticipated.
For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment expenses
was principally due to lower loss estimates for commercial general liability, and management
liability and professional liability coverages due to better than expected case incurred loss
development, primarily as a result of claim severity being less than anticipated.
For accident years 2004 and prior, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for commercial general liability,
commercial automobile liability, automobile rental leasing, and professional liability coverages
due to better than expected case incurred loss development, primarily as a result of claim
severity being less than anticipated.
During the nine months ended September 30, 2008, the Company increased (decreased) the estimated
net unpaid loss and loss adjustment expenses for accident years 2007 and prior by the following
amounts:
|
|
|
|
|
(In Millions)
|
|
Net Increase (Decrease)
|
|
Accident Year 2007
|
|
$
|
3.7
|
|
Accident Year 2006
|
|
|
(15.2
|
)
|
Accident Year 2005
|
|
|
(12.4
|
)
|
Accident Years 2004 and prior
|
|
|
(12.7
|
)
|
|
|
|
|
Total
|
|
$
|
(36.6
|
)
|
|
|
|
|
For accident year 2007, the increase in estimated net unpaid loss and loss adjustment expenses
was principally due to higher loss estimates for commercial automobile liability, involuntary
pools, professional liability and commercial property coverages. The higher loss estimates in
commercial automobile liability and commercial property coverages was due to higher than
expected case incurred loss development as a result of both claim frequency and severity being
greater than anticipated. The higher loss estimates in professional liability coverages was
primarily due to higher than expected case incurred loss development, primarily as a result of
claim severity being greater than anticipated. Loss estimates for involuntary pools are
reported to the Company by multiple residual market entities, and reasons for higher or lower
estimates vary by entity. These higher loss estimates were partially offset by lower loss
estimates for commercial general liability and management liability coverages. The lower
estimate in commercial general liability was due to lower than expected case incurred loss
development, primarily as a result of claim frequency being less than anticipated. The lower
estimate in management liability coverages was due to lower than expected case incurred loss
development, primarily as a result of claim severity being less than anticipated.
For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment expenses
was principally due to lower loss estimates for commercial general liability, commercial
property, management and professional liability, and automobile rental leasing coverages. The
lower estimates in commercial general liability and auto rental leasing coverages were due to
better than expected case incurred loss development, primarily as a result of claim frequency
being less than anticipated. The lower estimates in commercial property and management and
professional liability coverages were due to better than expected case incurred loss
development, primarily as a result of claim severity being less than anticipated. These lower
loss estimates were partially offset by higher loss estimates for commercial automobile
coverages due to higher than expected case incurred loss development, primarily as a result of
claim severity being greater than anticipated.
For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment expenses
was principally due to lower loss estimates for commercial general liability, commercial
property, management and
19
professional liability, and automobile rental leasing coverages due to better than expected case
incurred loss development, primarily as a result of claim severity being less than anticipated.
For accident years 2004 and prior, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for commercial general liability,
management and professional liability, and automobile rental leasing coverages due to better
than expected case incurred loss development, primarily as a result of claim severity being less
than anticipated.
6. Shareholders Equity
The Philadelphia Consolidated Holding Corp. Amended and Restated Employees Stock Incentive and
Performance Based Compensation Plan (the Plan) provides incentives and awards to those
employees and members of the Board (participants) largely responsible for the long term
success of the Company. Under the Plan, the Company issued 512,760 and 436,607 stock settled
appreciation rights (SARS) during the nine months ended September 30, 2008 and the year ended
December 31, 2007, respectively. The Company also issued 263,507 and 146,884 shares of
restricted stock awards during the nine months ended September 30, 2008 and the year ended
December 31, 2007, respectively.
7. Stock Repurchase
During the nine months ended September 30, 2008, the Company repurchased 1,353,200 shares of
stock at a cost of $42.9 million under its stock repurchase authorization. As of September 30,
2008, $52.1 million remains available under previous stock purchase authorizations which
aggregated $125.3 million. During the nine months ended September 30, 2007, the Company did not
repurchase any shares of stock under its stock repurchase authorization.
8. Earnings Per Share
Earnings per common share have been calculated by dividing net income for the period by the
weighted average number of common shares and common share equivalents outstanding during the
period. The computation of earnings per share for the three and nine months ended September 30,
2008 and 2007, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Three
|
|
|
As of and For the Nine
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In Thousands, Except Per Share Amounts)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Weighted-Average Common Shares Outstanding
|
|
|
69,996
|
|
|
|
70,458
|
|
|
|
70,084
|
|
|
|
70,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Potential Shares Issuable
|
|
|
3,602
|
|
|
|
3,599
|
|
|
|
2,885
|
|
|
|
3,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Shares and Potential
Shares Issuable
|
|
|
73,598
|
|
|
|
74,057
|
|
|
|
72,969
|
|
|
|
74,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
49,967
|
|
|
$
|
96,244
|
|
|
$
|
165,551
|
|
|
$
|
256,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share
|
|
$
|
0.71
|
|
|
$
|
1.37
|
|
|
$
|
2.36
|
|
|
$
|
3.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share
|
|
$
|
0.68
|
|
|
$
|
1.30
|
|
|
$
|
2.27
|
|
|
$
|
3.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables present stock appreciation rights (SARS) that were outstanding during
2008 or 2007, but were not included in the computation of earnings per share as of or for the
three or nine months ended September 30, 2008 and 2007 because the SARS hypothetical option
price was greater than the average market prices of the Companys common shares for the period:
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Three Months Ended September 30, 2008
|
|
As of and For the Three Months Ended September 30, 2007
|
SARS Outstanding
|
|
|
|
|
|
|
|
|
|
SARS Outstanding
|
|
|
|
|
as of
|
|
Hypothetical
|
|
Expiration Date
|
|
as of
|
|
Hypothetical
|
|
Expiration Date
|
September 30, 2008
|
|
Option Price
|
|
of SAR
|
|
September 30, 2007
|
|
Option Price
|
|
of SAR
|
|
|
|
|
|
|
|
|
|
|
|
30,000
|
|
|
$
|
39.95
|
|
|
September 28, 2016
|
|
|
|
|
|
|
|
|
|
|
|
407,446
|
|
|
$
|
47.52
|
|
|
February 21, 2017
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
$
|
43.44
|
|
|
March 19, 2017
|
|
|
|
|
|
|
|
|
|
|
|
661
|
|
|
$
|
42.41
|
|
|
May 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Nine Months Ended September 30, 2008
|
|
As of and For the Nine Months Ended September 30, 2007
|
SARS Outstanding
|
|
|
|
|
|
|
|
|
|
SARS Outstanding
|
|
|
|
|
as of
|
|
Hypothetical
|
|
Expiration Date
|
|
as of
|
|
Hypothetical
|
|
Expiration Date
|
September 30, 2008
|
|
Option Price
|
|
of SAR
|
|
September 30, 2007
|
|
Option Price
|
|
of SAR
|
407,446
|
|
$
|
47.52
|
|
|
February 21, 2017
|
|
|
407,446
|
|
|
$
|
47.52
|
|
|
February 21, 2017
|
25,000
|
|
$
|
43.44
|
|
|
March 19, 2017
|
|
|
25,000
|
|
|
$
|
43.44
|
|
|
March 19, 2017
|
661
|
|
$
|
42.41
|
|
|
May 1, 2017
|
|
|
661
|
|
|
$
|
42.41
|
|
|
May 1, 2017
|
9. Income Taxes
The Companys liability for its unrecognized tax benefits was $0.1 million and $0.2 million as
of September 30, 2008 and December 31, 2007, respectively. As of September 30, 2008 and
December 31, 2007, the total amount of unrecognized tax benefits that, if recognized, would
affect the effective tax rate was $0.1 million and $0.2 million, respectively. Interest and
penalties accrued for the underpayment of taxes are recorded as a component of income tax
expense. The liability for interest and penalties amounted to $40,000 and $72,000 as of
September 30, 2008 and December 31, 2007, respectively.
The Company and its subsidiaries file Federal and State income tax returns as required. The
Company and its subsidiaries are subject to Federal and State examinations for tax years 2005
through 2007.
The effective tax rate differs from the 35% marginal tax rate principally as a result of
tax-exempt interest income, the dividend received deduction and other differences in the
recognition of revenues and expenses for tax and financial reporting purposes.
10. Reinsurance
In the normal course of business, the Company has entered into various reinsurance contracts
with unrelated reinsurers. The Company participates in such agreements for the purpose of
limiting loss exposure and diversifying business. Reinsurance contracts do not relieve the
Company from its obligations to policyholders. The effect of reinsurance on written and earned
premiums is as follows:
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Three Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
(In Thousands)
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
Direct Business
|
|
$
|
547,608
|
|
|
$
|
453,487
|
|
|
$
|
503,078
|
|
|
$
|
410,264
|
|
Reinsurance Assumed
|
|
|
6,245
|
|
|
|
4,490
|
|
|
|
1,550
|
|
|
|
1,393
|
|
Reinsurance Ceded
|
|
|
(57,304
|
)
|
|
|
(49,465
|
)
|
|
|
(62,138
|
)
|
|
|
(52,508
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums
|
|
$
|
496,549
|
|
|
$
|
408,512
|
|
|
$
|
442,490
|
|
|
$
|
359,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30, 2008
|
|
|
September 30, 2007
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
Direct Business
|
|
$
|
1,434,953
|
|
|
$
|
1,321,317
|
|
|
$
|
1,294,438
|
|
|
$
|
1,181,840
|
|
Reinsurance Assumed
|
|
|
7,266
|
|
|
|
5,915
|
|
|
|
2,816
|
|
|
|
2,931
|
|
Reinsurance Ceded
|
|
|
(141,256
|
)
|
|
|
(146,295
|
)
|
|
|
(178,143
|
)
|
|
|
(169,589
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums
|
|
$
|
1,300,963
|
|
|
$
|
1,180,937
|
|
|
$
|
1,119,111
|
|
|
$
|
1,015,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11. Commitments and Contingencies
Legal Proceedings:
On February 26, 2008, the Company received a complaint filed on February 14, 2008 with the U.S.
District Court for the Southern District of Florida by seven individuals. These individuals
purported to act on behalf of a class of similarly situated persons who had been issued
insurance policies by Liberty American Select Insurance Company, formerly known as Mobile USA
Insurance Company (LASIC). The complaint, which is alleged to be a class action complaint,
was filed against the Company and its subsidiaries, LASIC, Liberty American Insurance Company
and Liberty American Insurance Group, Inc. The complaint requests an unspecified amount of
damages in excess of $5,000,000 and equitable relief to prevent the defendants from committing
what are alleged to be unfair business practices. The plaintiffs allege that from the period
from at least as early as September 1, 2003 through December 31, 2006 they and other
policyholders sustained property damage covered under policies issued by LASIC, and that LASIC
improperly denied or paid only a portion of the policyholders claims for which they were
entitled to be reimbursed.
The Company believes that it has valid defenses to the claims made in the complaint, and that
the claims may not be entitled to be brought as a class action. The Company will vigorously
defend against such claims. Although there is no assurance as to the outcome of this litigation
or as to its effect on the Companys financial position, the Company believes, based on the
facts currently known to it, that the outcome of this litigation will not have a material
adverse effect on its financial position.
The Company is also subject to routine legal proceedings in connection with its property and
casualty insurance business.
Credit Agreement:
Effective July 11, 2008, the Company entered into an Amended and Restated Credit Agreement (the
Amended Credit Agreement) with Bank of America, N.A. and Wachovia Bank, National Association.
The Amended Credit Agreement amended and restated the Companys existing unsecured Credit
Agreement among the Company and such Banks. The Amended Credit Agreement changed the terms of
the existing Credit Agreement by extending the maturity date to June 26, 2009, including a $10.0
million letter of credit facility as part of the aggregate $50.0 million revolving credit
commitments of the Bank lenders, increasing the unused commitment fee from 6.0 basis points to
7.0 basis points per annum and increasing the Companys Libor option per annum interest rate
from Libor plus 0.35% to Libor plus 0.40%. As of September 30, 2008, no borrowings were
outstanding under the Amended Credit Agreement.
22
The Amended Credit Agreement contains various representations, covenants and events of default
typical for credit facilities of this type. As of September 30, 2008, the Company was in
compliance with all covenants contained in the Amended Credit Agreement. Additionally, the
Company does not currently believe its ability to borrow under the Amended Credit Agreement has
been adversely impacted by the increased volatility in the capital markets or the adverse
conditions in the financial services industry.
State Insurance Guaranty Funds:
As of September 30, 2008 and December 31, 2007, included in Other Liabilities in the
Consolidated Balance Sheets were $17.0 million and $13.2 million, respectively, of liabilities
for state insurance guaranty funds. As of September 30, 2008 and December 31, 2007, included in
Other Assets in the Consolidated Balance Sheets were $0.2 million of related assets for premium
tax offsets or policy surcharges. The related asset is limited to the amount that is determined
based upon future premium collections or policy surcharges from policies in force.
State Insurance Facility Assessments:
The Company continually monitors developments with respect to state insurance facilities. The
Company is required to participate in various state insurance facilities that provide insurance
coverage to individuals or entities that otherwise are unable to purchase such coverage from
private insurers. Because of the Companys participation, it may be exposed to losses that
surpass the capitalization of these facilities and/or to assessments from these facilities.
Among other state insurance facilities, the Company is subject to assessments from Florida
Citizens Property Insurance Corporation (Florida Citizens), which was originally created by
the state of Florida to provide insurance to property owners unable to obtain coverage in the
private insurance market. Florida Citizens, at the discretion and direction of its Board of
Governors (Florida Citizens Board), can levy a regular assessment on participating companies
for a deficit in any calendar year up to a maximum of the greater of 6% of the deficit or 6% of
Florida property premiums industry-wide for the prior year. The portion of the total assessment
attributable to the Company is based on its market share. An insurer may recoup a regular
assessment through a surcharge to policyholders. If a deficit remains after the regular
assessment, Florida Citizens can also fund any remaining deficit through emergency assessments
in the current and subsequent years. Companies are required to collect the emergency assessments
directly from residential property policyholders and remit to Florida Citizens as collected. In
addition, Florida Citizens may issue bonds to further fund a deficit.
The Company also continues to monitor developments with respect to the Texas Windstorm Insurance
Association (TWIA). During the three and nine months ended September 30, 2008, the Company
accrued $3.6 million of TWIA assessments related to Hurricanes Dolly and Ike. Of this amount,
$3.0 million is recoverable from certain of the Companys reinsurers, resulting in $0.6 million
of net TWIA assessment expense being recognized during the three and nine months ended September
30, 2008. Due to the uncertainty of the ultimate impact of these catastrophe losses on TWIA,
TWIA could recognize a financial deficit greater than the level estimated by TWIA in calculating
the Companys assessments. If this occurs, TWIA has the ability to increase the Companys
assessments.
Florida Hurricane Catastrophe Fund:
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.
23
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 three and nine months ended September 30, 2008 and 2007 was $(33.9) million and $11.7
million, respectively, and $(64.4) million and $10.1 million, respectively. The related tax
effect of Reclassification Adjustments for the three and nine months ended September 30, 2008
and 2007 was $6.2 million and $(1.0) million, respectively, and $14.3 million and $(11.4)
million, respectively.
13. New Accounting Pronouncements
In March 2008, the FASB issued Statement No. 161
Disclosures about Derivative Instruments and
Hedging Activities
(SFAS 161) to enhance disclosures about an entitys derivative and hedging
activities. SFAS 161 is effective for all financial statements issued in fiscal years and
interim periods beginning after November 15, 2008 and early application is encouraged. SFAS 161
also encourages, but does not require comparative disclosures for earlier periods at initial
adoption. As the Company does not currently engage in derivative transactions or hedging
activities, the Company does not anticipate any significant financial statement disclosure
impact resulting from its evaluation of SFAS 161.
In April 2008, the FASB issued Staff Position No. FAS 142-3
Determination of the Useful Life of
Intangible Assets
(FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142
Goodwill and Other Intangible Assets
(SFAS 142),
in order to improve the consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset
under SFAS 141R
Business Combinations
and other U.S. generally accepted accounting principles.
FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. The Company does
not anticipate any significant financial statement impact resulting from its evaluation of FSP
FAS 142-3.
In May 2008, the FASB issued Statement No. 162
The Hierarchy of Generally Accepted Accounting
Principles
(SFAS 162) to identify the sources of accounting principles and provide a framework
for selecting the principles to be used in the preparation of financial statements in accordance
with generally accepted accounting principles in the United States. SFAS 162 is effective 60
days following the Securities and Exchange Commissions approval of the Public Company
Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles
, which occurred on September 16, 2008.
The Company does not anticipate any significant financial statement impact resulting from its
evaluation of SFAS 162.
In May 2008, the FASB issued Statement No. 163
Accounting for Financial Guarantee Insurance
Contracts an interpretation of FASB Statement No. 60
(SFAS 163) to eliminate diversity in
practice in accounting for financial guarantee insurance contracts by insurance enterprises
under FASB Statement No. 60
Accounting and Reporting by Insurance Enterprises
. SFAS 163 is
effective for all financial statements issued in fiscal years and interim periods beginning
after December 15, 2008, with the exception of the new requirements relating to disclosures
about insurance enterprises risk-management activities used to track and monitor deteriorating
insured financial obligations, which are effective for the first period, including interim
periods, after the issuance of SFAS 163. Except for these risk-management disclosures, early
application is not permitted. As the Company does not currently enter into financial guarantee
insurance contracts, the Company does not anticipate any significant financial statement or
disclosure impact resulting from its evaluation of SFAS 163.
14. Segment Information
The Companys operations are classified into three reportable business segments which are
organized around its underwriting divisions:
24
|
|
|
The Commercial Lines Underwriting Group, which has underwriting responsibility for
the commercial multi-peril package, commercial automobile, specialty property and
inland marine, and antique/collector car insurance products;
|
|
|
|
|
The Specialty Lines Underwriting Group, which has underwriting responsibility for
the professional and management liability insurance products; and
|
|
|
|
|
The Run-Off (previously the Personal Lines Group) business segment, which pursuant
to approval received in February, 2008 from the Florida Office of Insurance Regulation,
is currently in the process of non-renewing all personal lines policies, other than
policies issued pursuant to the National Flood Insurance Program (NFIP). The
non-renewal process began with policies expiring on July 23, 2008, and we currently
expect the process to be completed by July 23, 2009.
|
Each business segments 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.
The segments follow the same accounting policies used for the Companys consolidated financial
statements as described in the summary of significant accounting policies. Management evaluates
a segments performance based upon premium production and the associated loss experience which
includes paid losses, an amount determined on the basis of claim adjusters evaluation with
respect to insured events that have occurred and an amount for losses incurred that have not yet
been reported. Investments and investment performance including investment income and net
realized investment gain; acquisition costs and other underwriting expenses including
commissions, premium taxes and other acquisition costs; and other operating expenses are managed
at a corporate level by the corporate accounting function in conjunction with other corporate
departments and are included in Corporate.
Following is a tabulation of business segment information for the three and nine months ended
September 30, 2008 and 2007. Corporate information is included to reconcile segment data to the
consolidated financial statements:
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For The Three Months Ended September 30,
|
|
|
|
Commercial
|
|
|
Specialty
|
|
|
Personal
|
|
|
|
|
|
|
|
|
|
Lines
|
|
|
Lines
|
|
|
Lines
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
$
|
467,627
|
|
|
$
|
75,073
|
|
|
$
|
11,153
|
|
|
|
|
|
|
$
|
553,853
|
|
|
|
|
Net Written Premiums
|
|
$
|
425,251
|
|
|
$
|
72,113
|
|
|
$
|
(815
|
)
|
|
|
|
|
|
$
|
496,549
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earned Premiums
|
|
$
|
342,005
|
|
|
$
|
63,250
|
|
|
$
|
3,257
|
|
|
|
|
|
|
$
|
408,512
|
|
Net Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,273
|
|
|
|
33,273
|
|
Net Realized Investment Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,852
|
)
|
|
|
(17,852
|
)
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
174
|
|
|
|
696
|
|
|
|
870
|
|
|
|
|
Total Revenue
|
|
|
342,005
|
|
|
|
63,250
|
|
|
|
3,431
|
|
|
|
16,117
|
|
|
|
424,803
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
200,510
|
|
|
|
31,579
|
|
|
|
1,750
|
|
|
|
|
|
|
|
233,839
|
|
Acquisition Costs and Other Underwriting
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,640
|
|
|
|
117,640
|
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
87
|
|
|
|
4,227
|
|
|
|
4,314
|
|
|
|
|
Total Losses and Expenses
|
|
|
200,510
|
|
|
|
31,579
|
|
|
|
1,837
|
|
|
|
121,867
|
|
|
|
355,793
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
141,495
|
|
|
|
31,671
|
|
|
|
1,594
|
|
|
|
(105,750
|
)
|
|
|
69,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,043
|
|
|
|
19,043
|
|
|
|
|
|
Net Income
|
|
$
|
141,495
|
|
|
$
|
31,671
|
|
|
$
|
1,594
|
|
|
$
|
(124,793
|
)
|
|
$
|
49,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
$
|
87,811
|
|
|
$
|
4,728,644
|
|
|
$
|
4,816,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
$
|
425,131
|
|
|
$
|
68,476
|
|
|
$
|
11,021
|
|
|
|
|
|
|
$
|
504,628
|
|
|
|
|
Net Written Premiums
|
|
$
|
389,298
|
|
|
$
|
55,930
|
|
|
$
|
(2,738
|
)
|
|
|
|
|
|
$
|
442,490
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earned Premiums
|
|
$
|
303,381
|
|
|
$
|
48,675
|
|
|
$
|
7,093
|
|
|
|
|
|
|
$
|
359,149
|
|
Net Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,199
|
|
|
|
30,199
|
|
Net Realized Investment Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,817
|
|
|
|
2,817
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
530
|
|
|
|
450
|
|
|
|
980
|
|
|
|
|
Total Revenue
|
|
|
303,381
|
|
|
|
48,675
|
|
|
|
7,623
|
|
|
|
33,466
|
|
|
|
393,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
146,416
|
|
|
|
(3,149
|
)
|
|
|
1,538
|
|
|
|
|
|
|
|
144,805
|
|
Acquisition Costs and Other Underwriting
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,252
|
|
|
|
101,252
|
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
291
|
|
|
|
2,701
|
|
|
|
2,992
|
|
|
|
|
Total Losses and Expenses
|
|
|
146,416
|
|
|
|
(3,149
|
)
|
|
|
1,829
|
|
|
|
103,953
|
|
|
|
249,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
156,965
|
|
|
|
51,824
|
|
|
|
5,794
|
|
|
|
(70,487
|
)
|
|
|
144,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,852
|
|
|
|
47,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
156,965
|
|
|
$
|
51,824
|
|
|
$
|
5,794
|
|
|
$
|
(118,339
|
)
|
|
$
|
96,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
$
|
100,385
|
|
|
$
|
3,897,402
|
|
|
$
|
3,997,787
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For The Nine Months Ended September 30,
|
|
|
|
Commercial
|
|
|
Specialty
|
|
|
Personal
|
|
|
|
|
|
|
|
|
|
Lines
|
|
|
Lines
|
|
|
Lines
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
$
|
1,190,605
|
|
|
$
|
209,403
|
|
|
$
|
42,211
|
|
|
|
|
|
|
$
|
1,442,219
|
|
|
|
|
Net Written Premiums
|
|
$
|
1,088,051
|
|
|
$
|
205,772
|
|
|
$
|
7,140
|
|
|
|
|
|
|
$
|
1,300,963
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earned Premiums
|
|
$
|
995,821
|
|
|
$
|
177,237
|
|
|
$
|
7,879
|
|
|
|
|
|
|
$
|
1,180,937
|
|
Net Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,577
|
|
|
|
97,577
|
|
Net Realized Investment Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(40,759
|
)
|
|
|
(40,759
|
)
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
2,230
|
|
|
|
3,647
|
|
|
|
5,877
|
|
|
|
|
Total Revenue
|
|
|
995,821
|
|
|
|
177,237
|
|
|
|
10,109
|
|
|
|
60,465
|
|
|
|
1,243,632
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
566,596
|
|
|
|
79,548
|
|
|
|
4,384
|
|
|
|
|
|
|
|
650,528
|
|
Acquisition Costs and Other Underwriting
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347,275
|
|
|
|
347,275
|
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
673
|
|
|
|
11,606
|
|
|
|
12,279
|
|
|
|
|
Total Losses and Expenses
|
|
|
566,596
|
|
|
|
79,548
|
|
|
|
5,057
|
|
|
|
358,881
|
|
|
|
1,010,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
429,225
|
|
|
|
97,689
|
|
|
|
5,052
|
|
|
|
(298,416
|
)
|
|
|
233,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,999
|
|
|
|
67,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
429,225
|
|
|
$
|
97,689
|
|
|
$
|
5,052
|
|
|
$
|
(366,415
|
)
|
|
$
|
165,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
$
|
87,811
|
|
|
$
|
4,728,644
|
|
|
$
|
4,816,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
$
|
1,058,407
|
|
|
$
|
189,182
|
|
|
$
|
49,665
|
|
|
|
|
|
|
$
|
1,297,254
|
|
|
|
|
Net Written Premiums
|
|
$
|
968,264
|
|
|
$
|
155,827
|
|
|
$
|
(4,980
|
)
|
|
|
|
|
|
$
|
1,119,111
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earned Premiums
|
|
$
|
861,926
|
|
|
$
|
141,969
|
|
|
$
|
11,287
|
|
|
|
|
|
|
$
|
1,015,182
|
|
Net Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,694
|
|
|
|
85,694
|
|
Net Realized Investment Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,638
|
|
|
|
32,638
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
1,978
|
|
|
|
682
|
|
|
|
2,660
|
|
|
|
|
Total Revenue
|
|
|
861,926
|
|
|
|
141,969
|
|
|
|
13,265
|
|
|
|
119,014
|
|
|
|
1,136,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
385,122
|
|
|
|
51,651
|
|
|
|
7,126
|
|
|
|
|
|
|
|
443,899
|
|
Acquisition Costs and Other Underwriting
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299,902
|
|
|
|
299,902
|
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
1,087
|
|
|
|
8,041
|
|
|
|
9,128
|
|
|
|
|
Total Losses and Expenses
|
|
|
385,122
|
|
|
|
51,651
|
|
|
|
8,213
|
|
|
|
307,943
|
|
|
|
752,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
476,804
|
|
|
|
90,318
|
|
|
|
5,052
|
|
|
|
(188,929
|
)
|
|
|
383,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,620
|
|
|
|
126,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
476,804
|
|
|
$
|
90,318
|
|
|
$
|
5,052
|
|
|
$
|
(315,549
|
)
|
|
$
|
256,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
$
|
100,385
|
|
|
$
|
3,897,402
|
|
|
$
|
3,997,787
|
|
|
|
|
27
Summarized revenue information by product grouping for the Companys three reportable business
segments for the three and nine months ended September 30, 2008 and 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Three Months Ended
|
|
|
For The Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
(In Thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Commercial Lines Net Earned Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Package
|
|
$
|
310,155
|
|
|
$
|
274,360
|
|
|
$
|
905,239
|
|
|
$
|
787,412
|
|
Specialty Property
|
|
|
12,246
|
|
|
|
15,468
|
|
|
|
42,287
|
|
|
|
43,225
|
|
Commercial Auto
|
|
|
6,776
|
|
|
|
6,552
|
|
|
|
18,526
|
|
|
|
17,790
|
|
Antique/Collector Auto
|
|
|
8,361
|
|
|
|
5,655
|
|
|
|
23,913
|
|
|
|
10,791
|
|
All Other
|
|
|
4,467
|
|
|
|
1,346
|
|
|
|
5,856
|
|
|
|
2,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Lines
|
|
|
342,005
|
|
|
|
303,381
|
|
|
|
995,821
|
|
|
|
861,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Lines Net Earned Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Liability
|
|
|
38,804
|
|
|
|
26,927
|
|
|
|
106,359
|
|
|
|
76,586
|
|
Professional Liability
|
|
|
24,446
|
|
|
|
21,748
|
|
|
|
70,878
|
|
|
|
65,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Specialty Lines
|
|
|
63,250
|
|
|
|
48,675
|
|
|
|
177,237
|
|
|
|
141,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Run-Off Net Earned Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners and Manufactured Housing
|
|
|
3,257
|
|
|
|
7,093
|
|
|
|
7,879
|
|
|
|
11,287
|
|
National Flood Insurance Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Run-Off Net Earned Premiums
|
|
|
3,257
|
|
|
|
7,093
|
|
|
|
7,879
|
|
|
|
11,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
174
|
|
|
|
530
|
|
|
|
2,230
|
|
|
|
1,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Run-Off
|
|
|
3,431
|
|
|
|
7,623
|
|
|
|
10,109
|
|
|
|
13,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
33,273
|
|
|
|
30,199
|
|
|
|
97,577
|
|
|
|
85,694
|
|
Net Realized Investment Gain (Loss)
|
|
|
(17,852
|
)
|
|
|
2,817
|
|
|
|
(40,759
|
)
|
|
|
32,638
|
|
Other Income
|
|
|
696
|
|
|
|
450
|
|
|
|
3,647
|
|
|
|
682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Corporate
|
|
|
16,117
|
|
|
|
33,466
|
|
|
|
60,465
|
|
|
|
119,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
424,803
|
|
|
$
|
393,145
|
|
|
$
|
1,243,632
|
|
|
$
|
1,136,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Proposed Merger
On July 23, 2008, the Company and Tokio Marine Holdings, Inc. (TMHD) entered into an Agreement
and Plan of Merger under which, at the closing of the merger, TMHD would acquire all outstanding
shares of the Company for $61.50 per share, in cash, through TMHDs wholly owned subsidiary,
Tokio Marine & Nichido Fire Insurance Co., Ltd. The total value of this transaction is
approximately $4.7 billion. The transaction is expected to close in the fourth quarter of 2008.
As set forth below, the closing of the merger is subject to approval of the Financial Services
Agency of Japan, as well as other customary closing conditions.
On October 3, 2008, TMHD received approval from the Pennsylvania Department of Insurance to
acquire control of the Company. On October 23, 2008, at a special meeting of the shareholders
of the Company, the Companys shareholders approved the Agreement and Plan of Merger. On
November 3, 2008, TMHD received approval from the Florida Office of Insurance Regulation to
acquire control of the Company. The proposed merger transaction remains subject to regulatory
approval by the Financial Services Agency of Japan.
28
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Information
Certain information included in this report and other statements or materials published or to be
published by us 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, we provide the following cautionary remarks regarding important factors which, among others,
could cause our actual results and experience to differ materially from the anticipated results or
other expectations expressed in our forward-looking statements. The risks and uncertainties that
may affect the operations, performance, development, results of our business, and the other matters
referred to below include, but are not limited to those matters set forth in Item 1A of our Annual
Report on Form 10-K for the fiscal year ended December 31, 2007 and in Item 1A of Part II of this
Report. We do not intend to publicly update any forward looking statement, except as may be
required by law.
General
Although our financial performance is dependent upon our own specific business characteristics,
certain risk factors can affect our profitability and/or our financial condition. These include,
but are not limited to, the risk factors set forth in Item 1A of our Annual Report on Form 10-K for
the fiscal year ended December 31, 2007 and in Item 1A of Part II of this Report.
These risk factors should be read in conjunction with the Certain Critical Accounting Estimates and
Judgments included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007.
Our operations are classified into three reportable business segments which are organized as
follows: the Commercial Lines Underwriting Group, the Specialty Lines Underwriting Group and the
Run-Off (previously the Personal Lines Underwriting Group) business segments. The Run-Off business
segment, pursuant to approval received in February, 2008 from the Florida Office of Insurance
Regulation, is currently non-renewing all personal lines policies, other than policies issued
pursuant to the National Flood Insurance Program (NFIP). The non-renewal process began with
policies expiring on July 23, 2008, and we currently expect the process to be completed by July 23,
2009.
On July 23, 2008, we and Tokio Marine Holdings, Inc. (TMHD) entered into an Agreement and Plan of
Merger under which, at the closing of the merger, TMHD would acquire all of our outstanding shares
for $61.50 per share, in cash, through TMHDs wholly owned subsidiary, Tokio Marine & Nichido Fire
Insurance Co., Ltd. The total value of this transaction is approximately $4.7 billion. The
transaction is expected to close in the fourth quarter of 2008. As set forth below, the closing of
the merger is subject to approval of the Financial Services Agency of Japan, as well as other
customary closing conditions.
On October 3, 2008, TMHD received approval from the Pennsylvania Department of Insurance to acquire
control of the Company. On October 23, 2008, at a special meeting of the shareholders of the
Company, our shareholders approved the Agreement and Plan of Merger. On November 3, 2008, TMHD
received approval from the Florida Office of Insurance Regulation to acquire control of the
Company. The proposed merger transaction remains subject to the regulatory approval by the
Financial Services Agency of Japan.
Critical Accounting Estimates
The preparation of our financial statements and related disclosures in conformity with generally
accepted accounting principles, or GAAP, requires estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are
based on historical experience and on various other factors that we believe are reasonable under
the circumstances. Accounting policies and estimates are periodically reviewed and adjustments are
made when facts and circumstances dictate. Critical accounting policies that are affected by
accounting estimates include:
29
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
|
|
Investments fair value;
|
|
|
|
|
Investments other than temporary impairments;
|
|
|
|
|
Liability for unpaid loss and loss adjustment expenses;
|
|
|
|
|
Reinsurance receivables;
|
|
|
|
|
Liability for preferred agent profit sharing; and
|
|
|
|
|
Share-based compensation expense.
|
On January 1, 2008, we adopted the provisions of SFAS 157. SFAS 157 defines fair value and
provides a consistent framework for measuring items at fair value as previously permitted by
existing accounting pronouncements. SFAS 157 provides a fair value hierarchy which prioritizes
the quality of inputs used when measuring the items at fair value and requires expanded disclosures
for fair value measurements. As of September 30, 2008, the fair value of our investments has been
determined in accordance with the provisions of SFAS 157. A further discussion of this matter is
included under the Investments section below.
Our accounting policies are impacted significantly by judgments, assumptions and estimates used in
the preparation of the Consolidated Financial Statements. Actual results could differ materially
from these estimates. For a discussion of how these estimates and other factors may affect our
business, see the Risk Factors set forth in Item 1A of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007 and in Item 1A of Part II of this Report.
Results of Operations (Nine Months Ended September 30, 2008 compared to September 30, 2007)
Premiums
: Premium information for the nine months ended September 30, 2008 compared to
September 30, 2007 for each of our business segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars In Millions)
|
|
Commercial Lines
|
|
Specialty Lines
|
|
Run-off
|
|
Total
|
2008 Gross Written Premiums
|
|
$
|
1,190.6
|
|
|
$
|
209.4
|
|
|
$
|
42.2
|
|
|
$
|
1,442.2
|
|
2007 Gross Written Premiums
|
|
$
|
1,058.4
|
|
|
$
|
189.2
|
|
|
$
|
49.7
|
|
|
$
|
1,297.3
|
|
Percentage Increase (Decrease)
|
|
|
12.5
|
%
|
|
|
10.7
|
%
|
|
|
(15.1
|
)%
|
|
|
11.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Gross Earned Premiums
|
|
$
|
1,095.7
|
|
|
$
|
190.1
|
|
|
$
|
41.4
|
|
|
$
|
1,327.2
|
|
2007 Gross Earned Premiums
|
|
$
|
946.0
|
|
|
$
|
175.1
|
|
|
$
|
63.7
|
|
|
$
|
1,184.8
|
|
Percentage Increase (Decrease)
|
|
|
15.8
|
%
|
|
|
8.6
|
%
|
|
|
(35.0
|
)%
|
|
|
12.0
|
%
|
The overall growth in gross written premiums is primarily attributable to the following:
|
|
|
Prospecting efforts by marketing personnel in conjunction with long term relationships
formed by our marketing Regional Vice Presidents continue to result in additional prospects
and increased premium writings in existing product offerings, most notably for the
following:
|
|
§
|
|
Our condominium and homeowners associations, religious organizations,
non-profit, specialty schools, antique/collector vehicle, golf and country clubs,
day care centers, and mental health products in the commercial package product
grouping. These product offerings accounted for approximately $68.1 million of the
$132.2 million total commercial lines segment gross written premiums increase.
|
|
|
§
|
|
Our consultant liability product in the professional liability product grouping,
as well as our private company protection, directors and officers, and business
owners products in the management liability product grouping. These product
offerings accounted for all of the $20.2 million total specialty lines segment
gross written premiums increase.
|
|
|
|
The introduction of several new niche product offerings, such as the affordable housing,
vehicle parks, special events, and museum commercial package products, as well as the
difference in conditions inland
|
30
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
|
|
marine specialty property product. These new product offerings accounted for approximately
$42.8 million of the $132.2 million total commercial lines segment gross written premiums
increase.
|
|
|
|
The acquisition of Gillingham & Associates, Inc. on March 10, 2008, which accounted for
approximately $25.7 million of commercial lines segment gross written premium growth for
the nine months ended September 30, 2008.
|
|
|
|
|
An increase in our marketing personnel, as well as an increase in the number of our
preferred agents.
|
|
|
|
|
Our Firemark Producer program, which promotes our product offerings and underwriting
philosophy in selected producers offices.
|
|
|
|
|
As a result of the factors noted above, the commercial lines and specialty lines
segments in-force policy counts increased by 17.3% and 72.7% respectively, for the nine
months ended September 30, 2008.
|
The growth in gross written premiums was offset in part by:
|
|
|
Realized average rate decreases on renewal business approximating 4.8% and 2.3% for the
commercial lines and specialty lines segments, respectively.
|
|
|
|
|
Continued price competition during the nine months ended September 30, 2008,
particularly with respect to the following:
|
|
§
|
|
Large commercial property-driven accounts located in the non-coastal areas of
the country;
|
|
|
§
|
|
Commercial package business with annual premiums in excess of $100,000; and
|
|
|
§
|
|
Professional liability accounts at all premium levels.
|
|
|
|
A reduction in personal lines (run-off segment) production for our homeowners and rental
dwelling policies. This reduction was imposed to reduce our exposure to catastrophe wind
losses. On February 29, 2008, we received approval from the Florida Office of Insurance
Regulation (FLOIR) to non-renew all of our Florida personal lines policies, other than
policies issued pursuant to the National Flood Insurance Program. The non-renewal process
began with policies expiring on July 23, 2008, and we currently expect the process to be
completed by July 23, 2009. As of September 30, 2008, there were approximately 2,213
in-force policies with an aggregate in-force premium of approximately $1.6 million which
expire between October 1, 2008 and December 31, 2008, which we will not renew during 2008.
|
|
|
|
|
A decrease in bowling centers commercial package product gross written premium of
$3.3 million as a result of non-renewing policies due to unacceptable underwriting results.
For the nine months ended September 30, 2008, gross written premium for the bowling centers
commercial package product was $0.9 million. The Company anticipates that it will continue
to non-renew its remaining bowling centers commercial package business throughout 2008,
which approximated $0.3 million of gross written premium for the three months ended
December 31, 2007.
|
One of our preferred agents has terminated their preferred agency agreement with us effective
August 1, 2008. It has been agreed that we will not compete for a period of one year on a mutually
agreed upon list of accounts. The list of accounts is estimated to total approximately $30.0
million in annual gross written premium.
The respective net written premiums and net earned premiums for each of our business segments for
the nine months ended September 30, 2008 compared to September 30, 2007 were as follows:
31
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars In Millions)
|
|
Commercial Lines
|
|
Specialty Lines
|
|
Run-off
|
|
Total
|
2008 Net Written Premiums
|
|
$
|
1,088.1
|
|
|
$
|
205.8
|
|
|
$
|
7.1
|
|
|
$
|
1,301.0
|
|
2007 Net Written Premiums
|
|
$
|
968.3
|
|
|
$
|
155.8
|
|
|
$
|
(5.0
|
)
|
|
$
|
1,119.1
|
|
Percentage Increase
|
|
|
12.4
|
%
|
|
|
32.1
|
%
|
|
|
242.0
|
%
|
|
|
16.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Net Earned Premiums
|
|
$
|
995.8
|
|
|
$
|
177.2
|
|
|
$
|
7.9
|
|
|
$
|
1,180.9
|
|
2007 Net Earned Premiums
|
|
$
|
861.9
|
|
|
$
|
142.0
|
|
|
$
|
11.3
|
|
|
$
|
1,015.2
|
|
Percentage Increase (Decrease)
|
|
|
15.5
|
%
|
|
|
24.8
|
%
|
|
|
(30.1
|
)%
|
|
|
16.3
|
%
|
The differing percentage changes in net written premiums and/or net earned premiums versus gross
written premiums and/or gross earned premiums for our commercial lines, specialty lines and run-off
(personal lines) segments results primarily from the following:
|
|
|
We experienced higher property catastrophe reinsurance rates, maintained the same
catastrophe loss retention, and increased catastrophe coverage limits for our annual June
1, 2007 reinsurance renewal compared to the June 1, 2006 renewal. This resulted in
increased property catastrophe costs for the nine month period ended September 30, 2008
compared to the nine month period ended September 30, 2007.
|
|
|
|
|
For our June 1, 2008 commercial lines segment property catastrophe reinsurance renewal,
we experienced higher reinsurance rates, purchased increased catastrophe limits due to
higher exposures primarily in the northeastern portion of the country, and increased our
catastrophe loss retention compared to the June 1, 2007 renewal. Our commercial lines
segment property catastrophe reinsurance coverage, which is effective June 1, 2008 through
May 31, 2009, is as follows:
|
|
§
|
|
Our open-market catastrophe reinsurance coverage is $480.0 million in excess of a
$20.0 million per occurrence retention. The open-market catastrophe program
(coverage principally provided by large reinsurers that are rated at
least
A-
(Excellent)
by A.M. Best Company) includes one mandatory reinstatement.
|
|
|
§
|
|
We also purchased a reinstatement premium protection contract for the First and
Second Excess Layers of our commercial lines segment open-market catastrophe
reinsurance coverage, effective June 1, 2008. This reinstatement premium protection
contract provides coverage for reinstatement premiums which we may become liable to
pay as a result of a loss occurrence between $20.0 million and $100.0 million (the
First and Second Excess Layers of the commercial lines segment open-market
catastrophe reinsurance program).
|
|
|
|
For our run-off segment, our property catastrophe costs were significantly lower for the
nine months ended September 30, 2008 compared to September 30, 2007. For our June 1, 2007
run-off segment property catastrophe reinsurance renewal, we experienced reduced
reinsurance rates, lower catastrophe loss retention and purchased decreased catastrophe
coverage limits due to lower exposures, compared to the June 1, 2006 renewal.
|
|
|
|
|
For our June 1, 2008 run-off segment property catastrophe reinsurance renewal, we
experienced lower reinsurance rates, maintained the same catastrophe loss retention, and
purchased decreased catastrophe coverage limits due to lower exposures, compared to our
June 1, 2007 renewal. Our run-off segment property catastrophe reinsurance coverage, which
is effective June 1, 2008 through May 31, 2009 is as follows:
|
|
§
|
|
Our reinsurance coverage is approximately $43.3 million in excess of a $3.5
million per occurrence retention. Of this total amount, the Florida Hurricane
Catastrophe Fund (FHCF) provides, on an aggregate basis for Liberty American
Select Insurance Company and Liberty American Insurance Company, 90% coverage for
approximately $26.8 million in excess of $6.4 million per occurrence. The FHCF
coverage inures to the benefit of our open-market catastrophe program. The coverage
|
32
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
|
|
provided by our open-market catastrophe program (large reinsurers that are rated at
least A- (Excellent) by A.M. Best Company) includes one mandatory reinstatement,
but the FHCF coverage does not reinstate. Since the FHCF reimbursement coverage
cannot be reinstated, our open-market program is structured such that catastrophe
reinsurance coverage in excess of the FHCF coverage will drop down and fill in any
portion of the FHCF which has been utilized.
|
|
|
|
For our commercial and specialty lines segments, we experienced rate reductions on our
annual January 1, 2008 renewal of our casualty excess of loss reinsurance coverage compared
to the rate on our January 1, 2007 renewal of this coverage.
|
|
|
|
|
For our commercial lines segment, we experienced a rate increase on our annual January
1, 2008 renewal of our property excess of loss reinsurance coverage compared to the rate on
our January 1, 2007 renewal of this coverage.
|
|
|
|
|
For our specialty lines segment, the higher percentage increase in our net written
premiums compared to the percentage increase in our gross written premiums for the nine
months ended September 30, 2008 is primarily due to the January 1, 2008 renewal of our
casualty excess of loss reinsurance coverage. We experienced rate reductions on our
January 1, 2008 renewal of this coverage compared to our January 1, 2007 renewal of this
coverage. This reduced rate was applied to our January 1, 2008 gross unearned premiums,
which resulted in a reduction to ceded written premium as of January 1, 2008.
|
|
|
|
|
An increase in accelerated and net reinstatement premium costs related to our
catastrophe reinsurance coverages:
|
|
§
|
|
For our commercial lines segment, during the nine months ended September 30,
2008, we experienced catastrophe losses attributable to Hurricane Ike. These
losses resulted in the recognition of accelerated and net reinstatement catastrophe
reinsurance premium expense of $5.1 million during the nine months ended September
30, 2008 due to the utilization of certain of the catastrophe reinsurance
coverages. This recognition of accelerated and net reinstatement reinsurance
premium expense increases ceded written and earned premiums and reduces net written
and earned premiums.
|
|
|
|
Certain of our reinsurance contracts have reinstatement or additional premium provisions
under which we must pay reinstatement or additional reinsurance premiums to reinstate
coverage provisions upon utilization of initial reinsurance coverage. During the nine
months ended September 30, 2008 and 2007, we increased (reduced) our reinstatement or
additional premium accrual by $(4.9) million ($(1.4) million for the commercial lines
segment and $(3.5) million for the specialty lines segment) and $2.6 million ($1.1 million
for the commercial lines segment and $1.5 million for the specialty lines segment)
respectively, under our excess of loss reinsurance treaties, as a result of changes in our
ultimate loss estimates. Increases in these reinstatement and additional premium accruals
increase ceded written and earned premiums and decrease net written and earned premiums,
and decreases in these reinstatement and additional premium accruals decrease ceded written
and earned premiums and increase net written and earned premiums.
|
Net Investment Income:
Net investment income increased 13.9% to $97.6 million for the nine
months ended September 30, 2008 from $85.7 million for the same period of 2007. Total investments
grew by 9.6% to $3,131.0 million as of September 30, 2008 from $2,857.3 million as of September 30,
2007. The growth in investment income is primarily due to our ability to invest increased net cash
flows provided from our operating activities. In addition, despite a general decline in interest
rates compared with the previous historical reporting period, the capital market spreads to U.S.
Treasuries were generally wider, which also had a favorable impact on our ability to increase
investment income through new investments. The taxable equivalent book yield on our fixed income
holdings approximated 5.5% as of September 30, 2008 and September 30, 2007.
The average duration of our fixed maturity portfolio was 5.5 years and 4.9 years as of September
30, 2008 and 2007, respectively. Our decision to continue to increase the average duration of our
fixed maturity portfolio was based
33
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
upon our strategic enterprise risk management analyses
indicating our capacity to further refine the risk/return profile of our investment portfolio.
Effective January 1, 2008, we substituted a customized Merrill Lynch Enterprise Based Investment
Benchmark Index (the Index) for the Lehman Brothers Intermediate Aggregate Index to evaluate the
total return performance of our fixed income portfolio. This change was made in an effort to
establish an Index that more closely represents our strategic enterprise -based risk and return
profile, as reflected in a strategic optimal fixed maturity portfolio.
The total tax equivalent performance of our fixed income portfolio was 0.54% for the nine months
ended September 30, 2008, compared to the Index tax equivalent performance of (0.25)% for the same
period. This favorable variance is primarily due to the portfolios underweight allocation to
Municipal securities compared to the Municipal security allocation percentage in the custom Index.
While we continued to add to our Municipal portfolio given the attractive relative returns in this
sector, the new investments have been added at a measured pace during the recent periods of general
market disruption and, in particular, during the periods of volatility in the municipal markets
caused by leveraged funds unwinding.
The total pre-tax return, which includes the effects of both income and price returns on
securities, of our fixed income portfolio was 3.31% for the nine months ended September 30, 2007,
compared to the Lehman Brothers Intermediate Aggregate Bond Index total pre-tax return of 4.01% for
the same period.
We continue to expect some variation in our portfolios total return compared to the Index
primarily because of the differing sector, security and duration composition of our portfolio as
compared to the Index.
Net Realized Investment Gain (Loss):
Net realized investment (losses) gains were $(40.8)
million and $32.6 million for the nine months ended September 30, 2008 and 2007, respectively.
For the nine months ended September 30, 2008, we realized net investment gains of $7.3 from the
sale of fixed maturity securities. For the nine months ended September 30, 2008, we realized net
investment losses of $5.9 million from the sale of equity securities. In addition, as a result of
our impairment evaluations for the nine months ended September 30, 2008:
|
|
|
We recognized $7.5 million in non-cash realized fixed maturity security investment
losses primarily relating to our direct holdings in fixed maturity securities issued by
Lehman Brothers Holdings Inc. and its subsidiaries (Lehman).
|
|
|
|
|
We recognized $34.7 million in non-cash realized equity security investment losses.
|
For the nine months ended September 30, 2007, we realized net investment gains of $0.7 million and
$35.6 million from the sale of fixed maturity and equity securities, respectively. In addition,
for the nine months ended September 30, 2007, we recognized $0.5 million and $3.2 million in
non-cash realized investment losses for fixed maturity and equity securities, respectively, as a
result of our impairment evaluations. The $35.6 million net realized gains from the sale of equity
securities included approximately $22.2 million of net realized gains as a result of the
liquidation of one of our equity portfolios following our decision to change one of our common
stock investment managers.
Other Income
: Other income approximated $5.9 million and $2.7 million for the nine months
ended September 30, 2008 and 2007, respectively. Other income consists primarily of commissions
and fees earned on servicing and brokering commercial lines business, and to a lesser extent
commissions and fees earned on servicing and brokering personal lines business. In addition, other
income for the nine months ended September 30, 2008 includes our recognition of a $1.2 million gain
related to the sale of the headquarters building used by our Run-Off segment.
Net Loss and Loss Adjustment Expenses:
Net loss and loss adjustment expenses increased $206.6
million (46.5%) to $650.5 million for the nine months ended September 30, 2008 from $443.9 million
for the same period of 2007, and the loss ratio increased to 55.1% in 2008 from 43.7% in 2007.
34
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
The increase in net loss and loss adjustment expenses was primarily due to:
|
|
|
The growth in net earned premiums.
|
|
|
|
Net reserve actions taken during the nine months ended September 30, 2008 which
decreased net estimated unpaid loss and loss adjustment expenses for accident years 2007
and prior by $36.6 million, as compared to net reserve actions taken during the nine months
ended September 30, 2007 which decreased estimated net unpaid loss and loss adjustment
expenses for accident years 2006 and prior by $73.2 million. Increases/(decreases) in the
estimated net unpaid loss and loss adjustment expenses for prior accident years during the
nine months ended September 30, 2008 were as follows:
|
|
|
|
|
|
|
|
Net Basis
|
|
(Dollars In Millions)
|
|
Increase/(Decrease)
|
|
Accident Year 2007
|
|
$
|
3.7
|
|
Accident Year 2006
|
|
|
(15.2
|
)
|
Accident Year 2005
|
|
|
(12.4
|
)
|
Accident Years 2004 and prior
|
|
|
(12.7
|
)
|
|
|
|
|
Total
|
|
$
|
(36.6
|
)
|
|
|
|
|
|
|
|
For accident year 2007, the increase in estimated net unpaid loss and loss adjustment
expenses was principally due to higher loss estimates for commercial automobile liability,
involuntary pools, professional liability and commercial property coverages. The higher
loss estimates in commercial automobile liability and commercial property coverages was due
to higher than expected case incurred loss development as a result of both claim frequency
and severity being greater than anticipated. The higher loss estimates in professional
liability coverages was primarily due to higher than expected case incurred loss
development, primarily as a result of claim severity being greater than anticipated. Loss
estimates for involuntary pools are reported to the Company by multiple residual market
entities, and reasons for higher or lower estimates vary by entity. These higher loss
estimates were partially offset by lower loss estimates for commercial general liability and
management liability coverages. The lower estimate in commercial general liability was due
to lower than expected case incurred loss development, primarily as a result of claim
frequency being less than anticipated. The lower estimate in management liability coverages
was due to lower than expected case incurred loss development, primarily as a result of
claim severity being less than anticipated.
|
|
|
|
|
For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for commercial general liability,
commercial property, management and professional liability, and automobile rental leasing
coverages. The lower estimates in commercial general liability and auto rental leasing
coverages were due to better than expected case incurred loss development, primarily as a
result of claim frequency being less than anticipated. The lower estimates in commercial
property and management and professional liability coverages were due to better than
expected case incurred loss development, primarily as a result of claim severity being less
than anticipated. These lower loss estimates were partially offset by higher loss estimates
for commercial automobile coverages due to higher than expected case incurred loss
development, primarily as a result of claim severity being greater than anticipated.
|
|
|
|
|
For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for commercial general liability,
commercial property, management and professional liability, and automobile rental leasing
coverages due to better than expected case incurred loss development, primarily as a result
of claim severity being less than anticipated.
|
|
|
|
|
For accident years 2004 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower loss estimates for commercial general
liability, management and professional liability, and automobile rental leasing coverages
due to better than expected case incurred loss development, primarily as a result of claim
severity being less than anticipated.
|
35
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
|
|
An increase in the current accident year net ultimate loss and loss adjustment expense
ratio for the nine months ended September 30, 2008 compared to 2007. During the nine
months ended September 30, 2008, a net ultimate loss and loss adjustment expense ratio of
58.2% was estimated for the 2008 accident year. During the nine months ended September 30,
2007, a net ultimate loss and loss adjustment expense ratio of 50.9% was estimated for the
2007 accident year. The increase in the 2008 accident year loss and loss adjustment
expense ratio is principally attributable to:
|
|
§
|
|
$20.6 million of loss and loss adjustment expenses during the nine months ended
September 30, 2008 resulting from hail, tornado, and wind losses which occurred in
Minnesota, Nebraska, Kansas, and Oklahoma during the period of May 22, 2008
through May 26, 2008, and which occurred in Illinois, Indiana, Kansas, Minnesota,
Nebraska, and Oklahoma during the period of May 29, 2008 through June 1, 2008. We
did not have similar losses during the nine months ended September 30, 2007.
|
|
|
§
|
|
$21.7 million of loss and loss adjustment expenses during the nine months ended
September 30, 2008 resulting from losses attributable to Hurricane Ike. We did
not have similar losses during the nine months ended September 30, 2007.
|
|
|
§
|
|
Realized average rate decreases on renewal business approximating 4.8% and 2.3%
for the commercial and specialty lines segments, respectively, for the nine months
ended September 30, 2008 compared to the same period in 2007.
|
Establishing loss reserve estimates is a complex and imprecise process. Our estimation procedures
employ several generally accepted actuarial methods to determine net unpaid loss and loss
adjustment expenses. Some of these methods are based on actual loss development, while others are
based on expected loss development, and still others use a blend of both. Over time, more reliance
is placed on actuarial methods based on actual loss development, and accordingly, over time, less
reliance is placed on actuarial methods based on expected loss development.
Acquisition Costs and Other Underwriting Expenses:
Acquisition costs and other underwriting
expenses increased $47.4 million (15.8%) to $347.3 million for the nine months ended September 30,
2008 from $299.9 million for the same period of 2007, and the expense ratio decreased slightly to
29.4% in 2008 versus 29.6% in 2007. The increase in acquisition costs and other underwriting
expenses was due primarily to the growth in net earned premiums.
Income Tax Expense:
Our effective tax rate for the nine months ended September 30, 2008 and
2007 was 29.1% and 33.0%, respectively. The effective rates for 2008 and 2007 differed from the
35% statutory rate principally due to investments in tax-exempt securities and the relative
proportion of tax exempt income to our income before tax. The decrease in the effective tax rate
during 2008 is due principally to increased investments in tax exempt securities.
Results of Operations (Three Months Ended September 30, 2008 compared to September 30, 2007)
Premiums
: Premium information for the three months ended September 30, 2008 compared to
September 30, 2007 for each of our business segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars In Millions)
|
|
Commercial Lines
|
|
Specialty Lines
|
|
Run-off
|
|
Total
|
2008 Gross Written Premiums
|
|
$
|
467.6
|
|
|
$
|
75.1
|
|
|
$
|
11.2
|
|
|
$
|
553.9
|
|
2007 Gross Written Premiums
|
|
$
|
425.1
|
|
|
$
|
68.5
|
|
|
$
|
11.0
|
|
|
$
|
504.6
|
|
Percentage Increase
|
|
|
10.0
|
%
|
|
|
9.6
|
%
|
|
|
1.8
|
%
|
|
|
9.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Gross Earned Premiums
|
|
$
|
379.4
|
|
|
$
|
65.5
|
|
|
$
|
13.0
|
|
|
$
|
457.9
|
|
2007 Gross Earned Premiums
|
|
$
|
332.8
|
|
|
$
|
60.0
|
|
|
$
|
18.9
|
|
|
$
|
411.7
|
|
Percentage Increase (Decrease)
|
|
|
14.0
|
%
|
|
|
9.2
|
%
|
|
|
(31.2
|
)%
|
|
|
11.2
|
%
|
36
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
The overall growth in gross written premiums is primarily attributable to the following:
|
|
|
Prospecting efforts by marketing personnel in conjunction with long term relationships
formed by our marketing Regional Vice Presidents continue to result in additional prospects
and increased premium writings in existing product offerings, most notably for the
following:
|
|
§
|
|
Our religious organizations, specialty schools, non-profit, mental health,
antique/collector vehicle, program business, and golf and country clubs products in
the commercial package product grouping; These product offerings accounted for
approximately $19.0 million of the $42.5 million total commercial lines segment
gross written premiums increase.
|
|
|
§
|
|
Our private company protection, directors and officers, and business owners
products in the management liability product grouping. These product offerings
accounted for all of the $6.6 million total specialty lines segment gross written
premiums increase.
|
|
|
|
The introduction of several new niche product offerings, such as the affordable housing,
vehicle parks, rehabilitation facilities, and museums commercial package products, as well
as the difference in conditions inland marine specialty property product. These new product
offerings accounted for approximately $13.5 million of the $42.5 million total commercial
lines segment gross written premiums increase.
|
|
|
|
|
The acquisition of Gillingham & Associates, Inc. on March 10, 2008, which accounted for
approximately $16.8 million of commercial lines segment gross written premium growth for
the three months ended September 30, 2008.
|
|
|
|
|
An increase in our marketing personnel, as well as an increase in the number of our
preferred agents.
|
|
|
|
|
Our Firemark Producer program, which promotes our product offerings and underwriting
philosophy in selected producers offices.
|
|
|
|
|
As a result of the factors noted above the commercial and specialty lines segments
in-force policy counts increased by 4.2% and 15.7%, respectively, for the three months
ended September 30, 2008.
|
The growth in gross written premiums was offset in part by:
|
|
|
Realized average rate decreases on renewal business approximating 5.1% and 2.3% for the
commercial lines and specialty lines segments, respectively.
|
|
|
|
|
Continued price competition during the three months ended September 30, 2008,
particularly with respect to the following:
|
|
§
|
|
Large commercial property-driven accounts located in the non-coastal areas of the country;
|
|
|
§
|
|
Commercial package business with annual premiums in excess of $100,000; and
|
|
|
§
|
|
Professional liability accounts at all premium levels.
|
|
|
|
A reduction in personal lines (run-off segment) production for our homeowners and rental
dwelling policies. This reduction was imposed to reduce our exposure to catastrophe wind
losses.
|
|
|
|
|
On February 29, 2008, we received approval from the Florida Office of Insurance Regulation
(FLOIR) to non-renew all of our Florida personal lines policies, other than policies
issued pursuant to the National Flood Insurance Program. The non-renewal process began with
policies expiring on July 23, 2008, and we currently expect the process to be completed by
July 23, 2009. As of September 30, 2008, there were approximately 2,213 in-force policies
with an aggregate in-force premium of approximately $1.6 million which expire between
October 1, 2008 and December 31, 2008, which we will not renew during 2008.
|
37
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
One of our preferred agents has terminated their preferred agency agreement with us effective
August 1, 2008. It has been agreed that we will not compete for a period of one year on a mutually
agreed upon list of accounts. The list of accounts is estimated to total approximately $30.0
million in annual gross written premium.
The respective net written premiums and net earned premiums for each of our business segments for
the three months ended September 30, 2008 compared to September 30, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars In Millions)
|
|
Commercial Lines
|
|
Specialty Lines
|
|
Run-off
|
|
Total
|
2008 Net Written Premiums
|
|
$
|
425.2
|
|
|
$
|
72.1
|
|
|
$
|
(0.8
|
)
|
|
$
|
496.5
|
|
2007 Net Written Premiums
|
|
$
|
389.3
|
|
|
$
|
55.9
|
|
|
$
|
(2.7
|
)
|
|
$
|
442.5
|
|
Percentage Increase (Decrease)
|
|
|
9.2
|
%
|
|
|
29.0
|
%
|
|
|
70.4
|
%
|
|
|
12.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Net Earned Premiums
|
|
$
|
342.0
|
|
|
$
|
63.2
|
|
|
$
|
3.3
|
|
|
$
|
408.5
|
|
2007 Net Earned Premiums
|
|
$
|
303.3
|
|
|
$
|
48.7
|
|
|
$
|
7.1
|
|
|
$
|
359.1
|
|
Percentage Increase (Decrease)
|
|
|
12.8
|
%
|
|
|
29.8
|
%
|
|
|
(53.5
|
)%
|
|
|
13.8
|
%
|
The differing percentage changes in net written premiums and/or net earned premiums versus gross
written premiums and/or gross earned premiums for our commercial lines, specialty lines and run-off
(personal lines) segments results primarily from the following:
|
|
|
For our June 1, 2008 commercial lines segment property catastrophe reinsurance renewal,
we experienced higher reinsurance rates, purchased increased catastrophe limits due to
higher exposures primarily in the northeastern portion of the country, and increased our
catastrophe loss retention compared to our June 1, 2007 renewal.
|
|
|
|
|
For our June 1, 2008 run-off segment property catastrophe reinsurance renewal, we
experienced reduced reinsurance rates, maintained the same catastrophe loss retention, and
purchased decreased catastrophe coverage limits due to lower exposures compared to our June
1, 2007 renewal.
|
|
|
|
|
For our commercial and specialty lines segments, we experienced rate reductions on our
annual January 1, 2008 renewal of our casualty excess of loss reinsurance coverage compared
to the rate on our January 1, 2007 renewal of this coverage.
|
|
|
|
|
For our commercial lines segment, we experienced a rate increase on our annual January
1, 2008 renewal of our property excess of loss reinsurance coverage compared to the rate on
our January 1, 2007 renewal of this coverage.
|
|
|
|
|
An increase in accelerated and net reinstatement premium costs related to our
catastrophe reinsurance coverages:
|
|
§
|
|
For our commercial lines segment, during the three months ended September 30,
2008, we experienced catastrophe losses attributable to Hurricane Ike. These
losses resulted in the recognition of accelerated and net reinstatement catastrophe
reinsurance premium expense of $5.1 million during the three months ended September
30, 2008 due to the utilization of certain of the catastrophe reinsurance
coverages. This recognition of accelerated and net reinstatement premium expense
increases ceded written and earned premiums and reduces net written and earned
premiums.
|
|
|
|
Certain of our reinsurance contracts have reinstatement or additional premium provisions
under which we must pay reinstatement or additional reinsurance premiums to reinstate
coverage provisions upon utilization of initial reinsurance coverage. During the three
months ended September 30, 2008 and 2007, we increased (reduced) our reinstatement or
additional premium accrual by $(5.8) million ($(2.4) million for the commercial lines
segment and $(3.4) million for the specialty lines segment) and $0.7 million ($0.3
|
38
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
|
|
million for the commercial lines segment and $0.4 million for the specialty lines segment)
respectively, under our excess of loss reinsurance treaties, as a result of changes in our
ultimate loss estimates. Increases in these reinstatement and additional premium accruals
increase ceded written and earned premiums and decrease net written and earned premiums, and
decreases in these reinstatement and additional premium accruals decrease ceded written and
earned premiums and increase net written and earned premiums.
|
Net Investment Income:
Net investment income increased 10.3% to $33.3 million for the three
months ended September 30, 2008 from $30.2 million for the same period of 2007. Total investments
grew by 9.6% to $3,131.0 million as of September 30, 2008 from $2,857.3 million as of September 30,
2007. The growth in investment income is primarily due to our ability to invest increased net cash
flows provided from our operating activities. In addition, despite a general decline in interest
rates compared with the previous historical reporting period, the capital market spreads to U.S.
Treasuries were generally wider, which also had a favorable impact on our ability to increase
investment income through new investments. The taxable equivalent book yield on our fixed income
holdings approximated 5.5% as of September 30, 2008 and September 30, 2007.
The average duration of our fixed maturity portfolio was 5.5 years and 4.9 years as of September
30, 2008 and 2007, respectively. Our decision to continue to increase the average duration of our
fixed maturity portfolio was based on our enterprise risk management analyses indicating our
capacity to further refine the risk/return profile of our investment portfolio.
Effective January 1, 2008, we substituted a customized Merrill Lynch Enterprise Based Investment
Benchmark Index (the Index) for the Lehman Brothers Intermediate Aggregate Index to evaluate the
total return performance of our fixed income portfolio. This change was made in an effort to
establish an Index that more closely represents our strategic enterprise -based risk and return
profile, as reflected in a strategic optimal fixed maturity portfolio.
The total tax equivalent performance of our fixed income portfolio was (0.71)% for the three months
ended September 30, 2008, compared to the Index tax equivalent performance of (1.70)% for the same
period. This favorable variance is primarily due to the portfolios underweight allocation to
Municipal securities compared to the Municipal security allocation percentage in the custom Index.
While we continued to add to our Municipal security portfolio during the three months ended
September 30, 2008, given the attractive relative returns in this sector, the new investments have
been added at a measured pace during the recent periods of general market disruption and, in
particular, during the periods of volatility in the municipal markets caused by leveraged funds
unwinding.
The total pre-tax return, which includes the effects of both income and price returns on
securities, of our fixed income portfolio was 2.52% for the three months ended September 30, 2007,
compared to the Lehman Brothers Intermediate Aggregate Bond Index total pre-tax return of 2.76% for
the same period.
We continue to expect some variation in our portfolios total return compared to the Index
primarily because of the differing sector, security and duration composition of our portfolio as
compared to the Index.
Net Realized Investment Gain (Loss):
Net realized investment gains (losses) were $(17.9)
million and $2.8 million for the three months ended September 30, 2008 and 2007, respectively.
For the three months ended September 30, 2008, we realized net investment gains of $7.3 from the
sale of fixed maturity securities. For the three months ended September 30, 2008, we realized net
investment losses of $6.3 million from the sale of equity securities. In addition, as a result of
our impairment evaluations for the three months ended September 30, 2008:
|
|
|
We recognized $7.4 in non-cash realized fixed maturity security investment losses
relating to our direct holdings in fixed maturity securities issued by Lehman.
|
|
|
|
|
We recognized $11.4 million in non-cash realized equity security investment losses.
|
For the three months ended September 30, 2007, we realized net investment gains of $0.6 million and
$3.3 million from the sale of fixed maturity and equity securities, respectively. In addition, for
the three months ended
39
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
September 30, 2007, we recognized no non-cash realized investment losses for fixed maturity
securities and $1.1 million in non-cash realized investment losses for equity securities,
respectively, as a result of our impairment evaluations.
Other Income
: Other income approximated $0.9 million and $1.0 million for the three months
ended September 30, 2008 and 2007, respectively. Other income consists primarily of commissions
and fees earned on servicing and brokering commercial lines business, and to a lesser extent
commissions and fees earned on servicing and brokering personal lines business.
Net Loss and Loss Adjustment Expenses:
Net loss and loss adjustment expenses increased $89.0
million (61.5%) to $233.8 million for the three months ended September 30, 2008 from $144.8 million
for the same period of 2007, and the loss ratio increased to 57.2% in 2008 from 40.3% in 2007.
The increase in net loss and loss adjustment expenses was primarily due to:
|
|
|
The growth in net earned premiums.
|
|
|
|
|
Net reserve actions taken during the three months ended September 30, 2008 which
decreased net estimated unpaid loss and loss adjustment expenses for accident years 2007
and prior by $12.2 million, as compared to net reserve actions taken during the three
months ended September 30, 2007 which decreased estimated net unpaid loss and loss
adjustment expenses for accident years 2006 and prior by $39.5 million.
Increases/(decreases) in the estimated net unpaid loss and loss adjustment expenses for
prior accident years during the three months ended September 30, 2008 were as follows:
|
|
|
|
|
|
|
|
Net Basis
|
|
(Dollars In Millions)
|
|
Increase/(Decrease)
|
|
Accident Year 2007
|
|
$
|
8.4
|
|
Accident Year 2006
|
|
|
(6.3
|
)
|
Accident Year 2005
|
|
|
(7.1
|
)
|
Accident Years 2004 and prior
|
|
|
(7.2
|
)
|
|
|
|
|
Total
|
|
$
|
(12.2
|
)
|
|
|
|
|
For accident year 2007, the increase in estimated net unpaid loss and loss adjustment
expenses was principally due to higher loss estimates for commercial automobile liability,
involuntary pools and commercial property coverages. The higher loss estimate in commercial
automobile liability and commercial property coverages was due to higher than expected case
incurred loss development, primarily as a result of claim severity being greater than
anticipated. Loss estimates for involuntary pools are reported to the Company by multiple
residual market entities, and reasons for higher or lower estimates vary by entity. These
higher loss estimates were partially offset by lower loss estimates for commercial general
liability coverages. The lower estimate in commercial general liability was due to lower
than expected case incurred loss development, primarily as a result of claim frequency being
less than anticipated.
For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for commercial general liability, and
management and professional liability coverages due to better than expected case incurred
loss development, primarily as a result of claim severity being less than anticipated.
These lower loss estimates were partially offset by higher loss estimates for commercial
automobile coverages due to higher than expected case incurred loss development, primarily
as a result of claim severity being greater than anticipated.
For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for commercial general liability, and
management liability and
40
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
|
|
professional liability coverages due to better than expected case incurred loss development,
primarily as a result of claim severity being less than anticipated.
|
|
|
|
|
For accident years 2004 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower loss estimates for commercial general
liability, commercial automobile liability, automobile rental leasing, and professional
liability coverages due to better than expected case incurred loss development, primarily as
a result of claim severity being less than anticipated.
|
|
|
|
|
An increase in the current accident year net ultimate loss and loss adjustment expense
ratio for the three months ended September 30, 2008 compared to 2007. During the three
months ended September 30, 2008, a net ultimate loss and loss adjustment expense ratio of
60.2% was estimated for the 2008 accident year. During the three months ended September
30, 2007, a net ultimate loss and loss adjustment expense ratio of 51.3% was estimated for
the 2007 accident year. The increase in the 2008 accident year loss and loss adjustment
expense ratio is principally attributable to:
|
|
§
|
|
$21.7 million of loss and loss adjustment expenses during the three months
ended September 30, 2008 resulting from losses attributable to Hurricane Ike. We
did not have similar losses during the three months ended September 30, 2007.
|
|
|
§
|
|
Realized average rate decreases on renewal business approximating 5.1% and 2.3%
for the commercial and specialty lines segments, respectively, for the three
months ended September 30, 2008 compared to the same period in 2007.
|
Establishing loss reserve estimates is a complex and imprecise process. Our estimation procedures
employ several generally accepted actuarial methods to determine net unpaid loss and loss
adjustment expenses. Some of these methods are based on actual loss development, while others are
based on expected loss development, and still others use a blend of both. Over time, more reliance
is placed on actuarial methods based on actual loss development, and accordingly, over time, less
reliance is placed on actuarial methods based on expected loss development.
Acquisition Costs and Other Underwriting Expenses:
Acquisition costs and other underwriting
expenses increased $16.3 million (16.1%) to $117.6 million for the three months ended September 30,
2008 from $101.3 million for the same period of 2007, and the expense ratio increased slightly to
28.8% in 2008 versus 28.2% in 2007. The increase in acquisition costs and other underwriting
expenses was due primarily to the growth in net earned premiums. The increase in the expense ratio
for the three months ended September 30, 2008 is primarily due to $3.6 million of assessments from
the Texas Windstorm Insurance Association for losses related to Hurricanes Dolly and Ike.
Income Tax Expense:
Our effective tax rate for the three months ended September 30, 2008 and
2007 was 27.6% and 33.2%, respectively. The effective rates for 2008 and 2007 differed from the
35% statutory rate principally due to investments in tax-exempt securities and the relative
proportion of tax exempt income to our income before tax. The decrease in the effective tax rate
during 2008 is due principally to increased investments in tax exempt securities.
Investments
On January 1, 2008, we adopted the provisions of SFAS 157. SFAS 157 defines fair value and
provides a consistent framework for measuring items at fair value as previously permitted by
existing accounting pronouncements. SFAS 157 provides a fair value hierarchy which prioritizes
the quality of inputs utilized when measuring the items at fair value and requires expanded
disclosures for fair value measurements. As of September 30, 2008, the fair value of our total
invested assets (financial assets consisting of total investments plus cash equivalents) has been
determined in accordance with the provisions of SFAS 157. As a result of the adoption of SFAS
157, we note the following:
§
|
|
The fair value of our total invested assets is primarily measured utilizing a market based
valuation methodology (Market Approach). A Market Approach utilizes prices and other
relevant information generated by market transactions involving identical or comparable assets
or liabilities to measure fair value. We determine a market
|
41
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
|
to be active if securities have traded on it in the last 7 business days. We have consistently
applied the Market Approach as of and for the three and nine months ended September 30, 2008.
|
|
§
|
|
Because we have consistently used matrix pricing as the primary
valuation method for determining the fair value of our fixed
maturity securities, the lack of market activity or liquidity in
certain fixed maturity markets did not affect the determination of
the fair value our fixed maturity investments as of September 30,
2008.
|
|
§
|
|
Approximately 98.9% of our total invested assets are measured
utilizing significant observable inputs (Level 1 or Level 2 per
SFAS 157). Approximately 1.1% of our total invested assets are
measured utilizing significant unobservable inputs (Level 3 per
SFAS 157).
|
|
§
|
|
Approximately 99.7% of our fixed maturity investments are measured
utilizing significant observable inputs (Level 1 or Level 2 per
SFAS 157).
|
|
§
|
|
We have one investment grade asset backed security where the fair
value is determined using unadjusted broker pricing relying on
unobservable inputs. Due to the use of unobservable inputs, we
classify this measurement within Level 3 of the fair value
hierarchy. We obtain this broker pricing from the lead manager
of the issue and we consider the pricing to be indicative of fair
value. We do not consider our use of unobservable inputs (Level 3
per SFAS 157) in our fair value measurements to be significant to
our financial position, results of operations, or liquidity.
|
|
§
|
|
Approximately 92.3% of our equity investments are measured
utilizing significant observable inputs (Level 1 or Level 2 per
SFAS 157).
|
|
§
|
|
Significant observable inputs utilized to measure fair value
include matrix pricing for fixed maturity investments (Level 2
per SFAS 157) and quoted market prices for equity investments
(Level 1 per SFAS 157). Matrix pricing relies on observable
inputs from active markets other than quoted market prices
including, but not limited to, benchmark securities and yields,
latest reported trades, quotes from brokers or dealers, issuer
spreads, bids, offers, and other relevant reference data to
determine fair value. Matrix pricing is used to measure the
fair value of fixed maturity securities where obtaining individual
quoted market prices is impractical.
|
|
§
|
|
The significant unobservable inputs utilized to measure fair value
include broker pricing and net asset value calculations.
|
|
§
|
|
We use the lowest level of the most significant input utilized to
categorize a measurement within the fair value hierarchy.
Consequently, a fair value measurement categorized as having level
3 unobservable inputs may also contain Level 1 or Level 2
observable inputs.
|
|
§
|
|
We do not adjust quotes or prices received from brokers.
|
|
§
|
|
Except for our fixed maturity holdings in Lehman Brothers
Holdings, Inc. and in certain other equity securities that we
impaired as of September 30, 2008, we made no other material
adjustments to the fair value of our invested assets as of and for
the three and nine months ended September 30, 2008.
|
We utilize external independent investment managers in obtaining the pricing inputs noted above for
our fixed maturity and equity investments. In order to ensure we are maximizing our use of
observable pricing inputs and minimizing our use of unobservable pricing inputs, we verify with our
external investment managers that pricing for our fixed maturity and equity investments is obtained
from external market sources. In the event that pricing is obtained from sources other than
external market sources, we review the pricing inputs and reasons in order to determine that the
fair value measurements resulting from these inputs are properly categorized within the fair value
hierarchy. As our fair value measurements are primarily measured using external market
information, they are sensitive to changes in market conditions.
Our investment objectives are the realization of relatively high levels of after-tax net investment
income with competitive after-tax total rates of return subject to established specific guidelines
and objectives based on our
42
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
enterprise based asset allocation methods. We utilize external independent professional investment
managers for our fixed maturity and equity investments to help us achieve these objectives. These
investments consist of diversified issuers and issues, and as of September 30, 2008 approximately
84.1% and 10.5% of our total invested assets on a cost basis consisted of investments in fixed
maturity and equity securities, respectively, versus 87.8% and 10.7%, respectively, as of December
31, 2007.
Of our total fixed maturity investments, asset backed, mortgage pass-through, and collateralized
mortgage obligation securities, on a cost basis, amounted to $271.9 million, $408.0 million and
$275.5 million, respectively, as of September 30, 2008, and $199.3 million, $604.3 million and
$329.5 million, respectively, as of December 31, 2007.
We regularly perform impairment reviews with respect to our 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 we do not intend to hold a security to
maturity or determine 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 reflected in our earnings as a
realized loss in the period the impairment arose. These evaluations, for investments other than
interests in securitized assets, resulted in non-cash realized investment losses of $18.8 million
and $1.1 million, respectively, for the three months ended September 30, 2008 and 2007, and $42.2
million and $3.7 million, respectively, for the nine months ended September 30, 2008 and 2007. Our
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 FASB.
As a result of our impairment evaluations for investments in securitized assets, there were no
non-cash realized investment losses recorded for the three and nine months ended September 30, 2008
and 2007.
Our fixed maturity portfolio amounted to $2,779.0 million and $2,659.2 million, as of September 30,
2008 and December 31, 2007, respectively. 99.9% of the portfolio was comprised of investment grade
securities as of September 30, 2008 and December 31, 2007. We had fixed maturity investments with
gross unrealized losses amounting to $97.1 million and $7.0 million as of September 30, 2008 and
December 31, 2007, respectively. Of these amounts, interests in securitized assets had gross
unrealized losses amounting to $22.3 million and $3.0 million as of September 30, 2008 and December
31, 2007, respectively.
As a result of the systemic financial, credit and liquidity crises impacting financial and capital
markets across the world and virtually all asset classes, we expect fixed income and equity
markets, in general, to continue to experience more volatility than during most prior historical
reporting periods. As of September 30, 2008, we had $7.5 million in non-cash realized fixed
maturity security investment losses and $34.7 million in non-cash realized equity security
investment losses related to these market conditions as a result of our impairment evaluations. We
expect that ongoing volatility in these sectors, in particular, and in spread related sectors, in
general, will continue to impact the prices of securities held in our average AA+ rated investment
portfolio, including our average AAA rated structured securities portfolio.
Securities with an Unrealized Loss as of September 30, 2008:
The following table identifies the period of time securities with an unrealized loss as of
September 30, 2008 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 3.5% and 22.3%, respectively, of the total estimated
fair value, or 6.3% and 18.9%, 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 unrealized losses on these
securities are generally attributable to changes both in market spreads and in the level of
Treasury yields. The primary factor underlying the spread widening is the
increasing market risk aversion to issues surrounding the monoline financial guarantors,
given such guarantors significant participation in the municipal sector through their
financial guarantee insurance.
|
43
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
|
|
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. The unrealized losses on these securities are generally
attributable to the recent correction in the financial services industry primarily caused
by the deterioration of credit conditions and increased risk aversion in the marketplace
during the second half of 2007 and the first nine months of 2008. As of September 30, 2008,
these securities were evaluated for other than temporary impairment in accordance with the
Companys impairment policy, and the Company concluded that these securities were not other
than temporarily impaired.
|
The contractual repayment of the municipal securities is backed either by the general taxing
authority of the state or political subdivision or by general or specific revenues of the public
authorities and, in addition, a portion is pre-refunded and supported by collateral consisting of
US Government securities. Additionally, a portion of the securities is backed by financial
guarantee insurance issued by monoline financial guarantors. The contractual terms of these
investments do not permit the issuer to settle the securities at a price less than the amortized
costs of the investments. Given the investment grade credit quality of the issuers represented in
the municipal portfolio, without considering any monoline financial guarantee, we believe we will
be able to collect all amounts due according to the contractual terms of the investments. At the
present time, we have the ability and intent to hold these securities until a recovery of fair
value, which may be maturity; therefore, we do not consider these investments to be other than
temporarily impaired as of September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses as of September 30, 2008
|
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
Excluding Interests
|
|
|
Interests in
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuous time in
|
|
in Securitized
|
|
|
Securitized
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
Total
|
|
Unrealized loss position
|
|
Assets
|
|
|
Assets
|
|
|
Available for Sale
|
|
|
Equity Securities
|
|
|
Investments
|
|
0 3 months
|
|
$
|
21.0
|
|
|
$
|
5.2
|
|
|
$
|
26.2
|
|
|
$
|
14.1
|
|
|
$
|
40.3
|
|
4 6 months
|
|
|
12.0
|
|
|
|
4.8
|
|
|
|
16.8
|
|
|
|
12.6
|
|
|
|
29.4
|
|
7 9 months
|
|
|
21.2
|
|
|
|
7.6
|
|
|
|
28.8
|
|
|
|
4.7
|
|
|
|
33.5
|
|
10 12 months
|
|
|
3.8
|
|
|
|
0.7
|
|
|
|
4.6
|
|
|
|
1.6
|
|
|
|
6.2
|
|
13 18 months
|
|
|
8.0
|
|
|
|
1.2
|
|
|
|
9.1
|
|
|
|
|
|
|
|
9.1
|
|
19 24 months
|
|
|
8.0
|
|
|
|
0.2
|
|
|
|
8.2
|
|
|
|
|
|
|
|
8.2
|
|
> 24 months
|
|
|
0.8
|
|
|
|
2.6
|
|
|
|
3.4
|
|
|
|
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross
Unrealized Losses
|
|
$
|
74.8
|
|
|
$
|
22.3
|
|
|
$
|
97.1
|
|
|
$
|
33.0
|
|
|
$
|
130.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair
value of
securities with a
gross
unrealized loss
|
|
$
|
1,328.4
|
|
|
$
|
611.5
|
|
|
$
|
1,939.9
|
|
|
$
|
156.3
|
|
|
$
|
2,096.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our impairment evaluation as of September 30, 2008 for fixed maturities available for sale
excluding interests in securitized assets resulted in the following conclusions:
US Treasury Securities and Obligations of U.S. Government Agencies:
The unrealized losses on our investments in U.S. Treasury Securities and Obligations of U.S.
Government Agencies which have ratings of Aaa/AAA are attributable to the general level of
interest rates. Of the 29 investment positions held, approximately 10.3% were in an unrealized
loss position as of September 30, 2008.
Obligations of States and Political Subdivisions:
The unrealized losses on our investments in long term tax exempt securities, which have ratings
of A1/A to Aaa/AAA, except for one security which has a rating of Baa3/BBB-, are
attributable
to changes both in market spreads and in the level of
Treasury yields. Of the 990 investment positions held, approximately 66.2% were in an
unrealized loss position. The contractual terms of
the investments do not permit the issuer to settle the securities at a price less than the
amortized cost of the investments.
44
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Corporate
and Bank Debt Securities:
The unrealized losses on our long term investments in corporate bonds, which have ratings from
Baa3/BBB to Aaa/AAA, except for one security which has a rating of Ca/CCC and matured on October
6, 2008, are attributable primarily to changes in market spreads. Of the 64 investment
positions held, approximately 70.3% were in an unrealized loss position. The contractual terms
of the investments do not permit the issuer to settle the securities at a price less than the
amortized cost of the investments.
Our evaluation as of September 30, 2008 for interests in securitized assets resulted in the
following conclusions:
Asset Backed Securities:
The unrealized losses on our investments in Asset Backed Securities which have ratings of
Baa2/BBB to Aaa/AAA, are attributable primarily to changes in market spreads. Of 114 investment
positions held, approximately 90.4% were in an unrealized loss position. The contractual terms
of the investments do not permit the issuer to settle the security at a price less than the
amortized cost of the investments.
Mortgage Pass-Through Securities:
The unrealized losses on our investments in Mortgage Pass-Through Securities which have ratings
of Aaa/AAA, are attributable primarily to changes in market spreads. Of the 128 investment
positions held, approximately 44.5% were in an unrealized loss position. The contractual terms
of the investments do not permit the issuer to settle the security at a price less than the
amortized cost of the investments.
Collateralized Mortgage Obligations:
The unrealized losses on our investments in Collateralized Mortgage Obligations which have
ratings of Aa2/AA+ to Aaa/AAA, are attributable primarily to changes in market spreads. Of the
165 investment positions held, approximately 41.8% were in an unrealized loss position. The
contractual terms of the investments do not permit the issuer to settle the security at a price
less than the amortized cost of the investments.
Our impairment evaluation as of September 30, 2008 for equity securities resulted in the conclusion
that we do not consider the equity securities remaining in an unrealized loss position to be other
than temporarily impaired. Of the 3,114 investment positions held, approximately 45.7% were in an
unrealized loss position.
Structured Securities Portfolio:
The fair value of our structured securities investment portfolio (Asset Backed, Mortgage
Pass-Through and Collateralized Mortgage Obligation securities) amounted to $939.4 million as of
September 30, 2008. AAA rated securities represented approximately 98.2% of our September 30, 2008
structured securities portfolio.
Approximately $688.8 million of our structured securities investment portfolio is backed by
residential collateral, consisting of:
|
|
$407.8 million of U.S. government agency backed Mortgage Pass-Through Securities;
|
|
|
|
$195.9 million of U.S. government agency backed Collateralized Mortgage Obligations;
|
|
|
|
$67.9 million of non-U.S. government agency Collateralized Mortgage Obligations backed by
pools of prime loans (generally consists of loans made to the highest credit quality borrowers
with Fair Isaac Corporation (FICO) scores generally greater than 720);
|
|
|
|
$14.4 million of structured securities backed by pools of ALT A loans (loans with less than
normal documentation and borrowers with FICO scores in the approximated range of 650 to the
low 700s); and
|
|
|
|
$2.8 million of structured securities backed by pools of subprime loans (loans with less than
normal documentation, higher combined loan-to-value ratios and borrowers with FICO scores
capped at approximately 650).
|
Our $17.2 million ALT-A and subprime loan portfolio includes 19 securities with net unrealized
losses of $1.6 million as of September 30, 2008. These securities have the following
characteristics:
45
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
|
first to pay or among the first cash flow tranches of their respective transactions;
|
|
|
|
weighted average life of 1.6 years;
|
|
|
|
spread across multiple vintages (origination year of underlying collateral pool), and
|
|
|
|
an average AAA rating, with one holding experiencing a rating downgrade by Moodys during the
quarter to A2 from Aaa based on increased delinquencies and lower coverage levels. Based on
our analysis of the collateral underlying the security, we expect to receive full return of
our investment.
|
Our ALT-A and subprime loan portfolio has paid down to $17.2 million as of September 30, 2008, from
$27.6 million as of December 31, 2007, and
$35.7 million as of September 30, 2007.
As of September 30, 2008, we hold no investments in Collateralized Debt Obligations or Net Interest
Margin securities.
Municipal Bond Portfolio:
Our average AA+ rated $1,681.3 million municipal bond portfolio includes $1,046.3 million of
insured securities, or 62.2% of our total municipal bond portfolio. The average underlying rating
of the insured portion of our municipal bond portfolio is AA and the average rating of the
uninsured portion of our municipal bond portfolio is AA+. The following table represents our
insured bond portfolio by monoline insurer as of September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Market Value of Insured
|
|
|
Percentage of
|
|
|
Underlying Rating of
|
|
|
|
Municipal Bonds
|
|
|
Municipal Bond
|
|
|
Insured Municipal
|
|
Monoline Insurer
|
|
(In Millions)
|
|
|
Portfolio
|
|
|
Bonds
|
|
Financial Security
Assurance, Inc.
|
|
$
|
341.0
|
|
|
|
20.3
|
%
|
|
AA
|
MBIA, Inc.
|
|
|
308.1
|
|
|
|
18.3
|
|
|
AA
|
FGIC Corporation.
|
|
|
208.1
|
|
|
|
12.4
|
|
|
AA-
|
AMBAC Financial Group, Inc.
|
|
|
178.3
|
|
|
|
10.6
|
|
|
AA-
|
Berkshire Hathaway
Assurance Company
|
|
|
4.7
|
|
|
|
0.3
|
|
|
A+
|
XL Capital, LTD.
|
|
|
4.2
|
|
|
|
0.2
|
|
|
A
|
Assured Guaranty Corp.
|
|
|
1.9
|
|
|
|
0.1
|
|
|
A
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1046.3
|
|
|
|
62.2
|
%
|
|
AA
|
At the time of purchase, each municipal bond is evaluated with regard to certain characteristics,
including, but not limited to, the issuer, the underlying obligation and/or the revenue
pledge/collateral. The presence of any financial guarantee insurance is not an attribute used in
the purchase decision. We consider the financial guarantee insurance to be additional
protection. As of September 30, 2008, we had no impairments or surveillance issues related to
these insured municipal bonds.
Securities with an Unrealized Loss as of December 31, 2007:
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 shown in the
table include unrealized losses 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:
|
|
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 unrealized
|
46
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
|
|
losses on these securities are generally attributable to spread widening. The primary factor
underlying the spread widening is the increasing market risk aversion to issues surrounding
the monoline financial guarantors, given the monolines significant participation in the
municipal sector through their financial guarantee insurance.
|
|
|
|
|
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. The unrealized losses on these securities are generally attributable to the
recent correction in the Financial Services industry primarily caused by the deterioration of
credit conditions in the marketplace during the third and fourth quarters of 2007. As of
December 31, 2007, these equity securities were evaluated for other than temporary impairment
in accordance with the Companys impairment policy and the Company concluded that these
securities were not other than temporarily impaired.
|
The contractual repayment of the Municipal securities is backed either by the general taxing
authority of the state or political subdivision or by general or specific revenues of the public
authorities. Additionally, a portion of the securities are backed by financial guarantee insurance
issued by the monoline financial guarantors. The contractual terms of these investments do not
permit the issuer to settle the securities at a price less than the amortized costs of the
investments. Given the investment grade credit quality of the issuers represented in the Municipal
portfolio, without considering any monoline financial guarantee, we believe we will be able to
collect all amounts due according to the contractual terms of the investments. At the present time,
we have the ability and intent to hold these securities until a recovery of fair value, which may
be maturity; therefore, we do not consider these investments to be other than temporarily impaired
as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses as of December 31, 2007
|
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
Excluding Interests
|
|
|
Interests in
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
Continuous time in
|
|
in Securitized
|
|
|
Securitized
|
|
|
Available
|
|
|
Equity
|
|
|
Total
|
|
Unrealized loss position
|
|
Assets
|
|
|
Assets
|
|
|
for Sale
|
|
|
Securities
|
|
|
Investments
|
|
0 3 months
|
|
$
|
0.2
|
|
|
$
|
0.7
|
|
|
$
|
0.9
|
|
|
$
|
8.1
|
|
|
$
|
9.0
|
|
>3 6 months
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
6.5
|
|
|
|
6.6
|
|
>6 9 months
|
|
|
0.8
|
|
|
|
|
|
|
|
0.8
|
|
|
|
7.6
|
|
|
|
8.4
|
|
>9 12 months
|
|
|
1.3
|
|
|
|
|
|
|
|
1.3
|
|
|
|
|
|
|
|
1.3
|
|
>12 18 months
|
|
|
0.2
|
|
|
|
|
|
|
|
0.2
|
|
|
|
|
|
|
|
0.2
|
|
>18 24 months
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
> 24 months
|
|
|
1.4
|
|
|
|
2.2
|
|
|
|
3.6
|
|
|
|
|
|
|
|
3.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Unrealized Losses
|
|
$
|
4.0
|
|
|
$
|
3.0
|
|
|
$
|
7.0
|
|
|
$
|
22.2
|
|
|
$
|
29.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair value of
securities with a gross
unrealized loss
|
|
$
|
570.4
|
|
|
$
|
357.6
|
|
|
$
|
928.0
|
|
|
$
|
118.1
|
|
|
$
|
1,046.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our impairment evaluation as of December 31, 2007 for fixed maturities available for sale excluding
interests in securitized assets resulted in the following conclusions:
US
Treasury Securities and Obligations of U.S. Government
Agencies:
The unrealized losses on our Aaa/AAA rated investments in U.S. Treasury Securities and
Obligations of U.S. Government Agencies are attributable to interest rate fluctuations since the
date of purchase. Of the 30 investment positions held, approximately 26.7% were in an
unrealized loss position. The contractual terms of the investments do not permit the issuer to
settle the securities at a price less than the amortized cost of the investments.
Obligations of States and Political Subdivisions:
The unrealized losses on our investments in long term tax exempt securities, which have ratings
of A1/A+ to AAA/Aaa, are generally caused by spread widening. Of the 873 investment positions
held, approximately 32.8% were in an unrealized loss position. The contractual terms of the
investments do not permit the issuer to settle the securities at a price less than the amortized
cost of the investments.
47
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Corporate and Bank Debt Securities:
The unrealized losses on our long term investments in Corporate bonds, which have ratings from
Baa3/BBB to Aaa/AAA, are generally caused by spread widening. Of the 73 investment positions
held, approximately 79.5% were in an unrealized loss position. The contractual terms of the
investments do not permit the issuer to settle the securities at a price less than the amortized
cost of the investments.
Our impairment evaluation as of December 31, 2007 for interests in securitized assets resulted in
the following conclusions:
Asset Backed Securities:
The unrealized losses on our investments in Asset Backed Securities, which have ratings from
A2/A to Aaa/AAA are generally caused by spread widening. Of the 116 investment positions held,
approximately 40.5% were in an unrealized loss position. The contractual terms of the
investments do not permit the issuer to settle the security at a price less than the amortized
cost of the investments.
Mortgage Pass-Through Securities:
The unrealized losses on our investments in Mortgage Pass-Through Securities which have ratings
of Aaa/AAA are generally caused by spread widening. Of the 150 investment positions held,
approximately 38.7% were in an unrealized loss position. The contractual terms of the
investments do not permit the issuer to settle the security at a price less than the amortized
cost of the investments.
Collateralized Mortgage Obligations:
The unrealized losses on our investments in Collateralized Mortgage Obligations which have
ratings of Aa2/AA+ to Aaa/AAA are generally caused by spread widening. Of the 172 investment
positions held, approximately 41.3% were in an unrealized loss position. The contractual terms
of the investments do not permit the issuer to settle the security at a price less than the
amortized cost of the investments.
Our impairment evaluation as of December 31, 2007 for equity securities resulted in the conclusion
that we do not consider the equity securities to be other than temporarily impaired. Of the 2,674
investment positions held, approximately 38.4% were in an unrealized loss position.
Gross Realized Losses:
For the three months ended September 30, 2008, we did not have a gross loss on the sale of fixed
maturity securities. For the three months ended September 30, 2008, our gross loss on the sale of
equity securities was $9.0 million. The fair value of the equity securities at the time of sale
was $6.1 million.
For the three months ended September 30, 2007, our gross loss on the sale of fixed maturity and
equity securities was $0 million and $0.4 million, respectively. The fair value of the fixed
maturity and equity securities at the time of sale was $0 million and $3.4 million, respectively.
For the nine months ended September 30, 2008, we did not have a gross loss on the sale of fixed
maturity securities. For the nine months ended September 30, 2008, our gross loss on the sale of
equity securities was $15.3 million. The fair value of the equity securities at the time of sale
was $19.7 million. $2.7 million of the $15.3 million gross loss on the sale of equity securities
for the nine months ended September 30, 2008 resulted from the sale during the three months ended
March 31, 2008 of the common stock we held in The Bear Stearns
Companies, Inc., while $6.4 and $1.4
million of the $15.3 million gross loss resulted from the sale during the three months ended
September 30, 2008 of the common stock we held in American International Group, Inc. and Washington
Mutual, Inc., respectively.
For the nine months ended September 30, 2007, our gross loss on the sale of fixed maturity and
equity securities amounted to $0.3 million and $2.5 million, respectively. $1.2 million of the
$2.5 million gross loss on the sale of equity securities for the nine months ended September 30,
2007 was a result of the liquidation of one of our equity portfolios following the decision to
change one of our common stock investment managers. The $1.2 million realized gross loss on the
sale of equity securities was in addition to the $1.6 million impairment loss recognized during the
three months ended March 31, 2007 arising from the initial decision to change one of our common
stock
48
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
investment managers and no longer hold the securities to recovery. The fair value of the fixed
maturity and equity securities at the time of sale was $33.7 million and $31.3 million,
respectively.
Liquidity and Capital Resources
For the nine months ended September 30, 2008, our fixed maturity investments experienced unrealized
investment depreciation of $67.8 million, net of the related deferred tax benefit of $36.5 million,
and our equity investments experienced unrealized investment depreciation of $25.4 million, net of
the related deferred tax benefit of $13.7 million.
As of September 30, 2008, we had total investments with a carrying value of $3,131.0 million, of
which 88.8% consisted of investments in fixed maturity securities, including U.S. treasury
securities and obligations of U.S. government corporations and agencies, obligations of states and
political subdivisions, corporate debt securities, collateralized mortgage, mortgage pass-through
and asset backed securities. The remaining 11.2% of our total investments consisted primarily of
publicly traded common stock securities.
We produced net cash from operations of $422.7 million and $403.3 million for the nine months ended
September 30, 2008 and 2007, respectively. Sources of operating funds consist primarily of net
premiums written and investment income. Funds are used primarily to pay claims and operating
expenses and for the purchase of investments. Cash from operations for the nine months ended
September 30, 2008 was primarily generated from premium growth during the current year as a result
of increases in the number of policies written. Net loss and loss expense payments were $448.8
million and $321.0 million, respectively, for the nine months ended September 30, 2008 and 2007.
We believe we have adequate liquidity to pay all claims and meet all other cash needs.
We generated $103.8 million of net cash from financing activities during the nine months ended
September 30, 2008.
Cash provided by financing activities consisted of:
|
|
|
$130.6 million of cash provided from borrowings from the Federal Home Loan Bank of
Pittsburgh (FHLB),
|
|
|
|
|
$45.0 million of cash provided from borrowings from our unsecured $50.0 million credit
agreement,
|
|
|
|
|
$7.4 million of cash provided from proceeds from the issuance of shares pursuant to our
stock based compensation plans and stock purchase plans,
|
|
|
|
|
$5.7 million of cash provided from excess tax benefit from the issuance of shares
pursuant to stock based compensation plans, and
|
|
|
|
|
$3.0 million of cash provided from the collection of notes receivable associated with
our employee stock purchase plans.
|
Cash used for financing activities included:
|
|
|
$42.9 million of cash used to repurchase common stock under our stock purchase
authorization;
|
|
|
|
|
$45.0 million of cash used for repayments on our unsecured $50.0 million credit
agreement.
|
During the nine months ended September 30, 2008, Philadelphia Consolidated Holding Corp. received
$80.0 million of dividend payments from Philadelphia Indemnity Insurance Company, one of our
Insurance Subsidiaries.
On July 11, 2008, we entered into an Amended and Restated Credit Agreement (the Amended Credit
Agreement) with Bank of America, N.A. and Wachovia Bank, National Association. The Amended Credit
Agreement amended and restated our existing unsecured Credit Agreement. The Amended Credit
Agreement changed the terms of our existing Credit Agreement by extending the maturity date of our
revolving credit facility to June 26, 2009, including a $10.0 million letter of credit facility as
part of the aggregate $50.0 million revolving credit commitments of the Bank lenders, and
increasing the unused commitment fee from .06% to .07% per annum. The Amended Credit Agreement
provides capacity for working capital and other general corporate purposes and contains various
representations, covenants and events of default typical for credit facilities of this type. As of
September 30, 2008,
49
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
no borrowings were outstanding under the Amended Credit Agreement. Additionally, we not do
believe our ability to borrow under our Amended Credit Agreement has been adversely impacted by the
recent increased volatility in the capital markets or the adverse conditions in the financial
services industry.
Two of our Insurance Subsidiaries are members of 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 members access to credit is based upon its FHLB eligible collateral. Our
Insurance Subsidiaries have utilized a portion of their borrowing capacity to purchase a
diversified portfolio in investment grade floating rate securities. These purchases were funded by
floating rate FHLB borrowing to achieve a positive spread between the rate of interest on these
securities and borrowing rates. As of September 30, 2008 our Insurance Subsidiaries unused
borrowing capacity was $334.1 million. The remaining borrowing capacity will provide an
immediately available line of credit. As of September 30, 2008, our Insurance Subsidiaries had
$130.6 million of borrowings outstanding at interest rates ranging from LIBOR plus 0.15% to LIBOR
plus 0.41% which mature twelve months or less from inception and are collateralized by $131.2
million of our fixed maturity securities. We do not believe our ability to borrow from the FHLB
has been adversely impacted by the recent increased volatility in the capital markets or the
adverse conditions in the financial services industry.
The NAICs 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 companys 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 insurers domiciliary insurance department and ultimately rehabilitation or
liquidation. Based on the standards currently adopted, our Insurance Subsidiaries capital and
surplus is in excess of the prescribed risk-based capital requirements.
New Accounting Pronouncements
In March 2008, the FASB issued Statement No. 161
Disclosures about Derivative Instruments and
Hedging Activities
(SFAS 161) to enhance disclosures about an entitys derivative and hedging
activities. SFAS 161 is effective for all financial statements issued in fiscal years and interim
periods beginning after November 15, 2008 and early application is encouraged. SFAS 161 also
encourages, but does not require comparative disclosures for earlier periods at initial adoption.
Because we do not currently engage in derivative transactions or hedging activities, we do not
anticipate any significant financial statement disclosure impact resulting from SFAS 161.
In April 2008, the FASB issued Staff Position No. FAS 142-3
Determination of the Useful Life of
Intangible Assets
(FSP FAS 142-3). FSP FAS 142-3 amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142
Goodwill and Other Intangible Assets
(SFAS 142), in
order to improve the consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under
SFAS 141R
Business Combinations
and other U.S. generally accepted accounting principles. FSP FAS
142-3 is effective for fiscal years beginning after December 15, 2008. We do not anticipate any
significant financial statement impact resulting from FSP FAS 142-3.
In May 2008, the FASB issued Statement No. 162
The Hierarchy of Generally Accepted Accounting
Principles
(SFAS 162) to identify the sources of accounting principles and provide a framework
for selecting the principles to be used in the preparation of financial statements in accordance
with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days
following the Securities and Exchange Commissions approval of the Public Company Accounting
Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles
, which occurred on September 16, 2008. We do not
anticipate any significant financial statement impact resulting from SFAS 162.
In May 2008, the FASB issued Statement No. 163
Accounting for Financial Guarantee Insurance
Contracts an interpretation of FASB Statement No. 60
(SFAS 163) to eliminate diversity in
practice in accounting for financial guarantee insurance contracts by insurance enterprises under
FASB Statement No. 60
Accounting and Reporting by Insurance Enterprises
. SFAS 163 is effective for
all financial statements issued in fiscal years and interim periods beginning after December 15,
2008, with the exception of the new requirements relating to disclosures about insurance
enterprises risk-management activities used to track and monitor deteriorating insured financial
50
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
obligations, which are effective for the first period, including interim periods, after the
issuance of SFAS 163. Except for these risk-management disclosures, early application is not
permitted. As we do not currently enter into financial guarantee insurance contracts, we do not
anticipate any significant financial statement or disclosure impact resulting from SFAS 163.
51
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our financial instruments are subject to the market risk of potential losses from adverse changes
in market rates and prices. The primary market risks to us are equity price risks associated with
investments in equity securities and interest rate and spread risks associated with investments in
fixed maturities. We have established, among other criteria, duration, asset quality and asset
allocation guidelines for managing our investment portfolio market risk exposure. Our investments
are classified as Available for Sale and consist of diversified issuers and issues.
The table below provides information about our financial instruments that are sensitive to changes
in interest rates and shows the effect of hypothetical changes in interest rates as of September
30, 2008 and 2007. The selected hypothetical changes do not indicate what could be the potential
best or worst case scenarios. The information is presented in U.S. dollar equivalents, which is our
reporting currency.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
Hypothetical Percentage
|
|
|
|
|
|
|
Hypothetical Change
|
|
Fair Value after
|
|
Increase (Decrease) in
|
|
|
Estimated
|
|
in Interest Rates
|
|
Hypothetical Changes
|
|
|
|
|
|
Shareholders
|
|
|
Fair Value
|
|
(bp=basis points)
|
|
in Interest Rates
|
|
Fair Value
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
September 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Available For Sale
|
|
$
|
2,778,992
|
|
|
200 bp decrease
|
|
$
|
3,096,112
|
|
|
|
11.4
|
%
|
|
|
12.8
|
%
|
|
|
|
|
|
|
100 bp decrease
|
|
$
|
2,937,059
|
|
|
|
5.7
|
%
|
|
|
6.4
|
%
|
|
|
|
|
|
|
50 bp decrease
|
|
$
|
2,857,388
|
|
|
|
2.8
|
%
|
|
|
3.2
|
%
|
|
|
|
|
|
|
50 bp increase
|
|
$
|
2,702,522
|
|
|
|
(2.8
|
)%
|
|
|
(3.1
|
)%
|
|
|
|
|
|
|
100 bp increase
|
|
$
|
2,628,298
|
|
|
|
(5.4
|
)%
|
|
|
(6.1
|
)%
|
|
|
|
|
|
|
200 bp increase
|
|
$
|
2,487,892
|
|
|
|
(10.5
|
)%
|
|
|
(11.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Available For Sale
|
|
$
|
2,495,045
|
|
|
200 bp decrease
|
|
$
|
2,716,811
|
|
|
|
8.9
|
%
|
|
|
9.8
|
%
|
|
|
|
|
|
|
100 bp decrease
|
|
$
|
2,615,041
|
|
|
|
4.8
|
%
|
|
|
5.3
|
%
|
|
|
|
|
|
|
50 bp decrease
|
|
$
|
2,556,403
|
|
|
|
2.5
|
%
|
|
|
2.7
|
%
|
|
|
|
|
|
|
50 bp increase
|
|
$
|
2,432,864
|
|
|
|
(2.5
|
)%
|
|
|
(2.8
|
)%
|
|
|
|
|
|
|
100 bp increase
|
|
$
|
2,371,115
|
|
|
|
(5.0
|
)%
|
|
|
(5.5
|
)%
|
|
|
|
|
|
|
200 bp increase
|
|
$
|
2,251,758
|
|
|
|
(9.7
|
)%
|
|
|
(10.8
|
)%
|
52
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our disclosure controls and procedures,
as that term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the
Exchange Act), are designed with the objective of providing reasonable assurance that information
required to be disclosed in our reports filed or submitted under the Exchange Act, such as this
report, is recorded, processed, summarized and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission (the SEC). In designing and evaluating
our disclosure controls and procedures, our management recognizes that any disclosure controls and
procedures, no matter how well designed and operated, can provide only reasonable, rather than
absolute, assurance of achieving the desired control objectives.
An evaluation was performed by our management, with the participation of our chief executive
officer (CEO) and chief financial officer (CFO), of the effectiveness of the design and
operation of our disclosure controls and procedures as of the end of the period covered by this
report. Based on this evaluation, our CEO and CFO have concluded that, as of the end of such
period, our disclosure controls and procedures are effective to provide reasonable assurance that
information required to be disclosed in the reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported, within the time periods specified in the SECs
rules and forms and made known to our management, including our CEO and CFO, as appropriate, to
allow timely decisions regarding required disclosures.
(b) Changes in Internal Controls. There has been no change in our internal control over
financial reporting during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
53
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 1A. Risk Factors
There were no material changes to the risk factors disclosed in Item 1A of the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2007, except for risks
related to the proposed merger with an indirect wholly-owned subsidiary of Tokio Marine
Holdings, Inc. (TMHD), referred in Note 15 to the consolidated financial statements
included in this Form 10-Q. The Company is subject to several risks relating to the proposed
merger, including the following:
(a) if the merger is not completed, the share price of our common stock may decline
significantly;
(b) the occurrence of any circumstance that could give rise to the termination of the Merger
Agreement; in certain circumstances we may, in the event of such termination, be obligated to
pay to TMHD (i) a termination fee of $141.0 million and (ii) an expense reimbursement of up
to $15.0 million;
(c) failure of TMHD to obtain certain required regulatory approvals, or the failure to
satisfy certain other conditions would prevent the closing of the merger;
(d) the failure of the merger to be completed for any reason;
(e) the risk that the proposed merger could disrupt our operations and that our managements
and employees attention may be diverted from day-to-day operations; and
(f) the effect of the announcement of the merger on our employee, agency and broker
relationships, operating results and business generally.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Companys purchases of its common stock during the third quarter of 2008 are shown in the
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total
|
|
(d)
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Dollar Value of
|
|
|
|
|
|
|
|
|
|
|
Purchased as
|
|
Shares That
|
|
|
|
|
|
|
|
|
|
|
Part of
|
|
May Yet Be
|
|
|
|
|
|
|
|
|
|
|
Publicly
|
|
Purchased
|
|
|
(a) Total Number
|
|
(b) Average
|
|
Announced
|
|
Under the
|
|
|
of Shares
|
|
Price Paid per
|
|
Plans or
|
|
Plans or
|
Period
|
|
Purchased
|
|
Share
|
|
Programs
|
|
Programs
|
July 1 July 31
|
|
|
800
|
(1)
|
|
$
|
43.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,100,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1 August 31
|
|
|
1,910
|
(1)
|
|
$
|
36.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,100,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1 September 30
|
|
|
2,726
|
(1)
|
|
$
|
35.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,100,000
|
(2)
|
|
|
|
(1)
|
|
Such shares were issued under the Companys Employee Stock Purchase Plan and
Amended and Restated Employees Stock Incentive and Performance Based Compensation Plan
and were repurchased by the Company upon the employees termination.
|
|
(2)
|
|
The Companys total stock purchase authorization, which was publicly announced
in August 1998 and subsequently increased, was $125.3 million as of September 30, 2008.
As of September 30, 2008, $73.2 million has been utilized.
|
54
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibits:
|
|
|
Exhibit No.
|
|
Description
|
|
|
|
10.1*
|
|
Interest and Liabilities Agreement to the Property Fourth Per
Risk Excess of Loss Reinsurance Agreement with Swiss
Reinsurance America Corporation effective January 1, 2008
|
|
|
|
10.2*
|
|
Interest and Liabilities Agreement to the Property Fifth Per
Risk Excess of Loss Reinsurance Agreement with Swiss
Reinsurance America Corporation effective January 1, 2008
|
|
|
|
10.3*
|
|
Property Facultative Agreement of Reinsurance No. P304 with
General Reinsurance Corporation effective January 1, 2008
|
|
|
|
31.1*
|
|
Certification of the Companys chief executive officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2*
|
|
Certification of the Companys chief financial officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.1*
|
|
Certification of the Companys chief executive officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2*
|
|
Certification of the Companys chief financial officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
55
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
PHILADELPHIA CONSOLIDATED HOLDING CORP.
|
|
|
|
Registrant
|
|
|
|
|
|
|
|
Date November 10, 2008
|
|
James J. Maguire, Jr.
James J. Maguire, Jr.
|
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
Date November 10, 2008
|
|
Craig P. Keller
|
|
|
|
|
|
|
|
|
|
Craig P. Keller
|
|
|
|
|
Executive Vice President,
Secretary,
|
|
|
|
|
Treasurer and Chief Financial Officer
|
|
|
|
|
(Principal Financial and Accounting Officer)
|
|
|
56