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 March 31, 2008
Commission File Number 0-22280
PHILADELPHIA CONSOLIDATED HOLDING CORP.
(Exact name of registrant as specified in its charter)
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PENNSYLVANIA
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23-2202671
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(State of Incorporation)
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(IRS Employer Identification No.)
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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 one):
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
April 30, 2008.
Common
Stock, no par value, 71,426,658 shares outstanding
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX
For the Quarterly Period Ended March 31, 2008
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Part I Financial Information
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Item 1. Financial Statements:
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3
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4
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5
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6
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7 - 22
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23 - 36
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37
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38
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39
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39
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39
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40
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40
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40
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40
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41
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2
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
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As of
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March 31, 2008
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December 31,
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(Unaudited)
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2007
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ASSETS
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INVESTMENTS:
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FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $2,745,827 AND $2,639,471)
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$
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2,766,054
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$
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2,659,197
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EQUITY SECURITIES AT MARKET (COST $323,474
AND $322,877)
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331,041
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356,026
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TOTAL INVESTMENTS
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3,097,095
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3,015,223
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CASH AND CASH EQUIVALENTS
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113,105
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106,342
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ACCRUED INVESTMENT INCOME
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28,213
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24,964
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PREMIUMS RECEIVABLE
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385,997
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378,217
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PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES
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269,805
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280,110
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DEFERRED INCOME TAXES
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59,399
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42,855
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DEFERRED ACQUISITION COSTS
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186,579
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184,446
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PROPERTY AND EQUIPMENT, NET
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25,539
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26,330
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OTHER ASSETS
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79,957
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41,451
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TOTAL ASSETS
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$
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4,245,689
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$
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4,099,938
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LIABILITIES AND SHAREHOLDERS EQUITY
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POLICY LIABILITIES AND ACCRUALS:
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UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
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$
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1,504,575
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$
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1,431,933
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UNEARNED PREMIUMS
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861,663
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847,485
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TOTAL POLICY LIABILITIES AND ACCRUALS
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2,366,238
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2,279,418
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PREMIUMS PAYABLE
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74,011
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97,674
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OTHER LIABILITIES
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245,696
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175,373
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TOTAL LIABILITIES
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2,685,945
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2,552,465
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COMMITMENTS AND CONTINGENCIES
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SHAREHOLDERS EQUITY:
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PREFERRED STOCK, $.01 PAR VALUE,
10,000,000 SHARES AUTHORIZED,
NONE ISSUED AND OUTSTANDING
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COMMON STOCK, NO PAR VALUE,
100,000,000 SHARES AUTHORIZED, 71,216,436 AND
72,087,287 SHARES ISSUED AND OUTSTANDING
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388,144
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423,379
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NOTES RECEIVABLE FROM SHAREHOLDERS
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(18,462
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(19,595
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ACCUMULATED OTHER COMPREHENSIVE INCOME
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18,066
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34,369
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RETAINED EARNINGS
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1,171,996
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1,109,320
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TOTAL SHAREHOLDERS EQUITY
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1,559,744
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1,547,473
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TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
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$
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4,245,689
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$
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4,099,938
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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)
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For the Three Months
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Ended March 31,
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2008
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2007
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REVENUE:
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NET EARNED PREMIUMS
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$
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379,388
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$
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318,718
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NET INVESTMENT INCOME
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32,005
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26,973
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NET REALIZED INVESTMENT GAIN (LOSS)
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(11,394
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)
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1,757
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OTHER INCOME
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1,353
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830
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TOTAL REVENUE
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401,352
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348,278
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LOSSES AND EXPENSES:
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LOSS AND LOSS ADJUSTMENT EXPENSES
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223,386
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160,519
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NET REINSURANCE RECOVERIES
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(29,967
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(10,014
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NET LOSS AND LOSS ADJUSTMENT EXPENSES
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193,419
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150,505
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ACQUISITION COSTS AND OTHER UNDERWRITING
EXPENSES
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114,156
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96,904
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OTHER OPERATING EXPENSES
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3,589
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3,155
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TOTAL LOSSES AND EXPENSES
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311,164
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250,564
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INCOME BEFORE INCOME TAXES
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90,188
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97,714
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INCOME TAX EXPENSE (BENEFIT):
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CURRENT
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35,278
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36,819
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DEFERRED
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(7,766
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(5,085
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TOTAL INCOME TAX EXPENSE
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27,512
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31,734
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NET INCOME
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$
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62,676
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$
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65,980
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OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
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HOLDING INCOME (LOSS) ARISING DURING PERIOD
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$
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(23,709
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$
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8,881
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RECLASSIFICATION ADJUSTMENT
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7,406
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(1,142
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OTHER COMPREHENSIVE INCOME (LOSS)
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(16,303
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7,739
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COMPREHENSIVE INCOME
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$
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46,373
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$
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73,719
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PER AVERAGE SHARE DATA:
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NET INCOME BASIC
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$
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0.89
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$
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0.94
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NET INCOME DILUTED
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$
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0.86
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$
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0.89
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WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING
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70,448,471
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70,148,787
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WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING
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2,581,468
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4,054,030
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WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING
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73,029,939
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74,202,817
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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)
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For the Three
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Months Ended
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March 31, 2008
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For the Year Ended
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(Unaudited)
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December 31, 2007
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COMMON SHARES:
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BALANCE AT BEGINNING OF YEAR
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72,087,287
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70,848,482
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ISSUANCE (FORFEITURE) OF SHARES PURSUANT TO
STOCK PURCHASE PLANS, NET
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(5,796
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)
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491,416
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ISSUANCE OF SHARES PURSUANT TO STOCK
BASED COMPENSATION PLANS
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488,145
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747,389
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LESS TREASURY SHARES ACQUIRED
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(1,353,200
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)
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BALANCE AT END OF PERIOD
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71,216,436
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72,087,287
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COMMON STOCK:
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BALANCE AT BEGINNING OF YEAR
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$
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423,379
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$
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376,986
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ISSUANCE (FORFEITURE) OF SHARES PURSUANT TO STOCK
PURCHASE PLANS
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(367
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)
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16,448
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EFFECTS OF ISSUANCE OF SHARES PURSUANT TO STOCK
BASED COMPENSATION PLANS
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8,033
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29,155
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OTHER
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790
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LESS COST OF TREASURY SHARES ACQUIRED
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(42,901
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)
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BALANCE AT END OF PERIOD
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388,144
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423,379
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NOTES RECEIVABLE FROM SHAREHOLDERS:
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BALANCE AT BEGINNING OF YEAR
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(19,595
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)
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(17,074
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)
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NOTES RECEIVABLE (ISSUED) FORFEITURES PURSUANT TO
EMPLOYEE STOCK PURCHASE PLANS
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428
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(8,466
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)
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COLLECTION OF NOTES RECEIVABLE
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705
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5,945
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BALANCE AT END OF PERIOD
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(18,462
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)
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(19,595
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)
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ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXES:
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BALANCE AT BEGINNING OF YEAR
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34,369
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24,848
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OTHER COMPREHENSIVE INCOME (LOSS) INCOME,
NET OF TAXES
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(16,303
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)
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9,521
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BALANCE AT END OF PERIOD
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18,066
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34,369
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RETAINED EARNINGS:
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BALANCE AT BEGINNING OF YEAR
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1,109,320
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|
782,507
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NET INCOME
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62,676
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326,813
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BALANCE AT END OF PERIOD
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|
1,171,996
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|
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1,109,320
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|
|
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TOTAL SHAREHOLDERS EQUITY
|
|
$
|
1,559,744
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|
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$
|
1,547,473
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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 Three Months Ended March 31,
|
|
|
|
2008
|
|
|
2007
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
62,676
|
|
|
$
|
65,980
|
|
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
|
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|
|
|
|
|
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NET REALIZED INVESTMENT (GAIN) LOSS
|
|
|
11,394
|
|
|
|
(1,757
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)
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AMORTIZATION OF INVESTMENT PREMIUMS, NET OF DISCOUNT
|
|
|
2,217
|
|
|
|
1,513
|
|
AMORTIZATION OF INTANGIBLE ASSETS
|
|
|
789
|
|
|
|
661
|
|
DEPRECIATION
|
|
|
2,110
|
|
|
|
1,886
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|
DEFERRED INCOME TAX BENEFIT
|
|
|
(7,766
|
)
|
|
|
(5,085
|
)
|
CHANGE IN PREMIUMS RECEIVABLE
|
|
|
(7,780
|
)
|
|
|
19,541
|
|
CHANGE IN PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES, NET OF FUNDS HELD PAYABLE TO REINSURER
|
|
|
10,305
|
|
|
|
10,955
|
|
CHANGE IN ACCRUED INVESTMENT INCOME
|
|
|
(3,249
|
)
|
|
|
(2,333
|
)
|
CHANGE IN DEFERRED ACQUISITION COSTS
|
|
|
(2,133
|
)
|
|
|
(6,411
|
)
|
CHANGE IN INCOME TAXES PAYABLE
|
|
|
34,819
|
|
|
|
28,426
|
|
CHANGE IN OTHER ASSETS
|
|
|
(5,512
|
)
|
|
|
433
|
|
CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES
|
|
|
72,642
|
|
|
|
47,419
|
|
CHANGE IN UNEARNED PREMIUMS
|
|
|
14,178
|
|
|
|
16,501
|
|
CHANGE IN OTHER LIABILITIES
|
|
|
(24,750
|
)
|
|
|
(5,129
|
)
|
FAIR VALUE OF STOCK BASED COMPENSATION
|
|
|
4,155
|
|
|
|
3,536
|
|
EXCESS TAX BENEFIT FROM ISSUANCE OF SHARES PURSUANT TO
STOCK BASED COMPENSATION PLANS
|
|
|
(1,175
|
)
|
|
|
(2,464
|
)
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
162,920
|
|
|
|
173,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
PROCEEDS FROM SALES OF INVESTMENTS IN FIXED MATURITIES
|
|
|
500
|
|
|
|
10,436
|
|
PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED MATURITIES
|
|
|
78,840
|
|
|
|
60,795
|
|
PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY SECURITIES
|
|
|
23,088
|
|
|
|
39,042
|
|
COST OF FIXED MATURITIES ACQUIRED
|
|
|
(187,980
|
)
|
|
|
(204,281
|
)
|
COST OF EQUITY SECURITIES ACQUIRED
|
|
|
(33,147
|
)
|
|
|
(46,366
|
)
|
PURCHASE OF PROPERTY AND EQUIPMENT, NET
|
|
|
(1,319
|
)
|
|
|
(1,385
|
)
|
PURCHASE OF INTANGIBLES
|
|
|
|
|
|
|
(7,914
|
)
|
PAYMENT FOR ACQUISITION, NET OF CASH ACQUIRED
|
|
|
(32,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH USED BY INVESTING ACTIVITIES
|
|
|
(152,899
|
)
|
|
|
(149,673
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
REPAYMENTS ON LOANS
|
|
|
(10,000
|
)
|
|
|
|
|
PROCEEDS FROM LOANS
|
|
|
45,000
|
|
|
|
|
|
PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS
|
|
|
2,703
|
|
|
|
2,654
|
|
PROCEEDS FROM COLLECTION OF SHAREHOLDER NOTES RECEIVABLE
|
|
|
704
|
|
|
|
1,007
|
|
PROCEEDS FROM SHARES ISSUED PURSUANT TO
STOCK PURCHASE PLANS
|
|
|
61
|
|
|
|
101
|
|
EXCESS TAX BENEFIT FROM ISSUANCE OF SHARES PURSUANT TO
STOCK BASED COMPENSATION PLANS
|
|
|
1,175
|
|
|
|
2,464
|
|
COST OF COMMON STOCK REPURCHASED
|
|
|
(42,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
|
|
|
(3,258
|
)
|
|
|
6,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
6,763
|
|
|
|
30,225
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
106,342
|
|
|
|
108,671
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
113,105
|
|
|
$
|
138,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH TRANSACTIONS:
|
|
|
|
|
|
|
|
|
FORFEITURES OF SHARES PURSUANT TO EMPLOYEE STOCK
PURCHASE PLANS IN EXCHANGE FOR NOTES RECEIVABLE
|
|
$
|
(428
|
)
|
|
$
|
(99
|
)
|
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 March 31, 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 three months ended March 31, 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 (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 March 31, 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.
|
|
|
|
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). Historically, the Companys external fixed
maturity investment manager has provided pricing for the Companys financial assets based upon
pricing methodologies approved by the investment managers internal pricing committee utilizing
pricing information from market vendors on a pre-established provider list. As of March 31,
2008, the Companys external fixed maturity investment manager has assisted the Company in
measuring the fair value of these financial assets accounted for under SFAS 115, in accordance
with the provisions of SFAS 157. 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 March 31, 2008, the Company has no liabilities required to be measured at fair value in
accordance with the provisions of SFAS 157.
|
|
|
|
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.
7
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.
As of March 31, 2008, the Company primarily measured the fair value of its financial assets
which are measured on a recurring basis utilizing the Market Approach. Certain other financial
assets were measured using the Income Approach. The Company has consistently applied these
valuation techniques during the three months ended March 31, 2008.
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 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). 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 following is a description of the Companys categorization of the inputs used in the
recurring fair value measurements of its financial assets included in its Consolidated Balance
Sheets as of March 31, 2008:
Level 1 Represents financial assets whose fair value is determined based upon observable
unadjusted quoted market prices for identical financial assets in active markets that the
Company has the ability to access. The Company determines a market to be active if
securities have traded on it within the last 7 business days. An example of a Level 1 input
utilized to measure fair value includes the closing price of one share of common stock on an
active exchange market.
Level 2 Represents financial assets whose fair value is determined based upon: quoted
market prices for similar assets 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. An example of a Level 2 input
utilized to measure fair value, specifically for the Companys fixed maturity portfolio, is
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.
Level 3 Represents financial assets whose fair value is determined based upon inputs that
are unobservable, including the Companys own determinations of the assumptions that a
market participant would use in pricing the asset. Examples of a Level 3 input utilized to
measure fair value include broker pricing and net asset value calculations. As financial
assets measured using Level 3 inputs may represent non-investment grade structured
securities, the Company obtains the broker pricing from either the lead manager of the issue
or from the broker used at the time the security was purchased. Material assumptions and
factors considered by the brokers in pricing these securities may include cash flows,
collateral performance including delinquencies, defaults, and recoveries, and any market
clearing activity or liquidity circumstances in the security or benchmark securities that
may have occurred since the prior pricing period. Net asset value calculations are obtained
from the lead investment manager of the asset being measured.
8
The Companys external fixed maturity investment manager 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.
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.
SFAS 157 Recurring Fair Value Measurements:
The following table represents the Companys fair value hierarchy for all assets measured on a
recurring basis as of March 31, 2008 (dollars in thousands):
Fair Value Measurements as of March 31, 2008 Utilizing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
9,642
|
|
|
$
|
4,036
|
|
|
$
|
|
|
|
$
|
13,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of States and
Political Subdivisions
|
|
|
|
|
|
|
1,527,722
|
|
|
|
|
|
|
|
1,527,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Bank Debt
Securities
|
|
|
|
|
|
|
127,265
|
|
|
|
|
|
|
|
127,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Backed Securities
|
|
|
|
|
|
|
165,973
|
|
|
|
9,682
|
|
|
|
175,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Pass-Through Securities
|
|
|
|
|
|
|
605,331
|
|
|
|
|
|
|
|
605,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized Mortgage
Obligations
|
|
|
|
|
|
|
316,261
|
|
|
|
142
|
|
|
|
316,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities
Available For Sale at Market
|
|
$
|
9,642
|
|
|
$
|
2,746,588
|
|
|
$
|
9,824
|
|
|
$
|
2,766,054
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities at Market
|
|
|
314,319
|
|
|
|
323
|
|
|
|
16,399
|
|
|
|
331,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents
|
|
|
118,947
|
|
|
|
|
|
|
|
|
|
|
|
118,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fair Value Measurements
|
|
$
|
442,908
|
|
|
$
|
2,746,911
|
|
|
$
|
26,223
|
|
|
$
|
3,216,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Fair Value
Measurements
|
|
|
13.8
|
%
|
|
|
85.4
|
%
|
|
|
0.8
|
%
|
|
|
100
|
%
|
|
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.
Fair Value Measurements Utilizing Level 3 Inputs:
The $9.7 million of Asset Backed Securities measured utilizing Level 3 inputs included in the
table above primarily represents one security.
9
The $16.4 million of Equity Securities measured utilizing Level 3 inputs included in the table
above consists of $12.0 million of investments in an international equity fund owning
international equity securities, and $4.4 million of investments in limited partnerships.
The following table represents a summary of the changes in the fair value of Companys assets
measured on a recurring basis using Level 3 inputs as of and for the three months March 31, 2008
(dollars in thousands):
Fair Value Measurements Utilizing Significant Unobservable (Level 3) Inputs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
Collateralized
|
|
|
|
|
|
|
Backed
|
|
Mortgage
|
|
Equity
|
|
|
|
|
Securities
|
|
Obligations
|
|
Securities
|
|
Total
|
|
Beginning Balance as of January 1, 2008:
|
|
$
|
10,511
|
|
|
$
|
121
|
|
|
$
|
11,505
|
|
|
$
|
22,137
|
|
Total gains or loss (realized/unrealized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings
|
|
|
1
|
|
|
|
(5
|
)
|
|
|
(603
|
)
|
|
|
(607
|
)
|
Included in Other Comprehensive Income
|
|
|
(770
|
)
|
|
|
34
|
|
|
|
(1,248
|
)
|
|
|
(1,984
|
)
|
Purchases, issuances, settlements
|
|
|
(60
|
)
|
|
|
(8
|
)
|
|
|
6,745
|
|
|
|
6,677
|
|
Transfers in and/or out of Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance as of March 31, 2008:
|
|
$
|
9,682
|
|
|
$
|
142
|
|
|
$
|
16,399
|
|
|
$
|
26,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of total gains or losses for the
three months ended March 31, 2008
included in earnings attributable to the
change in unrealized gains or losses
relating to assets still held as of March
31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains and losses included in earnings for the three months ended March 31, 2008 are
reported as net realized investment gain (loss). During the three months ended March 31, 2008,
the Company recorded $0.6 million 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.
|
|
|
|
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
was to expand the use of fair value measurements by providing entities with the option of
measuring certain financial assets and liablities at fair value, which were previously measured
on a basis other than fair value under existing accounting pronouncements. Due to the fact that
the Company currently records its eligible financial assets at fair value under the provisions
of SFAS 115 and SFAS 157, the Company did not elect the fair value option under SFAS 159 for any
of its eligible financial instruments as of March 31, 2008.
|
|
3.
|
|
Investments
|
|
|
|
Impairment Reviews as of March 31, 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
|
10
investments other than interests in securitized assets, resulted in non-cash realized investment
losses of $11.7 million and $2.5 million, respectively, for the three months ended March 31,
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 months ended March 31, 2008 or 2007
The following table identifies the period of time securities with an unrealized loss as of March
31, 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 1.0% and 23.5%, respectively, of the total estimated fair value,
or 6.5% and 13.7%, 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
|
|
|
(Dollars In Thousands)
|
March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities Available for Sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of States and
Political Subdivisions
|
|
|
609,081
|
|
|
|
13,308
|
|
|
|
94,059
|
|
|
|
4,211
|
|
|
|
703,140
|
|
|
|
17,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and Bank Debt
Securities
|
|
|
43,560
|
|
|
|
653
|
|
|
|
5,587
|
|
|
|
207
|
|
|
|
49,147
|
|
|
|
860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Backed Securities
|
|
|
77,056
|
|
|
|
1,870
|
|
|
|
9,343
|
|
|
|
141
|
|
|
|
86,399
|
|
|
|
2,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Pass-Through Securities
|
|
|
19,419
|
|
|
|
54
|
|
|
|
27,372
|
|
|
|
348
|
|
|
|
46,791
|
|
|
|
402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized Mortgage
Obligations
|
|
|
54,869
|
|
|
|
1,738
|
|
|
|
22,717
|
|
|
|
640
|
|
|
|
77,586
|
|
|
|
2,378
|
|
|
Total Fixed Maturities
Available for Sale
|
|
$
|
803,985
|
|
|
$
|
17,623
|
|
|
$
|
159,078
|
|
|
$
|
5,547
|
|
|
$
|
963,063
|
|
|
$
|
23,170
|
|
|
Equity Securities
|
|
|
136,550
|
|
|
|
28,224
|
|
|
|
|
|
|
|
|
|
|
|
136,550
|
|
|
|
28,224
|
|
|
Total Investments
|
|
$
|
940,535
|
|
|
$
|
45,847
|
|
|
$
|
159,078
|
|
|
$
|
5,547
|
|
|
$
|
1,099,613
|
|
|
$
|
51,394
|
|
|
The Companys impairment evaluation as of March 31, 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 Companys 29 investment positions held in Aaa/AAA rated investments in U.S. Treasury
Securities and Obligations of U.S. Government Agencies were all in an unrealized gain
position as of March 31, 2008.
Obligations of States and Political Subdivisions:
The unrealized losses on the Companys investments in long term tax exempt securities which
have ratings of Baa3/A- to Aaa/AAA are attributable to changes both in market spreads and in
the level of Treasury yields. Of the 932 investment positions held, approximately 39.0%
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.
11
Corporate and Bank Debt Securities:
The unrealized losses on the Companys long term investments in Corporate bonds which have
ratings from Baa3/BBB to Aa3/A+ are attributable primarily to changes in market spreads. Of
the 67 investment positions held, approximately 28.4% 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 March 31, 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 Baa3/BBB to Aaa/AAA are attributable primarily to changes in market spreads. Of
the 110 investment positions held, approximately 58.2% 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 150 investment positions held, approximately 14.0% 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 172 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 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 March 31, 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 2,710 investment positions held,
approximately 48.6% 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 $1,097.4
million as of March 31, 2008. AAA rated securities represented approximately 99.5% of the March
31, 2008 structured securities portfolio. Approximately $929.4 million of the structured
securities investment portfolio is backed by residential collateral, consisting of:
|
|
|
$604.3 million of U.S. government agency backed Mortgage Pass-Through Securities;
|
|
|
|
|
$224.6 million of U.S. government agency backed Collateralized Mortgage Obligations;
|
|
|
|
|
$76.9 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);
|
|
|
|
|
$19.1 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
|
12
|
|
|
$4.5 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).
|
The Companys $23.6 million ALT-A and subprime overall AAA rated loan portfolio is comprised of
20 securities with net unrealized losses of $0.3 million as of March 31, 2008. These securities
have the following characteristics:
|
|
|
first to pay or among the first cash flow tranches of their respective transactions;
|
|
|
|
|
have a weighted average life of 2.3 years;
|
|
|
|
|
are spread across multiple vintages (origination year of underlying collateral pool);
and
|
|
|
|
|
have not experienced any ratings downgrades as of March 31, 2008.
|
The Companys ALT-A and subprime loan portfolio has paid down to $23.6 million as of March 31,
2008, from $27.6 million as of December 31, 2007, and $42.0 million as of June 30, 2007.
As of March 31, 2008, the Company holds no investments in Collateralized Debt Obligations or Net
Interest Margin securities.
Given a combination of events in the housing and mortgage finance sectors, the issues
surrounding the monoline financial guarantors and the impact on municipal and asset backed
finance, fixed maturity and equity markets, in
general, have recently experienced, and may continue to experience,
more volatility than during most prior historical reporting periods
over the last few years. As of March 31, 2008, the Company had no impairments or surveillance
issues related to these market conditions. However, the Company expects that ongoing volatility
in these sectors, in particular, and in spread related sectors, in general, may impact the
prices of securities held in the Companys overall AA+ rated investment portfolio.
Amortized Cost of Structured Securities:
For mortgage and asset-backed securities (structured securities) of high credit quality,
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 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 $1,527.7 million municipal bond overall AAA rated portfolio consists of $946.6
million of insured securities, or 61.9% of the Companys total municipal bond portfolio. The
weighted average underlying rating of the insured portion of our municipal bond portfolio is AA
and the weighted average underlying rating of
13
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 March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value of Insured
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Municipal Bonds
|
|
|
Percentage of Municipal
|
|
|
Underlying Rating of
|
|
Monoline Insurer
|
|
(in Thousands)
|
|
|
Bond Portfolio
|
|
|
Insured Municipal Bonds
|
|
Financial Security
Assurance, Inc.
|
|
$
|
302,945
|
|
|
|
19.8
|
%
|
|
AA
|
MBIA, Inc.
|
|
|
281,452
|
|
|
|
18.4
|
|
|
AA
|
FGIC Corporation
|
|
|
199,067
|
|
|
|
13.0
|
|
|
AA-
|
AMBAC Financial Group, Inc.
|
|
|
158,664
|
|
|
|
10.4
|
|
|
AA-
|
XL Capital, LTD.
|
|
|
4,469
|
|
|
|
0.3
|
|
|
AA-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
946,597
|
|
|
|
61.9
|
%
|
|
AA
|
|
|
|
|
|
|
|
|
|
|
At purchase, each municipal bond is evaluated with regard to the following features: the issuer,
the underlying obligation and/or the revenue pledge/collateral. The presence of the financial
guarantee insurance is not an attribute used in the purchase decision. The Company considers
the financial guarantee insurance to be extra protection. As of March 31, 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
|
|
|
(Dollars 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
|
|
|
14
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 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.
15
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 March 31, 2008 and December 31, 2007, the carrying value of
the securities on deposit totaled $16.0 million and $15.7 million, respectively.
|
|
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 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 March 31,
2008, the related adjustments could have a material adverse impact on the Companys financial
condition and results of operations.
|
|
|
|
During the three months ended March 31, 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
|
|
$
|
1.9
|
|
Accident Year 2006
|
|
|
(4.1
|
)
|
Accident Year 2005
|
|
|
(1.2
|
)
|
Accident Years 2004 and prior
|
|
|
(2.5
|
)
|
|
|
|
|
Total
|
|
$
|
(5.9
|
)
|
|
|
|
|
For accident year 2007, the increase in estimated net unpaid loss and loss adjustment expenses
was principally due to higher loss estimates for commercial property and commercial automobile
coverages due to greater than expected case incurred loss development, primarily as a result of
claim severity being higher 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 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 year 2005, the decrease in estimated net unpaid loss and loss adjustment expenses
was principally due to lower loss estimates for commercial general 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 property, and commercial automobile coverages due to better than expected case
incurred loss development, primarily as a result of claim severity being less than anticipated.
16
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 468,294 and 436,607 stock settled
appreciation rights (SARS) during the three months ended March 31, 2008 and the year ended
December 31, 2007, respectively. The Company also issued 256,595 and 146,884 shares of
restricted stock awards during the three months ended March 31, 2008 and the year ended December
31, 2007, respectively.
|
|
7.
|
|
Stock Repurchase
|
|
|
|
During the three months ended March 31, 2008, the Company repurchased 1,353,200 shares of stock
at a cost of $42.9 million under its stock repurchase authorization. As of March 31, 2008, $2.1
million remains available under previous stock purchase authorizations which aggregated $75.3
million. The Company did not repurchase any shares of stock under its stock repurchase
authorization during the three months ended March 31, 2007.
|
|
|
|
On April 24, 2008, the Companys Board of Directors authorized a $50.0 million increase in its
common stock repurchase program. This $50.0 million authorization is in addition to the $2.1
million remaining under the previous $75.3 million stock purchase authorizations.
|
|
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. Following is the computation of earnings per share for the three months ended March 31,
2008 and 2007, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Three
|
|
|
|
Months Ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2007
|
|
Weighted-Average Common Shares Outstanding
|
|
|
70,449
|
|
|
|
70,149
|
|
|
Weighted-Average Share Equivalents
|
|
|
2,581
|
|
|
|
4,054
|
|
|
|
|
|
|
|
|
|
Weighted-Average Shares and Share Equivalents
|
|
|
73,030
|
|
|
|
74,203
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
62,676
|
|
|
$
|
65,980
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share
|
|
$
|
0.89
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share
|
|
$
|
0.86
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
9.
|
|
Income Taxes
|
|
|
|
The Companys liability for its unrecognized tax benefits was $0.2 million as of March 31, 2008
and December 31, 2007. As of March 31, 2008 and December 31, 2007, the total amount of
unrecognized tax benefits that, if recognized, would affect the effective tax rate was $0.2
million.
|
|
|
|
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 $0.1 million as of
March 31, 2008 and December 31, 2007.
|
17
|
|
The Company and its subsidiaries file Federal and State income tax returns as required, and are
subject to Federal and State examinations for tax years 2003 through 2007, and 2005 through
2007, respectively.
|
|
|
|
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 premiums written
and earned is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
For the Three Months Ended
|
|
|
|
March 31, 2008
|
|
|
March 31, 2007
|
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
Direct Business
|
|
$
|
442,604
|
|
|
$
|
428,292
|
|
|
$
|
393,531
|
|
|
$
|
376,941
|
|
Reinsurance Assumed
|
|
|
483
|
|
|
|
616
|
|
|
|
583
|
|
|
|
673
|
|
Reinsurance Ceded
|
|
|
37,119
|
|
|
|
49,520
|
|
|
|
56,681
|
|
|
|
58,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Premiums
|
|
$
|
405,968
|
|
|
$
|
379,388
|
|
|
$
|
337,433
|
|
|
$
|
318,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 June 29, 2007, the Company amended its unsecured Credit Agreement (the Credit
Agreement) which establishes a revolving credit facility providing for loans to the Company of
up to $50.0 million in principal amount outstanding at any one time. The amended Credit
Agreement has a maturity date of June 27,
|
18
|
|
2008 and contains an annual commitment fee of 6.0 basis points per annum on the unused
commitments under the Credit Agreement. Each loan under the amended Credit Agreement will bear
interest at a per annum rate equal to, at the Companys option, (i) Libor plus 0.35% or (ii) the
higher of the administrative agent and lenders prime rate and the Federal Funds rate plus
0.50%. As of March 31, 2008, $35.0 million of borrowings were outstanding under this Credit
Agreement, at interest rates ranging from 2.91% to 3.35%.
|
|
|
|
The Credit Agreement contains various representations, covenants and events of default typical
for credit facilities of this type. As of March 31, 2008, the Company was in compliance with
all covenants contained in the Credit Agreement.
|
|
|
|
State Insurance Guaranty Funds:
|
|
|
|
As of March 31, 2008 and December 31, 2007, included in Other Liabilities in the Consolidated
Balance Sheets were $15.2 million and $13.2 million, respectively, of liabilities for state
insurance guaranty funds. As of March 31, 2008 and December 31, 2007, included in Other Assets
in the Consolidated Balance Sheets were $0.2 million and $0.2 million, respectively, 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 10% of the deficit or 10%
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. Participating companies
are obligated to purchase any unsold bonds issued by Florida Citizens.
|
|
|
|
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.
|
|
12.
|
|
Comprehensive Income
|
|
|
|
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 months ended March 31, 2008 and 2007 was $(12.8) million and $4.8 million,
respectively. The related tax
|
19
|
|
effect of Reclassification Adjustments for the three months ended March 31, 2008 and 2007 was
$4.0 million and $(0.6) million, respectively.
|
|
13.
|
|
New Accounting Pronouncement
|
|
|
|
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 as a result of its evaluation of SFAS 161.
|
|
14.
|
|
Segment Information
|
|
|
|
The Companys operations are classified into three reportable business segments which are
organized around its underwriting divisions:
|
|
|
|
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), beginning
with policies expiring on or about July 23, 2008. The Company currently expects the
non-renewal 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 months ended March 31,
2008 and 2007. Corporate information is included to reconcile segment data to the consolidated
financial statements (dollars in thousands):
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For The Three Months Ended March 31,
|
|
|
Commercial
|
|
Specialty
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines
|
|
Lines
|
|
Run-Off
|
|
Corporate
|
|
Total
|
|
|
|
|
|
|
|
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
$
|
358,353
|
|
|
$
|
69,132
|
|
|
$
|
15,602
|
|
|
$
|
|
|
|
$
|
443,087
|
|
|
|
|
|
|
|
|
Net Written Premiums
|
|
$
|
327,332
|
|
|
$
|
73,574
|
|
|
$
|
5,062
|
|
|
$
|
|
|
|
$
|
405,968
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earned Premiums
|
|
$
|
321,234
|
|
|
$
|
55,638
|
|
|
$
|
2,516
|
|
|
$
|
|
|
|
$
|
379,388
|
|
|
|
|
|
Net Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,005
|
|
|
|
32,005
|
|
|
|
|
|
Net Realized Investment Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,394
|
)
|
|
|
(11,394
|
)
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
426
|
|
|
|
927
|
|
|
|
1,353
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
321,234
|
|
|
|
55,638
|
|
|
|
2,942
|
|
|
|
21,538
|
|
|
|
401,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
160,979
|
|
|
|
30,738
|
|
|
|
1,702
|
|
|
|
|
|
|
|
193,419
|
|
|
|
|
|
Acquisition Costs and Other Underwriting
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,156
|
|
|
|
114,156
|
|
|
|
|
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
465
|
|
|
|
3,124
|
|
|
|
3,589
|
|
|
|
|
|
|
|
|
Total Losses and Expenses
|
|
|
160,979
|
|
|
|
30,738
|
|
|
|
2,167
|
|
|
|
117,280
|
|
|
|
311,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
160,255
|
|
|
|
24,900
|
|
|
|
775
|
|
|
|
(95,742
|
)
|
|
|
90,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,512
|
|
|
|
27,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
160,255
|
|
|
$
|
24,900
|
|
|
$
|
775
|
|
|
$
|
(123,254
|
)
|
|
$
|
62,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
88,951
|
|
|
$
|
4,156,738
|
|
|
$
|
4,245,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
$
|
311,368
|
|
|
$
|
60,743
|
|
|
$
|
22,003
|
|
|
$
|
|
|
|
$
|
394,114
|
|
|
|
|
|
|
|
|
Net Written Premiums
|
|
$
|
285,422
|
|
|
$
|
50,560
|
|
|
$
|
1,451
|
|
|
$
|
|
|
|
$
|
337,433
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earned Premiums
|
|
$
|
271,905
|
|
|
$
|
45,482
|
|
|
$
|
1,331
|
|
|
$
|
|
|
|
$
|
318,718
|
|
|
|
|
|
Net Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,973
|
|
|
|
26,973
|
|
|
|
|
|
Net Realized Investment Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,757
|
|
|
|
1,757
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
727
|
|
|
|
103
|
|
|
|
830
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
271,905
|
|
|
|
45,482
|
|
|
|
2,058
|
|
|
|
28,833
|
|
|
|
348,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
115,467
|
|
|
|
30,777
|
|
|
|
4,261
|
|
|
|
|
|
|
|
150,505
|
|
|
|
|
|
Acquisition Costs and Other Underwriting
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,904
|
|
|
|
96,904
|
|
|
|
|
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
438
|
|
|
|
2,717
|
|
|
|
3,155
|
|
|
|
|
|
|
|
|
Total Losses and Expenses
|
|
|
115,467
|
|
|
|
30,777
|
|
|
|
4,699
|
|
|
|
99,621
|
|
|
|
250,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
156,438
|
|
|
|
14,705
|
|
|
|
(2,641
|
)
|
|
|
(70,788
|
)
|
|
|
97,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,734
|
|
|
|
31,734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
156,438
|
|
|
$
|
14,705
|
|
|
$
|
(2,641
|
)
|
|
$
|
(102,522
|
)
|
|
$
|
65,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
118,178
|
|
|
$
|
3,517,370
|
|
|
$
|
3,635,548
|
|
|
|
|
|
|
|
|
21
Summarized revenue information by product grouping for the Companys three reportable business
segments for the three months ended March 31, 2008 and 2007 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
Commercial Lines Net Earned Premiums
|
|
|
|
|
|
|
|
|
Commercial Package
|
|
$
|
291,802
|
|
|
$
|
251,442
|
|
Specialty Property
|
|
|
15,543
|
|
|
|
13,250
|
|
Commercial Auto
|
|
|
4,872
|
|
|
|
4,953
|
|
Antique/Collector Auto
|
|
|
8,390
|
|
|
|
1,752
|
|
All Other
|
|
|
627
|
|
|
|
508
|
|
|
|
|
|
|
|
|
Total Commercial Lines
|
|
|
321,234
|
|
|
|
271,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Lines Net Earned Premiums
|
|
|
|
|
|
|
|
|
Management Liability
|
|
|
32,379
|
|
|
|
23,718
|
|
Professional Liability
|
|
|
23,259
|
|
|
|
21,764
|
|
|
|
|
|
|
|
|
Total Specialty Lines
|
|
|
55,638
|
|
|
|
45,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Run-Off Net Earned Premiums
|
|
|
|
|
|
|
|
|
Homeowners and Manufactured Housing
|
|
|
2,516
|
|
|
|
1,331
|
|
National Flood Insurance Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Run-Off Net Earned Premiums
|
|
|
2,516
|
|
|
|
1,331
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
426
|
|
|
|
727
|
|
|
|
|
|
|
|
|
Total Run-Off
|
|
|
2,942
|
|
|
|
2,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
32,005
|
|
|
|
26,973
|
|
Net Realized Investment Gain (Loss)
|
|
|
(11,394
|
)
|
|
|
1,757
|
|
Other Income
|
|
|
927
|
|
|
|
103
|
|
|
|
|
|
|
|
|
Total Corporate
|
|
|
21,538
|
|
|
|
28,833
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
401,352
|
|
|
$
|
348,278
|
|
|
|
|
|
|
|
|
22
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. 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.
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, 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), beginning with policies expiring on or about July 23, 2008. We
currently expect the non-renewal process to be completed by July 23, 2009.
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:
|
|
|
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 March 31, 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.
23
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
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.
Results of Operations (Three Months Ended March 31, 2008 vs. March 31, 2007)
Premiums
: Premium information for the three months ended March 31, 2008 vs. March 31, 2007
for each of our business segments is as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Lines
|
|
Specialty Lines
|
|
Run-off
|
|
Total
|
2008 Gross Written Premiums
|
|
$
|
358.4
|
|
|
$
|
69.1
|
|
|
$
|
15.6
|
|
|
$
|
443.1
|
|
2007 Gross Written Premiums
|
|
$
|
311.4
|
|
|
$
|
60.7
|
|
|
$
|
22.0
|
|
|
$
|
394.1
|
|
Percentage Increase (Decrease)
|
|
|
15.1
|
%
|
|
|
13.8
|
%
|
|
|
(29.1
|
)%
|
|
|
12.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Gross Earned Premiums
|
|
$
|
352.9
|
|
|
$
|
61.3
|
|
|
$
|
14.8
|
|
|
$
|
429.0
|
|
2007 Gross Earned Premiums
|
|
$
|
297.7
|
|
|
$
|
56.8
|
|
|
$
|
23.1
|
|
|
$
|
377.6
|
|
Percentage Increase (Decrease)
|
|
|
18.5
|
%
|
|
|
7.9
|
%
|
|
|
(35.9
|
)%
|
|
|
13.6
|
%
|
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 antique/collector vehicle product; our condominium and homeowners associations,
religious organizations, non-profit, day care centers, specialty schools, and golf
and country clubs products in the commercial package product
grouping; our inland marine product in the specialty property product grouping; 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 approximately $39.6 million of
the $55.4 million
total commercial and specialty lines segments gross written premiums increase.
|
|
|
|
The introduction of several new niche product offerings, such as the affordable housing,
special events, and campground and recreational vehicle parks commercial package products,
as well as the difference in conditions inland marine specialty property product. These new
product offerings accounted for approximately $11.5 million of the $47.0 million total
commercial lines segment gross written premiums increase.
|
|
|
|
|
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 segment in-force policy counts increased by 6.6% for the
three months ended March 31, 2008
|
24
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
§
|
|
The specialty lines segment in-force policy counts increased by 26.8% for the
three months ended March 31, 2008.
|
The growth in gross written premiums was offset in part by:
|
|
|
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
(FOIR) to non-renew all of our Florida personal lines policies, other than policies issued
pursuant to the National Flood Insurance Program, beginning with policies expiring on or
about July 23, 2008. We currently expect the non-renewal process to be completed by July
23, 2009. As of March 31, 2008, there were approximately 3,813 in-force policies with an
aggregate in-force premium of approximately $3.0 million which expire between July 23, 2008
and December 31, 2008, which we will not renew during 2008.
|
|
|
|
|
A decrease in bowling centers commercial package product gross written premium of
$2.4 million as a result of non-renewing policies due to unacceptable underwriting results.
For the three months ended March 31, 2008, gross written premium for the bowling centers
commercial package product was $0.3 million. The Company anticipates that it will continue
to non-renew its remaining bowling centers commercial package business throughout 2008,
which approximated $1.7 million of gross written premium for the nine months ended December
31, 2007.
|
|
|
|
|
Continued price competition during the three months ended March 31, 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.
|
|
|
|
Realized average rate decreases on renewal business approximating 4.7% and 2.1% for the
commercial lines and specialty lines segments, respectively.
|
The respective net written premiums and net earned premiums for each of our business segments for
the three months ended March 31, 2008 vs. March 31, 2007 were as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Lines
|
|
Specialty Lines
|
|
Run-off
|
|
Total
|
2008 Net Written Premiums
|
|
$
|
327.3
|
|
|
$
|
73.6
|
|
|
$
|
5.1
|
|
|
$
|
406.0
|
|
2007 Net Written Premiums
|
|
$
|
285.4
|
|
|
$
|
50.6
|
|
|
$
|
1.4
|
|
|
$
|
337.4
|
|
Percentage Increase
|
|
|
14.7
|
%
|
|
|
45.5
|
%
|
|
|
264.3
|
%
|
|
|
20.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 Net Earned Premiums
|
|
$
|
321.3
|
|
|
$
|
55.6
|
|
|
$
|
2.5
|
|
|
$
|
379.4
|
|
2007 Net Earned Premiums
|
|
$
|
271.9
|
|
|
$
|
45.5
|
|
|
$
|
1.3
|
|
|
$
|
318.7
|
|
Percentage Increase
|
|
|
18.2
|
%
|
|
|
22.2
|
%
|
|
|
92.3
|
%
|
|
|
19.0
|
%
|
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 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.
|
25
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
|
|
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 run-off segment, our property catastrophe costs were significantly lower for the
three months ended March 31, 2008 compared to March 31, 2007. For our June 1, 2007 run-off
segment property catastrophe reinsurance renewal, we experienced lower reinsurance rates,
reduced our catastrophe loss retention, and purchased decreased catastrophe coverage limits
due to lower exposures, compared to our June 1, 2006 renewal.
|
|
|
|
|
For our specialty lines segment, our net written premiums were higher than our gross
written premiums for the three months ended March 31, 2008 due to the previously noted rate
reductions on our 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. 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. For our specialty lines
segment, this reduction exceeded the ceded written premium amount on policies effective
January 1, 2008 through March 31, 2008, thereby resulting in negative overall ceded written
premium, and higher net written premium for this segment.
|
|
|
|
|
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 March 31, 2008 and 2007, we accrued $1.7 million ($1.4 million for the commercial lines segment and $0.3
million for the specialty lines segment) and $1.8 million ($0.8 million for the commercial lines segment and $1.0 million for the
specialty lines segment) respectively, of reinstatement or additional reinsurance premium
under our excess of loss reinsurance treaties, as a result of changes in ultimate loss
estimates. The decrease in reinstatement premium reduced ceded written and earned premiums
and increased net written and earned premiums.
|
Net Investment Income:
Net investment income increased 18.5% to $32.0 million for the three
months ended March 31, 2008 from $27.0 million for the same period of 2007. Total investments grew
by 18.5% to $3,097.1 million as of March 31, 2008 from $2,614.0 million as of March 31, 2007. The
growth in investment income is primarily due to our ability to invest increased net cash flows
provided from our operating activities at prevailing wider spreads over Treasuries despite a
general decline in interest rates during the three months ended March 31, 2008. Additionally, the
impact of interest rates changes was partially mitigated by our decision to continue to modestly
increase the average duration of our portfolio in line with our enterprise based asset allocation
strategy. The taxable equivalent book yield on our fixed income holdings approximated 5.5% as of
March 31, 2008, compared to 5.4% as of March 31, 2007.
The average duration of our fixed maturity portfolio was 5.2 years and 4.6 years as of March
31, 2008 and 2007, respectively. Our decision to continue to increase the average duration of our
fixed maturity portfolio was based upon enterprise risk management analyses which indicated the
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 Company also believes that the Index provides a
more enterprise relevant measure of return than the index used in prior periods.
The total tax equivalent performance of our fixed income portfolio was 1.38% for the three
months ended March 31, 2008, compared to the Index tax equivalent performance of 1.33% for the same
period. The total pre-tax return, which includes the effects of both income and price returns on
securities, of our fixed income portfolio was 1.21%
26
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
for the three months ended March 31, 2007,
compared to the Lehman Brothers Intermediate Aggregate Bond Index total pre-tax return of 1.57% for
the same period. We expect some variation in our portfolios total return compared
to the Index because of the differing sector, security, curve and duration composition of our
portfolio as compared to the Index.
Net Realized Investment Gain (Loss):
Net realized investment gains (losses) were $(11.4)
million and $1.8 million for the three months ended March 31, 2008 and 2007, respectively.
For
the three months ended March 31, 2008, we realized net investment gains of $0.0
million and $0.3 million from the sale of fixed maturity and equity securities, respectively, and
$0.1 million and $11.6 million in non-cash realized investment losses for fixed maturity and equity
securities, respectively, as a result of our impairment evaluations.
For the three months ended March 31, 2007, we realized net investment gains (losses) of $(0.1)
million and $4.4 million from the sale of fixed maturity and equity securities, respectively, and
$0.5 million and $2.0 million in non-cash realized investment losses for fixed maturity and equity
securities, respectively, as a result of our impairment evaluations.
Other Income
: Other income approximated $1.4 million and $0.8 million for the three months
ended March 31, 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 $42.9
million (28.5%) to $193.4 million for the three months ended March 31, 2008 from $150.5 million for
the same period of 2007, and the loss ratio increased to 51.0% in 2008 from 47.2% in 2007.
The increase in net loss and loss adjustment expenses was primarily due to:
|
|
|
The growth in net earned premiums; and
|
|
|
|
|
Net reserve actions taken during the three months ended March 31, 2008 which decreased
net estimated unpaid loss and loss adjustment expenses for accident years 2007 and prior by
$5.9 million, as compared to net reserve actions taken during the three months ended March
31, 2007 which decreased estimated net unpaid loss and loss adjustment expenses for
accident years 2006 and prior by $12.9 million. Increases/(decreases) in the estimated net
unpaid loss and loss adjustment expenses for prior accident years during the three months
ended March 31, 2008 were as follows (in millions):
|
|
|
|
|
|
|
|
Net Basis Increase
|
|
|
|
(Decrease)
|
|
Accident Year 2007
|
|
$
|
1.9
|
|
Accident Year 2006
|
|
|
(4.1
|
)
|
Accident Year 2005
|
|
|
(1.2
|
)
|
Accident Years 2004 and prior
|
|
|
(2.5
|
)
|
|
|
|
|
Total
|
|
$
|
(5.9
|
)
|
|
|
|
|
For accident year 2007, the increase in estimated net unpaid loss and loss adjustment
expenses was principally due to higher loss estimates for commercial property and commercial
automobile coverages due to greater than expected case incurred loss development, primarily
as a result of claim severity being higher 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
professional liability coverages
27
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
|
|
due to better than expected case incurred loss development,
primarily as a result of claim severity being less 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
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 property, and commercial automobile 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 March 31, 2008 compared to 2007. During the three months
ended March 31, 2008, a net ultimate loss and loss adjustment expense ratio of 52.5% was
estimated for the 2008 accident year. During the three months ended March 31, 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:
|
|
§
|
|
Realized average rate decreases on renewal business approximating 4.7% and 2.1%
for the commercial and specialty lines segments, respectively, for the three
months ended March 31, 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 $17.3 million (17.9%) to $114.2 million for the three months ended March 31,
2008 from $96.9 million for the same period of 2007, and the expense ratio remained consistent at
30.1% in 2008 versus 30.4% 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 three months ended March 31, 2008 and 2007
was 30.5% and 32.5%, 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 March 31, 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. Based upon the adoption of SFAS 157, we
note the following:
28
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
§
|
|
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 have consistently applied the Market Approach as of
and for the three months ended March 31, 2008.
|
|
§
|
|
Approximately 99.2% of our total invested assets are measured utilizing significant
observable inputs (Level 1 or Level 2 per SFAS 157). Approximately 0.8% of our total invested
assets are measured utilizing significant unobservable inputs (Level 3 per SFAS 157).
|
|
§
|
|
Approximately 99.6% of our fixed maturity investments are measured utilizing significant
observable inputs (Level 1 or Level 2 per SFAS 157). Approximately 95.0% of our equity
investments are measured utilizing significant observable inputs (Level 1 or Level 2 per SFAS
157). 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.
|
|
§
|
|
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 made no material adjustments to the fair value of our invested assets as of and for the
three months ended March 31, 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 markets, 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 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 March 31, 2008 approximately 86.3% and 10.2% 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 investments in fixed maturity securities, asset backed, mortgage pass-through, and
collateralized mortgage obligation securities, on a cost basis, amounted to $176.9 million, $589.3
million and $313.2 million, respectively, as of March 31, 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.
29
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
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 $11.7 million
and $2.5 million, respectively, for the three months ended March 31, 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 three months ended March 31,
2008 and 2007.
Our fixed maturity portfolio amounted to $2,766.1 million and $2,659.2 million, as of March 31,
2008 and December 31, 2007, respectively, of which 99.9% of the portfolio was comprised of
investment grade securities as of March 31, 2008 and December 31, 2007. We had fixed maturity
investments with gross unrealized losses amounting to $23.2 million and $7.0 million as of March
31, 2008 and December 31, 2007, respectively. Of these amounts, interests in securitized assets
had gross unrealized losses amounting to $4.8 million and $3.0 million as of March 31, 2008 and
December 31, 2007, respectively.
Securities with an Unrealized Loss as of March 31, 2008:
The following table identifies the period of time securities with an unrealized loss as of March
31, 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 1.0% and 23.5%, respectively, of the total estimated fair value, or
6.5% and 13.7%, 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.
|
|
|
|
|
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 quarter of 2008. As of March 31, 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 US Government-type
collateral. 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 March
31, 2008 (dollars in millions).
30
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses as of March 31, 2008
|
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuous time in
|
|
Excluding Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss
|
|
in Securitized
|
|
|
Interests in
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
Total
|
|
position
|
|
Assets
|
|
|
Securitized Assets
|
|
|
Available for Sale
|
|
|
Equity Securities
|
|
|
Investments
|
|
0 3 months
|
|
$
|
8.7
|
|
|
$
|
2.5
|
|
|
$
|
11.2
|
|
|
$
|
10.5
|
|
|
$
|
21.7
|
|
4 6 months
|
|
|
1.7
|
|
|
|
0.3
|
|
|
|
2.0
|
|
|
|
12.0
|
|
|
|
14.0
|
|
7 9 months
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
5.7
|
|
|
|
5.9
|
|
10 12 months
|
|
|
3.4
|
|
|
|
0.8
|
|
|
|
4.2
|
|
|
|
|
|
|
|
4.2
|
|
13 18 months
|
|
|
3.9
|
|
|
|
|
|
|
|
3.9
|
|
|
|
|
|
|
|
3.9
|
|
19 24 months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
> 24 months
|
|
|
0.6
|
|
|
|
1.1
|
|
|
|
1.7
|
|
|
|
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross
Unrealized Losses
|
|
$
|
18.4
|
|
|
$
|
4.8
|
|
|
$
|
23.2
|
|
|
$
|
28.2
|
|
|
$
|
51.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair
value of securities
with a gross
unrealized loss
|
|
$
|
752.3
|
|
|
$
|
210.8
|
|
|
$
|
963.1
|
|
|
$
|
136.6
|
|
|
$
|
1,099.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our impairment evaluation as of March 31, 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:
Our 29 investment positions in Aaa/AAA rated investments in U.S. Treasury Securities and
Obligations of U.S. Government Agencies were all in an unrealized gain position as of March 31,
2008.
Obligations of States
and Political Subdivisions:
The unrealized losses on our investments in long term tax exempt securities which have ratings
of Baa3/A- to Aaa/AAA are attributable to changes both in market spreads and in the level of
Treasury yields. Of the 932 investment positions held, approximately 39.0% 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.
Corporate Debt Securities:
The unrealized losses on our long term investments in Corporate bonds which have ratings from
Baa3/BBB to Aa3/A+ are attributable primarily to changes in market spreads. Of the 67
investment positions held, approximately 28.4% 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 March 31, 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
Baa3/BBB to Aaa/AAA are attributable primarily to changes in market spreads. Of the 110
investment positions held, approximately 58.2% 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 150 investment
positions held, approximately
31
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
14.0% 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
172 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 security at a price
less than the amortized cost of the investments.
Our impairment evaluation as of March 31, 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 2,710 investment positions held, approximately 48.6% 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 $1,097.4 million as of
March 31, 2008. AAA rated securities represented approximately 99.5% of our March 31, 2008
structured securities portfolio. Approximately $929.4 million of our structured securities
investment portfolio is backed by residential collateral, consisting of:
|
|
$604.3 million of U.S. government agency backed Mortgage Pass-Through Securities;
|
|
|
|
$224.6 million of U.S. government agency backed Collateralized Mortgage Obligations;
|
|
|
|
$76.9 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);
|
|
|
|
$19.1 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
|
|
|
|
$4.5 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 $23.6 million ALT-A and subprime overall AAA rated loan portfolio is comprised of 20
securities with net unrealized losses of $0.3 million as of March 31, 2008. These securities have
the following characteristics:
|
|
first to pay or among the first cash flow tranches of their respective transactions;
|
|
|
|
have a weighted average life of 2.3 years;
|
|
|
|
are spread across multiple vintages (origination year of underlying collateral pool), and
|
|
|
|
have not experienced any ratings downgrades as of March 31, 2008.
|
Our ALT-A and subprime loan portfolio has paid down to $23.6 million as of March 31, 2008, from
$27.6 million as of December 31, 2007, and $42.0 million as of June 30, 2007.
As of March 31, 2008, we hold no investments in Collateralized Debt Obligations or Net Interest
Margin securities.
Given a combination of events in the housing and mortgage finance sectors, the issues surrounding
the monoline financial guarantors and the impact on municipal and asset backed finance, fixed
maturity and equity markets, in general, have recently experienced, and may continue to experience,
more volatility than during most prior historical reporting periods over the last few years. As of
March 31, 2008, we had no impairments related to these market conditions. However, we expect that
ongoing volatility in these sectors, in particular, and in spread related sectors, in general, may
impact the prices of securities held in our overall AA+ rated investment portfolio.
32
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
Municipal Bond Portfolio:
Our $1,527.7 million municipal bond overall AAA rated portfolio consists of $946.6 million of
insured securities, or 61.9% of our total municipal bond portfolio. The weighted average
underlying rating of the insured portion of our municipal bond portfolio is AA and the weighted
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 March 31, 2008 (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value of Insured
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Municipal Bonds
|
|
|
Percentage of Municipal
|
|
|
Underlying Rating of
|
|
Monoline Insurer
|
|
(in Thousands)
|
|
|
Bond Portfolio
|
|
|
Insured Municipal Bonds
|
|
Financial Security
Assurance, Inc.
|
|
$
|
302,945
|
|
|
|
19.8
|
%
|
|
AA
|
MBIA, Inc.
|
|
|
281,452
|
|
|
|
18.4
|
|
|
AA
|
FGIC Corporation
|
|
|
199,067
|
|
|
|
13.0
|
|
|
AA-
|
AMBAC Financial Group, Inc.
|
|
|
158,664
|
|
|
|
10.4
|
|
|
AA-
|
XL Capital, LTD.
|
|
|
4,469
|
|
|
|
0.3
|
|
|
AA-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
946,597
|
|
|
|
61.9
|
%
|
|
AA
|
|
|
|
|
|
|
|
|
|
|
At purchase, each municipal bond is evaluated with regard to the following features: the issuer,
the underlying obligation and/or the revenue pledge/collateral. The presence of the financial
guarantee insurance is not an attribute used in the purchase decision. We consider the financial
guarantee insurance to be extra protection. As of March 31, 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 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 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
33
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
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
|
|
|
|
(Dollars in Millions)
|
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluding Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuous time in
|
|
in Securitized
|
|
|
Interests in
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
Unrealized loss position
|
|
Assets
|
|
|
Securitized Assets
|
|
|
Available for Sale
|
|
|
Equity Securities
|
|
|
Total 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.
Corporate 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
34
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
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 March 31, 2008, our gross loss on the sale of fixed maturity and equity
securities was $0.0 million and $3.4 million, respectively. The fair value of the fixed maturity
and equity securities at the time of sale was $0.0 million and $5.6 million, respectively. $2.7
million of the $3.4 million gross loss on the sale of equity securities for the three months ended
March 31, 2008 resulted from the sale of the common stock we
held in Bear Stearns Companies,
Inc.
For the three months ended March 31, 2007, our gross loss on the sale of fixed maturity and equity
securities was $0.1 million and $0.6 million, respectively. The fair value of the fixed maturity
and equity securities at the time of sale was $1.2 million and $8.9 million, respectively.
Liquidity and Capital Resources
For the three months ended March 31, 2008, our fixed maturity investments experienced
unrealized investment depreciation of $26.0 million, net of the related deferred tax benefit of
$14.0 million, and our equity investments experienced unrealized investment depreciation of $16.6
million, net of the related deferred tax benefit of $9.0 million. For the three months ended March
31, 2008, net realized investment gains from the sale of equity securities were $0.3 million.
As of March 31, 2008, we had total investments with a carrying value of $3,097.1 million, of
which 89.3% 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 10.7% of our total investments consisted primarily of
publicly traded common stock securities.
During
the three months ended March 31, 2008, Philadelphia Consolidated
Holding Corp. received a $45.0 million dividend payment, from
Philadelphia Indemnity Insurance Company, one of our insurance
subsidiaries.
We produced net cash from operations of $162.9 million and $173.7 million for the three months
ended March 31, 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 three months ended
March 31, 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 $135.2
million and $92.2 million, respectively, for the three months ended March 31, 2008 and 2007. We
believe we have adequate liquidity to pay all claims and meet all other cash needs.
The $3.3 million of cash used from financing activities consisted of: $42.9 million of cash
used to repurchase common stock under our stock purchase authorization, and $10.0 million of
repayments on our unsecured $50.0 million credit agreement,
offset by: $45.0 million of borrowings
from our unsecured $50.0 million credit agreement, $1.2 million of excess tax benefit from the
issuance of shares pursuant to stock based compensation plans, $2.7 million of proceeds from the
issuance of shares pursuant to our stock based compensation plans and $0.7 million from the
collection of notes receivable associated with our employee stock purchase plans.
35
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
(Continued)
We currently have in place an unsecured $50.0 million Credit Agreement (the Credit
Agreement) which expires on June 27, 2008. The Credit Agreement provides capacity for working
capital and other general corporate purposes. The Credit Agreement contains various
representations, covenants and events of default typical for credit facilities of this type. As of
March 31, 2008, $35.0 million of borrowings were outstanding under the Credit Agreement, at
interest rates ranging from 2.91% to 3.35%.
Two of our Insurance Subsidiaries are members of the Federal Home Loan Bank of Pittsburgh
(FHLB). A primary advantage of FHLB membership is the ability of members to access credit
products from a reliable capital markets provider. The availability of any one members access to
credit is based upon its FHLB eligible collateral. The borrowing capacity provides an immediately
available line of credit. As of March 31, 2008, our Insurance Subsidiaries had no borrowings
outstanding, and their unused borrowing capacity was $736.9 million.
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 Pronouncement
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 our evaluation of
SFAS 161.
36
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
March 31, 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)
|
March 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Available For Sale
|
|
$
|
2,766,054
|
|
|
200 bp decrease
|
|
$
|
3,042,597
|
|
|
|
10.0
|
%
|
|
|
11.5
|
%
|
|
|
|
|
|
|
100 bp decrease
|
|
$
|
2,908,375
|
|
|
|
5.2
|
%
|
|
|
5.9
|
%
|
|
|
|
|
|
|
50 bp decrease
|
|
$
|
2,837,984
|
|
|
|
2.6
|
%
|
|
|
3.0
|
%
|
|
|
|
|
|
|
50 bp increase
|
|
$
|
2,693,422
|
|
|
|
(2.6
|
)%
|
|
|
(3.0
|
)%
|
|
|
|
|
|
|
100 bp increase
|
|
$
|
2,620,802
|
|
|
|
(5.3
|
)%
|
|
|
(6.1
|
)%
|
|
|
|
|
|
|
200 bp increase
|
|
$
|
2,476,653
|
|
|
|
(10.5
|
)%
|
|
|
(12.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Available For Sale
|
|
$
|
2,282,135
|
|
|
200 bp decrease
|
|
$
|
2,472,159
|
|
|
|
8.3
|
%
|
|
|
9.9
|
%
|
|
|
|
|
|
|
100 bp decrease
|
|
$
|
2,383,528
|
|
|
|
4.4
|
%
|
|
|
5.3
|
%
|
|
|
|
|
|
|
50 bp decrease
|
|
$
|
2,334,103
|
|
|
|
2.3
|
%
|
|
|
2.7
|
%
|
|
|
|
|
|
|
50 bp increase
|
|
$
|
2,228,838
|
|
|
|
(2.3
|
)%
|
|
|
(2.8
|
)%
|
|
|
|
|
|
|
100 bp increase
|
|
$
|
2,175,311
|
|
|
|
(4.7
|
)%
|
|
|
(5.6
|
)%
|
|
|
|
|
|
|
200 bp increase
|
|
$
|
2,070,678
|
|
|
|
(9.3
|
)%
|
|
|
(11.0
|
)%
|
37
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 the 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.
38
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported in Item 3 of the Companys Annual Report on Form 10-K for its fiscal
year ended December 31, 2007, 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.
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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Companys purchases of its common stock during the first 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
|
|
|
|
|
|
Announced
|
|
Under the
|
|
|
of Shares
|
|
(b) Average
|
|
Plans or
|
|
Plans or
|
Period
|
|
Purchased
|
|
Price Paid per Share
|
|
Programs
|
|
Programs
|
January 1 January 31
|
|
|
1,273
|
(1)
|
|
$
|
30.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,000,000
|
(2)
|
|
February 1 February 29
|
|
|
3,374
|
(1)
|
|
$
|
33.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
45,000,000
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 1 March 31
|
|
|
8,050
|
(1)
|
|
$
|
34.17
|
|
|
|
|
|
|
|
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1,353,200
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$
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2,100,000
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(2)
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(1)
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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.
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39
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(2)
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The Companys total stock purchase authorization, which was publicly announced
in August 1998 and subsequently increased, was
$75.3 million as of March 31, 2008. As of March 31,
2008, $73.2 million has been utilized.
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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:
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Exhibit No.
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Description
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31.1*
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Certification of the Companys chief executive officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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|
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31.2*
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Certification of the Companys chief financial officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1*
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|
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
|
|
|
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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
|
40
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.
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PHILADELPHIA CONSOLIDATED HOLDING CORP.
Registrant
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Date May 6, 2008
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James J. Maguire, Jr.
James J. Maguire, Jr.
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President and Chief Executive Officer
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(Principal Executive Officer)
|
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|
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|
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Date May 6, 2008
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Craig P. Keller
Craig P. Keller
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Executive Vice President, Secretary,
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Treasurer and Chief Financial Officer
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(Principal Financial and Accounting Officer)
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41
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