UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2004
Commission File Number 0-22280
PHILADELPHIA CONSOLIDATED HOLDING CORP.
| PENNSYLVANIA | 23-2202671 | |
| (State of Incorporation) | (IRS Employer Identification No.) |
One Bala Plaza, Suite 100
Bala Cynwyd, Pennsylvania 19004
(610) 617-7900
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 x NO: o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES x NO: o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of October 29, 2004.
Common Stock, no par value, 22,242,062 shares outstanding
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX
For the Quarterly Period Ended September 30, 2004
2
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| As of |
||||||||
| September 30, | December 31, | |||||||
| 2004 | 2003 | |||||||
| (Unaudited) |
|
|||||||
ASSETS |
||||||||
INVESTMENTS: |
||||||||
FIXED MATURITIES AVAILABLE FOR SALE AT MARKET
(AMORTIZED COST $1,234,040 AND $1,066,523) |
$ | 1,251,297 | $ | 1,081,694 | ||||
EQUITY SECURITIES AT MARKET (COST $114,382
AND $79,813) |
121,520 | 90,358 | ||||||
TOTAL INVESTMENTS |
1,372,817 | 1,172,052 | ||||||
CASH AND CASH EQUIVALENTS |
116,175 | 73,942 | ||||||
ACCRUED INVESTMENT INCOME |
13,496 | 11,008 | ||||||
PREMIUMS RECEIVABLE |
236,842 | 179,509 | ||||||
PREPAID REINSURANCE PREMIUMS AND REINSURANCE
RECEIVABLES |
793,197 | 292,157 | ||||||
DEFERRED INCOME TAXES |
22,653 | 18,147 | ||||||
DEFERRED ACQUISITION COSTS |
90,159 | 56,288 | ||||||
PROPERTY AND EQUIPMENT, NET |
19,911 | 16,821 | ||||||
GOODWILL |
25,724 | 25,724 | ||||||
OTHER ASSETS |
69,671 | 25,293 | ||||||
TOTAL ASSETS |
$ | 2,760,645 | $ | 1,870,941 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
POLICY LIABILITIES AND ACCRUALS: |
||||||||
UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES |
$ | 1,242,256 | $ | 627,086 | ||||
UNEARNED PREMIUMS |
541,717 | 422,589 | ||||||
TOTAL POLICY LIABILITIES AND ACCRUALS |
1,783,973 | 1,049,675 | ||||||
FUNDS HELD PAYABLE TO REINSURER |
124,557 | 110,011 | ||||||
LOANS PAYABLE |
36,781 | 48,482 | ||||||
PREMIUMS PAYABLE |
77,905 | 35,044 | ||||||
OTHER LIABILITIES |
131,894 | 82,083 | ||||||
TOTAL LIABILITIES |
2,155,110 | 1,325,295 | ||||||
COMMITMENTS AND CONTINGENCIES |
||||||||
SHAREHOLDERS’ EQUITY: |
||||||||
PREFERRED STOCK, $.01 PAR VALUE,
10,000,000 SHARES AUTHORIZED,
NONE ISSUED AND OUTSTANDING |
— | — | ||||||
COMMON STOCK, NO PAR VALUE,
100,000,000 SHARES AUTHORIZED, 22,231,432 AND
22,007,552 SHARES ISSUED AND OUTSTANDING |
291,390 | 281,088 | ||||||
NOTES RECEIVABLE FROM SHAREHOLDERS |
(6,331 | ) | (5,444 | ) | ||||
ACCUMULATED OTHER COMPREHENSIVE INCOME |
15,857 | 16,715 | ||||||
RETAINED EARNINGS |
304,619 | 253,287 | ||||||
TOTAL SHAREHOLDERS’ EQUITY |
605,535 | 545,646 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
$ | 2,760,645 | $ | 1,870,941 | ||||
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
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, |
Ended September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
REVENUE: |
||||||||||||||||
NET EARNED PREMIUMS |
$ | 187,845 | $ | 146,676 | $ | 548,830 | $ | 418,387 | ||||||||
NET INVESTMENT INCOME |
10,896 | 9,173 | 31,669 | 28,348 | ||||||||||||
NET REALIZED INVESTMENT GAIN (LOSS) |
268 | 474 | 985 | (1,309 | ) | |||||||||||
OTHER INCOME |
719 | 1,988 | 2,930 | 3,689 | ||||||||||||
TOTAL REVENUE |
199,728 | 158,311 | 584,414 | 449,115 | ||||||||||||
LOSSES AND EXPENSES: |
||||||||||||||||
LOSS AND LOSS ADJUSTMENT EXPENSES |
760,267 | 100,645 | 1,027,473 | 328,023 | ||||||||||||
NET REINSURANCE RECOVERIES |
(612,498 | ) | (21,240 | ) | (676,144 | ) | (65,232 | ) | ||||||||
NET LOSS AND LOSS ADJUSTMENT EXPENSES |
147,769 | 79,405 | 351,329 | 262,791 | ||||||||||||
ACQUISITION COSTS AND OTHER
UNDERWRITING EXPENSES |
56,863 | 41,542 | 155,489 | 120,120 | ||||||||||||
OTHER OPERATING EXPENSES |
1,674 | 2,668 | 6,085 | 5,974 | ||||||||||||
TOTAL LOSSES AND EXPENSES |
206,306 | 123,615 | 512,903 | 388,885 | ||||||||||||
INCOME (LOSS) BEFORE INCOME TAXES |
(6,578 | ) | 34,696 | 71,511 | 60,230 | |||||||||||
INCOME TAX EXPENSE (BENEFIT): |
||||||||||||||||
CURRENT |
(1,541 | ) | 10,403 | 24,222 | 25,392 | |||||||||||
DEFERRED |
(2,942 | ) | 718 | (4,043 | ) | (6,832 | ) | |||||||||
TOTAL INCOME TAX EXPENSE (BENEFIT) |
(4,483 | ) | 11,121 | 20,179 | 18,560 | |||||||||||
NET INCOME (LOSS) |
$ | (2,095 | ) | $ | 23,575 | $ | 51,332 | $ | 41,670 | |||||||
OTHER COMPREHENSIVE INCOME, NET OF TAX: |
||||||||||||||||
HOLDING GAIN (LOSS) ARISING DURING
PERIOD |
$ | 11,157 | $ | (1,568 | ) | $ | (218 | ) | $ | 1,231 | ||||||
RECLASSIFICATION ADJUSTMENT |
(174 | ) | (308 | ) | (640 | ) | 851 | |||||||||
OTHER COMPREHENSIVE INCOME (LOSS) |
10,983 | (1,876 | ) | (858 | ) | 2,082 | ||||||||||
COMPREHENSIVE INCOME |
$ | 8,888 | $ | 21,699 | $ | 50,474 | $ | 43,752 | ||||||||
PER AVERAGE SHARE DATA: |
||||||||||||||||
BASIC EARNINGS (LOSS) PER SHARE |
$ | (0.09 | ) | $ | 1.08 | $ | 2.32 | $ | 1.90 | |||||||
DILUTED EARNINGS (LOSS) PER SHARE |
$ | (0.09 | ) | $ | 1.04 | $ | 2.21 | $ | 1.85 | |||||||
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING |
22,230,729 | 21,913,053 | 22,120,481 | 21,879,748 | ||||||||||||
WEIGHTED-AVERAGE SHARE EQUIVALENTS
OUTSTANDING |
1,132,451 | 787,627 | 1,120,535 | 681,716 | ||||||||||||
WEIGHTED-AVERAGE SHARES AND SHARE
EQUIVALENTS OUTSTANDING |
23,363,180 | 22,700,680 | 23,241,016 | 22,561,464 | ||||||||||||
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
| For the Nine | ||||||||
| Months Ended | ||||||||
| September 30, 2004 | For the Year Ended | |||||||
| (Unaudited) |
December 31, 2003 |
|||||||
COMMON SHARES: |
||||||||
BALANCE AT BEGINNING OF YEAR |
22,007,552 | 21,868,877 | ||||||
EXERCISE OF EMPLOYEE STOCK OPTIONS |
26,000 | 99,875 | ||||||
ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS, NET |
197,880 | 38,800 | ||||||
BALANCE AT END OF PERIOD |
22,231,432 | 22,007,552 | ||||||
TREASURY SHARES: |
||||||||
BALANCE AT BEGINNING OF YEAR |
— | — | ||||||
SHARES REPURCHASED PURSUANT TO AUTHORIZATION |
— | 10,000 | ||||||
EXERCISE OF EMPLOYEE STOCK OPTIONS |
— | (6,500 | ) | |||||
ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS, NET |
— | (3,500 | ) | |||||
BALANCE AT END OF PERIOD |
— | — | ||||||
COMMON STOCK: |
||||||||
BALANCE AT BEGINNING OF YEAR |
$ | 281,088 | $ | 276,945 | ||||
EXERCISE OF EMPLOYEE STOCK OPTIONS |
819 | 2,852 | ||||||
ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS |
9,483 | 1,291 | ||||||
BALANCE AT END OF PERIOD |
291,390 | 281,088 | ||||||
NOTES RECEIVABLE FROM SHAREHOLDERS: |
||||||||
BALANCE AT BEGINNING OF YEAR |
(5,444 | ) | (6,407 | ) | ||||
NOTES RECEIVABLE ISSUED PURSUANT TO
EMPLOYEE STOCK PURCHASE PLANS |
(2,307 | ) | (1,065 | ) | ||||
COLLECTION OF NOTES RECEIVABLE |
1,420 | 2,028 | ||||||
BALANCE AT END OF PERIOD |
(6,331 | ) | (5,444 | ) | ||||
ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXES: |
||||||||
BALANCE AT BEGINNING OF YEAR |
16,715 | 16,185 | ||||||
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXES |
(858 | ) | 530 | |||||
BALANCE AT END OF PERIOD |
15,857 | 16,715 | ||||||
RETAINED EARNINGS: |
||||||||
BALANCE AT BEGINNING OF YEAR |
253,287 | 191,100 | ||||||
NET INCOME |
51,332 | 62,187 | ||||||
BALANCE AT END OF PERIOD |
304,619 | 253,287 | ||||||
COMMON STOCK HELD IN TREASURY: |
||||||||
BALANCE AT BEGINNING OF YEAR |
— | — | ||||||
EXERCISE OF EMPLOYEE STOCK OPTIONS |
— | 94 | ||||||
COMMON SHARES REPURCHASED |
— | (300 | ) | |||||
ISSUANCES OF SHARES PURSUANT TO STOCK
PURCHASE PLANS |
— | 206 | ||||||
BALANCE AT END OF PERIOD |
— | — | ||||||
TOTAL SHAREHOLDERS’ EQUITY |
$ | 605,535 | $ | 545,646 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
5
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Nine Months Ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
NET INCOME |
$ | 51,332 | $ | 41,670 | ||||
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES: |
||||||||
NET REALIZED INVESTMENT (GAIN) LOSS |
(985 | ) | 1,309 | |||||
DEPRECIATION AND AMORTIZATION EXPENSE |
9,374 | 6,148 | ||||||
DEFERRED INCOME TAX BENEFIT |
(4,043 | ) | (6,832 | ) | ||||
CHANGE IN PREMIUMS RECEIVABLE |
(57,333 | ) | (51,854 | ) | ||||
CHANGE IN PREPAID REINSURANCE PREMIUMS AND
REINSURANCE RECEIVABLES, NET OF FUNDS HELD
PAYABLE TO REINSURER |
(486,494 | ) | (33,389 | ) | ||||
CHANGE IN OTHER RECEIVABLES |
(2,488 | ) | (1,941 | ) | ||||
CHANGE IN INCOME TAXES PAYABLE |
(16,932 | ) | 636 | |||||
CHANGE IN DEFERRED ACQUISITION COSTS |
(33,871 | ) | 7,111 | |||||
CHANGE IN OTHER ASSETS |
(15,681 | ) | (4,750 | ) | ||||
CHANGE IN UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES |
615,170 | 147,979 | ||||||
CHANGE IN UNEARNED PREMIUMS |
119,128 | 125,698 | ||||||
CHANGE IN OTHER LIABILITIES |
80,125 | 20,763 | ||||||
TAX BENEFIT FROM EXERCISE OF EMPLOYEE
STOCK OPTIONS |
387 | 495 | ||||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
257,689 | 253,043 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
PROCEEDS FROM SALES OF INVESTMENTS IN FIXED
MATURITIES |
117,764 | 71,674 | ||||||
PROCEEDS FROM MATURITY OF INVESTMENTS IN FIXED
MATURITIES |
136,319 | 162,032 | ||||||
PROCEEDS FROM SALES OF INVESTMENTS IN EQUITY
SECURITIES |
32,938 | 10,936 | ||||||
COST OF FIXED MATURITIES ACQUIRED |
(430,584 | ) | (419,264 | ) | ||||
COST OF EQUITY SECURITIES ACQUIRED |
(63,338 | ) | (38,593 | ) | ||||
PURCHASE OF PROPERTY AND EQUIPMENT |
(5,882 | ) | (4,632 | ) | ||||
NET CASH USED BY INVESTING ACTIVITIES |
(212,783 | ) | (217,847 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
REPAYMENTS ON LOANS PAYABLE |
(57,615 | ) | (34,245 | ) | ||||
PROCEEDS FROM LOANS PAYABLE |
45,914 | 44,882 | ||||||
PROCEEDS FROM EXERCISE OF EMPLOYEE STOCK OPTIONS |
432 | 1,590 | ||||||
PROCEEDS FROM COLLECTION OF NOTES RECEIVABLE |
1,420 | 1,364 | ||||||
PROCEEDS FROM SHARES ISSUED PURSUANT TO
STOCK PURCHASE PLANS |
7,176 | 402 | ||||||
COST OF COMMON STOCK REPURCHASED |
— | (300 | ) | |||||
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES |
(2,673 | ) | 13,693 | |||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
42,233 | 48,889 | ||||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
73,942 | 42,002 | ||||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
$ | 116,175 | $ | 90,891 | ||||
CASH PAID DURING THE PERIOD FOR: |
||||||||
INCOME TAXES |
$ | 41,442 | $ | 23,635 | ||||
INTEREST |
$ | 451 | $ | 487 | ||||
NON-CASH TRANSACTIONS: |
||||||||
ISSUANCE OF SHARES PURSUANT TO EMPLOYEE
STOCK PURCHASE PLAN IN EXCHANGE FOR
NOTES RECEIVABLE |
$ | 2,307 | $ | 1,154 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
6
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
| 1. | Basis of Presentation | |||
| The consolidated financial statements for the quarterly period ended September 30, 2004 are unaudited, but in the opinion of management have been prepared on the same basis as the annual audited consolidated financial statements and reflect all adjustments, consisting of normal recurring adjustments and accruals, necessary for a fair statement of the information set forth therein. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the operating results to be expected for the full year or any other period. Certain prior years’ amounts have been reclassified for comparative purposes. | ||||
| These consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Reports on Form 10-K and Form 10-K/A, Amendment No. 1 As of and For the Year Ended December 31, 2003. | ||||
| 2. | Stock-Based Compensation | |||
| Stock-based compensation plans are accounted for under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation expense is recognized for fixed stock option grants and the Company’s stock purchase plans. The following table illustrates the effect on net income and earnings per share as if the provisions of statement of Financial Accounting Standards (SFAS) No. 123 (as amended by SFAS No. 148), “Accounting for Stock-Based Compensation,” had been applied for the three and nine months ended September 30, 2004 and 2003, respectively: | ||||
(In thousands, except per share data)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, |
September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net Income (Loss) As Reported |
$ | (2,095 | ) | $ | 23,575 | $ | 51,332 | $ | 41,670 | |||||||
Assumed Stock Compensation Cost |
(1,134 | ) | (785 | ) | (2,932 | ) | (2,206 | ) | ||||||||
Pro Forma Net Income (Loss) |
$ | (3,229 | ) | $ | 22,790 | $ | 48,400 | $ | 39,464 | |||||||
Basic Earnings (Loss) Per Share: |
||||||||||||||||
As Reported |
$ | (0.09 | ) | $ | 1.08 | $ | 2.32 | $ | 1.90 | |||||||
Pro Forma |
$ | (0.15 | ) | $ | 1.04 | $ | 2.19 | $ | 1.80 | |||||||
Diluted Earnings (Loss) Per Share: |
||||||||||||||||
As Reported |
$ | (0.09 | ) | $ | 1.04 | $ | 2.21 | $ | 1.85 | |||||||
Pro Forma |
$ | (0.14 | ) | $ | 1.00 | $ | 2.08 | $ | 1.75 | |||||||
| 3. | Investments | |||
| The carrying amounts for the Company’s investments approximate their estimated fair value. The Company measures the fair value of investments based upon quoted market prices or by obtaining quotes from dealers. At September 30, 2004, the Company held no derivative financial instruments or other securities containing embedded derivatives. | ||||
| The Company performs various analytical procedures with respect to its investments, including identifying any security whose fair value is below its cost. Upon identification of such securities, a detailed review is performed for such securities, excluding interests in securitized assets, meeting predetermined thresholds to determine whether a decline in fair value below a security’s cost basis is other than temporary. If the Company 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 loss in the period the impairment | ||||
7
| arose. This evaluation resulted in non-cash realized investment losses of $1.0 million and $0 million, respectively, for the three months ended September 30, 2004 and 2003 and $1.0 million and $0.9 million, respectively, for the nine months ended September 30, 2004 and 2003. | ||||
| The Company’s impairment evaluation and recognition for interests in securitized assets is conducted in accordance with the guidance provided by the Emerging Issues Task Force of the Financial Accounting Standards Board. Under this guidance, impairment losses on securities must be recognized if both the fair value of the security is less than its book value and the net present value of expected future cash flows is less than the net present value of expected future cash flows at the most recent (prior) estimation date. If these criteria are met, an impairment charge, calculated as the difference between the current book value of the security and its fair value, is included in earnings as a realized loss in the period the impairment arose. Non-cash realized investment losses recorded for the three and nine months ended September 30, 2004 and 2003 were $4.7 million and $0.4 million, respectively, and $7.3 million and $2.6 million, respectively, as a result of the Company’s impairment evaluation for investments in securitized assets. | ||||
| The following table (in thousands) identifies the period of time securities with an unrealized loss at September 30, 2004 have continuously been in an unrealized loss position. Included in the amounts displayed in the table are $0.1 million of unrealized losses due to non-investment grade fixed maturity securities having a fair value of $11.8 million. No issuer of securities or industry represents more than 4.9% and 17.1%, respectively, of the total estimated fair value, or 10.4% and 11.6%, respectively, of the total gross unrealized loss included in the table below. As previously discussed, there are certain risks and uncertainties inherent in the Company’s 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 issuer. Should the Company subsequently determine a decline in the fair value below the cost basis to be other than temporary, the security would be written down to its fair value and the difference would be included in earnings as a realized loss for the period such determination was made. | ||||
| Less Than 12 Months |
12 Months or More |
Total |
||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| Fair Value |
Losses |
Fair Value |
Losses |
Fair Value |
Losses |
|||||||||||||||||||
Fixed Maturities: |
||||||||||||||||||||||||
Available for Sale |
||||||||||||||||||||||||
U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies |
$ | 36,790 | $ | 112 | $ | 591 | $ | 16 | $ | 37,381 | $ | 128 | ||||||||||||
Obligations of States and
Political Subdivisions |
86,424 | 913 | 8,754 | 109 | 95,178 | 1,022 | ||||||||||||||||||
Corporate and Bank Debt Securities |
137,780 | 1,152 | 1,444 | 20 | 139,224 | 1,172 | ||||||||||||||||||
Asset Backed Securities |
31,785 | 171 | 4,687 | 153 | 36,472 | 324 | ||||||||||||||||||
Mortgage Pass-Through Securities |
69,317 | 123 | 6,988 | 261 | 76,305 | 384 | ||||||||||||||||||
Collateralized Mortgage Obligations |
29,726 | 195 | 4,158 | 191 | 33,884 | 386 | ||||||||||||||||||
Total Fixed Maturities
Available for Sale |
391,822 | 2,666 | 26,622 | 750 | 418,444 | 3,416 | ||||||||||||||||||