UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the Fiscal Year Ended December 31, 2007
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the Transition Period from
to
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 or other jurisdiction of
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(IRS Employer Identification No.)
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incorporation or organization)
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One Bala Plaza, Suite 100
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Bala Cynwyd, Pennsylvania
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19004
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code:
(610) 617-7900
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on which Registered
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Common Stock, no par value
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The NASDAQ Stock Market, LLC
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Indicate by check mark whether the registrant is a well-known seasoned issuer (as defined in Rule
405 of the Securities Act).
YES:
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NO:
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If this report is an annual or transition report, indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15 (d) of the Securities Exchange Act of
1934.
YES:
o
NO:
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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:
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
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):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
YES:
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NO:
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The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon
the closing sale price of the Common Stock on June 30, 2007, as reported on the NASDAQ Global
Select Market, was $2,388,300,559. Shares of Common Stock held by each executive officer and
director and by certain other persons have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of January 31, 2008, Registrant had outstanding 72,090,501 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
(1)
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Portions of the definitive Proxy Statement for Registrants 2008 Annual Meeting of
Shareholders are incorporated by reference in Part III.
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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
INDEX
For the Annual Period Ended December 31, 2007
2
PART I
Item 1. BUSINESS
GENERAL
As used in this Annual Report on Form 10-K,
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(i)
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Philadelphia Insurance refers to Philadelphia Consolidated Holding Corp.,
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(ii)
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The Company, we, us, and our refers to Philadelphia Insurance and its
subsidiaries, doing business as Philadelphia Insurance Companies;
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(iii)
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The Insurance Subsidiaries refers to Philadelphia Indemnity Insurance Company
(PIIC), Philadelphia Insurance Company (PIC), Liberty American Select Insurance Company
(LASIC) and Liberty American Insurance Company (LAIC), collectively;
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(iv)
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MIA refers to Maguire Insurance Agency, Inc., a captive underwriting manager;
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(v)
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LAIS refers to Liberty American Insurance Services, Inc., a managing general agency;
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(vi)
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Premium Finance refers to Liberty American Premium Finance Company; and
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(vii)
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PCHC Investment refers to PCHC Investment Corp., an investment holding company.
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Philadelphia Insurance was incorporated in Pennsylvania in 1984 as an insurance holding
company. Liberty American Insurance Group, Inc., a Delaware insurance holding company, and its
subsidiaries LASIC, LAIC, LAIS and Premium Finance, are sometimes referred to collectively as
Liberty.
Our core strategy has three major principles:
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Adhering to an underwriting philosophy aimed at consistently generating underwriting
profits through sound risk selection and pricing discipline.
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Distributing products through a mixed marketing platform. This includes direct
policyholder prospecting, utilizing an extensive network of independent producers,
including a subset of this network, known as preferred agents, with whom we have
established special distribution arrangements, a subset known as Firemark producers,
wholesalers and the Internet.
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Seeking to create value-added coverage and service features not found in typical
property and casualty policies. We believe this differentiates and enhances the
marketability and appeal of our products relative to our competitors.
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2007 gross written premiums increased 13.3% to $1,692.2 million. Premium growth during 2007
was primarily attributable to:
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Consistent prospecting efforts by marketing personnel in conjunction with long-term
relationships formed by our Marketing Regional Vice Presidents;
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Continued expansion of marketing efforts through our field organization and preferred
agents;
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Better brand recognition through our Firemark producer program; and
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The introduction of a number of new niche product offerings.
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Our GAAP basis calendar year combined ratio (the sum of the net loss and loss adjustment
expenses and acquisition costs and other underwriting expenses divided by net earned premiums) was
74.8% for 2007. This was substantially lower than the combined ratio of the property and casualty
industry as a whole. Our calendar year combined ratio included an $85.8 million pre-tax benefit
from a decrease in net unpaid loss and loss adjustment expenses due to favorable trends in prior
years claims emergence. Our GAAP combined ratio for the 2007 accident year, excluding the $85.8
million pre-tax benefit from prior years claim emergence, was 81.0%. During 2007, our total assets
increased to $4.1 billion, and shareholders equity increased 32.6% to $1.5 billion.
INDUSTRY TRENDS
During 2007, despite increasing price competition across most commercial and personal property
and casualty line products which resulted in slowing or flat top-line premium growth, the
property/casualty industry realized underwriting profits primarily due to a relatively mild
catastrophe season, favorable prior year loss-reserve development and higher net investment income.
3
BUSINESS OVERVIEW AND STRATEGY
We design, market and underwrite specialty commercial and personal property and casualty
insurance products incorporating value-added coverages and services for select target markets or
niches. We target markets and niches with specialized areas of demand by offering, among other
things, innovative policy features. We believe this approach allows us to compete by offering
customized coverage and solutions, rather than competing solely on price. Our insurance products
are distributed through a diverse multi-channel delivery system centered around our production
underwriting organization. A select group of 210 preferred agents, a broader group of
approximately 500 Firemark producers and a network of approximately 11,300 independent producers
supplement our production underwriting organization, which consisted of approximately 330
professionals located in 45 regional and field offices across the United States as of December 31,
2007.
Our commercial products include: commercial multi-peril package insurance targeting
specialized niches, including, among others, non-profit and religious organizations, sports and
recreation centers, homeowners and condominium associations, private, vocational and specialty
schools, mental health facilities and day care facilities; commercial automobile insurance
targeting the leasing and rent-a-car industries; automobile liability and physical damage insurance
for the antique and collector car industry; specialty property insurance for large commercial
accounts such as nursing homes and hospitals, and inland marine products targeting larger new
builders risk and miscellaneous property floaters. We also write select classes of professional
and management liability products, as well as personal property and casualty products for the
homeowners and manufactured housing markets.
We maintain detailed systems, records and databases that enable us to monitor our book of
business in order to identify and react swiftly to positive or negative developments and trends.
We are able to track performance, including loss ratios, by business segment, product, region,
state, producer and policyholder. Detailed profitability reports are produced and reviewed on a
routine (primarily monthly) basis as part of our policy of regularly analyzing and reviewing our
book of business.
We maintain a local presence to more effectively serve our producer and customer base,
operating through 13 regional offices and 32 field offices, which report to the regional offices,
throughout the country. These offices are staffed with marketers, field underwriters, and, in some
cases, claims personnel. Field office personnel interact closely with home office management in
making key decisions. We believe this approach allows us to adapt our marketing and underwriting
strategies to local conditions and build value-added relationships with our customers and
producers.
We select and target industries and niches that require specialized areas of expertise where
we believe we can grow business through creatively developing insurance products with innovative
features specially designed to meet those areas of demand. We believe that these features are not
included in typical property and casualty policies, enabling us to compete based on the unique or
customized nature of the coverage provided.
Business Segments
Our operations are classified into three reportable business segments:
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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;
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The Specialty Lines Underwriting Group, which has underwriting responsibility for the
professional and management liability insurance products; and
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The Personal Lines Underwriting Group, which has underwriting responsibility for
personal property insurance products for the homeowners and manufactured housing market in
Florida, and the National Flood Insurance Program for both personal and commercial
policyholders.
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The following table sets forth, for the years ended December 31, 2007, 2006 and 2005, the
gross written premiums for each of our business segments and the relative percentages that such
premiums represented.
4
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For the Years Ended December 31,
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2007
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2006
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2005
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Dollars
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Percentage
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Dollars
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Percentage
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Dollars
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Percentage
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(dollars in thousands)
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Commercial Lines
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$
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1,388,181
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82.0
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%
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$
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1,169,468
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78.3
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%
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$
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960,344
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75.9
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Specialty Lines
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245,220
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14.5
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227,567
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15.2
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205,306
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16.2
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Personal Lines
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58,822
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3.5
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96,213
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6.5
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99,265
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7.9
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Total
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$
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1,692,223
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100.0
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%
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$
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1,493,248
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100.0
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%
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$
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1,264,915
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100.0
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%
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Commercial Lines:
Commercial Package:
We have provided Commercial multi-peril package policies to targeted niche
markets for over 19 years. The primary customers for these policies include:
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non-profit organizations;
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social service agencies;
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condominium and homeowners associations;
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private, vocational and specialty schools;
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mental health facilities;
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day care facilities;
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religious organizations;
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health and fitness clubs and studios;
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sports leagues and camps;
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hotels and motels;
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golf and country clubs;
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retail shopping centers, business parks and medical facilities;
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professional and amateur sports associations and teams;
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entertainment parks/centers;
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campground and recreational vehicle park operators; and
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public entities.
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The package policies provide a combination of comprehensive liability, property and automobile
coverage with limits of up to $1.0 million for casualty, $125.0 million for property, and umbrella
limits on an optional basis of up to $15.0 million. We believe our ability to provide
professional/management liability and general liability coverages in one policy is advantageous and
convenient to our producers and policyholders.
Commercial Automobile and Commercial Excess:
We have provided primary, excess, contingent,
interim and garage liability; physical damage; and property insurance to targeted markets for over
41 years. The primary customers for these policies include:
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rental car companies;
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leasing companies;
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banks; and
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credit unions.
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Specialty Property & Inland Marine
: We have provided property and inland marine coverage to
targeted markets for the past 8 years. The primary customers for these policies include:
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nursing homes;
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hospitals; and
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commercial real estate developers.
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Antique/Collector Car Program:
We have provided specialized automobile liability and physical
damage insurance for the antique/collector car industry for over one year. Coverage includes
enhancements to the standard automobile policy such as agreed value, inflation guard, auto show and
medical reimbursement to meet the unique exposures associated with this industry.
5
Specialty Lines:
We have provided comprehensive professional liability (errors and omissions) and management
liability (directors and officers) policies to targeted classes of business for approximately 16
years.
Our professional and excess liability policies provides errors and omissions coverage
primarily for:
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accountants; and
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miscellaneous professionals (preferred classes include among others: computer
technology, management and marketing consultants, and claims adjusters).
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Our management liability policy includes directors and officers, employment practices,
fiduciary, workplace violence, and Internet liability coverage parts for:
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non-profit organizations; and
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private companies.
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Personal Lines
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We entered the personal lines property and casualty business through the acquisition of
Liberty in 1999. Our personal lines segment includes specialized homeowners and manufactured
housing property business in Florida, and the production and servicing of federal flood insurance
under the National Flood Insurance Program (NFIP) for both personal and commercial policyholders.
During 2007, we restricted our personal lines business production by non-renewing all homeowners
and rental dwelling policies providing windstorm coverage which expired between June 15, 2007 and
December 31, 2007. This restriction was imposed to reduce our exposure to catastrophe wind losses.
In addition, on January 4, 2008, we provided the Florida Office of Insurance Regulation (FOIR)
with the required statutory notification of our intention to non-renew all of our Florida personal
lines policies, other than policies issued pursuant to the NFIP, beginning with policies expiring
on or about July 15, 2008. In February 2008, we received preliminary notification from the FOIR
that they have no objection to our intention to non-renew the noted policies. We currently expect
the non-renewal process to be completed by July 15, 2009. As of December 31, 2007, there were
approximately 4,100 in-force policies with an aggregate in-force premium of approximately $3.2
million which expire between July 15, 2008 and December 31, 2008, which we will not renew during
2008.
Geographic Distribution
The following table provides the geographic distribution of direct earned premiums for all of
our reportable business segments for the year ended December 31, 2007.
(Dollars in thousands)
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State
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Direct Earned Premiums
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Percent of Total
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California
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$
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211,793
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13.2
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%
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Florida
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176,382
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11.0
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New York
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173,014
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10.8
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Texas
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99,211
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6.2
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Pennsylvania
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86,579
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5.4
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New Jersey
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73,876
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4.6
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Massachusetts
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69,814
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4.4
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Illinois
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46,864
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2.9
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Ohio
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41,651
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2.6
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Michigan
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34,867
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2.2
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Connecticut
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32,873
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2.1
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Minnesota
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32,050
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2.0
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Missouri
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32,253
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2.0
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All other states with less than 2% of total
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489,053
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30.6
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Total Direct Earned Premiums
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$
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1,600,280
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100.0
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%
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6
See Note 18 of our Consolidated Financial Statements included with this Form 10-K for information
concerning the revenues, net income and assets of each of our business segments.
Underwriting and Pricing
Our business segments are organized around our three underwriting groups:
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Commercial Lines,
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Specialty Lines, and
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Personal Lines.
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Each of our underwriting groups responsibilities include pricing, managing the risk selection
process, and monitoring loss ratios by product and insured. The reportable segments operate solely
within the United States.
We attempt to adhere to conservative underwriting and pricing practices. Written underwriting
guidelines are maintained and updated regularly for all classes of business underwritten, and
adherence to these underwriting guidelines is monitored through our completion of underwriting
audits. Product pricing levels are monitored utilizing a system which measures the aggregate price
level of a book of business. This system assists management and underwriters in promptly
recognizing and responding to price deterioration. When necessary, we re-underwrite, sharply
curtail or discontinue a product deemed to present unacceptable risks.
Our Commercial Lines Underwriting Group has underwriting responsibility for our commercial
multi-peril package, commercial automobile, specialty property and inland marine, and
antique/collector car insurance products. As of December 31, 2007, this group consisted of 94 home
office and 101 regional office underwriters (including underwriting managers). These underwriters
are supported by underwriting assistants, raters, and other policy administration personnel. Our
Commercial Lines regional office underwriters have the responsibility for pricing, underwriting,
and policy issuance for new business. Our Commercial Lines home office underwriting unit is
responsible for underwriting, auditing and servicing renewal business, and for authorizing quotes
on new business which are in excess of the regional office underwriters authority. Our Commercial
Lines Underwriting Group is under the direction of our Senior Vice President of Commercial Lines
who reports directly to our Chief Underwriting Officer. Overall management responsibility for the
book of business resides in the home office with the senior underwriting officers. We believe that
our ability to deliver excellent service and build long term relationships is enhanced through our
organizational structure.
Our Specialty Lines Underwriting Group has the underwriting responsibility for our
professional and management liability products. As of December 31, 2007, this group consisted of 27
home office and 28 regional office underwriters (including underwriting managers). These
underwriters are supported by underwriting assistants and other policy administration personnel.
Our Specialty Lines regional office underwriters have the responsibility for pricing, underwriting,
and policy issuance for new business. Our Specialty Lines home office underwriting unit is
responsible for underwriting, auditing and servicing renewal business, as well as an authority
referral for the regional office underwriters for quoting new business. The Specialty Lines
Underwriting Group is managed by our Senior Vice President of Specialty Lines who reports directly
to our Chief Underwriting Officer.
Our Personal Lines Underwriting Group is located in Pinellas Park, Florida, under the
direction of our Personal Lines Chief Operating Officer. Much of the underwriting function is
automated through our proprietary policy underwriting system. Underwriting guidelines are embedded
within this system which prohibits binding on account if the risk does not meet the underwriting
guidelines. During 2007 we restricted our personal lines production to reduce our exposure to
catastrophe wind losses.
We use a combination of Insurance Services Office, Inc. (ISO) coverage forms and rates and
independently filed forms and rates. Coverage forms and rates are independently developed for
situations where the line of business is not supported by ISO or where we believe the ISO forms and
rates do not adequately address the risk. Departures from ISO forms are also used to differentiate
our products from our competitors.
Reinsurance
We have entered into various reinsurance agreements for the purpose of limiting loss exposure
and managing capacity constraints as described below:
7
Casualty Excess of Loss Agreements
:
As of January 1, 2008, our casualty excess of loss reinsurance agreement (Excess Treaty)
provides that we bear the first $2.0 million primary layer of liability on each loss occurrence.
Risks in excess of $2.0 million up to $16.0 million are reinsured under the Excess Treaty.
Casualty, liability and fidelity risks are reinsured under the Excess Treaty. As of January 1,
2008, the reinsurers participating on the Excess Treaty are Allied World Assurance Company Ltd.,
Everest Reinsurance Company, Liberty Mutual Insurance Company and Transatlantic Reinsurance
Company, with pro rata participation of 27.5%, 27.5%, 15.0% and 30.0%, respectively. Facultative
reinsurance (reinsurance which is provided on an individual risk basis) is placed for casualty
risks in excess of $16.0 million.
As of January 1, 2008, an excess casualty reinsurance agreement provides an additional $18.0
million of coverage excess of a $2.0 million retention for protection from exposures such as
extra-contractual obligations and judgments in excess of policy limits. This coverage is provided
by eight reinsurers that are rated A (Excellent) by A.M. Best Company, at varying participation
percentages aggregating to a 100% total participation. An errors and omissions insurance policy
provides us an additional $10.0 million of coverage with respect to these exposures.
Property Excess of Loss Agreements
:
As of January 1, 2008, our property excess of loss reinsurance treaties provide for coverage
of $72.5 million of loss in excess of a $2.5 million retention. Limits of $12.5 million in excess
of $2.5 million are provided by General Reinsurance Corporation in the following three layers:
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First Excess Layer ($2.5 million in excess of $2.5 million) the reinsurers loss
limit on each loss occurrence in this layer is limited to $5.0 million. However,
reinstatements in this layer are unlimited and free.
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Second Excess Layer ($5.0 million in excess of $5.0 million) the reinsurers
loss limit on each loss occurrence in this layer is limited to $10.0 million. However,
this layer provides three free reinstatements. The aggregate loss limit for all loss
occurrences in this layer is $20.0 million.
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Third Excess Layer ($5.0 million in excess of $10.0 million) the reinsurers
loss limit on each loss occurrence in this layer is limited to $10.0 million. However,
this layer provides one free reinstatement and one paid reinstatement. The aggregate loss
limit for all loss occurrences in this layer is $15.0 million.
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Limits of $35.0 million in excess of $15.0 million are provided in the Fourth Excess Layer by
Swiss Reinsurance America Corporation, at a 75% participation rate, and five other reinsurers, that
are rated at least A (Excellent) by A.M. Best Company, at varying participation percentages
aggregating to a 25% total participation. The loss limit on each loss occurrence in this layer is
limited to $35.0 million. However, this layer provides one paid reinstatement. The aggregate loss
limit for all loss occurrences in this layer is $70.0 million.
Limits of $25.0 million in excess of $50.0 million are provided in the Fifth Excess Layer by
Swiss Reinsurance America Corporation and Arch Reinsurance Company, each at a 50% participation
level. The loss limit on each loss occurrence in this layer is limited to $25.0 million. However,
this layer provides one paid reinstatement. The aggregate loss limit for all loss occurrences in
this layer is $50.0 million.
In addition, we have an automatic facultative excess of loss reinsurance facility with General
Reinsurance Corporation for property losses in excess of $75.0 million up to $125.0 million, except
for risks located in Florida, Hawaii or Harris County, Texas, where coverage for property losses is
in excess of $75.0 million up to $105.0 million. Facultative reinsurance (reinsurance which is
provided on an individual risk basis) is placed for property risks in excess of $125.0 million,
except for risks located in Florida, Hawaii or Harris County, Texas, where facultative reinsurance
coverage is placed for property risks in excess of $105.0 million.
Terrorism Coverage
:
Our January 1, 2008 property excess of loss reinsurance treaties discussed above provide for
terrorism coverage in the aggregate of $72.5 million in excess of a $2.5 million retention. In
addition, our automatic facultative excess of loss reinsurance with General Reinsurance Corporation
discussed above provides for terrorism coverage in the aggregate of $50.0 million. We have also
entered into Terrorism Catastrophe Excess of Loss reinsurance agreements for our commercial lines
segment. The coverage is effective for
8
the two year period from March 1, 2007 through February 28, 2009. The coverage provides, on an annual basis, in the aggregate, $50.0 million of coverage for losses arising from acts of
terrorism incurred in excess of $10.0 million, after all applicable inuring reinsurance coverages.
The coverage allows one reinstatement on an annual basis at the same cost as the initial coverage.
The participating reinsurers are Lloyds Catlin Syndicate (SJC # 2003), Lloyds MAP Syndicate (MAP #
2791) and Lloyds BRIT Syndicate (BRT # 2987), all at varying levels of participation for a total of
80% participation by these reinsurers for the entire two-year term of the agreement, and Validus Re
for 20% participation, but only for a one-year term from
March 1, 2007 through February 29, 2008. On
February 28, 2008, Validus Re agreed to provide coverage for
their 20% participation for the period March 1, 2008 through
February 28, 2009 at the same terms and conditions.
Property Catastrophe Agreements
:
We purchase property catastrophe reinsurance covering both our commercial and personal lines
catastrophe losses. Our primary catastrophe reinsurance program provides coverage for a one year
period with a June 1 renewal date.
Effective June 1, 2007 our commercial lines segment property catastrophe program open-market
catastrophe reinsurance coverage is $245.0 million in excess of a $10.0 million per occurrence
retention. The open-market catastrophe program (coverage provided by large reinsurers that are
rated at least A (Excellent) by A.M. Best Company) includes one mandatory reinstatement.
Based upon the various modeling methods we have utilized to estimate our probable maximum loss for
our commercial lines business, the 100 year storm event losses are estimated at $195.4 million and
the 250 year storm event losses are estimated at $385.6 million. These loss estimates were
calculated using the commercial lines in-force exposures as of December 31, 2006.
We also purchased a reinstatement premium protection contract for the First and Second Excess
Layers of our commercial lines segment open-market catastrophe contract effective June 1, 2007,
providing coverage for reinstatement premium which we may become liable to pay as a result of loss
occurrence between $10.0 million and $50.0 million.
Effective June 1, 2007 our personal lines segment property catastrophe program reinsurance
coverage is approximately $121.0 million in excess of a $3.5 million per occurrence retention. Of
this total amount, the Florida Hurricane Catastrophe Fund (FHCF) provides on an aggregate basis
for LASIC and LAIC coverage of approximately $78.3 million in excess of $15.4 million. The FHCF
participation for this coverage is 90%. The FHCF coverage inures to the benefit of our open-market
catastrophe program. The coverage provided by the open-market catastrophe program (coverage
provided by large reinsurers that are rated at least A (Excellent) by A.M. Best Company)
includes one mandatory reinstatement, but the FHCF coverage does not reinstate. Since the FHCF
reimbursement coverage cannot be reinstated, our open-market program is structured such that
catastrophe reinsurance coverage in excess of the FHCF coverage will drop down and fill in any
portion of the FHCF which has been utilized. Based upon the various modeling methods we have
utilized to estimate our probable maximum loss for our personal lines business, the 100 year storm
event is estimated at $46.1 million, and the 250 year storm event is estimated at $76.6 million.
These loss estimates were calculated using the personal lines in-force exposures as of September
30, 2007.
We also purchased reinstatement premium protection contracts for the First, Second and Third
Excess Layers of our personal lines open-market catastrophe reinsurance contracts effective June 1,
2007, providing coverage for reinstatement premium which we may become liable to pay as a result of
loss occurrences between $3.5 million and $24.0 million.
We seek to limit the risk of a reinsurers default in a number of ways. First, we principally
contract with large reinsurers that are rated at least A (Excellent) by A.M. Best Company.
Additionally, we seek to proactively collect the obligations due from of our reinsurers on a timely
basis. This collection effort is supported through the regular monitoring of reinsurance
receivables. We also obtain collateral for balances due from reinsurers that are not approved by
the Pennsylvania and/or Florida Insurance Departments due to their foreign domiciliary status, and
finally, we typically do not write casualty policies in excess of $16.0 million or property
policies in excess of $125.0 million. Although we purchase reinsurance to limit our loss exposure
by transferring certain large risks to our reinsurers, reinsurance does not relieve us from our
obligation to our policyholders. We regularly assess our reinsurance needs and seek to improve the
terms of our reinsurance arrangements as market conditions permit. Such improvements may involve
changes in retentions, modifications in premium rates, changes in reinsurers and other matters.
The following table sets forth our ten largest unsecured reinsurance receivable balances as of
December 31, 2007. The balances reflected have been reduced by the amount of collateral we are
holding from these reinsurers, as of December 31, 2007.
9
($s in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unsecured
|
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
|
|
|
|
|
Reinsurer
|
|
Receivables
|
|
|
% of Total
|
|
|
A.M. Best Rating
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Reinsurance Corporation
|
|
$
|
40,552
|
|
|
|
25.9
|
%
|
|
|
A++
|
|
National Flood Insurance Program
|
|
|
24,561
|
|
|
|
15.7
|
%
|
|
Not Rated Voluntary Pool
|
Liberty Mutual Insurance Company
|
|
|
20,298
|
|
|
|
13.0
|
%
|
|
|
A
|
|
Munich Reinsurance America, Inc.
|
|
|
14,976
|
|
|
|
9.6
|
%
|
|
|
A
|
|
ACE Property & Casualty Insurance Company
|
|
|
12,194
|
|
|
|
7.8
|
%
|
|
|
A+
|
|
Finial Reinsurance Company (formerly
Converium Reinsurance (NA) Inc.)
|
|
|
11,342
|
|
|
|
7.2
|
%
|
|
|
B+
|
|
Swiss Reinsurance America Corporation
|
|
|
7,456
|
|
|
|
4.8
|
%
|
|
|
A+
|
|
Everest Reinsurance Company
|
|
|
4,749
|
|
|
|
3.0
|
%
|
|
|
A+
|
|
Travelers Indemnity Company
|
|
|
4,746
|
|
|
|
3.0
|
%
|
|
|
A+
|
|
Employers Reinsurance Corporation
|
|
|
3,825
|
|
|
|
2.4
|
%
|
|
|
A+
|
|
All Other Reinsurers
|
|
|
12,013
|
|
|
|
7.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Unsecured Reinsurance Receivables
|
|
$
|
156,712
|
(1)
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
This amount differs by $123.4 million from the reinsurance receivables of $280.1 million
reported in our consolidated financial statements as of December 31, 2007 because the
reinsurance receivables in the table above have been reduced by the collateral that we are
holding from our reinsurers.
|
Marketing and Distribution
Proactive risk selection based on sound underwriting criteria and relationship selling in
clearly defined target markets continues to be the foundation of our marketing plan. Within this
framework, our marketing effort is designed to promote a systematic and disciplined approach to
developing business which is anticipated to be profitable.
We distribute our products through our production underwriting organization, an extensive
network of approximately 11,300 independent producers, our Firemark producers and our preferred
agent program. We believe our most important distribution channel is our production underwriting
organization. We established our production underwriting organization to stimulate new sales
through independent producers. Our production underwriting organization is currently comprised of
approximately 330 professionals located in 45 regional and field offices in major markets across
the country. The field offices are focused daily on interacting with prospective and existing
insureds. In addition to this prospecting, relationships with approximately 11,300 independent
producers have been formed, either because the producer has a pre-existing relationship with the
insured or has sought our expertise in one of its niche products. This marketing concept provides
us with the flexibility to respond to changing market conditions and, when appropriate, shift our
emphasis to different product lines to take advantage of opportunities as they arise. In addition,
the production underwriting organizations ability to gather market data enables the rapid
identification of soft markets and redeployment to firmer markets, from a product line or
geographic perspective. We believe that our marketing platform provides a competitive advantage.
Our preferred agent program, in which business relationships are formed with producers
specializing in certain of our business niches, consisted of 210 preferred agents as of December
31, 2007. We identify our preferred agents based on productivity and loss experience, and they
receive additional benefits from us in exchange for meeting minimum premium production thresholds
and defined profitability criteria. Our Firemark producers represent producers that have the
potential to become a preferred agent and consist of approximately 500 producers as of December 31,
2007.
We supplement our marketing efforts through affinity programs, trade shows, direct mailings,
e-flyers and national advertisements placed in trade magazines serving industries in which we
specialize, as well as links to industry web sites. We have also enhanced our marketing with
Internet-based initiatives, such as live chat.
10
Product Development
We continually evaluate new product opportunities, consistent with our strategic focus on
selected market niches. Direct contacts between our field and home office personnel, preferred
agents and our customers have produced a number of new product ideas. New product ideas are
presented to our Product Development Committee for consideration. This Committee, which is composed
of members of our senior management, meets regularly to review the feasibility of products from a
variety of perspectives, including:
|
|
|
profitability;
|
|
|
|
|
underwriting risk;
|
|
|
|
|
marketing and distribution;
|
|
|
|
|
availability of reinsurance coverage;
|
|
|
|
|
long-term viability; and
|
|
|
|
|
consistency with the Companys culture and philosophy.
|
For each new product, an individualized test market plan is prepared, addressing such matters
as the appropriate distribution channel, an appropriate cap on premiums to be generated during the
test market phase and reinsurance requirements for the test market phase. Test market products may
involve lower retentions than customarily utilized. After a new product is approved for test
marketing, we monitor its success based on specified criteria (e.g., underwriting results, sales
success, product demand and competitive pressures). If expectations are not realized, we either
move to improve results by initiating adjustments or abandon the product.
Claims Management and Administration
In accordance with our emphasis on underwriting profitability, we actively manage claims under
our policies in an effort to investigate reported incidents at an early stage, service insureds and
reduce fraud. Our claims personnel utilizes a claims system which is specifically designed for the
paperless management and handling of property and casualty claims in our market niches. Our claims
supervisors regularly audit claim files in an attempt to ensure that claims are being processed
properly and that case reserves are being set at appropriate levels.
Our experienced staff of claims management professionals is assigned to dedicated claim units
within specific niche markets. Each of these units receives supervisory direction and legislative
and product development updates from the unit director. Claims management personnel have an average
of approximately 20 years of experience in the industry. The dedicated claim units meet regularly
to communicate changes within their assigned specialty. Staffs within the dedicated claim units
have an average of 10 years experience in the industry.
We also maintain a Special Investigations Unit to investigate suspicious claims and to serve
as a clearinghouse for information concerning fraudulent practices. This unit also works closely
with a variety of industry contacts, including attorneys and investigators to identify fraudulent
claims.
Loss and Loss Adjustment Expenses
We are liable for losses and loss adjustment expenses under our insurance policies and
reinsurance treaties. While our professional/management liability policies are written on
claims-made forms, and while claims on our other policies are generally reported promptly after the
occurrence of an insured loss, in many cases several years may elapse between the occurrence of an
insured loss, the reporting of the loss to us and our payment of the loss. We reflect our liability
for the ultimate payment of all incurred losses and loss adjustment expenses by establishing loss
and loss adjustment expense reserves. These reserves are balance sheet liabilities representing
estimates of future amounts needed to pay claims and related expenses with respect to insured
events that have occurred.
When a claim involving a probable loss is reported, we establish a case reserve for the
estimated amount of our ultimate loss and loss adjustment expense. This estimate reflects our
informed judgment based on our reserving practices and the experience of our claims staff. We also
establish reserves on an aggregate basis to provide for losses incurred but not reported (IBNR),
as well as future development on claims already reported to us.
As part of our reserving process, we review historical data and give consideration to the
anticipated effect of various factors, including:
11
|
|
|
known and anticipated legal developments,
|
|
|
|
|
changes in societal attitudes,
|
|
|
|
|
inflation and economic conditions, and
|
|
|
|
|
pricing environment.
|
Reserve amounts are necessarily based on our estimates and judgments. As new data becomes
available and is reviewed, these estimates and judgments are revised, resulting in increases or
decreases to existing reserves. Our Insurance Subsidiaries internal actuary provides us with an
annual Statement of Actuarial Opinion for the statutory reserves included in the statutory filings
with regulators.
The following table sets forth for the years indicated a reconciliation of beginning and
ending reserves for unpaid loss and loss adjustment expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Years Ended December 31,
|
|
(In Thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Unpaid loss and loss adjustment expenses at beginning of year
|
|
$
|
1,283,238
|
|
|
$
|
1,245,763
|
|
|
$
|
996,667
|
|
Less: reinsurance receivables
|
|
|
187,809
|
|
|
|
304,768
|
|
|
|
324,948
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid loss and loss adjustment expenses at beginning of year
|
|
|
1,095,429
|
|
|
|
940,995
|
|
|
|
671,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for losses and loss adjustment expenses for current year claims
|
|
|
704,734
|
|
|
|
559,647
|
|
|
|
533,906
|
|
Decrease in estimated ultimate losses and loss adjustment expenses for
prior year claims
|
|
|
(85,781
|
)
|
|
|
(91,435
|
)
|
|
|
(29,900
|
)
|
|
|
|
|
|
|
|
|
|
|
Total incurred losses and loss adjustment expenses
|
|
|
618,953
|
|
|
|
468,212
|
|
|
|
504,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense payments for claims attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
180,798
|
|
|
|
118,845
|
|
|
|
110,496
|
|
Prior years (1)(2)
|
|
|
271,669
|
|
|
|
194,933
|
|
|
|
124,234
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
|
452,467
|
|
|
|
313,778
|
|
|
|
234,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid loss and loss adjustment expenses at end of year
|
|
|
1,261,915
|
|
|
|
1,095,429
|
|
|
|
940,995
|
|
Plus: reinsurance receivables
|
|
|
170,018
|
|
|
|
187,809
|
|
|
|
304,768
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expenses at end of year
|
|
$
|
1,431,933
|
|
|
$
|
1,283,238
|
|
|
$
|
1,245,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
During the year ended December 31, 2005, net loss and loss adjustment expense payments for
claims attributable to prior years reflect a ceded paid loss and loss adjustment expense
payment of $64.3 million due to the commutation of our 2003 Whole Account Net Quota Share
Reinsurance Agreement.
|
|
(2)
|
|
During the year ended December 31, 2006, net loss and loss adjustment expense payments for
claims attributable to prior years reflect a ceded paid loss and loss adjustment expense
payment of $31.9 million due to the commutation of our 2004 Whole Account Net Quota Share
Reinsurance Agreement.
|
During 2007, we increased/(decreased) the estimated net unpaid loss and loss adjustment
expenses for accident years 2006 and prior by the following amounts:
(In Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
|
increase (decrease)
|
|
|
|
|
|
|
|
Professional/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
Rental/Leasing
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Liability
|
|
|
Auto
|
|
|
|
|
|
|
|
Accident Year
|
|
Coverages
|
|
|
Coverages
|
|
|
Coverages
|
|
|
Other
|
|
|
Total
|
|
2006
|
|
$
|
(10.6
|
)
|
|
$
|
(10.8
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
(22.7
|
)
|
2005
|
|
$
|
(8.4
|
)
|
|
$
|
(15.1
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(25.0
|
)
|
2004
|
|
$
|
(6.0
|
)
|
|
$
|
(10.1
|
)
|
|
$
|
(3.1
|
)
|
|
$
|
0.1
|
|
|
$
|
(19.1
|
)
|
2003 & Prior
|
|
$
|
(6.0
|
)
|
|
$
|
(10.8
|
)
|
|
$
|
(3.1
|
)
|
|
$
|
0.9
|
|
|
$
|
(19.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(31.0
|
)
|
|
$
|
(46.8
|
)
|
|
$
|
(8.3
|
)
|
|
$
|
0.3
|
|
|
$
|
(85.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for:
|
|
|
|
Commercial property, professional liability, and commercial automobile coverages due to
better than expected case incurred loss development, primarily as a result of both claim
frequency and severity emergence being less than anticipated, and
|
|
|
|
|
Management liability coverages due to better than expected case incurred loss development
primarily as a result of claim severity emergence 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:
|
|
|
|
Professional liability, management liability, and commercial property coverages due to
better than expected case incurred loss development primarily as a result of claim severity
being less than anticipated.
|
|
|
|
|
General liability and commercial automobile coverages due to better than expected case
incurred loss development, primarily as a result of both claim frequency and severity
emergence being less than anticipated.
|
|
|
For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for:
|
|
|
|
Professional liability, commercial general liability, rental leasing and management
liability coverages due to better than expected case incurred loss development primarily as
a result of claim severity emergence being less than anticipated.
|
|
|
For accident year 2003 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower loss estimates for:
|
|
|
|
Professional liability, management liability and commercial general liability coverages
due to better than expected case incurred loss development primarily as a result of claim
severity emergence being less than anticipated.
|
During 2006, we increased/(decreased) the estimated net unpaid loss and loss adjustment
expenses for accident years 2005 and prior by the following amounts:
(In Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
|
increase (decrease)
|
|
|
|
|
|
|
|
Professional/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
Rental/Leasing
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Liability
|
|
|
Auto
|
|
|
|
|
|
|
|
Accident Year
|
|
Coverages
|
|
|
Coverages
|
|
|
Coverages
|
|
|
Other
|
|
|
Total
|
|
2005
|
|
$
|
(52.0
|
)
|
|
$
|
(5.0
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
(59.2
|
)
|
2004
|
|
$
|
(11.6
|
)
|
|
$
|
1.9
|
|
|
$
|
(2.8
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(12.6
|
)
|
2003
|
|
$
|
(0.3
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
(3.7
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(11.0
|
)
|
2002 & Prior
|
|
$
|
(1.0
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
(6.3
|
)
|
|
$
|
0.3
|
|
|
$
|
(8.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(64.9
|
)
|
|
$
|
(11.5
|
)
|
|
$
|
(13.8
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
(91.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment expenses
was principally due to lower estimates for commercial coverages due to better than expected case
incurred loss development. The incurred frequency emergence on general liability coverages, and
the incurred severity emergence on property and auto coverages, were less than anticipated.
For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment expenses
was principally due to lower estimates for commercial coverages due to better than expected case
incurred loss development. The incurred frequency emergence on general liability coverages, and
the incurred severity emergence on auto coverages, were less than anticipated.
For accident year 2003, the decrease in estimated net unpaid loss and loss adjustment expenses
was principally due to lower estimates for professional/management liability coverages and
rental/leasing auto coverages due to better than expected case incurred
13
loss development. The incurred severity emergence on professional/management liability (E&O
and D&O) coverages, and the incurred frequency emergence on rental/leasing auto coverages, were
less than anticipated.
For accident years 2002 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower estimates for rental/leasing auto coverages due to
better than expected case incurred loss development. The incurred frequency emergence on
rental/leasing auto coverages, and the incurred severity emergence on rental supplemental liability
coverages, were less than anticipated.
During 2005, we increased/(decreased) the estimated total net unpaid losses and loss
adjustment expenses for prior accident years by the following amounts:
(In Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
|
increase (decrease)
|
|
|
|
|
|
|
|
Professional/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Liability
|
|
|
Rental/Leasing
|
|
|
|
|
|
|
|
Accident Year
|
|
Coverages
|
|
|
Coverages
|
|
|
Auto Coverages
|
|
|
Other
|
|
|
Total
|
|
2004
|
|
$
|
(12.7
|
)
|
|
$
|
(7.6
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
0.4
|
|
|
$
|
(24.2
|
)
|
2003
|
|
$
|
3.5
|
|
|
$
|
(2.4
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
1.0
|
|
|
$
|
1.6
|
|
2002
|
|
$
|
(0.6
|
)
|
|
$
|
(2.0
|
)
|
|
$
|
(3.4
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
(7.0
|
)
|
2001 & Prior
|
|
$
|
1.9
|
|
|
$
|
(0.7
|
)
|
|
$
|
(0.9
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(7.9
|
)
|
|
$
|
(12.7
|
)
|
|
$
|
(9.1
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(29.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in the estimated net unpaid losses and loss adjustment expenses for prior accident
years during 2005 were primarily attributable to the following:
For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment expenses
was principally due to lower net loss estimates for commercial package policies as a result of
better than expected claim frequency and professional liability coverages due to better than
expected case incurred development.
For accident year 2002, the decrease in estimated net unpaid loss and loss adjustment expenses
and prior was principally due to decreased loss estimates across most commercial and specialty
lines of business due to better than expected case incurred loss development.
The following table presents the development of unpaid loss and loss adjustment expenses from
1997 through 2007. The top line of the table shows the estimated reserve for unpaid loss and loss
adjustment expenses at the balance sheet date for each of the indicated years. These figures
represent the estimated amount of unpaid loss and loss adjustment expenses for claims arising in
the current year and all prior years that were unpaid at the balance sheet date, including IBNR
losses. The table also shows the re-estimated amount of the previously recorded unpaid loss and
loss adjustment expenses based on experience as of the end of each succeeding year. The estimate
may change as more information becomes known about the frequency and severity of claims for
individual years.
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
|
|
|
(Dollars in Thousands)
|
|
|
1997
|
|
1998
|
|
1999
|
|
2000
|
|
2001
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Loss and
Loss Adjustment
Expenses, As Stated
|
|
$
|
122,430
|
|
|
$
|
153,383
|
|
|
$
|
188,063
|
|
|
$
|
237,494
|
|
|
$
|
302,733
|
|
|
$
|
445,548
|
|
|
$
|
627,086
|
|
|
$
|
996,667
|
|
|
$
|
1,245,763
|
|
|
$
|
1,283,238
|
|
|
$
|
1,431,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Paid as
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 year later
|
|
|
31,676
|
|
|
|
83,259
|
|
|
|
78,070
|
|
|
|
95,608
|
|
|
|
148,506
|
|
|
|
204,592
|
|
|
|
231,904
|
|
|
|
313,902
|
|
|
|
336,139
|
|
|
|
338,055
|
|
|
|
|
|
2 years later
|
|
|
81,535
|
|
|
|
127,253
|
|
|
|
143,464
|
|
|
|
192,234
|
|
|
|
282,410
|
|
|
|
365,666
|
|
|
|
365,358
|
|
|
|
490,114
|
|
|
|
564,414
|
|
|
|
|
|
|
|
|
|
3 years later
|
|
|
107,578
|
|
|
|
167,333
|
|
|
|
198,749
|
|
|
|
286,593
|
|
|
|
377,088
|
|
|
|
444,438
|
|
|
|
459,889
|
|
|
|
640,605
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 years later
|
|
|
126,985
|
|
|
|
193,217
|
|
|
|
265,721
|
|
|
|
336,425
|
|
|
|
423,654
|
|
|
|
496,893
|
|
|
|
519,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 years later
|
|
|
137,242
|
|
|
|
217,086
|
|
|
|
291,539
|
|
|
|
362,553
|
|
|
|
447,229
|
|
|
|
527,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 years later
|
|
|
144,819
|
|
|
|
226,813
|
|
|
|
303,934
|
|
|
|
372,035
|
|
|
|
457,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 years later
|
|
|
149,473
|
|
|
|
229,394
|
|
|
|
309,192
|
|
|
|
377,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 years later
|
|
|
150,210
|
|
|
|
230,933
|
|
|
|
312,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 years later
|
|
|
150,401
|
|
|
|
231,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 years later
|
|
|
151,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid Loss and
Loss Adjustment
Expenses
re-estimated as of
End of Year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 year later
|
|
|
119,261
|
|
|
|
187,267
|
|
|
|
201,642
|
|
|
|
270,006
|
|
|
|
371,857
|
|
|
|
497,326
|
|
|
|
674,337
|
|
|
|
988,850
|
|
|
|
1,133,177
|
|
|
|
1,188,150
|
|
|
|
|
|
2 years later
|
|
|
134,295
|
|
|
|
191,005
|
|
|
|
226,388
|
|
|
|
325,523
|
|
|
|
442,608
|
|
|
|
582,076
|
|
|
|
707,322
|
|
|
|
954,239
|
|
|
|
1,075,677
|
|
|
|
|
|
|
|
|
|
3 years later
|
|
|
138,761
|
|
|
|
202,481
|
|
|
|
273,985
|
|
|
|
374,738
|
|
|
|
482,006
|
|
|
|
608,257
|
|
|
|
678,716
|
|
|
|
923,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4 years later
|
|
|
144,620
|
|
|
|
220,496
|
|
|
|
310,086
|
|
|
|
388,064
|
|
|
|
489,014
|
|
|
|
584,446
|
|
|
|
658,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 years later
|
|
|
149,721
|
|
|
|
233,859
|
|
|
|
315,682
|
|
|
|
390,385
|
|
|
|
481,272
|
|
|
|
577,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 years later
|
|
|
151,242
|
|
|
|
234,214
|
|
|
|
317,229
|
|
|
|
386,427
|
|
|
|
475,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 years later
|
|
|
151,748
|
|
|
|
233,729
|
|
|
|
316,180
|
|
|
|
383,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 years later
|
|
|
151,042
|
|
|
|
232,829
|
|
|
|
316,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 years later
|
|
|
151,224
|
|
|
|
232,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10 years later
|
|
|
151,837
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
Redundancy
(Deficiency):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollars
|
|
$
|
(29,407
|
)
|
|
$
|
(79,586
|
)
|
|
$
|
(128,126
|
)
|
|
$
|
(146,267
|
)
|
|
$
|
(172,650
|
)
|
|
$
|
(131,542
|
)
|
|
$
|
(31,042
|
)
|
|
$
|
73,609
|
|
|
$
|
170,086
|
|
|
$
|
95,088
|
|
|
|
|
|
Percentage
|
|
|
(24.0
|
)%
|
|
|
(51.9
|
)%
|
|
|
(68.1
|
)%
|
|
|
(61.6
|
)%
|
|
|
(57.0
|
)%
|
|
|
(29.5
|
%)
|
|
|
(5.0
|
%)
|
|
|
7.4
|
%
|
|
|
13.7
|
%
|
|
|
7.4
|
%
|
|
|
|
|
|
|
|
(1)
|
|
Unpaid loss and loss adjustment expenses for 1998, as stated, have been adjusted to include
$2,233 unpaid loss and loss adjustment expenses for LASIC as of acquisition date.
|
The cumulative redundancy (deficiency) represents the aggregate change in the reserve
estimated over all prior years, and does not represent accident year loss development. Therefore,
each amount in the table includes the effects of changes in reserves for all prior years.
The unpaid loss and loss adjustment expense of our Insurance Subsidiaries, as reported in
their Annual Statements prepared in accordance with statutory accounting practices and filed with
state insurance departments, differ from those reflected in our financial statements prepared in
accordance with generally accepted accounting principles (GAAP) with respect to recording the
effects of reinsurance. Unpaid loss and loss adjustment expenses under statutory accounting
practices are reported net of the effects of reinsurance, but under GAAP these amounts are reported
without giving effect to reinsurance. Under GAAP, reinsurance receivables, with a corresponding
increase in unpaid loss and loss adjustment expense, have been recorded. There is no effect on net
income or shareholders equity due to the difference in reporting the effects of reinsurance
between statutory accounting practices and GAAP as discussed above.
15
Operating Ratios
Statutory Combined Ratio:
The statutory combined ratio, which is the sum of (a) the ratio of loss and loss adjustment
expenses incurred to net earned premiums (loss ratio) and (b) the ratio of policy acquisition costs
and other underwriting expenses to net written premiums (expense ratio), is the traditional measure
of underwriting profit and loss for insurance companies. A combined ratio below 100% indicates that
an insurer has an underwriting profit, and a combined ratio above 100% indicates an insurer has an
underwriting loss.
The following table reflects the consolidated loss, expense and combined ratios of our
Insurance Subsidiaries, together with the property and casualty industry-wide combined ratios after
policyholders dividends.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Loss Ratio
|
|
|
44.9
|
%
|
|
|
39.8
|
%
|
|
|
51.8
|
%
|
|
|
61.5
|
%
|
|
|
63.1
|
%
|
Expense Ratio
|
|
|
29.4
|
%
|
|
|
28.5
|
%
|
|
|
26.3
|
%
|
|
|
27.2
|
%
|
|
|
27.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Ratio
|
|
|
74.3
|
%
|
|
|
68.3
|
%
|
|
|
78.1
|
%
|
|
|
88.7
|
%
|
|
|
90.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry Statutory
Combined Ratio,
after
Policyholders
Dividends (1)
|
|
|
95.6
|
%
|
|
|
93.3
|
%
|
|
|
100.8
|
%
|
|
|
98.5
|
%
|
|
|
100.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Source: A.M. Best Company Review/Preview January 2008. 2007 industry data is estimated.
|
Premium-to-Surplus Ratio:
While there are no statutory provisions governing premium-to-surplus ratios, regulatory
authorities regard this ratio as an important indicator as to an insurers ability to withstand
abnormal loss experience. Guidelines established by the National Association of Insurance
Commissioners (the NAIC) provide that an insurers net written premium-to-surplus ratio is
satisfactory if it is below 3 to 1.
The following table presents net written premiums to policyholders surplus for our Insurance
Subsidiaries (statutory basis):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Years Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
(Dollars in Thousands)
|
Net Written Premiums
|
|
$
|
1,460,000
|
|
|
$
|
1,283,170
|
|
|
$
|
1,107,460
|
|
|
$
|
919,152
|
|
|
$
|
601,253
|
|
Policyholders Surplus
|
|
$
|
1,298,786
|
|
|
$
|
1,007,546
|
|
|
$
|
691,038
|
|
|
$
|
503,657
|
|
|
$
|
415,900
|
|
Premium to Surplus Ratio
|
|
|
1.1 to 1.0
|
|
|
|
1.3 to 1.0
|
|
|
|
1.6 to 1.0
|
|
|
|
1.8 to 1.0
|
|
|
|
1.5 to 1.0
|
|
Investments
Our investment objectives are the realization of relatively high levels of after-tax net
investment income while generating competitive after-tax total rates of return, subject to
established specific investment guidelines and the following objectives:
|
|
|
Maintaining an appropriate level of liquidity to satisfy the cash requirements of
current operating and longer term obligations;
|
|
|
|
|
Adjusting investment risk to offset or complement insurance risk based upon total
risk tolerance; and
|
|
|
|
|
Meeting insurance regulatory requirements with respect to investments under
applicable insurance laws.
|
We utilize external independent professional investment managers for our fixed maturity and
equity investments.
As of December 31, 2007, the total carrying value of our investments was $3,015.2 million. Of
this amount, 88.2% were 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, asset backed securities, mortgage pass-through securities
and collateralized mortgage obligations, with a weighted average credit quality of AAA. The
remaining 11.8% consisted primarily of publicly-traded common stocks.
16
The following table sets forth information concerning the composition of our total investments
as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
Market
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
Amortized Cost
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
(Dollars in Thousands)
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies
|
|
$
|
15,867
|
|
|
$
|
16,129
|
|
|
$
|
16,129
|
|
|
|
0.5
|
%
|
Obligations of States and Political Subdivisions
|
|
|
1,380,755
|
|
|
|
1,389,070
|
|
|
|
1,389,070
|
|
|
|
46.1
|
|
Corporate and Bank Debt Securities
|
|
|
109,784
|
|
|
|
110,659
|
|
|
|
110,659
|
|
|
|
3.7
|
|
Asset Backed Securities
|
|
|
199,313
|
|
|
|
200,651
|
|
|
|
200,651
|
|
|
|
6.7
|
|
Mortgage Pass-Through Securities
|
|
|
604,261
|
|
|
|
611,025
|
|
|
|
611,025
|
|
|
|
20.2
|
|
Collateralized Mortgage Obligations
|
|
|
329,491
|
|
|
|
331,663
|
|
|
|
331,663
|
|
|
|
11.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities
|
|
|
2,639,471
|
|
|
|
2,659,197
|
|
|
|
2,659,197
|
|
|
|
88.2
|
%
|
Equity Securities
|
|
|
322,877
|
|
|
|
356,026
|
|
|
|
356,026
|
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
2,962,348
|
|
|
$
|
3,015,223
|
|
|
$
|
3,015,223
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, 99.9% of our Insurance Subsidiaries fixed maturity securities (cost
basis) consisted of U.S. government securities or securities rated 1 (highest quality) or 2
(high quality) by the NAIC.
The cost and estimated market value of fixed maturity securities as of December 31, 2007, by
remaining original contractual maturity, is set forth below. Expected maturities may differ from
contractual maturities because certain borrowers have the right to call or prepay obligations, with
or without call or prepayment penalties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Market
|
|
|
|
Amortized Cost
|
|
|
Value
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less
|
|
$
|
49,212
|
|
|
$
|
49,138
|
|
Due after one year through five years
|
|
|
392,412
|
|
|
|
394,931
|
|
Due after five years through ten years
|
|
|
360,945
|
|
|
|
366,177
|
|
Due after ten years
|
|
|
703,837
|
|
|
|
705,611
|
|
Asset Backed, Mortgage Pass-Through and Collateralized Mortgage Obligation Securities
|
|
|
1,133,065
|
|
|
|
1,143,340
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,639,471
|
|
|
$
|
2,659,197
|
|
|
|
|
|
|
|
|
Investments of our Insurance Subsidiaries must comply with applicable laws and regulations
which prescribe the type, quality and diversification of investments. In general, these laws and
regulations permit investments, within specified limits and subject to certain qualifications, in
federal, state and municipal obligations, corporate bonds, secured obligations, preferred and
common equity securities, real estate mortgages and real estate.
Regulation
General:
We are subject to extensive supervision and regulation in the states in which we
operate. Such supervision and regulation relates to numerous aspects of our business and financial
condition. The primary purpose of the supervision and regulation is the protection of insurance
policyholders rather than our investors. The extent of regulation varies but generally is governed
by state statutes. These statutes delegate regulatory, supervisory and administrative authority to
state insurance departments. This system of regulation covers, among other things:
|
|
|
issuance, renewal, suspension and revocation of licenses to engage in the insurance business;
|
|
|
|
|
standards of solvency, including risk-based capital measurements;
|
|
|
|
|
restrictions on the nature, quality and concentration of investments;
|
|
|
|
|
restrictions on the types of terms that we can include in the insurance policies we offer;
|
|
|
|
|
certain required methods of accounting;
|
|
|
|
|
maintenance of reserves for unearned premiums, losses and other purposes; and
|
17
|
|
|
potential assessments for the provision of funds necessary for the settlement of covered
claims under certain insurance policies provided by: impaired, insolvent or failed insurance
companies; and state insurance facilities.
|
The regulations and any actions taken by the state insurance departments may affect the cost
or demand for our products and may prevent or interfere with our ability to obtain rate increases
or take other actions to increase profitability. Also, regulatory authorities have relatively
broad discretion to grant, renew or revoke licenses and approvals. If we do not have the requisite
licenses and approvals, or do not comply with applicable regulatory requirements, the insurance
regulatory authorities could stop or temporarily suspend us from carrying on some or all of our
activities. In light of several recent significant property and casualty insurance company
insolvencies, it is possible that assessments paid to state guaranty funds may increase. Because
our Insurance Subsidiaries are domiciled in Pennsylvania and Florida, the Pennsylvania Department
of Insurance (PADOI) and the Florida Office of Insurance Regulation (FOIR) have primary
authority over us.
Regulation of Insurance Holding Companies:
Pennsylvania and Delaware, like many other states,
have laws governing insurance holding companies (such as Philadelphia Insurance). Under these
laws, a person generally must obtain the applicable Insurance Departments approval to acquire,
directly or indirectly, 5% to 10% or more of the outstanding voting securities of Philadelphia
Insurance or our Insurance Subsidiaries. Such Departments determination of whether to approve any
such acquisition would be based on a variety of factors, including:
|
|
|
an evaluation of the acquirers financial stability;
|
|
|
|
|
the competence of its management;
|
|
|
|
|
the effect of rates on coverages provided, if any; and
|
|
|
|
|
whether competition in Pennsylvania or Florida would be reduced.
|
The Pennsylvania and Delaware holding company statutes require every Pennsylvania and Florida
domiciled insurer which is a member of an insurance holding company system to register with
Pennsylvania or Delaware, respectively, by filing and keeping current a registration statement on a
form prescribed by the NAIC.
The Pennsylvania statute also specifies that at least one-third of the board of directors, and
each committee thereof, of either the domestic insurer or its publicly owned holding company (if
any), must be comprised of outside directors (i.e., persons who are neither officers, employees nor
controlling shareholders of the insurer or any affiliate). In addition, the domestic insurer or
its publicly held holding company must establish one or more committees comprised solely of outside
directors, with responsibility for:
|
|
|
recommending the selection of independent certified public accountants;
|
|
|
|
|
reviewing the insurers financial condition,
|
|
|
|
|
reviewing the scope and results of the independent audit and any internal audit;
|
|
|
|
|
nominating candidates for director;
|
|
|
|
|
evaluating the performance of principal officers; and
|
|
|
|
|
recommending to the board the selection and compensation of principal officers.
|
Certain Requirements of Florida Insurers:
Under the Florida insurance laws, the affairs of
every domestic insurer must be managed by not less than five directors. Directors may not be
elected for a term of more than three years each and, if directors are to be elected for a term
greater than one year, the insurers bylaws must provide for a staggered-term system. Also, a
majority of the directors of a Florida insurer must be United States citizens. In addition, no
Florida insurer may make any contract whereby any person is granted or is to enjoy in fact the
management of the insurer to the substantial exclusion of its board of directors or to have the
controlling or preemptive right to produce substantially all insurance business for the insurer,
unless the contract is filed with and approved by the FOIR. A Florida insurer must give written
notice of any change to its directors or principal officers to the FOIR within 45 days of such
change. The written notice must include all information necessary to allow the Department to
determine that the insurer will be in compliance with state statutes.
Dividend Restrictions:
As an insurance holding company, Philadelphia Insurance will be
largely dependent on dividends and other permitted payments from our Insurance Subsidiaries to pay
any cash dividends to its shareholders. The ability of our Insurance Subsidiaries to pay dividends
to us is subject to certain restrictions imposed under Pennsylvania and Florida insurance laws.
Accumulated statutory profits of our Insurance Subsidiaries from which dividends may be paid
totaled $1,025.1 million at December 31, 2007. Of this amount, our Insurance Subsidiaries are
permitted to pay a total of approximately $299.2 million of dividends during 2008 without obtaining
prior approval from the PADOI or the FOIR. During 2007, our Insurance Subsidiaries paid $3.5
million of dividends.
18
The National Association of Insurance Commissioners:
In addition to state-imposed insurance
laws and regulations, our Insurance Subsidiaries are subject to Statutory Accounting Principles
(SAP) as codified by the NAIC in the Accounting Practices and Procedures Manual which was
adopted by the PADOI and FOIR effective January 1, 2001, and subsequently amended. The NAIC also
promulgates model insurance laws and regulations relating to the financial and operational
regulation of insurance companies. These model laws and regulations generally are not directly
applicable to an insurance company unless and until they are adopted by applicable state
legislatures or departments of insurance. However, NAIC model laws and regulations have become
increasingly important in recent years, due primarily to the NAICs state regulatory accreditation
program. Under this program, states which have adopted certain required model laws and regulations
and meet various staffing and other requirements are accredited by the NAIC. Such accreditation
is the cornerstone of an eventual nationwide regulatory network, and there is a certain degree of
political pressure on individual states to become accredited by the NAIC. Because the adoption of
certain model laws and regulations is a prerequisite to accreditation, the NAICs initiatives have
taken on a greater level of practical importance in recent years. The NAIC has accredited
Pennsylvania and Florida under the NAIC Financial Regulation Standards.
All the states have adopted the NAICs financial reporting form, which is typically referred
to as the NAIC Annual Statement. Most states, including Pennsylvania and Florida, generally defer
to the NAIC with respect to SAP. In this regard, the NAIC has a substantial degree of practical
influence and is able to accomplish certain quasi-legislative initiatives through amendments to the
NAIC annual statement and applicable accounting practices and procedures. For instance, the NAIC
requires all insurance companies to have an annual statutory financial audit and an annual
actuarial certification as to loss reserves by including such requirements within the annual
statement instructions.
Capital and Surplus Requirements:
As a surplus lines insurer, PICs eligibility to write
insurance on a surplus lines basis in most jurisdictions is dependent on its compliance with
certain financial standards, including the maintenance of a requisite level of capital and surplus
and the establishment of certain statutory deposits. In recent years, many jurisdictions have
increased the minimum financial standards applicable to surplus lines eligibility. For example,
California and certain other states have adopted regulations which require surplus lines companies
operating therein to maintain minimum capital of $15 million, calculated as set forth in the
regulations. PIC maintains capital to meet these requirements.
Risk-Based Capital:
Risk-based capital is designed to measure the acceptable amount of
capital an insurer should have, based on the inherent specific risks of each insurer. Insurers
failing to meet this benchmark capital level may be subject to scrutiny by the insurers
domiciliary insurance department, and ultimately rehabilitation or liquidation. Based on the
standards currently adopted, the policyholders surplus of each of our Insurance Subsidiaries at
December 31, 2007 is in excess of the minimum prescribed risk-based capital requirements.
Insurance Guaranty Funds:
Our Insurance Subsidiaries are subject to guaranty fund laws which
can result in assessments, up to prescribed limits, for losses incurred by policyholders as a
result of the impairment or insolvency of unaffiliated insurance companies. Typically, an
insurance company is subject to the guaranty fund laws of the states in which it conducts insurance
business; however, companies which conduct business on a surplus lines basis in a particular state
are generally exempt from that states guaranty fund laws.
Shared Markets:
As a condition of their license to do business in various states, PIIC, LASIC
and LAIC are required to participate in mandatory property-liability shared market mechanisms or
pooling arrangements which provide various insurance coverages to individuals or other entities
that otherwise are unable to purchase coverage voluntarily provided by private insurers. In
addition, some states require automobile insurers to participate in reinsurance pools for claims
that exceed a certain amount. The participation of PIIC, LASIC and LAIC in such shared markets or
pooling mechanisms is generally in proportion to the amount of their direct writings for the type
of coverage written by the specific pooling mechanism in the applicable state.
Mold Contamination:
The property-casualty insurance industry experienced an increase in claim
activity over recent years pertaining to mold contamination. Significant plaintiffs verdicts and
increased media attention to the subject have caused insurers to develop and/or refine relevant
insurance policy language that excludes mold coverage. We continue to closely monitor litigation
trends to review relevant insurance policy exclusion language. We have experienced an immaterial
impact from mold claims and attach a mold exclusion to policies where applicable.
Certain Legislative Initiatives and Developments:
A number of new, proposed or potential
legislative or industry developments could affect the insurance industry. These developments
include:
|
|
|
programs in which state-sponsored entities provide property insurance in
catastrophe-prone areas; and
|
19
|
|
|
Florida legislation enacted in January 2007 which, among other things, included the
following major changes with regard to the Florida Hurricane Catastrophe Fund (the FHCF)
and Citizens Property Insurance Company (Citizens).
|
|
|
|
FHCF: The law allows participating insurers to select options to expand their FHCF
coverage beyond the mandatory coverage levels for the 2007 through 2009 contract years by
selecting one or more of twelve $1 billion optional layers of coverage. The pricing for
the 12 optional coverage layers above the FHCF mandatory coverage will vary, but was
approximately a 2% rate-on-line for the 2007 contract. Insurers may also purchase
additional reinsurance coverage below the industry retention by selecting among three
alternative industry retention levels of $3 billion, $4 billion or $5 billion. For the
2007 contract, pricing for coverage at the three alternative industry retention levels
ranged from a 75% rate-on-line to an 85% rate-on-line. Each participating insurers share
of the industry retention will be determined by its share of FHCF reimbursement premiums.
Also, the legislation provides that the State Board of Administration may make available
an additional $4 billion of capacity. The legislation required every residential property
insurer to make a rate filing with the FOIR which reflected the savings or reduction in
loss exposure to the insurer due to the expanded FHCF coverage. Such reduced rates were
applied to policies issued on or after June 1, 2007.
|
|
|
|
|
Citizens Property Insurance Company (Citizens): The new legislation enacted many
changes to the manner in which Citizens (the facility created by the State of Florida to
provide insurance to property owners unable to obtain coverage in the private insurance
market) conducts business. Citizens is no longer required to charge rates sufficient to
purchase reinsurance to cover specified levels of probable maximum loss or to establish
rates that are non-competitive with the private sector. The Citizens rate increase that
took effect on January 1, 2007 was rescinded and further rate changes were prohibited
during 2007. The legislation also provides that if a new applicant to Citizens is
offered coverage from an insurer at the insurers approved rate, then that policyholder
is not eligible for a Citizens policy, unless the insurers premium is more than 15%
greater than the premium for comparable coverage provided by Citizens.
|
These developments could make the property and casualty insurance marketplace more competitive
by increasing the supply of insurance capacity. In that event, recent favorable industry trends
that have reduced insurance and reinsurance supply and increased demand could be reversed and
may negatively influence our ability to maintain or increase rates. Accordingly, these
developments could have an adverse effect on our earnings.
|
|
|
The federal Terrorism Risk Insurance Act of 2002, as amended by the Terrorism Risk
Insurance Program Reauthorization Act of 2007 (collectively the Act) established a
temporary federal program that provides for a system of shared public and private
compensation for insured commercial property and casualty losses resulting from certified
acts of terrorism, as defined in the Act. The Terrorism Insurance Program (the Program)
requires all commercial property and casualty insurers licensed in the United States to
participate. The Program provides that in the event of a terrorist attack, as defined,
resulting in insurance industry losses exceeding $5 million, the U.S. government will
provide funding to the insurance industry on an annual aggregate basis of 85% of covered
losses up to $100 billion cap. However, the government will provide funding only if
aggregate industry losses exceed $100 million. Each insurance company is subject to a
deductible based upon twenty percent (20%) of the previous years direct earned premium.
New policyholders have the option to accept or reject the coverage. Property and casualty
insurers, including us, are required to offer this coverage at each subsequent renewal even
if the policyholder elected to reject this coverage in the previous policy period. The
Program became effective upon enactment and runs through December 31, 2014.
|
Competition
We compete with a large number of other companies in our selected lines of business, including
major U.S. and non-U.S. insurers and other regional companies, as well as mutual companies,
specialty insurance companies, underwriting agencies and diversified financial services companies.
Some of our competitors have greater financial and marketing resources than we do. Our
profitability could be adversely affected if business is lost due to our competitors offering
similar or better products at or below our prices. In addition, a number of new, proposed or
potential legislative or industry developments could further increase competition. New competition
from these developments could cause the demand for our products to fall, which could adversely
affect profitability.
The current business climate remains competitive from a solicitation and pricing standpoint.
We will walk away, if necessary, from writing business that does not meet our established
underwriting standards and pricing guidelines. We believe, however, that our marketing strategy is
a strength in that it provides us the flexibility to quickly deploy the marketing efforts of our
direct production underwriters from soft market segments to market segments with emerging
opportunities. Additionally, through the marketing
20
strategy, our production underwriters have established relationships with 210 preferred
agents, approximately 500 Firemark producers and approximately 11,300 independent producers, thus
facilitating a regular flow of submissions.
Employees
As of December 31, 2007, we had 1,324 full-time employees and 50 part-time employees. We
actively encourage our employees to continue their educational efforts, and we provide assistance
to help defray their educational costs (including 100% of education costs related to the insurance
industry). We believe that our relations with our employees are generally excellent.
Company Website and Availability of Securities and Exchange Commission (SEC) Filings
Our Internet website is www.phly.com. Information on our website is not a part of this Form
10-K. We make available free of charge on our website, or provide a link to, our Forms 10-K, 10-Q
and 8-K filed or furnished on or after May 14, 1996, and any amendments to these Forms, that have
been filed with the SEC on or after May 14, 1996 as soon as reasonably practicable after we
electronically file such material with, or furnish it to the SEC. To access these filings, go to
our website and click on Investor Center, then click on SEC Filings.
Item 1A. RISK FACTORS
We face significant competitive pressures in our business that could cause demand for our products
to fall and adversely affect our profitability.
We compete with a large number of other companies in our selected lines of business. We
compete, and will continue to compete, with major U.S. and non-U.S. insurers and other regional
companies, as well as mutual companies, specialty insurance companies, underwriting agencies and
diversified financial services companies. Some of our competitors have greater financial and
marketing resources than we do. Our profitability could be adversely affected if we lower our
prices or lose business to competitors offering similar or better products at or below our prices.
In addition, new, proposed or potential legislative or industry developments could further increase
competition in our industry. New competition from these developments could cause the demand for our
products to fall, which could adversely affect our profitability.
Our results may fluctuate as a result of many factors, including cyclical changes in the insurance
industry.
The operating results of companies in the property and casualty insurance industry
historically have been subject to significant fluctuations and uncertainties. The industrys
profitability can be affected significantly by:
|
|
|
rising levels of actual costs that are not known by companies at the time they price their
products;
|
|
|
|
|
volatile and unpredictable developments, including man-made, weather-related and other
natural catastrophes or terrorist attacks;
|
|
|
|
|
changes in loss reserves resulting from the general claims and legal environments as
different types of claims arise and judicial interpretations relating to the scope of
insurers liability develop; and
|
|
|
|
|
fluctuations in interest rates, inflationary pressures and other changes in the
investment environment, which affect returns on invested assets and may impact the ultimate
payout of losses.
|
The demand for property and casualty insurance can also vary significantly, rising as the
overall level of economic activity increases, and falling as that activity decreases. The property
casualty insurance industry historically is cyclical in nature. These fluctuations in demand and
competition could produce underwriting results that would have a negative impact on our results of
operations and financial condition.
Catastrophic events could result in catastrophe losses.
It is possible that one or more catastrophic events could greatly increase claims under the
insurance policies we write. This, in turn, could result in losses for one or more of our insurance
company subsidiaries. Catastrophes may result from a variety of events or conditions, including
hurricanes, windstorms, earthquakes, hail and other severe weather conditions, and may include
terrorist events.
21
We generally try to reduce our exposure to catastrophe losses through the underwriting process
and the purchase of catastrophe reinsurance. However, reinsurance may not be sufficient to cover
our actual losses. In addition, a number of states from time to time have passed legislation that
has had the effect of limiting the ability of insurers to manage risk, such as legislation
prohibiting an insurer from withdrawing from catastrophe-prone areas. If we are unable to maintain
adequate reinsurance or to withdraw from areas where we experience or expect significant
catastrophe-related claims, we could experience significant losses.
Because we are heavily regulated by the states in which we operate, we may be limited in the way we
operate.
We are subject to extensive supervision and regulation in the states in which we operate. The
supervision and regulation relate to numerous aspects of our business and financial condition. The
primary purpose of this supervision and regulation is the protection of our insurance
policyholders, not our investors. The extent of regulation varies, but generally is governed by
state statutes. These statutes delegate regulatory, supervisory and administrative authority to
state insurance departments. This system of regulation covers, among other things, the following
areas:
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|
|
issuance, renewal, suspension and revocation of licenses to engage in the insurance
business;
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|
|
standards of solvency, including risk-based capital measurements;
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|
restrictions on the nature, quality and concentration of investments;
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|
restrictions on the premium rates we charge;
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|
restrictions on the terms and conditions that we can include in the insurance policies we
offer;
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|
certain required methods of accounting;
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|
reserves for unearned premiums, losses and other purposes; and
|
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|
|
potential assessments for the provision of funds necessary for the settlement of covered
claims under certain insurance policies provided by impaired, insolvent or failed insurance
companies.
|
The regulations of the state insurance departments may affect the cost or demand for our
products and may prevent or interfere with our ability to maintain or increase premium rates or
take other actions we might wish to take to maintain or increase our profitability. Further, we may
be unable to maintain all required licenses and approvals, and our business may not fully comply
with the wide variety of applicable laws and regulations or the relevant authoritys interpretation
of the laws and regulations. Also, regulatory authorities have relatively broad discretion to
grant, renew or revoke licenses and approvals. If we do not have the requisite licenses and
approvals or do not comply with applicable regulatory requirements, the insurance regulatory
authorities could stop or temporarily suspend us from carrying on some or all of our activities or
monetarily penalize us.
We are subject to possible assessments from state insurance facilities and state guaranty funds.
We are subject to assessments from various state guaranty funds and state insurance
facilities, including Florida Citizens Property Insurance Corporation, the Mississippi Windstorm
Underwriting Association and the Texas Windstorm Insurance Association. If these facilities
recognize a financial deficit, they may, in turn, have the ability to assess participating
insurers, including our Insurance Subsidiaries, which would adversely affect our results of
operations. These facilities are generally designed so that the ultimate cost is borne by
policyholders.
We and other insurance companies writing residential property policies in Florida must
participate in the Florida Hurricane Catastrophe Fund (FHCF), which potentially reimburses
companies for their qualifying losses at various participating percentages above required retention
levels, subject to maximum reimbursement amounts. 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. Such bonds 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. Companies are required to collect the FHCF assessments directly
from residential property policyholders and remit them to the FHCF as they are collected.
22
Our exposure to assessments and the availability of policyholder recoupments or premium rate
increases related to these assessments may not offset each other in our financial statements.
Moreover, even if they do offset each other, they may not offset each other in our financial
statements for the same fiscal period due to the ultimate timing of when the assessments are
accrued and when the related recoupments are accrued or when related premium rate increases are
earned, as well as the possibility of policies not being renewed in subsequent years.
Provisions of the Pennsylvania business corporation law, our articles of incorporation and the
insurance laws of Pennsylvania, Florida and other states may discourage takeover attempts.
The Pennsylvania Business Corporation Law contains anti-takeover provisions. We have opted
out of most of these provisions. However, Subchapter F of Chapter 25 of the Business Corporation
Law, which applies to us, may have an anti-takeover effect and may delay, defer or prevent a tender
offer or takeover attempt that a shareholder might consider in his or her best interest, including
those attempts that might result in shareholders receiving a premium over market price for their
shares. Subchapter F of the Business Corporation Law prohibits certain business combinations
between an interested shareholder and a corporation, unless the corporations board of directors
gives prior approval and certain other conditions are satisfied, or there is an available
exemption. The term business combination is defined broadly to include various merger,
consolidation, division, exchange or sale transactions. An interested shareholder, in general, is
a beneficial owner of shares entitling that person to cast at least 20% of the votes that all
shareholders would be entitled to cast in an election of directors.
In addition, our Articles of Incorporation allow the Board of Directors to issue one or more
classes or series of preferred stock with voting rights, preferences and other privileges as the
Board may determine. The issuance of preferred shares could adversely affect the holders of our
common stock and could prevent, delay or defer a change of control.
We are also subject to the laws of various states, such as Pennsylvania, Delaware and Florida,
governing insurance holding companies and insurance companies. Under these laws, a person generally
must obtain the applicable Insurance Departments approval to acquire, directly or indirectly, 5%
to 10% or more of the outstanding voting securities of Philadelphia Insurance or our insurance
subsidiaries. An Insurance Departments determination of whether to approve an acquisition would be
based on a variety of factors, including an evaluation of the acquirers financial stability, the
competence of its management and whether competition in that state would be reduced. These laws may
delay or prevent a takeover of Philadelphia Insurance or our insurance company subsidiaries.
If our insurance company subsidiaries are unable to pay dividends or make loans to us due to
government regulations that apply to insurance companies or for any other reason, we may not be
able to continue our normal business operations.
We are a holding company. Our principal assets currently consist of all or substantially all
of the equity interests of our subsidiaries listed below:
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Philadelphia Indemnity Insurance Company;
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Philadelphia Insurance Company;
|
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|
|
Maguire Insurance Agency, Inc.;
|
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|
|
PCHC Investment Corp., an investment holding company;
|
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|
|
Liberty American Insurance Group, Inc., an insurance holding company;
|
|
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|
|
Liberty American Select Insurance Company;
|
|
|
|
|
Liberty American Insurance Company;
|
|
|
|
|
Liberty American Insurance Services, Inc.; and
|
|
|
|
|
Liberty American Premium Finance Company.
|
Philadelphia Indemnity Insurance Company, Philadelphia Insurance Company, Liberty American
Select Insurance Company, Inc. and Liberty American Insurance Company are our insurance company
subsidiaries which are licensed or authorized to issue insurance policies. Maguire Insurance
Agency, Inc. is a captive underwriting manager and Liberty American Insurance Services, Inc. is a
managing general agency.
23
Our primary sources of funds are from our subsidiaries for dividends or payments that we
receive under tax allocation agreements. Government regulations that apply to insurance companies
restrict the ability of our insurance company subsidiaries to pay dividends and make loans to us.
The accumulated profits of these subsidiaries from which dividends may be paid totaled $1,025.1
million as of December 31, 2007. Of this amount, these insurance company subsidiaries may pay a
total of approximately $299.2 million of dividends during 2008 without obtaining prior approval
from the department of insurance for the states in which they are domiciled. Our insurance
subsidiaries paid $3.5 million of dividends during 2007. Further, creditors of any of our
subsidiaries will have the right to be paid in full the amounts they are owed if a subsidiary
liquidates its assets or undergoes a reorganization or other similar transaction before we will
have the right to receive any distribution of assets from the subsidiary, unless we also are
recognized as a creditor of the subsidiary. If we are unable to receive distributions from our
subsidiaries, we may not be able to continue our normal business operations.
If A.M. Best downgrades the ratings of our Philadelphia Indemnity Insurance Company and
Philadelphia Insurance Company subsidiaries, we will not be able to compete as effectively with our
competitors and our ability to sell insurance policies could decline, reducing our sales and
earnings.
A.M. Best Company rates Philadelphia Indemnity Insurance Company and Philadelphia Insurance
Company A+ (Superior). According to A.M. Best Company, companies rated A+ (Superior) have, on
balance, superior financial strength, operating performance and market profile, when compared to
the standards established by A.M. Best Company, and have a very strong ability to meet their
ongoing obligations to policyholders. We believe that the rating assigned by A.M. Best Company is
an important factor in marketing our products. If A.M. Best Company downgrades our ratings in the
future, it is likely that:
|
|
|
we would not be able to compete as effectively with our competitors; and
|
|
|
|
|
our ability to sell insurance policies could decline.
|
If that happens, our sales and earnings would decrease. Rating agencies evaluate insurance
companies based on financial strength and the ability to pay claims, factors which are more
relevant to policyholders than investors.
If our reserves for losses and loss adjustment expenses are not adequate, we would have to increase
our reserves, which would result in reductions in net income and policyholders surplus and could
result in a downgrading of the ratings of our insurance company subsidiaries.
We establish reserves for losses and loss adjustment expenses under the insurance policies we
write. We determine the amount of these reserves based on our best estimate and judgment of the
losses and loss adjustment expenses we will incur on existing insurance policies. While we believe
that our reserves are adequate, we base these reserves on assumptions about future events. The
following factors may have a substantial impact on our future loss experience:
|
|
|
the amounts of claims settlements;
|
|
|
|
|
the number and severity of catastrophes, such as hurricanes;
|
|
|
|
|
legislative and judicial activity; and
|
|
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|
|
changes in inflation and economic conditions.
|
Actual losses and loss adjustment expenses we incur under our insurance policies may be
different from the amount of reserves we establish. If the actual amount of losses and expenses
related to the adjustment of losses under insurance policies exceed the amount we have reserved for
these losses and loss adjustment expenses, we would be required to increase our reserves. When we
increase reserves, our income before income taxes for the period will decrease by a corresponding
amount. In addition, increasing reserves causes a reduction in policyholders surplus and could
cause a downgrading of the ratings of our insurance company subsidiaries. This, in turn, could hurt
our ability to sell insurance policies.
24
If market conditions cause reinsurance to be more costly or unavailable, we may be required to bear
increased risks or reduce the level of our underwriting commitments.
As part of our overall risk and capacity management strategy, we purchase reinsurance for
significant amounts of risk underwritten by our insurance company subsidiaries, including
catastrophe risks. Market conditions beyond our control determine the availability and cost of the
reinsurance we purchase, which may affect the level of our business and profitability. Our
reinsurance facilities are generally subject to annual renewal. We may be unable to maintain our
current reinsurance facilities at favorable rates or to obtain other reinsurance facilities in
adequate amounts and at favorable rates. If we are unable to renew our expiring facilities or to
obtain new reinsurance facilities, either our net exposure to risk would increase or, if we are
unwilling to bear an increase in net risk exposures, we would have to reduce the amount of risk we
underwrite, especially risks related to catastrophes.
We cannot guarantee that our reinsurers will pay on a timely basis, if at all, and, as a result, we
could experience losses.
We transfer some of the risk we have assumed to reinsurance companies in exchange for part of
the premium we receive in connection with the risk. Although reinsurance makes the reinsurer liable
to us, it does not relieve us of our obligation to our policyholders. Our reinsurers may not pay
the reinsurance recoverables that they owe to us or they may not pay such recoverables on a timely
basis. If our reinsurers fail to pay us or fail to pay us on a timely basis, our financial results
would be adversely affected.
We have a large shareholder whose interests may diverge from those of our other shareholders.
Mr. James J. Maguire, the Chairman of our Board of Directors, and his wife beneficially own
approximately 18.9% of our issued and outstanding common stock. Other members of Mr. Maguires
immediate family beneficially own approximately an additional 6.7% of our issued and outstanding
common stock (the immediate family beneficial ownership for this purpose excludes beneficial
ownership which is attributable to both Mr. James J. Maguire and his wife and immediate family
members). Such beneficial ownership is calculated pursuant to Rule 13d-3 under the Securities
Exchange Act of 1934, as amended. Consequently, Mr. Maguire will be in a position to strongly
influence the outcome of substantially all corporate actions requiring shareholder approval,
including mergers involving us, sales of all or substantially all of our assets, and the adoption
of certain amendments to our Articles of Incorporation. In so acting, Mr. Maguire may have
interests different than, or adverse to, the rest of our shareholders.
The outcome of industry-wide investigations into finite risk reinsurance products could adversely
affect our business and results of operations.
Various regulatory authorities, including the Securities and Exchange Commission and a number
of state attorneys-general, have initiated investigations and lawsuits relating to finite risk
reinsurance arrangements entered into by insurance companies with reinsurers. Finite-risk
reinsurance is a form of reinsurance in which, among other things, there is limited risk
transferred to the reinsurer.
We cannot predict the effects, if any, of these investigations, or any proceedings which may
result from these investigations, on our future operations, the insurance industry in general, or
changes, if any, which may be made to any laws or regulations. The outcome of these matters could
adversely affect our business and results of operations.
Because our investment portfolio is made up of primarily fixed income securities, our investment
income could fluctuate as a result of fluctuations in interest rates and spreads to U.S. Treasury
Securities.
We currently maintain and intend to continue to maintain an investment portfolio of primarily
fixed income securities. The fair value of these securities can fluctuate depending on changes in
interest rates and spreads. Generally, the fair market value of these investments increases or
decreases in an inverse relationship with changes in interest rates, while the level of net
investment income earned from future investments in fixed income securities is impacted by interest
rates. Changes in interest rates and spreads may result in fluctuations in the income derived from,
and the valuation of, our fixed income investments, which could have an adverse effect on our
results of operations and financial condition.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
25
Item 2. PROPERTIES
We lease office space at One Bala Plaza, Bala Cynwyd, PA which serves as our headquarters
location, we own office space in Pinellas Park, FL which serves as our home office for Liberty,
and we also lease space at 45 offices throughout the country for our field and regional offices.
Item 3. 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 Philadelphia Insurance 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of 2007.
26
PART II
Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) The Companys common stock, no par value, trades on The NASDAQ Global Select Market under
the symbol PHLY. As of February 8, 2008, there were 1,492 holders of record of the
Companys common stock. The high and low sales prices of the common stock, as reported by the
National Association of Securities Dealers, were as follows:
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2007
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2006
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Quarter
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High
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Low
|
|
High
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Low
|
First
|
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48.000
|
|
|
|
42.250
|
|
|
|
36.810
|
|
|
|
31.530
|
|
Second
|
|
|
46.940
|
|
|
|
39.900
|
|
|
|
34.260
|
|
|
|
29.820
|
|
Third
|
|
|
42.470
|
|
|
|
30.300
|
|
|
|
40.090
|
|
|
|
30.420
|
|
Fourth
|
|
|
46.720
|
|
|
|
36.640
|
|
|
|
45.990
|
|
|
|
38.410
|
|
The Company did not declare cash dividends on its common stock in 2007 or 2006, and currently
intends to retain its earnings to enhance future growth. Any future payment of dividends by
the Company will be determined by the Board of Directors, and will be based on general
business conditions and legal and regulatory restrictions.
As a holding company, the Company is dependent upon dividends and other permitted
payments from its subsidiaries to pay any cash dividends to its shareholders. The ability of
the Companys Insurance Subsidiaries to pay dividends to the Company is subject to regulatory
limitations (see Item 7-Liquidity and Capital Resources and Note 2 to the Companys
Consolidated Financial Statements).
(b) During the three years ended December 31, 2007, the Company did not sell any of its
securities which were not registered under the Securities Act of 1933.
(c) The Companys purchases of its common stock during the fourth quarter of 2007 are
shown in the following table:
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(c) Total Number of
|
|
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|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
(d) Approximate Dollar
|
|
|
(a) Total Number
|
|
|
|
|
|
Part of Publicly
|
|
Value of Shares That May
|
|
|
of Shares
|
|
(b) Average Price
|
|
Announced Plans or
|
|
Yet Be Purchased Under
|
Period
|
|
Purchased (1)
|
|
Paid per Share
|
|
Programs
|
|
the Plans or Programs (2)
|
October 1 October 31
|
|
|
400
|
|
|
$
|
29.08
|
|
|
|
|
|
|
$
|
45,000,000
|
|
November 1 November 30
|
|
|
2,346
|
|
|
$
|
36.03
|
|
|
|
|
|
|
$
|
45,000,000
|
|
December 1 December 31
|
|
|
430
|
|
|
$
|
37.30
|
|
|
|
|
|
|
$
|
45,000,000
|
|
|
|
|
(1)
|
|
Such shares were originally issued under the Companys Employee Stock Purchase Plan and
Amended and Restated Employees Stock Incentive and Performance Based Compensation Plan, and
were subsequently repurchased by the Company upon the employees termination.
|
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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, amounts to $75.3 million, of which $30.3 million has been
utilized.
|
27
Item 6. SELECTED FINANCIAL DATA
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Years Ended December 31,
|
|
|
(Dollars In Thousands, Except Share and Per Share Data)
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
Operations and Comprehensive Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
$
|
1,692,223
|
|
|
$
|
1,493,248
|
|
|
$
|
1,264,915
|
|
|
$
|
1,171,317
|
|
|
$
|
905,993
|
|
Gross Earned Premiums
|
|
|
1,604,097
|
|
|
|
1,365,358
|
|
|
|
1,165,296
|
|
|
|
1,062,057
|
|
|
|
789,498
|
|
Net Written Premiums
|
|
|
1,459,633
|
|
|
|
1,282,864
|
|
|
|
1,110,771
|
|
|
|
914,532
|
|
|
|
602,300
|
|
Net Earned Premiums
|
|
|
1,379,243
|
|
|
|
1,169,302
|
|
|
|
976,647
|
|
|
|
770,248
|
|
|
|
574,518
|
|
Net Investment Income
|
|
|
117,224
|
|
|
|
91,699
|
|
|
|
63,709
|
|
|
|
43,490
|
|
|
|
38,806
|
|
Net Realized Investment Gain (Loss)
|
|
|
29,566
|
|
|
|
(9,861
|
)
|
|
|
9,609
|
|
|
|
761
|
|
|
|
794
|
|
Other Income
|
|
|
3,561
|
|
|
|
2,630
|
|
|
|
1,464
|
|
|
|
4,357
|
|
|
|
5,519
|
|
|
Total Revenue
|
|
|
1,529,594
|
|
|
|
1,253,770
|
|
|
|
1,051,429
|
|
|
|
818,856
|
|
|
|
619,637
|
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
618,953
|
|
|
|
468,212
|
|
|
|
504,006
|
|
|
|
476,115
|
|
|
|
359,177
|
|
Acquisition Costs and Other Underwriting Expenses
|
|
|
413,103
|
|
|
|
338,267
|
|
|
|
263,759
|
|
|
|
214,369
|
|
|
|
162,912
|
|
Other Operating Expenses
|
|
|
12,241
|
|
|
|
12,637
|
|
|
|
17,124
|
|
|
|
9,439
|
|
|
|
7,822
|
|
Goodwill Impairment Loss (1)
|
|
|
|
|
|
|
|
|
|
|
25,724
|
|
|
|
|
|
|
|
|
|
|
Total Losses and Expenses
|
|
|
1,044,297
|
|
|
|
819,116
|
|
|
|
810,613
|
|
|
|
699,923
|
|
|
|
529,911
|
|
|
Income Before Income Taxes
|
|
|
485,297
|
|
|
|
434,654
|
|
|
|
240,816
|
|
|
|
118,933
|
|
|
|
89,726
|
|
Total Income Tax Expense
|
|
|
158,484
|
|
|
|
145,805
|
|
|
|
84,128
|
|
|
|
35,250
|
|
|
|
27,539
|
|
|
Net Income
|
|
$
|
326,813
|
|
|
$
|
288,849
|
|
|
$
|
156,688
|
|
|
$
|
83,683
|
|
|
$
|
62,187
|
|
|
Weighted-Average Common Shares Outstanding
|
|
|
70,381,631
|
|
|
|
69,795,947
|
|
|
|
68,551,572
|
|
|
|
66,464,460
|
|
|
|
65,726,364
|
|
Weighted-Average Share Equivalents Outstanding
|
|
|
3,845,044
|
|
|
|
3,674,121
|
|
|
|
4,533,807
|
|
|
|
3,456,099
|
|
|
|
2,254,800
|
|
|
Weighted-Average Shares and Share Equivalents Outstanding
|
|
|
74,266,675
|
|
|
|
73,470,068
|
|
|
|
73,085,379
|
|
|
|
69,920,559
|
|
|
|
67,981,164
|
|
|
Basic Earnings Per Share
|
|
$
|
4.64
|
|
|
$
|
4.14
|
|
|
$
|
2.29
|
|
|
$
|
1.26
|
|
|
$
|
0.95
|
|
|
Diluted Earnings Per Share
|
|
$
|
4.40
|
|
|
$
|
3.93
|
|
|
$
|
2.14
|
|
|
$
|
1.20
|
|
|
$
|
0.91
|
|
|
Cash Dividends Per Share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
Year End Financial Position:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments and Cash and Cash Equivalents
|
|
$
|
3,121,565
|
|
|
$
|
2,542,313
|
|
|
$
|
2,009,370
|
|
|
$
|
1,623,647
|
|
|
$
|
1,245,994
|
|
Total Assets
|
|
|
4,099,938
|
|
|
|
3,438,537
|
|
|
|
2,927,826
|
|
|
|
2,485,656
|
|
|
|
1,870,941
|
|
Unpaid Loss and Loss Adjustment Expenses
|
|
|
1,431,933
|
|
|
|
1,283,238
|
|
|
|
1,245,763
|
|
|
|
996,667
|
|
|
|
627,086
|
|
Total Shareholders Equity
|
|
|
1,547,473
|
|
|
|
1,167,267
|
|
|
|
816,496
|
|
|
|
644,157
|
|
|
|
545,646
|
|
Common Shares Outstanding
|
|
|
72,087,287
|
|
|
|
70,848,482
|
|
|
|
69,266,016
|
|
|
|
66,821,751
|
|
|
|
66,022,656
|
|
|
Insurance Operating Ratios (Statutory Basis):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Adjustment Expenses to Net Earned Premiums
|
|
|
44.9
|
%
|
|
|
39.8
|
%
|
|
|
51.8
|
%
|
|
|
61.6
|
%
|
|
|
63.1
|
%
|
Underwriting Expenses to Net Written Premiums
|
|
|
29.4
|
%
|
|
|
28.5
|
%
|
|
|
26.3
|
%
|
|
|
27.1
|
%
|
|
|
27.2
|
%
|
|
Combined Ratio
|
|
|
74.3
|
%
|
|
|
68.3
|
%
|
|
|
78.1
|
%
|
|
|
88.7
|
%
|
|
|
90.3
|
%
|
|
A.M. Best Rating (2)
|
|
|
A+
|
|
|
|
A+
|
|
|
|
A+
|
|
|
|
A+
|
|
|
|
A+
|
|
|
|
(Superior)
|
|
(Superior)
|
|
(Superior)
|
|
(Superior)
|
|
(Superior)
|
|
|
|
(1)
|
|
During the fourth quarter of 2005, the Company recorded a $25.7 million impairment charge
related to the write-down of goodwill arising from the acquisition of the Companys personal
lines segment. This loss, which was the same on a pre-tax and after-tax basis, was a result of
the Companys annual evaluation of the carrying value of goodwill. The write-down was
determined by comparing the fair value of the Companys personal lines segment and the implied
value of the goodwill with the carrying amounts on the balance sheet. The write-down resulted
from changes in business assumptions primarily due to the following: the unprecedented
hurricane activity and associated catastrophe losses experienced in 2004 and 2005; the
uncertainty of 2006 catastrophe reinsurance renewal rates; the decision to change the personal
lines segment business model to discontinue writing the mobile homeowners business and target
new construction homeowners business; and the disruption in the Florida marketplace.
|
|
(2)
|
|
As of September 30, 2004, the Companys four insurance subsidiaries were rated A+ (Superior)
by A.M. Best Company. Effective October 1, 2004, the Companys four insurance subsidiaries
entered into a new intercompany reinsurance pooling arrangement. Two of the insurance
subsidiaries, Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company,
entered into an intercompany reinsurance pooling arrangement which included substantially all
the Companys commercial and specialty lines business. The Companys two other insurance
subsidiaries, Liberty American Select Insurance Company and Liberty American Insurance
Company, also entered into an intercompany reinsurance pooling arrangement which substantially
included all the Companys personal lines segment business. As a result of this arrangement,
A.M. Best
Company assigned an A- (Excellent) rating to these two companies. The rating of Philadelphia
Indemnity Insurance Company and Philadelphia Insurance Company remained at A+.
|
28
Item 7. 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, and results of our business, and the other
matters referred to below include, but are not limited to:
|
(i)
|
|
Changes in the business environment in which we operate, including inflation and
interest rates;
|
|
|
(ii)
|
|
Changes in taxes, governmental laws, and regulations;
|
|
|
(iii)
|
|
Competitive product and pricing activity;
|
|
|
(iv)
|
|
Difficulties of managing growth profitably;
|
|
|
(v)
|
|
Claims development and the adequacy of our liability for unpaid loss and loss
adjustment expenses;
|
|
|
(vi)
|
|
Severity of natural disasters and other catastrophe losses;
|
|
|
(vii)
|
|
Adequacy of reinsurance coverage which may be obtained;
|
|
|
(viii)
|
|
Ability and willingness of our reinsurers to pay;
|
|
|
(ix)
|
|
Future terrorist attacks; and
|
|
|
(x)
|
|
The outcome of the Securities and Exchange Commissions industry-wide investigation
relating to the use of non-traditional insurance products, including finite risk
reinsurance arrangements.
|
We do not intend to publicly update any forward looking statement, except as may be required by
law.
GENERAL
Overview
We design, market, and underwrite specialty commercial and personal property and casualty
insurance products for select markets or niches by offering differentiated products through
multiple distribution channels. Our operations are classified into the following three reportable
business segments which are organized around our three underwriting divisions:
|
|
|
The Commercial Lines Underwriting Group has underwriting responsibility for the commercial
multi-peril package, commercial automobile, specialty property and inland marine and the
antique/collector car insurance products;
|
|
|
|
|
The Specialty Lines Underwriting Group, has underwriting responsibility for the professional
and management liability insurance products; and
|
|
|
|
|
The Personal Lines Group, which has underwriting responsibility for personal property
insurance products for the homeowners and manufactured housing markets in Florida, and the National
Flood Insurance Program for both Personal and Commercial policyholders.
|
We operate solely within the United States through our 13 regional and 32 field offices.
We generate most of our revenues through the sale of commercial property and casualty
insurance policies. The commercial insurance policies are sold through our five distribution
channels which include direct sales, retail insurance producers/open brokerage, wholesalers,
preferred agents and Firemark producers, and the Internet. We believe that consistency in our
field office representation has created excellent relationships with local insurance agencies
across the country.
During 2007, we experienced strong gross written premium growth for our commercial and
specialty lines segments due to an increase in policy counts resulting from continued expansion of
marketing efforts through our field organization and preferred agents, and the introduction of
several new niche product offerings. This strong premium growth occurred despite realized average
rate decreases for commercial and specialty lines renewal business of (3.6)% and (1.8)%,
respectively. We currently anticipate that these average rate decreases will continue through
2008, and may be higher than experienced during 2007. For our personal lines segment, gross written
premiums declined during 2007 due to a restriction of business production which included
non-renewing all
29
homeowners and rental dwelling policies providing windstorm coverage which expired between
June 15, 2007 and December 31, 2007. This reduction was imposed to reduce our exposure to
catastrophe wind losses.
We believe our product distribution marketing platform creates value added features not
typically found in property and casualty products which contribute to generating premium growth
above industry averages. Written premium information for our business segments for the years ended
December 31, 2007 and 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Specialty
|
|
Personal
|
|
|
($s in millions)
|
|
Lines
|
|
Lines
|
|
Lines
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Gross Written Premium
|
|
$
|
1,388.2
|
|
|
$
|
245.2
|
|
|
$
|
58.8
|
|
|
$
|
1,692.2
|
|
2006 Gross Written Premium
|
|
$
|
1,169.4
|
|
|
$
|
227.6
|
|
|
$
|
96.2
|
|
|
$
|
1,493.2
|
|
Percentage Increase (Decrease)
|
|
|
18.7
|
%
|
|
|
7.7
|
%
|
|
|
(38.9
|
)%
|
|
|
13.3
|
%
|
We also generate revenue from our investment portfolio, which approximated $3.0 billion as of
December 31, 2007, and generated $117.2 million in pre-tax investment income during 2007. We
utilize external independent professional investment managers with the objective of realizing
relatively high levels of investment income while generating competitive after-tax total rates of
return within specific objectives and guidelines.
Our GAAP basis combined ratio was 74.8% for 2007, which was substantially lower than the
combined ratio of the property and casualty industry as a whole. 2007 calendar year results
included an $85.8 million pre-tax benefit from a decrease in net unpaid loss and loss adjustment
expenses due to favorable trends in prior years claim emergence. The favorable net loss and loss
adjustment expense development occurred primarily in the Commercial and Specialty Lines segments
for accident years 2003 through 2006. This favorable development is primarily attributable to
better than expected case incurred loss development for professional liability, management
liability and commercial coverages.
The following table illustrates the 2007 calendar year and accident year loss ratios by
segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Specialty
|
|
Personal
|
|
Weighted
|
|
|
Lines
|
|
Lines
|
|
Lines
|
|
Average
|
2007 calendar year net loss and loss adjustment expense ratio
|
|
|
45.8
|
%
|
|
|
37.9
|
%
|
|
|
60.7
|
%
|
|
|
44.9
|
%
|
2007 accident year net loss and loss adjustment expense ratio
|
|
|
49.1
|
%
|
|
|
62.1
|
%
|
|
|
68.1
|
%
|
|
|
51.1
|
%
|
We believe our core strategy of adhering to an underwriting philosophy of sound risk selection
and pricing discipline have enabled us to produce loss ratios that have been well below industry
averages. We monitor certain measures of growth and profitability for each business segment,
including, but not limited to:
|
|
|
number of policies written,
|
|
|
|
|
renewal retention ratios,
|
|
|
|
|
new business production,
|
|
|
|
|
pricing,
|
|
|
|
|
risk selection, and
|
|
|
|
|
loss and loss adjustment expense ratios.
|
Other key financial metrics that are regularly monitored in evaluating financial condition and
operating performance include, but are not limited to:
|
|
|
level of expenses,
|
|
|
|
|
investment performance,
|
|
|
|
|
return on equity,
|
|
|
|
|
cash flow, and
|
|
|
|
|
capital leverage.
|
30
The following is a comparison of selected Statement of Operations and Comprehensive Income
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
(In millions)
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
1,529.6
|
|
|
$
|
1,253.8
|
|
|
$
|
1,051.4
|
|
Total Losses and Expenses
|
|
$
|
1,044.3
|
|
|
$
|
819.1
|
|
|
$
|
810.6
|
|
Net Income
|
|
$
|
326.8
|
|
|
$
|
288.8
|
|
|
$
|
156.7
|
|
Certain Critical Accounting Estimates and Judgments
The carrying amount of our investments approximates their estimated fair value. Our external
fixed income investment manager provides pricing of our investments based on a pricing
methodology approved by the investment managers pricing committee. Pricing is primarily
obtained from market vendors based on a pre-established provider list.
For non-investment grade structured securities for which a vendor price is not available,
broker pricing is obtained 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
independent vendors and brokers in pricing these securities may include:
|
|
|
cash flows,
|
|
|
|
|
collateral performance including delinquencies, default, and recoveries; and
|
|
|
|
|
any market clearing activity and/or liquidity circumstances in the security or other
benchmark securities that may have occurred since the prior month-end pricing period.
|
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).
Our total investments as of December 31, 2007 include $1.0 million in securities for which
there is no readily available independent market price.
31
|
|
|
Other than temporary impairments
|
We regularly perform impairment reviews with respect to our investments. There are
certain risks and uncertainties inherent in our impairment methodology. These include, but
are not limited to, the financial condition of specific industry sectors and the resultant
effect on any underlying 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 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. The amount of the write down is included in earnings as a realized investment loss in
the period the impairment arose (See Investments). Gross unrealized losses for investments
excluding interests in securitized assets were $26.2 million as of December 31, 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 Financial Accounting Standards Board. Gross unrealized losses for
investments in securitized assets were $3.0 million as of December 31, 2007.
|
|
Liability for Unpaid Loss and Loss Adjustment Expenses:
|
The liability for unpaid loss and loss adjustment expenses reflects our 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 us,
and an amount for losses incurred that have not yet been reported to us. In some cases
significant periods of time, up to several years or more, may elapse between the occurrence
of an insured loss and the reporting of it to us.
Estimates for unpaid loss and loss adjustment expenses are based on our 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,
|
|
|
our growth,
|
|
|
|
|
changes in our operations, and
|
|
|
|
|
legal, social, and economic developments.
|
We review these estimates regularly and any resulting adjustments are made in the
accounting period in which the adjustment arose.
The table below classifies the components of our reserve for gross losses and loss
adjustment expenses (loss or losses) with respect to major lines of business, as of
December 31, 2007:
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Loss and Loss Adjustment Expense Reserves
|
|
|
|
|
|
|
|
by Line of Business
|
|
|
|
|
|
(In Thousands)
|
|
As of December 31, 2007
|
|
|
|
Case
|
|
|
IBNR
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Lines Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
General Liability
|
|
$
|
258,261
|
|
|
$
|
400,601
|
|
|
$
|
658,862
|
|
Auto
|
|
|
97,862
|
|
|
|
89,991
|
|
|
|
187,853
|
|
Property
|
|
|
118,073
|
|
|
|
14,690
|
|
|
|
132,763
|
|
Rental/Leasing Supplemental Liability
|
|
|
7,121
|
|
|
|
6,537
|
|
|
|
13,658
|
|
Rental/Leasing Other
|
|
|
8,812
|
|
|
|
19,032
|
|
|
|
27,844
|
|
Program Umbrella
|
|
|
22,951
|
|
|
|
13,237
|
|
|
|
36,188
|
|
Other
|
|
|
6,148
|
|
|
|
5,311
|
|
|
|
11,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
519,228
|
|
|
|
549,399
|
|
|
|
1,068,627
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Lines Segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional Liability Errors & Omissions
|
|
|
50,422
|
|
|
|
90,220
|
|
|
|
140,642
|
|
Management Liability Directors & Officers
|
|
|
60,373
|
|
|
|
108,478
|
|
|
|
168,851
|
|
Professional Liability Excess
|
|
|
19,108
|
|
|
|
19,832
|
|
|
|
38,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
129,903
|
|
|
|
218,530
|
|
|
|
348,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines Segment:
|
|
|
4,460
|
|
|
|
10,413
|
|
|
|
14,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
653,591
|
|
|
$
|
778,342
|
|
|
$
|
1,431,933
|
|
|
|
|
|
|
|
|
|
|
|
The most significant actuarial assumptions used in determining our loss reserves are:
|
|
Ultimate losses are determinable by extrapolation of claim emergence and settlement
patterns observed in the past (via loss development factor selection) that can
reasonably be expected to persist into the future.
|
|
|
|
This assumption implies that historical claim reporting, handling, and settlement
patterns are predictive of future activity and can thus be utilized to forecast ultimate
liabilities on unpaid claims. Since the many factors that influence claim activity can
change over time and are often difficult to isolate or quantify, the rate at which claims
arose in the past and the costs to settle them may not always be representative of what
will occur in the future. Key objectives in developing estimates of ultimate losses are
to identify aberrations and systemic changes occurring within historical experience and
to adjust for them so that the future can be projected on a more reliable basis. Various
diagnostic tools are employed, (e.g., ratios of claims paid-to-claims incurred and
analyses of average claim costs by age of development), and close communication is
maintained among our actuarial, claims and underwriting departments to continually
monitor and assess the validity of this assumption.
|
|
|
|
In general, this assumption is considered fully valid across our lines of business for
older, more mature accident years. Most claims in these years have been reported, fully
adjusted and settled, and any remaining unpaid claims are not anticipated to result in
incurred loss activity at levels significant enough to cause material deviation in
ultimate losses as projected by generally accepted actuarial methods that rely upon this
assumption.
|
|
|
|
Loss reserve indications from generally accepted actuarial methods that rely upon this
assumption are utilized where this assumption is considered fully valid. Where this
assumption is considered to have less than full validity, those indications receive
partial or no weight.
|
|
|
Ultimate loss ratios (ultimate losses divided by earned premiums) in the current and
most recent accident years can be projected from ultimate loss ratios of prior years
after adjusting for factors such as trends and pricing changes, to the extent that those
factors can be quantified.
|
33
|
|
This assumption implies consistency in the loss ratio, after adjusting for inflationary
factors and other trends that may be affecting losses and/or premiums. Generally
accepted actuarial methods employing this expected loss ratio assumption are used to
supplement loss reserve indications from standard loss development methods where the
validity of the first assumption discussed is incomplete. While this assumption is also
subject to validity constraints, it is generally considered to have higher reliability
than the first assumption discussed for the current and more recently completed accident
years, as changes in rates and pricing can be monitored and loss trends can be derived or
inferred from both internal and external sources.
|
Our estimation procedures employ several generally accepted actuarial methods to determine
loss reserves, each of which has its own strengths and weaknesses. These methods generally
fall into one of the categories described below, or they are hybrids of one or more of them
(e.g., the Bornhuetter-Ferguson method which blends development and expected methods). The
predictive accuracy of any of these methods may vary by line of business, age of development,
and credibility of underlying historical experience data. Loss development methods tend to
be more accurate where claims data are relatively stable and for older accident years within
most lines of business. Expected loss methods and hybrid methods can be more appropriate for
more recent accident years. Adjusted historical loss development methods may be employed
where volatile claims data can be largely attributed to discernable events, such as changes
in claim handling procedures. Accordingly, more or less weight is placed on a particular
method based on the facts and circumstances at the time the actuarially determined loss
reserve estimates are made.
|
|
Historical paid loss development methods:
|
|
|
|
These methods use historical loss payments over discrete periods of time to estimate
future losses. Historical paid loss development methods assume that the ratio of losses
paid in one period to losses paid in an earlier period will remain constant. These
methods assume that factors which have affected paid losses in the past, such as claim
settlement patterns, inflation, or the effects of litigation, will remain constant in the
future. Because historical paid loss development methods do not use case reserves to
estimate ultimate losses, they can be more reliable than the other methods that use
incurred losses in situations where there are significant changes in how case reserves
are established by claims adjusters. However, historical paid loss development methods
are more leveraged (meaning that small changes in payments have a larger impact on
estimates of ultimate losses) than actuarial methods that use incurred losses, because
cumulative loss payments can take much longer to converge on the expected ultimate losses
than cumulative incurred amounts. In addition, and for similar reasons, historical paid
loss development methods are often slow to react to situations when new or different
factors arise than those that have affected paid losses in the past.
|
|
|
|
Historical incurred loss development methods:
|
|
|
|
These methods, like historical paid loss development methods, assume that the ratio of
losses in one period to losses in an earlier period will remain constant in the future.
However, these methods use incurred losses (i.e., the sum of cumulative historical loss
payments plus outstanding case reserves) over discrete periods of time to estimate future
losses. Historical incurred loss development methods can be preferable to historical
paid loss development methods because they explicitly take into account open cases and
the claims adjusters evaluations of the cost to settle all known claims. However,
historical incurred loss development methods assume that case reserving practices are
consistently applied over time. Therefore, when there have been significant changes in
how case reserves are established or material changes in the underlying loss exposures
and/or circumstances which may lead to a claim being reported, using incurred loss data
to project ultimate losses can be less reliable than other methods.
|
|
|
|
Expected loss ratio methods:
|
|
|
|
These methods are based on the assumption that ultimate losses vary proportionately with
premiums. Expected loss ratios are typically developed based upon the information used
in pricing, such as rate changes and trends affecting the frequency and/or severity of
claims, and are multiplied by the total amount of premiums earned during a given accident
period to calculate ultimate losses incurred during that same period. Expected loss
ratio methods are useful for estimating ultimate losses in the early years of long-tailed
lines of business, when little or no paid or incurred loss information is available, and
in new or growing lines of business where historical information may lack predictive
accuracy or otherwise not be representative of current loss exposures. Where expected
loss ratio methods are employed, one or more of several traditional and accepted
actuarial estimation methods are used to select expected loss ratios, including: loss
ratios from mature years adjusted for trends in pricing and claim costs; permissible loss
ratios underlying current rate levels; and projections of industry loss ratios in similar
lines.
|
34
|
|
Adjusted historical paid and incurred loss development methods:
|
|
|
|
These methods take traditional historical paid and incurred loss development methods and
adjust them for the estimated impact of recent changes, such as inflation, changes in
coverage and/or demographics of the line of business, the speed of claim payments, or the
adequacy of case reserves. During periods of significant change, adjusted historical
paid and incurred loss development methods are often more reliable methods of predicting
ultimate losses provided the actuaries can reasonably quantify the impact of each change.
|
|
|
|
Frequency/Severity Methods:
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|
|
|
These methods combine estimates of ultimate claim counts and estimates of per claim
ultimate loss severities to yield estimates of ultimate losses. Ultimate claim counts
(frequency) are typically estimated using expected ratios of claims to a selected base
(e.g., exposures or policy counts), with the expected ratios being based on historically
observed experience. Adjustments for trends affecting claim occurrence or affecting the
value of the base are also typically made. Ultimate loss severity estimates are
typically based on historically observed per claim average losses and are adjusted for
trends affecting the size of claims, most notably inflation. The Company has mainly used
this method in the case of its residual value product.
|
Each of the generally accepted actuarial methods employed generates discrete point estimates
of ultimate loss by line of business, by accident year. While the estimates are often
similar across methods, a diverse array of estimates may be generated, particularly for
current and recently completed accident years of longer-tailed lines and lines of business
experiencing growth. Often the outlying point estimates among these diverse results can be
dismissed as unreasonable because either the key assumptions of the method generating those
outliers are violated or the underlying data feeding that method are too thin for
meaningful results. The remaining indications generally form a reasonable range of point
estimates from which informed judgment is utilized to select the actuarially determined
estimate.
For most lines of business, given the high level of case reserve adequacy observed in recent
calendar periods and the consistent claim reserving practices employed by our claim staff,
loss reserves for older accident years are generally set in accordance with ultimate
projections from incurred loss development methods. Projections from paid loss development
methods may be selected for these older accident years where very few claims remain open and
case reserves held for those claims are low relative to observed historical average
severities of similar claims.
Data for the current accident year are often too limited to provide fully reliable
indications using standard loss development methods due to the delays in reporting claims and
the limited time that has elapsed for adjusting the known claims. For longer-tail coverages
and lines experiencing exposure growth, data may be somewhat limited in the more recently
completed accident years, as well, for similar reasons. In such situations, ultimate loss is
assessed by weighting results from standard paid and incurred loss development methods, with
results from expected loss ratio and hybrid methods. The judgmental weights assigned are
based upon the partial validity that can be attributed to the traditional methods, given the
stability of underlying claim activity and exposures, with the complement of that partial
validity given to the indications from expected loss ratio methods. The actuarially
determined estimates by line of business are often based upon a weighted average of these
results.
We have a loss reserve review committee consisting of senior members of our actuarial,
corporate, claims, underwriting, marketing and financial management groups. Our committee
generally meets monthly to review and discuss the various monthly and quarterly actuarial
analyses which are performed, as well as to discuss any other factors or trends that may
influence our claims activity. Generally, loss reserves are recorded in accordance with the
actuarially determined estimates by line of business. However, based upon the review
performed by the loss reserve committee, the committee may make a management adjustment to
an actuarially determined estimate for a line of business if, in the committees collective
judgment, factors affecting ultimate losses in a line have not been fully captured or
considered by actuarial methods. This may be the case with newer product lines, lines that
are growing, and/or lines which may be exposed to claims with latent emergence patterns that
extend beyond the credible historical period that we have experienced to date. Any such
management adjustment is documented and reported to our audit committee. Our loss reserve
committee did not establish a management adjustment as of December 31, 2007 or 2006.
Accordingly, the loss reserves recorded in the financial statements as of December 31, 2007
and 2006 are equal to the actuarially determined estimate for each line of business.
35
Due to numerous factors including, but not limited to, trends affecting loss development
factors and pricing adequacy, our key actuarial assumptions may change. The quantification
referred to in the next paragraph of the impact that changes to the actuarial assumptions
could have are stated without any adjustment for reinsurance and before the effects of taxes.
Changes may occur in the actuarial assumption that ultimate losses are determinable by
extrapolation of claim emergence and settlement patterns observed in the past (via loss
development factor selection) that can reasonably be expected to persist into the future.
Changes may also occur in the actuarial assumption that ultimate loss ratios in the current
and most recent accident years can be projected from ultimate loss ratios of prior years.
The first chart below illustrates the impact to the actuarially determined loss reserve
estimates as of December 31, 2007 applicable to all lines of business from selected
combinations of reasonably likely changes to the loss development factor and expected loss
ratio assumptions. Although the chart displays the impacts from selected combinations of
reasonably likely changes to the assumptions, the range of all possible combinations of
changes to the loss development factor and expected loss ratio assumptions are greater than
those reasonably likely to occur.
For each of the key actuarial assumptions, the median difference
was calculated from the historical
differences between actual data and the assumptions, with the reasonably likely range identified as a 40% statistical range
around the median. Therefore, the High (or Low) end of the reasonably likely range of
changes for each assumption is roughly equal to the median difference plus (or minus) the amount
of difference observed 40% of the time when the differences are above (or below) the median. In
statistical terms, this is equivalent to taking the 30
th
and 70
th
percentiles of the assumption differences. The resulting reasonably likely changes for each of
the actuarial assumptions are displayed in the second chart below.
Increase/(Decrease) to actuarially determined reserve estimate gross of reinsurance and
before taxes ($ millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Loss Ratios
|
|
|
Increase/(Decrease)
|
|
|
Low
|
|
|
No Change
|
|
|
High
|
|
|
Loss
|
|
|
Low
|
|
|
$
|
(119.6
|
)
(a)
|
|
|
$
|
(55.1
|
)
|
|
|
$
|
9.4
|
|
|
|
Development
|
|
|
No Change
|
|
|
$
|
(66.0
|
)
|
|
|
$
|
0.0
|
|
|
|
$
|
65.0
|
|
|
|
Factors
|
|
|
High
|
|
|
$
|
(32.0
|
)
|
|
|
$
|
34.2
|
|
|
|
$
|
100.4
|
(b)
|
|
|
|
|
|
(a)
|
|
This decrease in our actuarially determined reserve estimate would increase our net
income and financial position by $68.5 million, which reflects the impact of reinsurance
and federal income taxes. This change would not have a material impact on our liquidity.
|
|
(b)
|
|
This increase in our actuarially determined reserve estimate would decrease our net
income and financial position by $57.5 million, which reflects the impact of reinsurance
and federal income taxes. This change would not have a material impact on our liquidity.
|
Reasonably likely changes applied to key actuarial assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
Development Factors
|
|
|
|
|
|
Accident
|
|
|
Loss
|
|
|
Loss
Adjustment
Expense
|
|
|
Expected
Loss
Ratios
|
|
|
Years
(a)
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
(b)
|
|
|
1998 2004
|
|
|
|
(0.5
|
)%
|
|
|
|
0.1
|
%
|
|
|
|
(0.8
|
)%
|
|
|
|
1.0
|
%
|
|
|
|
(2.7
|
)%
|
|
|
|
2.7
|
%
|
|
|
2005 2007
|
|
|
|
(1.8
|
)%
|
|
|
|
1.5
|
%
|
|
|
|
(0.9
|
)%
|
|
|
|
3.6
|
%
|
|
|
|
(3.5
|
)%
|
|
|
|
3.5
|
%
|
|
|
|
|
|
(a)
|
|
Adjustments were not made to accident years aged beyond 10 years (i.e. 1997 and
prior).
|
36
|
|
|
(b)
|
|
The High end of the reasonably likely range of changes in expected loss ratios was
judgmentally raised to reflect that the historical period over which the expected loss
ratios were analyzed is widely recognized in the insurance industry as covering the hard
market (i.e. most favorable pricing and coverage terms from the insurers perspective)
portion of the current insurance cycle.
|
|
|
Reinsurance Receivables:
|
Reinsurance receivables from reinsurers under reinsurance contracts are subject to
estimation. Reinsurance receivables may prove uncollectible if reinsurers are unable or
unwilling to perform under our reinsurance contracts due to, but not limited to, such factors
as the reinsurers financial condition or coverage disputes. In order to limit the risk of a
reinsurers default, we:
|
|
|
principally contract with large reinsurers that are rated at least A (Excellent) by A.M.
Best Company;
|
|
|
|
|
obtain collateral for balances due from reinsurers that are not approved by the
Pennsylvania and/or Florida Insurance Departments due to their foreign domiciliary status;
and
|
|
|
|
|
seek to collect the obligations of our reinsurers on a timely basis through the regular
monitoring of reinsurance receivables.
|
Reinsurance receivables are reported net of an allowance for estimated uncollectible
reinsurance receivables. The allowance is based upon our regular review of amounts
outstanding, length of collection period, changes in reinsurer credit standing and other
relevant factors. As of December 31, 2007, reinsurance receivables amounted to $280.1
million. Based upon our continual monitoring, analysis and evaluation, we estimate that an
allowance for estimated uncollectible reinsurance receivables is not necessary as of December
31, 2007.
|
|
Liability for Preferred Agent Profit Sharing:
|
Our 210 preferred agents are eligible to receive profit sharing based upon achieving
minimum premium production thresholds and profitability results for their business placed for
a contact year with us. The ultimate amount of profit sharing may not be known until the
final contractual loss evaluation of the profit sharing is completed 6.5 years after the
contract year business has been written. We estimate the liability for this profit sharing
based upon the contractual provisions of the profit sharing agreements and our actual
historical profit sharing payout. As of December 31, 2007, we have accrued a liability for
profit sharing of $33.7 million, of which $32.7 million relates to business written for
contract years commencing January 1, 2004 and subsequent. We have estimated the profit
sharing liability to be 2.85% of the preferred agent business written for contract years
commencing January 1, 2004 and subsequent. In our judgment, it is reasonably likely that the
actual profit sharing payout as a percentage of the preferred agent business could increase
by up to 75 basis points or decrease by up to 50 basis points from the currently estimated
2.85%. An increase of 75 basis points would decrease our net income and financial position
by approximately $7.2 million. A decrease of 50 basis points would increase our net income
and financial position by approximately $4.8 million. These changes would not have a
material impact on our liquidity. The maximum potential ultimate profit sharing payout is
5.0% of preferred agent business written for contract years commencing January 1, 2003 and
thereafter.
|
|
Share-based Compensation Expense:
|
Effective January 1, 2006, we adopted on a modified prospective transition method Statement
of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (SFAS
123(R)). SFAS 123(R) requires the measurement and recognition of compensation expense for
all share-based payment awards made to employees and directors, including stock options,
stock settled stock appreciation rights (SARS), restricted stock and employee and director
stock purchases related to the Employee Stock Purchase Plan, Nonqualified Employee Stock
Purchase Plan, and Directors Stock Purchase Plan, based on fair values.
Share-based compensation expense recognized is based on the value of the portion of
share-based payment awards that is ultimately expected to vest. Share-based compensation
expense recognized in our Consolidated Statement of Operations and Comprehensive Income for
the year ended December 31, 2007 includes compensation expense for:
|
|
|
Share-based payment awards granted prior to, but not yet vested, as of December
31, 2006 based on the grant date fair value estimated in accordance with the pro
forma provisions of SFAS 123, and
|
37
|
|
|
Compensation expense for the share-based payment awards granted subsequent to
December 31, 2006 based on the grant date fair value estimated in accordance with
the provisions of SFAS 123(R).
|
In conjunction with the adoption of SFAS 123(R), the Company elected to attribute the value
of share-based compensation to expense using the straight-line method, which was previously
used for its pro forma information required under SFAS 123.
Pre-tax share-based compensation expense related to stock options and SARS was $9.9 million
and $7.3 million, for the years ended December 31, 2007 and 2006, respectively. Pre-tax
share-based compensation expense related to restricted stock grants and employee and director
stock purchase plans was $5.6 million and $2.7 million for the years ended December 31, 2007
and 2006, respectively.
See Note 13 to the Consolidated Financial Statements for additional information.
Upon adoption of SFAS 123(R), we elected to value share-based payment awards granted in 2006
and subsequent using the Black-Scholes option-pricing model, (Black-Scholes model) which
was also previously used for the pro forma information required under SFAS 123. The
determination of fair value of share-based payment awards on the date of grant using the
Black-Scholes model is affected by our stock price, as well as the input of other subjective
assumptions. These assumptions include, but are not limited to the expected term of stock
options and SARS and our expected stock price volatility over the term of the awards. Options
and the option component of the Employee and Directors Stock Purchase Plans shares have
characteristics significantly different from those of traded options, and changes in the
assumptions can materially affect the fair value estimates.
The expected term of stock options and SARS represents the weighted-average period the stock
options and SARS are expected to remain outstanding. The expected term is based on the
observed and expected time to post-vesting exercise and forfeitures of options by our
employees. Upon the adoption of SFAS 123(R), the expected term of stock options and SARS was
determined based on the demographic grouping of employees. Prior to January 1, 2006, the
expected term of stock options was determined based on a single grouping of employees. Upon
adoption of SFAS 123(R), historical volatility was utilized in deriving the expected
volatility assumption as allowed under SFAS 123(R). Prior to January 1, 2006, the historical
stock price volatility in accordance with SFAS 123 for purposes of the Companys pro forma
information was utilized. The risk-free rate is based on the U.S. Treasury yield curve in
effect at the time of grant appropriate for the expected life of the Companys stock options
and SARS. The dividend yield assumption is based on the history and the expectation of no
dividend payouts.
Since share-based compensation expense recognized in our Consolidated Statement of Operations
and Comprehensive Income for the year ended December 31, 2007 is based on awards ultimately
expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires
forfeitures to be estimated at the time of grant, and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on
historical experience. In our pro-forma information required under SFAS 123 for the periods
prior to January 1, 2006, forfeitures were estimated based upon historical experience. If
factors change and different assumptions are employed in the application of SFAS 123(R) in
future periods, the actual compensation expense under SFAS 123(R) may differ significantly
from what was recorded in the current period.
As of December 31, 2007, there was $30.4 million of total unrecognized compensation costs
related to stock options, SARS and restricted stock granted under our stock compensation
plan. This unrecognized compensation cost is expected to be recognized over a
weighted-average period of 3.0 years.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements (as that term is defined in Item 303(a) (4) of Regulation
S-K) that have or are reasonably likely to have a current or, future effect on our financial
condition, changes in financial condition, revenue or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors as of December 31, 2007.
38
RESULTS OF OPERATIONS
(2007 versus 2006)
Premiums
: Premium information for the years ended December 31, 2007 and 2006 for each of our
business segments is as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Lines
|
|
Specialty Lines
|
|
Personal Lines
|
|
Total
|
2007 Gross Written Premiums
|
|
$
|
1,388.2
|
|
|
$
|
245.2
|
|
|
$
|
58.8
|
|
|
$
|
1,692.2
|
|
2006 Gross Written Premiums
|
|
$
|
1,169.4
|
|
|
$
|
227.6
|
|
|
$
|
96.2
|
|
|
$
|
1,493.2
|
|
Percentage Increase (Decrease)
|
|
|
18.7
|
%
|
|
|
7.7
|
%
|
|
|
(38.9
|
)%
|
|
|
13.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Gross Earned Premiums
|
|
$
|
1,290.0
|
|
|
$
|
234.1
|
|
|
$
|
80.0
|
|
|
$
|
1,604.1
|
|
2006 Gross Earned Premiums
|
|
$
|
1,046.8
|
|
|
$
|
217.5
|
|
|
$
|
101.1
|
|
|
$
|
1,365.4
|
|
Percentage Increase (Decrease)
|
|
|
23.2
|
%
|
|
|
7.6
|
%
|
|
|
(20.9
|
)%
|
|
|
17.5
|
%
|
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 our condominium and
homeowners associations, non-profit, specialty schools, and golf and country clubs products in
the commercial package product grouping as well as the inland marine product in the specialty
property product grouping. These product offerings accounted for approximately $123.3 million
of the $218.8 million total Commercial Lines segment gross written premiums increase.
|
|
|
The introduction of several new niche product offerings, most notably the antique/collector
vehicle commercial auto product, as well as the health and wellness business owner,
professional sports and entertainment, religious organizations, camp operators and affordable
housing products in the commercial package product grouping. These new product offerings
accounted for approximately $84.6 million of the $218.8 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 130.6% for the year
ended December 31, 2007. The introduction of the antique/collector vehicle program
accounted for 67.4% of the 130.6% total policy count increase for the period. The other
factors discussed above accounted for the remaining 32.6% increase in the policy counts for
the period.
|
|
|
|
|
The specialty lines segment in-force policy counts increased by 26.2% for the year ended
December 31, 2007.
|
|
|
A $3.0 million increase in gross written premium by the personal lines segment for the
National Flood Insurance Program (NFIP) for the year ended December 31, 2007, compared to
2006. Gross written premiums for the NFIP accounted for 59.2% and 33.1% of the total personal
lines segment gross written premiums for the years ended December 31, 2007 and 2006,
respectively.
|
This growth in gross written premiums was offset in part by:
|
|
Restriction of personal lines business production which consisted of non-renewing all
homeowners and rental dwelling policies providing windstorm coverage which expired between
June 15, 2007 and December 31, 2007. This restriction was imposed to reduce our exposure to
catastrophe wind losses.
|
|
|
|
In addition, on January 4, 2008, we provided the Florida Office of Insurance Regulation (FOIR)
with the required statutory notification of our intention to non-renew all of our Florida
personal lines policies, other than policies issued pursuant to the NFIP, beginning with policies
expiring on or about July 15, 2008. In February 2008, we received preliminary notification from
the FOIR
|
39
|
|
that they have no objection to our intention to non-renew the noted policies. We currently
expect the non-renewal process to be completed by July 15, 2009. As of December 31, 2007, there
were approximately 4,100 in-force policies with an aggregate in-force premium of approximately
$3.2 million which expire between July 15, 2008 and December 31, 2008, which we will not renew
during 2008.
|
|
|
A decrease in the lawyers professional liability gross written premium of $11.6 million to
$0.2 million for the year ended December 31, 2007 as a result of non-renewing policies due to
unacceptable underwriting results.
|
|
|
An increase in price competition during the twelve months ended December 31, 2007,
particularly with respect to the following:
|
|
|
|
Large commercial property-driven accounts located in 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 3.6% and 1.8% during 2007
for the commercial lines and specialty lines segments, respectively.
|
We believe our mixed marketing platform is a strength in that it provides us the flexibility to
quickly deploy our marketing efforts from soft market segments to market segments with emerging
opportunities. However, we will walk away from writing business that does not meet our
established underwriting standards and pricing guidelines.
The respective net written premiums, and net earned premiums for our commercial lines, specialty
lines and personal lines segments for the years ended December 31, 2007 and 2006, were as follows
(dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Lines
|
|
Specialty Lines
|
|
Personal Lines
|
|
Total
|
2007 Net Written Premiums
|
|
$
|
1,266.5
|
|
|
$
|
200.5
|
|
|
$
|
(7.4
|
)
|
|
$
|
1,459.6
|
|
2006 Net Written Premiums
|
|
$
|
1,080.2
|
|
|
$
|
181.4
|
|
|
$
|
21.3
|
|
|
$
|
1,282.9
|
|
Percentage Increase (Decrease)
|
|
|
17.2
|
%
|
|
|
10.5
|
%
|
|
|
(134.7
|
)%
|
|
|
13.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 Net Earned Premiums
|
|
$
|
1,174.8
|
|
|
$
|
189.0
|
|
|
$
|
15.4
|
|
|
$
|
1,379.2
|
|
2006 Net Earned Premiums
|
|
$
|
966.3
|
|
|
$
|
174.0
|
|
|
$
|
29.0
|
|
|
$
|
1,169.3
|
|
Percentage Increase (Decrease)
|
|
|
21.6
|
%
|
|
|
8.6
|
%
|
|
|
(46.9
|
)%
|
|
|
18.0
|
%
|
The differing percentage changes in net written premiums and/or net earned premiums versus gross
written premiums and/or gross earned premiums for the commercial lines, specialty lines and
personal lines segments during the year results primarily from the following:
|
|
For our commercial lines segment, we experienced rate decreases on our annual January 1, 2007
renewal of our casualty excess of loss and property excess of loss reinsurance agreements
compared to the rates on our January 1, 2006 renewals of these agreements.
|
|
|
For our commercial lines segment, our property catastrophe costs were higher for the year
ended December 31, 2007 compared to December 31, 2006. For our June 1, 2007 commercial lines
segment property catastrophe reinsurance renewal, we experienced lower reinsurance rates,
purchased increased catastrophe limits due to higher exposures primarily in the Northeast part
of the country, and maintained the same catastrophe loss retention compared to our June 1,
2006 renewal.
|
|
|
For our personal lines segment, our property catastrophe costs were lower for the year ended
December 31, 2007 compared to December 31, 2006. For our June 1, 2007 personal lines 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.
|
|
|
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
|
40
|
|
years ended December 31, 2007 and 2006, we accrued $5.0 million ($2.1 million for the commercial
lines segment and $2.9 million for the specialty lines segment) and $5.3 million ($2.2 million
for the commercial lines segment and $3.1 million for the specialty lines segment) respectively,
of reinstatement or additional reinsurance premium under our casualty excess of loss reinsurance
treaties, as a result of changes in ultimate loss estimates. The reinstatement premium increased
ceded written and earned premiums and reduced net written and earned premiums.
|
|
|
Effective for the two-year period beginning March 1, 2007, we purchased Terrorism Catastrophe
Excess of Loss reinsurance coverage for our commercial lines segment which provides, on an
annual basis, in the aggregate, $50.0 million of coverage for losses arising from acts of
terrorism incurred in excess of $10.0 million, after all applicable inuring reinsurance
coverages. The agreements providing this coverage allows one reinstatement on an annual basis
at the same cost as the initial coverage. We did not purchase similar reinsurance coverage in
the prior year.
|
Net Investment Income:
Net investment income increased 27.8% to $117.2 million in 2007 from
$91.7 million in 2006. Total investments grew by 23.9% to $3,015.2 million as of December 31, 2007
from $2,433.6 million as of December 31, 2006. The growth in investment income is primarily due to
increased investments which arose from investing net cash flows provided from our operating
activities. In addition, during 2007, there was a general decrease in interest rates, the impact
of which was mitigated in part by our decision to increase the average duration of our portfolio.
The average duration of our fixed maturity portfolio was 5.0 years and 4.6 years as of
December 31, 2007 and 2006, respectively. Our decision to increase the average duration of our
fixed maturity portfolio was based upon enterprise risk management analyses completed during 2006
and 2007 which indicated the capacity to further refine the risk/return profile of our investment
portfolio. Based upon the analyses, the following actions were implemented:
|
|
|
The portfolio duration target was increased;
|
|
|
|
|
The percentage of the fixed maturity portfolio allocated to municipal security
investments was increased; and
|
|
|
|
|
The percentage of the investment portfolio allocated to common stock investments was
increased.
|
The taxable equivalent book yield on our fixed income holdings approximated 5.5% as of
December 31, 2007, compared to 5.4% as of December 31, 2006.
The total pre-tax return, which includes the effects of both income and price returns on
securities, of our fixed income portfolio was 5.65% and 4.57% for the years ended December 31, 2007
and 2006, respectively, compared to the Lehman Brothers Intermediate Aggregate Bond Index (the
Index) total pre-tax return of 7.02% and 4.63% for the same periods, respectively. We expect some
variation in our portfolios total return compared to the Index because of the differing sector,
security and duration composition of our portfolio as compared to the Index.
Net Realized Investment Gain (Loss):
Net realized investment gains (losses) were $29.6
million and $(9.9) million for the years ended December 31, 2007 and 2006, respectively.
For the year ended December 31, 2007, we realized net investment gains of $0.8 million and
$36.7 million from the sale of fixed maturity and equity securities, respectively, and $0.6 million
and $7.3 million in non-cash realized investment losses for fixed maturity and equity securities,
respectively, as a result of our impairment evaluations. The $36.7 million in net realized gains
from the sale of equity securities included approximately $22.2 million of net realized gains as a
result of the liquidation of one of our equity portfolios following our decision to change one of
our common stock investment managers.
For the year ended December 31, 2006, we realized net investment gains (losses) of $(1.5)
million and $0.4 million from the sale of fixed maturity and equity securities, respectively, and
$4.6 million and $4.2 million in realized investment losses for fixed maturity and equity
securities, respectively, as a result of our impairment evaluations. The $4.6 million in realized
investment losses for fixed maturities resulting from our impairment evaluations included
approximately $4.2 million of realized investment losses on available for sale fixed maturity
investments that were recognized as of September 30, 2006 and subsequently sold during the fourth
quarter of 2006 as a result of tax planning and investment portfolio management strategies.
Other Income
: Other income approximated $3.6 million and $2.6 million for the years ended
December 31, 2007 and 2006, respectively. Other income consists primarily of commissions earned on
brokered personal and commercial lines business, and fees earned on servicing personal lines
business.
41
Net Loss and Loss Adjustment Expenses:
Net loss and loss adjustment expenses increased by
$150.8 million (32.2%) to $619.0 million for the year ended December 31, 2007 from $468.2 million
for the year ended December 31, 2006. The loss and loss adjustment expense ratio increased to
44.9% in 2007 from 40.0% in 2006.
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 year ended December 31, 2007 decreased net estimated
unpaid loss and loss adjustment expenses for accident years 2006 and prior by $85.8 million,
as compared to net reserve actions taken during the year ended December 31, 2006 which
decreased estimated net unpaid loss and loss adjustment expenses for accident years 2005 and
prior by $91.4 million. Decreases in the estimated net unpaid loss and loss adjustment
expenses for prior accident years during the year ended December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
Net Basis Decrease
|
|
|
|
(In millions)
|
|
|
|
|
|
|
Accident Year 2006
|
|
$
|
22.8
|
|
Accident Year 2005
|
|
|
25.0
|
|
Accident Year 2004
|
|
|
19.1
|
|
Accident Years 2003 and prior
|
|
|
18.9
|
|
|
|
|
|
Total Decrease
|
|
$
|
85.8
|
|
|
|
|
|
|
|
|
|
For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower estimates for:
|
|
|
|
|
|
Commercial property, professional liability, and commercial automobile coverages
due to better than expected case incurred loss development, primarily as a result of both
claim frequency and severity emergence being less than anticipated, and
|
|
|
|
|
|
|
Management liability coverages due to better than expected case incurred loss
development primarily as a result of claim severity emergence 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:
|
|
|
|
|
|
Professional liability, management liability and commercial property coverages due
to better than expected case incurred loss development primarily as a result of claim
severity being less than anticipated.
|
|
|
|
|
|
General liability and commercial automobile coverages due to better than expected
case incurred loss development, primarily as a result of both claim frequency and
severity emergence being less than anticipated.
|
|
|
|
|
For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for:
|
|
|
|
|
|
Professional liability, commercial general liability, rental leasing and management
liability coverages due to better than expected case incurred loss development primarily
as a result of claim severity emergence being less than anticipated.
|
|
|
|
|
For accident year 2003 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower loss estimates for:
|
|
|
|
|
|
Professional liability, management liability, and commercial general liability coverages
due to better than expected case incurred loss development primarily as a result of claim
severity emergence being less than anticipated.
|
|
|
An increase in the current accident year net ultimate loss and loss adjustment expense
ratio for the year ended December 31, 2007 compared to 2006. During the year ended December
31, 2007, a net ultimate loss and loss adjustment expense ratio of
|
42
|
|
51.1% was estimated for the 2007 accident year. During the year ended December 31, 2006, a
net ultimate loss and loss adjustment expense ratio of 47.6% was estimated for the 2006
accident year. The increase in the 2007 accident year loss and loss adjustment expense ration
is principally attributable to:
|
|
|
|
A $7.5 million net loss and loss adjustment expense estimate which we recognized
for the October 2007 California wildfires during 2007. We incurred no such catastrophe
losses during 2006.
|
|
|
|
An increase in the net ultimate loss and loss adjustment expense ratio for property
business in the commercial lines segment due primarily to weather related losses, and a
higher frequency of large fire losses during 2007 compared to 2006; and
|
|
|
|
Realized average rate decreases on renewal business approximating 3.6% and 1.8% for
the commercial and specialty lines segments, respectively, for 2007 compared to 2006.
|
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 $74.8 million (22.1%) to $413.1 million for the year ended December 31, 2007
from $338.3 million for the year ended December 31, 2006. The expense ratio increased to 30.0% in
2007 from 28.9% in 2006. The increase in acquisition costs and other underwriting expenses was due
primarily to the 18.0% growth in net earned premiums.
The increase in the expense ratio for the year ended December 31, 2007 was due primarily to:
|
|
|
A $3.0 million change in the net reduction to expenses related to assessments from
Citizens Property Insurance Corporation (Citizens). During 2007, we recognized a net
reduction to expense of $0.4 million related to the Citizens assessments, compared to a net
reduction to expense of $3.4 million related to Citizens assessments during 2006. The
expense reduction during 2007 is attributable to recoupments recognized from our
policyholders.
|
|
|
|
A $1.6 million increase in amortization expense of intangible assets for the renewal
rights of insurance policies which we purchased during 2007 and 2006.
|
These increases were offset in part by a decrease in state insurance guaranty fund assessments.
Income Tax Expense:
Our effective tax rate for the years ended December 31, 2007 and 2006 was
32.7% and 33.5%, respectively. The effective rates for 2007 and 2006, respectively, 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 2007 is due principally to increased investments in tax exempt securities.
RESULTS OF OPERATIONS
(2006 versus 2005)
Premiums
: Premium information for our business segments is as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Lines
|
|
Specialty Lines
|
|
Personal Lines
|
|
Total
|
2006 Gross Written Premiums
|
|
$
|
1,169.4
|
|
|
$
|
227.6
|
|
|
$
|
96.2
|
|
|
$
|
1,493.2
|
|
2005 Gross Written Premiums
|
|
$
|
960.3
|
|
|
$
|
205.3
|
|
|
$
|
99.3
|
|
|
$
|
1,264.9
|
|
Percentage Increase (Decrease)
|
|
|
21.8
|
%
|
|
|
10.9
|
%
|
|
|
(3.1
|
)%
|
|
|
18.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Gross Earned Premiums
|
|
$
|
1,046.8
|
|
|
$
|
217.5
|
|
|
$
|
101.1
|
|
|
$
|
1,365.4
|
|
2005 Gross Earned Premiums
|
|
$
|
873.8
|
|
|
$
|
194.3
|
|
|
$
|
97.2
|
|
|
$
|
1,165.3
|
|
Percentage Increase (Decrease)
|
|
|
19.8
|
%
|
|
|
11.9
|
%
|
|
|
4.0
|
%
|
|
|
17.2
|
%
|
43
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 our non-profit,
condominium association and sports leagues commercial package product lines. These product
offerings accounted for approximately $105.3 million of the $209.1 million total Commercial
Lines segment gross written premiums increase.
|
|
|
The introduction of several new niche product offerings, most notably religious
organizations, professional sports and entertainment commercial package products and the
antique/collector vehicle product. These new product offerings accounted for approximately
$37.5 million of the $209.1 million total Commercial Lines segment gross written premiums
increase.
|
|
|
Continued expansion of marketing efforts relating to Commercial Lines and Specialty Lines
products through our field organization and preferred agents.
|
|
|
An increase to in-force policy counts as of December 31, 2006 versus December 31, 2005 of
57.3% for the Commercial Lines segment. The introduction of the antique/collector vehicle
program accounted for 22.3% of the 57.3% total policy count increase. The other factors
discussed above accounted for the remaining 35.0% increase in the policy counts.
|
|
|
An increase to in-force policy counts as of December 31, 2006 versus December 31, 2005 of
15.7% for the Specialty Lines segment, primarily as a result of the factors discussed above.
|
|
|
Realized average rate increases on renewal business approximating 0.9%, and 26.3% for the
Commercial and Personal Lines segments, respectively.
|
This growth in gross written premiums was offset in part by:
|
|
A decrease in mobile homeowners gross written premium of $13.7 million from Libertys
continuing shift in product mix as a result of reducing mobile homeowners product policies and
increasing homeowners product policies. This $13.7 million decrease was offset in part by a
$4.9 million increase in homeowners gross written premium.
|
|
|
A decrease in Libertys renewal retention percentage to 65.1% in the fourth quarter of 2006,
as compared to its year-to-date renewal retention for the nine months ending September 30,
2006 of 90.9%. This decrease in renewal retention is primarily attributed to Libertys
implementation of rate increases effective September 1, 2006, relating to higher reinsurance
costs. These rate increases are subject to reduction pending Florida Office of Insurance
Regulation final approval.
|
|
|
Restricting new personal lines business production of Liberty due to the significant increase
in catastrophe reinsurance rates and restricted availability of reinsurance catastrophe
coverage experienced at the June 1, 2006 catastrophe reinsurance renewal.
|
|
|
A decrease in the lawyers professional liability gross written premium of $7.1 million as a
result of non-renewing policies due to unacceptable underwriting results. Total 2006 gross
written premium for the lawyers professional liability product was $11.8 million. We will
continue to non-renew our remaining lawyers professional liability business in 2007.
|
|
|
A decrease in in-force policy counts for the personal lines segment of 27.2%, resulting from
a decrease to the in-force counts for the mobile homeowners product and the homeowners product
of 76.6% and 19.0%, respectively, due to the factors noted above.
|
|
|
Realized average rate decreases on renewal business approximating 0.5% for the specialty
lines segment.
|
The respective net written premiums, and net earned premiums for commercial lines, specialty lines
and personal lines segments for the year ended December 31, 2006 vs. the year ended December 31,
2005, were as follows (dollars in millions):
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Lines
|
|
Specialty Lines
|
|
Personal Lines
|
|
Total
|
2006 Net Written Premiums
|
|
$
|
1,080.2
|
|
|
$
|
181.4
|
|
|
$
|
21.3
|
|
|
$
|
1,282.9
|
|
2005 Net Written Premiums
|
|
$
|
904.7
|
|
|
$
|
159.1
|
|
|
$
|
47.0
|
|
|
$
|
1,110.8
|
|
Percentage Increase (Decrease)
|
|
|
19.4
|
%
|
|
|
14.0
|
%
|
|
|
(54.7
|
)%
|
|
|
15.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 Net Earned Premiums
|
|
$
|
966.3
|
|
|
$
|
174.0
|
|
|
$
|
29.0
|
|
|
$
|
1,169.3
|
|
2005 Net Earned Premiums
|
|
$
|
778.4
|
|
|
$
|
151.7
|
|
|
$
|
46.5
|
|
|
$
|
976.6
|
|
Percentage Increase (Decrease)
|
|
|
24.1
|
%
|
|
|
14.7
|
%
|
|
|
(37.6
|
)%
|
|
|
19.7
|
%
|
The differing percentage changes in net written premiums and/or net earned premiums versus gross
written premiums and/or gross earned premiums for the commercial lines, specialty lines and
personal lines segments during the year results primarily from the following:
|
|
Our decision to terminate our net liability cession under our quota share reinsurance
agreement whereby we had ceded 10% of our commercial and specialty lines net written and
earned premiums and loss and loss adjustment expenses for policies commencing during 2004.
Pursuant to the agreement, during the year ended December 31, 2005, we ceded $43.7 million
($36.5 million for the commercial lines segment, $7.1 million for the specialty lines segment,
and $0.1 million for the personal lines segment) of net earned premiums, which represented the
unearned premium reserves as of December 31, 2004 on policies commencing during 2004. No
earned premiums were ceded pursuant to this agreement during 2006 due to our decision to
terminate the agreement on a run-off basis effective December 31, 2004.
|
|
|
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 years ended December
31, 2006 and 2005, we accrued $5.3 million ($2.2 million for the commercial lines segment and
$3.1 million for the specialty lines segment) and $3.7 million ($1.6 million for the
commercial lines segment and $2.1 million for the specialty lines segment) respectively, of
reinstatement or additional reinsurance premium under our casualty excess of loss reinsurance
treaties, as a result of changes in ultimate loss estimates. The reinstatement premium
increased ceded written and earned premiums and reduced net written and earned premiums.
|
|
|
During the year ended December 31, 2005, we experienced catastrophe losses attributable to
Hurricanes Dennis, Katrina, Rita and Wilma. These multiple hurricane events resulted in the
recognition of reinstatement and accelerated catastrophe reinsurance premium expense of $3.9
million ($0.6 million for the Commercial Lines Segment and $3.3 million for the Personal Lines
Segment) during the year ended December 31, 2005 due to the utilization of certain of our
catastrophe reinsurance coverages. This recognition of reinstatement and accelerated
reinsurance premium expense increased reinsurance ceded written and earned premiums and
reduced net written and earned premiums. We experienced no such catastrophe losses during
2006.
|
|
|
We also experienced our higher property catastrophe reinsurance costs, increased catastrophe loss
retentions, and decreased catastrophe coverage limits for our June 1, 2006 reinsurance renewal
compared to the June 1, 2005 renewal as a result of the hardening property catastrophe
reinsurance market.
|
Net Investment Income:
Net investment income approximated $91.7 million in 2006 and $63.7
million in 2005. Total investments grew to $2,433.6 million at December 31, 2006 from $1,935.0
million at of December 31, 2005. The growth in investment income is primarily due to increased
investments which arose from investing net cash flows provided from operating activities, during a
period in which the general level of interest rates increased and in which we increased the average
duration of our fixed income portfolio. Our average duration of our fixed maturity portfolio was
4.6 years and 4.0 years at December 31, 2006 and December 31, 2005, respectively. The decision to
increase the average duration of our fixed maturity portfolio was based upon enterprise risk
management analyses completed during 2006. The analyses indicated the capacity to further refine
the risk/return profile of the investment portfolio. Based upon the analyses, the following
actions were implemented:
|
|
The portfolio duration target was increased;
|
|
|
The percentage of the fixed maturity portfolio allocated to municipal security
investments was increased; and
|
|
|
The percentage of the investment portfolio allocated to common stock investments was
increased.
|
45
Our taxable equivalent book yield on our fixed income holdings approximated 5.4% at December
31, 2006, compared to 4.8% at December 31, 2005. Net investment income was reduced by $1.5 million
for the year ended December 31, 2005 due to the interest credit on the Funds Held Account balance
pursuant to our quota share reinsurance agreement.
The total pre-tax return, which includes the effects of both income and price returns on
securities, of our fixed income portfolio was 4.57% and 2.34% for the years ended December 31, 2006
and 2005, respectively, compared to the Lehman Brothers Intermediate Aggregate Bond Index (the
Index) total pre-tax return of 4.63% and 2.01% for the same periods, respectively. We expect some
variation in our portfolios total return compared to the Index because of the differing sector,
security and duration composition of its portfolio as compared to the Index.
Net Realized Investment Gain (Loss):
Net realized investment gains (losses) were $(9.9)
million and $9.6 million for the years ended December 31, 2006 and 2005, respectively. For the
year ended December 31, 2006, we realized net investment gains (losses) of $(1.5) million and $0.4
million from the sale of fixed maturity and equity securities, respectively, and $4.6 million and
$4.2 million in realized investment losses for fixed maturity and equity securities, respectively,
as a result of our impairment evaluation. The $4.6 million in realized investment losses for fixed
maturities resulting from our impairment evaluation included approximately $4.2 million of realized
investment losses on available for sale fixed maturity investments that were recognized as of
September 30, 2006 and subsequently sold during the fourth quarter of 2006 as a result of tax
planning and investment portfolio management strategies.
For the year ended December 31, 2005, we realized net investment gains of $3.5 million and
$11.5 million from the sale of fixed maturity and equity securities, respectively, and $0 million
and $2.2 million in non-cash realized investment losses for fixed maturity and equity securities,
respectively, as a result of our impairment evaluation. The $11.5 million net realized gains from
the sale of equity securities included approximately $11.0 million of net realized gains as a
result of the liquidation of certain of our equity portfolios following our decision to change four
of our common stock investment managers. Net realized investment gain for the year ended December
31, 2005 was reduced by $3.2 million due to the recognized loss of the change in fair value of a
cash flow hedge we entered into for which the anticipated transaction did not occur.
Other Income
: Other income approximated $2.6 million and $1.5 million for the years ended
December 31, 2006 and 2005, respectively. Other income consists primarily of commissions earned on
brokered personal and commercial lines business, and fees earned on servicing personal lines
business.
Net Loss and Loss Adjustment Expenses:
Net loss and loss adjustment expenses decreased $35.8
million (7.1%) to $468.2 million for the year ended December 31, 2006 from $504.0 million for the
year ended December 31, 2005, while the loss and loss adjustment expense ratio decreased to 40.0%
in 2006 from 51.6% in 2005.
The decrease in net loss and loss adjustment expenses was primarily due to:
|
|
Net reserve actions taken during the year ended December 31, 2006, wherein the net estimated
unpaid loss and loss adjustment expenses for accident years 2005 and prior were decreased by
$91.4 million, as compared to net reserve actions taken during the year ended December 31,
2005 wherein the estimated net unpaid loss and loss adjustment expenses for accident years
2004 and prior were decreased by $29.9 million. Decreases in the estimated net unpaid loss
and loss adjustment expenses for prior accident years during the year ended December 31, 2006
were as follows:
|
|
|
|
|
|
|
|
Net Basis Decrease
|
|
|
|
(In millions)
|
|
|
|
|
|
|
Accident Year 2005
|
|
$
|
59.2
|
|
Accident Year 2004
|
|
|
12.6
|
|
Accident Year 2003
|
|
|
11.0
|
|
Accident Years 2002 and prior
|
|
|
8.6
|
|
|
|
|
|
Total Decrease
|
|
$
|
91.4
|
|
|
|
|
|
|
|
|
For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower estimates for commercial coverages due to better than
expected case incurred loss development. The incurred frequency emergence on general
liability coverages, and the incurred severity emergence on property and auto coverages,
were less than anticipated.
|
46
|
|
|
For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower estimates for commercial coverages due to better than
expected case incurred loss development. The incurred frequency emergence on general
liability coverages, and the incurred severity emergence on auto coverages, were less than
anticipated.
|
|
|
|
|
For accident year 2003, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower estimates for professional liability coverages and
rental/leasing auto coverages due to better than expected case incurred loss development.
The incurred severity emergence on professional liability E&O and D&O coverages, and the
incurred frequency emergence on rental/leasing auto coverages, were less than anticipated.
|
|
|
|
|
For accident years 2002 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower estimates for rental/leasing auto coverages
due to better than expected case incurred loss development. The incurred frequency
emergence on rental/leasing auto coverages, and the incurred severity emergence on rental
supplemental liability coverages, were less than anticipated.
|
Establishing loss reserve estimates is a necessarily complex and imprecise process. Our
methodology is to employ several generally accepted actuarial methods to determine net unpaid
loss and loss adjustment expenses. 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. The principal factor contributing to
the decreases in the estimated net unpaid loss and loss adjustment expenses for prior accident
years is the reconsideration of an assumption underlying previous estimates that loss ratio
deterioration would result from the high growth rates we experienced in the most recent
accident years. As actual losses experienced on these accident years have continued to be
lower than anticipated, it has become more likely that the ultimate loss ratio will prove to
be better than originally estimated. Over time, greater credibility has been given to this
favorable trend by applying greater weight to actuarial methods based on actual loss
development. The result is a reduction to these years net unpaid loss and loss adjustment
expenses, which, in turn, leads to lower ultimate loss ratio expectations for the more recent
accident years. As significant weight is given to actuarial methods based on expected losses
for the more recent accident years, the result of lower expectations is a reduction to these
years net unpaid loss and loss adjustment expenses.
|
|
A reduction in the current accident year net ultimate loss and loss adjustment expense ratio,
excluding catastrophe losses, for the year ended December 31, 2006 compared to 2005. During
the year ended December 31, 2006, a net ultimate loss and loss adjustment expense ratio,
excluding catastrophe losses, of 47.6% was estimated for the 2006 accident year. During the
year ended December 31, 2005, a net ultimate loss and loss adjustment expense ratio, excluding
catastrophe losses, of 51.7% was estimated for the 2005 accident year.
|
|
|
A $24.7 million reduction in hurricane catastrophe losses incurred. During the year ended
December 31, 2005, we incurred $24.7 million of net loss and loss adjustment expenses related
to Hurricanes Dennis, Katrina, Rita and Wilma. We incurred no such catastrophe losses during
the year ended December 31, 2006.
|
These decreases to net loss and loss adjustment expenses incurred were partially offset by
increases to net loss and loss adjustment expenses resulting from:
|
|
The growth in net earned premiums.
|
|
|
An $18.3 million reduction in ceded loss and loss adjustment expenses pursuant to a 10% quota
share agreement (See Premiums). Ceded loss and loss adjustment expenses pursuant to this quota
share agreement for the year ended December 31, 2005 were $18.3 million; however, due to our
decision to terminate this agreement on a run-off basis effective December 31, 2004, there
were no losses ceded to this agreement during 2006.
|
Acquisition Costs and Other Underwriting Expenses:
Acquisition costs and other underwriting
expenses increased $74.5 million (28.2%) to $338.3 million for the year ended December 31, 2006
from $263.8 million for the year ended December 31, 2005, and the expense ratio increased to 28.9%
in 2006 from 27.0% in 2005. The increase in acquisition costs and other underwriting expenses was
due primarily to the following:
|
|
The growth in net earned premiums.
|
|
|
$7.2 million of share-based compensation expense allocated to underwriting and acquisition
expenses which was recognized under SFAS 123(R), which we adopted on January 1, 2006.
|
47
|
|
A $21.3 million decrease in ceding commission earned pursuant to our quota share agreements
(See Premiums). During the year ended December 31, 2006, we earned no ceding commissions
related to quota share agreements, as compared to $21.3 million of ceding commissions earned
during 2005. There were no ceded earned premiums pursuant to these quota share agreements for
the year ended December 31, 2006 as compared to $43.7 million for 2005 due to our decision to
terminate its 10% quota share agreement on a run-off basis effective December 31, 2004.
|
These increases were partially offset by a $9.3 million change in net charges related to
assessments from Citizens Property Insurance Corporation (Citizens). During 2006, we recognized
a net reduction to expense of $3.4 million related to Citizens assessments, compared to a net
increase to expense of $5.9 million related to Citizens assessments during 2005. The $3.4 million
reduction to expense during 2006 is comprised of:
|
|
|
|
|
(In Millions)
|
|
For the Year Ended
|
|
|
|
December 31, 2006
|
|
Reduction to expense related to assessment on 2004
Premiums
|
|
$
|
1.6
|
|
Reduction to expense related to assessment on 2005
Premiums
|
|
|
1.8
|
|
|
|
|
|
Total
|
|
$
|
3.4
|
|
|
|
|
|
Citizens was established by the State of Florida to provide insurance to property owners
unable to obtain coverage in the private insurance market. Citizens assessments may be
recouped through future insurance policy surcharges to Florida insureds. These surcharges are
recorded in our consolidated financial statements as the related premiums are written.
The $1.6 million reduction in expense related to the 2004 assessment is attributable to net
policyholder surcharges related to premiums written during 2006. The $1.8 million reduction
in expense related to the 2005 assessment is attributable to a reduction in the actual 2005
assessment paid to Citizens, compared to the amount that was estimated by Citizens and accrued
by us as of December 31, 2005.
During the fourth quarter of 2005, Citizens announced that it was projecting the maximum ten
percent regular assessment allowed under Florida law plus an additional emergency assessment
of approximately one percent to be assessed during 2006 due to the hurricanes that struck
Florida in 2005. During 2006, the Florida legislature approved a $715 million budget
appropriation to be used to reduce the Citizens deficit and resulting assessments to insurers.
This budget appropriation resulted in the $1.8 million reduction to our net assessment
expense.
Other Operating Expenses
: Other operating expenses decreased by $4.5 million to $12.6 million
for the year ended December 31, 2006 from $17.1 million for the same period of 2005. Of this
decrease, $2.0 million is due to a bonus accrual for the year ended December 31, 2005 related to
the terms of an employment agreement with our founder and Chairman. There was no such bonus
accrual for 2006.
Income Tax Expense:
Our effective tax rate for the years ended December 31, 2006 and 2005 was
33.5% and 34.9%, respectively. The effective rate for 2006 differed from the 35% statutory rate
principally due to investments in tax-exempt securities. The effective tax rate for 2005 differed
from the 35% statutory rate principally due to investments in tax-exempt securities, offset by the
non-deductible goodwill impairment loss.
Investments
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. We utilize external independent professional investment managers for our fixed
maturity and equity investments. These investments consist of diversified issuers and issues, and
as of December 31, 2007 approximately 87.8% and 10.7% of our total invested assets (total
investments plus cash equivalents) on a cost basis consisted of investments in fixed maturity and
equity securities, respectively, versus 86.0% and 10.4%, respectively, as of December 31, 2006.
Of our total investments in fixed maturity securities, asset backed, mortgage pass-through, and
collateralized mortgage obligation securities, on a cost basis, amounted to $199.3 million, $604.3
million and $329.5 million, respectively, as of December 31, 2007, and $202.1 million, $425.5
million and $293.1 million, respectively, as of December 31, 2006.
48
We regularly perform impairment reviews with respect to our investments. For investments other than
interests in securitized assets, these reviews include identifying any security whose fair value is
below its cost and an analysis of securities meeting predetermined impairment thresholds to
determine whether such decline is other than temporary. If we do not intend to hold a security to
maturity or determine a decline in value to be other than temporary, the cost basis of the security
is written down to its fair value with the amount of the write down reflected in our earnings as a
realized loss in the period the impairment arose. These evaluations resulted in non-cash realized
investment losses of $7.9 million and $8.8 million, respectively, for the years ended December 31,
2007 and 2006. 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 Financial Accounting Standards Board. There were no non-cash realized investment
losses recorded for the years ended December 31, 2007 or 2006 as a result of our impairment
evaluations for investments in securitized assets.
Our fixed maturity portfolio amounted to $2,659.2 million and $2,129.6 million, as of December 31,
2007 and 2006, respectively, of which 99.9% of the portfolio was comprised of investment grade
securities as of December 31, 2007 and 2006. We had fixed maturity investments with gross
unrealized losses amounting to $7.0 million and $18.1 million as of December 31, 2007 and 2006,
respectively. Of these amounts, interests in securitized assets had gross unrealized losses
amounting to $3.0 million and $9.3 million as of December 31, 2007 and 2006, respectively.
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 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.
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses as of December 31, 2007
|
|
|
|
(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 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
50
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.
Structured Securities Portfolio:
The fair value of our structured securities investment portfolio (Asset Backed, Mortgage
Pass-Through and Collateralized Mortgage Obligation securities) amounted to $1,143.3 million as of
December 31, 2007. AAA rated securities represented approximately 99.8% of our December 31, 2007
structured securities portfolio. Approximately $947.7 million of our structured securities
investment portfolio is backed by residential collateral, consisting of:
|
|
$610.0 million of U.S. government agency backed Mortgage Pass-Through Securities;
|
|
|
$233.8 million of U.S. government agency backed Collateralized Mortgage Obligations;
|
|
|
$76.3 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);
|
|
|
$21.6 million of structured securities backed by pools of ALT A loans (loans with low
documentation and borrowers with FICO scores in the approximated range of 650 to the low
700s); and
|
|
|
$6.0 million of structured securities backed by pools of sub-prime loans (loans with low
documentation, higher combined loan-to-value ratios and borrowers with FICO scores capped at
approximately 650).
|
Our $27.6 million ALT-A and sub-prime overall AAA rated loan portfolio is comprised of 22
securities with net unrealized losses of $0.0 million as of December 31, 2007. 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 2.4 years;
|
|
|
|
are spread across multiple vintages (origination year of underlying collateral pool), and
|
|
|
|
have not experienced any ratings downgrades or surveillance issues as of December 31, 2007.
|
Our ALT-A and sub-prime loan portfolio has paid down to $27.6 million as of December 31, 2007 from
$35.7 million as of September 30, 2007 and from $42.0 million as of June 30, 2007.
As of December 31, 2007, we hold no investments in Collateralized Debt Obligations or Net Interest
Margin securities.
Given a combination of recent events in the housing and mortgage finance sectors and the issues
surrounding the monoline financial guarantors, we believe that fixed income and equity markets, in
general, may experience more volatility than during recent historical reporting periods. As of
December 31, 2007, we had no impairments or surveillance issues 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 Aaa/AAA rated
investment portfolio.
Municipal Bond Portfolio:
Our $1,389.1 million municipal bond overall AAA rated portfolio consists of $865.7 million of
insured securities, or 62.3% 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 December 31, 2007:
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Market Value of Insured
|
|
|
|
|
|
|
Underlying Rating of
|
|
|
|
Municipal Bonds
|
|
|
Percentage of Municipal
|
|
|
Insured Municipal
|
|
Monoline Insurer
|
|
(in Thousands)
|
|
|
Bond Portfolio
|
|
|
Bonds
|
|
Financial Security Assurance, Inc.
|
|
$
|
285,933
|
|
|
|
20.6
|
%
|
|
AA-
|
MBIA, Inc.
|
|
|
263,039
|
|
|
|
18.9
|
|
|
AA-
|
FGIC Corporation.
|
|
|
162,569
|
|
|
|
11.7
|
|
|
AA-
|
AMBAC Financial Group, Inc.
|
|
|
149,542
|
|
|
|
10.8
|
|
|
AA-
|
XL Capital, LTD.
|
|
|
4,658
|
|
|
|
0.3
|
|
|
AA-
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
865,741
|
|
|
|
62.3
|
%
|
|
AA-
|
|
|
|
|
|
|
|
|
|
|
|
Each municipal bond is evaluated prior to purchase to ensure that the issuer and underlying revenue
pledge/collateral supporting the municipal bond is sufficient, ignoring the presence of the
financial guarantee insurance. We consider the financial guarantee insurance to be extra
protection. As of December 31, 2007, we had no impairments or surveillance issues related to these
insured municipal bonds.
Securities with an Unrealized Loss as of December 31, 2006:
The following table identifies the period of time securities with an unrealized loss as of December
31, 2006 have continuously been in an unrealized loss position. None of the amounts displayed in
the table are due to non-investment grade fixed maturity securities. No issuer of securities or
industry represents more than 3.5% and 23.6%, respectively, of the total estimated fair value, or
2.8% and 28.7%, respectively, of the total gross unrealized loss included in the table below. The
industry concentration represents investments in AAA rated mortgage backed securities issued by
agencies of the U.S. Government which are collateralized by pools of residential mortgage loans. As
previously discussed, there are certain risks and uncertainties inherent in our impairment
methodology, including, but not limited to, the financial condition of specific industry sectors
and the resultant effect on the underlying 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. Should we 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 our earnings as a realized loss for the period such determination was made.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Unrealized Losses as of December 31, 2006
|
|
|
|
(in millions)
|
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuous
|
|
Available for Sale
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
time in unrealized
|
|
Excluding Interests
|
|
|
Interests in
|
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
loss position
|
|
in Securitized Assets
|
|
|
Securitized Assets
|
|
|
Available for Sale
|
|
|
Equity Securities
|
|
|
Total Investments
|
|
0 3 months
|
|
$
|
0.8
|
|
|
$
|
1.2
|
|
|
$
|
2.0
|
|
|
$
|
1.1
|
|
|
$
|
3.1
|
|
4 6 months
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.6
|
|
|
|
0.7
|
|
7 9 months
|
|
|
0.1
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.9
|
|
|
|
1.0
|
|
10 12 months
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.3
|
|
|
|
|
|
|
|
0.3
|
|
13 18 months
|
|
|
2.1
|
|
|
|
4.6
|
|
|
|
6.7
|
|
|
|
|
|
|
|
6.7
|
|
19 24 months
|
|
|
2.6
|
|
|
|
1.5
|
|
|
|
4.1
|
|
|
|
|
|
|
|
4.1
|
|
> 24 months
|
|
|
3.1
|
|
|
|
1.7
|
|
|
|
4.8
|
|
|
|
|
|
|
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross
Unrealized Losses
|
|
$
|
8.8
|
|
|
$
|
9.3
|
|
|
$
|
18.1
|
|
|
$
|
2.6
|
|
|
$
|
20.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated fair
value of securities
with a gross
unrealized loss
|
|
$
|
624.9
|
|
|
$
|
543.8
|
|
|
$
|
1,168.7
|
|
|
$
|
37.4
|
|
|
$
|
1,206.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our impairment evaluation as of December 31, 2006 for fixed maturities available for sale,
excluding interests in securitized assets, resulted in the following conclusions:
52
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 increases. Of the 32
investment positions held, approximately 71.9% 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 our investments in long term tax exempt securities which have ratings of
A1/A+ to AAA/Aaa are generally caused by interest rate increases. Of the 736 investment
positions held, approximately 49.3% were in an unrealized loss position. The contractual terms of
the investments do not permit the issuer to settle the securities at a price less than the
amortized cost of the investments. Therefore, it is expected that the securities would not be
settled at a price less than the amortized cost of the investments.
Corporate and Bank Debt Securities:
The unrealized losses on our long term investments in corporate bonds which have ratings from
Baa3/BBB to Aaa/AAA are generally caused by interest rate increases. Of the 114 investment
positions held, approximately 87.7% 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.
Our impairment evaluation as of December 31, 2006 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 Aaa/AAA
are generally caused by interest rate increases. Of the 132 investment positions held,
approximately 49.2% 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 our investments in Mortgage Pass-Through Securities which have ratings
of Aaa/AAA are generally caused by interest rate increases. Of the 130 investment positions
held, approximately 58.5% were in an unrealized loss position. The contractual terms of the
investments do not permit the issuer to settle the security at a price less than the amortized
cost of the investments. Therefore, it is expected that the securities would not be settled at a
price less than the amortized cost of the investments.
Collateralized Mortgage Obligations:
The unrealized losses on our investments in Collateralized Mortgage Obligations which have
ratings of Aa2/AA to Aaa/AAA are generally caused by interest rate increases. Of the 155
investment positions held, approximately 66.5% 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.
Our impairment evaluation as of December 31, 2006 for equity securities resulted in the conclusion
that we do not consider the equity securities to be other than temporarily impaired. Of the 3,555
investment positions held, approximately 14.8% were in an unrealized loss position.
There are certain risks and uncertainties inherent in our impairment methodology, including, but
not limited to, the financial condition of specific industry sectors and the resultant effect on
any 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. Should
we subsequently determine that we do not intend to hold the security until maturity or should we
determine that 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 as a realized
loss for the period in which such determination was made, thereby reducing earnings for such period
by the amount of such realized loss.
53
Gross Realized Losses:
For the year ended December 31, 2007, our gross loss on the sale of fixed maturity and equity
securities amounted to $0.3 million and $5.0 million, respectively. The fair value of the fixed
maturity and equity securities at the time of sale was $33.7 million and $39.6 million,
respectively. A total of $1.2 million of the $5.0 million gross loss on the sale of equity
securities for the year ended December 31, 2007 was a result of the liquidation of one of our
equity portfolios following our decision to change one of our common stock investment managers.
The $1.2 million realized gross loss on the sale of equity securities was in addition to the $1.6
million impairment loss recognized during the three months ended March 31, 2007 upon our initial
decision to change one of our common stock investment managers and no longer hold the securities to
recovery.
For the year ended December 31, 2006, our gross loss on the sale of fixed maturity and equity
securities amounted to $1.7 million and $7.0 million, respectively. The fair value of the fixed
maturity and equity securities at the time of sale was $185.2 million and $40.5 million,
respectively.
Market Risk of Financial Instruments:
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 December 31,
2007 and 2006. 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
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
Hypothetical
|
|
Fair Value after
|
|
Hypothetical Percentage
|
|
|
|
|
|
|
Change in
|
|
Hypothetical
|
|
Increase (Decrease) in
|
|
|
|
|
|
|
Interest
|
|
Changes in
|
|
|
|
|
|
|
|
|
Estimated
|
|
Rates (bp=basis
|
|
Interest
|
|
|
|
|
|
Shareholders
|
|
|
Fair Value
|
|
points)
|
|
Rates
|
|
Fair Value
|
|
Equity
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Available For Sale
|
|
$
|
2,659,197
|
|
|
200 bp decrease
|
|
$
|
2,909,489
|
|
|
|
9.4
|
%
|
|
|
10.5
|
%
|
|
|
|
|
|
|
100 bp decrease
|
|
$
|
2,788,220
|
|
|
|
4.8
|
%
|
|
|
5.4
|
%
|
|
|
|
|
|
|
50 bp decrease
|
|
$
|
2,724,762
|
|
|
|
2.5
|
%
|
|
|
2.7
|
%
|
|
|
|
|
|
|
50 bp increase
|
|
$
|
2,592,046
|
|
|
|
(2.5
|
)%
|
|
|
(2.8
|
)%
|
|
|
|
|
|
|
100 bp increase
|
|
$
|
2,523,607
|
|
|
|
(5.1
|
)%
|
|
|
(5.7
|
)%
|
|
|
|
|
|
|
200 bp increase
|
|
$
|
2,386,092
|
|
|
|
(10.3
|
)%
|
|
|
(11.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Available For Sale
|
|
$
|
2,129,609
|
|
|
200 bp decrease
|
|
$
|
2,313,272
|
|
|
|
8.6
|
%
|
|
|
10.2
|
%
|
|
|
|
|
|
|
100 bp decrease
|
|
$
|
2,226,770
|
|
|
|
4.6
|
%
|
|
|
5.4
|
%
|
|
|
|
|
|
|
50 bp decrease
|
|
$
|
2,178,954
|
|
|
|
2.3
|
%
|
|
|
2.8
|
%
|
|
|
|
|
|
|
50 bp increase
|
|
$
|
2,079,335
|
|
|
|
(2.4
|
)%
|
|
|
(2.8
|
)%
|
|
|
|
|
|
|
100 bp increase
|
|
$
|
2,029,023
|
|
|
|
(4.7
|
)%
|
|
|
(5.6
|
)%
|
|
|
|
|
|
|
200 bp increase
|
|
$
|
1,930,808
|
|
|
|
(9.3
|
)%
|
|
|
(11.1
|
)%
|
LIQUIDITY AND CAPITAL RESOURCES
Philadelphia Consolidated Holding Corp. (PCHC), a holding company whose principal assets currently
consist of 100% of the capital stock of our subsidiaries. PCHCs primary sources of funds are
payments received pursuant to tax allocation agreements with our
Insurance Subsidiaries; dividends from its subsidiaries, and proceeds from the issuance of shares
pursuant to our Stock Purchase and
54
Performance Based Compensation Plans. For the year ended
December 31, 2007, payments to PCHC pursuant to such tax allocation agreements totaled $188.1
million. The payment of dividends to PCHC from our Insurance Subsidiaries is subject to certain
limitations imposed by the insurance laws of the Commonwealth of Pennsylvania and State of Florida.
Accumulated statutory profits of our Insurance Subsidiaries from which dividends may be paid
totaled $1,025.1 million as of December 31, 2007. Of this amount, our Insurance Subsidiaries are
permitted to pay a total of approximately $299.2 million of dividends in 2008 without obtaining
prior approval from the Insurance Commissioner of the Commonwealth of Pennsylvania or State of
Florida (see Business Regulation). During 2007, PCHC received $3.5 million in dividend payments
from our Insurance Subsidiaries. No capital contributions were made by PCHC to our Insurance
Subsidiaries. During 2007, there were no stock repurchases under the stock repurchase
authorization. As of December 31, 2007, the remaining stock repurchase authorization is $45.0
million.
We produced net cash from operations of $534.1 million, $506.8 million and $430.7 million in 2007,
2006 and 2005, 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 to
purchase investments. Cash from operations in 2007 was primarily generated from strong premium
growth during the year due to new business written and strong renewal business retention. Net loss
and loss expense payments were $452.5 million, $313.8 million and $234.7 million in 2007, 2006 and
2005, respectively. Net cash from operations also included cash provided from tax savings from the
issuance of shares pursuant to our stock based compensation plans amounting to $0.8 million, $1.5
million and $7.0 million for 2007, 2006 and 2005, respectively. We believe that we have adequate
liquidity to pay all claims and meet all other cash needs.
We produced $26.5 million of net cash from financing activities during 2007. Cash provided from
financing activities consisted of a
$5.9 million excess tax benefit from the issuance of shares pursuant to our stock based
compensation plans; $8.0 million from our stock purchase plans; $6.6 million from the exercise of
stock options issued under our performance based compensation plan and $6.0 million from the
collection of notes receivable associated with our employee stock purchase plans.
During 2007, $257.6 million of the fixed maturity portfolio principal was received through either
maturity, call option, paydown or sinking fund transactions. Our fixed maturity portfolio cash
flow profile has been structured such that approximately 10% of the portfolio principal as of
December 31, 2007 will be received from maturity, call option, paydown or sinking fund transactions
for each of the next five years through 2012, and in varying percentages thereafter. We estimate
that approximately $297.0 million will be received from these transactions during 2008.
Effective June 29, 2007, we amended our unsecured $50.0 million Credit Agreement (the Credit
Agreement) to extend the maturity date to 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
December 31, 2007, no borrowings were outstanding under the Credit Agreement.
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 December 31, 2007, our Insurance Subsidiaries had no borrowings outstanding, and
their unused borrowing capacity was $708.4 million.
In the normal course of business, we have entered into various reinsurance contracts with unrelated
reinsurers. We participate in such agreements for the purpose of limiting loss exposure and
managing capacity constraints. Reinsurance contracts do not relieve us from our obligations to our
policyholders. To reduce the potential for a write-off of amounts due from reinsurers, we evaluate
the financial condition of our reinsurers and principally contract with large reinsurers that are
rated at least A (Excellent) by A.M. Best Company. Additionally, we proactively seek to collect
the obligations of our reinsurers on a timely basis, and will obtain collateral for balances due
from reinsurers that are not approved by the Pennsylvania and/or Florida Insurance Departments due
to their foreign domiciliary status. This collection effort is supported through the regular
monitoring of reinsurance receivables. As of December 31, 2007, approximately 93.5% of our
reinsurance receivables (excluding amounts ceded to voluntary and mandatory pool mechanisms) are
either with reinsurers rated A (Excellent) or better by A.M. Best Company or are fully
collateralized.
Under certain reinsurance agreements, we are required to maintain investments in trust accounts to
secure our reinsurance obligations (primarily the payment of losses and loss adjustment expenses on
business we do not write directly). As of December 31, 2007, the investment and cash balances in
such trust accounts totaled approximately $1.3 million. In addition, various insurance departments
of
states in which we operate require the deposit of funds to protect policyholders within those
states. As of December 31, 2007, the balance on deposit for the benefit of such policyholders
totaled approximately $15.7 million.
55
Our Insurance Subsidiaries, which operate under intercompany reinsurance pooling agreements, must
have certain levels of surplus to support premium writings. Guidelines of the National Association
of Insurance Commissioners (NAIC) suggest that a property and casualty insurers ratio of annual
statutory net premium written to policyholders surplus should not exceed 3-to-1. The ratio of
combined annual statutory net premium written by our Insurance Subsidiaries to their combined
policyholders surplus was 1.1-to-1.0 and 1.3-to-1.0 for 2007 and 2006, respectively.
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 may ultimately be subjected to be
placed in rehabilitation or liquidation. As of December 31, 2007, our Insurance Subsidiaries
exceeded their minimum risk-based capital requirements as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
Minimum Risk-
|
|
Actual
|
Insurance
|
|
Based Capital
|
|
Statutory
|
Subsidiary
|
|
Requirement
|
|
Surplus
|
PIIC
|
|
|
266.5
|
|
|
|
1,169.0
|
|
PIC
|
|
|
13.8
|
|
|
|
79.0
|
|
LASIC
|
|
|
1.5
|
|
|
|
24.4
|
|
LAIC
|
|
|
0.9
|
|
|
|
26.3
|
|
CONTRACTUAL OBLIGATIONS
We have certain contractual obligations and commitments as of December 31, 2007 which are
summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
(in thousands)
|
|
Contractual Obligations
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
4-5 years
|
|
|
5 years
|
|
Gross Loss and Loss Adjustment Expense Reserves (1)
|
|
$
|
1,431,933
|
|
|
$
|
341,932
|
|
|
$
|
597,359
|
|
|
$
|
346,384
|
|
|
|
$146,258
|
|
Reinsurance Premiums Payable Under Terms of Reinsurance Contracts (2)
|
|
|
109,286
|
|
|
|
109,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Commission Liability
|
|
|
68,786
|
|
|
|
68,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Agent Profit Sharing
|
|
|
33,703
|
|
|
|
6,979
|
|
|
|
20,135
|
|
|
|
5,911
|
|
|
|
678
|
|
Operating Leases
|
|
|
29,199
|
|
|
|
6,217
|
|
|
|
15,179
|
|
|
|
7,280
|
|
|
|
523
|
|
Other Long-Term Contractual Commitments (3)
|
|
|
17,297
|
|
|
|
12,165
|
|
|
|
4,751
|
|
|
|
282
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (4) (5)
|
|
$
|
1,690,204
|
|
|
$
|
545,365
|
|
|
$
|
637,424
|
|
|
$
|
359,857
|
|
|
|
$147,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Although there is typically no minimum contractual commitment with insurance contracts, the
cash flows displayed in the table above represent our best estimate as to amount and timing of
such.
|
|
(2)
|
|
Represents payments based on estimated subject earned premiums under certain reinsurance
contracts.
|
|
(3)
|
|
Represents open commitments under certain limited partnership agreements, information
technology development agreements, corporate sponsorship, renewal rights acquisitions and
Profit Sharing and Savings Incentive Plan arrangements.
|
|
(4)
|
|
As of December 31, 2007, we have recorded a $2.0 million liability for a bonus amount due to
our founder and Chairman under the terms of his employment agreement. This payment is due to
be paid six months after the date of the termination of his employment. Since his date of
termination is uncertain, this liability has been excluded from the above table.
|
|
(5)
|
|
As of December 31, 2007, we have recorded a $0.2 million liability for uncertain tax
positions in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (FIN 48). Due to the uncertain nature
of the timing of future cash flows relating to the liability and the inability to make a
reasonably
|
56
|
|
|
|
|
reliable estimate of the period of settlement of the liability with the related
taxing authority, the liability has been excluded from the above table.
|
INFLATION
Property and casualty insurance premiums are established before the amount of losses and loss
adjustment expenses, or the extent to which inflation may affect such amounts, is known. We attempt
to anticipate the potential impact of inflation in establishing our premiums and reserves.
Substantial future increases in inflation could result in future increases in interest rates,
which, in turn, are likely to result in a decline in the market value of our investment portfolio
and results in unrealized losses and/or reductions in shareholders equity.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
|
|
In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No.
155 Accounting for Certain Hybrid Financial Instruments (SFAS No. 155). Subsequently,
SFAS No. 155 was modified. Under current generally accepted accounting principles, an entity
that holds a financial instrument with an embedded derivative, subject to certain scope
exceptions, must bifurcate the financial instrument, resulting in the host and the embedded
derivative being accounted for separately. SFAS No. 155 permits, but does not require,
entities to account for financial instruments with an embedded derivative at fair value thus
negating the need to bifurcate the instrument between its host and the embedded derivative.
SFAS No. 155 is effective as of the beginning of the first annual reporting period that begins
after September 15, 2006. We adopted SFAS No. 155 on January 1, 2007. The adoption of SFAS
No. 155 did not have a material effect on our financial condition or results of operations.
|
|
|
In July 2006, the FASB released Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48, which is effective for fiscal years beginning
after December 15, 2006, also provides guidance on derecognition, classification, interest and
penalties, accounting for interim periods, disclosure and transition. We adopted FIN 48 on
January 1, 2007. The adoption of FIN 48 did not have a material effect on our financial
condition or results of operations. See Note 10 of the Consolidated Financial Statements for
additional information regarding the adoption of FIN 48.
|
NEW ACCOUNTING PRONOUNCEMENTS
|
|
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS No.
157), which clarifies that the term fair value is intended to represent a market-based
measure, not an entity-specific measure, and gives the highest priority to quoted prices in
active markets (Level 1 inputs) in determining fair value. SFAS No. 157 requires disclosures
about (1) the extent to which companies measure assets and liabilities at fair value, (2) the
methods and assumptions used to measure fair value, and (3) the effect of fair value
measurements on earnings. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007. We are currently in the process of evaluating the impact of SFAS No. 157; however,
we anticipate that SFAS No. 157 will primarily impact the fair value measurement and
disclosures of our investments in equity securities and fixed maturities available for sale.
Our initial assessment is as follows:
|
|
|
|
The fair value of our investments in government securities and equity securities is
primarily measured using a market based valuation methodology primarily using quoted
market prices in active markets (Level 1 inputs per SFAS 157).
|
|
|
|
|
The fair value of our investments in the remainder of our fixed maturities available
for sale is primarily measured using a market based valuation methodology using primarily
vendor pricing (Level 2 inputs per SFAS No. 157).
|
We do not currently anticipate that the adoption of SFAS No. 157 will have a material effect on
our financial position or the results of our operations.
|
|
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, (SFAS No. 159) which permits all entities the option to
elect, at specified election dates, to measure eligible financial instruments at fair value.
An entity must report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date, and recognize upfront costs and
fees related to those items in earnings as incurred and not deferred. SFAS No. 159 applies to
fiscal years beginning after November 15, 2007, with early adoption
|
57
|
|
permitted for an entity
that has also elected to apply the provisions of SFAS No. 157. An entity is prohibited from
retrospectively applying SFAS No. 159, unless it chooses early adoption. SFAS No. 159 also
applies to eligible items existing as of November 15, 2007 (or early adoption date). We are
currently in the process of evaluating the impact of SFAS No. 159; however we do not currently
anticipate electing the fair value option for any of our eligible financial instruments.
|
|
|
In December 2007, the FASB issued Statement No. 141R, Business Combinations (SFAS No.
141R), which revises the accounting for business combination transactions previously
accounted for under SFAS No. 141, Business Combinations (SFAS No. 141), and broadens the
scope of transactions which should be accounted for under this standard. SFAS No. 141R
retains the fundamental requirements of SFAS No. 141 in that the acquisition method of
accounting is still used, and an acquirer must be identified in all business combinations.
SFAS No. 141R applies prospectively to business combinations which the acquisition date is on
or after the beginning of the first annual reporting period beginning on or after December 15,
2008. An entity is prohibited from applying SFAS No. 141R prior to that date. We are
currently in the process of evaluating the impact of SFAS No. 141R.
|
|
|
In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements. an amendment of ARB No. 51 (SFAS No. 160), which
establishes accounting and reporting standards for the non-controlling interests in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 requires that the
ownership interests and the net income of the non-controlling interest be equally identified
from that of the parent on the face of the financial statements. SFAS No. 160 also provides
consistent accounting principles for changes in a parent controlling ownership interest in a
subsidiary, and that any retained non-controlling financial interests in a deconsolidated
subsidiary be measured at fair value. SFAS No. 160 applies to fiscal years beginning on or
after December 15, 2008, and is applied prospectively, except for presentation and disclosure
requirements, which are applied retrospectively for all periods presented. We are currently
in the process of evaluating the impact of SFAS No. 160.
|
58
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 December 31,
2007 and 2006. 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
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
Hypothetical
|
|
Fair Value after
|
|
Hypothetical Percentage
|
|
|
|
|
|
|
Change in
|
|
Hypothetical
|
|
Increase (Decrease) in
|
|
|
|
|
|
|
Interest
|
|
Changes in
|
|
|
|
|
|
|
|
|
Estimated
|
|
Rates (bp=basis
|
|
Interest
|
|
|
|
|
|
Shareholders'
|
|
|
Fair Value
|
|
points)
|
|
Rates
|
|
Fair Value
|
|
Equity
|
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Available For Sale
|
|
$
|
2,659,197
|
|
|
200 bp decrease
|
|
$
|
2,909,489
|
|
|
|
9.4
|
%
|
|
|
10.5
|
%
|
|
|
|
|
|
|
100 bp decrease
|
|
$
|
2,788,220
|
|
|
|
4.8
|
%
|
|
|
5.4
|
%
|
|
|
|
|
|
|
50 bp decrease
|
|
$
|
2,724,762
|
|
|
|
2.5
|
%
|
|
|
2.7
|
%
|
|
|
|
|
|
|
50 bp increase
|
|
$
|
2,592,046
|
|
|
|
(2.5
|
)%
|
|
|
(2.8
|
)%
|
|
|
|
|
|
|
100 bp increase
|
|
$
|
2,523,607
|
|
|
|
(5.1
|
)%
|
|
|
(5.7
|
)%
|
|
|
|
|
|
|
200 bp increase
|
|
$
|
2,386,092
|
|
|
|
(10.3
|
)%
|
|
|
(11.5
|
)%
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Available For Sale
|
|
$
|
2,129,609
|
|
|
200 bp decrease
|
|
$
|
2,313,272
|
|
|
|
8.6
|
%
|
|
|
10.2
|
%
|
|
|
|
|
|
|
100 bp decrease
|
|
$
|
2,226,770
|
|
|
|
4.6
|
%
|
|
|
5.4
|
%
|
|
|
|
|
|
|
50 bp decrease
|
|
$
|
2,178,954
|
|
|
|
2.3
|
%
|
|
|
2.8
|
%
|
|
|
|
|
|
|
50 bp increase
|
|
$
|
2,079,335
|
|
|
|
(2.4
|
)%
|
|
|
(2.8
|
)%
|
|
|
|
|
|
|
100 bp increase
|
|
$
|
2,029,023
|
|
|
|
(4.7
|
)%
|
|
|
(5.6
|
)%
|
|
|
|
|
|
|
200 bp increase
|
|
$
|
1,930,808
|
|
|
|
(9.3
|
)%
|
|
|
(11.1
|
)%
|
59
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Philadelphia Consolidated Holding Corp. and Subsidiaries
Index to Financial Statements and Schedules
|
|
|
|
|
Financial Statements
|
|
Page
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
|
|
65
|
|
|
|
|
|
|
|
|
|
66-92
|
|
|
|
|
|
|
Financial Statement Schedules:
|
|
|
|
|
60
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Of Philadelphia Consolidated Holding Corp.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations and comprehensive income, statements of changes in shareholders equity,
and statements of cash flows, present fairly, in all material respects, the financial position of
Philadelphia Consolidated Holding Corp. and its subsidiaries at December 31, 2007 and 2006, and the
results of their operations and their cash flows for each of the three years in the period ended
December 31, 2007 in conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedules listed in the
accompanying index appearing under Item 15
present fairly, in all material respects, the
information set forth therein when read in conjunction with the related consolidated financial
statements. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on criteria established in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Companys management is responsible for these financial statements
and financial statement schedules, for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying index appearing under Item 9A. Our responsibility is to express
opinions on these financial statements, on the financial statement schedules, and on the Companys
internal control over financial reporting based on our integrated audits. We conducted our audits
in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our audits of the
financial statements included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in
which it accounts for share-based compensation in 2006.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers, LLP
Philadelphia, PA
February 22, 2008
61
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Investments:
|
|
|
|
|
|
|
|
|
Fixed Maturities Available for Sale at Market (Amortized Cost $2,639,471 and $2,136,231)
|
|
$
|
2,659,197
|
|
|
$
|
2,129,609
|
|
Equity Securities at Market (Cost $322,877 and $259,184)
|
|
|
356,026
|
|
|
|
304,033
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
3,015,223
|
|
|
|
2,433,642
|
|
Cash and Cash Equivalents
|
|
|
106,342
|
|
|
|
108,671
|
|
Accrued Investment Income
|
|
|
24,964
|
|
|
|
20,083
|
|
Premiums Receivable
|
|
|
378,217
|
|
|
|
346,836
|
|
Prepaid Reinsurance Premiums and Reinsurance Receivables
|
|
|
280,110
|
|
|
|
272,798
|
|
Deferred Income Taxes
|
|
|
42,855
|
|
|
|
26,657
|
|
Deferred Acquisition Costs
|
|
|
184,446
|
|
|
|
158,805
|
|
Property and Equipment, Net
|
|
|
26,330
|
|
|
|
26,999
|
|
Other Assets
|
|
|
41,451
|
|
|
|
44,046
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
4,099,938
|
|
|
$
|
3,438,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES and SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Policy Liabilities and Accruals:
|
|
|
|
|
|
|
|
|
Unpaid Loss and Loss Adjustment Expenses
|
|
$
|
1,431,933
|
|
|
$
|
1,283,238
|
|
Unearned Premiums
|
|
|
847,485
|
|
|
|
759,358
|
|
|
|
|
|
|
|
|
Total Policy Liabilities and Accruals
|
|
|
2,279,418
|
|
|
|
2,042,596
|
|
Premiums Payable
|
|
|
97,674
|
|
|
|
66,827
|
|
Other Liabilities
|
|
|
175,373
|
|
|
|
161,847
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,552,465
|
|
|
|
2,271,270
|
|
|
|
|
|
|
|
|
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, 72,087,287 and 70,848,482
Shares Issued and Outstanding
|
|
|
423,379
|
|
|
|
376,986
|
|
Notes Receivable from Shareholders
|
|
|
(19,595
|
)
|
|
|
(17,074
|
)
|
Accumulated Other Comprehensive Income
|
|
|
34,369
|
|
|
|
24,848
|
|
Retained Earnings
|
|
|
1,109,320
|
|
|
|
782,507
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
|
1,547,473
|
|
|
|
1,167,267
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
4,099,938
|
|
|
$
|
3,438,537
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
62
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earned Premiums
|
|
$
|
1,379,243
|
|
|
$
|
1,169,302
|
|
|
$
|
976,647
|
|
Net Investment Income
|
|
|
117,224
|
|
|
|
91,699
|
|
|
|
63,709
|
|
Net Realized Investment Gain (Loss)
|
|
|
29,566
|
|
|
|
(9,861
|
)
|
|
|
9,609
|
|
Other Income
|
|
|
3,561
|
|
|
|
2,630
|
|
|
|
1,464
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
1,529,594
|
|
|
|
1,253,770
|
|
|
|
1,051,429
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and Loss Adjustment Expenses
|
|
|
678,759
|
|
|
|
497,288
|
|
|
|
711,706
|
|
Net Reinsurance Recoveries
|
|
|
(59,806
|
)
|
|
|
(29,076
|
)
|
|
|
(207,700
|
)
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
618,953
|
|
|
|
468,212
|
|
|
|
504,006
|
|
Acquisition Costs and Other Underwriting Expenses
|
|
|
413,103
|
|
|
|
338,267
|
|
|
|
263,759
|
|
Other Operating Expenses
|
|
|
12,241
|
|
|
|
12,637
|
|
|
|
17,124
|
|
Goodwill Impairment Loss
|
|
|
|
|
|
|
|
|
|
|
25,724
|
|
|
|
|
|
|
|
|
|
|
|
Total Losses and Expenses
|
|
|
1,044,297
|
|
|
|
819,116
|
|
|
|
810,613
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
485,297
|
|
|
|
434,654
|
|
|
|
240,816
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense (Benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
179,808
|
|
|
|
155,404
|
|
|
|
89,510
|
|
Deferred
|
|
|
(21,324
|
)
|
|
|
(9,599
|
)
|
|
|
(5,382
|
)
|
|
|
|
|
|
|
|
|
|
|
Total Income Tax Expense
|
|
|
158,484
|
|
|
|
145,805
|
|
|
|
84,128
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
326,813
|
|
|
$
|
288,849
|
|
|
$
|
156,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss), Net of Tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
Holding Gain (Loss) Arising during Year
|
|
$
|
28,739
|
|
|
$
|
21,140
|
|
|
$
|
(16,252
|
)
|
Reclassification Adjustment
|
|
|
(19,218
|
)
|
|
|
6,410
|
|
|
|
(6,246
|
)
|
|
|
|
|
|
|
|
|
|
|
Other Comprehensive Income (Loss)
|
|
|
9,521
|
|
|
|
27,550
|
|
|
|
(22,498
|
)
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
$
|
336,334
|
|
|
$
|
316,399
|
|
|
$
|
134,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Average Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Basic
|
|
$
|
4.64
|
|
|
$
|
4.14
|
|
|
$
|
2.29
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Diluted
|
|
$
|
4.40
|
|
|
$
|
3.93
|
|
|
$
|
2.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Common Shares Outstanding
|
|
|
70,381,631
|
|
|
|
69,795,947
|
|
|
|
68,551,572
|
|
Weighted-Average Share Equivalents Outstanding
|
|
|
3,845,044
|
|
|
|
3,674,121
|
|
|
|
4,533,807
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Shares and Share Equivalents Outstanding
|
|
|
74,226,675
|
|
|
|
73,470,068
|
|
|
|
73,085,379
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
63
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Year
|
|
|
70,848,482
|
|
|
|
69,266,016
|
|
|
|
66,821,751
|
|
Issuance of Shares Pursuant to Stock Purchase Plans, net
|
|
|
491,416
|
|
|
|
613,320
|
|
|
|
1,589,406
|
|
Issuance of Shares Pursuant to Stock based Compensation Plans
|
|
|
747,389
|
|
|
|
969,146
|
|
|
|
854,859
|
|
|
|
|
|
|
|
|
|
|
|
Balance at End of Year
|
|
|
72,087,287
|
|
|
|
70,848,482
|
|
|
|
69,266,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Year
|
|
$
|
376,986
|
|
|
$
|
332,757
|
|
|
$
|
292,856
|
|
Issuance of Shares Pursuant to Stock Purchase Plans
|
|
|
16,448
|
|
|
|
19,521
|
|
|
|
27,817
|
|
Effects of Issuance of Shares Pursuant to Stock based Compensation Plans
|
|
|
29,155
|
|
|
|
24,301
|
|
|
|
11,939
|
|
Other
|
|
|
790
|
|
|
|
407
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
Balance at End of Year
|
|
|
423,379
|
|
|
|
376,986
|
|
|
|
332,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Receivable from Shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Year
|
|
|
(17,074
|
)
|
|
|
(7,217
|
)
|
|
|
(5,465
|
)
|
Notes Receivable Issued Pursuant to Employee Stock Purchase Plans
|
|
|
(8,466
|
)
|
|
|
(12,391
|
)
|
|
|
(4,095
|
)
|
Collection of Notes Receivable
|
|
|
5,945
|
|
|
|
2,534
|
|
|
|
2,343
|
|
|
|
|
|
|
|
|
|
|
|
Balance at End of Year
|
|
|
(19,595
|
)
|
|
|
(17,074
|
)
|
|
|
(7,217
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss), Net of Deferred Income Taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Year
|
|
|
24,848
|
|
|
|
(2,702
|
)
|
|
|
19,796
|
|
Other Comprehensive Income (Loss), Net of Taxes
|
|
|
9,521
|
|
|
|
27,550
|
|
|
|
(22,498
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at End of Year
|
|
|
34,369
|
|
|
|
24,848
|
|
|
|
(2,702
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained Earnings:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Year
|
|
|
782,507
|
|
|
|
493,658
|
|
|
|
336,970
|
|
Net Income
|
|
|
326,813
|
|
|
|
288,849
|
|
|
|
156,688
|
|
|
|
|
|
|
|
|
|
|
|
Balance at End of Year
|
|
|
1,109,320
|
|
|
|
782,507
|
|
|
|
493,658
|
|
|
|
|
|
|
|
|
|
|
|
Total Shareholders Equity
|
|
$
|
1,547,473
|
|
|
$
|
1,167,267
|
|
|
$
|
816,496
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
64
PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
326,813
|
|
|
$
|
288,849
|
|
|
$
|
156,688
|
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized Investment (Gain) Loss
|
|
|
(29,566
|
)
|
|
|
9,861
|
|
|
|
(9,609
|
)
|
Amortization of Investment Premiums, Net of Discount
|
|
|
6,131
|
|
|
|
8,773
|
|
|
|
11,707
|
|
Amortization of Intangible Assets
|
|
|
2,948
|
|
|
|
802
|
|
|
|
|
|
Depreciation
|
|
|
8,105
|
|
|
|
7,159
|
|
|
|
4,798
|
|
Deferred Income Tax Benefit
|
|
|
(21,324
|
)
|
|
|
(9,599
|
)
|
|
|
(5,382
|
)
|
Change in Premiums Receivable
|
|
|
(31,381
|
)
|
|
|
(60,058
|
)
|
|
|
(57,276
|
)
|
Change in Prepaid Reinsurance Premiums and Reinsurance Receivables, Net of Funds
Held Payable to Reinsurer
|
|
|
(7,312
|
)
|
|
|
84,229
|
|
|
|
(58,296
|
)
|
Change in Accrued Investment Income
|
|
|
(4,881
|
)
|
|
|
(1,988
|
)
|
|
|
(4,620
|
)
|
Change in Deferred Acquisition Costs
|
|
|
(25,641
|
)
|
|
|
(29,319
|
)
|
|
|
(37,839
|
)
|
Goodwill Impairment Loss
|
|
|
|
|
|
|
|
|
|
|
25,724
|
|
Change in Income Taxes Payable
|
|
|
1,432
|
|
|
|
8,555
|
|
|
|
13,202
|
|
Change in Other Assets
|
|
|
10,963
|
|
|
|
3,105
|
|
|
|
(909
|
)
|
Change in Unpaid Loss and Loss Adjustment Expenses
|
|
|
148,695
|
|
|
|
37,475
|
|
|
|
249,096
|
|
Change in Unearned Premiums
|
|
|
88,127
|
|
|
|
127,890
|
|
|
|
99,619
|
|
Change in Other Liabilities
|
|
|
50,933
|
|
|
|
27,231
|
|
|
|
36,338
|
|
Fair Value of Stock Based Compensation
|
|
|
16,001
|
|
|
|
12,511
|
|
|
|
551
|
|
Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans
|
|
|
|
|
|
|
|
|
|
|
6,952
|
|
Excess Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans
|
|
|
(5,925
|
)
|
|
|
(8,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
534,118
|
|
|
|
506,830
|
|
|
|
430,744
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Sales of Investments in Fixed Maturities
|
|
|
203,409
|
|
|
|
320,878
|
|
|
|
185,576
|
|
Proceeds from Maturity of Investments in Fixed Maturities
|
|
|
257,562
|
|
|
|
274,722
|
|
|
|
200,615
|
|
Proceeds from Sales of Investments in Equity Securities
|
|
|
237,176
|
|
|
|
93,587
|
|
|
|
160,158
|
|
Cost of Fixed Maturities Acquired
|
|
|
(969,946
|
)
|
|
|
(972,532
|
)
|
|
|
(883,560
|
)
|
Cost of Equity Securities Acquired
|
|
|
(270,964
|
)
|
|
|
(196,096
|
)
|
|
|
(201,333
|
)
|
Settlement of Cash Flow Hedge
|
|
|
|
|
|
|
|
|
|
|
(3,148
|
)
|
Purchase of Property and Equipment, Net
|
|
|
(7,436
|
)
|
|
|
(10,272
|
)
|
|
|
(7,403
|
)
|
Purchase of Intangibles
|
|
|
(12,726
|
)
|
|
|
(3,162
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used for Investing Activities
|
|
|
(562,925
|
)
|
|
|
(492,875
|
)
|
|
|
(549,095
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Loans Payable
|
|
|
|
|
|
|
|
|
|
|
11,381
|
|
Repayments on Loans Payable
|
|
|
|
|
|
|
|
|
|
|
(44,787
|
)
|
Proceeds from Exercise of Employee Stock Options
|
|
|
6,621
|
|
|
|
6,697
|
|
|
|
4,582
|
|
Proceeds from Collection of Shareholder Notes Receivable
|
|
|
5,951
|
|
|
|
2,534
|
|
|
|
2,343
|
|
Proceeds from Shares Issued Pursuant to Stock Purchase Plans
|
|
|
7,981
|
|
|
|
7,130
|
|
|
|
23,721
|
|
Excess Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans
|
|
|
5,925
|
|
|
|
8,646
|
|
|
|
|
|
Cost of Shares Withheld to Satisfy Minimum Required Tax Withholding Obligation Arising
Upon Exchange of Options
|
|
|
|
|
|
|
(4,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided (Used) by Financing Activities
|
|
|
26,478
|
|
|
|
20,331
|
|
|
|
(2,760
|
)
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
(2,329
|
)
|
|
|
34,286
|
|
|
|
(121,111
|
)
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
108,671
|
|
|
|
74,385
|
|
|
|
195,496
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
106,342
|
|
|
$
|
108,671
|
|
|
$
|
74,385
|
|
|
|
|
|
|
|
|
|
|
|
Cash Paid During the Year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Taxes
|
|
$
|
177,073
|
|
|
$
|
146,899
|
|
|
$
|
73,903
|
|
Interest
|
|
|
|
|
|
|
|
|
|
|
165
|
|
Non-Cash Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Shares Pursuant to Employee Stock Purchase Plans in Exchange for Notes
Receivable
|
|
$
|
8,466
|
|
|
$
|
12,391
|
|
|
$
|
4,095
|
|
The accompanying notes are an integral part of the consolidated financial statements.
65
Philadelphia Consolidated Holding Corp. and Subsidiaries
Notes to Consolidated Financial Statements
1. General Information and Significant Accounting Policies
Philadelphia Consolidated Holding Corp. (Philadelphia Insurance), and its subsidiaries
(collectively the Company) doing business as Philadelphia Insurance Companies, include:
|
|
Four property and casualty insurance companies, Philadelphia Indemnity Insurance Company
(PIIC) and Philadelphia Insurance Company (PIC), which are domiciled in Pennsylvania; and
Liberty American Select Insurance Company (LASIC) and Liberty American Insurance Company
(LAIC), which are domiciled in Florida (collectively the Insurance Subsidiaries);
|
|
|
|
An underwriting manager, Maguire Insurance Agency, Inc.;
|
|
|
|
A managing general agency, Liberty American Insurance Services, Inc.;
|
|
|
|
A premium finance company, Liberty American Premium Finance Company; and
|
|
|
|
An investment subsidiary, PCHC Investment Corp.
|
The Company designs, markets, and underwrites specialty commercial and personal property and
casualty insurance products for select target industries or niches including, among others,
nonprofit and religious organizations; sports and recreation centers; the rental car, automobile
leasing and the antique and collector car industries; special property for large commercial
accounts; select classes of professional liability; and casualty insurance products for the
homeowners and manufactured housing markets. All marketing, underwriting, claims management,
investment, and general administration is provided by the underwriting manager and managing general
agency.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company prepared in conformity
with accounting principles generally accepted in the United States of America (GAAP). All
significant intercompany balances and transactions have been eliminated in consolidation. The
preparation of financial statements requires making estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(a) Investments
Fixed maturity investments, classified as Available for Sale, are carried at market value with the
change in unrealized appreciation (depreciation) credited or charged directly to shareholders
equity, net of applicable deferred income taxes. Income on fixed maturities is recognized on the
accrual basis.
The carrying amount for the Companys investments approximates their estimated fair value. The
Companys external fixed income investment manager provides pricing of the Companys investments
based on a pricing methodology approved by the investment managers pricing committee. Pricing is
primarily obtained from market vendors based on a pre-established provider list.
For non-investment grade structured securities for which a vendor price is not available, broker
pricing is obtained 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 independent vendors
and brokers in pricing these securities may include: cash flows, collateral performance including
delinquencies, default, and recoveries and any market clearing activity and/or liquidity
circumstances in the security or other benchmark securities that may have occurred since the prior
month-end pricing period.
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.
66
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 year), refinancing incentive (current level
of interest rates), economic activity (including housing turnover) and burnout/seasoning (the term
and age of the underlying collateral).
Our total investments include $1.0 million and $3.3 million in securities as of December 31, 2007
and 2006, respectively, for which there is no readily available independent market price.
The decision to purchase or sell investments is based on managements assessment of various factors
such as foreseeable economic conditions, including current interest rates and the interest rate
risk, and the liquidity and capital positions of the Company.
Investments in fixed maturities are adjusted for amortization of premiums and accretion of
discounts to maturity date, except for asset backed, mortgage pass-through and collateralized
mortgage obligation securities which are adjusted for amortization of premiums and accretion of
discounts over their estimated lives. Certain asset backed, mortgage pass-through and
collateralized mortgage obligation security repayment patterns will change based on interest rate
movements and, accordingly, could impact future investment income if the reinvestment of the
repayment amounts are at lower interest rates than the underlying securities. Asset backed,
mortgage pass-through and collateralized mortgage obligation securities, on a cost basis, amounted
to $199.3 million, $604.3 million and $329.5 million, respectively, as of December 31, 2007 and
202.1 million, $425.5 million and $293.1 million, respectively, as of December 31, 2006.
Equity securities are carried at market value with the change in unrealized appreciation
(depreciation) credited or charged directly to shareholders equity, net of applicable deferred
income taxes.
Realized investment gains and losses are calculated on the specific identification basis and
recorded as income when the securities are sold.
The Company regularly performs impairment reviews with respect to its investments. For investments
other than interests in securitized assets, these reviews include identifying any security whose
fair value is below its cost and an analysis of securities meeting predetermined impairment
thresholds to determine whether such decline is other than temporary. If the Company does not
intend to hold a security to maturity or determines a decline in value to be other than temporary,
the cost basis of the security is written down to its fair value with the amount of the write down
included in earnings as a realized investment loss in the period the impairment arose. This
evaluation resulted in non-cash realized investment losses of $7.9 million, $8.8 million and $2.2
million for the years ended December 31, 2007, 2006 and 2005, respectively. The 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
Financial Accounting Standards Board. This evaluation resulted in no non-cash realized investment
losses for the years ended December 31, 2007, 2006 or 2005.
(b) Cash Equivalents
Cash equivalents, consisting of fixed maturity investments with maturities of three months or less
when purchased and money market funds, are stated at market value.
(c) Deferred Acquisition Costs
Policy acquisition costs, which include commissions (net of ceding commissions), premium taxes,
fees, and certain other costs of underwriting policies, are deferred and amortized over the same
period in which the related premiums are earned. Deferred acquisition costs are limited to the
estimated amounts recoverable from future income, including anticipated investment income, after
providing for losses and expenses included in future income that are expected to be incurred, based
upon historical and current experience. If such costs are estimated to be unrecoverable, they are
expensed.
67
(d) Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over the
estimated useful lives of the respective assets. Costs incurred in developing information systems
technology are capitalized and included in property and equipment. These costs are amortized over
their useful lives from the dates the systems technology becomes operational. Upon disposal of
assets, the cost and related accumulated depreciation are removed from the accounts, and the
resulting gain or loss is reflected in earnings. The carrying value of property and equipment is
reviewed for recoverability including an evaluation of the estimated useful lives of such assets.
(e) Other Intangible Assets
Other intangible assets are carried in the Consolidated Balance Sheet as a component of Other
Assets. Other intangible assets consist of rights with respect to the renewals of insurance
policies and a trade name which were purchased during 2007 and 2006. As of December 31, 2007,
total gross intangible assets amounted to $27.0 million, and accumulated amortization amounted to
$3.2 million. As of December 31, 2006, total gross intangible assets amounted to $15.3 million, and
accumulated amortization amounted to $0.8 million. Renewal rights are being amortized over a
period of 10-12 years, and the trade name is being amortized over a period of 3 years. The
aggregate amortization expense of other intangible assets was $2.4 million and $0.8 million for the
years ended December 31, 2007 and 2006, respectively. The Company anticipates that the aggregate
amortization expense of other intangible assets will be approximately $2.2 million per year for
each of the next five succeeding years. This amount is subject to change based upon the reviews of
recoverability and useful lives performed at least annually.
(f) 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 ultimate claims liability is a complex imprecise process, requiring
the use of informed estimates and judgments using data currently available. The liability includes
an amount determined on the basis of claim adjusters evaluations with respect to insured events
that have occurred and an amount for losses incurred that have not been reported to the Company. In
some cases significant periods of time, up to several years or more, may elapse between the
occurrence of an insured loss and the reporting of such to the Company. Estimates for unpaid loss
and loss adjustment expenses are based upon 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 at December 31, 2007, the related adjustments could have a
material adverse impact on the Companys financial condition and results of operations.
(g) Premiums
Premiums are earned on a pro-rata basis over the terms of the policies. Premiums applicable to the
unexpired terms of the policies in-force are reported as unearned premiums. The Company records an
allowance for doubtful accounts for premiums receivable balances estimated to be uncollectible. As
of December 31, 2007 and 2006, the allowance for doubtful accounts amounted to $0.5 million and
$0.3 million, respectively.
(h) Reinsurance Ceded
In the normal course of business, the Company seeks to reduce the loss that may arise from events
that cause unfavorable underwriting results by reinsuring certain levels of risk in various areas
of exposure with reinsurers. Amounts recoverable from reinsurers are estimated in a manner
consistent with the reinsured policy. Amounts for reinsurance assets and liabilities are reported
gross.
Certain of the Companys reinsurance contracts have reinstatement or additional premium provisions
under which the Company must pay reinstatement or additional reinsurance premiums to reinstate
coverage provisions upon utilization of initial reinsurance coverage. The Company accrues
reinstatement and additional premiums based on ultimate loss estimates. During the years ended
December 31, 2007 and 2006, the Company accrued $5.0 million and $5.3 million, respectively, of
additional reinsurance premium under its casualty excess of loss reinsurance treaties as a result
of changes in ultimate loss estimates.
68
(i) Assessments
The Insurance Subsidiaries are subject to state guaranty fund assessments, which provide for the
payment of covered claims or other insurance obligations from insurance company insolvencies, and
other assessments from state insurance facilities. Each state has enacted legislation establishing
guaranty funds and other insurance activity related assessments resulting in a variety of
assessment methodologies. Expense for guaranty fund and other state insurance facility assessments
are recognized when it is probable that an assessment will be imposed, the obligatory event has
occurred, and the amount of the assessment is reasonably estimatable. Any related policyholder
surcharge receivable is accrued as the related premium is written.
(j) Stock Based Compensation Plans
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share Based Payment (SFAS 123(R)) using the modified prospective transition
method, which requires the measurement and recognition of compensation expense for all share-based
payment awards made to the Companys employees and directors including stock options, stock settled
appreciation rights (SARS), restricted stock and employee and director stock purchases related to
the Employee Stock Purchase Plan, the Nonqualified Employee Stock Purchase Plan and the Directors
Stock Purchase Plan based on fair values. The Companys financial statements as of and for the
years ended December 31, 2007 and 2006 reflect the impact of SFAS 123(R). In accordance with the
modified prospective transition method, the Companys financial statements for prior periods have
not been restated to reflect, and do not include, the impact of SFAS 123(R). Share-based
compensation expense recognized is based on the value of the portion of share-based payment awards
that is ultimately expected to vest.
The Companys policy with respect to issuance of shares pursuant to its stock based compensation
plan is to first utilize any available treasury shares, and then issue new shares as needed.
(k) Liability for Preferred Agent Profit Sharing
The Companys preferred agents are eligible to receive profit sharing based upon achieving minimum
premium production thresholds and profitability results for their business placed during a
particular contract year with the Company. The ultimate amount of profit sharing may not be known
until the final contractual loss evaluation of the profit sharing is completed 6.5 years after the
contract year business has been written. The Company estimates the liability for this profit
sharing based upon the contractual provisions of the profit sharing agreement and the Companys
actual historical profit sharing payout. As of December 31, 2007, the Company accrued a profit
sharing liability of $33.7 million, of which $32.2 million relates to business written for contract
years commencing January 1, 2004 and subsequent. As of December 31, 2006, the Company accrued a
profit sharing liability of $21.9 million, of which $20.6 million relates to business written for
contract years commencing January 1, 2003 and subsequent.
(l) Income Taxes
The Company files a consolidated federal income tax return. Deferred income taxes are recognized
for the tax consequences of temporary differences by applying enacted statutory tax rates
applicable to the differences between the financial statement carrying amounts and the tax bases of
existing assets and liabilities. The effect on deferred taxes for a change in tax rates is
recognized in income in the period that includes the enactment date.
(m) Earnings Per Share
Basic earnings per share has been calculated by dividing net income by the weighted-average common
shares outstanding. Diluted earnings per share has been calculated by dividing net income by the
weighted-average common shares outstanding and the weighted-average share equivalents outstanding.
(n) 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 year was $15.5 million, $11.4 million and $(8.8) million in 2007, 2006 and 2005,
respectively. The related tax effect of Reclassification Adjustments was $(10.3) million, $3.5
million and $(3.4) million in 2007, 2006 and 2005, respectively.
69
(o) Recently Adopted Accounting Pronouncements
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In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No.
155 Accounting for Certain Hybrid Financial Instruments (SFAS No. 155). Subsequently,
SFAS No. 155 was modified. Under current generally accepted accounting principles, an entity
that holds a financial instrument with an embedded derivative, subject to certain scope
exceptions, must bifurcate the financial instrument, resulting in the host and the embedded
derivative being accounted for separately. SFAS No. 155 permits, but does not require,
entities to account for financial instruments with an embedded derivative at fair value thus
negating the need to bifurcate the instrument between its host and the embedded derivative.
SFAS No. 155 is effective as of the beginning of the first annual reporting period that begins
after September 15, 2006. The Company adopted SFAS No. 155 on January 1, 2007. The adoption
of SFAS No. 155 did not have a material effect on the financial condition or results of
operations of the Company.
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In July 2006, the FASB released Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in accordance with SFAS No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48, which is effective for fiscal years beginning
after December 15, 2006, also provides guidance on derecognition, classification, interest and
penalties, accounting for interim periods, disclosure and transition. The Company adopted FIN
48 on January 1, 2007. The adoption of FIN 48 did not have a material effect on the financial
condition or results of operations of the Company. See Note 10 of the Consolidated Financial
Statements for additional information regarding the adoption of FIN 48.
|
(p) New Accounting Pronouncements
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In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS No.
157), which clarifies that the term fair value is intended to represent a market-based
measure, not an entity-specific measure, and gives the highest priority to quoted prices in
active markets (Level 1 inputs) in determining fair value. SFAS No. 157 requires disclosures
about (1) the extent to which companies measure assets and liabilities at fair value, (2) the
methods and assumptions used to measure fair value, and (3) the effect of fair value
measurements on earnings. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007. The Company is currently in the process of evaluating the impact of SFAS No. 157;
however, it anticipates that SFAS No. 157 will primarily impact the fair value measurement and
disclosures of its investments in equity securities and fixed maturities available for sale.
The Companys initial assessment is as follows:
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The fair value of its investments in government securities and equity securities is
primarily measured using a market based valuation methodology primarily using quoted
market prices in active markets (Level 1 inputs per SFAS 157).
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|
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The fair value of its investments in the remainder of its fixed maturities available
for sale is primarily measured using a market based valuation methodology using primarily
matrix pricing (Level 2 inputs per SFAS No. 157) and in certain cases, valuation models
using its own inputs (Level 3 inputs per SFAS 157)..
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The Company does not currently anticipate that the adoption of SFAS No. 157 will have a material
effect on its financial position or the results of its operations.
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In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, (SFAS No. 159) which permits all entities the option to
elect, at specified election dates, to measure eligible financial instruments at fair value.
An entity must report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date, and recognize upfront costs and
fees related to those items in earnings as incurred and not deferred. SFAS No. 159 applies to
fiscal years beginning after November 15, 2007, with early adoption permitted for an entity
that has also elected to apply the provisions of SFAS No. 157. An entity is prohibited from
retrospectively applying SFAS No. 159, unless it chooses early adoption. SFAS No. 159 also
applies to eligible items existing as of November 15, 2007 (or early adoption date). The
Company is currently in the process of evaluating the impact of SFAS No. 159; however it does
not currently anticipate electing the fair value option for any of its eligible financial
instruments.
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In December 2007, the FASB issued Statement No. 141R, Business Combinations (SFAS No.
141R), which revises the accounting for business combination transactions previously
accounted for under SFAS No. 141, Business Combinations (SFAS No. 141), and broadens the
scope of transactions which should be accounted for under this standard. SFAS No. 141R
retains the fundamental requirements of SFAS No. 141 in that the acquisition method of
accounting is still used, and an acquirer
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70
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must be identified in all business combinations. SFAS No. 141R applies prospectively to
business combinations which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008. An entity is prohibited from
applying SFAS No. 141R prior to that date. The Company is currently in the process of evaluating
the impact of SFAS No. 141R.
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In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in
Consolidated Financial Statements. an amendment of ARB No. 51 (SFAS No. 160), which
establishes accounting and reporting standards for the non-controlling interests in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 requires that the
ownership interests and the net income of the non-controlling interest be equally identified
from that of the parent on the face of the financial statements. SFAS No. 160 also provides
consistent accounting principles for changes in a parent controlling ownership interest in a
subsidiary, and that any retained non-controlling financial interests in a deconsolidated
subsidiary be measured at fair value. SFAS No. 160 applies to fiscal years beginning on or
after December 15, 2008, and is applied prospectively, except for presentation and disclosure
requirements, which are applied retrospectively for all periods presented. The Company is
currently in the process of evaluating the impact of SFAS No. 160.
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2. Statutory Information
Accounting Principles
: GAAP differs in certain respects from Statutory Accounting Principles
(SAP) prescribed or permitted by the Insurance Department of the Commonwealth of Pennsylvania
and/or the State of Florida. The principal differences between SAP and GAAP are as follows:
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Under SAP, investments in debt securities are carried at amortized cost, while under GAAP,
investments in debt securities classified as Available for Sale are carried at fair value.
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Under SAP, policy acquisition costs, such as commissions, premium taxes, fees, and other
costs of underwriting policies are charged to current operations as incurred, while under
GAAP, such costs are deferred and amortized on a pro-rata basis over the same period in which
the related premiums are earned.
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Under SAP, certain assets, designated as Non-admitted Assets (such as prepaid expenses) are
charged against surplus.
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Under SAP, net deferred income tax assets are admitted following the application of certain
criteria, with the resulting admitted deferred tax amount being credited directly to
policyholder surplus.
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Under SAP, premiums receivable are considered non-admitted if determined to be uncollected
based upon aging criteria as defined in SAP.
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Under SAP, the costs and related policyholder surcharge receivables for guaranty funds and
other assessments are recorded based on managements estimate of the ultimate liability and
related ultimate policyholder surcharge receivable, while under GAAP, such costs are accrued
when the liability is probable and reasonably estimatable, and the related policyholder
surcharge receivable is accrued as the related premium is written.
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Under SAP, unpaid losses and loss adjustment expenses and unearned premiums are reported net
of the effects of reinsurance transactions, under GAAP, unpaid loss and loss adjustment
expenses and unearned premiums are reported gross of reinsurance.
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Financial Information
: The combined statutory capital and surplus of the Insurance Subsidiaries as
of December 31, 2007 and 2006 was $1,298.8 million and $1,007.5 million, respectively. Combined
statutory net income for the years ended December 31, 2007, 2006 and 2005 was $299.2 million,
$270.9 million and $155.5 million, respectively. The Company made no capital contributions to the
Insurance Subsidiaries during the years ended December 31, 2007 or 2006.
Dividend Restrictions
: The Insurance Subsidiaries are subject to various regulatory restrictions
which limit the maximum amount of annual shareholder dividends permitted to be paid. The maximum
dividends which the Insurance Subsidiaries are permitted to pay to Philadelphia Insurance during
2008 without prior approval is $299.2 million. During 2007, PCHC received $3.5 million in dividend
payments from its Insurance Subsidiaries. During 2006, PCHC received no dividend payments from its
Insurance Subsidiaries.
Risk-Based Capital
: Risk-based capital is a method developed by the National Association of
Insurance Commissioners (NAIC) designed to measure the acceptable amount of capital and surplus
an insurer should have based on the inherent specific risks of each
71
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. As of December 31, 2007, the Companys Insurance Subsidiaries exceeded their
minimum risk-based capital requirements as follows (dollars in millions):
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|
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Minimum Risk-Based
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Actual Statutory
|
Insurance Subsidiary
|
|
Capital Requirement
|
|
Surplus
|
PIIC
|
|
|
266.5
|
|
|
|
1,169.0
|
|
PIC
|
|
|
13.8
|
|
|
|
79.0
|
|
LASIC
|
|
|
1.5
|
|
|
|
24.4
|
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LAIC
|
|
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0.9
|
|
|
|
26.3
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3. Investments
The Company invests primarily in investment grade fixed maturities, which possessed a weighted
average quality of AAA as of December 31, 2007. In addition, 99.9% of the Insurance Subsidiaries
fixed maturity securities (cost basis) consisted of U.S. government securities or securities rated
1 (highest quality) or 2 (high quality) by the NAIC as of December 31, 2007. The cost,
gross unrealized gains and losses and estimated market value of investments as of December 31, 2007
and 2006 are as follows (in thousands):
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Gross
|
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Gross
|
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Estimated
|
|
|
|
|
|
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Unrealized
|
|
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Unrealized
|
|
|
Market
|
|
|
|
Cost (1)
|
|
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Gains
|
|
|
Losses
|
|
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Value (2)
|
|
December 31, 2007:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies
|
|
$
|
15,867
|
|
|
$
|
283
|
|
|
$
|
21
|
|
|
$
|
16,129
|
|
Obligations of States and Political Subdivisions
|
|
|
1,380,755
|
|
|
|
11,698
|
|
|
|
3,383
|
|
|
|
1,389,070
|
|
Corporate and Bank Debt Securities
|
|
|
109,784
|
|
|
|
1,478
|
|
|
|
603
|
|
|
|
110,659
|
|
Asset Backed Securities
|
|
|
199,313
|
|
|
|
1,557
|
|
|
|
219
|
|
|
|
200,651
|
|
Mortgage Pass-Through Securities
|
|
|
604,261
|
|
|
|
8,623
|
|
|
|
1,859
|
|
|
|
611,025
|
|
Collateralized Mortgage Obligations
|
|
|
329,491
|
|
|
|
3,133
|
|
|
|
961
|
|
|
|
331,663
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Available for Sale
|
|
|
2,639,471
|
|
|
|
26,772
|
|
|
|
7,046
|
|
|
|
2,659,197
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Equity Securities
|
|
|
322,877
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|
|
|
55,308
|
|
|
|
22,159
|
|
|
|
356,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
2,962,348
|
|
|
$
|
82,080
|
|
|
$
|
29,205
|
|
|
$
|
3,015,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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December 31, 2006:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies
|
|
$
|
20,156
|
|
|
$
|
13
|
|
|
$
|
245
|
|
|
$
|
19,924
|
|
Obligations of States and Political Subdivisions
|
|
|
1,050,279
|
|
|
|
7,685
|
|
|
|
5,851
|
|
|
|
1,052,113
|
|
Corporate and Bank Debt Securities
|
|
|
145,114
|
|
|
|
474
|
|
|
|
2,693
|
|
|
|
142,895
|
|
Asset Backed Securities
|
|
|
202,102
|
|
|
|
1,111
|
|
|
|
567
|
|
|
|
202,646
|
|
Mortgage Pass-Through Securities
|
|
|
425,518
|
|
|
|
1,214
|
|
|
|
5,947
|
|
|
|
420,785
|
|
Collateralized Mortgage Obligations
|
|
|
293,062
|
|
|
|
971
|
|
|
|
2,787
|
|
|
|
291,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Available for Sale
|
|
|
2,136,231
|
|
|
|
11,468
|
|
|
|
18,090
|
|
|
|
2,129,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
259,184
|
|
|
|
47,475
|
|
|
|
2,626
|
|
|
|
304,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
2,395,415
|
|
|
$
|
58,943
|
|
|
$
|
20,716
|
|
|
$
|
2,433,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Original cost of equity securities; original cost of fixed maturities adjusted for
amortization of premiums and accretion of discounts. All amounts are shown net of impairment
losses.
|
|
(2)
|
|
Estimated market values are based on quoted market prices or quotes from third party
broker-dealers.
|
72
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
|
|
|
|
|
Unrealized
|
|
December 31, 2007:
|
|
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
|
|
$
|
|
|
|
$
|
|
|
|
$
|
5,670
|
|
|
$
|
21
|
|
|
$
|
5,670
|
|
|
$
|
21
|
|
Obligations of States and Political Subdivisions
|
|
|
294,719
|
|
|
|
2,377
|
|
|
|
203,427
|
|
|
|
1,006
|
|
|
|
498,146
|
|
|
|
3,383
|
|
Corporate and Bank Debt Securities
|
|
|
7,835
|
|
|
|
33
|
|
|
|
58,709
|
|
|
|
570
|
|
|
|
66,544
|
|
|
|
603
|
|
Asset Backed Securities
|
|
|
50,574
|
|
|
|
138
|
|
|
|
13,989
|
|
|
|
81
|
|
|
|
64,563
|
|
|
|
219
|
|
Mortgage Pass-Through Securities
|
|
|
68,691
|
|
|
|
366
|
|
|
|
128,382
|
|
|
|
1,493
|
|
|
|
197,073
|
|
|
|
1,859
|
|
Collateralized Mortgage Obligations
|
|
|
30,731
|
|
|
|
236
|
|
|
|
65,252
|
|
|
|
725
|
|
|
|
95,983
|
|
|
|
961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities Available for Sale
|
|
|
452,550
|
|
|
|
3,150
|
|
|
|
475,429
|
|
|
|
3,896
|
|
|
|
927,979
|
|
|
|
7,046
|
|
Equity Securities
|
|
|
118,095
|
|
|
|
22,159
|
|
|
|
|
|
|
|
|
|
|
|
118,095
|
|
|
|
22,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
570,645
|
|
|
$
|
25,309
|
|
|
$
|
475,429
|
|
|
$
|
3,896
|
|
|
$
|
1,046,074
|
|
|
$
|
29,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys impairment evaluation as of December 31, 2007 for fixed maturities available for sale
excluding interests in securitized assets resulted in the following conclusions:
US Treasury Securities and Obligations of U.S. Government Agencies:
The unrealized losses on the Companys Aaa/AAA rated investments in U.S. Treasury Securities and
Obligations of U.S. Government Agencies are attributable to interest rate fluctuations since the
date of purchase. Of the 30 investment positions held, approximately 26.7% were in an unrealized
loss position. The contractual terms of the investments do not permit the issuer to settle the
securities at a price less than the amortized cost of the investments. Therefore, it is expected
that the securities would not be settled at a price less than the amortized cost of the
investments.
Obligations of States and Political Subdivisions:
The unrealized losses on the Companys investments in long term tax exempt securities which have
ratings of A1/A+ to Aaa/AAA are attributable to the spread widening. Of the 873 investment
positions held, approximately 32.8% were in an unrealized loss position. The contractual terms of
the investments do not 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
73
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.
The fair value of the Companys structured securities investment portfolio (Asset Backed, Mortgage
Pass-Through and Collateralized Mortgage Obligation securities) amounted to $1,143.3 million as of
December 31, 2007. AAA rated securities represented approximately 99.8% of the December 31, 2007
structured securities portfolio. Approximately $947.7 million of the structured securities
investment portfolio is backed by residential collateral, consisting of:
|
|
$610.0 million of U.S. government agency backed Mortgage Pass-Through Securities;
|
|
|
$233.8 million of U.S. government agency backed Collateralized Mortgage Obligations;
|
|
|
$76.3 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);
|
|
|
$21.6 million of structured securities backed by pools of ALT A loans (loans with low
documentation and borrowers with FICO scores in the approximate range of 650 to the low
700s); and
|
|
|
$6.0 million of structured securities backed by pools of sub-prime loans (loans with low
documentation, higher combined loan-to-value ratios and borrowers with FICO scores capped at
approximately 650).
|
The Companys $27.6 million ALT-A and sub-prime overall AAA rated loan portfolio is comprised of 22
securities with net unrealized losses of $0.0 million as of December 31, 2007. 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 2.4 years;
|
|
|
|
are spread across multiple vintages (origination year of underlying collateral pool); and
|
|
|
|
have not experienced any ratings downgrades or surveillance issues as of December 31, 2007.
|
The Companys ALT-A and sub-prime loan portfolio has paid down to $27.6 million as of December 31,
2007 from $35.7 million as of September 30, 2007 and $42.0 million as of June 30, 2007.
As of December 31, 2007, the Company holds no investments in Collateralized Debt Obligations or Net
Interest Margin securities.
Given a combination of recent events in the housing and mortgage finance sectors, and the issues
surrounding the monoline financial guarantor the Company believes that fixed income and equity
markets, in general, may experience more volatility than during recent historical reporting
periods. As of December 31, 2007, 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 Aaa/AAA rated investment portfolio.
74
The Companys $1,389.1 million municipal bond overall AAA rated portfolio consists of $865.7
million of insured securities, or 62.3% 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 underlying ratio of the uninsured portion of our municipal bond portfolio is AA+.
The following table represents our insured bond portfolio by monoline insurer as of December 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
$
|
285,933
|
|
|
|
20.6
|
%
|
|
AA-
|
MBIA, Inc.
|
|
|
263,039
|
|
|
|
18.9
|
|
|
AA-
|
FGIC Corporation.
|
|
|
162,569
|
|
|
|
1.7
|
|
|
AA-
|
AMBAC Financial Group, Inc.
|
|
|
149,542
|
|
|
|
10.8
|
|
|
AA-
|
XL Capital, LTD.
|
|
|
4,658
|
|
|
|
0.3
|
|
|
AA-
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
865,741
|
|
|
|
62.3
|
%
|
|
AA-
|
|
|
|
|
|
|
|
|
|
|
|
Each municipal bond is evaluated prior to purchase to ensure that the issuer and underlying revenue
pledge/ collateral supporting the municipal bond is sufficient, ignoring the presence of the
financial guarantee insurance. The Company considers the financial guarantee insurance to be
extra protection. As of December 31, 2007, The Company had no impairments or surveillance issues
related to these insured municipal bonds.
During 2007, the Companys gross loss on the sale of fixed maturity and equity securities amounted
to $0.3 million and $5.0 million, respectively. The fair value of the fixed maturity and equity
securities at the time of sale was $33.7 million and $39.6 million, respectively.
During 2006, the Companys gross loss on the sale of fixed maturity and equity securities amounted
to $1.7 million and $7.0 million, respectively. The fair value of the fixed maturity and equity
securities at the time of sale was $185.2 million and $40.5 million, respectively. During 2005, the
Companys gross loss on the sale of fixed maturity and equity securities amounted to $0.9 million
and $5.5 million, respectively. The fair value of the fixed maturity and equity securities at the
time of sale was $63.6 million and $56.5 million, respectively.
The Company had no debt or equity investments in a single issuer in excess of 10% of Shareholders
Equity at December 31, 2007.
The cost and estimated market value of fixed maturity securities as of December 31, 2007, by
remaining contractual maturity, are shown below. Expected maturities may differ from contractual
maturities because certain borrowers have the right to call or prepay obligations with or without
call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortized
|
|
|
Market
|
|
(In Thousands)
|
|
Cost (1)
|
|
|
Value (2)
|
|
Due in One Year or Less
|
|
$
|
49,212
|
|
|
$
|
49,138
|
|
Due After One Year Through Five Years
|
|
|
392,412
|
|
|
|
394,931
|
|
Due After Five Years through Ten Years
|
|
|
360,945
|
|
|
|
366,177
|
|
Due After Ten Years
|
|
|
703,837
|
|
|
|
705,611
|
|
Asset Backed, Mortgage Pass-Through and Collateralized Mortgage Obligation Securities
|
|
|
1,133,065
|
|
|
|
1,143,340
|
|
|
|
|
|
|
|
|
|
|
$
|
2,639,471
|
|
|
$
|
2,659,197
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Original cost adjusted for amortization of premiums and accretion of discounts. All amounts
are shown net of impairment losses.
|
|
(2)
|
|
Estimated market values have been based on quoted market prices or quotes from third party
broker-dealers.
|
The sources of net investment income for the years ended December 31, 2007, 2006 and 2005 are as
follows (in thousands):
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities
|
|
$
|
108,532
|
|
|
$
|
82,833
|
|
|
$
|
61,550
|
|
Equity Securities
|
|
|
5,408
|
|
|
|
4,381
|
|
|
|
2,585
|
|
Cash and Cash Equivalents
|
|
|
7,761
|
|
|
|
8,168
|
|
|
|
3,943
|
|
|
|
|
|
|
|
|
|
|
|
Total Investment Income
|
|
|
121,701
|
|
|
|
95,382
|
|
|
|
68,078
|
|
Funds Held Interest Credit
|
|
|
|
|
|
|
|
|
|
|
(1,486
|
)
|
Investment Expense
|
|
|
(4,477
|
)
|
|
|
(3,683
|
)
|
|
|
(2,883
|
)
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
$
|
117,224
|
|
|
$
|
91,699
|
|
|
$
|
63,709
|
|
|
|
|
|
|
|
|
|
|
|
The investment portfolio had no non-income producing fixed maturity securities as of December 31,
2007.
Realized pre-tax investment gains (losses) for the years ended December 31, 2007, 2006 and 2005 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Fixed Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Realized Gains
|
|
$
|
1,061
|
|
|
$
|
243
|
|
|
$
|
4,454
|
|
Gross Realized Losses
|
|
|
(902
|
)
|
|
|
(6,316
|
)
|
|
|
(931
|
)
|
|
|
|
|
|
|
|
|
|
|
Net Fixed Maturities Gain (Loss)
|
|
|
159
|
|
|
|
(6,073
|
)
|
|
|
3,523
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Realized Gains
|
|
|
41,785
|
|
|
|
7,348
|
|
|
|
17,040
|
|
Gross Realized Losses
|
|
|
(12,378
|
)
|
|
|
(11,136
|
)
|
|
|
(7,806
|
)
|
|
|
|
|
|
|
|
|
|
|
Net Equity Securities Gain (Loss)
|
|
|
29,407
|
|
|
|
(3,788
|
)
|
|
|
9,234
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Hedge Realized Loss
|
|
|
|
|
|
|
|
|
|
|
(3,148
|
)
|
|
|
|
|
|
|
|
|
|
|
Total Net Realized Investment Gain/(Loss)
|
|
$
|
29,566
|
|
|
$
|
(9,861
|
)
|
|
$
|
9,609
|
|
|
|
|
|
|
|
|
|
|
|
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. The carrying value of the securities on deposit was $15.7 million and $15.1 million as of
December 31, 2007 and 2006, respectively.
5. Trust Accounts
The Company maintains investments in trust accounts under certain reinsurance agreements with
unrelated insurance companies. These investments collateralize the Companys obligations under the
reinsurance agreements. The Company possesses sole responsibility for investment and reinvestment
of the trust account assets. All dividends, interest and other income resulting from investment of
these assets are distributed to the Company on a monthly basis. As of December 31, 2007 and 2006,
the carrying values of these trust fund investments and cash balances were $1.3 million and $2.0
million, respectively.
The Companys share of the investments in the trust accounts is included in investments and cash
equivalents, as applicable, in the accompanying consolidated balance sheets.
6. Property and Equipment
The following table summarizes property and equipment as of December 31, 2007 and 2006 (dollars in
thousands):
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
Estimated Useful
|
|
|
|
2007
|
|
|
2006
|
|
|
Lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer Software
|
|
$
|
26,852
|
|
|
$
|
25,988
|
|
|
5 Years
|
Computer Hardware and Telephone Equipment
|
|
|
19,832
|
|
|
|
16,688
|
|
|
3 5 Years
|
Furniture, Fixtures and Automobiles
|
|
|
10,909
|
|
|
|
9,324
|
|
|
5 Years
|
Land and Building
|
|
|
3,640
|
|
|
|
3,635
|
|
|
40 Years
|
Leasehold Improvements
|
|
|
6,538
|
|
|
|
4,963
|
|
|
2 12 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,771
|
|
|
|
60,598
|
|
|
|
|
|
Accumulated Depreciation and Amortization
|
|
|
(41,441
|
)
|
|
|
(33,599
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, Net
|
|
$
|
26,330
|
|
|
$
|
26,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007 and 2006, costs incurred for Property and Equipment not yet placed in
service amounted to $2.7 million and $3.7 million, respectively. Amortization of costs incurred in
developing or purchasing computer software amounted to $3.9 million, $4.1 million and $2.6 million
for the years ended December 31, 2007, 2006 and 2005, respectively. Depreciation expense, excluding
amortization of computer software, amounted to $4.2 million, $3.1 million and $2.1 million for the
years ended December 31, 2007, 2006 and 2005, respectively.
7. Goodwill
The Company has no goodwill carried on its Consolidated Balance Sheets as of December 31, 2007 or
2006. During the fourth quarter of 2005, the Company recorded a $25.7 million impairment charge
related to the write-down of goodwill arising from the acquisition of the Companys personal lines
segment. This loss, which was the same on a pre-tax and after-tax basis, was a result of the
Companys annual evaluation of the carrying value of goodwill. The write-down was determined by
comparing the fair value of the Companys personal lines segment and the implied value of the
goodwill with the carrying amounts on the balance sheet. The write-down resulted from changes in
business assumptions primarily due to the following: the unprecedented hurricane activity and
associated catastrophe losses experienced in 2004 and 2005; the uncertainty of the 2006 catastrophe
reinsurance renewal rates; the forecasted weather pattern of increased hurricane activity; the
decision to change the personal lines segment business model to discontinue writing the mobile
homeowners business and target new construction homeowners business; and the disruption in the
Florida marketplace.
8. Liability for Unpaid Loss and Loss Adjustment Expenses
The following table sets forth a reconciliation of beginning and ending reserves for unpaid loss
and loss adjustment expenses, net of amounts for reinsured losses and loss adjustment expenses, for
the years indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss adjustment expenses:
|
|
As of and For the Years Ended December 31,
|
|
(In Thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expenses at beginning of year
|
|
$
|
1,283,238
|
|
|
$
|
1,245,763
|
|
|
$
|
996,667
|
|
Less: reinsurance receivables
|
|
|
187,809
|
|
|
|
304,768
|
|
|
|
324,948
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid loss and loss adjustment expenses at beginning of year
|
|
|
1,095,429
|
|
|
|
940,995
|
|
|
|
671,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for losses and loss adjustment expenses for current year claims
|
|
|
704,734
|
|
|
|
559,647
|
|
|
|
533,906
|
|
Decrease in estimated ultimate losses and loss adjustment expenses for
prior year claims
|
|
|
(85,781
|
)
|
|
|
(91,435
|
)
|
|
|
(29,900
|
)
|
|
|
|
|
|
|
|
|
|
|
Total incurred losses and loss adjustment expenses
|
|
|
618,953
|
|
|
|
468,212
|
|
|
|
504,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense payments for claims attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
180,798
|
|
|
|
118,845
|
|
|
|
110,496
|
|
Prior years (1)(2)
|
|
|
271,669
|
|
|
|
194,933
|
|
|
|
124,234
|
|
|
|
|
|
|
|
|
|
|
|
Total payments
|
|
|
452,467
|
|
|
|
313,778
|
|
|
|
234,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unpaid loss and loss adjustment expenses at end of year
|
|
|
1,261,915
|
|
|
|
1,095,429
|
|
|
|
940,995
|
|
Plus: reinsurance receivables
|
|
|
170,018
|
|
|
|
187,809
|
|
|
|
304,768
|
|
|
|
|
|
|
|
|
|
|
|
Unpaid loss and loss adjustment expenses at end of year
|
|
$
|
1,431,933
|
|
|
$
|
1,283,238
|
|
|
$
|
1,245,763
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
(1)
|
|
During the year ended December 31, 2005, net loss and loss adjustment expense payments for
claims attributable to prior years are lower by $64.3 million due to the Companys commutation
of its 2003 Whole Account Net Quota Share Reinsurance Agreement.
|
|
(2)
|
|
During the year ended December 31, 2006, net loss and loss adjustment expense payments for
claims attributable to prior years are lower by $31.9 million due to the Companys commutation
of its 2004 Whole Account Net Quota Share Reinsurance Agreement.
|
During 2007, the Company increased/(decreased) the estimated net unpaid loss and loss adjustment
expenses for accident years 2006 and prior by the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
|
increase (decrease)
|
|
|
|
|
|
|
|
Professional/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Liability
|
|
|
Rental/Leasing
|
|
|
|
|
|
|
|
Accident Year
|
|
Coverages
|
|
|
Coverages
|
|
|
Auto Coverages
|
|
|
Other
|
|
|
Total
|
|
2006
|
|
$
|
(10.6
|
)
|
|
$
|
(10.8
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
(22.7
|
)
|
2005
|
|
$
|
(8.4
|
)
|
|
$
|
(15.1
|
)
|
|
$
|
(1.3
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(25.0
|
)
|
2004
|
|
$
|
(6.0
|
)
|
|
$
|
(10.1
|
)
|
|
$
|
(3.1
|
)
|
|
$
|
0.1
|
|
|
$
|
(19.1
|
)
|
2003 & Prior
|
|
$
|
(6.0
|
)
|
|
$
|
(10.8
|
)
|
|
$
|
(3.1
|
)
|
|
$
|
0.9
|
|
|
$
|
(19.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(31.0
|
)
|
|
$
|
(46.8
|
)
|
|
$
|
(8.3
|
)
|
|
$
|
0.3
|
|
|
$
|
(85.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in the estimated net unpaid loss and loss adjustment expenses for the prior accident
years during 2007 were primarily attributable to the following:
|
|
For accident year 2006, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower estimates for:
|
|
|
|
Commercial property, professional liability, and commercial automobile coverages due to
better than expected case incurred loss development, primarily as a result of both claim
frequency and severity emergence being less than anticipated, and
|
|
|
|
|
Management liability coverages due to better than expected case incurred loss development
primarily as a result of claim severity emergence 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:
|
|
|
|
Professional liability and management liability coverages due to better than expected
case incurred loss development primarily as a result of claim severity being less than
anticipated.
|
|
|
|
|
General liability and commercial automobile and commercial property coverages due to
better than expected case incurred loss development, primarily as a result of both claim
frequency and severity emergence being less than anticipated.
|
|
|
For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower loss estimates for:
|
|
|
|
Professional liability, commercial general liability, rental leasing and management
liability coverages due to better than expected case incurred loss development primarily as
a result of claim severity emergence being less than anticipated.
|
|
|
For accident year 2003 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower loss estimates for:
|
|
|
|
Professional liability and management liability coverages due to better than expected
case incurred loss development primarily as a result of claim severity emergence being less
than anticipated.
|
|
|
|
|
Commercial general liability coverages due to better than expected case incurred loss
development primarily as a result of both claim frequency and severity emergence being less
than anticipated.
|
78
During 2006, the Company decreased the estimated net unpaid loss and loss adjustment expenses for
accident years 2005 and prior by the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Millions)
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
|
increase (decrease)
|
|
|
|
|
|
|
|
Professional/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Liability
|
|
|
Rental/Leasing
|
|
|
|
|
|
|
|
Accident Year
|
|
Coverages
|
|
|
Coverages
|
|
|
Auto Coverages
|
|
|
Other
|
|
|
Total
|
|
2005
|
|
$
|
(52.0
|
)
|
|
$
|
(5.0
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
(59.2
|
)
|
2004
|
|
$
|
(11.6
|
)
|
|
$
|
1.9
|
|
|
$
|
(2.8
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(12.6
|
)
|
2003
|
|
$
|
(0.3
|
)
|
|
$
|
(6.8
|
)
|
|
$
|
(3.7
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(11.0
|
)
|
2002 & Prior
|
|
$
|
(1.0
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
(6.3
|
)
|
|
$
|
0.3
|
|
|
$
|
(8.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(64.9
|
)
|
|
$
|
(11.5
|
)
|
|
$
|
(13.8
|
)
|
|
$
|
(1.2
|
)
|
|
$
|
(91.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in the estimated net unpaid loss and loss adjustment expenses for prior year accident
years during 2006 were primarily attributable to the following:
For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment expenses was
principally due to lower estimates for commercial coverages due to better than expected case
incurred loss development resulting from less than anticipated incurred frequency emergence on
general liability coverages, and less than anticipated severity emergence on property and auto
coverages.
For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment expenses was
principally due to lower estimates for commercial coverages due to better than expected case
incurred loss development resulting from less than anticipated incurred frequency emergence on
general liability coverages, and less than anticipated incurred severity emergence on auto
coverages.
For accident year 2003, the decrease in estimated net unpaid loss and loss adjustment expenses was
principally due to lower estimates for professional liability coverages and rental/leasing auto
coverages due to better than expected case incurred loss development resulting from less than
anticipated incurred severity emergence on professional liability E&O and D&O coverages, and less
than anticipated incurred frequency emergence on leasing auto coverages.
For accident years 2002 and prior, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower estimates for rental/leasing auto coverages due to better
than expected case incurred loss development resulting from less than anticipated incurred
frequency emergence on rental/leasing auto coverages, and less than anticipated incurred severity
emergence on rental supplemental liability coverages.
During 2005, the Company increased/(decreased) the estimated total net unpaid losses and loss
adjustment expenses for prior accident years by the following amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
|
increase (decrease)
|
|
|
|
|
|
|
|
Professional/
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Liability
|
|
|
Rental/Leasing
|
|
|
|
|
|
|
|
Accident Year
|
|
Coverages
|
|
|
Coverages
|
|
|
Auto Coverages
|
|
|
Other
|
|
|
Total
|
|
2004
|
|
$
|
(12.7
|
)
|
|
$
|
(7.6
|
)
|
|
$
|
(4.3
|
)
|
|
$
|
0.4
|
|
|
$
|
(24.2
|
)
|
2003
|
|
$
|
3.5
|
|
|
$
|
(2.4
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
1.0
|
|
|
$
|
1.6
|
|
2002
|
|
$
|
(0.6
|
)
|
|
$
|
(2.0
|
)
|
|
$
|
(3.4
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
(7.0
|
)
|
2001 & Prior
|
|
$
|
1.9
|
|
|
$
|
(0.7
|
)
|
|
$
|
(0.9
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(7.9
|
)
|
|
$
|
(12.7
|
)
|
|
$
|
(9.1
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(29.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in the estimated net unpaid losses and loss adjustment expenses for prior accident
years during 2005 were primarily attributable to the following:
For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment expenses was
principally due to lower net loss estimates for: commercial package policies as a result of better
than expected claim frequency and professional liability coverages due to better than expected case
incurred development.
79
For accident year 2002, the decrease in estimated net unpaid loss and loss adjustment expenses and
prior was principally due to decreased loss estimates across most commercial and specialty lines of
business due to better than expected case incurred loss development.
9. Loans Payable
Two of the Companys 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 will provide an
immediately available line of credit. As of December 31, 2007 and 2006, the insurance subsidiaries
had no borrowings outstanding, and the unused borrowing capacity was $708.4 million as of December
31, 2007.
10. Income Taxes
The composition of deferred tax assets and liabilities and the related tax effects as of December
31, 2007 and 2006 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
Deferred Income Tax Assets:
|
|
|
|
|
|
|
|
|
Unearned Premium
|
|
$
|
53,683
|
|
|
$
|
48,159
|
|
Loss Reserve Discounting
|
|
|
42,044
|
|
|
|
39,548
|
|
State Insurance Related Assessments
|
|
|
4,791
|
|
|
|
4,509
|
|
Fair Value of Equity Based Compensation
|
|
|
7,674
|
|
|
|
3,125
|
|
Deferred Compensation
|
|
|
4,634
|
|
|
|
2,645
|
|
Net Realized Investment Losses
|
|
|
2,837
|
|
|
|
1,544
|
|
Deferred Compensation Liability For Preferred Agent Profit Sharing
|
|
|
11,796
|
|
|
|
|
|
Other Assets
|
|
|
979
|
|
|
|
330
|
|
|
|
|
|
|
|
|
Total Deferred Income Tax Assets
|
|
|
128,438
|
|
|
|
99,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Income Tax Liabilities:
|
|
|
|
|
|
|
|
|
Deferred Acquisition Costs
|
|
|
64,556
|
|
|
|
55,582
|
|
Unrealized Appreciation of Securities
|
|
|
18,506
|
|
|
|
13,380
|
|
Property and Equipment Basis
|
|
|
1,357
|
|
|
|
2,495
|
|
Net Investment Income
|
|
|
781
|
|
|
|
869
|
|
Other Liabilities
|
|
|
383
|
|
|
|
877
|
|
|
|
|
|
|
|
|
Total Deferred Income Tax Liabilities
|
|
|
85,583
|
|
|
|
73,203
|
|
|
|
|
|
|
|
|
Net Deferred Income Tax Asset
|
|
$
|
42,855
|
|
|
$
|
26,657
|
|
|
|
|
|
|
|
|
Based on the Companys federal tax loss and capital loss carryback availability, expected levels of
future pre-tax financial statement income and federal taxable income, the Company believes that it
is more likely than not that the existing deductible temporary differences will reverse during
periods in which net federal taxable income is generated or have adequate federal carryback
availability. As a result, no valuation allowance is recognized for deferred income tax assets as
of December 31, 2007 or 2006.
On January 1, 2007 the Company adopted FASB Interpretation 48, Accounting for Uncertainty in
Income Taxes, an interpretation of FASB Statement No. 109. As a result of the implementation, no
adjustment to the beginning balance of retained earnings was deemed necessary. The following table
represents a reconciliation of the beginning and ending amount of the Companys unrecognized tax
benefits (dollars in thousands):
|
|
|
|
|
|
|
Amount
|
|
Balance as of January 1, 2007
|
|
$
|
175
|
|
Additions for Tax Positions Related to the Current Year
|
|
|
|
|
Additions for Tax Positions Related to Prior Years
|
|
|
6,641
|
|
Reductions for Tax Positions Related to Prior Years
|
|
|
|
|
Settlements with Taxing Authorities
|
|
|
(6,641
|
)
|
|
|
|
|
Balance as of December 31, 2007
|
|
$
|
175
|
|
|
|
|
|
80
As of December 31, 2007, the total amount of unrecognized tax benefits that, if recognized, would
affect the effective tax rate was $0.2 million. The Company does not believe that it is
reasonably possible that the $0.2 million of unrecognized tax benefits as of December 31, 2007
shown in the table above will significantly increase or decrease within the next twelve months.
Interest and penalties accrued for the underpayment of taxes are recorded as a component of income
tax expense. The Company recognized a $0.7 million benefit related to interest and penalties,
which reduced income tax expense for the year ended December 31, 2007. The liability for interest
and penalties was $0.1 million and $1.7 million as of December 31, 2007 and 2006, respectively.
The Company and its subsidiaries file Federal and State income tax returns as required, and is
subject to Federal and State examinations for tax years 2002 through 2006, and 2004 through 2006,
respectively.
The following table summarizes the differences between the Companys effective tax rate for
financial statement purposes and the federal statutory rate (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
Amount of Tax
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2007:
|
|
|
|
|
|
|
|
|
Federal Tax at Statutory Rate
|
|
$
|
170,297
|
|
|
|
35
|
%
|
Nontaxable Municipal Bond Interest and Dividends Received Exclusion
|
|
|
(14,460
|
)
|
|
|
(3
|
)
|
State Income Tax Expense
|
|
|
2,086
|
|
|
|
1
|
|
Other, Net
|
|
|
561
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense
|
|
$
|
158,484
|
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
Federal Tax at Statutory Rate
|
|
$
|
152,129
|
|
|
|
35
|
%
|
Nontaxable Municipal Bond Interest and Dividends Received Exclusion
|
|
|
(10,444
|
)
|
|
|
(2
|
)
|
State Income Tax Expense
|
|
|
2,290
|
|
|
|
1
|
|
Other, Net
|
|
|
1,830
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense
|
|
$
|
145,805
|
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
Federal Tax at Statutory Rate
|
|
$
|
84,286
|
|
|
|
35
|
%
|
Non-deductible Goodwill Impairment Loss
|
|
|
9,003
|
|
|
|
4
|
|
Nontaxable Municipal Bond Interest and Dividends Received Exclusion
|
|
|
(8,616
|
)
|
|
|
(4
|
)
|
Other, Net
|
|
|
(545
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Expense
|
|
$
|
84,128
|
|
|
|
35
|
%
|
|
|
|
|
|
|
|
Philadelphia Insurance has entered into tax sharing agreements with each of its subsidiaries. Under
the terms of these agreements, the income tax provision is computed as if each subsidiary were
filing a separate federal income tax return, including adjustments for the income tax effects of
net operating losses and other special tax attributes, regardless of whether those attributes are
utilized in the Companys consolidated federal income tax return. As of December 31, 2007 and
2006, income taxes payable amounting to $0.9 million and $6.2 million, respectively were included
in Other Liabilities in the Consolidated Balance Sheets.
11. Shareholders Equity
Basic and diluted earnings per share are calculated as follows (dollars and share data in
thousands, except per share data):
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Common Shares Outstanding
|
|
|
70,382
|
|
|
|
69,796
|
|
|
|
68,551
|
|
Weighted-Average Share Equivalents Outstanding
|
|
|
3,845
|
|
|
|
3,674
|
|
|
|
4,534
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Shares and Share Equivalents Outstanding
|
|
|
74,227
|
|
|
|
73,470
|
|
|
|
73,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
326,813
|
|
|
$
|
288,849
|
|
|
$
|
156,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
$
|
4.64
|
|
|
$
|
4.14
|
|
|
$
|
2.29
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
$
|
4.40
|
|
|
$
|
3.93
|
|
|
$
|
2.14
|
|
|
|
|
|
|
|
|
|
|
|
The following tables presents stock appreciation rights (SARS) that were outstanding during the
second half of 2007, but were not included in the computation of earnings per share for 2007
because the SARS hypothetical option price was greater than the average market prices of the
Companys common shares for 2007:
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
Expiration Date
|
SARS Outstanding
as of
December 31, 2007
|
|
Option Price
|
|
of SAR
|
407,446
|
|
$
|
47.52
|
|
|
February 21, 2017
|
25,000
|
|
$
|
43.44
|
|
|
March 19, 2017
|
661
|
|
$
|
42.41
|
|
|
May 1, 2017
|
During 2006, 30,000 SARS, which were granted at a hypothetical option price of $39.95 per SAR, were
outstanding during the fourth quarter of 2006, but were not included in the computation of earnings
per share for 2006 because the SARS hypothetical option price was greater than the average market
price of the Companys common shares for 2006. The SARS, which expire on September 28, 2016, were
outstanding as of December 31, 2006.
During 2005, options to purchase 45,000 shares of the Companys common stock, which were granted at
an exercise price of $28.30 per share, were outstanding during the fourth quarter of 2005, but were
not included in the computation of earnings per share for 2005 because the options price was
greater than the average market price of the Companys common shares for 2005. The options, which
expire on October 3, 2015, were outstanding as of December 31, 2005.
The Philadelphia Consolidated Holding Corp Amended and Restated Employees Stock Incentive and
Performance Based Compensation Plan (the Plan) (formerly known as Philadelphia Consolidated
Holding Corp. Stock Option Plan) provides incentives and awards to those employees and members of
the Board of Directors (participants) largely responsible for the long term success of the
Company.
The maximum number of shares of the Companys common stock which may be subject to awards granted
under the Plan is 18,750,000. The Plan permits (but does not require) the grant of restricted
stock awards under conditions meeting the performance based compensation requirements of Section
162(m) of the Internal Revenue Code. The maximum number of shares includes all shares previously
available for grants under the stock option plan prior to the adoption of this Plan. As of
December 31, 2007, 4,467,018 shares of common stock remain reserved for future issuance pursuant to
awards granted under the Plan. Under the Plan, the Company may grant stock options, SARS,
restricted stock awards and restricted stock units to participants. Stock options, restricted
stock awards and SARS have been granted to certain employees, and restricted stock awards have been
granted to the Companys non-employee directors pursuant to the Plan as of December 31, 2007.
During 2007, the Company granted SARS and restricted stock awards to certain employees and granted
restricted stock awards to its non-employee directors. All stock options that have been granted
have provided for the purchase of common stock at a price not less than the fair market value on
the grant date. A SAR grant consists of a right that is the economic equivalent of a stock option
that could have been granted under the Plan, except that on the exercise of a SAR, the employee
receives shares of the Companys common stock having a fair market value that is equal to the fair
market value of the shares of common stock that would be subject to such hypothetical option,
reduced by the amount that would be required to be paid by the employee as the purchase price upon
exercise of such hypothetical option. All grants of SARS have provided for a hypothetical option
purchase price of not less than the fair market value on the grant date. Stock options and SARS
are generally exercisable after the expiration of five years following the
82
grant date and expire ten years following the grant date. Compensation expense for stock options
and SARS is recognized ratably over the vesting period. Stock options and SARS are generally
forfeited by participants who terminate employment prior to vesting.
Compensation expense for restricted stock awards is recognized ratably over the vesting period
(Restriction Period). Stock subject to restricted stock awards granted to employees during 2007
become free of the risk of forfeiture (i.e., become vested) generally after the expiration of five
years following the grant date (the applicable Restriction Period). Stock subject to restricted
stock awards granted to the Companys non-employee directors during 2007 become free of the risk of
forfeiture after the expiration of three years following the grant date. Generally, if a
participant terminates employment prior to the expiration of the Restriction Period, the award will
lapse and all shares of common stock still subject to the restriction are forfeited.
The following table presents certain information regarding stock option transactions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
Exercise Price
|
|
|
|
|
|
|
Exercise Price
|
|
|
|
|
|
|
Exercise Price
|
|
|
|
Options
|
|
|
Per Option(1)
|
|
|
Options
|
|
|
Per Option(1)
|
|
|
Options
|
|
|
Per Option(1)
|
|
|
Outstanding at beginning of year
|
|
|
7,039,098
|
|
|
$
|
14.45
|
|
|
|
8,483,991
|
|
|
$
|
13.54
|
|
|
|
7,931,100
|
|
|
$
|
10.86
|
|
Granted
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
1,485,000
|
|
|
$
|
23.34
|
|
Exercised
|
|
|
(611,268
|
)
|
|
$
|
10.83
|
|
|
|
(1,076,643
|
)
|
|
$
|
6.22
|
|
|
|
(854,859
|
)
|
|
$
|
5.36
|
|
Canceled
|
|
|
(21,750
|
)
|
|
$
|
18.67
|
|
|
|
(368,250
|
)
|
|
$
|
17.61
|
|
|
|
(77,250
|
)
|
|
$
|
17.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
|
6,406,080
|
|
|
$
|
14.78
|
|
|
|
7,039,098
|
|
|
$
|
14.45
|
|
|
|
8,483,991
|
|
|
$
|
13.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year
|
|
|
2,428,830
|
|
|
$
|
9.77
|
|
|
|
1,746,348
|
|
|
$
|
8.31
|
|
|
|
1,474,491
|
|
|
$
|
6.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of
options granted during the year
(2)
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
9.40
|
|
The total intrinsic value of options exercised during the years ended December 31, 2007 and 2006
was $19.6 million and $29.3 million, respectively.
|
|
|
(1)
|
|
Weighted Average.
|
|
(2)
|
|
The Company uses the Black-Scholes pricing model to calculate the fair value of the
options awarded as of the date of grant.
|
The aggregate intrinsic value of outstanding and exercisable options as of December 31, 2007 was
$157.4 million and $71.8 million, respectively. The total fair value of exercisable options as of
December 31, 2007 was $9.6 million. The weighted average remaining contractual life of options
outstanding as of December 31, 2007 was 5.3 years.
The following table presents information regarding SARS transactions during the years ended
December 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended
|
|
|
As of and for the Year Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
SARS
|
|
|
SARS
|
|
Outstanding at beginning of period
|
|
|
949,000
|
|
|
|
|
|
Granted
|
|
|
436,607
|
|
|
|
949,000
|
|
Exercised
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(4,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
1,381,107
|
|
|
|
949,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of
SARS granted during the period
(1)
|
|
$
|
19.59
|
|
|
$
|
14.45
|
|
|
|
|
(1)
|
|
The Company uses the Black-Scholes pricing model to calculate the fair value of the
SARS awarded as of the date of grant.
|
There were no exercisable SARS outstanding as of December 31, 2007 or 2006. The aggregate intrinsic
value of outstanding SARS as of December 31, 2007 and 2006 was $5.7 million, and $10.6 million,
respectively. The weighted average remaining contractual life of SARS outstanding as of December
31, 2007 and 2006 was 8.5 years and 9.1 years, respectively.
83
The following table presents information regarding restricted stock award transactions for the
years ended December 31, 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the Year Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Restricted Stock
|
|
|
Grant Date Fair
|
|
|
Restricted Stock
|
|
|
Grant Date Fair
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at beginning of period
|
|
|
178,459
|
|
|
$
|
29.53
|
|
|
|
141,465
|
|
|
$
|
27.75
|
|
Granted
|
|
|
146,884
|
|
|
$
|
47.21
|
|
|
|
47,080
|
|
|
$
|
34.57
|
|
Vested
|
|
|
(50
|
)
|
|
$
|
47.52
|
|
|
|
|
|
|
$
|
|
|
Forfeited
|
|
|
(10,743
|
)
|
|
$
|
36.15
|
|
|
|
(10,086
|
)
|
|
$
|
28.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at end of period
|
|
|
314,550
|
|
|
$
|
37.56
|
|
|
|
178,459
|
|
|
$
|
29.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, there was $30.4 million of pre-tax unrecognized compensation costs related
to stock options, SARS and restricted stock granted under the Companys Plan. This unrecognized
compensation cost is expected to be recognized over a weighted-average period of 3.0 years.
The fair value of each stock option and SAR award is estimated on the date of grant using the
Black-Scholes option valuation model based on the assumptions noted in the following table.
Expected volatilities are based on the historical volatility of the Companys common stock. The
Company uses historical data to estimate stock option and SAR expected terms and employee
terminations that are utilized within the valuation model; separate groups of employees that have
similar historical exercise behavior are considered separately for valuation purposes. The
expected term of stock options and SARS granted represents the period of time that granted stock
option and SAR awards are expected to be outstanding. The risk-free interest rate is based on the
U.S. Treasury yield curve in effect at the time of grant appropriate for the expected life of the
Companys stock options and SARS. The dividend yield assumption is based on history and
expectation of dividend payouts. The ranges given below result from certain groups of employees
exhibiting different behavior and from the differing market conditions which existed on the various
grant dates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2007
|
|
2006
|
|
2005
|
Expected Stock Volatility
|
|
|
29.1% - 32.4
|
%
|
|
|
33.4% - 35.5
|
%
|
|
|
33.9
|
%
|
Weighted Average Expected Stock Volatility
|
|
|
33.1
|
%
|
|
|
33.9
|
%
|
|
|
33.9
|
%
|
Risk-Free Interest Rate
|
|
|
4.5% - 4.7
|
%
|
|
|
4.4% - 4.8
|
%
|
|
|
3.8% - 4.3
|
%
|
Weighted Average Risk-Free Interest Rate
|
|
|
4.6
|
%
|
|
|
4.6
|
%
|
|
|
3.8
|
%
|
Expected Life (Years)
|
|
|
6.0 9.0
|
|
|
|
6.0 9.0
|
|
|
|
6.0
|
|
Weighted Average Expected Life (Years)
|
|
|
6.5
|
|
|
|
6.5
|
|
|
|
6.0
|
|
Expected Dividends
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The Company has established the following stock purchase plans:
Employee Stock Purchase Plan (the Stock Purchase Plan): The aggregate maximum number of shares
that may be issued pursuant to the Stock Purchase Plan, as amended, is 3,000,000. Shares may be
purchased under the Stock Purchase Plan by eligible employees during designated one-month
offering periods established by the Compensation Committee of the Board of Directors at a
purchase price of the lesser of 85% of the fair market value of the shares on the first business
day of the offering period or the date the shares are purchased. Shares purchased are
restricted for a period of two years from the first day of the offering period. The purchase
price of shares may be paid by the employee over six years pursuant to the execution of a
promissory note. The promissory note(s) are collateralized by such shares purchased under the
Stock Purchase Plan and are interest free. Under the Stock Purchase Plan, the Company issued
99,481 shares and 180,322 shares in 2007 and 2006, respectively. The weighted-average fair value per share of those purchase rights granted in 2007 and 2006 was $7.43 and
$5.94, respectively.
The Nonqualified Employee Stock Purchase Plan (the Nonqualified Stock Plan): The aggregate
maximum number of shares that may be issued pursuant to the Nonqualified Stock Plan is 6,000,000.
Shares may be purchased under the Nonqualified Stock Plan by eligible employees during designated
one-month offering periods established by the Compensation Committee of the Board of Directors at a
purchase price of the lesser of 85% of the fair market value of the shares on the first business
day of the offering
84
period or the date the shares are purchased. Shares purchased are restricted for a period of
five years from the first day of the offering period. The purchase price of shares may be paid
by the employee over nine years pursuant to the execution of a promissory note. The promissory
note(s) are collateralized by such shares purchased under the Nonqualified Stock Plan and are
interest free. Under the Nonqualified Stock Plan, the Company issued 399,274 shares and 385,630
shares in 2007 and 2006, respectively. The weighted-average fair value per share of those
purchase rights granted in 2007 and 2006 was $7.44 and $6.55, respectively.
Directors Stock Purchase Plan (Directors Plan): The Directors Plan has been established for the
benefit of non-employee Directors. The aggregate maximum number of shares that may be issued
pursuant to the Directors Plan is 125,000. Non-employee Directors, during monthly offering
periods, may designate a portion of his or her fees to be used for the purchase of shares under
the terms of the Directors Plan at a purchase price of the lesser of 85% of the fair market value
of the shares on the first business day of the offering period or the date the shares are
purchased. Under the Directors Plan, the Company issued 7,526 shares and 8,635 shares in 2007 and
2006, respectively. The weighted-average fair value per share of those purchase rights granted in
2007 and 2006 was $7.56 and $6.14, respectively.
Preferred Agents Stock Purchase Plan (Preferred Agents Plan): The Preferred Agents Plan has
been established for the benefit of eligible Preferred Agents. The aggregate maximum number of
shares that may be issued pursuant to the Preferred Agents Plan is 600,000. During designated
offering periods, eligible Preferred Agents may either remit cash or have the Company withhold
from commissions or other compensation amounts to be used for the purchase of shares under the
terms of the Preferred Agents Plan at a purchase price of the lesser of 85% of the fair market
value of the shares on the first business day of the offering period or the date the shares are
purchased. Shares purchased are restricted for a period of two years from the first day of the
offering period. During 2007, there were no shares issued under the plan. During 2006, the
Company issued 60,492 shares under the plan. The weighted-average fair value of those purchase
rights granted during 2006 was $5.80.
12. Stock Repurchase Authorization
During the three years ended December 31, 2007, there were no repurchases under the Companys stock
repurchase authorization. As of December 31, 2007 and 2006, $45.0 million remains available under
a $75.3 million stock purchase authorization.
13. Stock Based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share Based Payment (SFAS 123(R)) using the modified prospective transition
method, which requires the measurement and recognition of compensation expense for all share-based
payment awards made to the Companys employees and directors including stock options, stock settled
appreciation rights (SARS), restricted stock and employee and director stock purchases related to
the Employee Stock Purchase Plan, Nonqualified Employee Stock Purchase Plan, and Directors Stock
Purchase Plan based on fair values. The Companys financial statements as of and for the years
ended December 31, 2007 and 2006 reflect the impact of SFAS 123(R). In accordance with the modified
prospective transition method, the Companys financial statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS 123(R). Share-based compensation
expense recognized is based on the value of the portion of share-based payment awards that is
ultimately expected to vest. Share-based compensation expense recognized in the Companys
Consolidated Statement of Operations and Comprehensive Income for the years ended December 31, 2007
and 2006 included compensation expense for:
|
|
|
Share-based payment awards granted prior to, but not yet vested as of December 31, 2006
based on the grant date fair value estimated in accordance with the pro forma provisions of
SFAS 123, and
|
|
|
|
|
Compensation expense for the share-based payment awards granted subsequent to December
31, 2006 based on the grant date fair value estimated in accordance with the provisions of
SFAS 123(R). In conjunction with the adoption of SFAS 123(R), the Company elected to
attribute the value of share-based compensation to expense using the straight-line method,
which was previously used for its pro forma information required under SFAS 123.
Share-based compensation expense related to stock options and SARS was $9.9 million and
$7.3 million, before income taxes for the years ended December 31, 2007 and 2006,
respectively.
|
Share-based compensation expense related to restricted stock grants and employee and director stock
purchase plans was $5.6 million and $2.7 million for the years ended December 31, 2007 and 2006,
respectively.
85
Upon adoption of SFAS 123(R), the Company elected to value share-based payment awards granted
beginning in 2006 using the Black-Scholes option-pricing model, (the Black-Scholes model), which
was also previously used for the pro forma information required under SFAS 123. The Black-Scholes
model requires the input of certain assumptions. The Companys stock options and the option
component of the Employee Stock Purchase Plan shares have characteristics significantly different
from those of traded options, and changes in the assumptions can materially affect the fair value
estimates.
The expected term of stock options and SARS represent the weighted-average period the stock options
and SARS are expected to remain outstanding. The expected term is based on the observed and
expected time to post-vesting exercise and forfeitures of options by the Companys employees. The
Company uses historical volatility in deriving the expected volatility assumption. The risk-free
interest rate is based on the U.S. Treasury yield curve in effect at the time of grant appropriate
for the expected life of the Companys stock options and SARS. The dividend yield assumption is
based on history and expectation of dividend payouts.
As the share-based compensation expense recognized in the Consolidated Statement of Operations and
Comprehensive Income for the years ended December 31, 2007 and 2006 is based on awards ultimately
expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures
to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures were estimated based on historical experience.
SFAS 123(R) requires that share-based compensation cost is recorded in the financial statements in
the same classifications as the related employees cash compensation. Accordingly, upon adoption
of SFAS 123(R), a portion of the share-based compensation cost related to unvested awards and new
awards has been capitalized as part of the Companys Deferred Acquisition Costs. As of December
31, 2007 and 2006, approximately $2.7 million and $2.3 million, respectively, of share-based
compensation cost is included in Deferred Acquisition Costs on the Consolidated Balance Sheet.
The effect of recording share-based compensation expense for the years ended December 31, 2007 and
2006 is as follows:
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
For the Year Ended
|
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
15,507
|
|
|
$
|
10,028
|
|
Tax benefit
|
|
|
(5,427
|
)
|
|
|
(3,510
|
)
|
|
|
|
|
|
|
|
Net decrease in net income
|
|
$
|
10,080
|
|
|
$
|
6,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation cost capitalized (gross
of amortization) as deferred acquisition costs
|
|
$
|
5,361
|
|
|
$
|
4,634
|
|
|
|
|
|
|
|
|
|
|
Effect on:
|
|
|
|
|
|
|
|
|
Cash flows from operating activities
|
|
$
|
783
|
|
|
$
|
1,531
|
|
Cash flows from financing activities
|
|
$
|
5,925
|
|
|
$
|
8,646
|
|
|
|
|
|
|
|
|
|
|
Effect on:
|
|
|
|
|
|
|
|
|
Net earnings per share Basic
|
|
$
|
0.10
|
|
|
$
|
0.09
|
|
Net earnings per share Diluted
|
|
$
|
0.01
|
|
|
$
|
0.01
|
|
14. 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
obligation to policyholders. The loss and loss adjustment expense reserves ceded under such
arrangements were $170.0 million and $187.8 million as of December 31, 2007 and 2006, respectively.
The Company evaluates the financial condition of its reinsurers to minimize its exposure to losses
from reinsurer insolvencies. The percentage of ceded reinsurance receivables (excluding amounts
ceded to voluntary and mandatory pool mechanisms) that are with reinsurers rated A (Excellent) or
better by A.M. Best Company, or are fully collateralized was 93.5% and 92.4% as of December 31,
2007 and 2006, respectively.
86
As of December 31, 2007, the Company did not have any aggregate unsecured reinsurance receivables
due from a single reinsurer that exceeded 3% of shareholders equity. Unsecured reinsurance
receivables include amounts receivable for paid and unpaid losses and loss adjustment expenses and
unearned premium less reinsurance receivables secured by collateral.
The effect of reinsurance on premiums written and earned is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Written
|
|
|
Earned
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007:
|
|
|
|
|
|
|
|
|
Direct Business
|
|
$
|
1,688,743
|
|
|
$
|
1,600,280
|
|
Reinsurance Assumed
|
|
|
3,480
|
|
|
|
3,817
|
|
Reinsurance Ceded
|
|
|
232,590
|
|
|
|
224,854
|
|
|
|
|
|
|
|
|
Net Premiums
|
|
$
|
1,459,633
|
|
|
$
|
1,379,243
|
|
|
|
|
|
|
|
|
Reinsurance Assumed as a Percentage of Net
|
|
|
0.2
|
%
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2006:
|
|
|
|
|
|
|
|
|
Direct Business
|
|
$
|
1,488,839
|
|
|
$
|
1,361,057
|
|
Reinsurance Assumed
|
|
|
4,409
|
|
|
|
4,301
|
|
Reinsurance Ceded
|
|
|
210,384
|
|
|
|
196,056
|
|
|
|
|
|
|
|
|
Net Premiums
|
|
$
|
1,282,864
|
|
|
$
|
1,169,302
|
|
|
|
|
|
|
|
|
Reinsurance Assumed as a Percentage of Net
|
|
|
0.3
|
%
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2005:
|
|
|
|
|
|
|
|
|
Direct Business
|
|
$
|
1,260,693
|
|
|
$
|
1,161,284
|
|
Reinsurance Assumed
|
|
|
4,222
|
|
|
|
4,012
|
|
Reinsurance Ceded
|
|
|
154,144
|
|
|
|
188,649
|
|
|
|
|
|
|
|
|
Net Premiums
|
|
$
|
1,110,771
|
|
|
$
|
976,647
|
|
|
|
|
|
|
|
|
Reinsurance Assumed as a Percentage of Net
|
|
|
0.4
|
%
|
|
|
0.4
|
%
|
|
|
|
|
|
|
|
15. Compensation Plans
The Company has a defined contribution Profit Sharing Plan, which includes a 401K feature, covering
substantially all employees. Under the plan, employees may contribute up to an annual maximum of
the lesser of 15% of eligible compensation or the applicable Internal Revenue Code limit in a
calendar year. The Company makes a matching contribution in an amount equal to 75% of the
participants pre-tax contribution, subject to a maximum of 6% of the participants eligible
compensation. The Company may also make annual discretionary profit sharing contributions at each
plan year end. Participants are fully vested in the Companys contribution upon completion of four
years of service. The Companys total contributions to the plan were $2.3 million, $1.8 million and
$1.3 million for the years ended December 31, 2007, 2006 and 2005, respectively.
The Company sponsors an unfunded nonqualified key employee deferred compensation plan. Under the
plan, deferred compensation benefits are provided through deferrals of base salary and bonus
compensation (Employee Deferrals) and discretionary contributions by the Company (Employer
Contributions) for a select group of management and highly compensated employees of the Company
and its subsidiaries. Each participant is permitted to specify an investment or investments from
among permissible investments which shall be the basis for determining the gain or loss adjustment
applicable to such participants plan deferral account. A participants interest in the portion of
his or her plan deferral account that is attributable to Employee Deferrals are fully vested at all
times. That portion of a participants plan deferral account attributable to Employer Contributions
generally will vest over the course of a five year period beginning on the last day of the first
year after the plan year for which the Employer Contribution was made. The amounts in each
participants plan deferral account represent an obligation of the Company to pay the participant
at some time in the future. The Company had a deferred compensation obligation pursuant to the plan
amounting to $8.8 million and $6.8 million as of December 31, 2007 and 2006, respectively.
The Company also sponsors an unfunded nonqualified executive deferred compensation plan. Under the
plan, deferred compensation benefits are provided by the Company through deferrals of base salary
and bonus compensation for management and highly compensated executives designated by the Board of
Directors. Each participant is permitted to specify an investment or investments from among
permissible investments which shall be the basis for determining the gain or loss adjustment
applicable to such participants plan deferral account. A participants benefit under the plan is
the amount of such participants plan deferral amount. The
87
Company had a deferred compensation obligation pursuant to the plan amounting to $3.2 million and
$3.8 million as of December 31, 2007 and 2006, respectively.
16. Commitments and Contingencies
The Company is subject to routine legal proceedings in connection with its property and casualty
insurance business. The Company also is not involved in any pending or threatened legal or
administrative proceedings which management believes can reasonably be expected to have a material
adverse effect on the Companys financial condition or results of operations.
Operating Leases:
The Company currently leases office space to serve as its headquarters location and 45 regional and
field offices throughout the country. In addition, the Company leases certain computer equipment
and licenses certain computer software. Rental expense for operating leases was $7.1 million, $5.5
million and $5.1 million for the years ended December 31, 2007, 2006 and 2005, respectively.
The future minimum rental payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31, 2007 were as follows (in
thousands):
|
|
|
|
|
Year Ending December 31:
|
|
|
|
|
2008
|
|
$
|
5,973
|
|
2009
|
|
|
5,595
|
|
2010
|
|
|
4,959
|
|
2011
|
|
|
4,625
|
|
2012 and Thereafter
|
|
|
7,803
|
|
|
|
|
|
Total Minimum Payments Required
|
|
$
|
28,955
|
|
|
|
|
|
Open Commitments:
As of December 31, 2007, the Company has open commitments of $4.1 million under certain limited
partnership, information technology and corporate sponsorship agreements.
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, 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 December 31, 2007, no borrowings have been made by the Company under this
Credit Agreement.
The Credit Agreement contains various representations, covenants and events of default typical for
credit facilities of this type. As of December 31, 2007, the Company was in compliance with all
covenants contained in the Credit Agreement.
State Insurance Guaranty Funds:
As of December 31, 2007 and 2006, included in Other Liabilities in the Consolidated Balance Sheets
were $13.2 million and $15.1 million, respectively, of liabilities for state insurance guaranty
funds. As of December 31, 2007 and 2006, 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
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 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
88
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.
In addition to Florida Citizens, the Company continues to monitor developments with respect to
various other state facilities such as the Mississippi Windstorm Underwriting Association and the
Texas Windstorm Insurance Association. The ultimate impact of the 2005 hurricane season on these
facilities is currently uncertain, but could result in the facilities recognizing a financial
deficit or a financial deficit greater than the level currently estimated by the facility. They
may, in turn, have the ability to assess participating insurers when financial deficits occur,
adversely affecting the Companys results of operations.
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.
17. Summary of Quarterly Financial Information Unaudited
The following quarterly financial information for each of the three months ended March 31, June 30,
September 30 and December 31, 2007 and 2006 is unaudited. However, in the opinion of management,
all adjustments (consisting of normal recurring adjustments) necessary to present fairly the
results of operations for such periods, have been made for a fair presentation of the results shown
(in thousands, except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2007 (1)
|
|
|
2007 (1)
|
|
|
2007 (1)
|
|
|
2007 (1)
|
|
Net Earned Premiums
|
|
$
|
318,718
|
|
|
$
|
337,315
|
|
|
$
|
359,149
|
|
|
$
|
364,061
|
|
Net Investment Income
|
|
$
|
26,973
|
|
|
|
28,522
|
|
|
$
|
30,199
|
|
|
$
|
31,530
|
|
Net Realized Investment Gain (Loss)
|
|
$
|
1,757
|
|
|
$
|
28,064
|
|
|
$
|
2,817
|
|
|
$
|
(3,072
|
)
|
Net Loss and Loss Adjustment Expenses
|
|
$
|
150,505
|
|
|
$
|
148,589
|
|
|
$
|
144,805
|
|
|
$
|
175,054
|
|
Acquisition Costs and Other Underwriting Expenses
|
|
$
|
96,904
|
|
|
$
|
101,746
|
|
|
$
|
101,252
|
|
|
$
|
113,201
|
|
Net Income
|
|
$
|
65,980
|
|
|
$
|
94,401
|
|
|
$
|
96,244
|
|
|
$
|
70,188
|
|
Basic Earnings Per Share
|
|
$
|
0.94
|
|
|
$
|
1.34
|
|
|
$
|
1.37
|
|
|
$
|
0.99
|
|
Diluted Earnings Per Share
|
|
$
|
0.89
|
|
|
$
|
1.27
|
|
|
$
|
1.30
|
|
|
$
|
0.94
|
|
Weighted-Average Common Shares Outstanding
|
|
|
70,148,787
|
|
|
|
70,361,554
|
|
|
|
70,457,765
|
|
|
|
70,553,136
|
|
Weighted-Average Share Equivalents Outstanding
|
|
|
4,054,030
|
|
|
|
3,835,617
|
|
|
|
3,599,654
|
|
|
|
3,858,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Shares and Share Equivalents Outstanding
|
|
|
74,202,817
|
|
|
|
74,197,171
|
|
|
|
74,057,419
|
|
|
|
74,411,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006 (2)
|
|
|
2006 (2)
|
|
|
2006 (2)
|
|
|
2006 (2)
|
|
Net Earned Premiums
|
|
$
|
276,546
|
|
|
$
|
288,794
|
|
|
$
|
296,366
|
|
|
$
|
307,596
|
|
Net Investment Income
|
|
$
|
20,062
|
|
|
|
21,677
|
|
|
$
|
23,833
|
|
|
$
|
26,127
|
|
Net Realized Investment Loss
|
|
$
|
(394
|
)
|
|
$
|
(2,412
|
)
|
|
$
|
(6,976
|
)
|
|
$
|
(79
|
)
|
Net Loss and Loss Adjustment Expenses
|
|
$
|
143,665
|
|
|
$
|
108,755
|
|
|
$
|
84,706
|
|
|
$
|
131,086
|
|
Acquisition Costs and Other Underwriting Expenses
|
|
$
|
77,017
|
|
|
$
|
85,337
|
|
|
$
|
89,052
|
|
|
$
|
86,861
|
|
Net Income
|
|
$
|
50,321
|
|
|
$
|
74,857
|
|
|
$
|
89,890
|
|
|
$
|
73,781
|
|
Basic Earnings Per Share
|
|
$
|
0.73
|
|
|
$
|
1.07
|
|
|
$
|
1.28
|
|
|
$
|
1.05
|
|
Diluted Earnings Per Share
|
|
$
|
0.70
|
|
|
$
|
1.03
|
|
|
$
|
1.22
|
|
|
$
|
1.00
|
|
Weighted-Average Common Shares Outstanding
|
|
|
69,377,774
|
|
|
|
69,775,336
|
|
|
|
69,991,728
|
|
|
|
70,029,636
|
|
Weighted-Average Share Equivalents Outstanding
|
|
|
2,982,230
|
|
|
|
2,721,730
|
|
|
|
3,488,999
|
|
|
|
3,887,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Shares and Share Equivalents Outstanding
|
|
|
72,360,004
|
|
|
|
72,497,066
|
|
|
|
73,480,727
|
|
|
|
73,917,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Net Realized Investment Gain (Loss) for the three months ended March 31, 2007, June 30, 2007,
September 30, 2007 and December 31, 2007 includes non-cash realized losses of $2.5 million,
$0.1 million, $1.1 million, and $4.2 million, respectively, as a result of impairment
evaluations.
|
|
(2)
|
|
Net Realized Investment Loss for the three months ended March 31, 2006, June 30, 2006,
September 30, 2006 and December 31, 2006 includes non-cash realized losses of $0.7 million,
$0.6 million, $5.7 million, and $1.8 million, respectively, as a result of impairment
evaluations.
|
18. Segment Information
The Companys operations are classified into three reportable business segments which are organized
around its three 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 professional
and management liability products; and
|
|
|
|
The Personal Lines Group which has underwriting responsibilities for personal property
insurance products for homeowners and manufactured housing markets in Florida, and the
National Flood Insurance Program for bother personal and commercial policy holders.
|
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 each of the past three years.
Corporate information is included to reconcile segment data to the consolidated financial
statements (in thousands):
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
|
Specialty
|
|
|
Personal
|
|
|
|
|
|
|
|
|
|
Lines
|
|
|
Lines
|
|
|
Lines
|
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
$
|
1,388,181
|
|
|
$
|
245,220
|
|
|
$
|
58,822
|
|
|
$
|
|
|
|
$
|
1,692,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Written Premiums
|
|
$
|
1,266,547
|
|
|
$
|
200,515
|
|
|
$
|
(7,429
|
)
|
|
$
|
|
|
|
$
|
1,459,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earned Premiums
|
|
$
|
1,174,779
|
|
|
$
|
188,985
|
|
|
$
|
15,479
|
|
|
$
|
|
|
|
$
|
1,379,243
|
|
Net Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,224
|
|
|
|
117,224
|
|
Net Realized Investment Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,566
|
|
|
|
29,566
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
2,363
|
|
|
|
1,198
|
|
|
|
3,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
1,174,779
|
|
|
|
188,985
|
|
|
|
17,842
|
|
|
|
147,988
|
|
|
|
1,529,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
537,999
|
|
|
|
71,561
|
|
|
|
9,393
|
|
|
|
|
|
|
|
618,953
|
|
Acquisition Costs and Other Underwriting Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
413,103
|
|
|
|
413,103
|
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
1,407
|
|
|
|
10,834
|
|
|
|
12,241
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Losses and Expenses
|
|
|
537,999
|
|
|
|
71,561
|
|
|
|
10,800
|
|
|
|
423,937
|
|
|
|
1,044,297
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
636,780
|
|
|
|
117,424
|
|
|
|
7,042
|
|
|
|
(275,949
|
)
|
|
|
485,297
|
|
Total Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
158,484
|
|
|
|
158,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
636,780
|
|
|
$
|
117,424
|
|
|
$
|
7,042
|
|
|
$
|
(434,433
|
)
|
|
$
|
326,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
89,063
|
|
|
$
|
4,010,875
|
|
|
$
|
4,099,938
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
$
|
1,169,468
|
|
|
$
|
227,567
|
|
|
$
|
96,213
|
|
|
$
|
|
|
|
$
|
1,493,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Written Premiums
|
|
$
|
1,080,248
|
|
|
$
|
181,358
|
|
|
$
|
21,258
|
|
|
$
|
|
|
|
$
|
1,282,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earned Premiums
|
|
$
|
966,281
|
|
|
$
|
173,974
|
|
|
$
|
29,047
|
|
|
$
|
|
|
|
$
|
1,169,302
|
|
Net Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,699
|
|
|
|
91,699
|
|
Net Realized Investment Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,861
|
)
|
|
|
(9,861
|
)
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
2,031
|
|
|
|
599
|
|
|
|
2,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
966,281
|
|
|
|
173,974
|
|
|
|
31,078
|
|
|
|
82,437
|
|
|
|
1,253,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
343,575
|
|
|
|
109,462
|
|
|
|
15,175
|
|
|
|
|
|
|
|
468,212
|
|
Acquisition Costs and Other Underwriting Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
338,267
|
|
|
|
338,267
|
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
1,407
|
|
|
|
11,230
|
|
|
|
12,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Losses and Expenses
|
|
|
343,575
|
|
|
|
109,462
|
|
|
|
16,582
|
|
|
|
349,497
|
|
|
|
819,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
622,706
|
|
|
|
64,512
|
|
|
|
14,496
|
|
|
|
(267,060
|
)
|
|
|
434,654
|
|
Total Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,805
|
|
|
|
145,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
622,706
|
|
|
$
|
64,512
|
|
|
$
|
14,496
|
|
|
$
|
(412,865
|
)
|
|
$
|
288,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
133,182
|
|
|
$
|
3,305,355
|
|
|
$
|
3,438,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Written Premiums
|
|
$
|
960,344
|
|
|
$
|
205,306
|
|
|
$
|
99,265
|
|
|
$
|
|
|
|
$
|
1,264,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Written Premiums
|
|
$
|
904,707
|
|
|
$
|
159,112
|
|
|
$
|
46,952
|
|
|
$
|
|
|
|
$
|
1,110,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earned Premiums
|
|
$
|
778,407
|
|
|
$
|
151,678
|
|
|
$
|
46,562
|
|
|
$
|
|
|
|
$
|
976,647
|
|
Net Investment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,709
|
|
|
|
63,709
|
|
Net Realized Investment Gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,609
|
|
|
|
9,609
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
943
|
|
|
|
521
|
|
|
|
1,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
778,407
|
|
|
|
151,678
|
|
|
|
47,505
|
|
|
|
73,839
|
|
|
|
1,051,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss and Loss Adjustment Expenses
|
|
|
375,590
|
|
|
|
93,824
|
|
|
|
34,592
|
|
|
|
|
|
|
|
504,006
|
|
Acquisition Costs and Other Underwriting Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
263,759
|
|
|
|
263,759
|
|
Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
370
|
|
|
|
16,754
|
|
|
|
17,124
|
|
Goodwill Impairment Loss
|
|
|
|
|
|
|
|
|
|
|
25,724
|
|
|
|
|
|
|
|
25,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Losses and Expenses
|
|
|
375,590
|
|
|
|
93,824
|
|
|
|
60,686
|
|
|
|
280,513
|
|
|
|
810,613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
|
402,817
|
|
|
|
57,854
|
|
|
|
(13,181
|
)
|
|
|
(206,674
|
)
|
|
|
240,816
|
|
Total Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,128
|
|
|
|
84,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
402,817
|
|
|
$
|
57,854
|
|
|
$
|
(13,181
|
)
|
|
$
|
(290,802
|
)
|
|
$
|
156,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
227,122
|
|
|
$
|
2,700,704
|
|
|
$
|
2,927,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
Summarized revenue information by product grouping for the Companys three reportable business
segments for the years ended December 31, 2007, 2006 and 2005 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Lines Net Earned Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Package
|
|
$
|
1,069,843
|
|
|
$
|
892,633
|
|
|
$
|
699,514
|
|
Specialty Property
|
|
|
59,628
|
|
|
|
45,060
|
|
|
|
38,048
|
|
Commercial Auto
|
|
|
21,801
|
|
|
|
22,733
|
|
|
|
23,574
|
|
Antique/Collector Auto
|
|
|
19,904
|
|
|
|
814
|
|
|
|
|
|
All Other
|
|
|
3,603
|
|
|
|
5,041
|
|
|
|
17,271
|
|
|
|
|
|
|
|
|
|
|
|
Total Commercial Lines
|
|
|
1,174,779
|
|
|
|
966,281
|
|
|
|
778,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Lines Net Earned Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
Management Liability
|
|
|
104,254
|
|
|
|
79,392
|
|
|
|
61,170
|
|
Professional Liability
|
|
|
84,731
|
|
|
|
94,582
|
|
|
|
90,508
|
|
|
|
|
|
|
|
|
|
|
|
Total Specialty Lines
|
|
|
188,985
|
|
|
|
173,974
|
|
|
|
151,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines Net Earned Premiums
|
|
|
|
|
|
|
|
|
|
|
|
|
Homeowners and Manufactured Housing
|
|
|
15,479
|
|
|
|
29,047
|
|
|
|
46,562
|
|
National Flood Insurance Program
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Personal Lines Net Earned Premiums
|
|
|
15,479
|
|
|
|
29,047
|
|
|
|
46,562
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
|
2,363
|
|
|
|
2,031
|
|
|
|
943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Personal Lines
|
|
|
17,842
|
|
|
|
31,078
|
|
|
|
47,505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Income
|
|
|
117,224
|
|
|
|
91,699
|
|
|
|
63,709
|
|
Net Realized Investment Gain (Loss)
|
|
|
29,566
|
|
|
|
(9,861
|
)
|
|
|
9,609
|
|
Other Income
|
|
|
1,198
|
|
|
|
599
|
|
|
|
521
|
|
|
|
|
|
|
|
|
|
|
|
Total Corporate
|
|
|
147,988
|
|
|
|
82,437
|
|
|
|
73,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
1,529,594
|
|
|
$
|
1,253,770
|
|
|
$
|
1,051,429
|
|
|
|
|
|
|
|
|
|
|
|
19. Subsequent Event
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 Philadelphia Insurance 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.
92
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
Item 9A. 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.
|
|
(c)
|
|
Managements Report on Internal Control Over Financial Reporting
|
|
|
|
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act
of 1934. Under the supervision and with the participation of our management, including the
principal executive officer and principal financial officer, we have conducted an evaluation of
the effectiveness of our internal control over financial reporting based on the framework in
Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on this evaluation under the framework in Internal
Control-Integrated Framework, we have concluded that the internal control over financial
reporting was effective as of December 31, 2007. Our managements assessment of the
effectiveness of internal control over financial reporting as of December 31, 2007 has been
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
|
|
|
|
Because of its inherent limitations, internal control over the financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
|
|
(d)
|
|
The Report of Independent Registered Public Accounting Firm on internal control over
financial reporting is included in this Annual Report on Form 10-K immediately before the
consolidated financial statements.
|
Item 9B. OTHER INFORMATION
Not applicable.
93
PART III
Certain information required by Part III is omitted from this Report in that the Company will file
a definitive proxy statement pursuant to Regulation 14A (the Proxy Statement) not later than 120
days after the end of the fiscal year covered by this Report, and certain information included
therein is incorporated herein by reference.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item is incorporated by reference to information included in the
Proxy Statement under the captions Nominees for Director, Director Independence, Independent
Directors, Audit Committee, Code of Conduct and Section 16(a) Beneficial Ownership
Reporting Compliance.
Item 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to information included in the
Proxy Statement under the captions Executive Compensation, and Compensation Committee Report.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
(a)
|
|
The information required by this Item is incorporated by reference to information included in
the Proxy Statement under the captions Security Ownership of Certain Beneficial Owners and
Management and Equity Compensation Plan Information.
|
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to information included in the
Proxy Statement under the caption Additional Information Regarding the Board.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference to information included in the
Proxy Statement under the caption Principal Accountant Fees and Services.
94
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) Financial Statements and Exhibits
1. The Financial Statements and Financial Statement Schedules listed in the accompanying index
on page 60 are filed as part of this Report.
2. Exhibits: The Exhibits listed below are filed as part of, or incorporated by reference
into, this Report.
|
|
|
|
|
Exhibit No.
|
|
|
|
Description
|
|
|
|
|
|
3.1
|
|
A
|
|
Articles of Incorporation of Philadelphia Insurance, as amended.
|
|
|
|
|
|
3.1.1
|
|
A
|
|
Amendment to Articles of Incorporation of Philadelphia Insurance.
|
|
|
|
|
|
3.1.2
|
|
G
|
|
Amendment to Articles of
Incorporation of Philadelphia Insurance.
|
|
|
|
|
|
3.2
|
|
P
|
|
By-Laws of Philadelphia Consolidated Holding Corp. (as Amended through April 29, 2005).
|
|
|
|
|
|
10.1
|
|
A
|
|
General Agency Agreement, effective December 1, 1987, between MIA and Providence Washington Insurance
Company, as amended to date, together with related Quota Share Reinsurance Agreements, as amended to
date.
|
|
|
|
|
|
10.2
|
|
A (1)
|
|
Wheelways Salary Savings Plus Plan Summary Plan Description.
|
|
|
|
|
|
10.3
|
|
A
|
|
Key Man Life Insurance Policies on James J. Maguire.
|
|
|
|
|
|
10.4
|
|
A
|
|
Tax Sharing Agreement, dated July 16, 1987, between Philadelphia Insurance and PIC, as amended to date.
|
|
|
|
|
|
10.5
|
|
A
|
|
Tax Sharing Agreement, dated November 1, 1986, between Philadelphia Insurance and PIIC, as amended to
date.
|
|
|
|
|
|
10.6
|
|
C (1)
|
|
Management Agreement dated May 20, 1991, between PIIC and MIA, as amended September 25, 1996.
|
|
|
|
|
|
10.7
|
|
C (1)
|
|
Management Agreement dated October 23, 1991, between PIC and MIA, as amended September 25, 1996.
|
|
|
|
|
|
10.8
|
|
B (1)
|
|
Employee Stock Purchase Plan.
|
|
|
|
|
|
10.9
|
|
B (1)
|
|
Cash Bonus Plan.
|
|
|
|
|
|
10.10
|
|
B (1)
|
|
Executive Deferred Compensation Plan.
|
|
|
|
|
|
10.11
|
|
D (1)
|
|
Directors Stock Purchase Plan.
|
|
|
|
|
|
10.12
|
|
F
|
|
Plan and Agreement of Merger Between Philadelphia Consolidated Holding Corp. and The Jerger Co. Inc.
|
|
|
|
|
|
10.13
|
|
G(1)
|
|
Philadelphia Insurance Companies Non Qualified Employee Stock Purchase Plan incorporated by
reference to Exhibit 4 to Registration Statement on Form S-8 (file no. 333-91216) filed with the
Securities and Exchange Commission on June 26, 2002.
|
|
|
|
|
|
10.14
|
|
G (1)
|
|
Philadelphia Insurance Companies Key Employee Deferred Compensation Plan incorporated by reference
to Exhibit 4.1 to Registration Statement on Form S-8 (file no. 333-90534) filed with the Securities
and Exchange Commission on June 14, 2002.
|
|
|
|
|
|
10.15
|
|
H (1)
|
|
Employment Agreement with James J. Maguire effective June 1, 2002.
|
|
|
|
|
|
10.16
|
|
I
|
|
AQS, Inc. Software License Agreement, dated October 1, 2002.
|
95
|
|
|
|
|
Exhibit No.
|
|
|
|
Description
|
|
|
|
|
|
10.17
|
|
K
|
|
Quota Share Reinsurance Contract with Swiss Reinsurance America Corporation effective May 15, 2003 covering
policies within the Custom Harvest Program.
|
|
|
|
|
|
10.18
|
|
K
|
|
Excess of Loss Agreement of Reinsurance No. 9034 with General Reinsurance Corporation effective January 1,
2003.
|
|
|
|
|
|
10.19
|
|
K
|
|
Addendum No. 3 to the Casualty Excess of Loss Reinsurance Agreement No. TC988A, B with Swiss Reinsurance
American Corporation effective January 1, 2003.
|
|
|
|
|
|
10.20
|
|
K
|
|
Property Excess of Loss Agreement of Reinsurance No. TP1600E with Swiss Reinsurance America Corporation
effective January 1, 2003.
|
|
|
|
|
|
10.21
|
|
K
|
|
Casualty Excess of Loss Reinsurance Contract with American Re-Insurance Company, Converium Reinsurance
(North America) Inc., Endurance Specialty Insurance Limited, Liberty Mutual Insurance Company effective
January 1, 2003.
|
|
|
|
|
|
10.22
|
|
L
|
|
Casualty Semi-Automatic Excess of Loss Reinsurance Contract with Endurance Specialty Insurance, Ltd.
effective March 1, 2003 RE: Philadelphia Insurance Company Master Policy PHUB015555 and Philadelphia
Indemnity Insurance Company Master Policy PHUB015555-01.
|
|
|
|
|
|
10.23
|
|
L
|
|
Casualty Semi-Automatic Excess of Loss Reinsurance Contract with Endurance Specialty Insurance, Ltd.
effective March 1, 2003 RE: Philadelphia Insurance Company Master Policy PHUB015557 and Philadelphia
Indemnity Insurance Company Master Policy PHUB015557-01.
|
|
|
|
|
|
10.24
|
|
M
|
|
Whole Account Net Quota Share Reinsurance Contract effective as of January 1, 2004 (Addendum No. 1).
|
|
|
|
|
|
10.25
|
|
M
|
|
Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective as of June 1, 2004.
|
|
|
|
|
|
10.26
|
|
M
|
|
Casualty Excess of Loss Reinsurance Contract effective as of January 1, 2004.
|
|
|
|
|
|
10.27
|
|
M
|
|
Property Per Risk 1st and 2nd Excess Reinsurance Contract effective as of January 1, 2004 (Endorsement No.
1).
|
|
|
|
|
|
10.28
|
|
M(1)
|
|
Amended and Restated Employment Agreement with James J. Maguire effective as of January 1, 2004.
|
|
|
|
|
|
10.29
|
|
N
|
|
Gap Quota Share Reinsurance Contract effective as of April 1, 2004.
|
|
|
|
|
|
10.30
|
|
N
|
|
Casualty (Clash) Excess of Loss effective January 1, 2004.
|
|
|
|
|
|
10.31
|
|
N
|
|
Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective June 1, 2004 (Liberty American
Insurance Company).
|
|
|
|
|
|
10.32
|
|
N
|
|
Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective June 1, 2004 (Mobile USA
Insurance Company).
|
|
|
|
|
|
10.33
|
|
O
|
|
Reinstatement Premium Protection Reinsurance Contract effective July 1, 2004.
|
|
|
|
|
|
10.34
|
|
O
|
|
Underlying Excess Catastrophe and Reinstatement Premium Protection Reinsurance Contract effective July 1,
2004.
|
|
|
|
|
|
10.35
|
|
O
|
|
35% Florida Only Third and Fourth Catastrophe Event Reinsurance Contract effective September 2, 2004.
|
|
|
|
|
|
10.36
|
|
O
|
|
$50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract effective September
3, 2004.
|
|
|
|
|
|
10.37
|
|
P
|
|
Florida Only Excess Catastrophe Reinsurance Contract effective June 1, 2004 with the Subscribing Reinsurers.
|
|
|
|
|
|
10.38
|
|
P
|
|
$50 million excess of $90 million Florida Only Excess Catastrophe Reinsurance Contract effective June 1,
2004 with the Subscribing Reinsurers.
|
96
|
|
|
|
|
Exhibit No.
|
|
|
|
Description
|
|
|
|
|
|
10.39
|
|
P
|
|
$50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract effective
September 1, 2004 with the Subscribing Reinsurers.
|
|
|
|
|
|
10.40
|
|
P
|
|
$5 million excess of $190 million Florida Only Catastrophe Excess Reinsurance Contract effective
September 10, 2004 with the Subscribing Reinsurers.
|
|
|
|
|
|
10.41
|
|
P
|
|
Underlying Excess Catastrophe Reinsurance Contract effective July 1, 2004 with the Subscribing Reinsurers.
|
|
|
|
|
|
10.42
|
|
P
|
|
Casualty Excess of Loss Contract effective January 1, 2005 with Swiss Reinsurance America Corporation.
|
|
|
|
|
|
10.43
|
|
P
|
|
Addendum Number 2 to the Property Excess of Loss Contract effective January 1, 2005 with Swiss
Reinsurance America Corporation.
|
|
|
|
|
|
10.44
|
|
P
|
|
Endorsement No. 2 to the Property Per Risk 1
st
and 2
nd
Excess Reinsurance Contract
effective January 1, 2005 with General Reinsurance Corporation.
|
|
|
|
|
|
10.45
|
|
Q
|
|
Excess Catastrophe Reinsurance Contract effective June 1, 2004 with the Subscribing Reinsurers.
|
|
|
|
|
|
10.46
|
|
Q
|
|
65% Florida Only Third and Fourth Event Excess Catastrophe Reinsurance Contract effective September 1,
2004 with the Subscribing Reinsurers.
|
|
|
|
|
|
10.47
|
|
Q
|
|
$45 million excess of $195 million Florida Only Catastrophe Reinsurance Contract effective September 10,
2004 with the Subscribing Reinsurers.
|
|
|
|
|
|
10.48
|
|
Q
|
|
$6.5 million excess of $3.5 million Florida Only Fifth Event Catastrophe Reinsurance Contract effective
September 24, 2004 with the Subscribing Reinsurers.
|
|
|
|
|
|
10.49
|
|
Q
|
|
$50 million excess of $240 million Florida Only Catastrophe Reinsurance Contract effective October 1,
2004 with the Subscribing Reinsurers.
|
|
|
|
|
|
10.50
|
|
Q
|
|
$40 million excess of $50 million Florida Only Third Event Catastrophe Reinsurance Contract effective
October 1, 2004 with the Subscribing Reinsurers.
|
|
|
|
|
|
10.51
|
|
Q
|
|
$50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract effective October
1, 2004 with the Subscribing Reinsurers.
|
|
|
|
|
|
10.52
|
|
Q
|
|
Florida Hurricane Catastrophe Fund Reinsurance Contract effective June 1, 2005 (Liberty American
Insurance Company).
|
|
|
|
|
|
10.53
|
|
Q
|
|
Florida Hurricane Catastrophe Fund Reinsurance Contract effective June 1, 2005 (Mobile USA Insurance
Company).
|
|
|
|
|
|
10.54
|
|
Q
|
|
Third Event Catastrophe Reinsurance Contract effective September 3, 2004 with the Subscribing Reinsurers
for 50% share.
|
|
|
|
|
|
10.55
|
|
Q
|
|
Third Event Catastrophe Reinsurance Contract effective September 3, 2004 with the Subscribing Reinsurers
for 50% share.
|
|
|
|
|
|
10.56
|
|
Q (1)
|
|
Amendment and Restatement of the Companys Employees Stock Incentive and Performance Based Compensation
Plan.
|
|
|
|
|
|
10.57
|
|
Q (1)
|
|
Form of Stock Option Award Agreement.
|
|
|
|
|
|
10.58
|
|
Q (1)
|
|
Form of Restricted Stock Award Agreement.
|
|
|
|
|
|
10.59
|
|
R
|
|
Casualty Excess of Loss Reinsurance Contract and Endorsement No. 1 effective January 1, 2005. The
participating reinsurers are Ace Property & Casualty Insurance Company, Allied World Assurance Company,
Ltd., Liberty Mutual Insurance Company, Max Re Ltd.
|
97
|
|
|
|
|
Exhibit No.
|
|
|
|
Description
|
|
|
|
|
|
10.60
|
|
R
|
|
Florida Only Reinstatement Premium Protection Reinsurance Contract effective June 1, 2005. The
participating reinsurers are ACE Tempest Reinsurance LTD, Aspen Insurance UK LTD, AXIS Specialty Limited,
Hannover Re (Bermuda) Ltd., Rosemont Reinsurance LTD, Syndicate #0958 and Syndicate #2001 at varying
levels of participation.
|
|
|
|
|
|
10.61
|
|
R
|
|
Professional Liability Insurance Quota Share Contract effective July 1, 2005 with Cumis Insurance Society,
Inc.
|
|
|
|
|
|
10.62
|
|
S
|
|
Lease Agreement dated as of March 1, 2006 between Bala Plaza Property, Inc., and Philadelphia Consolidated
Holding Corp.
|
|
|
|
|
|
10.63
|
|
T
|
|
Excess Catastrophe Reinsurance Contract effective June 1, 2005.
|
|
|
|
|
|
10.64
|
|
T
|
|
Florida Only Excess Catastrophe Reinsurance Contract effective June 1, 2005.
|
|
|
|
|
|
10.65
|
|
T
|
|
Reinstatement Premium Protection Reinsurance Contract effective June 1, 2005.
|
|
|
|
|
|
10.66
|
|
T
|
|
2004 Whole Account Net Quota Share Reinsurance Commutation and Release Agreement effective January 1, 2006
with Federal Insurance Company, through Chubb Re, Inc.
|
|
|
|
|
|
10.67
|
|
T
|
|
2004 Whole Account Net Quota Share Reinsurance Commutation and Release Agreement effective January 1, 2006
with Swiss Reinsurance America Corporation.
|
|
|
|
|
|
10.68
|
|
T
|
|
Casualty Excess of Loss Reinsurance Agreement effective January 1, 2006 80% Placement via Willis Re Inc.
|
|
|
|
|
|
10.69
|
|
T
|
|
Property Third and Fourth Excess of Loss Reinsurance Agreement effective January 1, 2006 50% Placement
via Willis Re Inc.
|
|
|
|
|
|
10.70
|
|
U
|
|
Credit Agreement dated as of June 30, 2006.
|
|
|
|
|
|
10.71
|
|
V
|
|
Casualty (Clash) Excess of Loss Reinsurance Agreement with Swiss Reinsurance America Corporation effective
January 1, 2006.
|
|
|
|
|
|
10.72
|
|
V
|
|
Addendum No. 3 to the 3rd and 4th Property Excess of Loss Reinsurance Agreement with Swiss Reinsurance
America Corporation 50% Placement effective January 1, 2006.
|
|
|
|
|
|
10.73
|
|
V
|
|
Casualty Excess of Loss Reinsurance Contract effective January 1, 2006 20% Placement with Employers
Reinsurance Corporation.
|
|
|
|
|
|
10.74
|
|
V
|
|
Endorsement No. 4 to the Property Per Risk 1st and 2nd Excess of Loss and Terrorism Reinsurance Contract
with General Reinsurance Corporation effective January 1, 2006.
|
|
|
|
|
|
10.75
|
|
V
|
|
Commutation and Release Agreement with Trenwick America Reinsurance Corporation.
|
|
|
|
|
|
10.76
|
|
V
|
|
$6,150,000 Excess $10,000,000 Catastrophe Reinsurance Contract with Aspen Insurance Limited effective June
1, 2006.
|
|
|
|
|
|
10.77
|
|
V
|
|
First Excess Reinstatement Premium Protection Reinsurance Contract with Subscribing Reinsurers effective
June 1, 2006 (Liberty American and Liberty American Select Insurance Companies).
|
|
|
|
|
|
10.78
|
|
V
|
|
Second and Third Excess Reinstatement Premium Protection Reinsurance Contract with Subscribing Reinsurers
effective June 1, 2006 (Liberty American and Liberty American Select Insurance Companies).
|
|
|
|
|
|
10.79
|
|
V
|
|
Florida Hurricane Catastrophe Fund Reimbursement Contract and Addendum No. 1 effective June 1, 2006
(Liberty American Insurance Company).
|
|
|
|
|
|
10.80
|
|
V
|
|
Florida Hurricane Catastrophe Fund Reimbursement Contract and Addendums No. 1 and No. 2 effective June 1,
2006 (Liberty American Select Insurance Company).
|
98
|
|
|
|
|
Exhibit No.
|
|
|
|
Description
|
|
|
|
|
|
10.81
|
|
W(1)
|
|
Form of Performance Share Award Agreement.
|
|
|
|
|
|
10.82
|
|
W(1)
|
|
James J. Maguire, Jr. Employment Agreement.
|
|
|
|
|
|
10.83
|
|
W(1)
|
|
Sean S. Sweeney Employment Agreement.
|
|
|
|
|
|
10.84
|
|
W(1)
|
|
Craig P. Keller Employment Agreement.
|
|
|
|
|
|
10.85
|
|
W(1)
|
|
Christopher J. Maguire Employment Agreement.
|
|
|
|
|
|
10.86
|
|
W(1)
|
|
Form of Stock Appreciation Right Award Agreement.
|
|
|
|
|
|
10.87
|
|
X(1)
|
|
James J. Maguire, Jr. 2006 Grant of Stock Appreciation Rights.
|
|
|
|
|
|
10.88
|
|
X(1)
|
|
Sean S. Sweeney 2006 Grant of Stock Appreciation Rights.
|
|
|
|
|
|
10.89
|
|
X(1)
|
|
Craig P. Keller 2006 Grant of Stock Appreciation Rights.
|
|
|
|
|
|
10.90
|
|
X(1)
|
|
Christopher J. Maguire 2006 Grant of Stock Appreciation Rights.
|
|
|
|
|
|
10.91
|
|
X
|
|
Excess Catastrophe Reinsurance Contract effective June 1, 2006.
|
|
|
|
|
|
10.92
|
|
Y
|
|
Florida Only Excess Catastrophe Reinsurance Contract effective June 1, 2006.
|
|
|
|
|
|
10.93
|
|
Y
|
|
Casualty Excess of Loss Reinsurance Contract effective January 1, 2007.
|
|
|
|
|
|
10.94
|
|
Y
|
|
Endorsement No. 6 to the Property Per Risk Excess of Loss Reinsurance Agreement effective January 1, 2007
- First through Third Excess Covers.
|
|
|
|
|
|
10.95
|
|
Y
|
|
Property Fourth Per Risk Excess of Loss Reinsurance Agreement effective January 1, 2007 25% Placement
via Willis Re Inc.
|
|
|
|
|
|
10.96
|
|
Z
|
|
The Philadelphia Insurance Companies 2007 Cash Bonus Plan effective as of January 1, 2007.
|
|
|
|
|
|
10.97
|
|
Z
|
|
Philadelphia Insurance Companies Non Qualified Employee Stock Purchase Plan (amended and restated,
effective as of January 1, 2007, with Performance-Based Compensation Provisions).
|
|
|
|
|
|
10.98
|
|
AA
|
|
Amendment to Credit Agreement dated June 30, 2006 with Bank of America and Wachovia Bank, National
Association.
|
|
|
|
|
|
10.99
|
|
BB
|
|
Casualty (Clash) Excess of Loss Reinsurance Agreement with Swiss Reinsurance America Corporation effective
January 1, 2007.
|
|
|
|
|
|
10.100
|
|
BB
|
|
Property Per Risk Excess of Loss Agreement of Reinsurance No. 9034 07 with General Reinsurance
Corporation effective January 1, 2007 and Termination of Endorsement No. 6 to the Property Per Risk Excess
of Loss Reinsurance Agreement No. 9034.
|
|
|
|
|
|
10.101
|
|
BB
|
|
Interest and Liabilities Agreement to the Property Fourth Per Risk Excess of Loss Reinsurance Agreement
with Swiss Reinsurance America Corporation effective January 1, 2007.
|
|
|
|
|
|
10.102
|
|
BB
|
|
Terrorism Catastrophe Excess of Loss Reinsurance Contract 80% Share with Underwriters At Lloyds
effective March 1, 2007.
|
|
|
|
|
|
10.103
|
|
BB
|
|
Terrorism Catastrophe Excess of Loss Reinsurance Contract 20% Share with Validus Reinsurance, LTD.
effective March 1, 2007.
|
|
|
|
|
|
10.104
|
|
BB
|
|
Excess Catastrophe Reinsurance Contract with Subscribing Reinsurers effective June 1, 2007.
|
99
|
|
|
|
|
Exhibit No.
|
|
|
|
Description
|
|
|
|
|
|
10.105
|
|
BB
|
|
Reinstatement Premium Protection Reinsurance Contract with Subscribing Reinsurers effective June 1, 2007.
|
|
|
|
|
|
10.106
|
|
BB
|
|
Florida Only Excess Catastrophe Reinsurance Contract with Subscribing Reinsurers effective June 1, 2007 -
Liberty American and Liberty American Select Insurance Companies.
|
|
|
|
|
|
10.107
|
|
BB
|
|
First and Second Excess Reinstatement Premium Protection Reinsurance Contract with Subscribing Reinsurers
effective June 1, 2007 Liberty American and Liberty American Select Insurance Companies.
|
|
|
|
|
|
10.108
|
|
BB
|
|
Third Excess Reinstatement Premium Protection Reinsurance Contract with Subscribing Reinsurers effective
June 1, 2007 Liberty American and Liberty American Select Insurance Companies.
|
|
|
|
|
|
10.109
|
|
BB
|
|
Florida Hurricane Catastrophe Fund Reimbursement Contract and Addendums No. 1 through No. 4 effective June
1, 2007 Liberty American Select Insurance Company.
|
|
|
|
|
|
10.110
|
|
BB
|
|
Florida Hurricane Catastrophe Fund Reimbursement Contract and Addendums No. 1 through No. 4 effective June
1, 2007 Liberty American Insurance Company.
|
|
|
|
|
|
14
|
|
CC
|
|
Companys Code of Conduct
|
|
|
|
|
|
21
|
|
DD
|
|
List of Subsidiaries of the Registrant.
|
|
|
|
|
|
23
|
|
DD
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
|
|
|
|
24
|
|
A
|
|
Power of Attorney.
|
|
|
|
|
|
31.1
|
|
DD
|
|
Certification of the Companys chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
|
|
31.2
|
|
DD
|
|
Certification of the Companys chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
|
|
|
|
32.1
|
|
DD
|
|
Certification of the Companys chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
|
|
|
|
32.2
|
|
DD
|
|
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.
|
|
|
|
A
|
|
Incorporated by reference to the Exhibit filed with the Registrants Form S-1 Registration Statement under the
Securities Act of 1933 (Registration No. 33-56958).
|
|
B
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30,
1996 and incorporated by reference.
|
|
C
|
|
Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 1996 and
incorporated by reference.
|
|
D
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997
and incorporated by reference.
|
|
E
|
|
Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 1997.
|
|
F
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999.
|
|
G
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002
and incorporated by reference.
|
|
H
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2002 and incorporated by reference.
|
|
I
|
|
Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2002.
|
|
J
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003
and incorporated by reference.
|
100
|
|
|
K
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2003 and incorporated by reference.
|
|
L
|
|
Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2003 and
incorporated by reference.
|
|
M
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004
and incorporated by reference.
|
|
N
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2004 and incorporated by reference.
|
|
O
|
|
Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2004 and
incorporated by reference.
|
|
P
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005
and incorporated by reference.
|
|
Q
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005
and incorporated by reference.
|
|
R
|
|
Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2005 and
incorporated by reference.
|
|
S
|
|
Filed as an Exhibit to the Companys Form 8-K dated March 21, 2006 and incorporated by reference.
|
|
T
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006
and incorporated by reference.
|
|
U
|
|
Filed as an Exhibit to the Companys Form 8-K dated July 6, 2006 and incorporated by reference.
|
|
V
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2006 and incorporated by reference.
|
|
W
|
|
Filed as an Exhibit to the Companys Form 8-K dated February 22, 2007 and incorporated by reference.
|
|
X
|
|
Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2006 and
incorporated by reference.
|
|
Y
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007
and incorporated by reference.
|
|
Z
|
|
Filed as an Exhibit to the Companys Form 8-K dated May 3, 2007 and incorporated by reference.
|
|
AA
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007
and incorporated by reference.
|
|
BB
|
|
Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2007 and incorporated by reference.
|
|
CC
|
|
Filed as an Exhibit to the Companys Form 8-K dated
February 28, 2008 and incorporated by reference.
|
|
DD
|
|
Filed herewith.
|
|
(1)
|
|
Compensatory Plan or Arrangement, or Management Contract.
|
101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
Philadelphia Consolidated Holding Corp.
|
|
|
By:
|
James J. Maguire, Jr.
|
|
|
|
James J. Maguire, Jr.
|
|
|
|
President and Chief Executive Officer
|
|
|
|
February 27, 2008
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
James J. Maguire, Jr.
James J. Maguire, Jr.
|
|
President & Chief Executive Officer,
(Principal Executive Officer)
|
|
February 27, 2008
|
|
|
|
|
|
Craig P. Keller
Craig P. Keller
|
|
Executive Vice President, Secretary,
Treasurer, and Chief Financial Officer
(Principal Financial and Accounting
Officer)
|
|
February 27, 2008
|
|
|
|
|
|
James J. Maguire
James J. Maguire
|
|
Chairman of the Board of
Directors
|
|
February 27, 2008
|
|
|
|
|
|
Sean S. Sweeney
Sean S. Sweeney
|
|
Executive Vice President, Director
|
|
February 27, 2008
|
|
|
|
|
|
Aminta Hawkins Breaux
Aminta Hawkins Breaux
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
Michael J. Cascio
Michael J. Cascio
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
Elizabeth H. Gemmill
Elizabeth H. Gemmill
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
Paul R. Hertel, Jr.
Paul R. Hertel, Jr.
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
Michael J. Morris
Michael J. Morris
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
Shaun F. OMalley
Shaun F. OMalley
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
Donald A. Pizer
Donald A. Pizer
|
|
Director
|
|
February 27, 2008
|
|
|
|
|
|
Ronald R. Rock
Ronald R. Rock
|
|
Director
|
|
February 27, 2008
|
102
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule I Summary of Investments Other than Investments in Related Parties
As of December 31, 2007
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COLUMN C
|
|
|
COLUMN D
|
|
|
|
|
|
|
|
Estimated
|
|
|
Amount at which
|
|
COLUMN A
|
|
COLUMN B
|
|
|
Market
|
|
|
shown in the
|
|
Type of Investment
|
|
Cost *
|
|
|
Value
|
|
|
Balance Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States Government and Government Agencies and Authorities
|
|
$
|
620,127
|
|
|
$
|
627,154
|
|
|
$
|
627,154
|
|
States, Municipalities and Political Subdivisions
|
|
|
1,380,755
|
|
|
|
1,389,070
|
|
|
|
1,389,070
|
|
Public Utilities
|
|
|
10,723
|
|
|
|
10,618
|
|
|
|
10,618
|
|
All Other Corporate Bonds
|
|
|
627,866
|
|
|
|
632,355
|
|
|
|
632,355
|
|
|
|
|
|
|
|
|
|
|
|
Total Fixed Maturities
|
|
|
2,639,471
|
|
|
|
2,659,197
|
|
|
|
2,659,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
Public Utilities
|
|
|
8,379
|
|
|
|
11,839
|
|
|
|
11,839
|
|
Banks, Trust and Insurance Companies
|
|
|
28,459
|
|
|
|
28,864
|
|
|
|
28,864
|
|
Industrial, Miscellaneous and all other
|
|
|
286,039
|
|
|
|
315,323
|
|
|
|
315,323
|
|
|
|
|
|
|
|
|
|
|
|
Total Equity Securities
|
|
|
322,877
|
|
|
|
356,026
|
|
|
|
356,026
|
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
$
|
2,962,348
|
|
|
$
|
3,015,223
|
|
|
$
|
3,015,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Original cost of equity securities; original cost of fixed maturities adjusted for
amortization of premiums and accretion of discounts. All amounts are shown net of
impairment losses.
|
See Notes to Consolidated Financial Statements included in Item 8.
S-1
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II
Condensed Financial Information of Registrant
(Parent Only)
Balance Sheets
(In Thousands, Except Share Data)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
$
|
868
|
|
|
$
|
188
|
|
Equity in and Advances to Unconsolidated Subsidiaries (a)
|
|
|
1,546,146
|
|
|
|
1,168,524
|
|
Income Taxes Recoverable
|
|
|
874
|
|
|
|
|
|
Other Assets
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,547,911
|
|
|
$
|
1,168,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Liabilities
|
|
$
|
438
|
|
|
$
|
1,445
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
438
|
|
|
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 72,087,287 and 70,848,482
Shares Issued and Outstanding
|
|
|
423,379
|
|
|
|
376,986
|
|
Notes Receivable from Shareholders
|
|
|
(19,595
|
)
|
|
|
(17,074
|
)
|
Accumulated Other Comprehensive Income
|
|
|
34,369
|
|
|
|
24,848
|
|
Retained Earnings
|
|
|
1,109,320
|
|
|
|
782,507
|
|
|
|
|
|
|
|
|
|
|
|
1,547,473
|
|
|
|
1,167,267
|
|
|
|
|
|
|
|
|
Total Liabilities and Shareholders Equity
|
|
$
|
1,547,911
|
|
|
$
|
1,168,712
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
This item has been eliminated in the Companys Consolidated Financial Statements.
|
See Notes to Consolidated Financial Statements included in Item 8.
S-2
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II, Continued
Condensed Financial Information of Registrant
(Parent Only)
Statements of Operations
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from Subsidiaries (a)
|
|
$
|
39,903
|
|
|
$
|
7,645
|
|
|
$
|
35,797
|
|
Net Investment Income
|
|
|
23
|
|
|
|
|
|
|
|
|
|
Net Realized Investment Loss
|
|
|
|
|
|
|
|
|
|
|
(3,148
|
)
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
39,926
|
|
|
|
7,645
|
|
|
|
32,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Expenses
|
|
|
3,229
|
|
|
|
3,511
|
|
|
|
3,385
|
|
|
|
|
|
|
|
|
|
|
|
Total Expenses
|
|
|
3,229
|
|
|
|
3,511
|
|
|
|
3,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income, Before Income Taxes and Equity in Earnings of Unconsolidated Subsidiaries
|
|
|
36,697
|
|
|
|
4,134
|
|
|
|
29,264
|
|
Income Tax Benefit
|
|
|
(1,122
|
)
|
|
|
(884
|
)
|
|
|
(2,287
|
)
|
|
|
|
|
|
|
|
|
|
|
Income, Before Equity in Earnings of Unconsolidated Subsidiaries
|
|
|
37,819
|
|
|
|
5,018
|
|
|
|
31,551
|
|
Equity in Earnings of Unconsolidated Subsidiaries
|
|
|
288,994
|
|
|
|
283,831
|
|
|
|
125,137
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
326,813
|
|
|
$
|
288,849
|
|
|
$
|
156,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
This item has been eliminated in the Companys Consolidated Financial Statements.
|
See Notes to Consolidated Financial Statements included in Item 8.
S-3
See Notes to Consolidated Financial Statements included in Item 8.
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule II, Continued
Condensed Financial Information of Registrant
(Parent Only)
Statements of Cash Flows
(In Thousands
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
326,813
|
|
|
$
|
288,849
|
|
|
$
|
156,688
|
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in Earnings of Unconsolidated Subsidiaries
|
|
|
(288,994
|
)
|
|
|
(283,831
|
)
|
|
|
(125,137
|
)
|
Net Realized Investment Loss
|
|
|
|
|
|
|
|
|
|
|
3,148
|
|
Change in Other Liabilities
|
|
|
(397
|
)
|
|
|
744
|
|
|
|
218
|
|
Change in Other Assets
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
Change in Income Taxes Recoverable
|
|
|
5,834
|
|
|
|
11,442
|
|
|
|
(2,147
|
)
|
Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans
|
|
|
|
|
|
|
|
|
|
|
6,952
|
|
Fair Value of Stock Based Compensation
|
|
|
16,001
|
|
|
|
12,511
|
|
|
|
|
|
Excess Tax Benefit from Issuance of Shares Pursuant to Stock Based
Compensation Plans
|
|
|
(5,925
|
)
|
|
|
(8,646
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating Activities
|
|
|
53,309
|
|
|
|
21,069
|
|
|
|
39,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows Used by Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Transfers to Subsidiaries (a)
|
|
|
(79,107
|
)
|
|
|
(41,408
|
)
|
|
|
(67,141
|
)
|
Settlement of Cash Flow Hedge
|
|
|
|
|
|
|
|
|
|
|
(3,148
|
)
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used by Investing Activities
|
|
|
(79,107
|
)
|
|
|
(41,408
|
)
|
|
|
(70,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Exercise of Employee Stock Options
|
|
|
6,621
|
|
|
|
6,697
|
|
|
|
4,582
|
|
Proceeds from Collection of Notes Receivable
|
|
|
5,951
|
|
|
|
2,534
|
|
|
|
2,343
|
|
Proceeds from Shares Issued Pursuant to Stock Purchase Plans
|
|
|
7,981
|
|
|
|
7,130
|
|
|
|
23,721
|
|
Excess Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation
Plans
|
|
|
5,925
|
|
|
|
8,646
|
|
|
|
|
|
Cost of Shares Withheld to Satisfy Minimum Required Tax Withholding Obligation
Arising Upon Exchange of Options
|
|
|
|
|
|
|
(4,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Financing Activities
|
|
|
26,478
|
|
|
|
20,331
|
|
|
|
30,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Equivalents
|
|
|
680
|
|
|
|
(8
|
)
|
|
|
79
|
|
Cash and Cash Equivalents at Beginning of Year
|
|
|
188
|
|
|
|
196
|
|
|
|
117
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at End of Year
|
|
$
|
868
|
|
|
$
|
188
|
|
|
$
|
196
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividends Received From Unconsolidated Subsidiaries
|
|
$
|
39,903
|
|
|
$
|
7,645
|
|
|
$
|
35,797
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Shares Pursuant to Employee Stock Purchase Plan in exchange for
Notes Receivable
|
|
$
|
8,466
|
|
|
$
|
12,391
|
|
|
$
|
4,095
|
|
|
|
|
(a)
|
|
This item has been eliminated in the Companys Consolidated Financial Statements.
|
See Notes to Consolidated Financial Statements included in Item 8.
S-4
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule III Supplementary Insurance Information
As of and For the Years Ended December 31, 2007, 2006 and 2005
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COLUMN C
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Policy
|
|
|
|
|
|
|
COLUMN E
|
|
|
|
|
|
|
|
|
|
|
COLUMN H
|
|
|
COLUMN I
|
|
|
|
|
|
|
|
|
|
COLUMN B
|
|
|
Benefits,
|
|
|
|
|
|
|
Other Policy
|
|
|
|
|
|
|
|
|
|
|
Benefits,
|
|
|
Amortization of
|
|
|
|
|
|
|
|
|
|
Deferred Policy
|
|
|
Losses, Claims
|
|
|
COLUMN D
|
|
|
Claims and
|
|
|
COLUMN F
|
|
|
COLUMN G
|
|
|
Claims, Losses,
|
|
|
Deferred Policy
|
|
|
COLUMN J
|
|
|
COLUMN K
|
|
COLUMN A
|
|
Acquisition
|
|
|
and Loss
|
|
|
Unearned
|
|
|
Benefits
|
|
|
Premium
|
|
|
Net Investment
|
|
|
and Settlement
|
|
|
Acquisition
|
|
|
Other Operating
|
|
|
Premiums
|
|
Segment
|
|
Costs
|
|
|
Expenses
|
|
|
Premiums
|
|
|
Payable
|
|
|
Revenue
|
|
|
Income
|
|
|
Expenses
|
|
|
Costs
|
|
|
Expenses
|
|
|
Written
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Lines
|
|
$
|
|
|
|
$
|
1,068,549
|
|
|
$
|
701,996
|
|
|
|
|
|
|
$
|
1,174,779
|
|
|
$
|
|
|
|
$
|
537,999
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,266,547
|
|
Specialty Lines
|
|
|
|
|
|
|
348,511
|
|
|
|
118,601
|
|
|
|
|
|
|
|
188,985
|
|
|
|
|
|
|
|
71,561
|
|
|
|
|
|
|
|
|
|
|
|
200,515
|
|
Personal Lines
|
|
|
|
|
|
|
14,873
|
|
|
|
26,888
|
|
|
|
|
|
|
|
15,479
|
|
|
|
|
|
|
|
9,393
|
|
|
|
|
|
|
|
|
|
|
|
(7,429
|
)
|
Corporate
|
|
|
184,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117,224
|
|
|
|
|
|
|
|
345,181
|
|
|
|
67,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
184,446
|
|
|
$
|
1,431,933
|
|
|
$
|
847,485
|
|
|
|
|
|
|
$
|
1,379,243
|
|
|
$
|
117,224
|
|
|
$
|
618,953
|
|
|
$
|
345,181
|
|
|
$
|
67,922
|
|
|
$
|
1,459,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Lines
|
|
$
|
|
|
|
$
|
904,521
|
|
|
$
|
603,822
|
|
|
|
|
|
|
$
|
966,281
|
|
|
$
|
|
|
|
$
|
343,575
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,080,248
|
|
Specialty Lines
|
|
|
|
|
|
|
355,275
|
|
|
|
107,504
|
|
|
|
|
|
|
|
173,974
|
|
|
|
|
|
|
|
109,462
|
|
|
|
|
|
|
|
|
|
|
|
181,358
|
|
Personal Lines
|
|
|
|
|
|
|
23,442
|
|
|
|
48,032
|
|
|
|
|
|
|
|
29,047
|
|
|
|
|
|
|
|
15,175
|
|
|
|
|
|
|
|
|
|
|
|
21,258
|
|
Corporate
|
|
|
158,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,699
|
|
|
|
|
|
|
|
283,692
|
|
|
|
54,575
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
158,805
|
|
|
$
|
1,283,238
|
|
|
$
|
759,358
|
|
|
|
|
|
|
$
|
1,169,302
|
|
|
$
|
91,699
|
|
|
$
|
468,212
|
|
|
$
|
283,692
|
|
|
$
|
54,575
|
|
|
$
|
1,282,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Lines
|
|
$
|
|
|
|
$
|
859,209
|
|
|
$
|
481,568
|
|
|
|
|
|
|
$
|
778,407
|
|
|
$
|
|
|
|
$
|
375,590
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
904,707
|
|
Specialty Lines
|
|
|
|
|
|
|
306,765
|
|
|
|
97,028
|
|
|
|
|
|
|
|
151,678
|
|
|
|
|
|
|
|
93,824
|
|
|
|
|
|
|
|
|
|
|
|
159,112
|
|
Personal Lines
|
|
|
|
|
|
|
79,789
|
|
|
|
52,872
|
|
|
|
|
|
|
|
46,562
|
|
|
|
|
|
|
|
34,592
|
|
|
|
|
|
|
|
|
|
|
|
46,952
|
|
Corporate
|
|
|
129,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63,709
|
|
|
|
|
|
|
|
208,914
|
|
|
|
54,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
129,486
|
|
|
$
|
1,245,763
|
|
|
$
|
631,468
|
|
|
|
|
|
|
$
|
976,647
|
|
|
$
|
63,709
|
|
|
$
|
504,006
|
|
|
$
|
208,914
|
|
|
$
|
54,845
|
|
|
$
|
1,110,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-5
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule IV Reinsurance
Earned Premiums
For the Years Ended December 31, 2007, 2006 and 2005
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COLUMN A
|
|
COLUMN B
|
|
COLUMN C
|
|
COLUMN D
|
|
COLUMN E
|
|
COLUMN F
|
|
|
|
|
|
|
|
Ceded to
|
|
Assumed
|
|
|
|
|
|
Percentage of
|
|
|
Gross
|
|
Other
|
|
from Other
|
|
|
|
|
|
Amount
|
|
|
Amount
|
|
Companies
|
|
Companies
|
|
Net Amount
|
|
Assumed to Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty Insurance
|
|
$
|
1,600,280
|
|
|
$
|
224,854
|
|
|
$
|
3,817
|
|
|
$
|
1,379,243
|
|
|
|
0.3
|
%
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty Insurance
|
|
$
|
1,361,057
|
|
|
$
|
196,056
|
|
|
$
|
4,301
|
|
|
$
|
1,169,302
|
|
|
|
0.4
|
%
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty Insurance
|
|
$
|
1,161,284
|
|
|
$
|
188,649
|
|
|
$
|
4,012
|
|
|
$
|
976,647
|
|
|
|
0.4
|
%
|
|
S-6
Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule VI Supplemental Information Concerning Property Casualty Insurance Operations
As of and For the Years Ended December 31, 2007, 2006 and 2005
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims and Claims
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustment Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred Related to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid Claims
|
|
|
|
|
|
|
|
|
Reserve for Unpaid
|
|
Discount if
|
|
|
|
|
|
Net
|
|
Net
|
|
(1)
|
|
(2)
|
|
Amortization of
|
|
and Claim
|
|
|
Affiliation with
|
|
Deferred Policy
|
|
Claims and Claim
|
|
Any deducted
|
|
Unearned
|
|
Earned
|
|
Investment
|
|
Current
|
|
Prior
|
|
deferred policy
|
|
Adjustment
|
|
Net Written
|
Registrant
|
|
Acquisition Costs
|
|
Adjustment Expenses
|
|
in Column C
|
|
Premiums
|
|
Premiums
|
|
Income
|
|
Year
|
|
Year
|
|
acquisition costs
|
|
Expenses
|
|
Premiums
|
COLUMN A
|
|
COLUMN B
|
|
COLUMN C
|
|
COLUMN D
|
|
COLUMN E
|
|
COLUMN F
|
|
COLUMN G
|
|
COLUMN H
|
|
COLUMN I
|
|
COLUMN J
|
|
COLUMN K
|
Consolidated
Property
Casualty Entities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
$
|
184,446
|
|
|
$
|
1,431,933
|
|
|
$
|
0
|
|
|
$
|
847,485
|
|
|
$
|
1,379,243
|
|
|
$
|
117,224
|
|
|
$
|
704,734
|
|
|
$
|
(85,781
|
)
|
|
$
|
345,181
|
|
|
$
|
452,467
|
|
|
$
|
1,459,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
$
|
158,805
|
|
|
$
|
1,283,238
|
|
|
$
|
0
|
|
|
$
|
759,358
|
|
|
$
|
1,169,302
|
|
|
$
|
91,699
|
|
|
$
|
559,647
|
|
|
$
|
(91,435
|
)
|
|
$
|
283,692
|
|
|
$
|
313,778
|
|
|
$
|
1,282,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
$
|
129,486
|
|
|
$
|
1,245,763
|
|
|
$
|
0
|
|
|
$
|
631,468
|
|
|
$
|
976,647
|
|
|
$
|
63,709
|
|
|
$
|
533,906
|
|
|
$
|
(29,900
|
)
|
|
$
|
208,914
|
|
|
$
|
234,730
|
|
|
$
|
1,110,771
|
|
S-7
Philadelphia Consolidated (NASDAQ:PHLY)
Historical Stock Chart
From Jul 2024 to Jul 2024
Philadelphia Consolidated (NASDAQ:PHLY)
Historical Stock Chart
From Jul 2023 to Jul 2024