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Executives

Joseph Barnholt - Assistant VP of IR

James J. Maguire, Jr. - President and CEO

Craig P. Keller - EVP, Secretary, Treasurer, and CFO

Analysts

Philadelphia Consolidated Holding Corp. (PHLY) Q4 FY07 Earnings Call February 22, 2008 3:00 PM ET

Operator

Good day, everyone, and welcome to today's Philadelphia Consolidated Holding Corp.'s Fourth Quarter 2007 Earnings Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Joe Barnholt, Director of Investor Relations. Please go ahead, sir.

Joseph Barnholt - Assistant Vice President of Investor Relations

Thank you Tabitha. I would also like to welcome you to Philadelphia Insurance Companies Fourth Quarter 2007 and Year-End Conference Call.

Please be advised that certain information included in this presentation and other statements or materials published by the company are not historical facts, but are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Please refer to the company's annual report on Form 10-K for the year ended December 31st, 2006 and its past and future filings and reports filed with the Securities and Exchange Commission for a description of the business environment in which the company operates and the important factors that may affect its business. Philadelphia Consolidated Holding Corp. does not intend to publicly update any forward-looking statements except as may be required by law.

I would now like to introduce the members of our management team who are joining me this afternoon. First of all, I would like to introduce Jamie Maguire, our President and CEO, who I will turn the conference over to shortly. Also joining me is; Sean Sweeney, Executive Vice President and Chief Marketing Officer; and Craig Keller, Executive Vice President and Chief Financial Officer.

A replay of today's conference call will be available from 5:00 p.m. today until March 7th, 2008. You can access the replay by visiting our website, which is phly.com. Additionally, our quarterly supplemental financial information has been posted on the website. In order to access this information, click on Investor Center followed by Reports. Please feel free to contact me with any follow-up questions or requests. My direct dial number is area code 610-617-7626, and my e-mail address is jbarnholt@phlyins.com.

I now will turn the conference over to Jamie Maguire, our President and CEO.

James J. Maguire, Jr. - President and Chief Executive Officer

Thanks, Joe. And welcome to everyone who is listening in on the conference call and over the Internet. We released our results for the fourth quarter, today we put out a press release around noon. So, I hope you would have got a chance to read the press release. We also have supplemental financial information on our website as Joe, mentioned, and hope you've had a chance to read through that information along with presentations that I am going through here.

First I want to thank our employees for a great quarter, obviously it's getting more competitive out there, I think we've got a differentiated model. We have a solution for the soft market which we are clearly in, which makes us different from and better than our competition. So, I just want to thank our employees for executing on our business model and making us great in the fourth quarter.

Moving on, in the presentation, we have the regulatory Safe Harbor statements some of the statements that we make will be forward-looking in nature. Slide 3, is our agenda, for the call, and as is typical on the call we go through the fourth quarter and year-end financial highlights. Some of our segment information speak about the investment portfolio, look at some of our operating metrics within the company, and then lastly go through the drivers, what we think are going to help continue to drive our future growth and give your expectations for 2008.

Moving to page 4, our fourth quarter highlights, for the fourth quarter, we did $395 million of gross written premiums that's 7.5% increase over this time last year. Embedded in that number are few things, first we had $21 million of non-recurring premium, by choice, in four areas that we decided to deemphasize and exit.

The first one, is hotel package business, the second is lawyers professional liability we continue to run off that business. Thirdly, bowling centers as a package product that we got into, which the loss trends from that products now work out as we expected, so we break into that product line.

And then lastly our personal lines segment, Liberty American Insurance Group, we continued to deemphasize our operations. And in total, those four lines, constitutes $21 million of non-recurring premium in this quarter. Also noteworthy in the quarter were some new products, that we launched, and we are continually looking at introducing new products, we've had camps and campgrounds which contributed, meaningfully to the quarter, Affordable Housing. Our Collector Vehicle program with Grundy Worldwide, and we introduced the Business Owner's Policy that we are selling in conjunction with our professional liability products and those four new products help contribute to the top line growth for the quarter.

From a regional perspective, we continue to deemphasize our writings in Florida obviously in Liberty American, but also in commercial property. So we had 16% decline in our Florida region for commercial business, and again that's by design. The Southwest and Ohio Valley regions we sold limited growth, but in the other regions of the country we continue to see growth in the mid-teens in the top line area of mid-teen range.

Though we are seeing opportunities profits of growth across the country and it seems to be a regional phenomenon where there is more competitions in certain areas of than in others.

Moving along in the quarter we had 18% growth in our earned premiums a 21% growth in our investment income we are going to that a little more detail. Our combined ratio of 79.2% with a loss ratio of 48.1% fairly a very good result in today's competitive environment, and then the diluted earnings per share of $0.94 for the fourth quarter.

Moving to page 5, reconciling our earnings from an operating perspective, which excludes the realize gains and losses in the quarter. We had $72.2 million in the quarter that's $0.97 diluted operating earnings per share, and then we had a combined ratio of 79.2% in the quarter an outstanding result from an underwriting perspective.

Page 7, some highlights from our balance sheet now we continue to grow our shareholder's equity and one of the most important measures of quality organizations successful organization is how large you can grow your shareholder's equity, and how large you can grow your book value, and clearly 32.6% growth year-over-year in our shareholder's equity, and 30.3% growth in our book value is meaningful growth, the substantive growth, and I think it's attributable to our proactive marketing strategy and our disciplined underwriting approach to bring earnings to the bottom line.

Shares outstanding were consistent year-over-year, and we had a return on equity of 23.2% that's down from last year, but obviously a very substantial and meaningful of returns to our shareholders for the year.

Page 7, some other noteworthy events, we reported $70.2 million of net income included in that was reserve redundancies from prior year's on an after-tax basis of $8.1 million, and we pre-announced losses due to the California wildfires of $4.9 million that represented $0.07 of earnings, which impacted the quarter.

Moving to page 8, the reserve redundancies, which we took in the earnings in the fourth quarter breaks out according to this schedule, basically across all accident years from 2003 forward and some from 2002 and prior. I guess most noteworthy from the reserve redundancy standpoint is our professional liability products.

We had historically pegged those products to emerge similar to the industries professional liability they've come in much more favorable due to the stringent underwriting guidelines, and due to the selective niches that we target, so as a result we continued to see favorable claims emergence to the professional liability lines of business across all accident years. We also saw some redundancy in other product lines commercial property, and some of our general liability lines of business.

Page 9, year-end highlights we had 13.3% top line growth for the year. This includes $61 million of non-recurring premium, I mentioned the bowling centers, lawyers professional liabilities, hotel package, and Liberty American that constituted $61 million for the year, absent that we would have seen at 17% top line growth.

So fairly when other companies were reporting flat to down for the year were, we continued to chug along in the mid to upper-teens from a growth perspective. We also had $133 million contributed in the year as a result of new products. So obviously we continue to diversify, and we continue to explore other areas, so that we have multiple offerings to our producer corp.

Investment income for the year grew by 27.8%, and we had 13% growth in our net income, and our combined ratio of 74.8%, clearly a very good result of the year, and 12% diluted EPS growth for the year.

Moving to page 10, reconciling operating income $307.6 million that equates to $4.14 per share, and a gain of 74.8% combined ratio result.

Page 11 year-to-date events we reported $326.8 million which is $4.40 of diluted earnings per share. We had $55.8 million as I mentioned the prior year of loss reserve development... favorable loss reserve development that contributed $0.75 for the year. We changed investment manager's midway through the year that generated $14.4 million of realized gains that's $0.19, and then as I mentioned we preannounced the wildfires of $4.9 million.

Page 12, the development where have we seen our redundancy coming from for the year. Again it's been across all lines with some emphasis on the professional liability lines of business. From 2002 prior we had a little bit of unfavorable claims development $5.7 million primarily in the commercial general liability area. But, other than that we have seen a lot of redundancy across our professional liability, general liability, commercial property lines of business.

Page 13, looking at our segments we have three reportable segments to the SEC. Our commercial lines segment, specialty lines and personal lines. The personal lines we continue to deemphasize through 55.6 % reduction in our top line growth by design. We will continue to underwrite and place wide insurance on behalf of the National Flood Insurance program. That's profitable 7% roughly pass through that we keep to the federal government.

Specialty lines, we have seen a fair amount of competition 6.7% growth quarter-over-quarter. And then the commercial lines grow 12.1% on aggregate growth of 7.5% for the quarter.

Page 14, for the year, aggregate growth as I mentioned 13.3% and you can see how the growth translate out here into each of the three segments. With the commercial lines segment experiencing the most growth and being most represented of what we do. 7.7%, specialty lines from roughly 39% decrease in personal lines.

Drilling into each of these segments, little more in detail, page 15, our commercial lines segment, roughly 84% of what we did in the fourth quarter, 82% of our year-to-date first written premium. We've had excellent growth in this area diversified into a number of new product areas. Some of the noteworthy contributors in the quarter condominium package grew by 49% quarter-over-quarter, $44 million.

Our golf center package business grew by 47% quarter-over-quarter to $5 million. A new product that we've got into is the affordable housing niche where we had no production this time last year, or rather in '06. We have $5.2 million of gross written premiums in the fourth quarter of '07. So this is a new area that we are moving into. And then the Grundy Vehicle, Collector Vehicle programs, we have 133% growth quarter-over-quarter to $6.3 million.

Some of the new competitors we are seeing in the commercial lines area, and I thank our Regional Vice President's across the country that gave me information on competitor update. Large insurance and our non-profit package business have stepped up their competition. Hanover Insurance from overseas is now moving into the domestic market we are seeing them in our builders risks and religious organization niches, and then Great American Insurance Company is contributed as the competing more so in our day care product line. We've seen them in our non-profit, as they have moved into the day care area. So it's getting a little more competitive, but we like competition and we have a business model to address that.

Moving to page 16, our specialty line segment, roughly 14% of our fourth quarter gross written premium, 14.5% of our year-to-date gross written premiums, we had about 7% quarter-over-quarter and year-over-year growth in this particular niche, a very price sensitive smaller premium account, as we've talked about in the past. Now we have seen growth in our private company directors and officers liability products, 15% growth quarter-over-quarter through roughly $11.5 million. And our non-profit directors and officers liability we've also seen 15% growth to $17.3 million.

Our Business Owner's Policy, which is a BOP, this is the new product that we have launched as a companion product to other professional liability products, grew to $2.6 million in the quarter from zero in 2006.

So we continue to move in new directions, we have launched a new miscellaneous professional liability product in the last quarter of 2007 called Cover Pro, which is a very broad cover for all the difference, various types of professional services that we offer to professional liabilities who are excited about the opportunities and the potential for that new product.

From a pricing perspective we are seeing roughly 3% decrease for this particular line more in certain product line the private D&O we are seeing 7% in employment practices liability we are seeing 9%. So obviously there is some competition here and in terms of competitors, no real new competitors pretty much the same competition we've seen for the last few years.

Moving to page 17, our personal line segment we continue to deemphasize as I mentioned in the personal line segment and that's apparent from the lack of growth. Here we will continue to focus on producing flood business for the National Flood Insurance program that's quite profitable as I mentioned is a pass through its risk free business. So we continue with that strategy to deemphasize this particular segment of the company.

Moving to page 18, our investment portfolio remains very highly rated, and we always say that we don't chances with our investment portfolio to risk of our businesses is in the underwriting and the operating side of the house, and that has helped through. We've had no write downs. We've had no problems whatsoever with our investment portfolio. We reached a milestone from a market value perspective. We are now over $3 billion under management $2.6 billion roughly is fixed income securities with an average rating of AAA. Our portfolio durations of five year is right on target with what our investment committee and what our management here is desiring out.

5.5% taxable equivalent yield that is obviously in a state of flux with the current market conditions, and then our quality long-term growth and value stocks. We have four managers that manage roughly $350 million of equities of value of growth to small path and an international fund. So we remain very... we are very positive about our investment portfolio.

Page 19, drills into a little detail as we've mentioned in the past, we have a very small amount of subprime exposure at 12/31/2007 totaled $28 million on a total portfolio of $3 billion. All those subprime or Alt-A loans are AAA rated first cash flow tranches. They have a short weighted average life of 2.4 years. There have been no downgrades. There is no surveillance issue, and they are CDOs or CBOs. So we are very comfortable and very confident about our investment portfolio, as we move through what has been a pretty, tumultuous time in our stock markets.

Moving to page 20, our investment income, we had a... just under 21% growth in our investment income in the quarter. We had $131 million of cash flow, and we invested our new money in the quarter, fourth quarter roughly 5.75% taxable equivalent yield. You can see at the bottom the effective tax rate for the investment income continues to come down from 23.7% to 22.2% as a result of our focus on municipal bonds, and that's been an area where we've seen a lot opportunity, and as a result our effective tax rate has come down.

Page 21, some selected operating metrics from the company, which we typically go through. We're continuing to hold on to our renewals, as we go through this soft market, and we've had a book of business that has performed admirably and we do not want to lose our renewals. So our commercial lines, specialty lines on accounts that we want to keep, i.e. quoted are in the order of 94%, 96%. So that's very encouraging and we are able to hold on to our renewal business. Rate changes as I alluded to for commercial lines were down roughly 5% quarter-over-quarter, and the specialty lines the rate changes are down 3% quarter-over-quarter.

From a new business growth prospective looking at policy count in the fourth quarter of 2006, we had roughly 18,518 policies, new pieces of business that we wrote. Then in fourth quarter of 2007, we had 34.2% increase to 24,852. Most of that increase is coming condominium package, health and fitness, in special events, insurance, and religious organizations.

Page 22, our preferred agent count stands at 210, year-over-year this is 20% increase in our key partners. We are going to be inducting two preferred agent conferences here in March and in April where we get together with our preferred agents and strategize on the year try to find out what's working what's not working. These are key partners across the country, and they contributed meaningfully to our growth and our profitability. In the fourth quarter we had roughly $124 million from this group through renewal retention 93% and we saw out $28 million of new business in the fourth quarter.

Some employee statistic were now over 1,300 employees coast-to-coast, and why we still run a very efficient organization with $1.2 million per employee as I mentioned in prior calls, the benchmark is roughly 500,000 to 750,000 so we continue to be a very well tuned machine. And our turnover remains roughly to 11%, and we'd like to get that under 10% form a voluntary standpoint.

Page 23 the drivers, of future, this slides will look pretty familiar, we've got a very good model, and I think as we go through this soft market, comparative pricing environment, this model has served us well over the last 20 years, it taken us through soft markets, hard markets. Our national presence with our proactive marketing approach, our disciplined approach to underwriting is going to help drive the future of this company.

We continue to go through a soft environment and the companies that are going to thrive, the companies that they are going to do well in insurance in the soft market or those who would understand their business. And the measure of understanding your business is your combined ratio. And we've had the best combined ratio in the industry for the last 15 years. We understand our business we understand what it takes to be profitable estimate drive our future.

We may not grow to top line just for top line sake, we are going to pick the best business, and we are going to be the most profitable through this cycle. We are going to look it off our new products. We will continue enhance our existing products to the extent if there is any disruptions in the industry, whether they be consolidations, downgrades, companies put on watch, we're going to be there with our national network of marketing personnel and underwriting personnel to take advantage of the disruption.

We've had an experience management team, we've had no turns over in our manager ranks. We've got the underwriting and pricing discipline to monitor and manage our product line. So that if we see something is not working we'll quick to move to either increase the pricing or exit the line of business that doesn't make any sense. We continue to invest in our technology platform with an eye towards being a web-based company. We are moving away from client server, and we want to use the Internet to lower our expenses and improve our process.

We anticipate maintaining our A+ rating with our invest, we are going to have the meeting with them next month, and our preferred agent program, we have above 15% growth, and we've, we've surpassed that. I should also add that Moody's just gave us a rating, our credit ratings for the first time and we are rated A1 by Moody's, so we think that's going to help us as we move through the soft market, gives us better security and a better name brand compared to our competition.

Page 24, our expectations for the year we've had an operating earnings per share range of $3.55 to $3.65. This contemplates one cap loss in each of our two catastrophe program, $10 million for commercial, $3.5 million for our personal lines. We are looking at gross written premium growth in the year of 10% to 15%, and accident year combined ratio approximately 85%. We are going to hold down to our renewals on a bounded quarter basis in mid to lower 90s is as I went through, but on a total basis we're looking at renewal retention levels of 87.5%.

Investment environment is in transition and is volatile. So we're going to continue to monitor that and try to maintain a very conservative highly rated investment portfolio, and we anticipate in this competition as we move through the year, because as I mentioned, I think we're prepared to for the competition and we like competitions.

At this point I'll take your questions.

Question And Answer

Operator

[Operator Instructions] And we will take our first question from Mike Grasher [ph]. Please go ahead.

Unidentified Analyst

Good afternoon, congratulations on another solid year.

Joseph Barnholt - Assistant Vice President of Investor Relations

Thanks Mike.

Unidentified Analyst

Want to begin with question just around the guidance that you said here, I am wondering if there is more to it in the comparative environment. Is there an area or a line of business that you maybe are concerned about, I guess I look at the combined ratio jumping 10 points, and not necessarily surprised it's going higher, but the rate of change I guess I am bit surprised by that change particularly given your comments around renewal pricing. Can you give us a little bit more color or discuss that a little more in depth?

Craig P. Keller - Executive Vice President, Secretary, Treasurer, and Chief Financial Officer

Hey, Mike it's a Craig Keller I'll address that, when you mentioned about the loss ratio jumping 10 points.

Unidentified Analyst

I am sorry I meant the combined.

Craig P. Keller - Executive Vice President, Secretary, Treasurer, and Chief Financial Officer

The combined ratio jumping about 10 points and other we have had significant redundancy in '07. And in our guidance we are not anticipating redundancy these are our operating earnings. So pricing will have an impact on our loss ratio, but not to the extent of 10 points. And the other thing about the environment is the financial markets and investment yields that's the other thing that is going to impact earnings through a way for ultimately that settles out with reinvesting our cash flows.

Unidentified Analyst

Okay, that's... thank you for that. And kind of leads me into my next question is if you have any intension of changing your allocation to equities?

Craig P. Keller - Executive Vice President, Secretary, Treasurer, and Chief Financial Officer

We have discussed that, we have certain ranges we operate in or sort of that to a lower end of our equity range and throughout the year we'll probably be allocating more cash flows to start approaching the upper-end of our equity allocation range.

Unidentified Analyst

Okay. And then final question, I'll get back in the queue. What portion of your investment portfolio would be facing reinvestment risk during the course of I suppose the next six months if you can put it in that perspective, if not the entire 2008?

Craig P. Keller - Executive Vice President, Secretary, Treasurer, and Chief Financial Officer

Yes, I think the cash flows are coming off of our investment portfolio to reinvest including the investment income will be about $400 million. That will be our reinvestment coming up in the portfolio, and then we'll have our operating cash flows also during '08 to invest.

Unidentified Analyst

Okay. Thank you very much.

Operator

[Operator Instructions] And we have no further questions. I would like to turn the conference back over to Mr. Maguire for any additional or closing remarks.

James J. Maguire, Jr. - President and Chief Executive Officer

Great. I just want to thank our employees for their hard work and dedication throughout the year. As I mentioned it's a very competitive market, we are going to be challenged this year, but as I said, I think we have a very good process in place that makes us different from and better than our peer companies. I want to thank our producers and agents for the profitable business, and our shareholders and analyst, thank you for your support and confidence, and we will talk to you next quarter.

Operator

And this does conclude today's conference. Thank you for your participation. You may now disconnect.

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Source: Philadelphia Consolidated Holding Corp. Q4 2007 Earnings Call Transcript
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