Philadelphia Consolidated Second Quarter Declines

NU Online News Service, July 17, 4:20 p.m. EDT?Philadelphia Consolidated Holding, a Bala Cynwyd, Pa.-based specialty insurer, posted $3.6 million in net income for its second quarter, a decline from $9 million in profit it posted one year ago, citing its reserve charge for a discontinued auto-leasing product.

The company, which specializes in designing and underwriting commercial property-casualty insurance for niche clients, said it decided to take a reserve charge of some $33 million after evaluating the worsening deterioration in used car market price trends.

This unfavorable environment for auto residual value product–a line of business that insures residual values of used vehicles–was also cited by Paul Bauer, analyst at New York-based Moody’s Investors Service, who said the reserve charge is not a big surprise because the market itself has been going through a very difficult period.

“This is primarily due to the oversupply of automobiles, combined with weak consumer demand. Car manufacturers have been offering good financial terms and heavy discount on new cars. So many people who would have gotten used cars otherwise are buying new cars.” he explained.

“As a result, used car prices have dropped significantly more than expected during the past six months to a year. It’s been a relatively bad environment over the last two years,” Mr. Bauer told National Underwriter.

Commenting on Philadelphia Consolidated’s reserve boost, James Maguire Jr., the company’s chief executive officer, also added that the price of used vehicles has seen “unusually significant declines” since the third quarter of 2002. “This adjustment reflects our best assessment of ultimate losses based on information available today,” Mr. Maguire said.

But Philadelphia Consolidated is not the only company having a difficult time in the auto residual value marketplace–in recent months, some other major players have also been taking reserve charges or exiting the market altogether.

This past April, the Hartford, Conn.-based Travelers Property Casualty Corp. boosted its reserves at Gulf Insurance, its majority owned subsidiary, by some $77 million, mainly for its auto residual value line of business.

“The price of used vehicles declined significantly during the first two months of 2003 and the reserve increase assumes further reductions during the remainder of the year,” Travelers said.

Mr. Bauer from Moody’s added, “Travelers more or less decided it will get out of this business because of the high level of losses at Gulf. And there is a company called Lyndon Property and Casualty Insurance Company which also pulled out of the market.”

Currently, the Bermuda-based RVI Guaranty Co., half owned by CNA Financial Corp. in Chicago, is the market leader. RVI declined a request to comment on its auto residual value product.

Looking forward, Mr. Bauer predicted that while the worst may be behind us, any real turnaround in this marketplace is at least “six months to a year away.”

“It really depends on whether auto prices stabilize or keep trending downwards,” he said. “But there are reasons to think that at least prices won’t be dropping at the rate they have been dropping.”