Philadelphia Consolidated Second Quarter Declines

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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 forits second quarter, a decline from $9 million in profit it postedone year ago, citing its reserve charge for a discontinuedauto-leasing product.

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The company, which specializes in designing and underwritingcommercial property-casualty insurance for niche clients, said itdecided to take a reserve charge of some $33 million afterevaluating the worsening deterioration in used car market pricetrends.

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This unfavorable environment for auto residual value product--aline of business that insures residual values of used vehicles--wasalso cited by Paul Bauer, analyst at New York-based Moody'sInvestors Service, who said the reserve charge is not a bigsurprise because the market itself has been going through a verydifficult period.

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"This is primarily due to the oversupply of automobiles,combined with weak consumer demand. Car manufacturers have beenoffering good financial terms and heavy discount on new cars. Somany people who would have gotten used cars otherwise are buyingnew cars." he explained.

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"As a result, used car prices have dropped significantly morethan expected during the past six months to a year. It's been arelatively bad environment over the last two years," Mr. Bauer toldNational Underwriter.

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Commenting on Philadelphia Consolidated's reserve boost, JamesMaguire Jr., the company's chief executive officer, also added thatthe price of used vehicles has seen "unusually significantdeclines" since the third quarter of 2002. "This adjustmentreflects our best assessment of ultimate losses based oninformation available today," Mr. Maguire said.

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But Philadelphia Consolidated is not the only company having adifficult time in the auto residual value marketplace--in recentmonths, some other major players have also been taking reservecharges or exiting the market altogether.

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This past April, the Hartford, Conn.-based Travelers PropertyCasualty Corp. boosted its reserves at Gulf Insurance, its majorityowned subsidiary, by some $77 million, mainly for its auto residualvalue line of business.

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"The price of used vehicles declined significantly during thefirst two months of 2003 and the reserve increase assumes furtherreductions during the remainder of the year," Travelers said.

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Mr. Bauer from Moody's added, "Travelers more or less decided itwill get out of this business because of the high level of lossesat Gulf. And there is a company called Lyndon Property and CasualtyInsurance Company which also pulled out of the market."

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

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Looking forward, Mr. Bauer predicted that while the worst may bebehind us, any real turnaround in this marketplace is at least "sixmonths to a year away."

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"It really depends on whether auto prices stabilize or keeptrending downwards," he said. "But there are reasons to think thatat least prices won't be dropping at the rate they have beendropping."

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