##### Table of Contents



FORM 10-K/A Amendment No. 1 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 Commission File Number: 0-22280 PHILADELPHIA CONSOLIDATED HOLDING CORP. 
  PENNSYLVANIA
    
    23-2202671(State or other jurisdiction of
incorporation or organization)
    
    (IRS Employer Identification No.)
 One Bala Plaza, Suite 100
Bala Cynwyd, Pennsylvania
    
    19004(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (610) 617-7900 Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value   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. x o
 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 registrants 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. x
 Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). x o
 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 March 10,
2004 as reported on the NASDAQ National Market System, was $510,690,534.
Shares of Common Stock held by each executive officer and director and by each
person who is known by the Registrant to beneficially own 5% or more of the
outstanding Common Stock 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 March 10, 2004, Registrant had outstanding 22,033,824 shares of Common
Stock. DOCUMENTS INCORPORATED BY REFERENCE  (1)
    
    Portions of the definitive Proxy Statement for Registrants 2004
Annual Meeting of Shareholders to be held April 29, 2004 are incorporated by
reference in Part III.




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EXPLANATORY NOTE The
Company has included its restated consolidated balance sheet as of December 31,
2003 (the restatement does not affect the Companys consolidated
balance sheet as of December 31, 2002) and the restated consolidated statements of
operations and comprehensive
income, of changes in shareholders equity and of cash flows for the years ended December 31, 2003,
December 31, 2002 and December 31, 2001 in this Form
10-K/A. The restatement records in prior periods a portion of the revenue and
net income arising from profit commissions under three reinsurance contracts, one
of which originally had been recorded in the second quarter 2002,
another of which originally had been recorded in the fourth quarter
2003, and another
of which should have been recorded in previous periods. These profit
commissions were due to the Company from reinsurers under a 2001
accident year aggregate stop loss reinsurance contract effective
during the period January 1, 2001 through December 31,
2001, a quota share
reinsurance contract effective during the period April 1, 2003
through December 31, 2003, and an excess catastrophe reinsurance contract effective during the
period June 1, 2003 through May 31, 2004. The restatement is more fully
described herein under Item 7-Managements Discussion and Analysis of
Financial Condition and Results of Operations, and Item 8-Financial
Statements and Supplementary Data  Note 2. Any amounts
shown herein as restated are the restated amounts. This Amendment No. 1 to Annual Report on Form 10-K/A amends Part I, Item 1,
Part II, Items 6, 7, 8 and 9A and Part IV, Item 15 of the Companys previously
filed Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2003 to
reflect the aforementioned restatement and related changes. The applicable
rules require that each of these Items be entirely restated upon
amendment. Items other than those listed above have not been changed
and therefore have not been included in this amendment No. 1 to
Annual Report on Form 10-K/A. In addition, as required by Rule 12b-15 under the Securities Exchange Act of
1934, as amended, new certifications by the Companys principal executive
officer and principal financial officer are being filed with this Form 10-K/A. 2




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TABLE OF CONTENTS  PART IItem 1. BUSINESSItem 6. SELECTED FINANCIAL DATAItem 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMCONSOLIDATED BALANCE SHEETSCONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOMECONSOLIDATED STATEMENTS OF CHANGESCONSOLIDATED STATEMENTS OF CASH FLOWSNotes to Consolidated Financial StatementsItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREItem 9A. CONTROLS AND PROCEDURESPART IVItem 15.  EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-KSIGNATURESCOMPUTATION OF EARNINGS PER SHARECONSENT OF INDEPENDENT ACCOUNTANTSCERTIFICATION OF CEO PURSUANT TO SECTION 302CERTIFICATION OF CFO PURSUANT TO SECTION 302CERTIFICATION OF CEO PURSUANT TO SECTION 906CERTIFICATION OF CFO PURSUANT TO SECTION 906REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM    Table of Contents  
 PART I 
 Item 1. BUSINESS GENERAL As
used in this Amendment No. 1 to Annual Report on Form 10-K/A, (i) Philadelphia Insurance
refers to Philadelphia Consolidated Holding Corp., (ii) the Company refers to
Philadelphia Insurance and its subsidiaries, doing business as Philadelphia
Insurance Companies; (iii) the Insurance Subsidiaries refers to Philadelphia
Indemnity Insurance Company (PIIC), Philadelphia Insurance Company (PIC),
Mobile USA Insurance Company (MUSA) and Liberty American Insurance Company
(LAIC), collectively; (iv) MIA refers to Maguire Insurance Agency, Inc., a
captive underwriting manager; (v) MHIA refers to Mobile Homeowners Insurance
Agencies, Inc., a managing general agency; (vi) Premium Finance refers to
Liberty American Premium Finance Company; and (vii) PCHC Investment refers to
PCHC Investment Corp., an investment holding company. 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 MUSA, LAIC, MHIA and Premium Finance, are sometimes
referred to herein collectively as Liberty. During 2003, the Company continued its growth through adherence to its
core philosophies of specialization, mixed marketing and profitable
underwriting. 2003 gross written premiums increased 36.5% to $906.0 million.
Premium growth was primarily attributable to the Company capitalizing on
continuing turmoil in the property and casualty market, as well as better
brand recognition with agents and brokers. The turmoil created a general
environment of rate increases and reduced capacity in the marketplace. The
Companys GAAP basis 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 91.3%, which was substantially lower than
the property and casualty industry as a whole. Total assets increased to $1.9
billion, and shareholders equity increased to $545.6 million (Restated). INDUSTRY TRENDS During the 1990s and into 2000, the insurance industry maintained excess
capacity, creating highly competitive market conditions, as evidenced by
declining premium rates and, in many cases, policy terms less favorable to the
insurer. As a result, the industry suffered from reduced profitability and a
contraction of capacity as insurers chose or were forced to exit the
marketplace. Subsequently, a tumultus environment has emerged in the property
and casualty insurance industry in large part due to: the significant losses
caused by the terrorist events of September 11, 2001; continued rating
downgrades and insolvencies; and lower interest rates resulting in reduced
investment income. These factors have resulted in a general environment of
rate increases and conservative risk selection. Industry participants expect a
moderation in rate increases for the foreseeable future. Increased reinsurance
costs, to some extent, offset the benefits of these trends to the Company and
to insurance companies in general. During 2003, the Companys rate increases on renewal business approximated
4.3%, 10.2% and 9.4% for the commercial, specialty and personal lines segments,
respectively. There can be no assurance, however, that these favorable trends
will continue or that these rate increases can be sustained. BUSINESS OVERVIEW AND STRATEGY The Company designs, markets and underwrites specialty commercial and
personal property and casualty insurance products incorporating value-added
coverages and services for select target markets or niches. Insurance products
are distributed through a diverse multi-channel delivery system centered around
the Companys direct production underwriting organization. A select group of
105 preferred agents and a broader network of approximately 8,500 independent
agents supplement the production underwriting organization, which consisted of
204 professionals located in 36 regional and field offices across the United
States as of December 31, 2003. The Companys commercial products include commercial multi-peril package
insurance targeting specialized niches, including, among others, non-profit
organizations, health and fitness organizations, homeowners associations,
condominium associations, specialty schools and day care facilities; commercial
automobile insurance targeting the leasing and rent-a-car industries; property
insurance for large commercial accounts such as shopping centers, business
parks, hotels and medical facilities; and inland marine products targeting
larger risks such as new builders risk and miscellaneous property floaters. 3




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The Company also writes select classes of professional liability and
directors and officers liability products, as well as personal property and
casualty products for the manufactured housing and homeowners markets. The Company maintains detailed systems, records and databases that enable
the continuous monitoring of its book of business in order to identify and
react swiftly to positive or negative developments and trends. The Company is
able to track performance, including loss ratios, by segment, product, region,
state, producer and policyholder. Detailed profitability reports are produced
and reviewed on a routine (primarily monthly) basis as part of the policy of
regularly analyzing and reviewing the Companys book of business. The Company maintains a local presence to more effectively serve its
producer and customer base, operating through 12 regional offices and 24 field
offices throughout the country, which report to the regional offices. These
offices are staffed with field underwriters, marketers, accounts receivable
and, in some cases, claim personnel, who interact closely with home office
management in making key decisions. This approach allows the Company to adapt
its underwriting and marketing strategies to local conditions and build
value-added relationships with its customers and producers. The Company selects and targets industries and niches that present
specialized areas of expertise where it believes it can grow business through
creatively developing insurance products with innovative features specially
designed to meet those areas of demand. The Company believes that these
features are not included in typical property and casualty policies, enabling
it to compete based on the unique or customized nature of the coverage
provided. Business Segments The Companys operations are classified into three reportable business
segments:  
    
    Commercial Lines Underwriting Group, which has underwriting
responsibility for the commercial multi-peril package, commercial
automobile and specialty property and inland marine insurance
products;
    
    Specialty Lines Underwriting Group, which has underwriting
responsibility for the professional liability and directors and
officers liability insurance products; and
    
    Personal Lines Underwriting Group, which has underwriting
responsibility for personal property and casualty insurance products
for the manufactured housing and homeowners markets, principally in
Florida. The following table sets forth, for the years ended December 31, 2003,
2002 and 2001, the gross written premiums for each of the Companys business
segments and the relative percentages that such premiums represented. For the Years Ended December 31,2003
    
    2002
    
    2001Dollars
    
    Percentage
    
    Dollars
    
    Percentage
    
    Dollars
    
    Percentage(dollars in thousands)Commercial Lines
    
    $
    662,339
    
    
    
    73.1
    %
    
    $
    473,100
    
    
    
    71.3
    %
    
    $
    315,948
    
    
    
    66.7
    %Specialty Lines
    
    
    154,105
    
    
    
    17.0
    
    
    
    110,176
    
    
    
    16.6
    
    
    
    79,317
    
    
    
    16.7Personal Lines
    
    
    89,549
    
    
    
    9.9
    
    
    
    80,463
    
    
    
    12.1
    
    
    
    78,300
    
    
    
    16.6Total
    
    $
    905,993
    
    
    
    100.0
    %
    
    $
    663,739
    
    
    
    100.0
    %
    
    $
    473,565
    
    
    
    100.0
    %
 Commercial Lines: Commercial Package:The Company has provided commercial multi-peril
package policies to targeted niche markets for over 15 years. The primary
customers for these policies include:  
    
    non-profit and social service organizations;
    
    health and fitness organizations;
    
    homeowners associations; 4




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
    
    condominium associations;
    
    specialty schools;
    
    boat dealerships;
    
    mobile home parks;
    
    day care facilities; and
    
    mental health facilities. The package policies provide a combination of comprehensive liability,
property and automobile coverage with limits up to $1.0 million for casualty,
$50.0 million for property, and umbrella limits on an optional basis up to
$10.0 million. The Company believes its ability to provide professional
liability and general liability coverages in one policy is advantageous and
convenient to producers and policyholders. Commercial Automobile and Commercial Excess:The Company has provided
primary, excess, contingent, interim and garage liability; physical damage;
property; and Guaranteed Asset Protection (GAP) to targeted markets for over
35 years. The primary customers for these policies include:  
    
    rental car companies
    
    leasing companies
    
    banks
    
    credit unions Specialty Property & Inland Marine: The Company has provided property and
inland marine coverage to targeted markets for the past 5 years. The primary
customers for these policies include:  
    
    shopping centers
    
    business parks
    
    medical facilities
    
    hotels and motels
    
    new construction (inland marine) Specialty Lines: The Company has provided errors and omissions (professional) and directors
and officers (D&O) liability to targeted classes of business for approximately
14 years. The professional liability products provide errors and omissions
coverage primarily for:  
    
    lawyers
    
    accountants
    
    miscellaneous (marketing, management, computer, marriage/family counseling) consultants
    
    excess liability The directors and officers product, with an emphasis on non-profit
institutions and private companies, are offered to:  
    
    non-profit (501(c)(3) companies)
    
    for-profit public and private companies. Personal Lines: The Company entered the personal lines property and casualty business
through the acquisition of Liberty American Insurance Group, Inc. (Liberty)
in 1999. This personal lines platform produces and underwrites specialized
manufactured housing and homeowners property and casualty business principally
in Florida, and to a lesser extent, in California, Arizona and Nevada. Liberty
also produces and services federal flood insurance under the National Flood
Insurance Program for both personal and commercial policyholders. 5




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Products offered include manufactured housing insurance for senior citizen
retirees in preferred parks, a program for newly constructed manufactured
homes on private property; a preferred homeowners program that targets newer
homes valued between $100,000 and $375,000 in gated retiree communities, and a
homeowners program excluding wind exposure in Florida coastal counties for the
in-park manufactured housing business. As a result of Floridas increased
seasonal residents during the winter months, approximately 50% of the in-park
manufactured housing business is written in the first four calendar months of
the year. Geographic Distribution The following table provides the geographic distribution for all
reportable business segments of the Companys risks insureds as represented by
direct earned premiums for the year ended December 31, 2003. No other state
accounted for more than 2% of total direct earned premiums for the year ended
December 31, 2003 (dollars in thousands). State
    
    Direct Earned Premiums
    
    Percent of TotalFlorida
    
    $
    154,277
    
    
    
    19.7
    %California
    
    
    89,442
    
    
    
    11.4New York
    
    
    58,743
    
    
    
    7.5Texas
    
    
    42,508
    
    
    
    5.4Illinois
    
    
    34,513
    
    
    
    4.4Pennsylvania
    
    
    32,447
    
    
    
    4.1Massachusetts
    
    
    32,272
    
    
    
    4.1New Jersey
    
    
    31,850
    
    
    
    4.1Ohio
    
    
    29,335
    
    
    
    3.7Minnesota
    
    
    16,850
    
    
    
    2.1Other
    
    
    262,208
    
    
    
    33.5Total Direct Earned Premiums
    
    $
    784,445
    
    
    
    100.0
    %
 See
Note 20 to the Companys financial statements included with this
Form 10-K/A
for information concerning the revenues, net income and assets of the Companys
business segments. Underwriting and Pricing The Companys business segments are organized around its three
underwriting divisions: Commercial Lines, Specialty Lines, and Personal Lines.
Each underwriting divisions responsibilities include: pricing, managing the
risk selection process, and monitoring loss ratios by product insured. The Company attempts to adhere to conservative underwriting and pricing
practices. The Companys underwriting strategy is detailed in a document which
is signed by each underwriting professional. Written underwriting guidelines
are maintained and updated regularly for all classes of business underwritten
and adherence to these underwriting guidelines is maintained through
underwriting audits conducted by the Company. 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 to promptly
recognize and respond to price deterioration. When necessary, the Company is
willing to re-underwrite, sharply curtail or discontinue a product deemed to
present unacceptable risks. The Commercial Lines Underwriting Group has underwriting responsibility
for the Companys commercial multi-peril package, commercial automobile and
large property and inland marine products. The Group currently consists of 58
home office and 59 regional office underwriters which are supported by
underwriting assistants, raters, and other policy administration personnel.
The Commercial 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
regional office underwriters have the responsibility for pricing, underwriting,
and policy issuance for new business. The commercial lines underwriting group
is under the immediate direction of Underwriter Managers who report to the Vice
Presidents of Commercial Lines Underwriting. Overall management responsibility
of the book of business resides in the home office with the senior underwriting
officers. The Company believes that its ability to deliver excellent service
and build long lasting relationships is enhanced through its management
structure. The Specialty Lines Underwriting Group has the underwriting responsibility
for the errors and omissions and directors and officers liability products. The
Group consists of 20 home office underwriters and underwriter trainees and 27
regional underwriters. These underwriters and underwriter trainees are
supported by underwriting assistants and other policy 6




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administration personnel. The 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
regional office underwriters have the responsibility for pricing, underwriting,
and policy issuance of new business. The Specialty Lines Group is managed by
three Assistant Vice Presidents who report directly to the Chief Underwriting
Officer. The Personal Lines Underwriting Group is located in Pinellas Park,
Florida. The underwriting staff consists of 14 professionals who are under the
direction of the Personal Lines Underwriting Vice President. Much of the
underwriting function is automated through internet accessed rating software.
Underwriting guidelines are embedded within this software which prohibit
binding of accounts if a risk does not meet the underwriting guidelines. The
Company has a proactive exposure distribution management system in place to aid
in portfolio optimization. The risk portfolio is managed at a zip code level
through the use of in-house software and external modeling tools. The Company
inspects all risks on its new preferred homeowners program and manufactured
homes on private property. The Company uses 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 management believes the ISO forms and
rates do not adequately address the risk. Departures from ISO forms are also
used to differentiate the Companys products from its competitors. Reinsurance The Company has entered into various reinsurance agreements for the
purpose of limiting loss exposure. The Companys casualty excess of loss
reinsurance agreement provides that the Company bears the first $1.0 million
layer of liability on each occurrence. Casualty, fidelity, professional
liability and/or fiduciary liability risks in excess of $1.0 million up to
$11.0 million are reinsured under a casualty treaty (Excess Treaty) placed
through a reinsurance broker with Converium Reinsurance North America Inc.,
American Reinsurance Company, Endurance Specialty Insurance LTD, and Liberty
Mutual Insurance Company, with a pro rata participation of 35%, 25%, 20% and
20%, respectively. Facultative reinsurance (reinsurance which is provided on
an individual risk basis) is placed for each casualty risk in excess of $11.0
million. Effective January 1, 2004 the Companys casualty excess of loss
reinsurance agreement provides that the Company bears the first $1.0 million
layer of liability on umbrella risks for policies where the Company provides
the first $1.0 million primary layer of coverage. The Companys property excess of loss reinsurance treaty provides that the
Company bears the first $2.0 million of loss on each risk with its reinsurers
bearing two layers of loss up to $15.0 million on each risk (General
Reinsurance Corporation provides limits of $8.0 million in excess of $2.0
million, and Swiss Reinsurance American Corporation, provides limits of $5.0
million in excess of $10.0 million). The Company also has automatic
facultative excess of loss reinsurance with General Reinsurance Corporation for
each property loss in excess of $15.0 million up to $50.0 million. To mitigate
potential exposures to losses arising from terrorist acts, the Company has
purchased per risk reinsurance coverage for terrorism with a $13.0 million
aggregate policy limit for 2003. Under this reinsurance coverage the Company
bears the first $2.0 million layer of loss on each risk and coverage. Effective April 1, 2003, the Company entered into a quota share
reinsurance agreement covering substantially all of the Companys lines of
business. Under this agreement, the Company cedes 22% of its net written
premium (including 22% of net unearned premium reserves at April 1, 2003) and
loss and loss adjustment expenses. The Company also receives a provisional
ceding commission of 33.0%, adjusted pro-rata based upon the ratio of losses
incurred to premiums earned. Pursuant to this reinsurance agreement the
Company withholds the reinsurance premium due the reinsurers in a Funds Held
Payable to Reinsurer account. In addition, the agreement provides that a profit
commission will be paid to the Company upon commutation equal to the positive balance
in the Funds Held Payable to Reinsurer account. The Company has also purchased property catastrophe reinsurance covering
both its commercial and personal lines losses. For catastrophe losses
occurring in the State of Florida the Companys reinsurance coverage is
approximately $289.0 million in excess of the Companys $4.0 million per
occurrence retention. For catastrophe property losses occurring outside the
State of Florida the Companys reinsurance coverage is approximately $46.0
million for commercial lines catastrophe losses and $6.0 million for personal
lines catastrophe losses in excess of the Companys $4.0 million retention.
Based upon the various modeling methods utilized by the Company to estimate its
probable maximum loss, the Company currently maintains catastrophe reinsurance
coverage for the 250 year storm event on its personal lines business in
Florida. The Company also has an excess casualty reinsurance agreement which
provides an additional $5.0 million of coverage for protection from exposures
such as extra-contractual obligations and judgments in excess of policy limits. 7




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Additionally, an errors and omissions insurance policy provides an
additional $10.0 million of coverage with respect to these exposures. The Company seeks to limit the risk of a reinsurers default in a number
of ways. First, the Company principally contracts with large reinsurers that
are rated at least A (Excellent) by A.M. Best. Secondly, the Company seeks
to collect the obligations of its reinsurers on a timely basis. This
collection effort is supported through the regular monitoring of reinsurance
receivables. Finally, the Company typically does not write casualty policies
in excess of $11.0 million or property policies in excess of $25.0 million.
Although the Company purchases reinsurance to limit its loss exposure by
transferring the risk to its reinsurers, reinsurance doesnt relieve the
Company of its liability to policyholders. The Company regularly assesses its reinsurance needs and seeks to improve
the terms of its reinsurance arrangements as market conditions permit. Such
improvements may involve increases in retentions, modifications in premium
rates, changes in reinsurers and other matters. 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 the Companys marketing plan. Within this framework, the
Companys marketing effort is designed to promote a systematic and disciplined
approach to developing business which is anticipated to be profitable. The Company distributes its products through its direct production
underwriting organization, an extensive network of approximately 8,500
independent brokers and its preferred agent program. The Companys most
important distribution channel is its production underwriting organization.
Although the Company has always written business directly, the production
underwriting organization was established by the Company to stimulate new sales
through independent agents. The production underwriting organization is
currently comprised of 204 professionals located in 36 offices in major markets
across the country. The field offices are focused daily on interacting with
prospective and existing insureds. In addition to this direct prospecting,
relationships with approximately 8,500 brokers have been formed, either because
the broker has a preexisting relationship with the insured or has sought the
Companys expertise in one of its specialty products. This mixed marketing
concept provides the Company with the flexibility to respond to changing market
conditions and, when appropriate, shift its emphasis to different product lines
to take advantage of opportunities as they arise. In addition, the production
underwriting organizations ability to gather market intelligence enables the
rapid identification of soft markets and redeployment to firmer markets, from a
product line or geographic perspective. The Company believes that its mixed
marketing platform provides a competitive edge in stable market conditions, the
strengths of which are all the more evident during periods of dislocation or
consolidation. The Companys preferred agent program, in which business relationships are
formed with brokers specializing in certain of the Companys business niches,
consisted of 105 preferred agents at year-end 2003. Preferred agents are
identified by the Company based on productivity and loss experience, and
receive additional benefits from the Company in exchange for meeting defined
production and profitability criteria. The Company supplements its marketing efforts through affinity programs,
trade shows, direct mailings and national advertisements placed in trade
magazines serving industries in which the Company specializes, as well as links
to industry web sites. The Company has also enhanced its marketing with
Internet-based initiatives, such as the Personal Lines Divisions Liberty
American In TouchSM real-time policy inquiry system, which allows agents to
view account data, process non-dollar endorsements, rate, quote and issue a
policy over the Internet. Product Development The Company continually evaluates new product opportunities, consistent
with its strategic focus on selected market niches. Direct contacts between
the Companys field and home office personnel, preferred agent council and its
customers have produced a number of new product ideas. All new product ideas
are presented to the Product Development Committee for consideration. Such
Committee, currently composed of the Companys President and members of senior
management, meets regularly to review the feasibility of products from a
variety of perspectives, including profitability, underwriting risk, marketing
and distribution, reinsurance, long-term viability and consistency with the
Companys culture and philosophy. For each new product, an individualized test
market plan is prepared, addressing such matters as the appropriate
distribution channel (e.g., a limited number of selected production
underwriters), 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 8




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retentions than customarily utilized. After a new product is approved for
test marketing, the Company monitors its success based on specified criteria
(e.g., underwriting results, sales success, product demand and competitive
pressures). If expectations are not realized, the Company either moves to
improve results by initiating adjustments or abandons the product. Claims Management and Administration In accordance with its emphasis on underwriting profitability, the Company
actively manages claims under its policies in an effort to investigate reported
incidents at an early stage, service insureds and reduce fraud. Claim files
are regularly audited by claims supervisors in an attempt to ensure that claims
are being processed properly and that reserves are being set at appropriate
levels. The Companys experienced staff of claims management professionals are
assigned to dedicated claim units within specific niche markets. Each of these
units receive supervisory direction and news, legislative and product
development updates from the unit director. Claims management personnel have
an average of approximately twenty years of experience in the industry. The
dedicated claim units meet regularly to communicate findings of change within
their assigned specialty. Staff within the dedicated claim units have an
average of ten years experience in the industry. The claims department also maintains a Special Investigations Unit to
investigate suspicious claims and to serve as a clearinghouse for information
concerning fraudulent practices, primarily within the rental car industry. The
Special Investigations Unit works closely with a variety of industry contacts,
including attorneys, investigators and rental car company fraud units to
identify fraudulent claims. Loss and Loss Adjustment Expenses The Company is liable for losses and loss adjustment expenses under its
insurance policies and reinsurance treaties. While the Companys professional
liability policies are written on claims-made forms, and while claims on its
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 the Company and the Companys
payment of the loss. The Company reflects its liability for the ultimate
payment of all incurred losses and loss adjustment expenses by establishing
loss and loss adjustment expense reserves, which 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, the Company
establishes a case reserve for the estimated amount of the Companys ultimate
loss and loss adjustment expense. This estimate reflects an informed judgment,
based on the Companys reserving practices and the experience of the Companys
claims staff. Management also establishes reserves on an aggregate basis to
provide for losses incurred but not reported (IBNR), as well as future
development on claims reported to the Company. As part of the reserving process, historical data are reviewed and
consideration is given to the anticipated effect of various factors, including
known and anticipated legal developments, changes in societal attitudes,
inflation and economic conditions. Reserve amounts are necessarily based on
managements estimates and judgments; as new data become available and are
reviewed, these estimates and judgments are revised, resulting in increases or
decreases to existing reserves. The Insurance Subsidiaries actuary provides
the Companys with an annual statement of opinion for its statutory filings
with regulators. 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. 9




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##### Table of Contents



As of and For the Years Ended December 31,2003
    
    2002
    
    2001(Dollars in Thousands)Unpaid loss and loss adjustment expenses at
beginning of year
    
    $
    359,711
    
    
    $
    250,134
    
    
    $
    195,464Provision for losses and loss adjustment expenses for current
year claims
    
    
    314,609
    
    
    
    239,834
    
    
    
    166,220Increase in estimated ultimate losses and loss adjustment
expenses for prior year claims
    
    
    44,568
    
    
    
    27,599
    
    
    
    13,435Total incurred losses and loss adjustment expenses
    
    
    359,177
    
    
    
    267,433
    
    
    
    179,655Loss and loss adjustment expense payments for claims
attributable to:Current year
    
    
    69,905
    
    
    
    58,530
    
    
    
    54,228Prior years
    
    
    167,488
    
    
    
    99,326
    
    
    
    70,757Total payments
    
    
    237,393
    
    
    
    157,856
    
    
    
    124,985Unpaid loss
and loss adjustment expenses at end of year (1)
    
    $
    481,495
    
    
    $
    359,711
    
    
    $
    250,134
  (1)
    
    Unpaid loss and loss adjustment expenses differ from the
amounts reported in the Consolidated Financial Statements
because of the inclusion therein of reinsurance receivables of
$145,591, $85,837 and $52,599 at December 31, 2003, 2002 and
2001, respectively. During 2003 the Company increased the liability for unpaid loss and loss
adjustment expenses by $51.7 million ($44.6 million net of reinsurance
recoverables), primarily for accident years 1997 through 2001. This increase
in the liability for unpaid loss and loss adjustment expense, net of
reinsurance recoverables, was primarily due to the following:  
    
    The Company increased the estimated gross and net loss for
unreported claims incurred and related claim adjustment expenses on
residual value polices issued during the years 1998 through 2002 by
$38.8 million. As of December 31, 2003 the Companys total liability
for gross and net unpaid loss and loss adjustment expenses for these
policies is estimated to be $30.3 million. The residual value policies
provide coverage guaranteeing the value of a leased automobile at the
lease termination, which can be up to five years from lease inception.
The increase in the estimated gross and net loss was a result of:  
    
    Adverse trends further deteriorating in both claims
frequency and severity for leases expiring in 2003. During the
second quarter of 2003, the Company engaged a consulting firm to
aid in evaluating the ultimate potential loss exposure under these
policies. Based upon the study and subsequent evaluation by the
Company the Company changed its assumptions relating to future
frequency and severity of losses, and increased the estimate for
unpaid loss and loss adjustment expenses by $33.0 million. The
Company primarily attributes this deterioration to the following
factors that led to a softening of prices in the used car market
subsequent to the September 11, 2001 terrorist attacks: prolonged
0% new car financing rates and other incentives which increased
new car sales and the volume of trade-ins, daily rental units
being sold into the market earlier and in greater numbers than
expected, further adding to the over supply of used cars and the
overall uncertain economic conditions.
    
    The Company entering into an agreement with U.S. Bank,
N.A. d/b/a Firstar Bank (Firstar) for residual value insurance
policies purchased by Firstar. Under the terms of the agreement,
the Company paid Firstar $27.5 million in satisfaction of any and
all claims made or which could have been made by Firstar under the
residual value policies. The Company increased the gross and net
reserves for loss and loss adjustment expenses from $21.7 million
to $27.5 million pursuant to this agreement.  
    
    The Company increased its estimate for unpaid loss and loss
adjustment expenses for non residual value policies by $43.5 million
($30.8 million net of reinsurance recoverables) primarily for accident
years 1999 to 2001 and decreased its estimate of the unpaid loss and
loss adjustment expenses by $30.6 million ($25.0 million net of
reinsurance recoverables) for the 2002 accident year. The increase in
accident years 1999 to 2001 is principally attributable to:  
    
    $19.6 million ($13.7 million net of reinsurance
recoverables) of development in claims made professional liability
products as a result of case reserves developing greater than
anticipated from the year-end 2002 10




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##### Table of Contents



ultimate loss estimate; $18.1 million ($11.1 million net of
reinsurance recoverables) of development in the automobile and
general liability coverages for commercial package products due to
the frequency and severity of the losses developing beyond the
underlying pricing assumptions; and $5.8 million ($6.0 million net
of reinsurance recoverables) of development in the commercial
automobile excess liability insurance and GAP commercial automobile
products due to losses developing beyond the underlying pricing
assumptions.  
    
    The decrease in unpaid loss and loss adjustment expenses in
accident year 2002 is principally attributable to:  
    
    $4.2 million ($4.7 million net of reinsurance
recoverables) and $26.4 million ($20.3 million net of reinsurance
recoverables) of favorable development in professional liability
products and commercial package products, respectively, due to
favorable loss experience as a result of favorable product
pricing. The following table presents the development of unpaid loss and loss
adjustment expenses, net of amounts for reinsured losses and loss adjustment
expenses, from 1993 through 2003. 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 changes as more
information becomes known about the frequency and severity of claims for
individual years. 11




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##### Table of Contents



AS OF AND FOR THE YEARS ENDED DECEMBER 31,
(Dollars in Thousands) 1993
    
    1994
    
    1995
    
    1996
    
    1997
    
    1998
    
    1999
    
    2000
    
    2001
    
    2002
    
    2003UNPAID LOSS AND LOSS ADJUSTMENT
EXPENSES, AS STATED
    
    $
    38,714
    
    
    $
    53,595
    
    
    $
    68,246
    
    
    $
    85,723
    
    
    $
    108,928
    
    
    $
    136,237
    
    
    $
    161,353
    
    
    $
    195,464
    
    
    $
    250,134
    
    
    $
    359,711
    
    
    $
    481,496Cumulative Paid as of:1 year later
    
    
    10,792
    
    
    
    12,390
    
    
    
    15,214
    
    
    
    22,292
    
    
    
    26,870
    
    
    
    43,769
    
    
    
    60,922
    
    
    
    70,757
    
    
    
    99,325
    
    
    
    167,4892 years later
    
    
    19,297
    
    
    
    23,139
    
    
    
    31,410
    
    
    
    38,848
    
    
    
    56,488
    
    
    
    84,048
    
    
    
    109,092
    
    
    
    131,649
    
    
    
    211,8513 years later
    
    
    24,991
    
    
    
    33,511
    
    
    
    40,637
    
    
    
    52,108
    
    
    
    80,206
    
    
    
    115,900
    
    
    
    144,435
    
    
    
    213,2864 years later
    
    
    28,903
    
    
    
    38,461
    
    
    
    47,994
    
    
    
    63,738
    
    
    
    95,047
    
    
    
    131,062
    
    
    
    201,7795 years later
    
    
    30,558
    
    
    
    42,366
    
    
    
    51,806
    
    
    
    69,116
    
    
    
    99,755
    
    
    
    151,7536 years later
    
    
    32,748
    
    
    
    43,860
    
    
    
    53,198
    
    
    
    70,779
    
    
    
    106,9157 years later
    
    
    32,929
    
    
    
    44,243
    
    
    
    53,701
    
    
    
    73,9398 years later
    
    
    33,102
    
    
    
    44,627
    
    
    
    55,5419 years later
    
    
    33,721
    
    
    
    45,90210 years later
    
    
    33,923Unpaid Loss and Loss Adjustment
Expenses
re-estimated as of End of Year:1 year later
    
    
    38,603
    
    
    
    52,671
    
    
    
    67,281
    
    
    
    84,007
    
    
    
    105,758
    
    
    
    135,983
    
    
    
    163,896
    
    
    
    208,899
    
    
    
    277,733
    
    
    
    404,2792 years later
    
    
    38,016
    
    
    
    52,062
    
    
    
    66,061
    
    
    
    81,503
    
    
    
    103,513
    
    
    
    138,245
    
    
    
    177,782
    
    
    
    232,582
    
    
    
    334,8023 years later
    
    
    37,184
    
    
    
    51,149
    
    
    
    63,872
    
    
    
    76,348
    
    
    
    104,712
    
    
    
    146,679
    
    
    
    196,735
    
    
    
    274,1664 years later
    
    
    36,272
    
    
    
    49,805
    
    
    
    59,085
    
    
    
    73,992
    
    
    
    109,061
    
    
    
    151,077
    
    
    
    228,0825 years later
    
    
    35,783
    
    
    
    47,366
    
    
    
    56,673
    
    
    
    75,672
    
    
    
    107,796
    
    
    
    163,6576 years later
    
    
    34,509
    
    
    
    45,797
    
    
    
    55,861
    
    
    
    74,645
    
    
    
    110,8457 years later
    
    
    33,799
    
    
    
    45,245
    
    
    
    55,439
    
    
    
    75,2728 years later
    
    
    33,695
    
    
    
    44,878
    
    
    
    55,6069 years later
    
    
    33,622
    
    
    
    45,76410 years later
    
    
    33,782Cumulative Redundancy (Deficiency)Dollars
    
    $
    4,932
    
    
    $
    7,831
    
    
    $
    12,640
    
    
    $
    10,451
    
    
    $
    (1,917
    )
    
    $
    (27,420
    )
    
    $
    (66,729
    )
    
    $
    (78,702
    )
    
    $
    (84,668
    )
    
    $
    (44,568
    )Percentage
    
    
    12.7
    %
    
    
    14.6
    %
    
    
    18.5
    %
    
    
    12.2
    %
    
    
    (1.8
    )%
    
    
    (20.1
    )%
    
    
    (41.4
    )%
    
    
    (40.3
    )%
    
    
    (33.8
    )%
    
    
    (12.4
    %)
  (1)
    
    Unpaid loss and loss adjustment expenses differ from the amounts
reported in the Consolidated Financial Statements because of the
inclusion therein of reinsurance receivables of $145,591, $85,837,
$52,599, $42,030, $26,710, $16,120, $13,502, $10,919, $9,440, $5,580,
and $5,539 at December 31, 2003, 2002, 2001, 2000, 1999, 1998, 1997,
1996, 1995, 1994, and 1993, respectively.(2)
    
    1998 Unpaid Loss and Loss Adjustment Expenses, as stated, adjusted
to include $1,207 unpaid loss and loss adjustment expenses for Mobile
USA Insurance Company as of acquisition date.(3)
    
    The Company maintains its historical loss records net of
reinsurance, and therefore is unable to conform the presentation of
this table to the financial statements. 12




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##### Table of Contents



The cumulative redundancy (deficiency) represents the aggregate change in
the reserve estimated over all prior years, and does not present 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 the 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 the Companys 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, whereas 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. (See footnote (1) on Page 10 for amounts). 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. 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 experience for insurance companies. If the combined ratio is
below 100%, an insurance company has an underwriting profit, and if it is above
100%, the insurer has an underwriting loss. The following table reflects the consolidated loss, expense and combined
ratios of the Insurance Subsidiaries, together with the property and casualty
industry-wide combined ratios after policyholders dividends. For the Years Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Loss Ratio
    
    
    63.1
    %
    
    
    63.5
    %
    
    
    60.7
    %
    
    
    57.8
    %
    
    
    59.7
    %Expense Ratio
    
    
    27.2
    %
    
    
    28.0
    %
    
    
    31.2
    %
    
    
    31.3
    %
    
    
    33.6
    %Combined Ratio
    
    
    90.3
    %
    
    
    91.5
    %
    
    
    91.9
    %
    
    
    89.1
    %
    
    
    93.3
    %Industry Statutory Combined Ratio, after Policyholders
Dividends
    
    
    101.1
    %
    
    
    107.4
    %
    
    
    115.9
    %
    
    
    110.4
    %
    
    
    108.1
    %(1
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
  (1)
    
    Source: Bests Special Report Keeping Pace February 9, 2004 (Estimated
2003).  (2)
    
    Source: Bests Special Report Keeping Pace February 9, 2004 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 insurers ability to withstand abnormal loss experience. Guidelines
established by the National Association of Insurance Commissioners (the NAIC)
provide that an insurers net premium-to-surplus ratio is satisfactory if it is
below 3 to 1. The following table sets forth, for the periods indicated, net written
premiums to surplus as regards policyholders for the Insurance Subsidiaries
(statutory basis): As of and For the Years Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in Thousands)Net Written Premiums
    
    $
    601,253
    
    
    $
    523,962
    
    
    $
    333,817
    
    
    $
    263,637
    
    
    $
    195,258Surplus as regards Policyholders
    
    $
    415,900
    
    
    $
    312,626
    
    
    $
    280,960
    
    
    $
    193,292
    
    
    $
    179,341Premium to Surplus Ratio
    
    
    1.5 to 1.0
    
    
    
    1.7 to 1.0
    
    
    
    1.2 to 1.0
    
    
    
    1.4 to 1.0
    
    
    
    1.1 to 1.0
 13




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##### Table of Contents



Investments The Companys investment objective is the realization of relatively high
levels of investment income while generating competitive after-tax total rates
of return within a prudent level of risk and within the constraints of
maintaining adequate securities in amount and duration to meet cash
requirements of current operations and long-term liabilities, as well as
maintaining and improving the Companys A.M. Best rating. The Company utilizes
professional investment managers for its fixed maturity and equity investments,
which consist of diversified issuers and issues. At December 31, 2003, the Company had total investments with a carrying
value of $1,172.1 million, and 92.3% of the Companys total investments 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 rating of AA+. The asset backed, mortgage pass-through
and collateralized mortgage obligation securities amortizing securities
possessing favorable prepayment risk and/or extension profiles. The remaining
7.7% of the Companys total investments consisted primarily of publicly-traded
common stocks. The following table sets forth information concerning the composition of
the Companys total investments at December 31, 2003: Estimated
    
    
    
    
    
    Percent ofMarket
    
    Carrying
    
    CarryingAmortized Cost
    
    Value
    
    Value
    
    Value(Dollars in Thousands)Fixed Maturities:Obligations of States and Political
Subdivisions
    
    $
    476,762
    
    
    $
    488,976
    
    
    $
    488,976
    
    
    
    41.7
    %U.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
    
    
    51,480
    
    
    
    51,918
    
    
    
    51,918
    
    
    
    4.4Corporate and Bank Debt Securities
    
    
    142,264
    
    
    
    147,054
    
    
    
    147,054
    
    
    
    12.6Asset Backed Securities
    
    
    183,065
    
    
    
    177,675
    
    
    
    177,675
    
    
    
    15.1Mortgage Pass-Through Securities
    
    
    159,160
    
    
    
    162,529
    
    
    
    162,529
    
    
    
    13.9Collateralized Mortgage Obligations
    
    
    53,792
    
    
    
    53,542
    
    
    
    53,542
    
    
    
    4.6Equity Securities
    
    
    79,813
    
    
    
    90,358
    
    
    
    90,358
    
    
    
    7.7Total Investments
    
    $
    1,146,336
    
    
    $
    1,172,052
    
    
    $
    1,172,052
    
    
    
    100.0
    %
 At December 31, 2003, approximately 98.7% 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. The cost and estimated market value of fixed maturity securities at
December 31, 2003, 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: Amortized Cost
    
    Estimated Market Value(Dollars in Thousands)Due in one year or less
    
    $
    53,845
    
    
    $
    54,545Due after one year through five years
    
    
    223,676
    
    
    
    229,476Due after five years through ten years
    
    
    177,412
    
    
    
    182,132Due after ten years
    
    
    215,573
    
    
    
    221,795Asset Backed, Mortgage Pass-Through and
Collateralized Mortgage Obligation Securities
    
    
    396,017
    
    
    
    393,746Total
    
    $
    1,066,523
    
    
    $
    1,081,694
 14




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##### Table of Contents



Investments of the 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, preferred and common equity securities,
real estate mortgages and real estate. Regulation General:The Company is subject to extensive supervision and regulation in
the states in which it operates. Such supervision and regulation relate to
numerous aspects of the Companys business and financial condition. The
primary purpose of the supervision and regulation is the protection of
insurance policyholders and not the Companys 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 the Company can include in the insurance policies it offers;
    
    certain required methods of accounting;
    
    maintenance of reserves for unearned premiums, losses and other purposes; and
    
    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 or the state insurance departments may affect the cost or
demand for the Companys products and may present impediments to obtaining rate
increases or taking other actions to increase profitability. Also, regulatory
authorities have relatively broad discretion to grant, renew or revoke licenses
and approvals. If the Company does not have the requisite licenses and
approvals, or does not comply with applicable regulatory requirements, the
insurance regulatory authorities could stop or temporarily suspend the Company
from carrying on some or all of its 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
the Insurance Subsidiaries are domiciled in Pennsylvania and Florida, the
Pennsylvania Department of Insurance and the Florida Office of Insurance
Regulation have primary authority over the Company. Regulation of Insurance Holding Companies:Pennsylvania and Florida, 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 Departments approval to acquire, directly or indirectly,
5% to 10% or more of the outstanding voting securities of Philadelphia
Insurance or the Insurance Subsidiaries. Such Departments determination of
whether to approve any such acquisition would be based on a variety of factors,
including an evaluation of the acquirers 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 Florida statutes require every Pennsylvania and
Florida domiciled insurer which is a member of an insurance holding company
system to register with Pennsylvania or Florida, 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 outsiders
(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 insurers financial
condition, 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. Under the Florida statute, a majority of the directors must be citizens of
the United States. 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 Florida
Office of Insurance 15




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##### Table of Contents



Regulation. An insurer must give the Department written notice of any change
of personnel among the directors or principal officers of the insurer 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 the Insurance Subsidiaries to pay any cash dividends to its shareholders.
The ability of the Insurance Subsidiaries to pay dividends to the Company is
subject to certain restrictions imposed under Pennsylvania and Florida
insurance laws. Accumulated statutory profits of the Insurance Subsidiaries
from which dividends may be paid totaled $179.2 million at December 31, 2003.
Of this amount, the Insurance Subsidiaries are entitled to pay a total of
approximately $50.7 million of dividends in 2004 without obtaining prior
approval from the Pennsylvania Insurance Department or Florida Office of
Insurance Regulation. During 2003 the insurance subsidiaries paid dividends of
$4.0 million to Liberty American Insurance Group, Inc., a subsidiary of
Philadelphia Insurance. The National Association of Insurance Commissioners:In addition to
state-imposed insurance laws and regulations, the 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
Pennsylvania Insurance Department and Florida Office of Insurance Regulation
effective January 1, 2001. 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 NAICs 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 NAICs initiatives
have taken on a greater level of practical importance in recent years. The
NAIC accredited both Pennsylvania and Florida under the NAIC Financial
Regulation Standards. All the states have adopted the NAICs financial reporting form, which is
typically referred to as the NAIC Annual Statement, and 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:PICs 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 insurers domiciliary insurance
department, and ultimately rehabilitation or liquidation. Based on the
standards currently adopted, the policyholders surplus of each of the
Insurance Subsidiaries at December 31, 2003 is in excess of the minimum
prescribed risk-based capital requirements. Insurance Guaranty Funds:The 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 states
guaranty fund laws. Shared Markets:As a condition of its license to do business in various
states, PIIC, MUSA 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. PIICs, MUSAs
and LAICs participation in such shared markets or pooling mechanisms is 16




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##### Table of Contents



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 in the last few 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. The insurance industry foresees
increased state legislative activity pertaining to mold contamination in 2004.
The Company will closely monitor litigation trends in 2004, and continue to
review relevant insurance policy exclusion language. There were few insurance
laws or regulations enacted in 2003 regarding mold coverages. The regulatory
emphasis appears to focus on personal lines rather than commercial lines. The
Company has experienced an immaterial impact from mold claims and attaches a
mold exclusion to policies where applicable. Health Insurance Portability and Accessibility Act:Regulations under the
Health Insurance Portability and Accessibility Act of 1996 (HIPAA) were adopted
on April 14, 2003 to protect the privacy of individual health information.
While property/casualty insurers are not required to comply with the various
administrative requirements of the act, the regulations have an impact on
obtaining information within the context of claims information. The Company
continues to monitor regulatory developments under HIPAA. Certain Legislative Initiatives and Developments:A number of new,
proposed or potential legislative or industry developments could further
increase competition in the insurance industry. These developments include:  
    
    the enactment of the Gramm-Leach-Bliley Act of 1999 (which
permits financial services companies such as banks and brokerage
firms to engage in the insurance business), which could result in
increased competition from new entrants to the Companys markets;
    
    the formation of new insurers and an influx of new capital in
the marketplace as existing companies attempt to expand their
business as a result of better pricing and/or terms;
    
    programs in which state-sponsored entities provide property insurance in catastrophe-prone areas;
    
    changing practices caused by the Internet, which have led to greater competition in the insurance business. 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 the Companys ability to maintain or increase rates. Accordingly,
these developments could have an adverse effect on the Companys earnings. The federal Terrorism Risk Insurance Act of 2002 (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 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 90% of covered losses
up to $100 billion. Each insurance company is subject to a deductible based
upon a percentage of the previous years direct earned premium, with the
percentage increasing each year. The Program requires that insurers notify
in-force commercial policyholders by February 24, 2003 that coverage for
terrorism acts is provided and the cost for this coverage. It also requires
notices to be given at certain specified times to insureds to which policies
are issued after the date of the Acts enactment. Policyholders have the
option to accept or decline the coverage, or negotiate other terms. Property
and casualty insurers, including the Company, are required to offer this
coverage at each subsequent renewal even if the policyholder elected to exclude
this coverage in the previous policy period. The Program became effective upon
enactment and runs through December 31, 2005. With the signing of the Act, all
previously approved exclusions for terrorism in any contract for property and
casualty insurance in force as of November 26, 2002 are excluded. However, an
insurer may reinstate a preexisting provision in a contract for property and
casualty insurance that is in force on the date of enactment and that excludes
coverage for an act of terrorism only: (1) if the insurer has received a written statement from the insured that
affirmatively authorizes such reinstatement; or (2) if (A) the insured fails to pay any increased premium charged by the insurer
for providing such terrorism coverage; and 17




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##### Table of Contents



(B) the insurer provided notice, at least 30 days before any such
reinstatement, of (i) the increased premium for such terrorism coverage; and
(ii) the rights of the insured with respect to such coverage, including any
date upon which the exclusion would be reinstated if no payment is received. Sarbanes-Oxley Act of 2002:The Sarbanes-Oxley Act of 2002, enacted on
July 30, 2002, presents a significant expansion of securities law regulation of
corporate governance, accounting practices, reporting and disclosure that
affects publicly traded companies. The act, in part, sets forth requirements
for certification by company CEOs and CFOs of certain reports filed with the
SEC, disclosures pertaining to the adoption of a code of ethics applicable to
certain management personnel, and safeguards against actions to fraudulently
influence, manipulate or mislead independent public or certified accountants of
the issuers financial statements. It also requires stronger guidance for
development and evaluation of internal control procedures, as well as
provisions pertaining to a companys audit committee of the board of directors.
The Company continues its efforts toward compliance with the act, particularly
related to Section 404 dealing with our system of internal controls. Competition The Company competes with a large number of other companies in its
selected line 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
these competitors have greater financial and marketing resources than the
Company. Profitability could be adversely affected if business is lost due to
competitors offering similar or better products at or below the Companys
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 the Companys products to fall,
which could adversely affect profitability. The current business climate remains competitive from a solicitation
standpoint. The Company will walk away, if necessary, from writing business
that does not meet established underwriting standards and pricing guidelines.
Management believes though that the Companys mixed marketing strategy is a
strength in that it provides the flexibility to quickly deploy the marketing
efforts of the Companys direct production underwriters from soft market
segments to market segments with emerging opportunities. Additionally, through
the mixed marketing strategy, the Companys production underwriters have
established relationships with approximately 8,500 brokers, thus facilitating a
regular flow of submissions. Employees As of February 25, 2004, the Company had 876 full-time employees and 30
part-time employees. The Company actively encourages its employees to continue
their educational efforts and aids in defraying their educational costs
(including 100% of education costs related to the insurance industry).
Management believes that the Companys relations with its employees are
generally excellent. Company Website and Availability of Securities and Exchange Commission (SEC)
Filings The Companys Internet website is www.phly.com. Information on the
Companys website is not a part of this Form 10-K. The Company makes available
free of charge on its website, or provides a link to, the Companys 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 the Company electronically files such material
with, or furnishes it to the SEC. To access these filings, go to the Companys
website and click on Investor Relations, then click on SEC Filings. 18




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##### Table of Contents



Item 6. SELECTED FINANCIAL DATA As of and For the Years Ended December 31,(In Thousands, Except Share and Per Share Data)2003 (Restated)
    
    2002 (Restated)
    
    2001 (Restated)
    
    2000
    
    1999Operations and Comprehensive Income
Statement Data:Gross Written Premiums
    
    $
    905,993
    
    
    $
    663,739
    
    
    $
    473,565
    
    
    $
    361,872
    
    
    $
    274,918Gross Earned Premiums
    
    $
    789,498
    
    
    $
    555,485
    
    
    $
    421,063
    
    
    $
    328,350
    
    
    $
    245,978Net Written Premiums
    
    $
    602.300
    
    
    $
    519,707
    
    
    $
    337,281
    
    
    $
    263,429
    
    
    $
    184,071Net Earned Premiums
    
    $
    574,518
    
    
    $
    417,722
    
    
    $
    299,557
    
    
    $
    227,292
    
    
    $
    164,915Net Investment Income
    
    
    38,806
    
    
    
    37,516
    
    
    
    32,426
    
    
    
    25,803
    
    
    
    20,695Net Realized Investment Gain (Loss)
    
    
    794
    
    
    
    (3,371
    )
    
    
    3,357
    
    
    
    11,718
    
    
    
    5,700Other Income
    
    
    5,519
    
    
    
    911
    
    
    
    587
    
    
    
    8,981
    
    
    
    4,722Total Revenue
    
    
    619,637
    
    
    
    452,778
    
    
    
    335,927
    
    
    
    273,794
    
    
    
    196,032Net Loss and Loss Adjustment
Expenses
    
    
    359,177
    
    
    
    267,433
    
    
    
    179,655
    
    
    
    131,304
    
    
    
    99,410Acquisition Costs and Other
Underwriting Expenses
    
    
    162,912
    
    
    
    129,918
    
    
    
    97,020
    
    
    
    75,054
    
    
    
    53,793Other Operating Expenses
    
    
    7,822
    
    
    
    6,372
    
    
    
    6,841
    
    
    
    14,679
    
    
    
    8,939Total Losses and Expenses
    
    
    529,911
    
    
    
    403,723
    
    
    
    283,516
    
    
    
    221,037
    
    
    
    162,142Minority Interest: Distributions on
Company Obligated Mandatorily
Redeemable Preferred Securities of
Subsidiary Trust
    
    
    
    
    
    
    
    
    
    
    2,749
    
    
    
    7,245
    
    
    
    7,245Income Before Income Taxes
    
    
    89,726
    
    
    
    49,055
    
    
    
    49,662
    
    
    
    45,512
    
    
    
    26,645Total Income Tax Expense
    
    
    27,539
    
    
    
    15,302
    
    
    
    16,851
    
    
    
    14,742
    
    
    
    7,802Net Income
    
    $
    62,187
    
    
    $
    33,753
    
    
    $
    32,811
    
    
    $
    30,770
    
    
    $
    18,843Weighted-Average Common Shares
Outstanding
    
    
    21,908,788
    
    
    
    21,611,053
    
    
    
    16,528,601
    
    
    
    12,177,989
    
    
    
    12,501,165Weighted-Average Share Equivalents
Outstanding
    
    
    751,600
    
    
    
    682,382
    
    
    
    656,075
    
    
    
    2,411,552
    
    
    
    2,614,399Weighted-Average Shares and Share
Equivalents Outstanding
    
    
    22,660,388
    
    
    
    22,293,435
    
    
    
    17,184,676
    
    
    
    14,589,541
    
    
    
    15,115,564Basic Earnings Per Share
    
    $
    2.84
    
    
    $
    1.56
    
    
    $
    1.99
    
    
    $
    2.53
    
    
    $
    1.51Diluted Earnings Per Share
    
    $
    2.74
    
    
    $
    1.51
    
    
    $
    1.91
    
    
    $
    2.11
    
    
    $
    1.25Year End Financial Position:Total Investments and Cash
and Cash Equivalents
    
    $
    1,245,994
    
    
    $
    950,861
    
    
    $
    723,318
    
    
    $
    487,028
    
    
    $
    420,016Total Assets
    
    
    1,870,941
    
    
    
    1,358,334
    
    
    
    1,019,974
    
    
    
    730,464
    
    
    
    599,051Unpaid Loss and Loss Adjustment
Expenses
    
    
    627,086
    
    
    
    445,548
    
    
    
    302,733
    
    
    
    237,494
    
    
    
    188,063Minority Interest in Consolidated
Subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98,905
    
    
    
    98,905Total Shareholders Equity
    
    
    545,646
    
    
    
    477,823
    
    
    
    430,944
    
    
    
    182,325
    
    
    
    161,440Common Shares Outstanding
    
    
    22,007,552
    
    
    
    21,868,877
    
    
    
    21,509,723
    
    
    
    13,431,408
    
    
    
    12,590,908Insurance Operating Ratios(Statutory Basis):Net Loss and Loss Adjustment
Expenses to Net Earned Premiums
    
    
    63.1
    %
    
    
    63.5
    %
    
    
    60.7
    %
    
    
    57.8
    %
    
    
    59.7
    %Underwriting Expenses to Net
Written Premiums
    
    
    27.2
    %
    
    
    28.0
    %
    
    
    31.2
    %
    
    
    31.3
    %
    
    
    33.6
    %Combined Ratio
    
    
    90.3
    %
    
    
    91.5
    %
    
    
    91.9
    %
    
    
    89.1
    %
    
    
    93.3
    %A+
    
    
    
    A+
    
    
    
    A+
    
    
    
    A+
    
    
    
    A+A.M. Best Rating
    
    (Superior)
    
    (Superior)
    
    (Superior)
    
    (Superior)
    
    (Superior)
 19




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##### Table of Contents



Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Restatement of Financial Statements The Companys previously issued financial statements for the years ended
December 31, 2003, December 31, 2002 and December 31, 2001 have been restated to record a portion of the revenue and net
income arising from profit commissions under three reinsurance contracts, one of
which originally had been recorded in the second quarter 2002,
another of which had originally been recorded in the fourth quarter
2003, and another of
which should have been recorded in previous periods. These profit commissions
were due to the Company from reinsurers under a 2001 aggregate stop loss reinsurance contract effective
during the period January 1, 2001 through December 31,
2001, a quota share reinsurance
contract effective during the period April 1, 2003 through December 31, 2003,
and an excess catastrophe reinsurance contract effective during the period June
1, 2003 through May 31, 2004. See Note 2 of Notes to Consolidated Financial
Statements for more information on these matters. The impact of this
restatement on the previously reported results of operations
for the years ended December 31, 2003, December 31, 2002 and
December 31, 2001 was to increase net income by $1.9 million
($0.08 diluted earnings per share), decrease net income by
$2.3 million ($0.11 diluted earnings per share), and increase net
income by $2.3 million ($0.13 diluted earnings per share), respectively.
The restatement also resulted in an increase (decrease) to net
earned premiums in the amount of $2.9 million, ($3.5) million,
and $3.5 million for the years ended December 31, 2003, December 31,
2002 and December 31, 2001, respectively, and an increase to the previously reported
retained earnings balance as of December 31, 2003 and
December 31, 2001 in the amount of $1.9 million, and
$2.3 million, respectively. The restatement does not affect the
Companys retained earnings balance as of December 31,
2002. Any amounts shown herein as restated are the restated amounts. GENERAL Overview The Company designs, markets, and underwrites specialty commercial and personal
property and casualty insurance products for select target industries or
niches. The Companys 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 Automobile and Commercial Property and Commercial multi-peril
package insurance products; The Specialty Lines Underwriting Group which has
underwriting responsibility for the professional liability insurance products;
and The Personal Lines Group has responsibility for personal property and
casualty insurance products for the Manufactured Housing and Homeowners
markets. The company operates solely within the United States through its 12
regional and 24 field offices. The Company generates its revenues through the sale of commercial property and
casualty insurance policies. The insurance policies are sold through the
Companys five distribution channels which include direct sales, retail
insurance agents/open brokerage, wholesalers, preferred agents and the
internet. The Company believes that consistency in its field office
representation has created excellent relationships with local insurance
agencies across the country. The Company also generates revenue from its investment portfolio, which
approximated $1.2 billion at December 31, 2003 and generated $43.4 million in
gross pretax investment income during 2003. The Company utilizes 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 duration and credit quality targets. Management measures the results of operations through monitoring certain
measures of growth and profitability, including, but not limited to: number of
policies written, pricing, risk selection, loss ratio (sum of net loss and loss
adjustment expenses divided by net earned premiums) and expense levels. During 2003, the prior year market trends of premium rate increases and turmoil
in the property and casualty insurance market continued. Although further
premium rate increases were realized during 2003, the increases moderated from
those realized in 2002. The increases have primarily arisen due to the
significant property and casualty industry losses as a result of the tragic
terrorist attacks of September 11, 2001, lower interest rates, and diminished
risk capacity. Rating agency downgrades, insolvencies and consolidations in
the industry also continued to be market factors during 2003. In this environment, the Company continued its strong growth, with gross
written premiums increasing 36.5% to $906.0 million. Gross written premium
growth was strong across all the Companys business segments with in-force
policy counts increasing 22.8% and 39.7% for the commercial and specialty lines
segments, respectively, remaining flat for the personal lines segment, and
weighted average premium rate increases on renewal business approximating 4.3%,
10.2% and 9.4% for the commercial, specialty and personal lines segments,
respectively. 20




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##### Table of Contents



Commercial
    
    Specialty
    
    Personal($s in millions)
    
    Lines
    
    Lines
    
    Lines
    
    Total2003 Gross Written Premium
    
    $
    662.4
    
    
    $
    154.1
    
    
    $
    89.5
    
    
    $
    906.02002 Gross Written Premium
    
    $
    473.1
    
    
    $
    110.2
    
    
    $
    80.5
    
    
    $
    663.8Percentage Increase
    
    
    40.0
    %
    
    
    39.9
    %
    
    
    11.3
    %
    
    
    36.5
    %2003 Weighted Average Premium Rate Increase on
Renewal Business
    
    
    4.3
    %
    
    
    10.2
    %
    
    
    9.4
    %2002 Weighted Average Premium Rate Increase on
Renewal Business
    
    
    10.0
    %
    
    
    26.0
    %
    
    
    8.0
    %
 The Company also believes its core strategy of adhering to an underwriting
philosophy of sound risk selection and pricing discipline, the mixed marketing
platform for its product distribution and the creation of value added features
not typically found in property and casualty products have also contributed to
generating premium growth above industry averages, as well as enabling the
Company to produce combined ratios (the sum of net loss and loss adjustment
expenses and acquisition costs and other underwriting expenses, divided by net
earned premiums) well below industry averages. The GAAP combined ratio for the year ended December 31, 2003 was 90.9%, which,
once again, was substantially lower than the property and casualty industry as
a whole. Included in the 2003 calendar year net loss and loss adjustment
expenses was $44.6 million of prior accident year development, of which, $38.8
million was attributable to the Companys run-off residual value line of
business. The following table illustrates the 2003 calendar year and accident
year loss ratios by segment. Commercial
    
    Specialty
    
    PersonalLines
    
    Lines
    
    Lines
    
    Total2003 calendar year loss and loss adjustment expense ratio (Restated)
    
    
    63.4
    %
    
    
    59.8
    %
    
    
    60.3
    %
    
    
    62.5
    %2003 accident year loss and loss adjustment expense ratio (Restated)
    
    
    54.9
    %
    
    
    53.4
    %
    
    
    57.3
    %
    
    
    54.8
    %
 Investments The Companys investment objective is the realization of relatively high levels
of investment income while generating competitive after-tax total rates of
return within a prudent level of risk and within the constraints of maintaining
adequate securities in amount and duration to meet cash requirements of current
operations and long-term liabilities, as well as maintaining and improving the
Companys A.M. Best rating. The Company utilizes external independent
professional investment managers for its fixed maturity and equity investments.
These investments consist of diversified issuers and issues, and as of
December 31, 2003, approximately 87.8% and 6.6% of the total invested assets
(total investments plus cash equivalents) on a cost basis consisted of
investments in fixed maturity and equity securities, respectively, versus 90.2%
and 5.6%, respectively, at December 31, 2002. During 2003 the relative percentage investment in tax-exempt fixed maturity
securities versus taxable fixed maturity securities increased, due to the
Company taking advantage of the more favorable after-tax yields. At the end of
2003, on a cost basis, investment grade tax-exempt fixed maturity securities
represented 39.2% of the total invested assets, compared to 30.3% as of the end
of 2002. Asset backed, mortgage pass through, and collateralized mortgage obligation
securities, on a cost basis, amounted to $183.0 million, $159.2 million and
$53.8 million, respectively, as of December 31, 2003 and $202.8 million, $81.3
million and $89.2 million, respectively, as of December 31, 2002. The asset
backed, mortgage pass through, and collateralized mortgage obligation
investments are amortizing securities possessing favorable prepayment risk
and/or extension profiles. The Company regularly performs various analytical procedures with respect to
its investments, including identifying any security whose fair value is below
its cost. Upon identification of such securities, a detailed review is
performed for all securities, except interests in securitized assets, meeting
predetermined thresholds to determine whether such decline is other than
temporary. If the Company determines a decline in value to be other than
temporary, based upon its detailed review, or if a decline in value for an
equity investment has persisted continuously for nine months, the cost basis of
the security is written down to its fair value. The factors considered in
reaching the conclusion that a decline below cost is other than temporary
include, but are not limited to, whether: the issuer is in financial distress;
the investment is secured; a significant credit rating 21




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##### Table of Contents



action has occurred; scheduled interest payments have been delayed or missed;
or changes in laws and/or regulations have impacted an issuer or industry. The
amount of any write down is included in earnings as a realized loss in the
period the impairment arose. This evaluation resulted in non-cash realized
investment losses of $1.0 million and $2.1 million for the years ended December
31, 2003 and 2002, respectively. Such non-cash realized investment losses
resulted from other than temporary declines in the fair value of certain
holdings in the Companys common stock portfolio occurring primarily in the
fourth quarter of 2002 and the first quarter of 2003. The Company primarily
attributes these other than temporary declines in fair value to the uncertain
economic climate, the overhang of corporate governance issues, and the high
profile bankruptcies occurring during 2002 into early 2003. Additionally, the Company conducts its impairment evaluation and recognition
for interests in securitized assets in accordance with the guidance provided by
the Emerging Issues Task Force of the Financial Accounting Standards Board
(EITF) in EITF 99-20. Under this guidance, impairment losses on securities
must be recognized if both the fair value of the security is less than its book
value and the net present value of expected future cash flows is less than the
net present value of expected future cash flows at the most recent (prior)
estimation date. If these criteria are met, an impairment charge, calculated
as the difference between the current book value of the security and its fair
value, is included in earnings as a realized loss in the period the impairment
arose. This evaluation resulted in non-cash realized investment losses of $9.3
million and $1.6 million for the years ended December 31, 2003 and 2002,
respectively. These non-cash realized investment losses were primarily due to
investments in collateralized bond obligations as a result of the non
investment grade default rates which remain higher than historic averages. The Companys fixed maturity portfolio amounted to $1,081.7 million and $854.5
million, as of December 31, 2003 and December 31, 2002, respectively, of which
98.6% of the portfolio for both years was comprised of investment grade
securities. From the fourth quarter of 2001 into early 2003 following the war
in Iraq, U.S. investment grade securities experienced varying price and ratings
volatility, having been affected by the uncertain economic climate, corporate
governance issues, and the subsequent stream of corporate scandals and high
profile bankruptcies. More recently certain sectors of the investment grade
security market have continued to lag despite a return to a more favorable
economic climate. However, the high quality of the Companys overall AA+
rated fixed maturity portfolio, has mitigated potential volatility. The
Company had fixed maturity investments with unrealized losses amounting to
$10.6 million and $9.2 million as of December 31, 2003 and December 31, 2002,
respectively. Of these amounts, interests in securitized assets had unrealized
losses amounting to $9.2 million and $7.3 million as of December 31, 2003 and
December 31, 2002, respectively. As discussed above, the Companys impairment
evaluation and recognition for interests in securitized assets is conducted in
accordance with the guidance provided by the EITF. Investments in aircraft
collateralized Enhanced Equipment Trust Certificates (EETCs) had unrealized
losses amounting to $0 and $1.3 million as of December 31, 2003 and December
31, 2002, respectively. The following table identifies the period of time securities with an unrealized
loss at December 31, 2003 have continuously been in an unrealized loss
position. Included in the amounts displayed in the table are $6.5 million of
unrealized losses due to non-investment grade fixed maturity securities having
a fair value of $15.6 million. No issuer of securities or industry represents
more than 4.4% and 15.5%, respectively, of the total estimated fair value, or
18.1% and 39.7%, respectively, of the total gross unrealized loss included in
the table below. As previously discussed, there are certain risks and
uncertainties inherent in the Companys impairment methodology, such as the
financial condition of specific industry sectors and the resultant effect on
underlying security collateral values. Should the Company subsequently
determine a decline in the fair value below the cost basis to be other than
temporary, the security would be written down to its fair value and the
difference would be included in earnings as a realized loss for the period such
determination was made. 22




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##### Table of Contents



Gross Unrealized Losses(in millions)Fixed MaturitiesContinuous
    
    Available for Sale
    
    
    
    
    
    Totaltime in unrealized loss
    
    Excluding Interests
    
    Interests in
    
    Fixed Maturitiesposition
    
    in Securitized Assets
    
    Securitized Assets
    
    Available for Sale
    
    Equity Securities
    
    Total Investments0 - 3 months
    
    $
    0.2
    
    
    $
    0.3
    
    
    $
    0.5
    
    
    $
    1.5
    
    
    $
    2.0>3 - 6 months
    
    
    0.3
    
    
    
    0.5
    
    
    
    0.8
    
    
    
    0.1
    
    
    
    0.9>6 - 9 months
    
    
    0.5
    
    
    
    0.6
    
    
    
    1.1
    
    
    
    
    
    
    
    1.1>9 - 12 months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    >12 - 18 months
    
    
    
    
    
    
    1.9
    
    
    
    1.9
    
    
    
    
    
    
    
    1.9>18 - 24 months
    
    
    
    
    
    
    3.4
    
    
    
    3.4
    
    
    
    
    
    
    
    3.4> 24 months
    
    
    0.4
    
    
    
    2.5
    
    
    
    2.9
    
    
    
    
    
    
    
    2.9Total Gross
Unrealized Losses
    
    $
    1.4
    
    
    $
    9.2
    
    
    $
    10.6
    
    
    $
    1.6
    
    
    $
    12.2Estimated fair
value of securities
with a gross
unrealized loss
    
    $
    101.9
    
    
    $
    96.9
    
    
    $
    198.8
    
    
    $
    6.8
    
    
    $
    205.6
 The following table presents certain information with respect to individual
securities with a significant unrealized loss position as of December 31, 2003. Significant Unrealized Losses by Security
(in millions) Issuer
    
    Security Type
    
    Carrying Value
    
    Unrealized LossBatterson Park CBO I CLC 144A
    
    Equity Security-Equity Tranche of Securitized Asset
    
    $
    0.0
    
    
    $
    1.2Conseco Fin SEC Corp 2000-4 M1
    
    Fixed Maturity - Interest in Securitized Assets
    
    
    0.5
    
    
    
    1.6Conseco Fin SEC Corp SER 2000-4 M2
    
    Fixed Maturity - Interest in Securitized Assets
    
    
    0.1
    
    
    
    1.0Greentree Financial Corp. 99-2 B1
    
    Fixed Maturity - Interest in Securitized Assets
    
    
    0.3
    
    
    
    2.2Nextcard CRCN MNT 2001-1 CLB144A
    
    Fixed Maturity - Interest in Securitized Assets
    
    
    3.7
    
    
    
    1.3$
    4.6
    
    
    $
    7.3
 During 2003 the Company recorded impairment losses of $1.1 million, $0.1
million, $0.5 million for the Batterson Park CBO I CLC 144A, Conseco Fin SEC
Corp SER 2000-4M2, and Greentree Financial Corp 99-2-B1 securities,
respectively. Based upon the Companys impairment evaluation as of December
31, 2003 utilizing cash flow assumptions of the supporting collateral,
estimated default and recovery rates it was concluded that the remaining
unrealized losses in the significant unrealized losses by security table are
not other than temporary. During 2003 the Companys gross loss on the sale of fixed maturity and equity
securities amounted to $0.7 million and $0.8 million, respectively. The fair
value of the fixed maturity and equity securities at the time of sale was $20.1
million and $4.4 million, respectively. During 2002 the Companys gross loss
on the sale of fixed maturity and equity securities amounted to $0.3 million
and $3.2 million, respectively. The fair value of the fixed maturity and
equity securities at the time of sale was $31.6 million and $14.1 million,
respectively. The decision to sell these securities was based upon
managements assessment of economic conditions. Market Risk of Financial Instruments The Companys financial instruments are subject to the market risk of potential
losses from adverse changes in market rates and prices. The primary market
risks to the Company are equity price risk associated with investments in
equity securities and interest rate risk associated with investments in fixed
maturities. The Company has established, among other criteria, duration, asset
quality and asset allocation guidelines for managing its investment portfolio
market risk exposure. The Companys investments are held for purposes other
than trading and consist of diversified issuers and issues. 23




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##### Table of Contents



The table below provides information about the Companys financial instruments
that are sensitive to changes in interest rates. For debt obligations, the
table presents principal cash flows and related weighted average interest rates
by expected maturity dates. The information is presented in U.S. dollar
equivalents. 24




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##### Table of Contents



DECEMBER 31, 2003EXPECTED MATURITY DATES(In thousands, except average interest rate)
    
    TOTALFAIR2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TOTAL
    
    VALUEFIXED MATURITIES
AVAILABLE FOR SALE:Principal Amount
    
    $
    119,372
    
    
    $
    150,850
    
    
    $
    128,609
    
    
    $
    106,668
    
    
    $
    127,667
    
    
    $
    412,502
    
    
    $
    1,045,668
    
    
    $
    1,078,394Book Value
    
    $
    120,047
    
    
    $
    153,444
    
    
    $
    130,874
    
    
    $
    107,360
    
    
    $
    129,818
    
    
    $
    421,813
    
    
    $
    1,063,356Average Interest Rate
    
    
    4.03
    %
    
    
    3.80
    %
    
    
    3.59
    %
    
    
    4.78
    %
    
    
    4.27
    %
    
    
    4.11
    %
    
    
    4.08
    %
    
    
    4.29
    %PREFERRED:Principal Amount
    
    $
    1,500
    
    
    $
    1,000
    
    
    $
    3,625
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,125
    
    
    $
    6,572Book Value
    
    $
    1,489
    
    
    $
    1,040
    
    
    $
    3,792
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,321Average Interest Rate
    
    
    6.06
    %
    
    
    6.84
    %
    
    
    6.46
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.43
    %
    
    
    6.18
    %SHORT-TERM INVESTMENTS:Principal Amount
    
    $
    68,469
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    68,469
    
    
    $
    68,469Book Value
    
    $
    68,469
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    68,469
    
    
    
    Average Interest Rate
    
    
    1.24
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.24
    %
    
    
    1.24
    %LOANS PAYABLE:Principal Amount
    
    $
    48,482
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    48,482
    
    
    
    Average Interest Rate
    
    
    1.23
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.23
    %
    
    
    
 Certain Critical Accounting Estimates and Judgments  
    
    Investments  
    
    Fair valuesThe carrying amount for the Companys investments approximates their
estimated fair value. The Company measures the fair value of investments
based upon quoted market prices or by obtaining quotes from third party
broker-dealers. Material assumptions and factors utilized by such
broker-dealers in pricing these securities include: future cash flows,
constant default rates, recovery rates and any market clearing activity
that may have occurred since the prior month-end pricing period. The
Companys total investments include $13.7 million in securities for which
there is no readily available independent market price.
    
    Other than temporary impairment, excluding interests in securitized
assetsThe Company regularly performs various analytical procedures with respect
to its investments, including identifying any security whose fair value is
below its cost. Upon identification of such securities, a detailed review
is performed for all securities, meeting predetermined thresholds, to
determine whether such decline is other than temporary. If the Company
determines a decline in value to be other than temporary, based upon its
detailed review, or if a decline 25




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##### Table of Contents



in value for an equity investment has persisted continuously for nine
months, the cost basis of the security is written down to its fair value.
The factors considered in reaching the conclusion that a decline below
cost is other-than-temporary include, but are not limited to, whether:
the issuer is in financial distress; the investment is secured; a
significant credit rating action has occurred; scheduled interest payments
have been delayed or missed; changes in laws and/or regulations have
impacted an issuer or industry. The amount of any write down is included
in earnings as a realized loss in the period the impairment arose (see
Investments).  
    
    Impairment recognition for investments in securitized assetsThe Company conducts its impairment evaluation and recognition for
interests in securitized assets in accordance with the guidance provided
by the Emerging Issues Task Force of the Financial Accounting Standards
Board. Under this guidance, impairment losses on securities must be
recognized if both the fair value of the security is less than its book
value and the net present value of expected future cash flows is less than
the net present value of expected future cash flows at the most recent
(prior) estimation date. If these criteria are met, an impairment charge,
calculated as the difference between the current book value of the
security and its fair value, is included in earnings as a realized loss in
the period the impairment arose (see Investments).  
    
    Liability for Unpaid Loss and Loss Adjustment Expenses:The liability for unpaid loss and loss adjustment expenses ($627.1 million
and $445.6 million as of December 31, 2003 and 2002, respectively) reflects
the Companys best estimate for future amounts needed to pay losses and
related settlement expenses with respect to insured events. Based upon past
experience this estimate has been redundant by as much as 18.5% and
deficient by as much as 41.4%. 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. This 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. The method for determining the Companys
liability for unpaid loss and loss adjustment expenses includes, but is not
limited to, reviewing past loss experience and considering other factors
such as legal, social, and economic developments. The methods of making
such estimates and establishing the resulting liabilities are regularly
reviewed and updated, and any adjustments resulting therefrom are made in
the accounting period in which the adjustment arose.During 2003 the Company increased the liability for unpaid loss and loss
adjustment expenses by $51.7 million ($44.6 million net of reinsurance
recoverables), primarily for accident years 1997 through 2001. This
increase in the liability for unpaid loss and loss adjustment expense, net
of reinsurance recoverables, was primarily due to the following:  
    
    The Company increased the estimated gross and net loss for
unreported claims incurred and related claim adjustment expenses on
residual value polices issued during the years 1998 through 2002 by
$38.8 million. As of December 31, 2003 the Companys total liability
for gross and net unpaid loss and loss adjustment expenses for these
policies is estimated to be $30.3 million. The residual value policies
provide coverage guaranteeing the value of a leased automobile at the
lease termination which can be up to five years from lease inception.
The increase in the estimated gross and net loss was a result of:  
    
    Further deterioration in both claims frequency and
severity for leases expiring in 2003. During the second quarter
of 2003, the Company engaged a consulting firm to aid in
evaluating the ultimate potential loss exposure under these
policies. Based upon the study and the subsequent evaluation by
the Company, the Company changed its assumptions relating to
future frequency and severity of losses, the estimate for unpaid
loss and loss adjustment expenses by $33.0 million. The Company
primarily attributes this deterioration to the following factors
that led to a softening of prices in the used car market
subsequent to the September 11, 2001 terrorist attacks: prolonged
0% new car financing rates and other incentives which increased
new car sales and the volume of trade-ins, daily rental units
being sold into the market earlier and in greater numbers than
expected, further adding to the over supply of used cars, and the
overall uncertain economic conditions. 26




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##### Table of Contents




    
    The Company entering into an agreement with U.S. Bank, N.A. d/b/a
Firstar Bank (Firstar) for residual value insurance policies
purchased by Firstar. Under the terms of the agreement, the Company
paid Firstar $27.5 million in satisfaction of any and all claims
made or which could have been made by Firstar under the residual
value policies. The Company increased the gross and net reserves
for loss and loss adjustment expenses from $21.7 million to $27.5
million.  
    
    The Company increased its estimate for unpaid loss and loss
adjustment expenses for non residual value policies by $43.5 million
($30.8 million net of reinsurance recoverables) primarily for accident
years 1999 to 2001 and decreased its estimate of the unpaid loss and
loss adjustment expenses by $30.6 million ($25.0 million net of
reinsurance recoverables) for the 2002 accident year. The increase in
accident years 1999 to 2001 is principally attributable to:  
    
    $19.6 million ($13.7 million net of reinsurance
recoverables) of development in professional liability products as
a result of case reserves developing greater than anticipated from
the year-end 2002 ultimate loss estimate; $18.1 million ($11.1
million net of reinsurance recoverables) of development in the
automobile and general liability coverages for commercial package
products due to losses developing beyond the underlying pricing
assumptions; and $5.8 million ($6.0 million net of reinsurance
recoverables) of development in the commercial automobile excess
liability insurance and GAP commercial automobile products due to
losses developing beyond the underlying pricing assumptions.  
    
    The decrease in unpaid loss and loss adjustment expenses in
accident year 2002 is principally attributable to:  
    
    $4.2 million ($4.7 million net of reinsurance
recoverables) and $26.4 million ($20.3 million net of reinsurance
recoverables) of favorable development in professional liability
products and commercial package products, respectively, due to
conservative initial loss estimates combined with favorable
product pricing.  The method for determining reinsurance recoverables and estimated
recoverability are regularly reviewed and adjustments resulting from this
review are included in earnings in the period the adjustment arose.
    
    Deferred Acquisition Costs:Policy acquisition costs ($56.3 million and $61.3 million as of December 31,
2003 and 2002, respectively) 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 after providing for losses and expenses that
are expected to be incurred, based upon historical and current experience.
Anticipated investment income is considered in determining whether a premium
deficiency exists. The methods of making such estimates and establishing
the deferred costs are continually reviewed by the Company, and any
adjustments therefrom are made in the accounting period in which the
adjustment arose. OFF-BALANCE SHEET ARRANGEMENTS The Company has 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 as of December 31, 2003, future effect on it 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, 2003. 27




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##### Table of Contents



RESULTS OF OPERATIONS
(2003 (Restated) versus 2002 (Restated)) Premiums: Premium information relating to the Companys business segments is
as follows (in millions): Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2003 Gross Written Premiums
    
    $
    662.4
    
    
    $
    154.1
    
    
    $
    89.5
    
    
    $
    906.02002 Gross Written Premiums
    
    $
    473.1
    
    
    $
    110.2
    
    
    $
    80.4
    
    
    $
    663.7Percentage Increase (Decrease)
    
    
    40.0
    %
    
    
    39.9
    %
    
    
    11.3
    %
    
    
    36.5
    %2003 Gross Earned Premiums
    
    $
    566.1
    
    
    $
    138.3
    
    
    $
    85.1
    
    
    $
    789.52002 Gross Earned Premiums
    
    $
    384.4
    
    
    $
    93.9
    
    
    $
    77.2
    
    
    $
    555.5Percentage Increase (Decrease)
    
    
    47.3
    %
    
    
    47.2
    %
    
    
    10.2
    %
    
    
    42.1
    %
 The overall growth in gross written premiums is primarily attributable to the
following:  
    
    Further rating downgrades of certain major competitor property and
casualty insurance companies have led to their diminished presence in
the Companys commercial and specialty lines business segments and
continue to result in additional prospects and increased premium
writings, most notably for the Companys various commercial package
and non-profit D&O product lines.
    
    The displacement of certain competitor property and casualty insurance
companies and their independent agency relationships continues to
result in new agency relationship opportunities for the Company.
These relationship opportunities have resulted in additional
policyholders and premium writings for the Companys commercial and
specialty lines segments.
    
    Continued expansion of marketing efforts relating to commercial lines
and specialty lines products through the Companys field organization
and preferred agents.
    
    In-force policy counts have increased 22.8% and 39.7% for the
commercial and specialty lines segments, respectively, primarily as a
result of the factors discussed above. Policy counts were
approximately the same for the personal lines segment as a result of
restricting new business and not renewing certain business to manage
overall property exposures and the related catastrophe loss
considerations. Firming prices in the property and casualty industry
resulted in weighted average rate increases on renewal business
approximating 4.3%, 10.2%, and 9.4% for the commercial, specialty and
personal lines segments, respectively. The respective net written premium changes for commercial lines, specialty
lines and personal lines segments for the year ended December 31, 2003 vs.
December 31, 2002 were (in millions): Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2003 Net Written Premiums
(Restated)
    
    $
    463.9
    
    
    $
    107.9
    
    
    $
    30.5
    
    
    $
    602.32002 Net Written Premiums (Restated)
    
    $
    381.0
    
    
    $
    101.6
    
    
    $
    37.1
    
    
    $
    519.7Percentage Increase (Decrease)
    
    
    21.8
    %
    
    
    6.2
    %
    
    
    (17.8
    %)
    
    
    15.9
    %2003 Net Earned Premiums
(Restated)
    
    $
    431.5
    
    
    $
    108.8
    
    
    $
    34.2
    
    
    $
    574.52002 Net Earned Premiums (Restated)
    
    $
    297.6
    
    
    $
    85.0
    
    
    $
    35.1
    
    
    $
    417.7Percentage Increase (Decrease)
    
    
    45.0
    %
    
    
    28.0
    %
    
    
    (2.6
    %)
    
    
    37.5
    %
 The differing percentage changes in net written premiums versus gross written
premiums for the commercial lines, specialty lines and personal lines segments
during the year results from:  
    
    The Company entering into a Quota Share reinsurance agreement (effective
April 1, 2003) covering all of the Companys lines of business. Under
this agreement, the Company cedes 22% of its net written premium
(including 22% of the net unearned premium reserves at April 1, 2003) and
loss and loss adjustment expenses. The Company also receives a
provisional commission of 33.0% adjusted pro-rata based upon the ratio of
losses incurred to premiums 28




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##### Table of Contents



earned. Pursuant to this reinsurance agreement the Company withholds the
reinsurance premium reduced by the reinsurers expense allowance and the
Companys ceding commission allowance in a Funds Held Payable to Reinsurer
account. This Funds Held Payable to Reinsurer account is also reduced by ceded
paid losses and loss adjustment expenses under this agreement, and increased by
an interest credit. In addition, the agreement provides that a profit commission will
be paid to the Company, upon commutation equal to the positive balance in the Funds
Held Payable to Reinsurers account. During the year ended December 31, 2003, the Company ceded
$194.0 million of written premium, which included unearned premium reserves of
$63.6 million at April 1, 2003.
    
    Relatively lower reinsurance costs (ceded premiums)
as a result of increasing the Companys loss
retention from $0.5 million to $2.0 million on its
commercial lines per-risk property reinsurance treaty
and from $0.9 million to $1.0 million on its excess
liability reinsurance treaty, effective January 1,
2003. Net Investment IncomeNet investment income approximated $38.8 in 2003 and
$37.5 million in 2002. Total investments grew to $1,172.1 million at December
31, 2003 from $908.9 million at December 31, 2002. The growth in investment
income is due to investing net cash flows provided from operating activities.
The Companys average duration of its fixed income portfolio increased to
approximately 4.0 years at December 31, 2003, compared to 3.2 years at December
31, 2002 as a result of investing in overall AAA rated intermediate to longer
tax exempt fixed income securities due to their perceived relative value to
taxable alternatives. The Companys taxable equivalent book yield on its fixed
income holdings declined to 4.9% at December 31, 2003, from 5.2% at December
31, 2002, as a result of investing strong cash inflows due to premium increases
at relatively low interest rates during the Federal Reserves latest easing
cycle. Net investment income was reduced by $2.3 million due to the interest
credit on the Funds Held Account balance pursuant to the Companys quota share
reinsurance agreement (see Premiums). The total return, which includes the effects of both income and price
returns on securities, of the Companys fixed income portfolio was 4.36% and
9.09% for the years ended December 31, 2003 and 2002, respectively, and was
similar to the Lehman Brothers Intermediate Aggregate Bond Index (the Index)
total return of 3.81% and 9.51% for the same periods, respectively. The
Company expects some variation in its portfolios total return compared to the
index because of the differing sector, security and duration composition of its
portfolio compared to the index. Net Realized Investment Gain (Loss):Net realized investment gains
(losses) were $0.8 million for the year ended December 31, 2003 and ($3.4)
million for the same period in 2002. The Company realized net investment gains
of $7.1 million and $4.0 million from the sale of fixed maturity and equity
securities, respectively, for the year ended December 31, 2003, and $4.0
million and $6.3 million in non-cash realized investment losses for fixed
maturity and common stock investments, respectively, as a result of the
Companys impairment evaluations. The Company realized $3.4 million in net investment gains from the sale of
fixed maturity securities and $3.1 million in net investment losses from the
sale of common stock equity securities for the year ended December 31, 2002.
Additionally, $2.1 million and $1.6 million in non-cash realized investment
losses were recorded for common stock and fixed maturity investments,
respectively as a result of the Companys impairment evaluations. Other Income: Other income approximated $5.5 million for the year ended
December 31, 2003 and $0.9 million for the same period of 2002. Other income
primarily consists of commissions earned on brokered personal lines business,
and to a lesser extent brokered commercial lines business. The Company is
seeking to increase brokering activities in its personal lines segment as it is
restricting new business and not renewing certain policies in designated areas
of Florida as a result of its property exposures in these areas and related
catastrophe loss considerations. Net Loss and Loss Adjustment Expenses:Net loss and loss adjustment
expenses increased $91.8 million (34.3%) to $359.2 million for the year ended
December 31, 2003 from $267.4 million for the same period of 2002 and the loss
ratio decreased to 62.5% in 2003 from 64.0% in 2002. This increase in net loss
and loss adjustment expenses was due to the 37.5% growth in net earned
premiums, a $38.8 million increase in the estimated gross and net loss for
unreported claims incurred and related claim adjustment expenses on residual
value polices issued during the years 1998 through 2002, and a $5.8 million net
increase in the estimated gross and net loss reserves for loss and loss
adjustment expenses primarily for claims made professional liability and
commercial automobile lines of business in prior accident years. Additionally,
during the year the Company ceded $111.5 million of net earned premium and
$62.7 million in net loss and loss adjustment expenses pursuant to the quota
share reinsurance agreement (see Premiums). As of December 31, 2003, the Company has estimated a total liability for
gross and net unpaid loss and loss adjustment expenses for the residual value
policies of $30.3 million. The residual value policies provide coverage
guaranteeing the value of a leased automobile at the lease termination, which
can be up to five years from lease inception. As 29




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##### Table of Contents



part of the Companys monitoring and evaluation process, a consulting firm was
engaged during the second quarter of 2003 to aid in evaluating the ultimate
potential loss exposure under these policies. Based upon the result of the
indications and subsequent evaluation by the Company and changes in the
Companys assumptions relating to future frequency and severity of losses, the
estimate for unpaid loss and loss adjustment expenses was increased by $33.0
million. The Company primarily attributes this deterioration to the following
factors that led to a softening of prices in the used car market subsequent to
the September 11, 2001 terrorist attacks: prolonged 0% new car financing rates
and other incentives which increased new car sales and the volume of trade-ins,
daily rental units being sold into the market earlier and in greater numbers
than expected further adding to the oversupply of used cars; and the overall
general economic conditions. As of December 31, 2003, approximately 22,000
leases were outstanding under the Companys residual value policies. Acquisition Costs and Other Underwriting Expenses:Acquisition costs and
other underwriting expenses increased $33.0 million (25.4%) to $162.9 million
for the year ended December 31, 2003 from $129.9 million for the same period of
2002. This increase was due primarily to the 37.5% growth in net earned
premiums and in part to the Company establishing a $1.4 million allowance for
doubtful reinsurance receivables based upon its review of collectibility from
its reinsurers. During the year the Company ceded $111.5 million of net earned
premium and earned $46.7 million in ceding commission under the quota share
reinsurance agreement (see Premiums). Other Operating Expenses: Other operating expenses increased $1.4 million
to $7.8 million for the year ended December 31, 2003 from $6.4 million for the
same period of 2002 as the Company continues to control its expenses during
this period of premium growth. Income Tax Expense:The Companys effective tax rate for the years ended
December 31, 2003 and 2002 was 30.7% and 31.2%, respectively. The effective
rates differed from the 35% statutory rate principally due to investments in
tax-exempt securities and the relative proportion of tax exempt income to total
income before tax. RESULTS OF OPERATIONS
(2002 (Restated) versus 2001 (Restated)) Premiums: Gross written premiums grew $190.1 million (40.1%) to $663.7 million
in 2002 from $473.6 million in 2001; gross earned premiums grew $134.4 million
(31.9%) to $555.5 million in 2002 from $421.1 million in 2001; net written
premiums increased $182.4 million (54.1%) to $519.7 million in 2002 from $337.3
million in 2001; and net earned premiums grew $118.1 million (39.4%) to $417.7
million in 2002 from $299.6 million in 2001. The respective gross written premium increases for the commercial lines,
specialty lines and personal lines segments for the years ended December 31,
2002 vs. December 31, 2001 amount to $157.9 million (50.0%), $30.0 million
(37.8%) and $2.2 million (2.8%), respectively. The overall growth in gross
written premiums is primarily attributable to the following:  
    
    Further rating downgrades of certain
major competitor property and
casualty insurance companies have led
to their diminished presence in the
Companys commercial and specialty
lines business segments and continue
to result in additional prospects and
increased premium writings, most
notably for the Companys various
commercial package and non-profit D&O
product lines.
    
    The continued consolidation of
certain competitor property and
casualty insurance companies has led
to the displacement of certain of
their independent agency
relationships. This consolidation
continues to result in new agency
relationship opportunities for the
Company, which have resulted in
additional prospects and premium
writings for the Companys commercial
and specialty lines segments.
    
    Continued expansion of marketing
efforts relating to commercial lines
and specialty lines products through
the Companys field organization and
preferred agents.
    
    As a result of firming prices in the
property and casualty industry, rate
increases on renewal business have
approximated 16.0%, 26.0%, and 8.0%
for the commercial, specialty and the
personal lines segments,
respectively. Additionally, in force
policy counts have increased 43.0%
and 13.0% for the commercial and
specialty lines segments,
respectively, primarily as a result
of the factors discussed above.
Policy counts have decreased
approximately 7.0% for the personal
lines segment as a result of
restricting new business and not
renewing certain business to manage
overall property exposures and the
related catastrophe loss
considerations. Overall premium growth has been offset in part by the following factors: 30




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##### Table of Contents




    
    Specialty Lines Segment  The
Companys decision not to renew
approximately 2,000 policies in the
professional liability product lines
due to inadequate pricing levels
being experienced as a result of
market conditions and/or an
unacceptable underwriting risk
profile.
    
    Personal Lines Segment  The
Companys decision to restrict new
business and not renew approximately
9,000 policies in designated areas of
Florida in the Companys manufactured
housing and homeowners product lines,
based on an evaluation of property
exposures and the related catastrophe
loss considerations. Pursuant to a routine underwriting review which focused on pricing adequacy and
loss experience, as well as other underwriting criteria, the Company cancelled
a Commercial Automobile Excess Liability Insurance customer (Commercial Lines
Underwriting Group) effective October 22, 2002 as a result of an unacceptable
underwriting risk profile. Such customers gross written premium and net
written premium amounted to $36.7 million and $10.9 million, respectively, for
the year ended December 31, 2002. Additionally, the respective net written premium increases (decreases) for
commercial lines, specialty lines and personal lines segments for the year
ended December 31, 2002 vs. December 31, 2001 amount to
$155.0 million (68.6%),
$31.1 million (44.0%) and ($3.7) million (9.0%) respectively. The differing
percentage increases (decreases) in net written premiums versus gross written
premiums for the year is primarily due to the Company commuting a 2001 accident
year aggregate stop loss reinsurance program during the quarter ended June 30,
2002 whereby net written and net earned premiums increased by $3.5 million
($2.3 million Commercial Lines, $0.8 million Specialty Lines, $0.4 million
Personal Lines), and in part to other various changes in, or pricing of, the
Companys reinsurance program. Net Investment Income:Net investment income approximated $37.5 million
in 2002 and $32.4 million in 2001. Total investments grew to $908.9 million at
December 31, 2002 from $673.4 million at December 31, 2001. The growth in
investment income is due to investing net cash flows provided from operating
activities and the proceeds of the Companys fourth quarter 2001 equity
offering. The capital market environment during 2001 and most of 2002 (low
U.S. Treasury yields) had the effect of increasing the level of prepayments in
certain of the Companys interest rate sensitive investments. The Companys
average duration of its fixed income portfolio approximated 3.2 years at
December 31, 2002, compared to 2.7 years at December 31, 2001. Additionally,
due to the capital market environment, the Company has invested approximately
$75.1 million in overall AAA rated floating rate and shorter amortizing
securities to reduce interest rate risk with the expectation of reinvesting
these funds into longer duration investments at higher future fixed income
rates. The Companys tax equivalent book yield on its fixed income holdings
was 5.2% at December 31, 2002, compared to 6.0% at December 31, 2001. The total return, which includes the effect of realized and unrealized
gains and losses, of the Companys fixed income portfolio was 9.09% and 7.30%
for the years ended December 31, 2002 and 2001, respectively versus the Lehman
Brothers US Aggregate Bond Index (the Index) total return of 9.51% and 8.67%
for the same periods, respectively. While the performance during 2002 and 2001
was similar to the total return of the Index, performance differed from the
Index due primarily to the following factors:  
    
    the Companys fixed income portfolio is overweighted in the spread sectors, versus the Index, to capture the incremental
spread available in non-Treasury securities consistent with its investment objective of achieving the highest after-tax
risk adjusted yields;
    
    the Company maintains a higher level of credit quality in the portfolio versus the Index; and
    
    the Company maintains a shorter portfolio duration versus the Index. Net Realized Investment Gain (Loss):Net realized investment gains
(losses) were ($3.4) million for the year ended December 31, 2002 and $3.4
million for the same period in 2001. The Company realized net investment
losses of $3.1 million from the sales of common stock equity securities and
$3.4 million in net investment gains from the sale of fixed maturity securities
during the year ended December 31, 2002. Additionally, $2.1 million and $1.6
million in non-cash realized investment losses were recorded for common stock
and fixed maturity investments, respectively, as a result of the Companys
impairment evaluation (see Investments). The Company realized net investment
gains of $8.3 million from the sales of common stock equity securities and $0.9
million from the sales of fixed maturity securities during the year ended
December 31, 2001. These realized net investment gains were offset by $5.8
million in non-cash realized investment losses experienced on certain
securities as a result of the Companys impairment evaluation (see
Investments). The proceeds from the sales were reinvested in fixed maturity
securities to increase current investment income and decrease the overall
percentage of investments in common stock securities. 31




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##### Table of Contents



Other Income: Other income approximated $0.9 million for the year ended
December 31, 2002 and $0.6 million for the same period of 2001. Other income
primarily consists of commissions earned on brokered personal lines business,
and to a lesser extent brokered commercial lines business. The Company is
seeking to increase brokering activities in its personal lines segment, as it
is restricting new business and not renewing certain policies in designated
areas of Florida as a result of its property exposures in these areas and the
related catastrophe loss considerations. Net Loss and Loss Adjustment Expenses:Net loss and loss adjustment
expenses increased $87.7 million (48.8%) to $267.4 million for the year ended
December 31, 2002 from $179.7 million for the same period of 2001 and the loss
ratio increased to 64.0% in 2002 from 60.0% in 2001. This increase in net loss
and loss adjustment expenses was due principally to the 39.4% growth in net
earned premiums, and in part to the Company increasing loss and loss adjustment
expenses incurred as a result of changes in estimates of insured events in
prior years by: $27.6 million ($68.0 million gross of reinsurance) due to
deterioration in frequency and severity trends on automobile leases currently
expiring on residual value policies issued during the years 1998 through 2001
(see Certain Critical Accounting Estimates and Judgments  Liability for Unpaid
Loss and Loss Adjustment Expense); and by $4.9 million ($6.9 million gross of
reinsurance) due to adverse loss experience on the Commercial Automobile Excess
Liability Insurance product (see Certain Critical Accounting Estimates and
Judgments  Liability for Unpaid Loss and Loss Adjustment Expense). The
Company also commuted a 2001 accident year aggregate stop loss reinsurance
program in the second quarter of 2002, resulting in net written and net earned
premium increasing by $3.6 million. The Company had not ceded any losses to
the 2001 accident year aggregate stop loss reinsurance program. The year ended
December 31, 2001 included a $4.0 million increase to unpaid loss and loss
adjustment expenses arising from business interruption, business personal
property, business property and workers compensation exposures relating to the
September 11, 2001 terrorist attacks. The Company has entered into various
reinsurance agreements for the purpose of limiting its loss exposure. Net
reinsurance recoveries as a percentage of loss and loss adjustment expenses may
vary considerably from period to period based upon the number and/or severity
of our individual losses in excess of the amount retained under the Companys
reinsurance agreements in any one period. Acquisition Costs and Other Underwriting Expenses:Acquisition costs and
other underwriting expenses increased $32.9 million (33.9%) to $129.9 million
for the year ended December 31, 2002 from $97.0 million for the same period of
2001. This increase was due primarily to the 39.4% growth in net earned
premiums, offset in part by:  
    
    A lower weighted average effective commission rate incurred on the commercial and specialty lines segment products of
approximately 12.7% for the year ended December 31, 2002 compared to a weighted average effective commission rate of
approximately 13.9% for the year ended December 31, 2001. The Company has been able to incur a relatively lower commission
rate on business produced by independent agents in the current market environment.
    
    Incremental written premium growth without a corresponding incremental increase in operating costs. Other Operating Expenses: Other operating expenses decreased $0.4 million
to $6.4 million for the year ended December 31, 2002 from $6.8 million for the
same period of 2001. The decrease in other operating expenses was primarily
due to the discontinuance of goodwill amortization effective January 1, 2002,
which amounted to $1.5 million for the year ended December 31, 2001. This
decrease has been partially offset by an increase in expenses attributable to
increased operating activities. Income Tax Expense:The Companys effective tax rate for the year ended
December 31, 2002 and 2001 was 31.2% and 33.9%, respectively. The effective
rates differed from the 35% statutory rate principally due to investments in
tax-exempt securities and in part due to the discontinuance of goodwill
amortization. The decrease in the effective tax rate is principally due to a
greater investment of cash flows in tax-exempt securities relative to taxable
securities. LIQUIDITY AND CAPITAL RESOURCES Philadelphia Consolidated Holding Corp. (PCHC) is a holding company whose
principal assets currently consist of 100% of the capital stock of its
subsidiaries. PCHCs primary sources of funds are dividends from its
subsidiaries and payments received pursuant to tax allocation agreements with
the insurance subsidiaries. For the year ended December 31, 2003, payments to
PCHC pursuant to such tax allocation agreements totaled $36.3 million. The
payment of dividends to PCHC from the insurance subsidiaries is subject to
certain limitations imposed by the insurance laws of the Commonwealth of
Pennsylvania and State of Florida. Accumulated statutory profits or
policyholders surplus of the insurance subsidiaries from which dividends may
be paid totaled $179.2 million at December 31, 2003. Of this amount, the
insurance subsidiaries are 32




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##### Table of Contents



entitled to pay a total of approximately $50.7 million of dividends in 2004
without obtaining prior approval from the Insurance Commissioner of the
Commonwealth of Pennsylvania or State of Florida. During 2003 the insurance
subsidiaries paid dividends of $4.0 million to Liberty American Insurance
Group, Inc., a subsidiary of PCHC. During 2003 PCHC repurchased 10,000 shares
of its common stock for approximately $0.3 million under the stock repurchase
authorization. At December 31, 2003 the remaining stock repurchase
authorization is $24.7 million. The Company produced net cash from operations of $298.5 million in 2003, $205.0
million in 2002 and $115.1 million in 2001. Sources of operating funds consist
primarily of net premiums written and investment income. Funds are used
primarily to pay claims and operating expenses and for the purchase of
investments. Cash from operations in 2003 was primarily generated from strong
premium growth during such year due to increases in the number of policies
written and price increases realized on renewal business. Net loss and loss
expense payments were $237.4 million in 2003, $157.9 million in 2002, and
$125.0 million in 2001. Net cash from operations also included cash provided
from tax savings as a result of the exercise of employee stock options
amounting to $0.9 million, $1.3 million and $25.8 million for 2003, 2002 and
2001, respectively. Management believes that the Company has adequate
liquidity to pay all claims and meet all other cash needs. Two of the Companys 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 members access to credit is based upon
its FHLB eligible collateral. At December 31, 2003, the Insurance Subsidiaries
borrowing capacity with FHLB was $124.8 million. The Insurance Subsidiaries
have utilized a portion of its borrowing capacity to purchase a diversified
portfolio of investment grade floating rate securities. These purchases were
funded by floating rate FHLB borrowings to achieve a positive spread between
the rate of interest on these securities and FHLB borrowing rates. The
remaining unused borrowing capacity provides an immediately available line of
credit. Borrowings aggregated $48.5 million at December 31, 2003, bear
interest at adjusted LIBOR and mature twelve months from inception. The
weighted-average interest rate on borrowings outstanding as of December 31,
2003 was 1.23% per annum. These borrowings are collateralized by investment
securities, principally asset backed securities, with a carrying value of $59.1
million. 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
obligations to policyholders. To reduce the potential for a write-off of
amounts due from reinsurers, the Company: evaluates the financial condition of
its reinsurers, principally contracts with large reinsurers that are rated at
least A (Excellent) by A.M. Best Company, regularly monitors its reinsurance
receivables and attempts to collect the obligations of its reinsurers on a
timely basis. Under certain reinsurance agreements, the Company is required to maintain
investments in trust accounts to secure its reinsurance obligations (primarily
the payment of losses and loss adjustment expenses on business it does not
write directly). At December 31, 2003, the investment and cash balances in such
trust accounts totaled approximately $1.7 million. In addition, various
insurance departments of states in which the Company operates require the
deposit of funds to protect policyholders within those states. At December 31,
2003, the balance on deposit for the benefit of such policyholders totaled
approximately $15.5 million. The Insurance Subsidiaries, which operate under an intercompany reinsurance
pooling agreement, must have certain levels of surplus to support premium
writings. Guidelines of the National Association of Insurance Commissioners
(the NAIC) suggest that a property and casualty insurers 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 the
insurance subsidiaries to their combined policyholders surplus was 1.5-to-1.0
and 1.7-to-1.0 for 2003 and 2002, respectively. The NAICs 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 companys 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 insurers domiciliary insurance department and ultimately
rehabilitation or liquidation. As of December 31, 2003, PIIC, PIC, MUSA and
LAIC exceeded their minimum risk-based capital requirements of $107.6 million,
$13.1 million, $15.3 million and $14.9 million, respectively, by 218%, 134%,
40% and 48%, respectively. 33




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##### Table of Contents



CONTRACTUAL OBLIGATIONS The Company has certain contractual obligations and commitments as of December
31, 2003 which are summarized below: Payments Due by Period(in thousands)Less than 1
    
    
    
    
    
    
    
    
    
    More ThanTotal
    
    year
    
    1-3 years
    
    4-5 years
    
    5 yearsCertain Contractual Obligations (1)Long-Term
Debt Obligations (2)
    
    $
    48,482
    
    
    $
    48,482
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating Leases
    
    
    17,602
    
    
    
    4,611
    
    
    
    11,753
    
    
    
    1,238
    
    
    
    Other Long-Term Commercial
Commitments (3)
    
    
    2,252
    
    
    
    2,252
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    68,336
    
    
    $
    55,345
    
    
    $
    11,753
    
    
    $
    1,238
    
    
    $
    
  (1)
    
    Unpaid loss and loss adjustment expenses are not included in the above
table as there is no related contractual maturity for such obligations.(2)
    
    Represents 12 month collateralized borrowings from the Federal Home Loan
Bank of Pittsburgh.(3)
    
    Represents open commitments under certain limited partnership and
information technology development agreements. INFLATION Property and casualty insurance premiums are established before the amount of
losses and loss adjusted expenses, or the extent to which inflation may affect
such amounts, is known. The Company attempts to anticipate the potential impact
of inflation in establishing its 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 the
Companys investment portfolio and resulting unrealized losses and/or
reductions in shareholders equity. NEW ACCOUNTING PRONOUNCEMENTS FASB Interpretation 46 Consolidation of Variable Interest Entities was issued
in January 2003 and is effective at various dates for various requirements.
This interpretation addresses consolidation of variable interest entities
(formerly known as special purpose entities). Management has determined that
this interpretation will have no effect on the Companys consolidated financial
statements. In May 2003, the Financial Accounting Standards Board FASB issued Statement
of Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments With Characteristics of both Liabilities and Equity, which
establishes standards for how an issuer classifies and measures financial
instruments characteristics of both liabilities and equity. With the exception
of certain financial measurement criteria deferred indefinitely by the FASB,
SFAS No. 150 was adopted in fiscal 2003. The implementation of SFAS No. 150
had no impact on the Companys financial condition or results of operations. FORWARD-LOOKING INFORMATION Certain information included in this report and other statements or materials
published or to be published by the Company 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, the Company provides the following cautionary
remarks regarding important factors which, among others, could cause the
Companys actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Companys
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development, results of the Companys business, and
the other matters referred to above include, but are not limited to: (i)
changes in the business environment in which the Company operates, 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) 34




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##### Table of Contents



severity of natural disasters and other catastrophe losses; (vii) adequacy of
reinsurance coverage which may be obtained by the Company; (viii) ability and
willingness of our reinsurers to pay; and (ix) future terrorist attacks. 35




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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Philadelphia Consolidated Holding Corp. and Subsidiaries
Index to Financial Statements and Schedules

PageFinancial StatementsReport of Independent Registered Public Accounting Firm
    
    37Consolidated Balance Sheets - As of
December 31, 2003 (Restated)
and 2002 (Restated)
    
    38Consolidated
Statements of Operations and Comprehensive Income - For the Years
Ended December 31, 2003 (Restated),
2002 (Restated) and 2001 (Restated)
    
    39Consolidated Statements of Changes in Shareholders Equity -
For the Years Ended December 31, 2003 (Restated),
2002 (Restated) and 2001 (Restated)
    
    40Consolidated Statements of Cash Flows -
For the Years Ended December 31, 2003 (Restated), 2002 (Restated), and 2001 (Restated)
    
    41Notes to Consolidated Financial Statements
    
    42-64Financial Statement Schedules:ScheduleI
    
    Summary of Investments - Other Than Investments in Related Parties As of December 31, 2003
    
    S-1II
    
    Condensed Financial Information of Registrant As of December 31,
2003 (Restated) and 2002 and For Each of the Three Years in the Period Ended December 31, 2003 (Restated)
    
    S-2  S-4III
    
    Supplementary Insurance Information As of and For the Years Ended
December 31, 2003 (Restated), 2002 (Restated) and 2001 (Restated)
    
    S-5IV
    
    Reinsurance For the Years ended December 31, 2003 (Restated),
2002 (Restated) and 2001 (Restated)
    
    S-6VI
    
    Supplementary Information Concerning Property-Casualty Insurance Operations
As of and For the Years Ended December 31, 2003 (Restated), 2002 (Restated) and 2001 (Restated)
    
    S-7


36



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##### Table of Contents



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, changes in
shareholders equity and cash flows present fairly, in all material respects,
the financial position of Philadelphia Consolidated Holding Corp. and
Subsidiaries (the Company) at December 31, 2003 and 2002, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2003 in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes 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. We believe that
our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, in 2002 the
Company changed its method of accounting for goodwill to conform with Statement
of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets. As
described in Note 2, the Company has restated its 2003, 2002 and
2001 consolidated financial statements in order to properly recognize
profit commissions under three of its reinsurance contracts. PricewaterhouseCoopers LLP
February 11, 2004, except for Note 2
as to which the Date is August 19, 2004 37




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA) As of December 31,2003 (Restated)
    
    2002ASSETSInvestments:Fixed Maturities Available for Sale at Market
(Amortized Cost $1,066,523 and $832,701)
    
    $
    1,081,694
    
    
    $
    854,513Equity Securities at Market (Cost $79,813 and $51,257)
    
    
    90,358
    
    
    
    54,346Total Investments
    
    
    1,172,052
    
    
    
    908,859Cash and Cash Equivalents
    
    
    73,942
    
    
    
    42,002Accrued Investment Income
    
    
    11,008
    
    
    
    8,571Premiums Receivable
    
    
    179,509
    
    
    
    130,007Prepaid Reinsurance Premiums and Reinsurance
Receivables
    
    
    292,157
    
    
    
    151,352Deferred Income Taxes
    
    
    18,147
    
    
    
    7,541Deferred Acquisition Costs
    
    
    56,288
    
    
    
    61,272Property and Equipment, Net
    
    
    16,821
    
    
    
    12,794Goodwill
    
    
    25,724
    
    
    
    25,724Other Assets
    
    
    25,293
    
    
    
    10,212Total Assets
    
    $
    1,870,941
    
    
    $
    1,358,334LIABILITIES and SHAREHOLDERS EQUITYPolicy Liabilities and Accruals:Unpaid Loss and Loss Adjustment Expenses
    
    $
    627,086
    
    
    $
    445,548Unearned Premiums
    
    
    422,589
    
    
    
    306,093Total Policy Liabilities and Accruals
    
    
    1,049,675
    
    
    
    751,641Funds Held Payable to Reinsurer
    
    
    110,011
    
    
    
    Loans Payable
    
    
    48,482
    
    
    
    39,113Premiums Payable
    
    
    35,044
    
    
    
    33,553Other Liabilities
    
    
    82,083
    
    
    
    56,204Total Liabilities
    
    
    1,325,295
    
    
    
    880,511Commitments and ContingenciesShareholders Equity:Preferred Stock, $.01 Par Value,
10,000,000 Shares Authorized,
None Issued and Outstanding
    
    
    
    
    
    
    Common Stock, No Par Value,
100,000,000 Shares Authorized, 22,007,552 and
21,868,877 Shares Issued and Outstanding
    
    
    281,088
    
    
    
    276,945Notes Receivable from Shareholders
    
    
    (5,444
    )
    
    
    (6,407
    )Accumulated Other Comprehensive Income
    
    
    16,715
    
    
    
    16,185Retained Earnings
    
    
    253,287
    
    
    
    191,100Total Shareholders Equity
    
    
    545,646
    
    
    
    477,823Total Liabilities and Shareholders Equity
    
    $
    1,870,941
    
    
    $
    1,358,334
 The accompanying notes are an integral part of the consolidated financial
statements. 38




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME  For the Years Ended December 31,2003 (Restated)
    
    2002 (Restated)
    
    2001 (Restated)Revenue:Net Earned Premiums
    
    $
    574,518
    
    
    $
    417,722
    
    
    $
    299,557Net Investment Income
    
    
    38,806
    
    
    
    37,516
    
    
    
    32,426Net Realized Investment Gain (Loss)
    
    
    794
    
    
    
    (3,371
    )
    
    
    3,357Other Income
    
    
    5,519
    
    
    
    911
    
    
    
    587Total Revenue
    
    
    619,637
    
    
    
    452,778
    
    
    
    335,927Losses and Expenses:Loss and Loss Adjustment Expenses
    
    
    469,547
    
    
    
    361,154
    
    
    
    222,581Net Reinsurance Recoveries
    
    
    (110,370
    )
    
    
    (93,721
    )
    
    
    (42,926
    )Net Loss and Loss Adjustment Expenses
    
    
    359,177
    
    
    
    267,433
    
    
    
    179,655Acquisition Costs and Other
Underwriting Expenses
    
    
    162,912
    
    
    
    129,918
    
    
    
    97,020Other Operating Expenses
    
    
    7,822
    
    
    
    6,372
    
    
    
    6,841Total Losses and Expenses
    
    
    529,911
    
    
    
    403,723
    
    
    
    283,516Minority Interest: Distributions on Company Obligated
Mandatorily Redeemable Preferred Securities of
Subsidiary Trust
    
    
    
    
    
    
    
    
    
    
    2,749Income Before Income Taxes
    
    
    89,726
    
    
    
    49,055
    
    
    
    49,662Income Tax Expense (Benefit):Current
    
    
    38,430
    
    
    
    22,018
    
    
    
    18,216Deferred
    
    
    (10,891
    )
    
    
    (6,716
    )
    
    
    (1,365
    )Total Income Tax Expense
    
    
    27,539
    
    
    
    15,302
    
    
    
    16,851Net Income
    
    $
    62,187
    
    
    $
    33,753
    
    
    $
    32,811Other Comprehensive Income (Loss), Net of Tax:Holding Gain (Loss) Arising during Year
    
    $
    1,046
    
    
    $
    5,533
    
    
    $
    (2,851
    )Reclassification Adjustment
    
    
    (516
    )
    
    
    2,191
    
    
    
    (2,182
    )Other Comprehensive Income (Loss)
    
    
    530
    
    
    
    7,724
    
    
    
    (5,033
    )Comprehensive Income
    
    $
    62,717
    
    
    $
    41,477
    
    
    $
    27,778Per Average Share Data:Basic Earnings Per Share
    
    $
    2.84
    
    
    $
    1.56
    
    
    $
    1.99Diluted Earnings Per Share
    
    $
    2.74
    
    
    $
    1.51
    
    
    $
    1.91Weighted-Average Common Shares Outstanding
    
    
    21,908,788
    
    
    
    21,611,053
    
    
    
    16,528,601Weighted-Average Share Equivalents Outstanding
    
    
    751,600
    
    
    
    682,382
    
    
    
    656,075Weighted-Average Shares and Share Equivalents
Outstanding
    
    
    22,660,388
    
    
    
    22,293,435
    
    
    
    17,184,676
 The accompanying notes are an integral part of the consolidated financial
statements. 39




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##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY  For the Years Ended December 31,2003 (Restated)
    
    2002 (Restated)
    
    2001 (Restated)Common Shares:Balance at Beginning of Year
    
    
    21,868,877
    
    
    
    21,509,723
    
    
    
    13,431,408Issuance of Shares Pursuant to Public Offering
    
    
    
    
    
    
    
    
    
    
    3,600,000Issuance of Shares Pursuant to Stock Purchase Contracts
    
    
    
    
    
    
    
    
    
    
    3,993,006Exercise of Employee Stock Options
    
    
    99,875
    
    
    
    107,000
    
    
    
    391,083Issuance of Shares Pursuant to Stock Purchase Plans, net
    
    
    38,800
    
    
    
    252,154
    
    
    
    94,226Balance at End of Year
    
    
    22,007,552
    
    
    
    21,868,877
    
    
    
    21,509,723Treasury Shares:Balance at Beginning of Year
    
    
    
    
    
    
    
    
    
    
    Exercise of Employee Stock Options
    
    
    (6,500
    )
    
    
    
    
    
    
    Issuance of Shares Pursuant to Stock Purchase Plans, net
    
    
    (3,500
    )
    
    
    (75,000
    )
    
    
    Shares Repurchased Pursuant to Authorization
    
    
    10,000
    
    
    
    75,000
    
    
    
    Balance at End of Year
    
    
    
    
    
    
    
    
    
    
    Common Stock:Balance at Beginning of Year
    
    $
    276,945
    
    
    $
    268,509
    
    
    $
    46,582Issuance of Shares Pursuant to Public Offering
    
    
    
    
    
    
    
    
    
    
    114,518Issuance of Shares Pursuant to Stock Purchase Contracts
    
    
    
    
    
    
    
    
    
    
    98,905Exercise of Employee Stock Options
    
    
    2,852
    
    
    
    2,115
    
    
    
    6,437Issuance of Shares Pursuant to Stock Purchase Plans
    
    
    1,291
    
    
    
    6,321
    
    
    
    2,067Balance at End of Year
    
    
    281,088
    
    
    
    276,945
    
    
    
    268,509Notes Receivable from Shareholders:Balance at Beginning of Year
    
    
    (6,407
    )
    
    
    (3,373
    )
    
    
    (2,287
    )Notes Receivable Issued Pursuant to Employee
Stock Purchase Plans
    
    
    (1,065
    )
    
    
    (4,017
    )
    
    
    (2,158
    )Collection of Notes Receivable
    
    
    2,028
    
    
    
    983
    
    
    
    1,072Balance at End of Year
    
    
    (5,444
    )
    
    
    (6,407
    )
    
    
    (3,373
    )Accumulated Other Comprehensive Income,
Net of Deferred Income Taxes:Balance at Beginning of Year
    
    
    16,185
    
    
    
    8,461
    
    
    
    13,494Other Comprehensive Income (Loss), Net of Taxes
    
    
    530
    
    
    
    7,724
    
    
    
    (5,033
    )Balance at End of Year
    
    
    16,715
    
    
    
    16,185
    
    
    
    8,461Retained Earnings:Balance at Beginning of Year
    
    
    191,100
    
    
    
    157,347
    
    
    
    124,536Net Income
    
    
    62,187
    
    
    
    33,753
    
    
    
    32,811Balance at End of Year
    
    
    253,287
    
    
    
    191,100
    
    
    
    157,347Common Stock Held in Treasury:Balance at Beginning of Year
    
    
    
    
    
    
    
    
    
    
    Common Shares Repurchased
    
    
    (300
    )
    
    
    (2,023
    )
    
    
    Exercise of Employee Stock Options
    
    
    94
    
    
    
    
    
    
    
    Issuance of Shares Pursuant to Stock Purchase Plans
    
    
    206
    
    
    
    2,023
    
    
    
    Balance at End of Year
    
    
    
    
    
    
    
    
    
    
    Total Shareholders Equity
    
    $
    545,646
    
    
    $
    477,823
    
    
    $
    430,944
 The accompanying notes are an integral part of the consolidated financial
statements. 40




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PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS  For the Years Ended December 31,2003 (Restated)
    
    2002 (Restated)
    
    2001 (Restated)Cash Flows from Operating Activities:Net Income
    
    $
    62,187
    
    
    $
    33,753
    
    
    $
    32,811Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:Net Realized Investment (Gain) Loss
    
    
    (794
    )
    
    
    3,371
    
    
    
    (3,357
    )Depreciation and Amortization Expense
    
    
    8,097
    
    
    
    2,142
    
    
    
    2,528Deferred Income Tax Benefit
    
    
    (10,891
    )
    
    
    (6,716
    )
    
    
    (1,365
    )Change in Premiums Receivable
    
    
    (49,502
    )
    
    
    (33,982
    )
    
    
    (26,648
    )Change in Other Receivables
    
    
    (143,242
    )
    
    
    (53,740
    )
    
    
    (26,944
    )Change in Deferred Acquisition Costs
    
    
    4,984
    
    
    
    (19,746
    )
    
    
    (8,202
    )Change in Income Taxes Payable
    
    
    513
    
    
    
    367
    
    
    
    (6,083
    )Change in Other Assets
    
    
    (14,721
    )
    
    
    (2,438
    )
    
    
    (840
    )Change in Unpaid Loss and Loss Adjustment Expenses
    
    
    181,538
    
    
    
    142,815
    
    
    
    65,239Change in Unearned Premiums
    
    
    116,496
    
    
    
    108,254
    
    
    
    52,355Change in Funds Held Payable to Reinsurer
    
    
    110,011
    
    
    
    
    
    
    
    Change in Other Liabilities
    
    
    32,958
    
    
    
    26,173
    
    
    
    13,320Tax Benefit from Exercise of Employee Stock Options
    
    
    889
    
    
    
    1,251
    
    
    
    25,799Net Cash Provided by Operating Activities
    
    
    298,523
    
    
    
    204,968
    
    
    
    115,149Cash Flows from Investing Activities:Proceeds from Sales of Investments in Fixed
Maturities
    
    
    184,082
    
    
    
    226,981
    
    
    
    112,676Proceeds from Maturity of Investments in Fixed
Maturities
    
    
    202,284
    
    
    
    147,850
    
    
    
    72,650Proceeds from Sales of Investments in Equity
Securities
    
    
    23,992
    
    
    
    18,546
    
    
    
    20,864Cost of Fixed Maturities Acquired
    
    
    (628,879
    )
    
    
    (576,564
    )
    
    
    (424,852
    )Cost of Equity Securities Acquired
    
    
    (54,956
    )
    
    
    (36,421
    )
    
    
    (22,529
    )Purchase of Property and Equipment, Net
    
    
    (6,692
    )
    
    
    (5,191
    )
    
    
    (1,808
    )Net Cash Used for Investing Activities
    
    
    (280,169
    )
    
    
    (224,799
    )
    
    
    (242,999
    )Cash Flows from Financing Activities:Net Proceeds from Public Offering of Common Stock
    
    
    
    
    
    
    
    
    
    
    114,518Proceeds from Loans Payable
    
    
    62,340
    
    
    
    9,923
    
    
    
    31,341Repayments on Loans Payable
    
    
    (52,971
    )
    
    
    (2,151
    )
    
    
    (22,000
    )Proceeds from Exercise of Employee Stock Options
    
    
    2,057
    
    
    
    864
    
    
    
    3,041Proceeds from Collection of Notes Receivable
    
    
    2,028
    
    
    
    983
    
    
    
    1,072Proceeds from Shares Issued Pursuant to Stock Purchase Plans
    
    
    432
    
    
    
    4,327
    
    
    
    46Cost of Common Stock Repurchased
    
    
    (300
    )
    
    
    (2,023
    )
    
    
    Net Cash Provided by Financing Activities
    
    
    13,586
    
    
    
    11,923
    
    
    
    128,018Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    31,940
    
    
    
    (7,908
    )
    
    
    168Cash and Cash Equivalents at Beginning of Year
    
    
    42,002
    
    
    
    49,910
    
    
    
    49,742Cash and Cash Equivalents at End of Year
    
    $
    73,942
    
    
    $
    42,002
    
    
    $
    49,910Cash Paid During the Year for:Income Taxes
    
    $
    36,319
    
    
    $
    20,110
    
    
    $
    7,023Interest
    
    
    638
    
    
    
    616
    
    
    
    689Non-Cash Transactions:Issuance of Shares Pursuant to Employee
Stock Purchase Plans in Exchange for Notes Receivable
    
    $
    1,065
    
    
    $
    4,017
    
    
    $
    2,158
 The accompanying notes are an integral part of the consolidated financial
statements. 41




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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 Mobile USA Insurance
Company (MUSA) 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, Mobile Homeowners Insurance Agencies, 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 organizations;
the health, fitness and wellness industry; select classes of professional
liability; the rental car industry; automobile leasing industry; and personal
property and casualty insurance products for the manufactured housing and
homeowners 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. Certain prior years amounts have been
reclassified for comparative purposes. The Consolidated Financial Statements for the year ended December 31, 2003 have
been restated, as further described in Note 2. (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 Companys investments approximates their estimated
fair value. The Company measures the fair value of investments based upon
quoted market prices or by obtaining quotes from third party broker-dealers.
Material assumptions and factors utilized by such broker-dealers in pricing
these securities include: future cash flows, constant default rates, recovery
rates and any market clearing activity that may have occurred since the prior
month-end pricing period. The Companys total investments include $13.7
million in securities for which there is no readily available independent
market price. The decision to purchase or sell investments is based on managements
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 amounted to
$177.7 million, $162.5 million and $53.5 million, respectively, at December 31,
2003 and $200.0 million, $86.1 million and $90.7 million, respectively, at
December 31, 2002. The asset backed, mortgage pass-through and collateralized
mortgage obligation securities held as of December 31, 2003 and 2002 are
shorter tranche securities possessing favorable prepayment risk profiles. 42




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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 various analytical procedures with respect to
its investments, including identifying any security whose fair value is below
its cost. Upon identification of such securities, a detailed review is
performed for all securities, except interests in securitized assets, meeting
predetermined thresholds, to determine whether such decline is other than
temporary. If the Company determines a decline in value to be other than
temporary, the cost basis of the security is written down to its fair value
with the amount of the write down included in earnings as a realized loss in
the period the impairment arose. This evaluation resulted in non-cash realized
investment losses of $1.0 million and $2.1 million for the years ended December
31, 2003 and December 31, 2002, respectively. No impairment losses were
recorded for the year ended December 31, 2001. Additionally, the Companys impairment evaluation and recognition for interests
in securitized assets is conducted in accordance with the guidance provided by
the Emerging Issues Task Force of the Financial Accounting Standards Board.
Under this guidance, impairment losses on securities must be recognized if both
the fair value of the security is less than its book value and the net present
value of expected future cash flows is less than the net present value of
expected future cash flows at the most recent (prior) estimation date. If
these criteria are met, an impairment charge, calculated as the difference
between the current book value of the security and its fair value, is included
in earnings as a realized loss in the period the impairment arose. This
re-evaluation resulted in non-cash realized investment losses of $9.3 million,
$1.6 million and $5.8 million for the years ended December 31, 2003, 2002 and
2001, respectively. The Company held no derivative financial instruments, nor embedded financial
derivatives, as of December 31, 2003 and 2002. (b) Cash and 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. (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 included 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) Goodwill The Company adopted the provisions of Statement of Financial Accounting
Standards No. 142 (SFAS No. 142), Goodwill and Other Intangible Assets on
January 1, 2002. SFAS No. 142 eliminates the practice of amortizing goodwill
through periodic charges to earnings and establishes a two-step impairment test
to identify potential goodwill impairment and measure the amount of a goodwill
impairment loss to be recognized (if any). As a result of the impairment
analysis, no change in the carrying amount of goodwill, which arose from the
purchase of Liberty, was recorded by the Company for the years ended December
31, 2003 and December 31, 2002, respectively. Goodwill amortization was $1.5
million for the year ended December 31, 2001. 43




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(f) Liability for Unpaid Loss and Loss Adjustment Expenses The liability for unpaid loss and loss adjustment expenses reflects the
Companys 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 necessarily 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. The method for determining the Companys liability for
unpaid loss and loss adjustment expenses includes, but is not limited to,
reviewing past loss experience and considering other factors such as legal,
social, and economic developments. The methods of making such estimates and
establishing the resulting liabilities are regularly reviewed and updated and
any adjustments therefrom are made in the accounting period in which the
adjustment arose. If the Companys ultimate losses, net of reinsurance, prove
to differ substantially from the amounts recorded at December 31, 2003, the
related adjustments could have a material adverse impact on the Companys
financial condition, and results of operations. (g) Premiums Premiums are generally 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. At December 31, 2003 and 2002 the allowance for doubtful
accounts amounted to $2.2 million and $1.7 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. At December 31, 2003 and 2002 the allowance for
uncollectible reinsurance amounted to $1.2 million and $0, respectively.
Amounts for reinsurance assets and liabilities are reported gross. (i) Assessments The Insurance Subsidiaries are subject to state guaranty fund assessments,
which provide for the payment of covered claims or meet other insurance
obligations from insurance company insolvencies, and other assessments related
to its insurance activities. 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 insurance
activity related 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. As of December 31, 2003 and 2002,
included in Other Liabilities in the Consolidated Balance Sheets were $10.3
million and $6.1 million, respectively, of liabilities for state guarantee fund
and other assessments. As of December 31, 2003 and 2002, included in other
assets were $0.1 million and $1.8 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 future premium collections or policy
surcharges from policies in force. (j) 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. (k) 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. 44




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(l) 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 $0.6 million, $3.0
million and ($1.5) million in 2003, 2002 and 2001, respectively. The related
tax effect of Reclassification Adjustments was $0.3 million, ($1.2) million,
and $1.2 million in 2003, 2002 and 2001, respectively. (m) Stock Based Compensation Plans The Company continues to maintain its accounting for stock-based compensation
in accordance with APB No. 25, but has adopted the disclosure provisions of
SFAS No. 148. The following represents pro forma information as if the Company
recorded compensation costs using the fair value of the issued compensation
instruments (the results may not be indicative of the actual effect on net
income in future years) (in thousands, except per average common share data): 2003
    
    2002
    
    2001(Restated)
    
    (Restated)
    
    (Restated)Net Income As Reported
    
    $
    62,187
    
    
    $
    33,753
    
    
    $
    32,811Assumed Stock Compensation Cost
    
    
    3,029
    
    
    
    2,254
    
    
    
    1,543Pro Forma Net Income
    
    $
    59,158
    
    
    $
    31,499
    
    
    $
    31,268Diluted Earnings Per Average Common Share as
Reported
    
    $
    2.74
    
    
    $
    1.51
    
    
    $
    1.91Pro Forma Diluted Earnings Per Average Common Share
    
    $
    2.61
    
    
    $
    1.41
    
    
    $
    1.82
 (n) New Accounting Pronouncements FASB Interpretation 46 Consolidation of Variable Interest Entities was issued
in January 2003 and is effective at various dates for various requirements.
This interpretation addresses consolidation of variable interest entities
(formerly known as special purpose entities). Management has determined that
this interpretation will have no effect on the Companys consolidated financial
statements. In May 2003, the Financial Accounting Standards Board FASB issued Statement
of Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments With Characteristics of both Liabilities and Equity, which
establishes standards for how an issuer classifies and measures financial
instruments characteristics of both liabilities and equity. With the exception
of certain financial measurement criteria deferred indefinitely by the FASB,
SFAS No. 150 was adopted in fiscal 2003. The implementation of SFAS No. 150
had no impact on the Companys financial condition or results of operations. 2. Restatement of Financial Statements The
Companys previously issued consolidated balance sheets as of December 31,
2003 and December 31, 2001 (the restatement does not affect the
Companys consolidated balance sheet as of December 31,
2002) and consolidated statements of operations and comprehensive
income, changes in shareholders equity and cash flows for the
years ended December 31, 2003, December 31, 2002, and
December 31, 2001, respectively, have been restated to record a
portion of the revenue and net income arising from profit commissions
under three reinsurance contracts. The revenue and net income of one
of the contracts had originally been recorded in the second quarter
of 2002 and portions of such revenue and net income should have been
recorded during each quarter of 2001. The revenue and net income of
another contract had originally been fully recorded in the fourth
quarter 2003 although portions of such revenue and net income should
have been recorded in the quarters ended June 30, 2003,
September 30, 2003 and March 31, 2004. Portions of the
revenue and net income for the other contract should have been
recorded in the quarters ended June 30, 2003, September 30,
2003, December 31, 2003 and March 31, 2004. These profit
commissions were due to the Company from reinsurers under a 2001
aggregate stop loss reinsurance contract effective during the period
January 1, 2001 through December 31, 2001, a quota share
reinsurance contract effective during the period April 1, 2003
through December 31, 2003 and an excess catastrophe reinsurance
contract effective during the period June 1, 2003 through
May 31, 2004. The decision to restate resulted from an analysis of the accounting effect
at the expiration of one of these reinsurance contracts. Based upon
the provisions of Emerging Issues Task Force No. 93-6,
Accounting for Multiple-Year Retrospectively Rated Contracts by
Ceding and Assuming Enterprises, the Company
determined that under generally acceptable accounting principles there was an
error in the prior period financial statements and it should have been accruing
a profit commission for each period since the inception of the contracts based
on the actual experience of the underlying business. As a result, the Company has restated its aforementioned
previously issued financial statements to include a portion of the revenue and
net income arising from the profit commissions in each of the prior quarters
that the contracts were in effect. 45




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##### Table of Contents



The effect of this restatement on the consolidated statement of operations and
comprehensive income for the year ended December 31, 2003,
December 31, 2002 and December 31, 2001 and on the
consolidated balance sheets as of December 31, 2003 and
December 31, 2001 are shown in the tables
below (in thousands, except per share amounts): Consolidated Statements of Operations and Comprehensive Income Data Year Ended December 31, 2003As Previously
    
    Restatement
    
    AsReported
    
    Adjustment
    
    RestatedNet earned premiums
    
    $
    571,579
    
    
    $
    2,939
    
    
    $
    574,518Total revenue
    
    $
    616,698
    
    
    $
    2,939
    
    
    $
    619,637Income before income taxes
    
    $
    86,787
    
    
    $
    2,939
    
    
    $
    89,726Income tax
expense: deferred
    
    $
    (11,920
    )
    
    $
    1,029
    
    
    $
    (10,891
    )Total income tax expense
    
    $
    26,510
    
    
    $
    1,029
    
    
    $
    27,539Net income
    
    $
    60,277
    
    
    $
    1,910
    
    
    $
    62,187Basic earnings per share
    
    $
    2.75
    
    
    $
    0.09
    
    
    $
    2.84Diluted earnings per share
    
    $
    2.66
    
    
    $
    0.08
    
    
    $
    2.74
 Year Ended December 31, 2002As Previously
    
    Restatement
    
    AsReported
    
    Adjustment
    
    RestatedNet earned premiums
    
    $
    421,186
    
    
    $
    (3,464
    )
    
    $
    417,722Total revenue
    
    $
    456,242
    
    
    $
    (3,464
    )
    
    $
    452,778Income before income taxes
    
    $
    52,519
    
    
    $
    (3,464
    )
    
    $
    49,055Income tax
expense: deferred
    
    $
    (5,504
    )
    
    $
    (1,212
    )
    
    $
    (6,716
    )Total income tax expense
    
    $
    16,514
    
    
    $
    (1,212
    )
    
    $
    15,302Net income
    
    $
    36,005
    
    
    $
    (2,252
    )
    
    $
    33,753Basic earnings per share
    
    $
    1.67
    
    
    $
    (0.11
    )
    
    $
    1.56Diluted earnings per share
    
    $
    1.62
    
    
    $
    (0.11
    )
    
    $
    1.31
 Year Ended December 31, 2001As Previously
    
    Restatement
    
    AsReported
    
    Adjustment
    
    RestatedNet earned premiums
    
    $
    296,093
    
    
    $
    3,464
    
    
    $
    299,557Total revenue
    
    $
    332,463
    
    
    $
    3,464
    
    
    $
    335,927Income before income taxes
    
    $
    46,198
    
    
    $
    3,464
    
    
    $
    49,662Income tax
expense: deferred
    
    $
    (2,577
    )
    
    $
    1,212
    
    
    $
    (1,365
    )Total income tax expense
    
    $
    15,639
    
    
    $
    1,212
    
    
    $
    16,851Net income
    
    $
    30,559
    
    
    $
    2,252
    
    
    $
    32,811Basic earnings per share
    
    $
    1.85
    
    
    $
    0.14
    
    
    $
    1.99Diluted earnings per share
    
    $
    1.78
    
    
    $
    0.13
    
    
    $
    1.91
 Consolidated Balance Sheet Data As of December 31, 2003As Previously
    
    Restatement
    
    AsReported
    
    Adjustment
    
    RestatedDeferred
income taxes
    
    $
    19,176
    
    
    $
    (1,029
    )
    
    $
    18,147Other assets
    
    $
    22,354
    
    
    $
    2,939
    
    
    $
    25,293Total assets
    
    $
    1,869,031
    
    
    $
    1,910
    
    
    $
    1,870,941Retained earnings
    
    $
    251,377
    
    
    $
    1,910
    
    
    $
    253,287Total shareholders equity
    
    $
    543,736
    
    
    $
    1,910
    
    
    $
    545,646Total liabilities and shareholders equity
    
    $
    1,869,031
    
    
    $
    1,910
    
    
    $
    1,870,941
 As of December 31, 2001As Previously
    
    Restatement
    
    AsReported
    
    Adjustment
    
    RestatedDeferred
income taxes
    
    $
    6,916
    
    
    $
    (1,212
    )
    
    $
    4,984Other assets
    
    $
    8,668
    
    
    $
    3,464
    
    
    $
    12,132Total assets
    
    $
    1,017,722
    
    
    $
    2,252
    
    
    $
    1,019,974Retained earnings
    
    $
    155,095
    
    
    $
    2,252
    
    
    $
    157,347Total
shareholders equity
    
    $
    428,692
    
    
    $
    2,252
    
    
    $
    430,944Total
liabilities and shareholders equity
    
    $
    1,017,722
    
    
    $
    2,252
    
    
    $
    1,019,974
 3. 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:  
    
    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.
    
    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 period covered by
the policy.
    
    Under SAP, certain assets, designated as Non-admitted Assets (such
as prepaid expenses) are charged against surplus.
    
    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.
    
    Under SAP, premiums receivable are considered nonadmitted if
determined to be uncollected based upon aging criteria as defined in
SAP.
    
    Under SAP, the costs and related recoverables for guaranty funds and
other assessments are recorded based on managements estimate of the
ultimate liability and related recoverable settlement, while under
GAAP, such costs are accrued when the liability is probable and
reasonably estimatable and the related recoverable amount is based on
future premium collections or policy surcharges from in-force
policies. 46




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##### Table of Contents




    
    Under SAP, unpaid losses and loss adjustment expenses and unearned
premiums are reported net of the effects of reinsurance transactions,
whereas under GAAP, unpaid loss and loss adjustment expenses and
unearned premiums are reported gross of reinsurance. Financial Information: The combined statutory capital and surplus of the
Insurance Subsidiaries as of December 31, 2003 and 2002 was $415.9 million and
$312.6 million, respectively. Combined statutory net income for the years
ended December 31, 2003, 2002 and 2001 was $49.9 million, $14.5 million, and
$28.3 million, respectively. The Company made capital contributions of $47.0
million and $20.0 million to the Insurance Subsidiaries for the years ended
December 31, 2003 and 2002, respectively. Dividend Restrictions: The Insurance Subsidiaries are subject to various
regulatory restrictions which limit the maximum amount of annual shareholder
dividends allowed to be paid. The maximum dividend which the Insurance
Subsidiaries may pay to Philadelphia Insurance during 2004 without prior
approval is $50.7 million. Dividends paid for the years ended December 31,
2003 and 2002 were $4.0 million and $5.1 million, respectively. 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 insurer. The adequacy of a companys 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 insurers domiciliary insurance department and
ultimately rehabilitation or liquidation. As of December 31, 2003, PIIC, PIC,
MUSA and LAIC exceeded their minimum risk-based capital requirement of $107.6
million, $13.1 million, $15.3 million and $14.9 million, respectively, by 218%,
134%, 40% and 48%, respectively. 4. Investments The Company invests primarily in investment grade fixed maturities which
possessed an average quality rating of AA+ at December 31, 2003. The cost,
gross unrealized gains and losses and estimated market value of investments as
of December 31, 2003 and 2002 are as follows (in thousands): 47




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##### Table of Contents



Gross
    
    Gross
    
    EstimatedUnrealized
    
    Unrealized
    
    MarketCost (1)
    
    Gains
    
    Losses
    
    Value (2)December 31, 2003Fixed Maturities:Available for SaleU.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
    
    $
    51,480
    
    
    $
    456
    
    
    $
    18
    
    
    $
    51,918Obligations of States and
Political Subdivisions
    
    
    476,762
    
    
    
    12,876
    
    
    
    662
    
    
    
    488,976Corporate and Bank Debt Securities
    
    
    142,264
    
    
    
    5,558
    
    
    
    768
    
    
    
    147,054Asset Backed Securities
    
    
    183,065
    
    
    
    2,688
    
    
    
    8,078
    
    
    
    177,675Mortgage Pass-Through Securities
    
    
    159,160
    
    
    
    3,692
    
    
    
    323
    
    
    
    162,529Collateralized Mortgage Obligations
    
    
    53,792
    
    
    
    454
    
    
    
    704
    
    
    
    53,542Total Fixed Maturities
Available for Sale
    
    
    1,066,523
    
    
    
    25,724
    
    
    
    10,553
    
    
    
    1,081,694Equity Securities
    
    
    79,813
    
    
    
    12,148
    
    
    
    1,603
    
    
    
    90,358Total Investments
    
    $
    1,146,336
    
    
    $
    37,872
    
    
    $
    12,156
    
    
    $
    1,172,052December 31, 2002Fixed Maturities:Available for SaleU.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
    
    $
    9,754
    
    
    $
    433
    
    
    $
    1
    
    
    $
    10,186Obligations of States and
Political Subdivisions
    
    
    279,397
    
    
    
    10,600
    
    
    
    7
    
    
    
    289,990Corporate and Bank Debt Securities
    
    
    170,222
    
    
    
    9,283
    
    
    
    1,919
    
    
    
    177,586Asset Backed Securities
    
    
    202,779
    
    
    
    4,234
    
    
    
    7,037
    
    
    
    199,976Mortgage Pass-Through Securities
    
    
    81,360
    
    
    
    4,726
    
    
    
    
    
    
    
    86,086Collateralized Mortgage Obligations
    
    
    89,189
    
    
    
    1,771
    
    
    
    271
    
    
    
    90,689Total Fixed Maturities
Available for Sale
    
    
    832,701
    
    
    
    31,047
    
    
    
    9,235
    
    
    
    854,513Equity Securities
    
    
    51,257
    
    
    
    4,679
    
    
    
    1,590
    
    
    
    54,346Total Investments
    
    $
    883,958
    
    
    $
    35,726
    
    
    $
    10,825
    
    
    $
    908,859
  (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 have been based on quoted market prices or quotes
from third party broker-dealers. The following table (in thousands) identifies the period of time securities
with an unrealized loss at December 31, 2003 have continuously been in an
unrealized loss position. Included in the amounts displayed in the table are
$6.5 million of unrealized losses due to non-investment grade fixed maturity
securities having a fair value of $15.6 million. No issuer of securities or
industry represents more than 4.4% and 15.5%, respectively, of the total
estimated fair value, or 18.1% and 39.7%, respectively, of the total gross
unrealized loss included in the table below. As previously discussed, there
are certain risks and uncertainties inherent in the Companys impairment
methodology, such as the financial condition of specific industry sectors and
the resultant effect on underlying security collateral values. Should the
Company subsequently determine a decline in the fair value below the cost basis
to be other than temporary, the security would be written down to its fair
value and the difference would be included in earnings as a realized loss for
the period such determination was made. 48




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##### Table of Contents



Less Than 12 Months
    
    12 Months or More
    
    TotalUnrealized
    
    
    
    
    
    Unrealized
    
    
    
    
    
    UnrealizedFair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    LossesFixed Maturities:Available for SaleU.S. Treasury Securities and
Obligations of U.S. Government
Corporations and Agencies
    
    $
    1,948
    
    
    $
    18
    
    
    $
    
    
    
    $
    
    
    
    $
    1,948
    
    
    $
    18Obligations of States and
Political Subdivisions
    
    
    71,439
    
    
    
    662
    
    
    
    
    
    
    
    
    
    
    
    71,439
    
    
    
    662Corporate and Bank Debt Securities
    
    
    26,781
    
    
    
    333
    
    
    
    1,670
    
    
    
    435
    
    
    
    28,451
    
    
    
    768Asset Backed Securities
    
    
    28,671
    
    
    
    494
    
    
    
    24,344
    
    
    
    7,584
    
    
    
    53,015
    
    
    
    8,078Mortgage Pass-Through Securities
    
    
    13,508
    
    
    
    323
    
    
    
    
    
    
    
    
    
    
    
    13,508
    
    
    
    323Collateralized Mortgage Obligations
    
    
    29,467
    
    
    
    546
    
    
    
    933
    
    
    
    158
    
    
    
    30,400
    
    
    
    704Total Fixed Maturities
Available for Sale
    
    
    171,814
    
    
    
    2,376
    
    
    
    26,947
    
    
    
    8,177
    
    
    
    198,761
    
    
    
    10,553Equity Securities
    
    
    6,778
    
    
    
    1,603
    
    
    
    
    
    
    
    
    
    
    
    6,778
    
    
    
    1,603Total Investments
    
    $
    178,592
    
    
    $
    3,979
    
    
    $
    26,947
    
    
    $
    8,177
    
    
    $
    205,539
    
    
    $
    12,156
 Based upon the Companys impairment evaluation as of December 31, 2003, it was
concluded that the remaining unrealized losses in the table above are not other
than temporary. During 2003 the Companys gross loss on the sale of fixed maturity and equity
securities amounted to $0.7 million and $0.8 million, respectively. The fair
value of the fixed maturity and equity securities at the time of sale was $20.1
million and $4.4 million, respectively. During 2002 the Companys gross loss
on the sale of fixed maturity and equity securities amounted to $0.3 million
and $3.2 million, respectively. The fair value of the fixed maturity and
equity securities at the time of sale was $31.6 million and $14.1 million,
respectively. The decision to sell these securities was based upon
managements assessment of economic conditions. The Company had no debt or equity investments in a single issuer totaling in
excess of 10% of shareholders equity at December 31, 2003. The cost and estimated market value of fixed maturity securities at December
31, 2003, by remaining contractual maturity, are shown below (in thousands).
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. EstimatedMarketCost (1)
    
    Value (2)Due in One Year or Less
    
    $
    53,845
    
    
    $
    54,545Due After One Year Through Five Years
    
    
    223,676
    
    
    
    229,476Due After Five Years through Ten Years
    
    
    177,412
    
    
    
    182,132Due After Ten Years
    
    
    215,573
    
    
    
    221,795Asset Backed, Mortgage Pass-Through and
Collateralized Mortgage Obligation Securities
    
    
    396,017
    
    
    
    393,746$
    1,066,523
    
    
    $
    1,081,694
  (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. 49




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##### Table of Contents



The sources of net investment income for the years ended December 31, 2003,
2002, and 2001 are as follows (in thousands): 2003
    
    2002
    
    2001Fixed Maturities
    
    $
    41,393
    
    
    $
    37,959
    
    
    $
    30,962Equity Securities
    
    
    1,373
    
    
    
    706
    
    
    
    1,343Cash and Cash Equivalents
    
    
    656
    
    
    
    1,113
    
    
    
    1,908Total Investment Income
    
    
    43,422
    
    
    
    39,778
    
    
    
    34,213Fund Held Credit
    
    
    (2,318
    )
    
    
    
    
    
    
    Investment Expense
    
    
    (2,298
    )
    
    
    (2,262
    )
    
    
    (1,787
    )Net Investment Income
    
    $
    38,806
    
    
    $
    37,516
    
    
    $
    32,426
 There was one fixed maturity security with a carrying value of $0.6 million
which was non-income producing for the year ended December 31, 2003.
Investment expense includes $15,400, $77,000, and $107,000, in investment
management fees paid to a director of the Company in 2003, 2002, and 2001,
respectively. These transactions are in the ordinary course of business at
negotiated prices comparable to those of transactions with other investment
advisors. Realized pre-tax gains (losses) on the sale of investments for the years ended
December 31, 2003, 2002, and 2001 are as follows (in thousands): 2003
    
    2002
    
    2001Fixed MaturitiesGross Realized Gains
    
    $
    7,832
    
    
    $
    3,771
    
    
    $
    5,023Gross Realized Losses
    
    
    (4,718
    )
    
    
    (1,952
    )
    
    
    (9,979
    )Net Gain (Loss)
    
    
    3,114
    
    
    
    1,819
    
    
    
    (4,956
    )Equity SecuritiesGross Realized Gains
    
    
    4,903
    
    
    
    177
    
    
    
    10,259Gross Realized Losses
    
    
    (7,223
    )
    
    
    (5,367
    )
    
    
    (1,946
    )Net Gain (Loss)
    
    
    (2,320
    )
    
    
    (5,190
    )
    
    
    8,313Total Net RealizedInvestment Gain (Loss)
    
    $
    794
    
    
    $
    (3,371
    )
    
    $
    3,357
 5. Restricted Assets The Insurance Subsidiaries have investments, principally U.S. Treasury
securities, on deposit with the various states in which they are licensed
insurers. At December 31, 2003 and 2002, the carrying value of the securities
on deposit totaled $15.5 million. Additionally, the Insurance Subsidiaries have investments, principally asset
backed securities, which collateralize the borrowings from the Federal Home
Loan Bank of Pittsburgh, see Note 10. The carrying value of these investments
was $59.1 million and $49.2 million as of December 31, 2003 and 2002,
respectively. 6. Trust Accounts The Company maintains investments in trust accounts under reinsurance
agreements with unrelated insurance companies. These investments collateralize
the Companys 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.
At December 31, 2003 and 2002 the carrying value of these trust fund
investments were $1.7 million. The Companys share of the investments in the trust accounts is included in
investments and cash equivalents, as applicable, in the accompanying
consolidated balance sheets. 50




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##### Table of Contents



7. Property and Equipment The following table summarizes property and equipment at December 31, 2003 and
2002 (dollars in thousands): Estimated UsefulDecember 31,
    
    Lives (Years)2003
    
    2002Furniture, Fixtures and Automobiles
    
    $
    5,225
    
    
    $
    4,491
    
    
    
    5Software, Computer Hardware and
Telephone Equipment
    
    
    24,296
    
    
    
    18,755
    
    
    
    3 - 7Land and Building
    
    
    3,598
    
    
    
    3,588
    
    
    
    40Leasehold Improvements
    
    
    2,186
    
    
    
    1,881
    
    
    
    10 -1235,305
    
    
    
    28,715Accumulated Depreciation and
Amortization
    
    
    (18,484
    )
    
    
    (15,921
    )Property and Equipment
    
    $
    16,821
    
    
    $
    12,794
 Included in property and equipment are costs incurred in developing or
purchasing information systems technology of $13.3 million and $8.2 million in
2003 and 2002, respectively. At December 31, 2003, costs incurred for Property
and Equipment not yet placed in service was $4.0 million. Amortization of
these costs was $1.1 million, $1.0 million and $0.8 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Depreciation expense, excluding
amortization of capitalized information systems technology costs, was $1.6
million, $1.5 million and $1.4 million, for the years ended December 31, 2003,
2002, and 2001, respectively. 8. Goodwill The following table provides a reconciliation of the prior three years ended
December 31 reported net income to adjusted net income had SFAS No. 142 been
applied at the beginning of fiscal 2001 (in thousands, except per share
amounts): For the Year Ended December 31,2003 (Restated)
    
    2002 (Restated)
    
    2001 (Restated)Reported net income
    
    $
    62,187
    
    
    $
    33,753
    
    
    $
    32,811Adjustment for goodwill amortization
    
    
    
    
    
    
    
    
    
    
    1,500Adjusted net income
    
    $
    62,187
    
    
    $
    33,753
    
    
    $
    34,311Reported basic earnings per share
    
    $
    2.84
    
    
    $
    1.56
    
    
    $
    1.99Adjustment for goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.09Adjusted basic earnings per share
    
    $
    2.84
    
    
    $
    1.56
    
    
    $
    2.08Reported diluted earnings per share
    
    $
    2.74
    
    
    $
    1.51
    
    
    $
    1.91Adjustment for goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.09Adjusted diluted earnings per share
    
    $
    2.74
    
    
    $
    1.51
    
    
    $
    2.00
 51




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9. Liability for Unpaid Loss and Loss Adjustment Expenses Activity in the liability for Unpaid Loss and Loss Adjustment Expenses is
summarized as follows (in thousands): 2003
    
    2002
    
    2001Balance at January 1,
    
    $
    445,548
    
    
    $
    302,733
    
    
    $
    237,494Less Reinsurance Recoverables
    
    
    85,837
    
    
    
    52,599
    
    
    
    42,030Net Balance at January 1,
    
    
    359,711
    
    
    
    250,134
    
    
    
    195,464Incurred related to:Current Year
    
    
    314,609
    
    
    
    239,834
    
    
    
    166,220Prior Years
    
    
    44,568
    
    
    
    27,599
    
    
    
    13,435Total Incurred
    
    
    359,177
    
    
    
    267,433
    
    
    
    179,655Paid related to:Current Year
    
    
    69,905
    
    
    
    58,530
    
    
    
    54,228Prior Years
    
    
    167,488
    
    
    
    99,326
    
    
    
    70,757Total Paid
    
    
    237,393
    
    
    
    157,856
    
    
    
    124,985Net Balance at December 31,
    
    
    481,495
    
    
    
    359,711
    
    
    
    250,134Plus Reinsurance Recoverables
    
    
    145,591
    
    
    
    85,837
    
    
    
    52,599Balance at December 31,
    
    $
    627,086
    
    
    $
    445,548
    
    
    $
    302,733
 During 2003 the Company increased the liability for unpaid loss and loss
adjustment expenses by $51.7 million ($44.6 million net of reinsurance
recoverables), primarily for accident years 1997 through 2001. This increase
in the liability for unpaid loss and loss adjustment expense, net of
reinsurance recoverables, was primarily due to the following:  
    
    The Company increased the estimated gross and net loss for
unreported claims incurred and related claim adjustment expenses on
residual value polices issued during the years 1998 through 2002 by
$38.8 million. As of December 31, 2003 the Companys total liability
for gross and net unpaid loss and loss adjustment expenses for these
policies is estimated to be $30.3 million. The residual value policies
provide coverage guaranteeing the value of a leased automobile at the
lease termination, which can be up to five years from lease inception.
The increase in the estimated gross and net loss was a result of:  
    
    Adverse trends further deteriorating in both claims
frequency and severity for leases expiring in 2003. During the
second quarter of 2003, the Company engaged a consulting firm to
aid in evaluating the ultimate potential loss exposure under these
policies. Based upon the study and subsequent evaluation by the
Company the Company changed its assumptions relating to future
frequency and severity of losses, and increased the estimate for
unpaid loss and loss adjustment expenses by $33.0 million. The
Company primarily attributes this deterioration to the following
factors that led to a softening of prices in the used car market
subsequent to the September 11, 2001 terrorist attacks: prolonged
0% new car financing rates and other incentives which increased
new car sales and the volume of trade-ins, daily rental units
being sold into the market earlier and in greater numbers than
expected, further adding to the over supply of used cars and the
overall uncertain economic conditions.
    
    The Company entering into an agreement with U.S. Bank,
N.A. d/b/a Firstar Bank (Firstar) for residual value insurance
policies purchased by Firstar. Under the terms of the agreement,
the Company paid Firstar $27.5 million in satisfaction of any and
all claims made or which could have been made by Firstar under the
residual value policies. The Company increased the gross and net
reserves for loss and loss adjustment expenses from $21.7 million
to $27.5 million.  
    
    The Company increased its estimate for unpaid loss and loss
adjustment expenses for non residual value policies by $43.5 million
($30.8 million net of reinsurance recoverables) primarily for accident
years 1999 to 2001 and decreased its estimate of the unpaid loss and
loss adjustment expenses by $30.6 million ($25.0 million net of
reinsurance recoverables) for the 2002 accident year. The increase in
accident years 1999 to 2001 is principally attributable to:  
    
    $19.6 million ($13.7 million net of reinsurance
recoverables) of development in professional liability products as
a result of case reserves developing greater than anticipated from
the year-end 2002 ultimate loss estimate; $18.1 million ($11.1
million net of reinsurance recoverables) of development in the 52




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automobile and general liability coverages for commercial package
products due to losses developing beyond the underlying pricing
assumptions; and $5.8 million ($6.0 million net of reinsurance
recoverables) of development in the commercial automobile excess
liability insurance and GAP commercial automobile products due to
losses developing beyond the underlying pricing assumptions.  
    
    The decrease in unpaid loss and loss adjustment expenses in
accident year 2002 is principally attributable to:  
    
    $4.2 million ($4.7 million net of reinsurance
recoverables) and $26.4 million ($20.3 million net of reinsurance
recoverables) of favorable development in professional liability
products and commercial package products, respectively, due to
conservative initial loss estimates combined with favorable
product pricing. During 2002, the Company increased the estimated loss for unreported claims
incurred and related claim adjustment expenses on residual value polices issued
during the years 1998 through 2001 by $30.2 million ($20.7 million net of
reinsurance). As of December 31, 2001 the Company had estimated a total
liability for unpaid loss and loss adjustment expenses for these policies of
$14.5 million ($8.7 million net of reinsurance recoverables). During 2002
adverse trends further deteriorated in both frequency and severity on leases
expiring in 2002. As part of the Companys monitoring and evaluation process,
consulting firms were engaged during the third quarter of 2002 to aid in
evaluating this deterioration and the ultimate potential loss exposure under
these policies. As a result of the indications and subsequent evaluation by
the Company and changes in the Companys assumptions relating to future
frequency and severity of losses, the estimate for unpaid loss and loss
adjustment expenses was increased. The Company primarily attributes this
deterioration to the following factors that led to a softening of prices in the
used car market subsequent to the September 11, 2001 terrorist attacks:
prolonged 0% new car financing rates and other incentives which increased new
car sales and the volume of trade-ins, daily rental units being sold into the
market earlier and in greater numbers than expected further adding to the over
supply of used cars; and the overall uncertain economic conditions. The Company also increased the liability for unpaid loss and loss adjustment
expenses on the Commercial Automobile Excess Liability Insurance (Excess
Liability) product sold to rental car companies (Commercial Lines Underwriting
Segment) primarily for the 2000 and 2001 accident years by $6.9 million ($4.9
million net of reinsurance). As of December 31, 2001 the Company had estimated
a total liability for unpaid loss and loss adjustment expenses for the Excess
Liability policies issued in these years of $23.0 million ($21.6 million net of
reinsurance). Excess Liability provides automobile liability coverage in
excess of the state mandated limits which are provided by the rental car
company. During the third quarter of 2002, pursuant to a routine underwriting
review focusing on price adequacy and loss experience, the Company non-renewed
a significant Excess Liability customer as a result of an unacceptable
underwriting risk profile. This adverse loss development was primarily due to
pricing inadequacy and the adverse loss experience of this customer.
Additionally, the Company has experienced a delay in both the reporting of
claims and the claim litigation discovery process as a result of this
policyholder and another Excess Liability policyholder filing for Chapter 11
during the third quarter 2002 and fourth quarter 2001, respectively. During 2001, as a result of changes in estimates of insured events in prior
years, the Company increased losses and loss adjustment expenses incurred by
$13.4 million. Such development was primarily due to losses emerging at a
higher rate on automobile leases expiring in 2001 on residual value policies
underwritten in prior years than had been originally anticipated when the
initial reserves were estimated. 10. Funds Held Payable to Reinsurer Effective April 1, 2003, the Company entered into a quota share reinsurance
agreement. Under this agreement, the Company ceded 22% of its net written
premiums and loss and loss adjustment expenses for substantially all of the
Companys lines of business on policies effective April 1, 2003 through
December 31, 2003, and 10% of its commercial and specialty lines net written
premiums and loss and loss adjustment expenses for policies effective January
1, 2004 and thereafter. The Company receives a provisional commission of 33.0%
adjusted pro-rata based upon the ratio of losses incurred to premiums earned.
Pursuant to this reinsurance agreement the Company withholds the reinsurance
premium due the reinsurers reduced by the reinsurers expense allowance, and
the Companys ceding commission allowance in a Funds Held Payable to Reinsurer
account. This Funds Held Payable to Reinsurer account is also reduced by ceded
paid losses and loss adjustment expenses under this agreement, and increased by
an interest credit. In addition, the agreement provides that a profit commission will be paid to the Company upon commutation equal to the positive balance in the
Funds Held Payable to Reinsurer account. Pursuant to the quota share reinsurance agreement, the Company ceded $199.4
million of net written premiums, $116.8 million of net earned premiums, $62.7
million in net loss and loss adjustment expenses, and earned $46.7 million in
ceding 53




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##### Table of Contents



commissions, for the year ended December 31, 2003. In addition, the interest
credit (expense), which is included in net investment income, for the year
ended December 31, 2003 was $2.3 million. The Company has also accrued a
profit commission based upon the experience of the underlying business ceded to
this reinsurance agreement, in the amount of $5.4 million for the year ended
December 31, 2003. The profit commission reduces ceded written and earned
premiums. 54




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11. Loans Payable The Company had aggregate borrowings of $48.5 million and $39.1 million as of
December 31, 2003 and 2002, respectively, from the Federal Home Loan Bank of
Pittsburgh. These borrowings bear interest at adjusted LIBOR and mature twelve
months from inception. The proceeds from these borrowings were invested in
asset backed securities and collateralized mortgage obligations to achieve a
positive spread between the rate of interest on these securities and the
borrowing rates. The weighted-average interest rate on borrowings outstanding
as of December 31, 2003 was 1.23%. In November 2000 the Company, pursuant to a Board of Directors authorization,
entered into an unsecured revolving credit facility for aggregate borrowings of
up to $22.0 million at any one time outstanding with a maturity date of 364
days after closing. During 2000, $22.0 million of the facility was utilized by
the Company to pay a withholding tax liability as a result of the CEO electing
to have shares otherwise issuable withheld in satisfaction of the minimum
withholding tax attributable to the exercise of stock options. Borrowings
under the facility bore interest at adjusted LIBOR and unused commitments under
the facility were subject to a fee of 20 basis points per annum. Interest
expense amounted to $0.1 million and $0.2 million for the years ended December
31, 2001 and 2000, respectively. During the first quarter 2001 the Company
repaid all aggregate borrowings and cancelled the commitment under this
revolving credit facility. 12. Income Taxes The composition of deferred tax assets and liabilities and the related tax
effects as of December 31, 2003 and 2002 are as follows (in thousands): December 31,2003
    
    2002Assets:Excess of Tax Over Financial Reporting Earned Premium
    
    $
    21,142
    
    
    $
    18,838Loss Reserve Discounting
    
    
    19,868
    
    
    
    16,461Excess of Financial Reporting Over Tax Net Realized Investment Losses
    
    
    6,720
    
    
    
    3,315Deferred Compensation
    
    
    471
    
    
    
    282Other Assets
    
    
    666
    
    
    
    345Total Assets
    
    
    48,867
    
    
    
    39,241Liabilities:Deferred Acquisition Costs
    
    
    19,701
    
    
    
    21,445Unrealized Appreciation of Securities
    
    
    9,001
    
    
    
    8,715Property and Equipment Basis
    
    
    985
    
    
    
    803Excess of Financial Reporting Over Tax Net Investment Income
    
    
    892
    
    
    
    624Other Liabilities
    
    
    141
    
    
    
    113Total Liabilities
    
    
    30,720
    
    
    
    31,700Net Deferred Income Tax Asset
    
    $
    18,147
    
    
    $
    7,541
 55




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The following table summarizes the differences between the Companys effective
tax rate for financial statement purposes and the federal statutory rate
(dollars in thousands): Amount of Tax
    
    PercentFor the year ended December 31, 2003 (Restated):Federal Tax at Statutory Rate
    
    $
    31,404
    
    
    
    35
    %Nontaxable Municipal Bond Interest and
Dividends Received Exclusion
    
    
    (4,522
    )
    
    
    (5
    )Other, Net
    
    
    657
    
    
    
    1Income Tax Expense
    
    $
    27,539
    
    
    
    31
    %For the year ended December 31, 2002 (Restated):Federal Tax at Statutory Rate
    
    $
    17,170
    
    
    
    35
    %Nontaxable Municipal Bond Interest and
Dividends Received Exclusion
    
    
    (2,525
    )
    
    
    (5
    )Other, Net
    
    
    657
    
    
    
    1Income Tax Expense
    
    $
    15,302
    
    
    
    31
    %For the year ended December 31, 2001 (Restated):Federal Tax at Statutory Rate
    
    $
    17,381
    
    
    
    35
    %Nontaxable Municipal Bond Interest and
Dividends Received Exclusion
    
    
    (1,456
    )
    
    
    (3
    )Nondeductible Goodwill Amortization
    
    
    523
    
    
    
    1Other, Net
    
    
    403
    
    
    
    1Income Tax Expense
    
    $
    16,851
    
    
    
    34
    %
 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 Companys consolidated federal income tax return. 13. Minority Interest in Consolidated Subsidiaries During 1998, the Company issued 10.350 million FELINE PRIDESSM at $10.00 per
security and PCHC Financing I, the Companys business trust subsidiary, issued
1,000,000 7.0% Trust Originated Preferred Securities with a stated liquidation
amount per trust preferred security equal to $10.00. The 10.350 million FELINE
PRIDESSM consisted of 9.350 million units referred to as Income Prides and
1.000 million units referred to as Growth Prides. Each Income Prides consisted
of a unit comprised of (a) a purchase contract under which the holder purchased
a number of shares of Philadelphia Consolidated Holding Corp. common stock on
May 16, 2001 (equal to .3858 shares per FELINE PRIDESSM) under the terms
specified in the stock purchase contract and (b) beneficial ownership of a 7.0%
Trust Originated Preferred Security issued by PCHC Financing I and representing
an undivided beneficial ownership in the assets of PCHC Financing I. Each
holder received aggregate cumulative cash distributions at the annual rate of
7.00% of the $10.00 stated amount for the security, payable quarterly in
arrears. Each Growth Prides consisted of a unit with a face amount of $10.00
comprised of (a) a purchase contract under which (i) the holder purchased a
number of shares of Philadelphia Consolidated Holding Corp. common stock on May
16, 2001 (equal to .3858 shares per FELINE PRIDESSM) under the terms specified
in the stock purchase contract and (ii) the Company paid the holder contract
adjustment payments at the rate of .50% of the stated amount per annum and (b)
a 1/100 undivided beneficial ownership interest in a treasury security having a
principal amount at maturity equal to $1,000 and maturing on May 15, 2001. On May 16, 2001, the Company issued 4.0 million common shares to satisfy the
stock purchase contract obligation from the Companys 1998 FELINE PRIDESSM
offering. The issuance of such shares resulted in a $98.9 million increase in
Shareholders Equity and a corresponding decrease in the Minority Interest In
Consolidated Subsidiaries balance. 56




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14. Shareholders Equity Basic and diluted earnings per share are calculated as follows (dollars and
share data in thousands, except per share data): As of and For the Years Ended December 31,2003 (Restated)
    
    2002 (Restated)
    
    2001 (Restated)Weighted-Average Common Shares Outstanding
    
    
    21,909
    
    
    
    21,611
    
    
    
    16,529Weighted-Average Share Equivalents Outstanding
    
    
    751
    
    
    
    682
    
    
    
    656Weighted-Average Shares and Share Equivalents Outstanding
    
    
    22,660
    
    
    
    22,293
    
    
    
    17,185Net Income
    
    
    62,187
    
    
    $
    33,753
    
    
    $
    32,811Basic Earnings Per Share
    
    $
    2.84
    
    
    $
    1.56
    
    
    $
    1.99Diluted Earnings Per Share
    
    $
    2.74
    
    
    $
    1.51
    
    
    $
    1.91
 The number of weighted share equivalents not included in the weighted-average
share equivalents outstanding calculation amounted to 2,730, 9,620 and 122 for
the years ended December 31, 2003, 2002 and 2001, respectively. During the fourth quarter of 2001, the Company closed on its public offering of
an aggregate of 3.6 million shares of its common stock. Proceeds from the
offering amounted to $114.5 million (after underwriting and associated costs).
The Company contributed $70.0 million of the net proceeds to its subsidiaries
in 2001, of which $60.0 million was contributed to the Insurance Subsidiaries.
The remaining proceeds are presently being held for general corporate purposes. Under the Companys stock option plan, stock options may be granted for the
purchase of common stock at a price not less than the fair market value on the
date of grant. Options are primarily exercisable after the expiration of five
years following the grant date. Under this plan, as amended, the Company has
reserved 3,500,000 shares of common stock for issuance pursuant to options
granted under the plan. As of December 31, 2003, 119,725 shares of common
stock remain reserved for future issuance pursuant to options granted under
this plan. In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure (SFAS No. 148) which amends SFAS
Statement No. 123, Accounting for Stock-Based Compensation (SFAS No. 123).
The objective of SFAS No. 148 is to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. SFAS No. 148 does not change the provisions
of SFAS No. 123 that permit entities to continue to apply the intrinsic value
method of Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25). In addition, this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The Company continues to maintain its accounting for stock-based
compensation in accordance with APB No. 25, but has adopted the disclosure
provisions of SFAS No. 148. The following table presents certain information regarding the Companys stock
option plan. 57




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##### Table of Contents



2003
    
    2002
    
    2001Exercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExercisePrice
    
    
    
    
    
    Price
    
    
    
    
    
    PriceOptions
    
    Per Option(1)
    
    Options
    
    Per Option(1)
    
    Options
    
    Per Option(1)Outstanding at beginning
of year
    
    
    1,890,075
    
    
    $
    24.82
    
    
    
    1,453,075
    
    
    $
    19.32
    
    
    
    1,330,075
    
    
    $
    12.68Granted
    
    
    484,000
    
    
    $
    36.60
    
    
    
    549,500
    
    
    $
    36.14
    
    
    
    572,500
    
    
    $
    27.09Exercised
    
    
    (106,375
    )
    
    $
    19.34
    
    
    
    (107,000
    )
    
    $
    8.07
    
    
    
    (392,000
    )
    
    $
    8.09Canceled
    
    
    (33,000
    )
    
    $
    30.68
    
    
    
    (5,500
    )
    
    $
    29.60
    
    
    
    (57,500
    )
    
    $
    19.68Outstanding at end of year
    
    
    2,234,700
    
    
    $
    27.55
    
    
    
    1,890,075
    
    
    $
    24.82
    
    
    
    1,453,075
    
    
    $
    19.32Exercisable at end of year
    
    
    323,200
    
    
    
    
    
    
    
    194,950
    
    
    
    
    
    
    
    296,950Weighted-average fair
value of options
granted during the
year (2)
    
    
    
    
    
    $
    11.27
    
    
    
    
    
    
    $
    14.46
    
    
    
    
    
    
    $
    10.99
 Outstanding
    
    Exercise
    
    Remaining
    
    Exercisable
    
    ExerciseAt
    
    Price
    
    Contractual
    
    at
    
    PriceDecember
    
    Per
    
    Life
    
    December
    
    PerRange of Exercise Prices
    
    31, 2003
    
    Option(1)
    
    (Years)(1)
    
    31, 2003
    
    Option(1)$8.13 to $9.31
    
    
    188,450
    
    
    $
    8.99
    
    
    
    2.4
    
    
    
    188,450
    
    
    $
    8.99$13.88 to $19.75
    
    
    390,000
    
    
    $
    15.47
    
    
    
    5.6
    
    
    
    90,000
    
    
    
    18.63$20.50 to $27.00
    
    
    531,250
    
    
    $
    25.23
    
    
    
    6.9
    
    
    
    3,750
    
    
    
    21.96$27.31 to $34.63
    
    
    397,500
    
    
    $
    30.60
    
    
    
    8.6
    
    
    
    41,000
    
    
    
    29.80$36.05 to $42.49
    
    
    727,500
    
    
    $
    39.15
    
    
    
    9.0
    
    
    
    
    
    
    
    2,234,700
    
    
    $
    27.55
    
    
    
    
    
    
    
    323,200
    
    
    $
    14.46
  (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 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 1,000,000. 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. 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 36,265 and 77,730 shares in
2003 and 2002, respectively. The weighted-average fair value of those purchase
rights granted in 2003 and 2002 was $6.00 and $4.47, 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 1,000,000. 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 period or the date the
shares are purchased. 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 5,939 and 242,444 shares in 2003 and 2002, respectively. The
weighted-average fair value of those purchase rights granted in 2003 and 2002
was $6.00 and $4.47, 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 50,000.
Non-employee Directors, during monthly offerings periods, may designate a
portion of his or her fees to be used for the purchase of 58




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##### Table of Contents



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 3,325 and 2,237 shares in 2003 and 2002, respectively.
The weighted-average fair value of those purchase rights granted in 2003 and
2002 was $5.96 and $5.63, 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 200,000. Eligible Preferred Agents during designated
offering periods 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. Under the Preferred
Agents Plan, the Company issued 7,056 and 10,966 shares in 2003 and 2002,
respectively. The weighted-average fair value of those purchase rights granted
in 2003 and 2002 was $6.00 and $6.07, respectively. The fair value of options at date of grant was estimated using the
Black-Scholes valuation model with the following weighted-average assumptions: 2003
    
    2002
    
    2001Expected Stock Volatility
    
    
    23.2
    %
    
    
    33.0
    %
    
    
    32.0
    %Risk-Free Interest Rate
    
    
    3.1
    %
    
    
    4.1
    %
    
    
    4.7
    %Expected Option Life (Years)
    
    
    6.0
    
    
    
    6.0
    
    
    
    6.0Expected Dividends
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
 15. Stock Repurchase Authorization During the three years ended December 31, 2003, the Company repurchased 0.1
million shares for approximately $2.5 million under its stock repurchase
authorization. At December 31, 2003, $24.7 million remains under a $55.0
million stock purchase authorization. 16. 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 $145.6 million and $85.8 million at December 31, 2003 and 2002,
respectively. The Company evaluates the financial condition of its reinsurers
to minimize its exposure to losses from reinsurer insolvencies. The percentage
of ceded reinsurance reserves (excluding reserves ceded to voluntary and
mandatory pool mechanisms) that are with companies rated A (Excellent) or
better by A.M. Best Company is 99.3% and 97.0% as of December 31, 2003 and
2002, respectively. Additionally, approximately 1%, 1% and 3% of the Companys
net written premiums for the years ended December 31, 2003, 2002, and 2001,
respectively, were assumed from an unrelated reinsurance company. 59




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##### Table of Contents



The effect of reinsurance on premiums written and earned is as follows (in
thousands): Written
    
    EarnedFor the Year Ended December 31, 2003 (Restated):Direct Business
    
    $
    898,170
    
    
    $
    784,445Reinsurance Assumed
    
    
    7,823
    
    
    
    5,053Reinsurance Ceded
    
    
    303,693
    
    
    
    214,980Net Premiums
    
    $
    602,300
    
    
    $
    574,518Percentage Assumed of Net
    
    
    1.3
    %
    
    
    0.9
    %For the Year Ended December 31, 2002 (Restated):Direct Business
    
    $
    660,789
    
    
    $
    550,443Reinsurance Assumed
    
    
    2,950
    
    
    
    5,042Reinsurance Ceded
    
    
    144,032
    
    
    
    134,299Net Premiums
    
    $
    519,707
    
    
    $
    421,186Percentage Assumed of Net
    
    
    0.6
    %
    
    
    1.2
    %For the Year Ended December 31, 2001 (Restated):Direct Business
    
    $
    464,491
    
    
    $
    409,814Reinsurance Assumed
    
    
    9,074
    
    
    
    11,249Reinsurance Ceded
    
    
    136,284
    
    
    
    124,970Net Premiums
    
    $
    337,281
    
    
    $
    296,093Percentage Assumed of Net
    
    
    2.7
    %
    
    
    3.8
    %
 Certain of the Companys reinsurance contracts have provisions whereby the
Company is entitled to a return profit commission based on the ultimate
experience of the underlying business ceded to the contracts. Under the terms
of these contracts, the Company accrued profit commissions of
$10.5 million,
$0 million and $3.5 million for the years ended
December 31, 2003,  2002 and 2001, respectively. The
profit commissions reduce ceded written and earned premiums. 17. 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
participants pre-tax contribution, subject to a maximum of 6% of the
participants eligible compensation. The Company may also make annual
discretionary profit sharing contributions at each plan year end. Participants
are fully vested in the Companys contribution upon completion of four years of
service. The Companys total contributions to the plan were $0.9 million, $0.8
million and $0.6 million in 2003, 2002, and 2001, 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 participants plan
deferral account. A participants 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 participants 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 participants
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 $1.8 million and $0.7
million as of December 31, 2003 and 2002, 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 participants plan
deferral account. A participants benefit under the plan is the amount 60




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##### Table of Contents



of such participants plan deferral amount. The Company had a deferred
compensation obligation pursuant to the plan amounting to $0.8 million and $0.5
million as of December 31, 2003 and 2002, respectively. 18. 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
Companys financial condition or results of operations. The Company currently leases office space to serve as its headquarters location
and 36 field offices for its production underwriters. In addition, the Company
leases certain computer equipment. Rental expense for these operating leases
was $3.5 million, $3.1 million and $2.6 million for the years ended December
31, 2003, 2002, and 2001, 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, 2003 were as follows (in thousands): Year Ending December 31:2004
    
    $
    4,6112005
    
    
    4,3072006
    
    
    3,9522007
    
    
    3,4942008 and Thereafter
    
    
    1,238Total Minimum Payments Required
    
    $
    17,602
 At December 31, 2003 the Company has open commitments of $2.3 million under
certain limited partnership and information technology development agreements. 19. 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, 2003 and 2002 is
unaudited. However, in the opinion of management, all adjustments (consisting
of normal recurring adjustments and accruals and adjustments necessary to
reflect the restatement discussed in Note 2) 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): 61




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##### Table of Contents



Three Months EndedJune 30,
    
    September 30,
    
    December 31,March 31,
    
    2003 (1)(2)
    
    2003 (1)(2)
    
    2003 (1)(2)2003 (1)
    
    (Restated)
    
    (Restated)
    
    (Restated)Net Earned Premiums
    
    $
    148,362
    
    
    $
    123,349
    
    
    $
    146,676
    
    
    $
    156,131Net Investment Income
    
    $
    9,805
    
    
    $
    9,370
    
    
    $
    9,173
    
    
    $
    10,458Net Realized Investment Gain (Loss)
    
    $
    (1,133
    )
    
    $
    (650
    )
    
    $
    474
    
    
    $
    2,103Net Loss and Loss Adjustment Expenses
    
    $
    90,360
    
    
    $
    93,026
    
    
    $
    79,405
    
    
    $
    96,386Acquisition Costs and Other
Underwriting Expenses
    
    $
    46,420
    
    
    $
    32,158
    
    
    $
    41,542
    
    
    $
    42,792Net Income
    
    $
    13,233
    
    
    $
    4,863
    
    
    $
    23,575
    
    
    $
    20,517Basic Earnings Per Share
    
    $
    0.61
    
    
    $
    0.22
    
    
    $
    1.08
    
    
    $
    0.93Diluted Earnings Per Share
    
    $
    0.59
    
    
    $
    0.22
    
    
    $
    1.04
    
    
    $
    0.89Weighted-Average Common Shares
Outstanding
    
    
    21,865,269
    
    
    
    21,860,396
    
    
    
    21,913,053
    
    
    
    21,994,960Weighted-Average Share Equivalents
Outstanding
    
    
    562,552
    
    
    
    706,608
    
    
    
    787,627
    
    
    
    981,017Weighted-Average Shares and Share
Equivalents Outstanding
    
    
    22,427,821
    
    
    
    22,567,004
    
    
    
    22,700,680
    
    
    
    22,975,977
 June 30,March 31,
    
    2002(3)(4)
    
    September 30,
    
    December 31,2002(4)
    
    (Restated)
    
    2002(4)
    
    2002(4)Net Earned Premiums
    
    $
    89,244
    
    
    $
    96,809
    
    
    $
    106,146
    
    
    $
    125,523Net Investment Income
    
    $
    8,855
    
    
    $
    9,375
    
    
    $
    9,497
    
    
    $
    9,789Net Realized Investment Gain (Loss)
    
    $
    47
    
    
    $
    (3,181
    )
    
    $
    199
    
    
    $
    (436
    )Net Loss and Loss Adjustment Expenses
    
    $
    53,049
    
    
    $
    60,832
    
    
    $
    78,349
    
    
    $
    75,203Acquisition Costs and Other
Underwriting Expenses
    
    $
    27,821
    
    
    $
    31,057
    
    
    $
    32,343
    
    
    $
    38,697Net Income
    
    $
    10,677
    
    
    $
    6,701
    
    
    $
    2,892
    
    
    $
    13,483Basic Earnings Per Share
    
    $
    0.50
    
    
    $
    0.31
    
    
    $
    0.13
    
    
    $
    0.62Diluted Earnings Per Share
    
    $
    0.48
    
    
    $
    0.30
    
    
    $
    0.13
    
    
    $
    0.61Weighted-Average Common Shares
Outstanding
    
    
    21,528,091
    
    
    
    21,578,045
    
    
    
    21,625,799
    
    
    
    21,710,121Weighted-Average Share Equivalents
Outstanding
    
    
    724,311
    
    
    
    753,575
    
    
    
    636,828
    
    
    
    558,100Weighted-Average Shares and Share
Equivalents Outstanding
    
    
    22,252,402
    
    
    
    22,331,620
    
    
    
    22,262,627
    
    
    
    22,268,221
  (1)
    
    Net Realized Investment (Gain) Loss for the three months ended March
31, 2003, June 30, 2003, September 30, 2003 and December 31, 2003
includes non-cash realized losses of $1.5 million, $1.7 million, $0.4
million and $6.7 million, respectively, as a result of impairment
evaluations.(2)
    
    The three months ended June 30, September 30, and December 31, 2003
have been restated, as described in Note 2, to accrue profit commissions
under two reinsurance contracts. The impact of this restatement on the
previously reported results of operations for the three months ended
June 30, September 30, and December 31, 2003 was to increase (decrease)
net earned premiums by $1.9 million, $4.0 million and ($2.9) million,
respectively, and net income by $1.2 million, $2.6 million, and ($1.9)
million, respectively.(3)
    
    The three months ended June 30, 2002 has been restated,
as described in Note 2, for a profit commission under a
2001 accident year aggregate stop loss reinsurance contract. The
impact of this restatement on the previously reported results of
operations for the three months ended June 30, 2002 was to
decrease net earned premiums by $3.5 million and net income by
$2.3 million. 62




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##### Table of Contents



(4)
    
    Net Realized Investment Gain (Loss) for the three months ended June
30, 2002, September 30, 2002 and December 31, 2002 includes non-cash
realized losses of $1.2 million, $0.3 million, and $2.2 million,
respectively, as a result of impairment evaluations. 20. Segment Information The Companys 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 Automobile and Commercial Property and Commercial multi-peril
package insurance products; The Specialty Lines Underwriting Group which has
underwriting responsibility for the professional liability insurance products;
and The Personal Lines Group which designs, markets and underwrites personal
property and casualty insurance products for the Manufactured Housing and
Homeowners markets. Each business segments 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 Companys
consolidated financial statements as described in the summary of significant
accounting policies. Management evaluates a segments 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 been reported. Investments and investment performance including
investment income and net realized investment gain (loss); 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): 63




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##### Table of Contents



Commercial
    
    Specialty
    
    PersonalLines
    
    Lines
    
    Lines
    
    Corporate
    
    Total2003 (Restated):Gross Written Premiums
    
    $
    662,339
    
    
    $
    154,105
    
    
    $
    89,549
    
    
    $
    
    
    
    $
    905,993Net Written Premiums
    
    $
    463,853
    
    
    $
    107,911
    
    
    $
    30,536
    
    
    $
    
    
    
    $
    602,300Revenue:Net Earned Premiums
    
    $
    431,535
    
    
    $
    108,809
    
    
    $
    34,174
    
    
    $
    
    
    
    $
    574,518Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,806
    
    
    
    38,806Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    794
    
    
    
    794Other Income
    
    
    
    
    
    
    
    
    
    
    5,092
    
    
    
    427
    
    
    
    5,519Total Revenue
    
    
    431,535
    
    
    
    108,809
    
    
    
    39,266
    
    
    
    40,027
    
    
    
    619,637Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    273,487
    
    
    
    65,075
    
    
    
    20,615
    
    
    
    
    
    
    
    359,177Acquisition Costs and Other Underwriting Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162,912
    
    
    
    162,912Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    4,050
    
    
    
    3,772
    
    
    
    7,822Total Losses and Expenses
    
    
    273,487
    
    
    
    65,075
    
    
    
    24,665
    
    
    
    166,684
    
    
    
    529,911Income Before Income Taxes
    
    
    158,048
    
    
    
    43,734
    
    
    
    14,601
    
    
    
    (126,657
    )
    
    
    89,726Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,539
    
    
    
    27,539Net Income
    
    $
    158,048
    
    
    $
    43,734
    
    
    $
    14,601
    
    
    $
    (154,196
    )
    
    $
    62,187Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    148,409
    
    
    $
    1,722,532
    
    
    $
    1,870,9412002
(Restated):Gross Written Premiums
    
    $
    473,100
    
    
    $
    110,176
    
    
    $
    80,463
    
    
    $
    
    
    
    $
    663,739Net Written Premiums
    
    $
    380,991
    
    
    $
    101,623
    
    
    $
    37,093
    
    
    $
    
    
    
    $
    519,707Revenue:Net Earned Premiums
    
    $
    297,635
    
    
    $
    85,030
    
    
    $
    35,057
    
    
    $
    
    
    
    $
    417,722Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,516
    
    
    
    37,516Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,371
    )
    
    
    (3,371
    )Other Income
    
    
    
    
    
    
    
    
    
    
    645
    
    
    
    266
    
    
    
    911Total Revenue
    
    
    297,635
    
    
    
    85,030
    
    
    
    35,702
    
    
    
    34,411
    
    
    
    452,778Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    202,604
    
    
    
    43,310
    
    
    
    21,519
    
    
    
    
    
    
    
    267,433Acquisition Costs and Other Underwriting Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    129,918
    
    
    
    129,918Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    130
    
    
    
    6,242
    
    
    
    6,372Total Losses and Expenses
    
    
    202,604
    
    
    
    43,310
    
    
    
    21,649
    
    
    
    136,160
    
    
    
    403,723Income Before Income Taxes
    
    
    95,031
    
    
    
    41,720
    
    
    
    14,053
    
    
    
    (101,749
    )
    
    
    52,519Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,302
    
    
    
    15,302Net Income
    
    $
    95,031
    
    
    $
    41,720
    
    
    $
    14,053
    
    
    $
    (117,051
    )
    
    $
    33,753Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    135,753
    

    
    $
    1,222,581
    
    
    $
    1,358,3342001
(Restated):Gross Written Premiums
    
    $
    315,948
    
    
    $
    79,317
    
    
    $
    78,300
    
    
    $
    
    
    
    $
    473,565Net Written Premiums
    
    $
    225,964
    
    
    $
    70,572
    
    
    $
    40,745
    
    
    $
    
    
    
    $
    337,281Revenue:Net Earned Premiums
    
    $
    192,099
    
    
    $
    68,956
    
    
    $
    38,502
    
    
    $
    
    
    
    $
    299,557Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    32,426
    
    
    
    32,426Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,357
    
    
    
    3,357Other Income
    
    
    
    
    
    
    
    
    
    
    2,964
    
    
    
    (2,377
    )
    
    
    587Total Revenue
    
    
    192,099
    
    
    
    68,956
    
    
    
    41,466
    
    
    
    33,406
    
    
    
    335,927Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    117,429
    
    
    
    42,840
    
    
    
    19,386
    
    
    
    
    
    
    
    179,655Acquisition Costs and Other Underwriting Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    97,020
    
    
    
    97,020Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    1,546
    
    
    
    5,295
    
    
    
    6,841Total Losses and Expenses
    
    
    117,429
    
    
    
    42,840
    
    
    
    20,932
    
    
    
    102,315
    
    
    
    283,516Minority Interest: Distributions on Company
Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,749
    
    
    
    2,749Income Before Income Taxes
    
    
    74,670
    
    
    
    26,116
    
    
    
    20,534
    
    
    
    (71,658
    )
    
    
    46,198Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,851
    
    
    
    16,851Net Income
    
    $
    74,670
    
    
    $
    26,116
    
    
    $
    20,534
    
    
    $
    (88,509
    )
    
    $
    32,811Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    168,200
    
    
    $
    851,774
    
    
    $
    1,019,974
 64




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##### Table of Contents



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. The Companys 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 the Companys 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 the Companys
disclosure controls and procedures, 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 in February 2004 by management, with the
participation of the Companys chief executive officer (CEO) and chief
financial officer (CFO), of the effectiveness of the design and operation of
the Companys disclosure controls and procedures as of the end of the period
covered by the Companys previously filed Annual Report on
Form 10-K for the fiscal year ended December 31, 2003. Based on this evaluation, the CEO and CFO had
concluded that, as of the end of the period covered by such Annual
Report on Form
10-K, the Companys disclosure controls and procedures were effective to ensure
that material information relating to the Company and its consolidated
subsidiaries would be made known to them by others within such entities,
particularly during the period in which such Annual Report on Form 10-K was
being prepared. In connection with the Companys Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 2004, an evaluation was performed by
management, with the participation of the Companys chief executive officer
(CEO) and chief financial officer (CFO), of the effectiveness of the design
and operation of the Companys disclosure controls and procedures as of the end
of the period covered by such Quarterly Report. Based on this evaluation, the
CEO and CFO have concluded that, as of the end of such period, the Companys
disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed in the reports that the
Company files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules
and forms, subject to the matters set forth in the following paragraph. As a result of the Companys restatement of certain of its financial
statements, as referred to in Item 7  Restatement of Financial Statements to
the Consolidated Financial Statements of the Company contained in Item 8 of
Part II, to include a portion of its revenue and net income in prior periods
arising from profit commissions under two reinsurance contracts, the Company
has determined that it should enhance its documentation and research as to its
understanding of appropriate accounting for reinsurance transactions. In
connection therewith, the Company:  1.
    
    Formed a new reinsurance contract subcommittee with senior members from
appropriate departments within the Company to review, discuss and make
appropriate conclusions with respect to the documentation requirements
and the accounting for the Companys reinsurance contracts;2.
    
    Will, as promptly as practicable, add an additional accounting professional
to its staff whose responsibility will be to spend substantially all of
his or her working time researching and documenting technical accounting
matters (including reinsurance matters), as well as supporting other
members of the Companys accounting staff and the reinsurance contract
subcommittee. The
Companys independent auditors, PricewaterhouseCoopers, LLP, have advised the Company that
there is a material weakness in the Companys internal controls over the accounting and
reporting for reinsurance contracts. The Company anticipates that its implementation of the matters
set forth in the immediately preceding paragraph will correct the material weakness. (b) Changes in Internal Controls. There has been no change in the Companys
internal control over financial reporting during the Companys fiscal quarter
ended December 31, 2003 that has materially affected, or is reasonably likely
to materially affect, the Companys internal control over financial reporting. 65




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##### Table of Contents



PART IV 
 Item 15.  EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Exhibits 1. The Financial Statements and Financial Statement Schedules listed in
the accompanying index on page 38 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.
    
    Description3.1
    
    A
    
    Articles of Incorporation of Philadelphia Insurance, as amended to date.3.1.1
    
    A
    
    Amendment to Articles of Incorporation of Philadelphia Insurance.3.1.2
    
    L
    
    Amendment to Articles of Incorporation, Philadelphia Consolidated Holding Corp.3.2
    
    A
    
    By-laws of Philadelphia Insurance, as amended to date.10.1
    
    A(1)
    
    Amended and Restated Key Employees Stock Option Plan.10.1.1
    
    H(1)
    
    Amended and Restated Key Employees Stock Option Plan.10.2
    
    A(1)
    
    Key Employees Stock Bonus Plan.10.2.1
    
    A (1)
    
    Excerpt of Board of Directors and Shareholders Resolution amending Key Employees Stock
Bonus Plan.10.6
    
    A
    
    Casualty Excess of Loss Reinsurance Agreement No. 14P-106,401,402, effective January 1, 1990, with Swiss Re, as amended to date.10.7
    
    A
    
    Property Quota Share Reinsurance Agreement No. 14P-202, effective December 9, 1989, with Swiss Re, as amended to date.10.8
    
    A
    
    Casualty Quota Share Reinsurance Agreement No. 14P-201, effective January 1, 1989, with Swiss Re, as amended to date.10.9
    
    A
    
    Retrocession Contract No. 80101, effective October 1, 1990, with Swiss Re, as amended to date, together with related Casualty Quota Share Reinsurance Agreement
No. X21-201, as amended to
date.10.10
    

    A
    
    Retrocession Contract No. 81100/81101, effective October 1, 1990, with Swiss Re, as amended to date, together with related Property Quota Share Reinsurance
Agreement No. DP2AB, effective October 1, 1990, as amended to date.10.11
    
    A
    
    Retrocession Contract No. 80100/80103, effective October 1, 1990, with Swiss Re, as amended to date, together with related Casualty Quota Share Reinsurance
Agreement No. DC2ABC, effective October 1, 1990, as amended to date.10.12
    
    A
    
    Agreement of Reinsurance no. B367, dated June 11, 1991, with General Reinsurance Corporation, as amended to date.10.13
    
    A
    
    Agreement of Reinsurance No. A271, dated July 2, 1993, with General Reinsurance Corporation.10.14
    
    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.10.15
    
    A
    
    E & O Insurance Policy effective July 20, 1993.10.15.1
    
    G
    
    E & O Insurance Policy effective July 20, 1996.10.15.2
    
    I
    
    E & O Insurance Policy effective July 20, 1997.10.16
    
    A
    
    Minutes of the Board of Directors Meeting dated October 20, 1992, and excerpts from the Minutes of the Board of Directors Meeting dated
November 16, 1992.10.17
    
    A(1)
    
    Letter dated July 9, 1993 from James J. Maguire, confirming verbal agreements concerning
options.10.18
    
    A(1)
    
    James J. Maguire Stock Option Agreements.10.18.1
    
    C(1)
    
    Amendment to James J. Maguire Stock Option Agreements.10.19
    
    A(1)
    
    Wheelways Salary Savings Plus Plan Summary Plan Description.10.20
    
    A
    
    Key Man Life Insurance Policies on James J. Maguire10.21
    
    A
    
    Reinsurance Pooling Agreement dated August 14, 1992, between PIIC and PIC.10.22
    
    A
    
    Tax Sharing Agreement, dated July 16, 1987, between Philadelphia Insurance and PIC, as amended to date.10.23
    
    A
    
    Tax Sharing Agreement, dated November 1, 1986, between Philadelphia Insurance and PIIC, as amended to date.10.24
    
    A(1)
    
    Management Agreement dated May 20, 1991, between PIIC and MIA, as amended to date.
 66




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##### Table of Contents



Exhibit No.
    
    Description10.24.1
    
    G(1)
    
    Management Agreement dated May 20, 1991, between PIIC and MIA, as amended September 25, 1996.10.25
    
    A(1)
    
    Management Agreement dated October 23, 1991, between PIC and MIA, as amended to date.10.25.1
    
    G(1)
    
    Management Agreement dated October 23, 1991, between PIC and MIA, as amended
September 25, 1996.10.26
    
    A
    
    General Mutual Release and Settlement of All Claims dated July 2, 1993, with the Liquidator of Integrity Insurance Company.10.27
    
    A
    
    Settlement Agreement and General Release with Robert J. Wilkin, Jr., dated August 18, 1993.10.28
    
    B
    
    Lease tracking portfolio assignment agreement.10.29
    
    D(1)
    
    James J. Maguire Split Dollar Life Insurance Agreement, Collateral Assignment and Joint and Last Survivor Flexible Premium Adjustable
Life Insurance Policy Survivorship Life.10.30
    
    E
    
    Allenbrook Software License Agreement, dated September 26, 1995.10.31
    
    E
    
    Sublease Agreement dated August 24, 1995 with CoreStates Bank, N.A.10.32
    
    E
    
    Lease Agreement dated August 30, 1995 with The Prudential Insurance Company of America.10.33
    
    F(1)
    
    Employee Stock Purchase Plan.10.34
    
    F(1)
    
    Cash Bonus Plan.10.35
    
    F(1)
    
    Executive Deferred Compensation Plan.10.36
    
    H(1)
    
    Directors Stock Purchase Plan10.37
    
    I
    
    Lease Agreement dated May 8, 1997 with Bala Plaza, Inc.10.38
    
    I
    
    Casualty Excess of Loss Reinsurance Agreement effective January 1, 1997, together with Property
Per Risk Excess of Loss Reinsurance Agreement effective January 1, 1997 and Property Facultative Excess of Loss Automatic
Reinsurance Agreement effective January 1,
1997.10.39
    
    I
    
    Automobile Leasing Residual Value Excess of Loss Reinsurance Agreement
effective January 1,
1997, together with Second Casualty Excess of Loss Reinsurance Agreement,
effective January 1,
1997.10.40
    
    J
    
    Inspire Software License Agreement, dated December 31, 1998.10.41
    
    J
    
    Lease Agreement dated July 6, 1998 with Bala Plaza, Inc.10.42
    
    K
    
    Plan and Agreement of Merger Between Philadelphia Consolidated Holding Corp. and The Jerger Co. Inc.10.43
    
    L
    
    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, 2002.10.44
    
    L
    
    Philadelphia Consolidated Holding Corp. Employees Stock Option Plan (Amended and Restated Effective March 24,
2002)  incorporated by reference to Exhibit 4 to Registration Statement on Form S-8 (file no. 333-91218)
filed with the Securities and Exchange Commission on June 26, 2002.10.45
    
    L
    
    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, 2002.10.46
    
    L(1)
    
    Employment Agreement with James J. Maguire, Jr. effective June 1, 2002.10.47
    
    L(1)
    
    Employment Agreement with Sean S. Sweeney effective June 1, 2002.10.48
    
    L(1)
    
    Employment Agreement with Craig P. Keller effective June 1, 2002.10.49
    
    M(1)
    
    Employment Agreement with James J. Maguire effective June 1, 2002.10.50
    
    M(1)
    
    Employment Agreement with Christopher J. Maguire effective June 1, 2002.10.51
    
    N
    
    AQS, Inc. Software License Agreement, dated October 1, 2002.10.52
    
    N(1)
    
    Employment Agreement with P. Daniel Eldridge effective October 1, 2002.10.53
    
    O
    
    Florida Hurricane Catastrophe Fund Reimbursement Contract Effective June 1, 2003.10.54
    
    P
    
    Quota Share Reinsurance Contract with Swiss Reinsurance America Corporation effective May 15, 2003 covering
policies within the Custom Harvest Program.10.55
    
    P
    
    Excess of Loss Agreement of Reinsurance No. 9034 with General Reinsurance Corporation effective January 1,
2003.10.56
    
    P
    
    Addendum No. 3 to the Casualty Excess of Loss Reinsurance Agreement No. TC988A, B with Swiss Reinsurance
American Corporation effective January 1, 2003.10.57
    
    P
    
    Property Excess of Loss Agreement of Reinsurance No. TP1600E with Swiss Reinsurance America Corporation
effective January 1, 2003.10.58
    
    P
    
    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.
 67




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##### Table of Contents



Exhibit No.
    
    Description10.59
    
    Q
    
    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 PHUB015555-01.10.60
    
    Q
    
    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 PHUB015557-01.10.61
    
    Q
    
    Non Florida Commercial Excess Catastrophe Reinsurance Contract with the Subscribing Reinsurer (s) Executing
the Interests and Liabilities Agreement (s) effective June 1, 2003.10.62
    
    Q
    
    Florida Commercial Excess Catastrophe Reinsurance Contract with the Subscribing Reinsurer (s) Executing the
Interests and Liabilities Agreement (s) effective June 1, 2003.10.63
    
    Q
    
    Excess Catastrophe Reinsurance Contract with Federal Insurance Company through Chubb Re, Inc. effective June
1, 2003.10.64
    
    Q
    
    Whole Account Net Quota Share Reinsurance Contract with Federal Insurance Company through Chubb Re, Inc. and
Swiss Reinsurance America Corporation effective April 1, 2003.11
    
    R
    
    Statement regarding computation of earnings per share.21
    
    Q
    
    List of Subsidiaries of the Registrant.23
    
    R
    
    Consent of PricewaterhouseCoopers LLP.24
    
    A
    
    Power of Attorney31.1
    
    R
    
    Certification of the Companys chief executive officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 dated August 19, 2004.31.2
    
    R
    
    Certification of the Companys chief financial officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 dated August 19, 2004.32.1
    
    R
    
    Certification of the Companys chief executive officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 dated August 19, 2004.32.2
    
    R
    
    Certification of the Companys chief financial officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 dated August 19, 2004.99.1
    
    R
    
    Report of Independent Registered Public Accounting Firm of PricewaterhouseCoopers LLP on Financial Statement
Schedules.
 A
    
    Incorporated by reference to the Exhibit filed with the Registrants Form S-1 Registration
Statement under the Securities Act of 1933 (Registration No. 33-65958).B
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated by reference.C
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1994 and incorporated by reference.D
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1995 and incorporated by reference.E
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended
December 31, 1995 and incorporated by reference.F
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1996 and incorporated by reference.G
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended
December 31, 1996 and incorporated by reference.H
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997 and incorporated by reference.I
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended
December 31, 1997.J
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended
December 31, 1998.K
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1999.L
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2002 and incorporated by reference.M
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2002 and incorporated by reference.N
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended
December 31, 2002.O
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2003 and incorporated by reference.
 68




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##### Table of Contents



P
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 2003 and incorporated by reference.Q
    
    Filed as an Exhibit to the
Companys Annual Report on Form 10-K for the year ended
December 31, 2003.R
    
    Filed herewith.
  (1)         Compensatory Plan or Arrangement, or Management Contract. (b) Reports on Form 8-K: The Company filed or furnished the following reports on Form 8-K during
the quarterly period ended December 31, 2003: Date of Report
    
    Item ReportedOctober 23, 2003
    
    Clarification of statement made during October 23, 2003
quarterly earnings conference call (filed Form 8-K).October 23, 2003
    
    Third quarter results September 30, 2003 and Regulation
FD disclosure (furnished Form 8-K).
 69




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##### Table of Contents



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: Craig P. KellerCraig P. KellerExecutive Vice President,Secretary, Treasurer & CFOAugust 19, 2004
 70




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##### Table of Contents



Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule I  Summary of Investments  Other than Investments in Related Parties
As of December 31, 2003
(Dollars in Thousands) COLUMN A
    
    
    COLUMN B
    
    
    COLUMN C
    
    COLUMN DEstimated
    
    Amount at whichMarket
    
    shown in theType of Investment
    
    Cost *
    
    Value
    
    Balance SheetFixed Maturities:Bonds:United States Government and Government
Agencies and Authorities
    
    $
    210,640
    
    
    $
    214,447
    
    
    $
    214,447States, Municipalities and Political Subdivisions
    
    
    476,762
    
    
    
    488,976
    
    
    
    488,976Public Utilities
    
    
    26,747
    
    
    
    27,461
    
    
    
    27,461All Other Corporate Bonds
    
    
    349,207
    
    
    
    347,511
    
    
    
    347,511Redeemable Preferred Stock
    
    
    3,167
    
    
    
    3,299
    
    
    
    3,299Total Fixed Maturities
    
    
    1,066,523
    
    
    
    1,081,694
    
    
    
    1,081,694Equity Securities:Common Stocks:Public Utilities
    
    
    217
    
    
    
    276
    
    
    
    276Banks, Trust and Insurance Companies
    
    
    20,589
    
    
    
    23,749
    
    
    
    23,749Industrial, Miscellaneous and all other
    
    
    55,854
    
    
    
    63,060
    
    
    
    63,060Non-redeemable Preferred Stocks
    
    
    3,153
    
    
    
    3,273
    
    
    
    3,273Total Equity Securities
    
    
    79,813
    
    
    
    90,358
    
    
    
    90,358Total Investments
    
    $
    1,146,336
    
    
    $
    1,172,052
    
    
    $
    1,172,052
  *
    
    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. S-1




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##### Table of Contents



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 31,2003 (Restated)
    
    2002ASSETSCash and Cash Equivalents
    
    $
    125
    
    
    $
    124Equity in and Advances to Unconsolidated Subsidiaries (a)
    
    
    547,229
    
    
    
    479,560Other Assets
    
    
    1
    
    
    
    1Total Assets
    
    $
    547,355
    
    
    $
    479,685LIABILITIES AND SHAREHOLDERS EQUITYIncome Taxes Payable
    
    $
    1,282
    
    
    $
    1,247Other Liabilities
    
    
    427
    
    
    
    615Total Liabilities
    
    
    1,709
    
    
    
    1,862Commitments and ContingenciesShareholders EquityPreferred Stock, $.01 Par Value, 10,000,000 Shares
Authorized, None Issued and Outstanding
    
    
    
    
    
    
    Common Stock, No Par Value, 100,000,000 Shares
Authorized, 22,007,552 and 21,868,877 Shares
Issued and Outstanding
    
    
    281,088
    
    
    
    276,945Notes Receivable from Shareholders
    
    
    (5,444
    )
    
    
    (6,407
    )Accumulated Other Comprehensive Income
    
    
    16,715
    
    
    
    16,185Retained Earnings
    
    
    253,287
    
    
    
    191,100545,646
    
    
    
    477,823Total Liabilities and Shareholders Equity
    
    $
    547,355
    
    
    $
    479,685
  (a)
    
    This item has been eliminated in the Companys Consolidated Financial
Statements. See Notes to Consolidated
Financial Statements included in Item 8, pages 42-64. S-2




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##### Table of Contents



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 31,2003 (Restated)
    
    2002 (Restated)
    
    2001 (Restated)Revenue:Dividends from Subsidiaries (a)
    
    $
    61,348
    
    
    $
    27,804
    
    
    $
    21,074Total Revenue
    
    
    61,348
    
    
    
    27,804
    
    
    
    21,074Other Expenses
    
    
    778
    
    
    
    1,062
    
    
    
    1,248Total Expenses
    
    
    778
    
    
    
    1,062
    
    
    
    1,248Minority Interest: Distributions on Company
Mandatorily Redeemable Preferred Securities of
Subsidiary Trust
    
    
    
    
    
    
    
    
    
    
    2,749Income, Before Income Taxes and Equity in Earnings of
Unconsolidated Subsidiaries
    
    
    60,570
    
    
    
    26,742
    
    
    
    17,077Income Tax Benefit
    
    
    (272
    )
    
    
    (372
    )
    
    
    (1,399
    )Income, Before Equity in Earnings of Unconsolidated
Subsidiaries
    
    
    60,842
    
    
    
    27,114
    
    
    
    18,476Equity in Earnings of Unconsolidated Subsidiaries
    
    
    1,345
    
    
    
    6,639
    
    
    
    14,335Net Income
    
    $
    62,187
    
    
    $
    33,753
    
    
    $
    32,811
  (a)
    
    This item has been eliminated in the Companys Consolidated Financial
Statements. See Notes to Consolidated
Financial Statements included in Item 8, pages 42-64. S-3




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##### Table of Contents



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 31,2003 (Restated)
    
    2002 (Restated)
    
    2001 (Restated)Cash Flows From Operating Activities:Net Income
    
    $
    62,187
    
    
    $
    33,753
    
    
    $
    32,811Adjustments to Reconcile Net Income to NetCash Provided (Used) by Operating Activities:Equity in Earnings of Unconsolidated Subsidiaries
    
    
    (1,345
    )
    
    
    (6,639
    )
    
    
    (14,335
    )Change in Other Liabilities
    
    
    (188
    )
    
    
    39
    
    
    
    (611
    )Change in Other Assets
    
    
    
    
    
    
    
    
    
    
    3Change in Income Taxes Payable
    
    
    35
    
    
    
    1,936
    
    
    
    (20,911
    )Tax Benefit from Exercise of Employee Stock Options
    
    
    889
    
    
    
    1,251
    
    
    
    25,799Net Cash Provided by Operating Activities
    
    
    61,578
    
    
    
    30,340
    
    
    
    22,756Cash Flows Used by Investing Activities:Net Transfers to Subsidiaries (a)
    
    
    (65,794
    )
    
    
    (34,367
    )
    
    
    (119,679
    )Net Cash Used by Investing Activities
    
    
    (65,794
    )
    
    
    (34,367
    )
    
    
    (119,679
    )Cash Flows From Financing Activities:Net Proceeds From Public Offering of Common Stock
    
    
    
    
    
    
    
    
    
    
    114,518Repayments on Loans Payable
    
    
    
    
    
    
    
    
    
    
    (22,000
    )Proceeds from Exercise of Employee Stock Options
    
    
    2,057
    
    
    
    864
    
    
    
    3,041Proceeds from Collection of Notes Receivable
    
    
    2,028
    
    
    
    983
    
    
    
    1,072Proceeds from Shares Issued Pursuant to Stock Purchase Plans
    
    
    432
    
    
    
    4,327
    
    
    
    46Cost of Common Stock Repurchased
    
    
    (300
    )
    
    
    (2,023
    )
    
    
    Net Cash Provided by Financing Activities
    
    
    4,217
    
    
    
    4,151
    
    
    
    96,677Net Increase (Decrease) in Cash and Equivalents
    
    
    1
    
    
    
    124
    
    
    
    (246
    )Cash and Cash Equivalents at Beginning of Year
    
    
    124
    
    
    
    
    
    
    
    246Cash and Cash Equivalents at End of Year
    
    $
    125
    
    
    $
    124
    
    
    $
    Cash Dividends Received From Unconsolidated Subsidiaries
    
    $
    61,348
    
    
    $
    27,804
    
    
    $
    21,074Non-Cash Transactions:Issuance of Shares Pursuant to Employee Stock Purchase Plan
in exchange
for Notes Receivable
    
    $
    1,065
    
    
    $
    4,017
    
    
    $
    2,158
  (a)
    
    This item has been eliminated in the Companys Consolidated Financial
Statements. See Notes to Consolidated
Financial Statements included in Item 8, pages 42-64. S-4




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##### Table of Contents



Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule III  Supplementary Insurance Information
As of and For the Year Ended December 31, 2003, 2002 and 2001
(In Thousands) COLUMN A
    
    COLUMN B
    
    COLUMN C
    
    COLUMN D
    
    COLUMN E
    
    COLUMN FFuture PolicyBenefits,
    
    
    
    
    
    Other PolicyDeferred Policy
    
    Losses, Claims
    
    
    
    
    
    Claims andAcquisition
    
    and Loss
    
    Unearned
    
    Benefits
    
    PremiumSegment
    
    Costs
    
    Expenses
    
    Premiums
    
    Payable
    
    Revenue2003 (Restated):Commercial Lines
    
    $
    
    
    
    $
    477,483
    
    
    $
    309,596
    
    
    
    
    
    
    $
    431,535Specialty Lines
    
    
    
    
    
    
    136,000
    
    
    
    71,743
    
    
    
    
    
    
    
    108,809Personal Lines
    
    
    
    
    
    
    13,603
    
    
    
    41,250
    
    
    
    
    
    
    
    34,174Corporate
    
    
    56,288
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    56,288
    
    
    $
    627,086
    
    
    $
    422,589
    
    
    
    
    
    
    $
    574,5182002 (Restated):Commercial Lines
    
    $
    
    
    
    $
    337,791
    
    
    $
    214,021
    
    
    
    
    
    
    $
    297,635Specialty Lines
    
    
    
    
    
    
    96,837
    
    
    
    55,251
    
    
    
    
    
    
    
    85,030Personal Lines
    
    
    
    
    
    
    10,920
    
    
    
    36,821
    
    
    
    
    
    
    
    35,057Corporate
    
    
    61,272
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    61,272
    
    
    $
    445,548
    
    
    $
    306,093
    
    
    
    
    
    
    $
    417,7222001 (Restated):Commercial Lines
    
    $
    
    
    
    $
    212,134
    
    
    $
    124,522
    
    
    
    
    
    
    $
    192,099Specialty Lines
    
    
    
    
    
    
    82,735
    
    
    
    39,725
    
    
    
    
    
    
    
    68,956Personal Lines
    
    
    
    
    
    
    7,864
    
    
    
    33,592
    
    
    
    
    
    
    
    38,502Corporate
    
    
    41,526
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    41,526
    
    
    $
    302,733
    
    
    $
    197,839
    
    
    
    
    
    
    $
    299,557
   [Continued from above table, first column(s) repeated] COLUMN A
    
    COLUMN G
    
    COLUMN H
    
    COLUMN I
    
    COLUMN J
    
    COLUMN KBenefits,
    
    Amortization ofClaims, Losses,
    
    Deferred PolicyNet Investment
    
    and Settlement
    
    Acquisition
    
    Other Operating
    
    PremiumsSegment
    
    Income
    
    Expenses
    
    Costs
    
    Expenses
    
    Written2003 (Restated):Commercial Lines
    
    $
    
    
    
    $
    273,487
    
    
    $
    
    
    
    $
    
    
    
    $
    463,853Specialty Lines
    
    
    
    
    
    
    65,075
    
    
    
    
    
    
    
    
    
    
    
    107,911Personal Lines
    
    
    
    
    
    
    20,615
    
    
    
    
    
    
    
    
    
    
    
    30,536Corporate
    
    
    38,806
    
    
    
    
    
    
    
    109,888
    
    
    
    53,024
    
    
    
    Total
    
    $
    38,806
    
    
    $
    359,177
    
    
    $
    109,888
    
    
    $
    53,024
    
    
    $
    602,3002002 (Restated):Commercial Lines
    
    $
    
    
    
    $
    202,604
    
    
    $
    
    
    
    $
    
    
    
    $
    380,991Specialty Lines
    
    
    
    
    
    
    43,310
    
    
    
    
    
    
    
    
    
    
    
    101,623Personal Lines
    
    
    
    
    
    
    21,519
    
    
    
    
    
    
    
    
    
    
    
    37,093Corporate
    
    
    37,516
    
    
    
    
    
    
    
    108,097
    
    
    
    21,821
    
    
    
    Total
    
    $
    37,516
    
    
    $
    267,433
    
    
    $
    108,097
    
    
    $
    21,821
    
    
    $
    519,7072001 (Restated):Commercial Lines
    
    $
    
    
    
    $
    117,429
    
    
    $
    
    
    
    $
    
    
    
    $
    225,964Specialty Lines
    
    
    
    
    
    
    42,840
    
    
    
    
    
    
    
    
    
    
    
    70,572Personal Lines
    
    
    
    
    
    
    19,386
    
    
    
    
    
    
    
    
    
    
    
    40,745Corporate
    
    
    32,426
    
    
    
    
    
    
    
    80,239
    
    
    
    16,781
    
    
    
    Total
    
    $
    32,426
    
    
    $
    179,655
    
    
    $
    80,239
    
    
    $
    16,781
    
    
    $
    337,281
 S-5




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##### Table of Contents



Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule IV  Reinsurance
Earned Premiums
For the Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands) COLUMN A
    
    COLUMN B
    
    COLUMN C
    
    COLUMN D
    
    COLUMN E
    
    COLUMN FCeded to
    
    Assumed
    
    
    
    
    
    Percentage ofGross
    
    Other
    
    from Other
    
    
    
    
    
    AmountAmount
    
    Companies
    
    Companies
    
    Net Amount
    
    Assumed to Net2003 (Restated)Property and Casualty Insurance
    
    $
    784,445
    
    
    $
    214,980
    
    
    $
    5,053
    
    
    $
    574,518
    
    
    
    0.9
    %2002 (Restated)Property and Casualty Insurance
    
    $
    550,443
    
    
    $
    137,763
    
    
    $
    5,042
    
    
    $
    417,722
    
    
    
    1.2
    %2001 (Restated)Property and Casualty Insurance
    
    $
    409,814
    
    
    $
    121,506
    
    
    $
    11,249
    
    
    $
    299,557
    
    
    
    3.8
    %
 S-6




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##### Table of Contents



Philadelphia Consolidated Holding Corp. and Subsidiaries
Schedule VI  Supplemental Information Concerning Property  Casualty Insurance Operations
As of and For the Years Ended December 31, 2003, 2002 and 2001
(Dollars in Thousands) Reserve forUnpaidDeferred
    
    Claims andPolicy
    
    Claim
    
    Discount if
    
    
    
    
    
    Net
    
    NetAffiliation with
    
    Acquisition
    
    Adjustment
    
    any deducted
    
    Unearned
    
    Earned
    
    InvestmentRegistrant
    
    Costs
    
    Expenses
    
    in Column C
    
    Premiums
    
    Premiums
    
    IncomeCOLUMN A
    
    COLUMN B
    
    COLUMN C
    
    COLUMN D
    
    COLUMN E
    
    COLUMN F
    
    COLUMN GConsolidated
Property  Casualty
EntitiesDecember 31, 2003
(Restated)
    
    $
    56,288
    
    
    $
    627,086
    
    
    $
    0
    
    
    $
    422,589
    
    
    $
    574,517
    
    
    $
    38,806December 31, 2002 (Restated)
    
    $
    61,272
    
    
    $
    445,548
    
    
    $
    0
    
    
    $
    306,093
    
    
    $
    417,722
    
    
    $
    37,516December 31, 2001 (Restated)
    
    $
    41,526
    
    
    $
    302,733
    
    
    $
    0
    
    
    $
    197,839
    
    
    $
    299,557
    
    
    $
    32,426
   [Continued from above table, first column(s) repeated] Claims and Claims AdjustmentExpenses Incurred Related toPaid Claims(1)
    
    (2)
    
    Amortization of
    
    and ClaimAffiliation with
    
    Current
    
    Prior
    
    deferred policy
    
    Adjustment
    
    Net WrittenRegistrant
    
    Year
    
    Year
    
    acquisition costs
    
    Expenses
    
    PremiumsCOLUMN A
    
    COLUMN H
    
    COLUMN I
    
    COLUMN J
    
    COLUMN KConsolidated
Property  Casualty
EntitiesDecember 31, 2003
(Restated)
    
    $
    314,609
    
    
    $
    44,568
    
    
    $
    109,888
    
    
    $
    237,393
    
    
    $
    602,300December 31, 2002 (Restated)
    
    $
    239,834
    
    
    $
    27,599
    
    
    $
    108,097
    
    
    $
    157,856
    
    
    $
    519,707December 31, 2001 (Restated)
    
    $
    166,220
    
    
    $
    13,435
    
    
    $
    80,239
    
    
    $
    124,985
    
    
    $
    337,281
 S-7