##### Table of Contents



FORM 10-K
 UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the Fiscal Year Ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the Transition Period from  to
 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 100Bala Cynwyd, Pennsylvania
    
    19004(Address of principal executive offices)
    
    (Zip Code)
 (610) 617-7900
 Securities registered pursuant to Section 12(b) of the Act:
 Title of Each Class
    
    Name of Each Exchange on which RegisteredCommon Stock, no par value
    
    The NASDAQ Stock Market LLC
  þ o
  o þ
  þ o
  o
  þ o o
  o þ
   DOCUMENTS INCORPORATED BY REFERENCE
 (1)
    
    Portions of the definitive Proxy Statement for Registrants 2007 Annual Meeting of
Shareholders to be held April 27, 2007 are incorporated by reference in Part III.




---



TABLE OF CONTENTS  PART IItem 1. BUSINESSItem 1A. RISK FACTORSItem 1B. UNRESOLVED STAFF COMMENTSItem 2. PROPERTIESItem 3. LEGAL PROCEEDINGSItem 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIItem 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESItem 6. SELECTED FINANCIAL DATAItem 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSItem 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAItem 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREItem 9A. CONTROLS AND PROCEDURESItem 9B. OTHER INFORMATIONPART IIIItem 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEItem 11. EXECUTIVE COMPENSATIONItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSItem 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEItem 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVItem 15.  EXHIBITS AND FINANCIAL STATEMENTS SCHEDULESSIGNATURESJAMES J. MAGUIRE, JR. 2006 GRANT OF STOCK APPRECIATION RIGHTSSEAN S. SWEENEY 2006 GRANT OF STOCK APPRECIATION RIGHTSCRAIG P. KELLER 2006 GRANT OF STOCK APPRECIATION RIGHTSCHRISTOPHER J. MAGUIRE 2006 GRANT OF STOCK APPRECIATION RIGHTSEXCESS CATASTROPHE REINSURANCE CONTRACT EFFECTIVE JUNE 1, 2006LIST OF SUBSIDIARIES OF THE REGISTRANTCONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FORMCERTIFICATION OF THE COMPANY'S CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302CERTIFICATION OF  THE COMPANY'S CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906CERTIFICATION OF THE COMPANY'S CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906    Table of Contents  
  
     
    
    Adhering to an underwriting philosophy aimed at consistently generating
underwriting profits through sound risk selection and pricing discipline.
    
    Distributing products through a mixed marketing platform, which includes
direct policyholder prospecting, an extensive network of independent producers, a subset of
this network, known as preferred agents, with whom the Company has established special
distribution arrangements, wholesalers and the internet.
    
    Seeking to create value-added coverage and service features not found in
typical property and casualty policies that the Company believes differentiates and
enhances the marketability and appeal of its products relative to its competitors.
      2




---



##### Table of Contents




    
    The Commercial Lines Underwriting Group, which has underwriting responsibility for
the commercial multi-peril package, commercial automobile, specialty property and inland
marine, and antique/collector car insurance products;
    
    The Specialty Lines Underwriting Group, which has underwriting responsibility for the
professional and management liability insurance products; and
    
    The Personal Lines Underwriting Group, which has underwriting responsibility for
personal property insurance products for the homeowners and manufactured housing market in
Florida, and the National Flood Insurance Program for both personal and commercial
policyholders.
  For the Years Ended December 31,2006
    
    
    2005
    
    
    2004Dollars
    
    
    Percentage
    
    
    Dollars
    
    
    Percentage
    
    
    Dollars
    
    
    Percentage(dollars in thousands)Commercial Lines
    
    $
    1,169,468
    
    
    
    78.3
    %
    
    $
    960,344
    
    
    
    75.9
    %
    
    $
    874,018
    
    
    
    74.6
    %Specialty Lines
    
    
    227,567
    
    
    
    15.2
    
    
    
    205,306
    
    
    
    16.2
    
    
    
    184,419
    
    
    
    15.7Personal Lines
    
    
    96,213
    
    
    
    6.5
    
    
    
    99,265
    
    
    
    7.9
    
    
    
    112,880
    
    
    
    9.7Total
    
    $
    1,493,248
    
    
    
    100.0
    %
    
    $
    1,264,915
    
    
    
    100.0
    %
    
    $
    1,171,317
    
    
    
    100.0
    %
 3




---



##### Table of Contents



Commercial Lines:
 Commercial Package:
 
    
    non-profit organizations;
    
    social service agencies;
    
    health and fitness clubs and studios;
    
    homeowners and condominium associations;
    
    private, vocational and specialty schools;
    
    religious organizations;
    
    day care facilities;
    
    mental health facilities;
    
    amateur and professional sports associations and teams;
    
    entertainment parks/centers;
    
    bowling centers;
    
    golf and country clubs;
    
    public entity;
    
    retail shopping centers, business parks and medical facilities;
    
    hotels and motels; and
    
    campground and recreational vehicle park operators.
  Commercial Automobile and Commercial Excess:
 
    
    rental car companies;
    
    leasing companies;
    
    banks; and
    
    credit unions.
 Specialty Property & Inland Marine
 
    
    nursing homes;
    
    hospitals; and
    
    commercial real estate developers.
 Antique/Collector Car Program:
 Specialty Lines:
   
    
    accountants; and
 4




---



##### Table of Contents




    
    miscellaneous professional (preferred classes include among others: computer technology, management and
marketing consultants, claims adjusters, and mortgage brokers).
  
    
    non-profit organizations; and
    
    private companies.
 Personal Lines
   
    
    single family homes, primarily built after 1995;
    
    mobile homes, primarily built after 1995;
    
    condominiums; and
    
    rental dwellings.
   (Dollars in thousands)State
    
    Direct Earned Premiums
    
    
    Percent of TotalFlorida
    
    $
    198,925
    
    
    
    14.6
    %California
    
    
    171,007
    
    
    
    12.6New York
    
    
    145,289
    
    
    
    10.7Pennsylvania
    
    
    74,986
    
    
    
    5.5Texas
    
    
    74,915
    
    
    
    5.5Massachusetts
    
    
    59,266
    
    
    
    4.4New Jersey
    
    
    58,918
    
    
    
    4.3Illinois
    
    
    39,903
    
    
    
    2.9Ohio
    
    
    38,768
    
    
    
    2.8Michigan
    
    
    28,252
    
    
    
    2.1Minnesota
    
    
    27,802
    
    
    
    2.0Missouri
    
    
    27,492
    
    
    
    2.0Other
    
    
    415,534
    
    
    
    30.6Total Direct Earned Premiums
    
    $
    1,361,057
    
    
    
    100.0
    %
  5




---



##### Table of Contents



6




---



##### Table of Contents



7




---



##### Table of Contents



UnsecuredReinsuranceReinsurer
    
    Receivables
    
    
    % of Total
    
    
    A.M. Best RatingLiberty Mutual Insurance Company
    
    $
    34,432
    
    
    
    15.4
    %
    
    
    AGeneral Reinsurance Corporation
    
    
    30,997
    
    
    
    13.8
    %
    
    
    A++National Flood Insurance Program
    
    
    27,919
    
    
    
    12.5
    %
    
    Not Rated-Voluntary PoolACE Property & Casualty Insurance Company
    
    
    25,097
    
    
    
    11.2
    %
    
    
    A+Munich Reinsurance America, Inc.
    
    
    21,123
    
    
    
    9.4
    %
    
    
    AConverium Reinsurance (NA) Inc.
    
    
    17,179
    
    
    
    7.7
    %
    
    
    B+
    (2)Swiss Reinsurance America Corporation
    
    
    15,935
    
    
    
    7.1
    %
    
    
    A+Everest Reinsurance Company
    
    
    14,328
    
    
    
    6.4
    %
    
    
    A+Employers Reinsurance Corporation
    
    
    12,478
    
    
    
    5.6
    %
    
    
    ACUMIS Insurance Society Inc.
    
    
    5,642
    
    
    
    2.5
    %
    
    
    AAll Other Reinsurers
    
    
    18,776
    
    
    
    8.4
    %
    
    
    Total Unsecured Reinsurance Receivables
    
    $
    223,906
    (1)
    
    
    100.0
    %
 
 (1)
    
    This amount differs by $48.9 million from the reinsurance receivables of $272.8 million as
reported in the consolidated financial statements as of December 31, 2006 due to the
collateral held by the Company from the reinsurers reflected in this table.(2)
    
    On October 17, 2006, Converium AG (Switzerland) announced that it had signed a definitive
agreement to sell Converium Reinsurance (NA) Inc. to National Indemnity Insurance Company, a
subsidiary of Berkshire Hathaway, that is rated A++ (Superior) by A.M. Best Company. On
December 14, 2006, Converium AG (Switzerland) announced the closing of this sale.     8




---



##### Table of Contents



9




---



##### Table of Contents



As of and For the Years Ended December 31,(In Thousands)
    
    2006
    
    
    2005
    
    
    2004Unpaid loss and loss adjustment expenses at beginning of year
    
    $
    1,245,763
    
    
    $
    996,667
    
    
    $
    627,086Less: reinsurance receivables
    
    
    304,768
    
    
    
    324,948
    
    
    
    145,591Net unpaid loss and loss adjustment expenses at beginning of year
    
    
    940,995
    
    
    
    671,719
    
    
    
    481,495Provision for losses and loss adjustment expenses for current year claims
    
    
    559,647
    
    
    
    533,906
    
    
    
    440,989Increase (Decrease) in estimated ultimate losses and loss adjustment
expenses for prior year claims
    
    
    (91,435
    )
    
    
    (29,900
    )
    
    
    35,126Total incurred losses and loss adjustment expenses
    
    
    468,212
    
    
    
    504,006
    
    
    
    476,115Loss and loss adjustment expense payments for claims attributable to:Current year
    
    
    118,845
    
    
    
    110,496
    
    
    
    107,129Prior years (1)(2)
    
    
    194,933
    
    
    
    124,234
    
    
    
    178,762Total payments
    
    
    313,778
    
    
    
    234,730
    
    
    
    285,891Net unpaid loss and loss adjustment expenses at end of year
    
    
    1,095,429
    
    
    
    940,995
    
    
    
    671,719Plus: reinsurance receivables
    
    
    187,809
    
    
    
    304,768
    
    
    
    324,948Unpaid loss and loss adjustment expenses at end of year
    
    $
    1,283,238
    
    
    $
    1,245,763
    
    
    $
    996,667
 
 (1)
    
    During the year ended December 31, 2005, net loss and loss adjustment expense payments for
claims attributable to prior years are lower by $64.3 million than they otherwise would have
been due to the Companys commutation of its 2003 Whole Account Net Quota Share Reinsurance
Agreement (See Note 10 to the Companys Consolidated Financial Statements included with this
Form 10-K).(2)
    
    During the year ended December 31, 2006, net loss and loss adjustment expense payments for
claims attributable to prior years are lower by $31.9 million than they otherwise would have
been due to the Companys commutation of its 2004 Whole Account Net Quota Share Reinsurance
Agreement (See Note 10 to the Companys Consolidated Financial Statements included with this
Form 10-K).  (In Millions)
    
    Net Basis Loss and Loss Adjustment Expensesincrease (decrease)Professional/Management
    
    
    Rental/LeasingCommercial
    
    
    Liability
    
    
    AutoAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Coverages
    
    
    Other
    
    
    Total2005
    
    $
    (52.0
    )
    
    $
    (5.0
    )
    
    $
    (1.0
    )
    
    $
    (1.2
    )
    
    $
    (59.2
    )2004
    
    $
    (11.6
    )
    
    $
    1.9
    
    
    $
    (2.8
    )
    
    $
    (0.1
    )
    
    $
    (12.6
    )2003
    
    $
    (0.3
    )
    
    $
    (6.8
    )
    
    $
    (3.7
    )
    
    $
    (0.2
    )
    
    $
    (11.0
    )2002 & Prior
    
    $
    (1.0
    )
    
    $
    (1.6
    )
    
    $
    (6.3
    )
    
    $
    0.3
    
    
    $
    (8.6
    )Total
    
    $
    (64.9
    )
    
    $
    (11.5
    )
    
    $
    (13.8
    )
    
    $
    (1.2
    )
    
    $
    (91.4
    )
   10




---



##### Table of Contents



(In Millions)
    
    Net Basis Loss and Loss Adjustment Expensesincrease (decrease)Professional/ManagementCommercial
    
    
    Liability
    
    
    Rental/LeasingAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Auto Coverages
    
    
    Other
    
    
    Total2004
    
    $
    (12.7
    )
    
    $
    (7.6
    )
    
    $
    (4.3
    )
    
    $
    0.4
    
    
    $
    (24.2
    )2003
    
    $
    3.5
    
    
    $
    (2.4
    )
    
    $
    (0.5
    )
    
    $
    1.0
    
    
    $
    1.62002
    
    $
    (0.6
    )
    
    $
    (2.0
    )
    
    $
    (3.4
    )
    
    $
    (1.0
    )
    
    $
    (7.0
    )2001 & Prior
    
    $
    1.9
    
    
    $
    (0.7
    )
    
    $
    (0.9
    )
    
    $
    (0.6
    )
    
    $
    (0.3
    )Total
    
    $
    (7.9
    )
    
    $
    (12.7
    )
    
    $
    (9.1
    )
    
    $
    (0.2
    )
    
    $
    (29.9
    )
     
    
    The increase for accident years 1997 through 2002 is principally attributable to case
reserve development above expectations primarily across various professional liability
products in the specialty lines segment and general liability and commercial automobile
coverages in the commercial lines segment. The decrease for accident year 2003 is
principally attributable to better than expected claim frequency, primarily for general
liability and commercial automobile coverages in the commercial lines segment.
  11




---



##### Table of Contents



AS OF AND FOR THE YEARS ENDED DECEMBER 31,(Dollars in Thousands)1996
    
    1997
    
    1998
    
    1999
    
    2000
    
    2001
    
    2002
    
    2003
    
    2004
    
    2005
    
    2006Unpaid Loss and
Loss Adjustment
Expenses, As Stated
    
    $
    85,723
    
    
    $
    108,928
    
    
    $
    136,237
    
    
    $
    161,353
    
    
    $
    195,464
    
    
    $
    250,134
    
    
    $
    359,711
    
    
    $
    481,496
    
    
    $
    671,719
    
    
    $
    940,995
    
    
    $
    1,095,429Cumulative Paid as
of:1 year later
    
    
    22,292
    
    
    
    26,870
    
    
    
    43,769
    
    
    
    60,922
    
    
    
    70,757
    
    
    
    99,325
    
    
    
    167,489
    
    
    
    178,762
    
    
    
    124,234
    
    
    
    194,9332 years later
    
    
    38,848
    
    
    
    56,488
    
    
    
    84,048
    
    
    
    109,092
    
    
    
    131,649
    
    
    
    211,851
    
    
    
    291,325
    
    
    
    258,186
    
    
    
    251,8253 years later
    
    
    52,108
    
    
    
    80,206
    
    
    
    115,900
    
    
    
    144,435
    
    
    
    213,286
    
    
    
    277,783
    
    
    
    356,743
    
    
    
    333,9914 years later
    
    
    63,738
    
    
    
    95,047
    
    
    
    131,062
    
    
    
    201,779
    
    
    
    247,298
    
    
    
    314,042
    
    
    
    394,7635 years later
    
    
    69,116
    
    
    
    99,755
    
    
    
    151,753
    
    
    
    217,677
    
    
    
    267,966
    
    
    
    328,0576 years later
    
    
    70,779
    
    
    
    106,915
    
    
    
    158,158
    
    
    
    225,737
    
    
    
    272,6097 years later
    
    
    73,939
    
    
    
    110,194
    
    
    
    160,499
    
    
    
    227,2428 years later
    
    
    74,469
    
    
    
    111,102
    
    
    
    161,0169 years later
    
    
    75,156
    
    
    
    111,22610 years later
    
    
    75,181Unpaid Loss and
Loss Adjustment
Expenses
re-estimated as of
End of Year:1 year later
    
    
    84,007
    
    
    
    105,758
    
    
    
    135,983
    
    
    
    163,896
    
    
    
    208,899
    
    
    
    277,733
    
    
    
    404,279
    
    
    
    516,622
    
    
    
    641,819
    
    
    
    849,5602 years later
    
    
    81,503
    
    
    
    103,513
    
    
    
    138,245
    
    
    
    177,782
    
    
    
    232,582
    
    
    
    334,802
    
    
    
    473,680
    
    
    
    510,916
    
    
    
    609,6153 years later
    
    
    76,348
    
    
    
    104,712
    
    
    
    146,679
    
    
    
    196,735
    
    
    
    274,166
    
    
    
    361,052
    
    
    
    466,413
    
    
    
    491,2664 years later
    
    
    73,992
    
    
    
    109,061
    
    
    
    151,077
    
    
    
    228,082
    
    
    
    283,619
    
    
    
    360,791
    
    
    
    457,8025 years later
    
    
    75,672
    
    
    
    107,796
    
    
    
    163,657
    
    
    
    230,391
    
    
    
    285,563
    
    
    
    354,9446 years later
    
    
    74,645
    
    
    
    110,845
    
    
    
    164,272
    
    
    
    233,206
    
    
    
    283,0177 years later
    
    
    75,272
    
    
    
    111,582
    
    
    
    163,416
    
    
    
    232,4558 years later
    
    
    74,982
    
    
    
    111,827
    
    
    
    162,6289 years later
    
    
    75,221
    
    
    
    111,95010 years later
    
    
    75,546Cumulative
Redundancy
(Deficiency):Dollars
    
    $
    10,177
    
    
    $
    (3,022
    )
    
    $
    (26,391
    )
    
    $
    (71,102
    )
    
    $
    (87,553
    )
    
    $
    (104,810
    )
    
    $
    (98,091
    )
    
    $
    (9,770
    )
    
    $
    62,104
    
    
    $
    91,435Percentage
    
    
    11.9
    %
    
    
    (2.8
    )%
    
    
    (19.4
    )%
    
    
    (44.1
    )%
    
    
    (44.8
    )%
    
    
    (41.9
    )%
    
    
    (27.3
    %)
    
    
    (2.0
    %)
    
    
    9.2
    %
    
    
    9.7
    %
 
 (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 $187,809,
$304,768, $324,948, $145,591, $85,837, $52,599, $42,030, $26,710, $16,120, $13,502 and
$10,919, as of December 31, 2006, 2005, 2004, 2003, 2002, 2001, 2000, 1999, 1998, 1997, and
1996, respectively.(2)
    
    Unpaid loss and loss adjustment expenses for 1998, as stated, have been adjusted to include
$1,207 unpaid loss and loss adjustment expenses for LASIC 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




---



##### Table of Contents



Statutory Combined Ratio:
   For the Years Ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002Loss Ratio
    
    
    39.8
    %
    
    
    51.8
    %
    
    
    61.5
    %
    
    
    63.1
    %
    
    
    63.5
    %Expense Ratio
    
    
    28.5
    %
    
    
    26.3
    %
    
    
    27.2
    %
    
    
    27.2
    %
    
    
    28.0
    %Combined Ratio
    
    
    68.3
    %
    
    
    78.1
    %
    
    
    88.7
    %
    
    
    90.3
    %
    
    
    91.5
    %Industry Statutory
Combined Ratio,
after
Policyholders
Dividends (1)
    
    
    93.3
    %
    
    
    100.8
    %
    
    
    98.5
    %
    
    
    100.2
    %
    
    
    107.3
    %
 
 (1)
    
    Source: A.M. Best Company Review/Preview January 2007. 2006 industry data is estimated. Premium-to-Surplus Ratio:
   As of and For the Years Ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(Dollars in Thousands)Net Written Premiums
    
    $
    1,283,170
    
    
    $
    1,107,460
    
    
    $
    919,152
    
    
    $
    601,253
    
    
    $
    523,962Surplus as Regards Policyholders
    
    $
    1,007,546
    
    
    $
    691,038
    
    
    $
    503,657
    
    
    $
    415,900
    
    
    $
    312,626Premium to Surplus Ratio
    
    
    1.3 to 1.0
    
    
    
    1.6 to 1.0
    
    
    
    1.8 to 1.0
    
    
    
    1.5 to 1.0
    
    
    
    1.7 to 1.0
   
    
    Maintaining an appropriate level of liquidity to satisfy the cash requirements of
current operating and longer term obligations;
    
    Adjusting investment risk to affect or complement insurance risk based upon total corporate risk tolerance; and
    
    Meeting insurance regulatory requirements with respect to investments under appropriate insurance laws.
   13




---



##### Table of Contents



Estimated
    
    
    
    
    
    
    Percent ofMarket
    
    
    Carrying
    
    
    CarryingAmortized Cost
    
    
    Value
    
    
    Value
    
    
    Value(Dollars in Thousands)Fixed Maturities:U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies
    
    $
    20,156
    
    
    $
    19,924
    
    
    $
    19,924
    
    
    
    0.8
    %Obligations of States and Political Subdivisions
    
    
    1,050,279
    
    
    
    1,052,113
    
    
    
    1,052,113
    
    
    
    43.2Corporate and Bank Debt Securities
    
    
    145,114
    
    
    
    142,895
    
    
    
    142,895
    
    
    
    5.9Asset Backed Securities
    
    
    202,102
    
    
    
    202,646
    
    
    
    202,646
    
    
    
    8.3Mortgage Pass-Through Securities
    
    
    425,518
    
    
    
    420,785
    
    
    
    420,785
    
    
    
    17.3Collateralized Mortgage Obligations
    
    
    293,062
    
    
    
    291,246
    
    
    
    291,246
    
    
    
    12.0Total Fixed Maturities
    
    
    2,136,231
    
    
    
    2,129,609
    
    
    
    2,129,609
    
    
    
    87.5
    %Equity Securities
    
    
    259,184
    
    
    
    304,033
    
    
    
    304,033
    
    
    
    12.5Total Investments
    
    $
    2,395,415
    
    
    $
    2,433,642
    
    
    $
    2,433,642
    
    
    
    100.0
    %
   Estimated MarketAmortized Cost
    
    
    Value(Dollars in Thousands)Due in one year or less
    
    $
    48,685
    
    
    $
    48,752Due after one year through five years
    
    
    218,839
    
    
    
    215,599Due after five years through ten years
    
    
    372,653
    
    
    
    371,248Due after ten years
    
    
    575,371
    
    
    
    579,333Asset Backed, Mortgage Pass-Through and Collateralized Mortgage Obligation Securities
    
    
    920,683
    
    
    
    914,677Total
    
    $
    2,136,231
    
    
    $
    2,129,609
   General:
 
    
    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
 14




---



##### Table of Contents




    
    potential assessments for the provision of funds necessary for the settlement of covered
claims under certain insurance policies provided by: impaired, insolvent or failed insurance
companies; and state insurance facilities.
  Regulation of Insurance Holding Companies:
    Dividend Restrictions:
 The National Association of Insurance Commissioners:
 15




---



##### Table of Contents



Capital and Surplus Requirements:
 Risk-Based Capital:
 Insurance Guaranty Funds:
 Shared Markets:
 Mold Contamination:
 Sarbanes-Oxley Act of 2002:
 Certain Legislative Initiatives and Developments:
 §
    
    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;
 16




---



##### Table of Contents



§
    
    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; and§
    
    Florida legislation enacted in January 2007 which, among other things, included the
following major changes with regard to the Florida Hurricane Catastrophe Fund (the FHCF)
and Citizens Property Insurance Company (Citizens).
 §
    
    FHCF: The new law allows participating insurers to select options to expand their
FHCF coverage beyond the current mandatory levels for the 2007, 2008 and 2009
contract years. Insurers may now purchase additional reinsurance coverage below the
currently available approximate $6 billion industry retention by selecting an
industry retention level of $3 billion, $4 billion or $5 billion. Coverage based on
a $3 billion retention is priced at 85% of the coverage limit provided
(rate-on-line), a $4 billion retention at an 80% rate-on-line and a $5 billion
retention at a 75% rate-on-line. Each participating insurers share of the industry
retention will be determined by its share of FHCF reimbursement premiums.
Additionally, insurers may now purchase additional reinsurance coverage above the
currently available approximate $16 billion capacity by selecting one or more of
twelve $1 billion layers of coverage. The pricing for the 12 optional coverage
layers above the FHCF mandatory coverage will vary, but should be around a 2% or 3%
rate-on-line. Also, the legislation provides that the State Board of Administration
may make available an additional $4 billion of capacity. The legislation requires
every residential property insurer to make a rate filing with the FOIR which reflects
the savings or reduction in loss exposure to the insurer due to the expanded FHCF
coverage. Such reduced rates shall be applied to policies issued on or after June 1,
2007.§
    
    Citizens Property Insurance Company (Citizens): The new legislation enacted
many changes to the manner in which Citizens (the facility created by the State of
Florida to provide insurance to property owners unable to obtain coverage in the
private insurance market) conducts business. Citizens is no longer required to charge
rates sufficient to purchase reinsurance to cover specified levels of probable
maximum loss or to establish rates that are non-competitive with the private sector.
The Citizens rate increase that took effect on January 1, 2007 was rescinded and
further rate changes are prohibited during 2007. The legislation also provides that
if a new applicant to Citizens is offered coverage from an insurer at the insurers
approved rate, then that policyholder is not eligible for a Citizens policy, unless
the insurers premium is more than 25% greater than the premium for comparable
coverage provided by Citizens.
 §
    
    The Governor of Florida issuing an emergency rule in January 2007 that impacted the
ability of insurers to cancel or non-renew personal property and casualty policies or to
file for increased rates until the insurer submits a rate filing reflecting the reinsurance
savings from the expanded FHCF coverage noted above.
  §
    
    The federal Terrorism Risk Insurance Act of 2002, as amended by the Terrorism Insurance
Extension Act of 2005 (collectively the Act) established a temporary federal program that
provides for a system of shared public and private compensation for insured commercial
property and casualty losses resulting from 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 through December 31, 2006, and 85% of covered
losses between January 1, 2007 and December 31, 2007, up to $100 billion. However, if a
terrorist attack occurs after March 31, 2006, the government will provide funding only if
aggregate industry losses between January 1, 2006 and December 31, 2006 exceed $50 million,
or if such losses between January 1, 2007 and December 31, 2007 exceed $100 million. 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 required 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
 17




---



##### Table of Contents



enactment and runs through December 31, 2007. 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(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.
        
  If our insurance company subsidiaries are unable to pay dividends or make loans to us due to
government regulations that apply to insurance companies or for any other reason, we may not be
able to continue our normal business operations.
  
    
    Philadelphia Indemnity Insurance Company;
 18




---



##### Table of Contents




    
    Philadelphia Insurance Company;
    
    Maguire Insurance Agency, Inc.;
    
    PCHC Investment Corp., a Delaware investment corporation;
    
    Liberty American Insurance Group, Inc., an insurance holding company;
    
    Liberty American Select Insurance Company;
    
    Liberty American Insurance Company;
    
    Liberty American Insurance Services, Inc.; and
    
    Liberty American Premium Finance Company.
   If A.M. Best downgrades the ratings of our Philadelphia Indemnity Insurance Company and
Philadelphia Insurance Company subsidiaries, we will not be able to compete as effectively with our
competitors and our ability to sell insurance policies could decline, reducing our sales and
earnings.
  
    
    we would not be able to compete as effectively with our competitors; and
    
    our ability to sell insurance policies could decline.
  If our reserves for losses and expenses related to adjustment of losses are not adequate, we would
have to increase our reserves, which would result in reductions in net income and policyholders
surplus and could result in a downgrading of the ratings of our insurance company subsidiaries.
  
    
    the amounts of claims settlements;
 19




---



##### Table of Contents




    
    the number and severity of catastrophes, such as hurricanes;
    
    legislative activity; and
    
    changes in inflation and economic conditions.
  If market conditions cause reinsurance to be more costly or unavailable, we may be required to bear
increased risks or reduce the level of our underwriting commitments.
  We cannot guarantee that our reinsurers will pay on a timely basis, if at all, and, as a result, we
could experience losses.
  Catastrophic events could result in catastrophe losses.
   We are subject to possible assessments from state insurance facilities and state guaranty funds.
   20




---



##### Table of Contents



Our results may fluctuate as a result of many factors, including cyclical changes in the insurance
industry.
  
    
    rising levels of actual costs that are not known by companies at the time they price their
products;
    
    volatile and unpredictable developments, including man-made, weather-related and other
natural catastrophes or terrorist attacks;
    
    changes in loss reserves resulting from the general claims and legal environments as
different types of claims arise and judicial interpretations relating to the scope of
insurers liability develop; and
    
    fluctuations in interest rates, inflationary pressures and other changes in the
investment environment, which affect returns on invested assets and may impact the ultimate
payout of losses.
  We face significant competitive pressures in our business that could cause demand for our products
to fall and adversely affect our profitability.
  Because we are heavily regulated by the states in which we operate, we may be limited in the way we
operate.
  
    
    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;
 21




---



##### Table of Contents




    
    restrictions on the types of terms that we can include in the insurance policies we offer;
    
    certain required methods of accounting;
    
    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 outcome of industry-wide investigations into finite risk reinsurance products and contingent
commission arrangements could adversely affect our business and results of operations.
     Because our investment portfolio is made up of primarily fixed income securities, our investment
income could suffer as a result of fluctuations in interest rates.
  22




---



##### Table of Contents



Provisions of the Pennsylvania business corporation law, our articles of incorporation and the
insurance laws of Pennsylvania, Florida and other states may discourage takeover attempts.
    We have a large shareholder whose interests may diverge from those of our other shareholders.
  
   
   
   
   23




---



##### Table of Contents



2006
    
    2005 (1)Quarter
    
    High
    
    Low
    
    High
    
    LowFirst
    
    
    36.810
    
    
    
    31.530
    
    
    
    26.700
    
    
    
    21.767Second
    
    
    34.260
    
    
    
    29.820
    
    
    
    29.277
    
    
    
    24.453Third
    
    
    40.090
    
    
    
    30.420
    
    
    
    28.967
    
    
    
    25.307Fourth
    
    
    45.990
    
    
    
    38.410
    
    
    
    34.133
    
    
    
    27.250
 
      (c) Total Number ofShares Purchased as
    
    (d) Approximate Dollar(a) Total Number
    
    
    
    
    
    Part of Publicly
    
    Value of Shares That Mayof Shares
    
    (b) Average Price
    
    Announced Plans or
    
    Yet Be Purchased UnderPeriod
    
    Purchased (1)
    
    Paid per Share
    
    Programs
    
    the Plans or Programs (2)October 1  October 31
    
    
    3,800
    
    
    $
    24.02
    
    
    
    
    $
    45,000,000November 1  November 30
    
    
    535
    
    
    $
    27.79
    
    
    
    
    $
    45,000,000December 1  December 31
    
    
    2,439
    
    
    $
    23.93
    
    
    
    
    $
    45,000,000
 
 (1)
    
    Such shares were originally issued under the Companys Employee Stock Purchase Plan and
Employees Stock Incentive and Performance Based Compensation Plan, and were subsequently
repurchased by the Company upon termination of various employees.(2)
    
    The Companys total stock purchase authorization, which was publicly announced in August
1998, amounts to $75.3 million, of which $30.3 million has been utilized. 24




---



##### Table of Contents



As of and For the Years Ended December 31,(In Thousands, Except Share and Per Share Data)2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002Operations and Comprehensive Income Statement Data:Gross Written Premiums
    
    $
    1,493,248
    
    
    $
    1,264,915
    
    
    $
    1,171,317
    
    
    $
    905,993
    
    
    $
    663,739Gross Earned Premiums
    
    
    1,365,358
    
    
    
    1,165,296
    
    
    
    1,062,057
    
    
    
    789,498
    
    
    
    555,485Net Written Premiums
    
    
    1,282,864
    
    
    
    1,110,771
    
    
    
    914,532
    
    
    
    602,300
    
    
    
    519,707Net Earned Premiums
    
    
    1,169,302
    
    
    
    976,647
    
    
    
    770,248
    
    
    
    574,518
    
    
    
    417,722Net Investment Income
    
    
    91,699
    
    
    
    63,709
    
    
    
    43,490
    
    
    
    38,806
    
    
    
    37,516Net Realized Investment Gain (Loss)
    
    
    (9,861
    )
    
    
    9,609
    
    
    
    761
    
    
    
    794
    
    
    
    (3,371
    )Other Income
    
    
    2,630
    
    
    
    1,464
    
    
    
    4,357
    
    
    
    5,519
    
    
    
    911Total Revenue
    
    
    1,253,770
    
    
    
    1,051,429
    
    
    
    818,856
    
    
    
    619,637
    
    
    
    452,778Net Loss and Loss Adjustment Expenses
    
    
    468,212
    
    
    
    504,006
    
    
    
    476,115
    
    
    
    359,177
    
    
    
    267,433Acquisition Costs and Other Underwriting Expenses
    
    
    338,267
    
    
    
    263,759
    
    
    
    214,369
    
    
    
    162,912
    
    
    
    129,918Other Operating Expenses
    
    
    12,637
    
    
    
    17,124
    
    
    
    9,439
    
    
    
    7,822
    
    
    
    6,372Goodwill Impairment Loss (1)
    
    
    
    
    
    
    25,724
    
    
    
    
    
    
    
    
    
    
    
    Total Losses and Expenses
    
    
    819,116
    
    
    
    810,613
    
    
    
    699,923
    
    
    
    529,911
    
    
    
    403,723Income Before Income Taxes
    
    
    434,654
    
    
    
    240,816
    
    
    
    118,933
    
    
    
    89,726
    
    
    
    49,055Total Income Tax Expense
    
    
    145,805
    
    
    
    84,128
    
    
    
    35,250
    
    
    
    27,539
    
    
    
    15,302Net Income
    
    $
    288,849
    
    
    $
    156,688
    
    
    $
    83,683
    
    
    $
    62,187
    
    
    $
    33,753Weighted-Average Common Shares Outstanding
    
    
    69,795,947
    
    
    
    68,551,572
    
    
    
    66,464,460
    
    
    
    65,726,364
    
    
    
    64,833,159Weighted-Average Share Equivalents Outstanding
    
    
    3,674,121
    
    
    
    4,533,807
    
    
    
    3,456,099
    
    
    
    2,254,800
    
    
    
    2,047,146Weighted-Average Shares and Share Equivalents Outstanding
    
    
    73,470,068
    
    
    
    73,085,379
    
    
    
    69,920,559
    
    
    
    67,981,164
    
    
    
    66,880,305Basic Earnings Per Share
    
    $
    4.14
    
    
    $
    2.29
    
    
    $
    1.26
    
    
    $
    0.95
    
    
    $
    0.52Diluted Earnings Per Share
    
    $
    3.93
    
    
    $
    2.14
    
    
    $
    1.20
    
    
    $
    0.91
    
    
    $
    0.50Cash Dividends Per Share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Year End Financial Position:Total Investments and Cash and Cash Equivalents
    
    $
    2,542,313
    
    
    $
    2,009,370
    
    
    $
    1,623,647
    
    
    $
    1,245,994
    
    
    $
    950,861Total Assets
    
    
    3,438,537
    
    
    
    2,927,826
    
    
    
    2,485,656
    
    
    
    1,870,941
    
    
    
    1,358,334Unpaid Loss and Loss Adjustment Expenses
    
    
    1,283,238
    
    
    
    1,245,763
    
    
    
    996,667
    
    
    
    627,086
    
    
    
    445,548Total Shareholders Equity
    
    
    1,167,267
    
    
    
    816,496
    
    
    
    644,157
    
    
    
    545,646
    
    
    
    477,823Common Shares Outstanding
    
    
    70,848,482
    
    
    
    69,266,016
    
    
    
    66,821,751
    
    
    
    66,022,656
    
    
    
    65,606,631Insurance Operating Ratios (Statutory Basis):Net Loss and Loss Adjustment Expenses to Net Earned Premiums
    
    
    39.8
    %
    
    
    51.8
    %
    
    
    61.6
    %
    
    
    63.1
    %
    
    
    63.5
    %Underwriting Expenses to Net Written Premiums
    
    
    28.5
    %
    
    
    26.3
    %
    
    
    27.1
    %
    
    
    27.2
    %
    
    
    28.0
    %Combined Ratio
    
    
    68.3
    %
    
    
    78.1
    %
    
    
    88.7
    %
    
    
    90.3
    %
    
    
    91.5
    %A.M. Best Rating (2)
    
    
    A+
    
    
    
    A+
    
    
    
    A+
    
    
    
    A+
    
    
    
    A+(Superior)
    
    (Superior)
    
    (Superior)
    
    (Superior)
    
    (Superior)
 
 (1)
    
    During the fourth quarter of 2005, the Company recorded a $25.7 million impairment charge
related to the write-down of goodwill arising from the acquisition of the Companys personal
lines segment. This loss, which was the same on a pre-tax and after-tax basis, was a result of
the Companys annual evaluation of the carrying value of goodwill. The write-down was
determined by comparing the fair value of the Companys personal lines segment and the implied
value of the goodwill with the carrying amounts on the balance sheet. The write-down resulted
from changes in business assumptions primarily due to the following: the unprecedented
hurricane activity and associated catastrophe losses experienced in 2004 and 2005; the
uncertainty of 2006 catastrophe reinsurance renewal rates; the decision to change the personal
lines segment business model to discontinue writing the mobile homeowners business and target
new construction homeowners business; and the disruption in the Florida marketplace.(2)
    
    As of September 30, 2004, the Companys four insurance subsidiaries were rated A+ (Superior)
by A.M. Best Company. Effective October 1, 2004, the Companys four insurance subsidiaries
entered into a new intercompany reinsurance pooling arrangement. Two of the insurance
subsidiaries, Philadelphia Indemnity Insurance Company and Philadelphia Insurance Company,
entered into an intercompany reinsurance pooling arrangement which included substantially all
the Companys commercial and specialty lines business. The Companys two other insurance
subsidiaries, Liberty American Select Insurance Company and Liberty American Insurance
Company, also entered into an intercompany reinsurance pooling arrangement which substantially
included all the Companys personal lines segment business. As a result of this arrangement,
A.M. Best
Company assigned an A- (Excellent) rating to these two companies. The rating of Philadelphia
Indemnity Insurance Company and Philadelphia Insurance Company remained at A+. 25




---



##### Table of Contents



GENERAL
 Overview
     Commercial
    
    Specialty
    
    Personal($s in millions)
    
    Lines
    
    Lines
    
    Lines
    
    Total2006 Gross Written Premium
    
    $
    1,169.4
    
    
    $
    227.6
    
    
    $
    96.2
    
    
    $
    1,493.22005 Gross Written Premium
    
    $
    960.3
    
    
    $
    205.3
    
    
    $
    99.3
    
    
    $
    1,264.9Percentage Increase (Decrease)
    
    
    21.8
    %
    
    
    10.9
    %
    
    
    (3.1
    )%
    
    
    18.0
    %
   26




---



##### Table of Contents



Commercial
    
    Specialty
    
    Personal
    
    WeightedLines
    
    Lines
    
    Lines
    
    Average2006 calendar year net loss and loss adjustment expense ratio
    
    
    35.6
    %
    
    
    62.9
    %
    
    
    52.2
    %
    
    
    40.0
    %2006 accident year net loss and loss adjustment expense ratio
    
    
    43.6
    %
    
    
    68.2
    %
    
    
    56.6
    %
    
    
    47.6
    %
   For the years ended December 31,(In millions)
    
    2006
    
    2005
    
    2004Total Revenue
    
    $
    1,253.8
    
    
    $
    1,051.4
    
    
    $
    818.9Total Losses and Expenses
    
    $
    819.1
    
    
    $
    810.6
    
    
    $
    699.9Net Income
    
    $
    288.8
    
    
    $
    156.7
    
    
    $
    83.7
  
    
    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 $3.3 million in
securities for which there is no readily available independent market price.
    
    Other than temporary impairmentsThe Company regularly performs impairment reviews with respect to its investments. For
investments other than interests in securitized assets, these reviews include identifying any
security whose fair value is below its cost and an analysis of securities meeting
predetermined impairment thresholds to determine whether such decline is other than
temporary. If the Company determines that it does not intend to hold a security to maturity
or determines a decline in value to be other than temporary, the cost basis of the security
is written down to its fair value with the amount of the write down included in earnings as a
realized investment loss in the period the impairment arose (See Investments). Gross
unrealized losses for investments excluding interests in securitized assets at December 31,
2006 were $11.4 million. The Companys impairment review also includes an impairment
evaluation for interests in securitized assets conducted in accordance with the guidance
provided by the Emerging Issues Task Force of the Financial Accounting Standards Board.
Gross unrealized losses for investments in securitized assets at December 31, 2006 were $9.3
million.There are certain risks and uncertainties inherent in the Companys impairment
methodology including, but not limited to, the financial condition of specific industry
sectors and the resultant effect on any underlying collateral values and changes in
accounting, tax and/or regulatory requirements which may have an effect on either, or both,
the investor and/or the issuer.
 
    
    Liability for Unpaid Loss and Loss Adjustment Expenses:
  27




---



##### Table of Contents



Gross Loss and Loss Adjustment Expense Reservesby Line of Business(In Thousands)
    
    As of December 31, 2006Case
    
    
    IBNR
    
    
    TotalCommercial Lines Segment:General Liability
    
    $
    198,091
    
    
    $
    321,743
    
    
    $
    519,834Auto
    
    
    71,340
    
    
    
    97,381
    
    
    
    168,721Property
    
    
    81,796
    
    
    
    24,893
    
    
    
    106,689Rental/Leasing  Supplemental Liability
    
    
    10,768
    
    
    
    11,185
    
    
    
    21,953Rental/Leasing  Other
    
    
    11,389
    
    
    
    27,096
    
    
    
    38,485Program Umbrella
    
    
    22,827
    
    
    
    14,303
    
    
    
    37,130Other
    
    
    5,863
    
    
    
    5,846
    
    
    
    11,709402,074
    
    
    
    502,447
    
    
    
    904,521Specialty Lines Segment:Professional Liability Errors & Omissions
    
    
    57,696
    
    
    
    127,043
    
    
    
    184,739Management Liability Directors & Officers
    
    
    46,739
    
    
    
    83,306
    
    
    
    130,045Professional Liability Excess
    
    
    18,042
    
    
    
    22,449
    
    
    
    40,491122,477
    
    
    
    232,798
    
    
    
    355,275Personal Lines Segment:Personal Lines
    
    
    6,074
    
    
    
    17,368
    
    
    
    23,4426,074
    
    
    
    17,368
    
    
    
    23,442Total
    
    $
    530,625
    
    
    $
    752,613
    
    
    $
    1,283,238
  
    
    Ultimate losses are determinable by extrapolation of claim emergence and settlement
patterns observed in the past (via loss development factor selection) that can
reasonably be expected to persist into the future.This assumption implies that historical claim reporting, handling, and settlement
patterns are predictive of future activity and can thus be utilized to forecast ultimate
liabilities on unpaid claims. Since the many factors that influence claim activity can
change over time and are often difficult to isolate or quantify, the rate at which claims
arose in the past and the costs to settle them may not always be representative of what
will occur in the future. Key objectives in developing estimates of ultimate losses are
to identify aberrations and systemic changes occurring within historical experience and
to adjust for them so that the future can be projected on a more reliable basis. Various
diagnostic tools are employed, (e.g., ratios of claims paid-to-claims incurred and
analyses of average claim costs by age of development), and close communication is
maintained among the Companys actuarial, claims and underwriting departments to
continually monitor and assess the validity of this assumption.
 28




---



##### Table of Contents



In general, this assumption is considered fully valid across the Companys lines of
business for older, more mature accident years. Most claims in these years have been
reported, fully adjusted and settled, and any remaining unpaid claims are not anticipated
to result in incurred loss activity at levels significant enough to cause material
deviation in ultimate losses as projected by generally accepted actuarial methods that
rely upon this assumption.Loss reserve indications from generally accepted actuarial methods that rely upon this
assumption are utilized where this assumption is considered fully valid. Where this
assumption is considered to have less than full validity, those indications receive
partial or no weight.
    
    Ultimate loss ratios (ultimate losses divided by earned premiums) in the current and
most recent accident years can be projected from ultimate loss ratios of prior years
after adjusting for factors such as trends and pricing changes, to the extent that those
factors can be quantified.This assumption implies consistency in the loss ratio, after adjusting for inflationary
factors and other trends that may be affecting losses and/or premiums. Generally
accepted actuarial methods employing this expected loss ratio assumption are used to
supplement loss reserve indications from standard loss development methods where the
validity of the first assumption discussed is incomplete. While this assumption is also
subject to validity constraints, it is generally considered to have higher reliability
than the first assumption discussed for the current and more recently completed accident
years, as changes in rates and pricing can be monitored and loss trends can be derived or
inferred from both internal and external sources.
  
    
    Historical paid loss development methods:These methods use historical loss payments over discrete periods of time to estimate
future losses. Historical paid loss development methods assume that the ratio of losses
paid in one period to losses paid in an earlier period will remain constant. These
methods necessarily assume that factors which have affected paid losses in the past, such
as claim settlement patterns, inflation, or the effects of litigation, will remain
constant in the future. Because historical paid loss development methods do not use case
reserves to estimate ultimate losses, they can be more reliable than the other methods
that use incurred losses in situations where there are significant changes in how case
reserves are established by claims adjusters. However, historical paid loss development
methods are more leveraged (meaning that small changes in payments have a larger impact
on estimates of ultimate losses) than actuarial methods that use incurred losses, because
cumulative loss payments can take much longer to converge on the expected ultimate losses
than cumulative incurred amounts. In addition, and for similar reasons, historical paid
loss development methods are often slow to react to situations when new or different
factors arise than those that have affected paid losses in the past.
    
    Historical incurred loss development methods:These methods, like historical paid loss development methods, assume that the ratio of
losses in one period to losses in an earlier period will remain constant in the future.
However, these methods use incurred losses (i.e., the sum of cumulative historical loss
payments plus outstanding case reserves) over discrete periods of time to estimate future
losses. Historical incurred loss development methods can be preferable to historical
paid loss development methods because they explicitly take into account open cases and
the claims adjusters evaluations of the cost to settle all known claims. However,
historical incurred loss development methods necessarily assume that case reserving
practices are consistently applied over time. Therefore, when there have been
significant changes in how case reserves are established or material changes in the
underlying loss exposures and/or circumstances which may lead to a claim being reported,
using incurred loss data to project ultimate losses can be less reliable than other
methods.
 29




---



##### Table of Contents




    
    Expected loss ratio methods:These methods are based on the assumption that ultimate losses vary proportionately with
premiums. Expected loss ratios are typically developed based upon the information used
in pricing, such as rate changes and trends affecting the frequency and/or severity of
claims, and are multiplied by the total amount of premiums earned during a given accident
period to calculate ultimate losses incurred during that same period. Expected loss
ratio methods are useful for estimating ultimate losses in the early years of long-tailed
lines of business, when little or no paid or incurred loss information is available, and
in new or growing lines of business where historical information may lack predictive
accuracy or otherwise not be representative of current loss exposures. Where expected
loss ratio methods are employed, one or more of several traditional and accepted
actuarial estimation methods are used to select expected loss ratios, including: loss
ratios from mature years adjusted for trends in pricing and claim costs; permissible loss
ratios underlying current rate levels; and projections of industry loss ratios in similar
lines.
    
    Adjusted historical paid and incurred loss development methods:These methods take traditional historical paid and incurred loss development methods and
adjust them for the estimated impact of recent changes, such as inflation, changes in
coverage and/or demographics of the line of business, the speed of claim payments, or the
adequacy of case reserves. During periods of significant change, adjusted historical
paid and incurred loss development methods are often more reliable methods of predicting
ultimate losses provided the actuaries can reasonably quantify the impact of each change.
    
    Frequency/Severity Methods:These methods combine estimates of ultimate claim counts and estimates of per claim
ultimate loss severities to yield estimates of ultimate losses. Ultimate claim counts
(frequency) are typically estimated using expected ratios of claims to a selected base
(e.g., exposures or policy counts), with the expected ratios being based on historically
observed experience. Adjustments for trends affecting claim occurrence or affecting the
value of the base are also typically made. Ultimate loss severity estimates are
typically based on historically observed per claim average losses and are adjusted for
trends affecting the size of claims, most notably inflation. The Company uses this
method only in the case of its residual value product.
    30




---



##### Table of Contents




    
    Changes may occur in the actuarial assumption that ultimate losses are determinable
by extrapolation of claim emergence and settlement patterns observed in the past (via
loss development factor selection) that can reasonably be expected to persist into the
future. Changes may also occur in the actuarial assumption that ultimate loss ratios in
the current and most recent accident years can be projected from ultimate loss ratios of
prior years. A 5% increase to the actuarially selected loss development factors and a 5%
increase to the expected loss ratios, in the aggregate, as applicable to all lines of
business in accident years 2004 to 2006, would increase the actuarially determined loss
reserve estimate by approximately $100.5 million. The results of aggregate changes in
the loss development factors and expected loss ratios are approximately linear over
reasonable ranges. A 1% increase in the loss development factors and expected loss
ratios, in the aggregate, would have impact equal to approximately 20% of the impact
stated above.The chart below illustrates the impact to the actuarially determined loss reserve
estimates as of December 31, 2006 applicable to all lines of business in accident years
2004 to 2006 from selected combinations of possible increases and decreases to the loss
development factor and expected loss ratio assumptions.Increase/(Decrease) to actuarially determined reserve estimate ($ millions):
 Increase/(Decrease) inLoss Development Factors(2)(5)%
    
    
    
    
    0%
    
    
    
    
    5%ExpectedLossRatios(1)
    
    
    
    (5)%
    
    
    
    
    $(97.6)
    
    
    
    
    $(65.8)
    
    
    
    
    $(35.2)0%
    
    
    
    
    $(34.1)
    
    
    
    
    $0.0
    
    
    
    
    $32.65%
    
    
    
    
    $29.5
    
    
    
    
    $65.9
    
    
    
    
    $100.5
 
 (1)
    
    For example, a 5% increase in an expected loss ratio of 50% would equal 55% (50% +
5%)(2)
    
    For example, a 5% increase in a loss development factor of 1.500 would equal 1.575
(1.500 multiplied by 1.05). 
    
    Reinsurance Receivables:
 31




---



##### Table of Contents




    
    Liability for Preferred Agent Profit Sharing:
  
    
    Share-based Compensation Expense:
   32




---



##### Table of Contents



Premiums
 Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2006 Gross Written Premiums
    
    $
    1,169.4
    
    
    $
    227.6
    
    
    $
    96.2
    
    
    $
    1,493.22005 Gross Written Premiums
    
    $
    960.3
    
    
    $
    205.3
    
    
    $
    99.3
    
    
    $
    1,264.9Percentage Increase (Decrease)
    
    
    21.8
    %
    
    
    10.9
    %
    
    
    (3.1
    )%
    
    
    18.0
    %2006 Gross Earned Premiums
    
    $
    1,046.8
    
    
    $
    217.5
    
    
    $
    101.1
    
    
    $
    1,365.42005 Gross Earned Premiums
    
    $
    873.8
    
    
    $
    194.3
    
    
    $
    97.2
    
    
    $
    1,165.3Percentage Increase (Decrease)
    
    
    19.8
    %
    
    
    11.9
    %
    
    
    4.0
    %
    
    
    17.2
    %
  
    
    Prospecting efforts by marketing personnel in conjunction with long term relationships formed by the
Companys marketing Regional Vice Presidents continue to result in additional prospects and increased
premium writings in existing product offerings,
 33




---



##### Table of Contents



most notably for the Companys non-profit, condominium
association and sports leagues commercial package product lines.
These product offerings accounted for approximately $105.3 million of the
$209.1 million total Commercial Lines segment gross written
premiums increase.
 
    
    The introduction of several new niche product offerings, most notably religious organizations,
professional sports and entertainment commercial package products and the antique/collector vehicle
product. These new product offerings accounted for approximately
$37.5 million of the $209.1 million total Commercial
Lines segment gross written premiums increase.
 
    
    Continued expansion of marketing efforts relating to Commercial Lines and Specialty Lines products
through the Companys field organization and preferred agents.
 
    
    An increase to in-force policy counts as of December 31, 2006 versus December 31, 2005 of 57.3% for
the Commercial Lines segment. The introduction of the antique/collector vehicle program accounted for
22.3% of the 57.3% total policy count increase. The other factors discussed above accounted for the
remaining 35.0% increase in the policy counts.
 
    
    An increase to in-force policy counts as of December 31, 2006 versus December 31, 2005 of 15.7% for
the Specialty Lines segment, primarily as a result of the factors discussed above.
 
    
    Realized average rate increases on renewal business approximating 0.9%, and 26.3% for the Commercial
and Personal Lines segments, respectively.
  
    
    A decrease in mobile homeowners gross written premium of $13.7 million from Libertys continuing shift
in product mix as a result of reducing mobile homeowners product policies and increasing homeowners
product policies. This $13.7 million decrease was offset in part by a $4.9 million increase in
homeowners gross written premium.
 
    
    A decrease in Libertys renewal retention percentage to 65.1% in the fourth quarter of 2006, as
compared to its year-to-date renewal retention for the nine months ending September 30, 2006 of 90.9%.
This decrease in renewal retention is primarily attributed to Libertys implementation of rate
increases effective September 1, 2006, relating to higher reinsurance costs. These rate increases are
subject to reduction pending Florida Office of Insurance Regulation final approval.
 
    
    Restricting new personal lines business production of Liberty due to the significant increase in
catastrophe reinsurance rates and restricted availability of reinsurance catastrophe coverage
experienced at the June 1, 2006 catastrophe reinsurance renewal.
 
    
    A decrease in the lawyers professional liability gross written premium of $7.1 million as a result of
non-renewing policies due to unacceptable underwriting results. Total 2006 gross written premium for
the lawyers professional liability product was $11.8 million. The Company will continue to non-renew
its remaining lawyers professional liability business in 2007.
 
    
    A decrease in in-force policy counts for the personal lines segment of 27.2%, resulting from a
decrease to the in-force counts for the mobile homeowners product and the homeowners product of 76.6%
and 19.0%, respectively, due to the factors noted above.
 
    
    Realized average rate decreases on renewal business approximating 0.5% for the specialty lines segment.
  Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2006 Net Written Premiums
    
    $
    1,080.2
    
    
    $
    181.4
    
    
    $
    21.3
    
    
    $
    1,282.92005 Net Written Premiums
    
    $
    904.7
    
    
    $
    159.1
    
    
    $
    47.0
    
    
    $
    1,110.8Percentage Increase (Decrease)
    
    
    19.4
    %
    
    
    14.0
    %
    
    
    (54.7
    )%
    
    
    15.5
    %2006 Net Earned Premiums
    
    $
    966.3
    
    
    $
    174.0
    
    
    $
    29.0
    
    
    $
    1,169.32005 Net Earned Premiums
    
    $
    778.4
    
    
    $
    151.7
    
    
    $
    46.5
    
    
    $
    976.6Percentage Increase (Decrease)
    
    
    24.1
    %
    
    
    14.7
    %
    
    
    (37.6
    )%
    
    
    19.7
    %
 34




---



##### Table of Contents




    
    A decision by the Company to terminate its net liability cession under
its quota share reinsurance agreement whereby the Company had ceded
10% of its commercial and specialty lines net written and earned
premiums and loss and loss adjustment expenses for policies commencing
during 2004. Pursuant to the agreement, during the year ended December
31, 2005, the Company ceded $43.7 million ($36.5 million for the
commercial lines segment, $7.1 million for the specialty lines
segment, and $0.1 million for the personal lines segment) of net
earned premiums, which represented the unearned premium reserves as of
December 31, 2004 on policies commencing during 2004. No earned
premiums were ceded pursuant to this agreement during 2006 due to the
Companys decision to terminate the agreement on a run-off basis
effective December 31, 2004.
 
    
    Certain of the Companys reinsurance contracts have reinstatement or
additional premium provisions under which the Company must pay
reinstatement or additional reinsurance premiums to reinstate coverage
provisions upon utilization of initial reinsurance coverage. During
the years ended December 31, 2006 and 2005, the Company accrued $5.3
million ($2.2 million for the commercial lines segment and $3.1
million for the specialty lines segment) and $3.7 million ($1.6
million for the commercial lines segment and $2.1 million for the
specialty lines segment) respectively, of reinstatement or additional
reinsurance premium under its casualty excess of loss reinsurance
treaties, as a result of changes in ultimate loss estimates. The
reinstatement premium increased ceded written and earned premiums and
reduced net written and earned premiums.
 
    
    During the year ended December 31, 2005, the Company experienced
catastrophe losses attributable to Hurricanes Dennis, Katrina, Rita
and Wilma. These multiple hurricane events resulted in the
recognition of reinstatement and accelerated catastrophe reinsurance
premium expense of $3.9 million ($0.6 million for the Commercial Lines
Segment and $3.3 million for the Personal Lines Segment) during the
year ended December 31, 2005 due to the utilization of certain of the
catastrophe reinsurance coverages. This recognition of reinstatement
and accelerated reinsurance premium expense increased reinsurance
ceded written and earned premiums and reduced net written and earned
premiums. The Company experienced no such catastrophe losses during
2006.
 
    
    The Company also experienced higher property catastrophe reinsurance
costs, increased catastrophe loss retentions, and decreased
catastrophe coverage limits for its June 1, 2006 reinsurance renewal
compared to the June 1, 2005 renewal as a result of the hardening
property catastrophe reinsurance market.
 Net Investment Income:
 
    
    The portfolio duration target was increased;
    
    The percentage of the fixed maturity portfolio allocated to municipal security investments was increased; and
    
    The percentage of the investment portfolio allocated to common stock investments was increased.
   35




---



##### Table of Contents



Net Realized Investment Gain (Loss):
  Other Income
 Net Loss and Loss Adjustment Expenses:
  
    
    Net reserve actions taken during the year ended December 31, 2006, wherein the net estimated
unpaid loss and loss adjustment expenses for accident years 2005 and prior were decreased by
$91.4 million, as compared to net reserve actions taken during the year ended December 31,
2005 wherein the estimated net unpaid loss and loss adjustment expenses for accident years
2004 and prior were decreased by $29.9 million. Decreases in the estimated net unpaid loss
and loss adjustment expenses for prior accident years during the year ended December 31, 2006
were as follows:
 Net Basis Decrease(In millions)Accident Year 2005
    
    $
    59.2Accident Year 2004
    
    
    12.6Accident Year 2003
    
    
    11.0Accident Years 2002 and prior
    
    
    8.6Total Decrease
    
    $
    91.4
 
    
    For accident year 2005, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower estimates for commercial coverages due to better than
expected case incurred loss development. The incurred frequency emergence on general
liability coverages, and the incurred severity emergence on property and auto coverages,
were less than anticipated.
    
    For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower estimates for commercial coverages due to better than
expected case incurred loss development. The incurred frequency emergence on general
liability coverages, and the incurred severity emergence on auto coverages, were less than
anticipated.
    
    For accident year 2003, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower estimates for professional liability coverages and
rental/leasing auto coverages due to better than expected case incurred loss development.
The incurred severity emergence on professional liability E&O and D&O coverages, and the
incurred frequency emergence on rental/leasing auto coverages, were less than anticipated.
 36




---



##### Table of Contents




    
    For accident years 2002 and prior, the decrease in estimated net unpaid loss and loss
adjustment expenses was principally due to lower estimates for rental/leasing auto coverages
due to better than expected case incurred loss development. The incurred
frequency emergence on rental/leasing auto coverages, and the incurred severity emergence on
rental supplemental liability coverages, were less than anticipated.Establishing loss reserve estimates is a necessarily complex and imprecise process. The
Companys methodology is to employ several generally accepted actuarial methods to determine
net unpaid loss and loss adjustment expenses. Over time, more reliance is placed on actuarial
methods based on actual loss development, and accordingly, over time, less reliance is placed
on actuarial methods based on expected loss development. The principal factor contributing to
the decreases in the estimated net unpaid loss and loss adjustment expenses for prior accident
years is the reconsideration of an assumption underlying previous estimates that loss ratio
deterioration would result from the high growth rates experienced by the Company in the most
recent accident years. As actual losses experienced on these accident years have continued to
be lower than anticipated, it has become more likely that the ultimate loss ratio will prove
to be better than originally estimated. Over time, greater credibility has been given to this
favorable trend by applying greater weight to actuarial methods based on actual loss
development. The result is a reduction to these years net unpaid loss and loss adjustment
expenses, which, in turn, leads to lower ultimate loss ratio expectations for the more recent
accident years. As significant weight is given to actuarial methods based on expected losses
for the more recent accident years, the result of lower expectations is a reduction to these
years net unpaid loss and loss adjustment expenses.
 
    
    A reduction in the current accident year net ultimate loss and loss
adjustment expense ratio, excluding catastrophe losses, for the year
ended December 31, 2006 compared to 2005. During the year ended
December 31, 2006, a net ultimate loss and loss adjustment expense
ratio, excluding catastrophe losses, of 47.6% was estimated for the
2006 accident year. During the year ended December 31, 2005, a net
ultimate loss and loss adjustment expense ratio, excluding catastrophe
losses, of 51.7% was estimated for the 2005 accident year.
    
    A $24.7 million reduction in hurricane catastrophe losses incurred.
During the year ended December 31, 2005, the Company incurred $24.7
million of net loss and loss adjustment expenses related to Hurricanes
Dennis, Katrina, Rita and Wilma. The Company incurred no such
catastrophe losses during the year ended December 31, 2006.
  
    
    The growth in net earned premiums.
 
    
    An $18.3 million reduction in ceded loss and loss adjustment expenses
pursuant to a 10% quota share agreement (See Premiums). Ceded loss and
loss adjustment expenses pursuant to this quota share agreement for
the year ended December 31, 2005 were $18.3 million; however, due to
the Companys decision to terminate this agreement on a run-off basis
effective December 31, 2004, there were no losses ceded to this
agreement during 2006.
 Acquisition Costs and Other Underwriting Expenses:
 
    
    The growth in net earned premiums.
 
    
    $7.2 million of share-based compensation expense allocated to
underwriting and acquisition expenses which was recognized under SFAS
123(R), which was adopted by the Company on January 1, 2006.
 
    
    A $21.3 million decrease in ceding commission earned pursuant to the
Companys quota share agreements (See Premiums). During the year
ended December 31, 2006, the Company earned no ceding commissions
related to quota share agreements, as compared to $21.3 million of
ceding commissions earned during 2005. There were no ceded earned
premiums pursuant to these quota share agreements for the year ended
December 31, 2006 as compared to $43.7 million for 2005 due to the
Companys decision to terminate its 10% quota share agreement on a
run-off basis effective December 31, 2004.
 37




---



##### Table of Contents



For the Year Ended(In Millions)
    
    December 31, 2006Reduction to expense related to assessment on 2004
Premiums
    
    $
    1.6Reduction to expense related to assessment on 2005
Premiums
    
    
    1.8Total
    
    $
    3.4
    Other Operating Expenses
 Income Tax Expense:
 
 Premiums
 Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2005 Gross Written Premiums
    
    $
    960.3
    
    
    $
    205.3
    
    
    $
    99.3
    
    
    $
    1,264.92004 Gross Written Premiums
    
    $
    874.0
    
    
    $
    184.4
    
    
    $
    112.9
    
    
    $
    1,171.3Percentage Increase (Decrease)
    
    
    9.9
    %
    
    
    11.3
    %
    
    
    (12.0
    )%
    
    
    8.0
    %2005 Gross Earned Premiums
    
    $
    873.8
    
    
    $
    194.3
    
    
    $
    97.2
    
    
    $
    1,165.32004 Gross Earned Premiums
    
    $
    788.6
    
    
    $
    170.2
    
    
    $
    103.3
    
    
    $
    1,062.1Percentage Increase (Decrease)
    
    
    10.8
    %
    
    
    14.2
    %
    
    
    (5.9
    )%
    
    
    9.7
    %
  
    
    Prospecting efforts by marketing personnel in conjunction with long term relationships formed by the
Companys marketing Regional Vice Presidents continue to result in additional prospects and increased premium
writings, most notably for the Companys various commercial package and non profit management liability
product lines.
 38




---



##### Table of Contents




    
    Continued expansion of marketing efforts relating to commercial lines and specialty lines products through
the Companys field organization and preferred agents.
 
    
    The introduction of a number of new Sports and Fitness niche products.
 
    
    In-force policy counts as of December 31, 2005 versus December 31, 2004 have increased 10.0% and 18.8% for
the commercial lines and specialty lines segments, respectively, primarily as a result of the factors
discussed above.
 
    
    Realized average rate increases on renewal business approximating 1.3%, and 17.9% for the specialty and
personal lines segments, respectively. Realized rates on renewal business decreased 0.2% for the commercial
lines segment.
  
    
    Liberty American Insurance Group, Inc.s planned shift in product mix of reducing mobile homeowners product
policies and increasing homeowners product policies. As a result, mobile homeowners gross written premium
decreased $44.9 million and homeowners gross written premium increased $25.7 million.
 
    
    In-force policy counts for the personal lines segment decreased 3.8%, resulting from a decrease in the
in-force counts for the mobile homeowners product of 70.9% and an increase in in-force policy counts for the
homeowners product of 54.7%, as a result of the planned shift in product mix noted above.
 
    
    The decisions by an automobile leasing customer and an automobile excess liability customer to self-insure
business previously written by the Company. As a result, gross written premiums for the commercial lines
segment were reduced by approximately $78.0 million.
 
    
    Re-underwriting the lawyers errors and omissions, professional liability excess and program umbrella books
of business, resulting in gross written premiums for the specialty lines segment being reduced by $10.9
million, $4.3 million and $5.6 million, respectively.
 
    
    Increased pricing competition for specialty lines segment products and for the specialty property product
(commercial lines segment).
  Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2005 Net Written Premiums
    
    $
    904.7
    
    
    $
    159.1
    
    
    $
    47.0
    
    
    $
    1,110.82004 Net Written Premiums
    
    $
    720.6
    
    
    $
    154.1
    
    
    $
    39.8
    
    
    $
    914.5Percentage Increase
    
    
    25.5
    %
    
    
    3.2
    %
    
    
    18.1
    %
    
    
    21.5
    %2005 Net Earned Premiums
    
    $
    778.4
    
    
    $
    151.7
    
    
    $
    46.5
    
    
    $
    976.62004 Net Earned Premiums
    
    $
    614.1
    
    
    $
    134.1
    
    
    $
    22.0
    
    
    $
    770.2Percentage Increase
    
    
    26.8
    %
    
    
    13.1
    %
    
    
    111.4
    %
    
    
    26.8
    %
  
    
    A reduction in the Companys net liability cession percentage under its quota share
reinsurance agreements, as follows:
 
    
    The Company ceded 22% of its net written and earned premiums and loss and loss adjustment
expenses for policies effective April 1, 2003 through December 31, 2003 and 10% of its
commercial and specialty lines net written and earned premiums and loss and loss adjustment
expenses for policies becoming effective during 2004. During the years ended December 31,
2005 and 2004, the Company ceded $(0.5) million ($0.2 million for the commercial lines
segment and $(0.7) million for the specialty lines segment) and $94.5 million ($77.8 million
for the commercial lines segment, $16.9 million for the specialty
 39




---



##### Table of Contents



lines segment, and $(0.2)
million for the personal lines segment) of net written premiums, respectively, and $43.7
million
($36.5 million for the commercial lines segment, $7.1 million for the specialty lines segment
and $0.1 million for the personal lines segment) and $132.5 million ($103.6 million for the
commercial lines segment, $23.4 million for the specialty lines segment, and $5.5 million for
the personal lines segment) of net earned premiums, respectively.
    
    On December 31, 2004, the Company terminated a quota share reinsurance agreement under
which it ceded 15% of its mobile homeowners and homeowners business (personal lines
segment). Upon termination, the Company increased its unearned premium reserve and net
written premium by $5.7 million.
 
    
    As a result of the January 1, 2005 casualty excess of loss treaty
renewal, the reinsurance costs by product charged by the reinsurers
are at a different level than that charged under the prior treaty to
reflect their view of expected treaty experience. Accordingly, the
specialty lines segment product reinsurance costs were increased, and
the commercial lines segment product reinsurance costs were decreased.
 
    
    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 $4.0 million ($3.4 million for the commercial lines
segment and $0.6 million for the specialty lines segment) and $15.6
million ($13.0 million for the commercial lines segment, $2.0 million
for the specialty lines segment, and $0.5 million for the personal
lines segment) for the years ended December 31, 2005 and 2004,
respectively. The profit commissions reduced ceded written and earned
premiums and increased net written and earned premiums.
 
    
    Certain of the Companys reinsurance contracts have reinstatement
provisions under which the Company must pay additional reinsurance
premiums to reinstate coverage provisions upon utilization of initial
reinsurance coverage. During the years ended December 31, 2005 and
2004, the Company accrued $3.7 million ($1.6 million for the
commercial lines segment and $2.1 million for the specialty lines
segment) and $1.1 million ($0.8 million for the commercial lines
segment and $0.3 million for the specialty lines segment),
respectively, of reinstatement reinsurance premium under its casualty
excess of loss reinsurance treaty, as a result of changes in ultimate
loss estimates. The reinstatement premium increased ceded written and
earned premiums and reduced net written and earned premiums.
 
    
    A reduction in accelerated, reinstatement and additional reinsurance
premium costs related to the Companys catastrophe reinsurance
coverages:
 
    
    During the year ended December 31, 2005, the Company experienced catastrophe losses
attributable to Hurricanes Dennis, Katrina, Rita and Wilma. These multiple hurricane events
resulted in the recognition of reinstatement and accelerated catastrophe reinsurance premium
expense of $3.9 million ($0.6 million for the Commercial Lines Segment and $3.3 million for
the Personal Lines Segment) during the year ended December 31, 2005 due to the utilization
of certain of the catastrophe reinsurance coverages. This recognition of reinstatement and
accelerated reinsurance premium expense increased ceded written and earned premiums and
reduced net written and earned premiums.
    
    During the year ended December 31, 2004, the Company experienced catastrophe losses
attributable to Hurricanes Charley, Frances, Ivan and Jeanne. Due to these multiple
hurricane events, the Company purchased additional catastrophe reinsurance coverages (which
provided coverage from the inception date of the coverage through May 31, 2005) to
supplement its original reinsurance programs. The estimated aggregate pre-tax cost of these
additional catastrophe reinsurance coverages is $22.9 million. Additionally, these multiple
hurricane events resulted in accelerating the recognition of $26.0 million (Commercial Lines
Segment ($2.2 million), and Personal Lines Segment ($23.8 million)) catastrophe reinsurance
premium expense during 2004 due to the utilization of certain of the catastrophe reinsurance
coverages. Of this $26.0 million, $10.3 million was attributable to the additional
reinsurance coverages referred to above. This acceleration of reinsurance premium expense
increased reinsurance ceded written and earned premiums and reduced net written and earned
premiums.
 Net Investment Income:
 40




---



##### Table of Contents



Net Realized Investment Gain:
  Other Income
 Net Loss and Loss Adjustment Expenses:
  
    
    The growth in net earned premiums.
 
    
    A $41.5 million reduction in ceded loss and loss adjustment expenses pursuant to
quota share agreement (See Premiums). Ceded loss and loss adjustment expenses
pursuant to this quota share agreement for the year ended December 31, 2005 were
$18.3 million vs. $59.8 million for the same period during 2004.
  
    
    A $22.0 million reduction in hurricane catastrophe losses incurred. During the
year ended December 31, 2005, the Company incurred $24.7 million of net loss and
loss adjustment expenses related to Hurricanes Dennis, Katrina, Rita and Wilma.
During the year ended December 31, 2004, the Company incurred $46.7 million of net
loss and loss adjustment expenses related to Hurricanes Charley, Frances, Ivan and
Jeanne.
 
    
    Reserve actions taken during the year ended December 31, 2005 whereby the estimated
net unpaid loss and loss adjustment expenses for accident years 2004 and prior were
decreased by $29.9 million vs. reserve actions taken during the year ended December
31, 2004 whereby the estimated net unpaid loss and loss adjustment expenses for
accident years 2003 and prior were
 41




---



##### Table of Contents



increased by $35.1 million. Changes in the estimated net unpaid loss and loss adjustment
expenses during the year ended December 31, 2005 by accident year were as follows:
 Net Basisincrease (decrease)(in millions)Accident Year 2004
    
    $
    (24.2
    )Accident Year 2003
    
    
    1.6Accident Year 2002
    
    
    (7.0
    )Accident Years 2001 and prior
    
    
    (0.3
    )Total
    
    $
    (29.9
    )
  Acquisition Costs and Other Underwriting Expenses:
 
    
    The growth in net earned premiums
    
    A $5.9 million net charge during 2005 for assessments from Citizens
Property Insurance Corporation (Citizens). Citizens was established
by the state of Florida to provide insurance to property owners unable
to obtain coverage in the private insurance market.Citizens reported incurred losses from the hurricanes that struck Florida during 2004 and a
deficit for the 2004 plan year. During 2005, the Board of Governors of Citizens authorized the
levying of a regular assessment, and the Florida Office of Insurance Regulation also approved
the assessment. Based on the Companys market share, the Company was assessed and paid $11.9
million in Citizens assessments during 2005. This assessment may be recouped through future
insurance policy surcharges to Florida insureds. These surcharges will be recorded in the
consolidated financial statements as the related premiums are written. The Company also
recognized and paid an additional $0.6 million related to this Citizens assessment pursuant to
a quota share reinsurance agreement whereby the Company assumed a 50% participation from an
unaffiliated Florida insurer.Of the $12.5 million in total payments related to the Citizens assessment during 2005, $8.6
million is recoverable from certain of the Companys catastrophe reinsurers under its 2004
catastrophe reinsurance program and from one of the Companys quota share reinsurers, resulting
in a $3.9 million net assessment expense being recognized during 2005 for Citizens assessments
paid during 2005. Any recoupment of the Citizens assessment through future policy surcharges
will be allocated between the Company and its reinsurers.During the fourth quarter of 2005, Citizens announced that it was projecting the maximum ten
percent regular assessment allowed under Florida law plus an additional emergency assessment of
approximately one percent to be assessed during 2006 due to the hurricanes that struck Florida
in 2005. As of December 31, 2005, the Company has accrued $12.4 million for the Companys
estimated share of the projected regular assessment. Of this amount, $10.4 million is
recoverable from certain of the Companys catastrophe reinsurers under its 2005 catastrophe
reinsurance program and from one of the Companys quota share reinsurers, resulting in a $2.0
million net assessment expense being recognized during 2005 for Citizens assessments accrued as
of December 31, 2005. Companies are required to collect any emergency assessments from
residential property policyholders and remit them to Citizens as they are collected, therefore,
the Company has not recorded a liability related to the projected emergency assessment.The following table summarizes the impact to the Company of Citizens assessments recognized
during 2005:
 42




---



##### Table of Contents



(In Millions)
    
    Gross of
    
    
    Reinsurance
    
    
    Net ExpenseReinsurance
    
    
    Receivables
    
    
    RecognizedAssessments paid during 2005
    
    $
    12.5
    
    
    $
    (8.6
    )
    
    $
    3.9Assessments accrued as of
December 31, 2005
    
    
    12.4
    
    
    
    (10.4
    )
    
    
    2.0Total
    
    $
    24.9
    
    
    $
    (19.0
    )
    
    $
    5.9
  
    
    A $42.5 million decrease in acquisition costs and other underwriting
expenses due to an automobile excess liability customers decision to
self insure business previously written by the Company (see Premiums).
During the year ended December 31, 2005, the Company incurred $9.0
million in acquisition and underwriting expenses vs. $51.5 million
during the same period in 2004 for the automobile excess liability
product. Net earned premiums for this product were $13.8 million for
the year ended December 31, 2005 vs. $71.3 million for the same period
of 2004.
 
    
    A $40.2 million decrease in ceding commission earned pursuant to quota
share agreements (see Premiums). During the year ended December 31,
2005, the Company earned $21.3 million in ceding commissions vs. $61.5
million during the same period of 2004. Ceded earned premiums
pursuant to these quota share agreements were $43.7 million for the
year ended December 31, 2005 vs. $132.5 million for the same period of
2004.
 Other Operating Expenses
 Goodwill Impairment Loss:
 Income Tax Expense:
 Investments
   43




---



##### Table of Contents



Gross Unrealized Losses as of December 31, 2006(in millions)Fixed MaturitiesAvailable for SaleExcluding InterestsContinuous time in
    
    in Securitized
    
    
    Interests in
    
    
    Fixed MaturitiesUnrealized loss position
    
    Assets
    
    
    Securitized Assets
    
    
    Available for Sale
    
    
    Equity Securities
    
    
    Total Investments0  3 months
    
    $
    0.8
    
    
    $
    1.2
    
    
    $
    2.0
    
    
    $
    1.1
    
    
    $
    3.1>3  6 months
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.6
    
    
    
    0.7>6  9 months
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    0.9
    
    
    
    1.0>9  12 months
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    
    
    
    
    0.3>12  18 months
    
    
    2.1
    
    
    
    4.6
    
    
    
    6.7
    
    
    
    
    
    
    
    6.7>18  24 months
    
    
    2.6
    
    
    
    1.5
    
    
    
    4.1
    
    
    
    
    
    
    
    4.1> 24 months
    
    
    3.1
    
    
    
    1.7
    
    
    
    4.8
    
    
    
    
    
    
    
    4.8Total Gross Unrealized Losses
    
    $
    8.8
    
    
    $
    9.3
    
    
    $
    18.1
    
    
    $
    2.6
    
    
    $
    20.7Estimated fair value of
securities with a gross
unrealized loss
    
    $
    624.9
    
    
    $
    543.8
    
    
    $
    1,168.7
    
    
    $
    37.4
    
    
    $
    1,206.1
    44




---



##### Table of Contents



45




---



##### Table of Contents



EstimatedHypothetical
    
    
    Fair Value afterChange in
    
    
    Hypothetical
    
    
    Hypothetical PercentageInterest
    
    
    Changes in
    
    
    Increase (Decrease) inEstimated
    
    
    Rates (bp=basis
    
    
    Interest
    
    
    
    
    
    
    Shareholders(Dollars in Thousands)
    
    Fair Value
    
    
    points)
    
    
    Rates
    
    
    Fair Value
    
    
    EquityDecember 31, 2006InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    2,129,609
    
    
    200 bp decrease
    
    $
    2,313,272
    
    
    
    8.6
    %
    
    
    10.2
    %100 bp decrease
    
    $
    2,226,770
    
    
    
    4.6
    %
    
    
    5.4
    %50 bp decrease
    
    $
    2,178,954
    
    
    
    2.3
    %
    
    
    2.8
    %50 bp increase
    
    $
    2,079,335
    
    
    
    (2.4
    )%
    
    
    (2.8
    )%100 bp increase
    
    $
    2,029,023
    
    
    
    (4.7
    )%
    
    
    (5.6
    )%200 bp increase
    
    $
    1,930,808
    
    
    
    (9.3
    )%
    
    
    (11.1
    )%December 31, 2005InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    1,761,530
    
    
    200 bp decrease
    
    $
    1,894,692
    
    
    
    7.6
    %
    
    
    10.6
    %100 bp decrease
    
    $
    1,831,630
    
    
    
    4.0
    %
    
    
    5.6
    %50 bp decrease
    
    $
    1,797,245
    
    
    
    2.0
    %
    
    
    2.8
    %50 bp increase
    
    $
    1,725,460
    
    
    
    (2.1
    )%
    
    
    (2.9
    )%100 bp increase
    
    $
    1,689,499
    
    
    
    (4.1
    )%
    
    
    (5.7
    )%200 bp increase
    
    $
    1,620,123
    
    
    
    (8.0
    )%
    
    
    (11.3
    )%
   46




---



##### Table of Contents



47




---



##### Table of Contents



Payments Due by Period(in thousands)Less than
    
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    4-5 years
    
    
    5 yearsGross Loss and Loss Adjustment Expense Reserves (1)
    
    $
    1,283,238
    
    
    $
    444,916
    
    
    $
    555,097
    
    
    $
    228,996
    
    
    $
    54,229Reinsurance Premiums Payable Under Terms of Reinsurance Contracts (2)
    
    
    84,332
    
    
    
    84,332
    
    
    
    
    
    
    
    
    
    
    
    Operating Leases
    
    
    30,037
    
    
    
    5,076
    
    
    
    14,100
    
    
    
    7,383
    
    
    
    3,478Preferred Agent Profit Sharing
    
    
    21,891
    
    
    
    4,200
    
    
    
    12,546
    
    
    
    4,743
    
    
    
    402Other Long-Term Contractual Commitments (3)
    
    
    17,249
    
    
    
    7,219
    
    
    
    9,630
    
    
    
    200
    
    
    
    200Total (4)
    
    $
    1,436,747
    
    
    $
    545,743
    
    
    $
    591,373
    
    
    $
    241,322
    
    
    $
    58,309
 
 (1)
    
    Although there is typically no minimum contractual commitment with insurance contracts, the
cash flows displayed in the table above represent the Companys best estimate as to amount and
timing of such.(2)
    
    Represents payments based on estimated subject earned premiums under certain reinsurance
contracts.(3)
    
    Represents open commitments under certain limited partnership agreements, information
technology development agreements, corporate sponsorship and renewal rights agreements.(4)
    
    As of December 31, 2006, the Company has recorded a $2.0 million liability for a bonus amount
due to the Companys founder and Chairman under the terms of his employment agreement with the
Company. This payment is due to be paid six months after the date of the termination of his
employment with the Company. Since his date of termination is uncertain, this payment has been
excluded from the above table.     48




---



##### Table of Contents



49




---



##### Table of Contents



(Dollars
in Thousands)
    
    
    
    
    
    
    
    EstimatedHypothetical
    
    Fair Value after
    
    Hypothetical PercentageChange in
    
    Hypothetical
    
    Increase (Decrease) inInterest
    
    Changes inEstimated
    
    Rates (bp=basis
    
    Interest
    
    
    
    
    
    ShareholdersFair Value
    
    points)
    
    Rates
    
    Fair Value
    
    EquityDecember 31, 2006InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    2,129,609
    
    
    200 bp decrease
    
    $
    2,313,272
    
    
    
    8.6
    %
    
    
    10.2
    %100 bp decrease
    
    $
    2,226,770
    
    
    
    4.6
    %
    
    
    5.4
    %50 bp decrease
    
    $
    2,178,954
    
    
    
    2.3
    %
    
    
    2.8
    %50 bp increase
    
    $
    2,079,335
    
    
    
    (2.4
    )%
    
    
    (2.8
    )%100 bp increase
    
    $
    2,029,023
    
    
    
    (4.7
    )%
    
    
    (5.6
    )%200 bp increase
    
    $
    1,930,808
    
    
    
    (9.3
    )%
    
    
    (11.1
    )%December 31, 2005InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    1,761,530
    
    
    200 bp decrease
    
    $
    1,894,692
    
    
    
    7.6
    %
    
    
    10.6
    %100 bp decrease
    
    $
    1,831,630
    
    
    
    4.0
    %
    
    
    5.6
    %50 bp decrease
    
    $
    1,797,245
    
    
    
    2.0
    %
    
    
    2.8
    %50 bp increase
    
    $
    1,725,460
    
    
    
    (2.1
    )%
    
    
    (2.9
    )%100 bp increase
    
    $
    1,689,499
    
    
    
    (4.1
    )%
    
    
    (5.7
    )%200 bp increase
    
    $
    1,620,123
    
    
    
    (8.0
    )%
    
    
    (11.3
    )%
 50




---



##### Table of Contents



Financial Statements
    
    
    
    PageReport of Independent Registered Public Accounting Firm
    
    
    52Consolidated Balance Sheets  As of December 31, 2006 and 2005
    
    
    53Consolidated Statements of Operations and Comprehensive Income  For the Years Ended December 31, 2006, 2005 and 2004
    
    
    54Consolidated Statements of Changes in Shareholders Equity  For the Years Ended December 31, 2006, 2005 and 2004
    
    
    55Consolidated Statements of Cash Flows  For the Years Ended December 31, 2006, 2005, and 2004
    
    
    56Notes to Consolidated Financial Statements
    
    
    57-81Financial Statement Schedules:ScheduleI
    
    Summary of Investments -
    
    
    S-1Other Than Investments in Related Parties As of December 31, 2006II
    
    Condensed Financial Information of
Registrant As of December 31, 2006 and 2005 and For Each of the Three
Years in the Period Ended December 31, 2006
    
    
    S-2S-4III
    
    Supplementary Insurance Information
As of and For the Years Ended December 31, 2006, 2005 and 2004
    
    
    S-5IV
    
    Reinsurance For the Years ended December 31, 2006, 2005 and 2004
    
    
    S-6VI
    
    Supplementary Information
Concerning Property-Casualty Insurance Operations As of and For the
Years Ended December 31, 2006, 2005 and 2004
    
    
    S-7
 51




---



##### Table of Contents



Consolidated financial statements and financial statement schedules
 
  Internal control over financial reporting
 Internal Control  Integrated Framework Internal Control  Integrated Framework
   
 52




---



##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
 As of December 31,2006
    
    
    2005ASSETSInvestments:Fixed Maturities Available for Sale at Market (Amortized Cost $2,136,231 and $1,778,215)
    
    $
    2,129,609
    
    
    $
    1,761,530Equity Securities at Market (Cost $259,184 and $160,926)
    
    
    304,033
    
    
    
    173,455Total Investments
    
    
    2,433,642
    
    
    
    1,934,985Cash and Cash Equivalents
    
    
    108,671
    
    
    
    74,385Accrued Investment Income
    
    
    20,083
    
    
    
    18,095Premiums Receivable
    
    
    346,836
    
    
    
    286,778Prepaid Reinsurance Premiums and Reinsurance Receivables
    
    
    272,798
    
    
    
    396,248Deferred Income Taxes
    
    
    26,657
    
    
    
    31,893Deferred Acquisition Costs
    
    
    158,805
    
    
    
    129,486Property and Equipment, Net
    
    
    26,999
    
    
    
    23,886Other Assets
    
    
    44,046
    
    
    
    32,070Total Assets
    
    $
    3,438,537
    
    
    $
    2,927,826LIABILITIES and SHAREHOLDERS EQUITYPolicy Liabilities and Accruals:Unpaid Loss and Loss Adjustment Expenses
    
    $
    1,283,238
    
    
    $
    1,245,763Unearned Premiums
    
    
    759,358
    
    
    
    631,468Total Policy Liabilities and Accruals
    
    
    2,042,596
    
    
    
    1,877,231Funds Held Payable to Reinsurer
    
    
    
    
    
    
    39,221Premiums Payable
    
    
    66,827
    
    
    
    58,839Other Liabilities
    
    
    161,847
    
    
    
    136,039Total Liabilities
    
    
    2,271,270
    
    
    
    2,111,330Commitments 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, 70,848,482 and 69,266,016
Shares Issued and Outstanding
    
    
    376,986
    
    
    
    332,757Notes Receivable from Shareholders
    
    
    (17,074
    )
    
    
    (7,217
    )Accumulated Other Comprehensive Income (Loss)
    
    
    24,848
    
    
    
    (2,702
    )Retained Earnings
    
    
    782,507
    
    
    
    493,658Total Shareholders Equity
    
    
    1,167,267
    
    
    
    816,496Total Liabilities and Shareholders Equity
    
    $
    3,438,537
    
    
    $
    2,927,826
 The accompanying notes are an integral part of the consolidated financial statements.
 53




---



##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
 For the Years Ended December 31,2006
    
    
    2005
    
    
    2004Revenue:Net Earned Premiums
    
    $
    1,169,302
    
    
    $
    976,647
    
    
    $
    770,248Net Investment Income
    
    
    91,699
    
    
    
    63,709
    
    
    
    43,490Net Realized Investment Gain (Loss)
    
    
    (9,861
    )
    
    
    9,609
    
    
    
    761Other Income
    
    
    2,630
    
    
    
    1,464
    
    
    
    4,357Total Revenue
    
    
    1,253,770
    
    
    
    1,051,429
    
    
    
    818,856Losses and Expenses:Loss and Loss Adjustment Expenses
    
    
    497,288
    
    
    
    711,706
    
    
    
    1,232,645Net Reinsurance Recoveries
    
    
    (29,076
    )
    
    
    (207,700
    )
    
    
    (756,530
    )Net Loss and Loss Adjustment Expenses
    
    
    468,212
    
    
    
    504,006
    
    
    
    476,115Acquisition Costs and Other Underwriting Expenses
    
    
    338,267
    
    
    
    263,759
    
    
    
    214,369Other Operating Expenses
    
    
    12,637
    
    
    
    17,124
    
    
    
    9,439Goodwill Impairment Loss
    
    
    
    
    
    
    25,724
    
    
    
    Total Losses and Expenses
    
    
    819,116
    
    
    
    810,613
    
    
    
    699,923Income Before Income Taxes
    
    
    434,654
    
    
    
    240,816
    
    
    
    118,933Income Tax Expense (Benefit):Current
    
    
    155,404
    
    
    
    89,510
    
    
    
    33,158Deferred
    
    
    (9,599
    )
    
    
    (5,382
    )
    
    
    2,092Total Income Tax Expense
    
    
    145,805
    
    
    
    84,128
    
    
    
    35,250Net Income
    
    $
    288,849
    
    
    $
    156,688
    
    
    $
    83,683Other Comprehensive Income (Loss), Net of Tax:Holding Gain (Loss) Arising during Year
    
    $
    21,140
    
    
    $
    (16,252
    )
    
    $
    3,576Reclassification Adjustment
    
    
    6,410
    
    
    
    (6,246
    )
    
    
    (495
    )Other Comprehensive Income (Loss)
    
    
    27,550
    
    
    
    (22,498
    )
    
    
    3,081Comprehensive Income
    
    $
    316,399
    
    
    $
    134,190
    
    
    $
    86,764Per Average Share Data:Net Income  Basic
    
    $
    4.14
    
    
    $
    2.29
    
    
    $
    1.26Net Income  Diluted
    
    $
    3.93
    
    
    $
    2.14
    
    
    $
    1.20Weighted-Average Common Shares Outstanding
    
    
    69,795,947
    
    
    
    68,551,572
    
    
    
    66,464,460Weighted-Average Share Equivalents Outstanding
    
    
    3,674,121
    
    
    
    4,533,807
    
    
    
    3,456,099Weighted-Average Shares and Share Equivalents Outstanding
    
    
    73,470,068
    
    
    
    73,085,379
    
    
    
    69,920,559
 The accompanying notes are an integral part of the consolidated financial statements.
 54




---



##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
 For the Years Ended December 31,2006
    
    
    2005
    
    
    2004Common Shares:Balance at Beginning of Year
    
    
    69,266,016
    
    
    
    66,821,751
    
    
    
    66,022,656Issuance of Shares Pursuant to Stock Purchase Plans, net
    
    
    613,320
    
    
    
    1,589,406
    
    
    
    597,345Issuance of Shares Pursuant to Stock based Compensation Plans
    
    
    969,146
    
    
    
    854,859
    
    
    
    201,750Balance at End of Year
    
    
    70,848,482
    
    
    
    69,266,016
    
    
    
    66,821,751Common Stock:Balance at Beginning of Year
    
    $
    332,757
    
    
    $
    292,856
    
    
    $
    281,088Issuance of Shares Pursuant to Stock Purchase Plans
    
    
    19,521
    
    
    
    27,817
    
    
    
    9,585Effects of Issuance of Shares Pursuant to Stock based Compensation Plans
    
    
    24,301
    
    
    
    11,939
    
    
    
    2,183Other
    
    
    407
    
    
    
    145
    
    
    
    Balance at End of Year
    
    
    376,986
    
    
    
    332,757
    
    
    
    292,856Notes Receivable from Shareholders:Balance at Beginning of Year
    
    
    (7,217
    )
    
    
    (5,465
    )
    
    
    (5,444
    )Notes Receivable Issued Pursuant to Employee Stock Purchase Plans
    
    
    (12,391
    )
    
    
    (4,095
    )
    
    
    (2,326
    )Collection of Notes Receivable
    
    
    2,534
    
    
    
    2,343
    
    
    
    2,305Balance at End of Year
    
    
    (17,074
    )
    
    
    (7,217
    )
    
    
    (5,465
    )Accumulated Other Comprehensive Income (Loss), Net of Deferred Income Taxes:Balance at Beginning of Year
    
    
    (2,702
    )
    
    
    19,796
    
    
    
    16,715Other Comprehensive Income (Loss), Net of Taxes
    
    
    27,550
    
    
    
    (22,498
    )
    
    
    3,081Balance at End of Year
    
    
    24,848
    
    
    
    (2,702
    )
    
    
    19,796Retained Earnings:Balance at Beginning of Year
    
    
    493,658
    
    
    
    336,970
    
    
    
    253,287Net Income
    
    
    288,849
    
    
    
    156,688
    
    
    
    83,683Balance at End of Year
    
    
    782,507
    
    
    
    493,658
    
    
    
    336,970Total Shareholders Equity
    
    $
    1,167,267
    
    
    $
    816,496
    
    
    $
    644,157
 The accompanying notes are an integral part of the consolidated financial statements.
 55




---



##### Table of Contents



PHILADELPHIA CONSOLIDATED HOLDING CORP. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
 For the Years Ended December 31,2006
    
    
    2005
    
    
    2004Cash Flows from Operating Activities:Net Income
    
    $
    288,849
    
    
    $
    156,688
    
    
    $
    83,683Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:Net Realized Investment (Gain) Loss
    
    
    9,861
    
    
    
    (9,609
    )
    
    
    (761
    )Amortization of Investment Premiums, Net of Discount
    
    
    8,773
    
    
    
    11,707
    
    
    
    9,175Amortization of Intangible Assets
    
    
    802
    
    
    
    
    
    
    
    Depreciation
    
    
    7,159
    
    
    
    4,798
    
    
    
    3,494Deferred Income Tax Expense (Benefit)
    
    
    (9,599
    )
    
    
    (5,382
    )
    
    
    2,092Change in Premiums Receivable
    
    
    (60,058
    )
    
    
    (57,276
    )
    
    
    (49,993
    )Change in Prepaid Reinsurance Premiums and Reinsurance Receivables, Net of Funds
Held Payable to Reinsurer
    
    
    84,229
    
    
    
    (58,296
    )
    
    
    (116,585
    )Change in Other Receivables
    
    
    (1,988
    )
    
    
    (4,620
    )
    
    
    (2,467
    )Change in Deferred Acquisition Costs
    
    
    (29,319
    )
    
    
    (37,839
    )
    
    
    (35,359
    )Goodwill Impairment Loss
    
    
    
    
    
    
    25,724
    
    
    
    Change in Income Taxes Payable
    
    
    8,555
    
    
    
    13,202
    
    
    
    (8,563
    )Change in Other Assets
    
    
    3,105
    
    
    
    (909
    )
    
    
    (6,392
    )Change in Unpaid Loss and Loss Adjustment Expenses
    
    
    37,475
    
    
    
    249,096
    
    
    
    369,581Change in Unearned Premiums
    
    
    127,890
    
    
    
    99,619
    
    
    
    109,260Change in Other Liabilities
    
    
    27,231
    
    
    
    36,338
    
    
    
    32,341Fair Value of Stock Based Compensation
    
    
    12,511
    
    
    
    551
    
    
    
    Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans
    
    
    
    
    
    
    6,952
    
    
    
    1,031Excess Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans
    
    
    (8,646
    )
    
    
    
    
    
    
    Net Cash Provided by Operating Activities
    
    
    506,830
    
    
    
    430,744
    
    
    
    390,537Cash Flows from Investing Activities:Proceeds from Sales of Investments in Fixed Maturities
    
    
    320,878
    
    
    
    185,576
    
    
    
    198,442Proceeds from Maturity of Investments in Fixed Maturities
    
    
    274,722
    
    
    
    200,615
    
    
    
    195,317Proceeds from Sales of Investments in Equity Securities
    
    
    93,587
    
    
    
    160,158
    
    
    
    43,734Cost of Fixed Maturities Acquired
    
    
    (972,532
    )
    
    
    (883,560
    )
    
    
    (622,238
    )Cost of Equity Securities Acquired
    
    
    (196,096
    )
    
    
    (201,333
    )
    
    
    (71,924
    )Settlement of Cash Flow Hedge
    
    
    
    
    
    
    (3,148
    )
    
    
    Purchase of Property and Equipment, Net
    
    
    (10,272
    )
    
    
    (7,403
    )
    
    
    (7,954
    )Purchase of Intangibles
    
    
    (3,162
    )
    
    
    
    
    
    
    Net Cash Used for Investing Activities
    
    
    (492,875
    )
    
    
    (549,095
    )
    
    
    (264,623
    )Cash Flows from Financing Activities:Proceeds from Loans Payable
    
    
    
    
    
    
    11,381
    
    
    
    76,104Repayments on Loans Payable
    
    
    
    
    
    
    (44,787
    )
    
    
    (91,180
    )Proceeds from Exercise of Employee Stock Options
    
    
    6,697
    
    
    
    4,582
    
    
    
    1,151Proceeds from Collection of Shareholder Notes Receivable
    
    
    2,534
    
    
    
    2,343
    
    
    
    2,305Proceeds from Shares Issued Pursuant to Stock Purchase Plans
    
    
    7,130
    
    
    
    23,721
    
    
    
    7,260Excess Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans
    
    
    8,646
    
    
    
    
    
    
    
    Cost of Shares Withheld to Satisfy Minimum Required Tax Withholding Obligation Arising
Upon Exchange of Options
    
    
    (4,676
    )
    
    
    
    
    
    
    Net Cash Provided (Used) by Financing Activities
    
    
    20,331
    
    
    
    (2,760
    )
    
    
    (4,360
    )Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    34,286
    
    
    
    (121,111
    )
    
    
    121,554Cash and Cash Equivalents at Beginning of Year
    
    
    74,385
    
    
    
    195,496
    
    
    
    73,942Cash and Cash Equivalents at End of Year
    
    $
    108,671
    
    
    $
    74,385
    
    
    $
    195,496Cash Paid During the Year for:Income Taxes
    
    $
    146,899
    
    
    $
    73,903
    
    
    $
    41,442Interest
    
    
    
    
    
    
    165
    
    
    
    639Non-Cash Transactions:Issuance of Shares Pursuant to Employee Stock Purchase Plans in Exchange for Notes
Receivable
    
    $
    12,391
    
    
    $
    4,095
    
    
    $
    2,326
 The accompanying notes are an integral part of the consolidated financial statements.
 56




---



##### Table of Contents



Philadelphia Consolidated Holding Corp. and Subsidiaries
 Notes to Consolidated Financial Statements
   Principles of Consolidation and Basis of Presentation
  (a) Investments
     57




---



##### Table of Contents



(b) Cash and Cash Equivalents
  (c) Deferred Acquisition Costs
  (d) Property and Equipment
  (e) Goodwill
    58




---



##### Table of Contents



(f) Other Intangible Assets
  (g) Liability for Unpaid Loss and Loss Adjustment Expenses
  (h) Premiums
  (i) Reinsurance Ceded
   (j) Assessments
  (k) Stock Based Compensation Plans
  59




---



##### Table of Contents



(l) Liability for Preferred Agent Profit Sharing
  (m) Income Taxes
  (n) Earnings Per Share
  (o) Comprehensive Income
  (p) New Accounting Pronouncements
   60




---



##### Table of Contents



Accounting Principles
 
    
    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 same period in which the related premiums are earned.
 
    
    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 non-admitted if determined to be uncollected based upon aging criteria as
defined in SAP.
 
    
    Under SAP, the costs and related policyholder surcharge receivables for guaranty funds and other assessments are recorded
based on managements estimate of the ultimate liability and related ultimate policyholder surcharge receivable, while
under GAAP, such costs are accrued when the liability is probable and reasonably estimatable, and the related policyholder
surcharge receivable amount is accrued as the related premium is written.
 
    
    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
 61




---



##### Table of Contents



Dividend Restrictions
 Risk-Based Capital
   Gross
    
    
    Gross
    
    
    EstimatedUnrealized
    
    
    Unrealized
    
    
    MarketCost (1)
    
    
    Gains
    
    
    Losses
    
    
    Value (2)December 31, 2006Fixed Maturities:Available for SaleU.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies
    
    $
    20,156
    
    
    $
    13
    
    
    $
    245
    
    
    $
    19,924Obligations of States and Political Subdivisions
    
    
    1,050,279
    
    
    
    7,685
    
    
    
    5,851
    
    
    
    1,052,113Corporate and Bank Debt Securities
    
    
    145,114
    
    
    
    474
    
    
    
    2,693
    
    
    
    142,895Asset Backed Securities
    
    
    202,102
    
    
    
    1,111
    
    
    
    567
    
    
    
    202,646Mortgage Pass-Through Securities
    
    
    425,518
    
    
    
    1,214
    
    
    
    5,947
    
    
    
    420,785Collateralized Mortgage Obligations
    
    
    293,062
    
    
    
    971
    
    
    
    2,787
    
    
    
    291,246Total Fixed Maturities Available for Sale
    
    
    2,136,231
    
    
    
    11,468
    
    
    
    18,090
    
    
    
    2,129,609Equity Securities
    
    
    259,184
    
    
    
    47,475
    
    
    
    2,626
    
    
    
    304,033Total Investments
    
    $
    2,395,415
    
    
    $
    58,943
    
    
    $
    20,716
    
    
    $
    2,433,642December 31, 2005Fixed Maturities:Available for SaleU.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies
    
    $
    62,311
    
    
    $
    48
    
    
    $
    646
    
    
    $
    61,713Obligations of States and Political Subdivisions
    
    
    821,456
    
    
    
    5,046
    
    
    
    6,867
    
    
    
    819,635Corporate and Bank Debt Securities
    
    
    246,918
    
    
    
    555
    
    
    
    6,263
    
    
    
    241,210Asset Backed Securities
    
    
    138,292
    
    
    
    728
    
    
    
    1,193
    
    
    
    137,827Mortgage Pass-Through Securities
    
    
    282,256
    
    
    
    201
    
    
    
    5,521
    
    
    
    276,936Collateralized Mortgage Obligations
    
    
    226,982
    
    
    
    189
    
    
    
    2,962
    
    
    
    224,209Total Fixed Maturities Available for Sale
    
    
    1,778,215
    
    
    
    6,767
    
    
    
    23,452
    
    
    
    1,761,530Equity Securities
    
    
    160,926
    
    
    
    15,541
    
    
    
    3,012
    
    
    
    173,455Total Investments
    
    $
    1,939,141
    
    
    $
    22,308
    
    
    $
    26,464
    
    
    $
    1,934,985
 
 (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.  62




---



##### Table of Contents



(In Thousands)
    
    Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDecember 31, 2006:
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesFixed Maturities:Available for Sale:U.S. Treasury Securities and Obligations of
U.S. Government Corporations and Agencies
    
    $
    1,354
    
    
    $
    19
    
    
    $
    12,707
    
    
    $
    226
    
    
    $
    14,061
    
    
    $
    245Obligations of States and Political Subdivisions
    
    
    164,444
    
    
    
    831
    
    
    
    321,194
    
    
    
    5,020
    
    
    
    485,638
    
    
    
    5,851Corporate and Bank Debt Securities
    
    
    28,439
    
    
    
    119
    
    
    
    96,794
    
    
    
    2,574
    
    
    
    125,233
    
    
    
    2,693Asset Backed Securities
    
    
    45,478
    
    
    
    187
    
    
    
    31,654
    
    
    
    380
    
    
    
    77,132
    
    
    
    567Mortgage Pass-Through Securities
    
    
    109,877
    
    
    
    921
    
    
    
    174,327
    
    
    
    5,026
    
    
    
    284,204
    
    
    
    5,947Collateralized Mortgage Obligations
    
    
    72,686
    
    
    
    347
    
    
    
    109,789
    
    
    
    2,440
    
    
    
    182,475
    
    
    
    2,787Total Fixed Maturities Available for Sale
    
    
    422,278
    
    
    
    2,424
    
    
    
    746,465
    
    
    
    15,666
    
    
    
    1,168,743
    
    
    
    18,090Equity Securities
    
    
    37,371
    
    
    
    2,626
    
    
    
    
    
    
    
    
    
    
    
    37,371
    
    
    
    2,626Total Investments
    
    $
    459,649
    
    
    $
    5,050
    
    
    $
    746,465
    
    
    $
    15,666
    
    
    $
    1,206,114
    
    
    $
    20,716
        63




---



##### Table of Contents



EstimatedAmortized
    
    
    Market(In Thousands)
    
    Cost (1)
    
    
    Value (2)Due in One Year or Less
    
    $
    48,685
    
    
    $
    48,752Due After One Year Through Five Years
    
    
    218,839
    
    
    
    215,599Due After Five Years through Ten Years
    
    
    372,654
    
    
    
    371,248Due After Ten Years
    
    
    575,371
    
    
    
    579,333Asset Backed, Mortgage Pass-Through and Collateralized Mortgage Obligation Securities
    
    
    920,682
    
    
    
    914,677$
    2,136,231
    
    
    $
    2,129,609
 
 (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. 64




---



##### Table of Contents



2006
    
    
    2005
    
    
    2004Fixed Maturities
    
    $
    82,833
    
    
    $
    61,550
    
    
    $
    47,739Equity Securities
    
    
    4,381
    
    
    
    2,585
    
    
    
    2,046Cash and Cash Equivalents
    
    
    8,168
    
    
    
    3,943
    
    
    
    1,443Total Investment Income
    
    
    95,382
    
    
    
    68,078
    
    
    
    51,228Funds Held Interest Credit
    
    
    
    
    
    
    (1,486
    )
    
    
    (4,853
    )Investment Expense
    
    
    (3,683
    )
    
    
    (2,883
    )
    
    
    (2,885
    )Net Investment Income
    
    $
    91,699
    
    
    $
    63,709
    
    
    $
    43,490
   2006
    
    
    2005
    
    
    2004Fixed MaturitiesGross Realized Gains
    
    $
    243
    
    
    $
    4,454
    
    
    $
    5,472Gross Realized Losses
    
    
    (6,316
    )
    
    
    (931
    )
    
    
    (7,437
    )Net Fixed Maturities Gain (Loss)
    
    
    (6,073
    )
    
    
    3,523
    
    
    
    (1,965
    )Equity SecuritiesGross Realized Gains
    
    
    7,349
    
    
    
    17,040
    
    
    
    8,340Gross Realized Losses
    
    
    (11,136
    )
    
    
    (7,806
    )
    
    
    (5,614
    )Net Equity Securities Gain (Loss)
    
    
    (3,787
    )
    
    
    9,234
    
    
    
    2,726Cash Flow Hedge Realized Loss
    
    
    
    
    
    
    (3,148
    )
    
    
    Total Net Realized Investment Gain/(Loss)
    
    $
    (9,861
    )
    
    $
    9,609
    
    
    $
    761
         65




---



##### Table of Contents



As of December 31,
    
    
    Estimated Useful2006
    
    
    2005
    
    
    LivesComputer Software
    
    $
    25,988
    
    
    $
    22,446
    
    
    5 YearsComputer Hardware and Telephone Equipment
    
    
    16,688
    
    
    
    14,603
    
    
    3  5 YearsFurniture, Fixtures and Automobiles
    
    
    9,324
    
    
    
    7,072
    
    
    5 YearsLand and Building
    
    
    3,635
    
    
    
    3,635
    
    
    40 YearsLeasehold Improvements
    
    
    4,963
    
    
    
    2,686
    
    
    2  12 Years60,598
    
    
    
    50,442Accumulated Depreciation and Amortization
    
    
    (33,599
    )
    
    
    (26,556
    )Property and Equipment, Net
    
    $
    26,999
    
    
    $
    23,886
      66




---



##### Table of Contents



Net loss and loss adjustment expenses:
    
    As of and For the Years Ended December 31,(In Thousands)
    
    2006
    
    
    2005
    
    
    2004Unpaid loss and loss adjustment expenses at beginning of year
    
    $
    1,245,763
    
    
    $
    996,667
    
    
    $
    627,086Less: reinsurance receivables
    
    
    304,768
    
    
    
    324,948
    
    
    
    145,591Net unpaid loss and loss adjustment expenses at beginning of year
    
    
    940,995
    
    
    
    671,719
    
    
    
    481,495Provision for losses and loss adjustment expenses for current year claims
    
    
    559,647
    
    
    
    533,906
    
    
    
    440,989Increase (Decrease) in estimated ultimate losses and loss adjustment
expenses for prior year claims
    
    
    (91,435
    )
    
    
    (29,900
    )
    
    
    35,126Total incurred losses and loss adjustment expenses
    
    
    468,212
    
    
    
    504,006
    
    
    
    476,115Loss and loss adjustment expense payments for claims attributable to:Current year
    
    
    118,845
    
    
    
    110,496
    
    
    
    107,129Prior years (1)(2)
    
    
    194,933
    
    
    
    124,234
    
    
    
    178,762Total payments
    
    
    313,778
    
    
    
    234,730
    
    
    
    285,891Net unpaid loss and loss adjustment expenses at end of year
    
    
    1,095,429
    
    
    
    940,995
    
    
    
    671,719Plus: reinsurance receivables
    
    
    187,809
    
    
    
    304,768
    
    
    
    324,948Unpaid loss and loss adjustment expenses at end of year
    
    $
    1,283,238
    
    
    $
    1,245,763
    
    
    $
    996,667
 
 (1)
    
    During the year ended December 31, 2005, net loss and loss adjustment expense payments for
claims attributable to prior years are lower by $64.3 million than they otherwise would have
been due to the Companys commutation of its 2003 Whole Account Net Quota Share Reinsurance
Agreement (See Note 10).(2)
    
    During the year ended December 31, 2006, net loss and loss adjustment expense payments for
claims attributable to prior years are lower by $31.9 million than they otherwise would have
been due to the Companys commutation of its 2004 Whole Account Net Quota Share Reinsurance
Agreement (See Note 10).  (In millions)
    
    Net Basis Loss and Loss Adjustment Expensesincrease (decrease)Professional/ManagementCommercial
    
    
    Liability
    
    
    Rental/LeasingAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Auto Coverages
    
    
    Other
    
    
    Total2005
    
    $
    (52.0
    )
    
    $
    (5.0
    )
    
    $
    (1.0
    )
    
    $
    (1.2
    )
    
    $
    (59.2
    )2004
    
    $
    (11.6
    )
    
    $
    1.9
    
    
    $
    (2.8
    )
    
    $
    (0.1
    )
    
    $
    (12.6
    )2003
    
    $
    (0.3
    )
    
    $
    (6.8
    )
    
    $
    (3.7
    )
    
    $
    (0.2
    )
    
    $
    (11.0
    )2002 & Prior
    
    $
    (1.0
    )
    
    $
    (1.6
    )
    
    $
    (6.3
    )
    
    $
    0.3
    
    
    $
    (8.6
    )Total
    
    $
    (64.9
    )
    
    $
    (11.5
    )
    
    $
    (13.8
    )
    
    $
    (1.2
    )
    
    $
    (91.4
    )
    67




---



##### Table of Contents



Net Basis Loss and Loss Adjustment Expensesincrease (decrease)Professional/ManagementCommercial
    
    
    Liability
    
    
    Rental/LeasingAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Auto Coverages
    
    
    Other
    
    
    Total2004
    
    $
    (12.7
    )
    
    $
    (7.6
    )
    
    $
    (4.3
    )
    
    $
    0.4
    
    
    $
    (24.2
    )2003
    
    $
    3.5
    
    
    $
    (2.4
    )
    
    $
    (0.5
    )
    
    $
    1.0
    
    
    $
    1.62002
    
    $
    (0.6
    )
    
    $
    (2.0
    )
    
    $
    (3.4
    )
    
    $
    (1.0
    )
    
    $
    (7.0
    )2001 & Prior
    
    $
    1.9
    
    
    $
    (0.7
    )
    
    $
    (0.9
    )
    
    $
    (0.6
    )
    
    $
    (0.3
    )Total
    
    $
    (7.9
    )
    
    $
    (12.7
    )
    
    $
    (9.1
    )
    
    $
    (0.2
    )
    
    $
    (29.9
    )
     --
    
    The increase for accident years 1997 through 2002 is principally attributable to case
reserve development above expectations primarily across various professional liability
products in the specialty lines segment and general liability and commercial automobile
coverages in the commercial lines segment. The decrease for accident year 2003 is
principally attributable to better than expected claim frequency, primarily for general
liability and commercial automobile coverages in the commercial lines segment.
    68




---



##### Table of Contents



As of and For the Year EndedDecember 31, 2006
    
    
    December 31, 2005Funds Held Payable to Reinsurer Balance at Beginning of Period
    
    $
    39,221
    
    
    $
    131,119Net Written Premiums Ceded
    
    
    
    
    
    
    (316
    )Reinsurer Expense Allowance
    
    
    
    
    
    
    11Provisional Commission
    
    
    
    
    
    
    (6,722
    )Paid Loss and Loss Adjustment Expenses
    
    
    
    
    
    
    (8,451
    )Interest Credit
    
    
    
    
    
    
    1,486Commutation
    
    
    (39,221
    )
    
    
    (77,906
    )Other
    
    
    
    
    
    
    Subtotal Activity
    
    
    (39,221
    )
    
    
    (91,898
    )Funds Held Payable to Reinsurer Balance at End of Period
    
    $
    
    
    
    $
    39,221
        69




---



##### Table of Contents



As of December 31,2006
    
    
    2005Deferred Income Tax Assets:Unearned Premium
    
    $
    48,159
    
    
    $
    40,161Loss Reserve Discounting
    
    
    39,548
    
    
    
    32,587State Insurance Related Assessments
    
    
    4,509
    
    
    
    4,233Fair Value of Equity Based Compensation
    
    
    3,125
    
    
    
    142Deferred Compensation
    
    
    2,645
    
    
    
    1,577Net Realized Investment Losses
    
    
    1,544
    
    
    
    1,603Unrealized Depreciation of Securities
    
    
    
    
    
    
    1,455Other Assets
    
    
    330
    
    
    
    43Total Deferred Income Tax Assets
    
    
    99,860
    
    
    
    81,801Deferred Income Tax Liabilities:Deferred Acquisition Costs
    
    
    55,582
    
    
    
    45,320Unrealized Appreciation of Securities
    
    
    13,380
    
    
    
    Property and Equipment Basis
    
    
    2,495
    
    
    
    2,492Net Investment Income
    
    
    869
    
    
    
    1,035Other Liabilities
    
    
    877
    
    
    
    1,061Total Deferred Income Tax Liabilities
    
    
    73,203
    
    
    
    49,908Net Deferred Income Tax Asset
    
    $
    26,657
    
    
    $
    31,893
   Amount of Tax
    
    
    PercentFor the year ended December 31, 2006:Federal Tax at Statutory Rate
    
    $
    152,129
    
    
    
    35
    %Nontaxable Municipal Bond Interest and Dividends Received Exclusion
    
    
    (10,444
    )
    
    
    (2
    )State Income Tax Expense
    
    
    2,290
    
    
    
    1Other, Net
    
    
    1,830
    
    
    
    Income Tax Expense
    
    $
    145,805
    
    
    
    34
    %For the year ended December 31, 2005:Federal Tax at Statutory Rate
    
    $
    84,286
    
    
    
    35
    %Non-deductible Goodwill Impairment Loss
    
    
    9,003
    
    
    
    4Nontaxable Municipal Bond Interest and Dividends Received Exclusion
    
    
    (8,616
    )
    
    
    (4
    )Other, Net
    
    
    (545
    )
    
    
    Income Tax Expense
    
    $
    84,128
    
    
    
    35
    %For the year ended December 31, 2004:Federal Tax at Statutory Rate
    
    $
    41,627
    
    
    
    35
    %Nontaxable Municipal Bond Interest and Dividends Received Exclusion
    
    
    (6,439
    )
    
    
    (5
    )Other, Net
    
    
    62
    
    
    
    Income Tax Expense
    
    $
    35,250
    
    
    
    30
    %
  70




---



##### Table of Contents



As of and For the Years Ended December 31,2006
    
    
    2005
    
    
    2004Weighted-Average Common Shares Outstanding
    
    
    69,796
    
    
    
    68,551
    
    
    
    66,465Weighted-Average Share Equivalents Outstanding
    
    
    3,674
    
    
    
    4,534
    
    
    
    3,456Weighted-Average Shares and Share Equivalents Outstanding
    
    
    73,470
    
    
    
    73,085
    
    
    
    69,921Net Income
    
    $
    288,849
    
    
    $
    156,688
    
    
    $
    83,683Basic Earnings Per Share
    
    $
    4.14
    
    
    $
    2.29
    
    
    $
    1.26Diluted Earnings Per Share
    
    $
    3.93
    
    
    $
    2.14
    
    
    $
    1.20
       71




---



##### Table of Contents



As of and For the Years Ended December 31,2006
    
    2005
    
    2004Exercise Price
    
    
    
    
    
    Exercise Price
    
    
    
    
    
    Exercise PriceOptions
    
    Per Option(1)
    
    Options
    
    Per Option(1)
    
    Options
    
    Per Option(1)Outstanding at beginning of year
    
    
    8,483,991
    
    
    $
    13.54
    
    
    
    7,931,100
    
    
    $
    10.86
    
    
    
    6,704,100
    
    
    $
    9.18Granted
    
    
    
    
    
    $
    
    
    
    
    1,485,000
    
    
    $
    23.34
    
    
    
    1,440,750
    
    
    $
    17.70Exercised
    
    
    (1,076,643
    )
    
    $
    6.22
    
    
    
    (854,859
    )
    
    $
    5.36
    
    
    
    (201,750
    )
    
    $
    5.71Canceled
    
    
    (368,250
    )
    
    $
    17.61
    
    
    
    (77,250
    )
    
    $
    17.58
    
    
    
    (12,000
    )
    
    $
    14.97Outstanding at end of year
    
    
    7,039,098
    
    
    $
    14.45
    
    
    
    8,483,991
    
    
    $
    13.54
    
    
    
    7,931,100
    
    
    $
    10.86Exercisable at end of year
    
    
    1,746,348
    
    
    $
    8.31
    
    
    
    1,474,491
    
    
    $
    6.18
    
    
    
    1,363,350
    
    
    $
    5.42Weighted-average fair value of
options granted during the year
(2)
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    9.40
    
    
    
    
    
    
    $
    6.21
  
 (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.   As of and for the Year EndedDecember 31, 2006SARSOutstanding at beginning of period
    
    
    Granted
    
    
    949,000Exercised
    
    
    Canceled
    
    
    Outstanding at end of period
    
    
    949,000Weighted-average fair value of SARS
granted during the period
(1)
    
    $
    14.45
 
 (1)
    
    The Company uses the Black-Scholes pricing model to calculate the fair value of the
SARS awarded as of the date of grant.   72




---



##### Table of Contents



As of and for the Year EndedDecember 31, 2006
    
    December 31, 2005Weighted Average
    
    
    
    
    
    Weighted AverageRestricted Stock
    
    Grant Date Fair
    
    Restricted Stock
    
    Grant Date FairShares
    
    Value
    
    Shares
    
    ValueUnvested at beginning of period
    
    
    141,465
    
    
    $
    27.75
    
    
    
    
    
    
    $
    Granted
    
    
    47,080
    
    
    $
    34.57
    
    
    
    145,140
    
    
    $
    27.74Vested
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Forfeited
    
    
    (10,086
    )
    
    $
    28.17
    
    
    
    (3,675
    )
    
    $
    27.52Unvested at end of period
    
    
    178,459
    
    
    $
    29.53
    
    
    
    141,465
    
    
    $
    27.75
   For the Year Ended December 31,2006
    
    2005
    
    2004Expected Stock Volatility
    
    
    33.4% - 35.5
    %
    
    
    33.9
    %
    
    
    28.3
    %Weighted Average Expected Stock Volatility
    
    
    33.9
    %
    
    
    33.9
    %
    
    
    28.3
    %Risk-Free Interest Rate
    
    
    4.4% - 4.8
    %
    
    
    3.8% - 4.3
    %
    
    
    2.9%-3.9
    %Weighted Average Risk-Free Interest Rate
    
    
    4.6
    %
    
    
    3.8
    %
    
    
    3.8
    %Expected Life (Years)
    
    
    6.0  9.0
    
    
    
    6.0
    
    
    
    6.0Weighted Average Expected Life (Years)
    
    
    6.5
    
    
    
    6.0
    
    
    
    6.0Expected Dividends
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    73




---



##### Table of Contents



74




---



##### Table of Contents



For the Year Ended(In thousands, except per share amounts)
    
    December 31, 2006Stock-based compensation expense
    
    $
    10,028Tax benefit
    
    
    (3,510
    )Net decrease in net income
    
    $
    6,518Stock-based compensation cost capitalized (gross
of amortization) as deferred acquisition costs
    
    $
    4,634Effect on:Cash flows from operating activities
    
    $
    1,531Cash flows from financing activities
    
    $
    8,646Effect on:Net earnings per share  Basic
    
    $
    0.09Net earnings per share  Diluted
    
    $
    0.01
  75




---



##### Table of Contents



For the Year Ended December 31,(In thousands, except per share amounts)
    
    2005
    
    
    2004Net income, as reported
    
    $
    156,688
    
    
    $
    83,683Deduct: Total stock-based employee
compensation determined under the fair
value method for all awards, net of
related tax effects
    
    
    (6,354
    )
    
    
    (4,107
    )Pro forma net income
    
    $
    150,334
    
    
    $
    79,576Net earnings per share  Basic:As reported
    
    $
    2.29
    
    
    $
    1.26Pro forma
    
    $
    2.19
    
    
    $
    1.20Net earnings per share  Diluted:As reported
    
    $
    2.14
    
    
    $
    1.20Pro forma
    
    $
    2.06
    
    
    $
    1.14
      76




---



##### Table of Contents



Written
    
    
    EarnedFor the Year Ended December 31, 2006:Direct Business
    
    $
    1,488,839
    
    
    $
    1,361,057Reinsurance Assumed
    
    
    4,409
    
    
    
    4,301Reinsurance Ceded
    
    
    210,384
    
    
    
    196,056Net Premiums
    
    $
    1,282,864
    
    
    $
    1,169,302Reinsurance Assumed as a Percentage of Net
    
    
    0.3
    %
    
    
    0.4
    %For the Year Ended December 31, 2005:Direct Business
    
    $
    1,260,693
    
    
    $
    1,161,284Reinsurance Assumed
    
    
    4,222
    
    
    
    4,012Reinsurance Ceded
    
    
    154,144
    
    
    
    188,649Net Premiums
    
    $
    1,110,771
    
    
    $
    976,647Reinsurance Assumed as a Percentage of Net
    
    
    0.4
    %
    
    
    0.4
    %For the Year Ended December 31, 2004:Direct Business
    
    $
    1,166,966
    
    
    $
    1,055,152Reinsurance Assumed
    
    
    4,351
    
    
    
    6,905Reinsurance Ceded
    
    
    256,785
    
    
    
    291,809Net Premiums
    
    $
    914,532
    
    
    $
    770,248Reinsurance Assumed as a Percentage of Net
    
    
    0.5
    %
    
    
    0.9
    %
     77




---



##### Table of Contents



Operating Leases:
   Year Ending December 31:2007
    
    $
    4,9702008
    
    
    5,2452009
    
    
    4,7222010
    
    
    4,1322011 and Thereafter
    
    
    10,862Total Minimum Payments Required
    
    $
    29,931
 Open Commitments:
  Credit Agreement:
   State
Insurance Guaranty Funds:
 State Insurance Facility Assessments:
   78




---



##### Table of Contents



Florida
Hurricane Catastrophe Fund:
    79




---



##### Table of Contents



Three Months EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2006 (1)
    
    
    2006 (1)
    
    
    2006 (1)
    
    
    2006 (1)Net Earned Premiums
    
    $
    276,546
    
    
    $
    288,794
    
    
    $
    296,366
    
    
    $
    307,596Net Investment Income
    
    $
    20,062
    
    
    
    21,677
    
    
    $
    23,833
    
    
    $
    26,127Net Realized Investment Gain (Loss)
    
    $
    (394
    )
    
    $
    (2,412
    )
    
    $
    (6,976
    )
    
    $
    (79
    )Net Loss and Loss Adjustment Expenses
    
    $
    143,665
    
    
    $
    108,755
    
    
    $
    84,706
    
    
    $
    131,086Acquisition Costs and Other Underwriting Expenses
    
    $
    77,017
    
    
    $
    85,337
    
    
    $
    89,052
    
    
    $
    86,861Net Income
    
    $
    50,321
    
    
    $
    74,857
    
    
    $
    89,890
    
    
    $
    73,781Basic Earnings Per Share
    
    $
    0.73
    
    
    $
    1.07
    
    
    $
    1.28
    
    
    $
    1.05Diluted Earnings Per Share
    
    $
    0.70
    
    
    $
    1.03
    
    
    $
    1.22
    
    
    $
    1.00Weighted-Average Common Shares Outstanding
    
    
    69,377,774
    
    
    
    69,775,336
    
    
    
    69,991,728
    
    
    
    70,029,636Weighted-Average Share Equivalents Outstanding
    
    
    2,982,230
    
    
    
    2,721,730
    
    
    
    3,488,999
    
    
    
    3,887,446Weighted-Average Shares and Share Equivalents Outstanding
    
    
    72,360,004
    
    
    
    72,497,066
    
    
    
    73,480,727
    
    
    
    73,917,082
 Three Months EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2005 (2)(3)
    
    
    2005 (2)(3)
    
    
    2005 (2)(3)
    
    
    2005 (2)(3)Net Earned Premiums
    
    $
    236,755
    
    
    $
    233,136
    
    
    $
    244,770
    
    
    $
    261,986Net Investment Income
    
    $
    13,491
    
    
    
    15,373
    
    
    $
    16,979
    
    
    $
    17,866Net Realized Investment Gain (Loss)
    
    $
    10,798
    
    
    $
    296
    
    
    $
    1,097
    
    
    $
    (2,582
    )Net Loss and Loss Adjustment Expenses
    
    $
    126,471
    
    
    $
    115,802
    
    
    $
    141,859
    
    
    $
    119,874Acquisition Costs and Other Underwriting Expenses
    
    $
    63,948
    
    
    $
    57,826
    
    
    $
    67,542
    
    
    $
    74,443Goodwill Impairment Loss
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    25,724Net Income
    
    $
    45,571
    
    
    $
    47,140
    
    
    $
    35,090
    
    
    $
    28,887Basic Earnings Per Share
    
    $
    0.68
    
    
    $
    0.68
    
    
    $
    0.51
    
    
    $
    0.42Diluted Earnings Per Share
    
    $
    0.64
    
    
    $
    0.64
    
    
    $
    0.48
    
    
    $
    0.39Weighted-Average Common Shares Outstanding
    
    
    67,273,227
    
    
    
    68,858,718
    
    
    
    69,008,412
    
    
    
    69,041,580Weighted-Average Share Equivalents Outstanding
    
    
    4,310,019
    
    
    
    4,461,048
    
    
    
    4,368,114
    
    
    
    4,925,142Weighted-Average Shares and Share Equivalents Outstanding
    
    
    71,583,246
    
    
    
    73,319,766
    
    
    
    73,376,526
    
    
    
    73,966,722
 
 (1)
    
    Net Realized Investment Gain (Loss) for the three months ended March 31, 2006, June 30, 2006,
September 30, 2006 and December 31, 2006 includes non-cash realized losses of $0.7 million,
$0.6 million, $5.7 million, and $1.8 million, respectively, as a result of impairment
evaluations.(2)
    
    Net Earned Premiums for the three months ended March 31, 2005, June 30, 2005, September 30,
2005 and December 31, 2005 includes accrued profit commissions on certain reinsurance
contracts of $1.3 million, $1.2 million, $0.8 million and $0.7 million, respectively.(3)
    
    Net Realized Investment Gain (Loss) for the three months ended March 31, 2005, June 30, 2005,
September 30, 2005 and December 31, 2005 includes non-cash realized losses of $0.1 million,
$0.1 million, $0.1 million, and $1.9 million, respectively, as a result of impairment
evaluations.    80




---



##### Table of Contents



Commercial
    
    
    Specialty
    
    
    PersonalLines
    
    
    Lines
    
    
    Lines
    
    
    Corporate
    
    
    Total2006:Gross Written Premiums
    
    $
    1,169,468
    
    
    $
    227,567
    
    
    $
    96,213
    
    
    $
    
    
    
    $
    1,493,248Net Written Premiums
    
    $
    1,080,248
    
    
    $
    181,358
    
    
    $
    21,258
    
    
    $
    
    
    
    $
    1,282,864Revenue:Net Earned Premiums
    
    $
    966,281
    
    
    $
    173,974
    
    
    $
    29,047
    
    
    $
    
    
    
    $
    1,169,302Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,699
    
    
    
    91,699Net Realized Investment Loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,861
    )
    
    
    (9,861
    )Other Income
    
    
    
    
    
    
    
    
    
    
    2,031
    
    
    
    599
    
    
    
    2,630Total Revenue
    
    
    966,281
    
    
    
    173,974
    
    
    
    31,078
    
    
    
    82,437
    
    
    
    1,253,770Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    343,575
    
    
    
    109,462
    
    
    
    15,175
    
    
    
    
    
    
    
    468,212Acquisition Costs and Other Underwriting Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    338,267
    
    
    
    338,267Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    1,407
    
    
    
    11,230
    
    
    
    12,637Total Losses and Expenses
    
    
    343,575
    
    
    
    109,462
    
    
    
    16,582
    
    
    
    349,497
    
    
    
    819,116Income Before Income Taxes
    
    
    622,706
    
    
    
    64,512
    
    
    
    14,496
    
    
    
    (267,060
    )
    
    
    434,654Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145,805
    
    
    
    145,805Net Income
    
    $
    622,706
    
    
    $
    64,512
    
    
    $
    14,496
    
    
    $
    (412,865
    )
    
    $
    288,849Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    133,182
    
    
    $
    3,305,355
    
    
    $
    3,438,5372005:Gross Written Premiums
    
    $
    960,344
    
    
    $
    205,306
    
    
    $
    99,265
    
    
    $
    
    
    
    $
    1,264,915Net Written Premiums
    
    $
    904,707
    
    
    $
    159,112
    
    
    $
    46,952
    
    
    $
    
    
    
    $
    1,110,771Revenue:Net Earned Premiums
    
    $
    778,407
    
    
    $
    151,678
    
    
    $
    46,562
    
    
    $
    
    
    
    $
    976,647Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,709
    
    
    
    63,709Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,609
    
    
    
    9,609Other Income
    
    
    
    
    
    
    
    
    
    
    943
    
    
    
    521
    
    
    
    1,464Total Revenue
    
    
    778,407
    
    
    
    151,678
    
    
    
    47,505
    
    
    
    73,839
    
    
    
    1,051,429Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    375,590
    
    
    
    93,824
    
    
    
    34,592
    
    
    
    
    
    
    
    504,006Acquisition Costs and Other Underwriting Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    263,759
    
    
    
    263,759Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    370
    
    
    
    16,754
    
    
    
    17,124Goodwill Impairment Loss
    
    
    
    
    
    
    
    
    
    
    25,724
    
    
    
    
    
    
    
    25,724Total Losses and Expenses
    
    
    375,590
    
    
    
    93,824
    
    
    
    60,686
    
    
    
    280,513
    
    
    
    810,613Income Before Income Taxes
    
    
    402,817
    
    
    
    57,854
    
    
    
    (13,181
    )
    
    
    (206,674
    )
    
    
    240,816Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,128
    
    
    
    84,128Net Income
    
    $
    402,817
    
    
    $
    57,854
    
    
    $
    (13,181
    )
    
    $
    (290,802
    )
    
    $
    156,688Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    227,122
    
    
    $
    2,700,704
    
    
    $
    2,927,8262004:Gross Written Premiums
    
    $
    874,018
    
    
    $
    184,419
    
    
    $
    112,880
    
    
    $
    
    
    
    $
    1,171,317Net Written Premiums
    
    $
    720,639
    
    
    $
    154,130
    
    
    $
    39,763
    
    
    $
    
    
    
    $
    914,532Revenue:Net Earned Premiums
    
    $
    614,151
    
    
    $
    134,050
    
    
    $
    22,047
    
    
    $
    
    
    
    $
    770,248Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,490
    
    
    
    43,490Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    761
    
    
    
    761Other Income
    
    
    
    
    
    
    
    
    
    
    3,426
    
    
    
    931
    
    
    
    4,357Total Revenue
    
    
    614,151
    
    
    
    134,050
    
    
    
    25,473
    
    
    
    45,182
    
    
    
    818,856Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    303,847
    
    
    
    123,597
    
    
    
    48,671
    
    
    
    
    
    
    
    476,115Acquisition Costs and Other Underwriting Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    214,369
    
    
    
    214,369Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    1,969
    
    
    
    7,470
    
    
    
    9,439Total Losses and Expenses
    
    
    303,847
    
    
    
    123,597
    
    
    
    50,640
    
    
    
    221,839
    
    
    
    699,923Income Before Income Taxes
    
    
    310,304
    
    
    
    10,453
    
    
    
    (25,167
    )
    
    
    (176,657
    )
    
    
    118,933Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,250
    
    
    
    35,250Net Income
    
    $
    310,304
    
    
    $
    10,453
    
    
    $
    (25,167
    )
    
    $
    (211,907
    )
    
    $
    83,683Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    248,031
    
    
    $
    2,237,625
    
    
    $
    2,485,656
 81




---



##### Table of Contents



(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 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 this 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.(b)
    
    Changes in Internal Controls. There has been no change in the Companys internal control over
financial reporting during the Companys most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Companys internal control over
financial reporting.(c)
    
    Managements Report on Internal Control Over Financial ReportingThe Companys management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities
Exchange Act of 1934. Under the supervision and with the participation of the Companys
management, including the principal executive officer and principal financial officer, the
Companys management conducted an evaluation of the effectiveness of the Companys internal
control over financial reporting based on the framework in Internal Control  Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this evaluation under the framework in Internal Control-Integrated Framework, management
concluded that the internal control over financial reporting was effective as of December 31,
2006. Our managements assessment of the effectiveness of internal control over financial
reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which is included herein.Because of its inherent limitations, internal control over the financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.(d)
    
    The Report of Independent Registered Public Accounting Firm on internal control over
financial reporting is included in this Annual Report on Form 10-K immediately before the
consolidated financial statements.
 
   82




---



##### Table of Contents



(a)
    
    The information required by this Item is incorporated by reference to the Proxy Statement
under the caption Security Ownership of Certain Beneficial Owners and Management.
 (b)
    
    The information required by this Item is incorporated by reference to the Proxy Statement
under the caption Equity Compensation Plan Information.
 83




---



##### Table of Contents



84




---



##### Table of Contents



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
    
    G
    
    Amendment to Articles of Incorporation, Philadelphia Consolidated Holding Corp.3.2
    
    A
    
    By-laws of Philadelphia Insurance, as amended to date.3.21
    
    P
    
    By-Laws of Philadelphia Consolidated Holding Corp. (as Amended through April 29, 2005).3.22
    
    Q
    
    Amendment to the Companys bylaws effective as of April 29, 2005.10.1
    
    A
    
    General Agency Agreement, effective December 1, 1987, between MIA and Providence Washington Insurance
Company, as amended to date, together with related Quota Share Reinsurance Agreements, as amended to
date.10.2
    
    A(1)
    
    Wheelways Salary Savings Plus Plan Summary Plan Description.10.3
    
    A
    
    Key Man Life Insurance Policies on James J. Maguire10.4
    
    A
    
    Tax Sharing Agreement, dated July 16, 1987, between Philadelphia Insurance and PIC, as amended to date.10.5
    
    A
    
    Tax Sharing Agreement, dated November 1, 1986, between Philadelphia Insurance and PIIC, as amended to
date.10.6
    
    C (1)
    
    Management Agreement dated May 20, 1991, between PIIC and MIA, as amended September 25, 1996.10.7
    
    C (1)
    
    Management Agreement dated October 23, 1991, between PIC and MIA, as amended September 25, 1996.10.8
    
    B (1)
    
    Employee Stock Purchase Plan.10.9
    
    B (1)
    
    Cash Bonus Plan.10.10
    
    B (1)
    
    Executive Deferred Compensation Plan.10.11
    
    D (1)
    
    Directors Stock Purchase Plan10.12
    
    E
    
    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, 1997.10.13
    
    E
    
    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, 1997.10.14
    
    F
    
    Plan and Agreement of Merger Between Philadelphia Consolidated Holding Corp. and The Jerger Co. Inc.
 85




---



##### Table of Contents



Exhibit No.
    
    
    
    Description10.15
    
    G(1)
    
    Philadelphia Insurance Companies Non Qualified Employee Stock Purchase Plan  incorporated by reference to
Exhibit 4 to Registration Statement on Form S-8 (file no. 333-91216) filed with the Securities and Exchange
Commission on June 26, 2002.10.16
    
    G (1)
    
    Philadelphia Insurance Companies Key Employee Deferred Compensation Plan  incorporated by reference to
Exhibit 4.1 to Registration Statement on Form S-8 (file no. 333-90534) filed with the Securities and
Exchange Commission on June 14, 2002.10.17
    
    H (1)
    
    Employment Agreement with James J. Maguire effective June 1, 2002.10.18
    
    I
    
    AQS, Inc. Software License Agreement, dated October 1, 2002.10.19
    
    J
    
    Florida Hurricane Catastrophe Fund Reimbursement Contract Effective June 1, 2003.10.20
    
    K
    
    Quota Share Reinsurance Contract with Swiss Reinsurance America Corporation effective May 15, 2003 covering
policies within the Custom Harvest Program.10.21
    
    K
    
    Excess of Loss Agreement of Reinsurance No. 9034 with General Reinsurance Corporation effective January 1,
2003.10.22
    
    K
    
    Addendum No. 3 to the Casualty Excess of Loss Reinsurance Agreement No. TC988A, B with Swiss Reinsurance
American Corporation effective January 1, 2003.10.23
    
    K
    
    Property Excess of Loss Agreement of Reinsurance No. TP1600E with Swiss Reinsurance America Corporation
effective January 1, 2003.10.24
    
    K
    
    Casualty Excess of Loss Reinsurance Contract with American Re-Insurance Company, Converium Reinsurance
(North America) Inc., Endurance Specialty Insurance Limited, Liberty Mutual Insurance Company effective
January 1, 2003.10.25
    
    L
    
    Casualty Semi-Automatic Excess of Loss Reinsurance Contract with Endurance Specialty Insurance, Ltd.
effective March 1, 2003 RE: Philadelphia Insurance Company Master Policy PHUB015555 and Philadelphia
Indemnity Insurance Company Master Policy PHUB015555-01.10.26
    
    L
    
    Casualty Semi-Automatic Excess of Loss Reinsurance Contract with Endurance Specialty Insurance, Ltd.
effective March 1, 2003 RE: Philadelphia Insurance Company Master Policy PHUB015557 and Philadelphia
Indemnity Insurance Company Master Policy PHUB015557-01.10.27
    
    L
    
    Non Florida Commercial Excess Catastrophe Reinsurance Contract with the Subscribing Reinsurer (s) Executing
the Interests and Liabilities Agreement (s) effective June 1, 2003.10.28
    
    L
    
    Florida Commercial Excess Catastrophe Reinsurance Contract with the Subscribing Reinsurer (s) Executing the
Interests and Liabilities Agreement (s) effective June 1, 2003.10.29
    
    L
    
    Excess Catastrophe Reinsurance Contract with Federal Insurance Company through Chubb Re, Inc. effective
June 1, 2003.10.30
    
    M
    
    Whole Account Net Quota Share Reinsurance Contract effective as of January 1, 2004 (Addendum No. 1)10.31
    
    M
    
    Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective as of June 1, 200410.32
    
    M
    
    Casualty Excess of Loss Reinsurance Contract effective as of January 1, 200410.33
    
    M
    
    Property Per Risk 1st and 2nd Excess Reinsurance Contract effective as of January 1, 2004 (Endorsement No.10.34
    
    M(1)
    
    Amended and Restated Employment Agreement with James J. Maguire effective as of January 1, 200410.35
    
    N
    
    Gap Quota Share Reinsurance Contract effective as of April 1, 2004
 86




---



##### Table of Contents



Exhibit No.
    
    
    
    Description10.36
    
    N
    
    Casualty (Clash) Excess of Loss effective January 1, 200410.37
    
    N
    
    Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective June 1, 2004 (Liberty American
Insurance Company)10.38
    
    N
    
    Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective June 1, 2004 (Mobile USA
Insurance Company)10.39
    
    O
    
    Reinstatement Premium Protection Reinsurance Contract effective July 1, 2004.10.40
    
    O
    
    Underlying Excess Catastrophe and Reinstatement Premium Protection Reinsurance Contract effective July 1,
2004.10.41
    
    O
    
    35% Florida Only Third and Fourth Catastrophe Event Reinsurance Contract effective September 2, 2004.10.42
    
    O
    
    $50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract effective September
3, 2004.10.43
    
    P
    
    Florida Only Excess Catastrophe Reinsurance Contract effective June 1, 2004 with the Subscribing Reinsurers.10.44
    
    P
    
    $50 million excess of $90 million Florida Only Excess Catastrophe Reinsurance Contract effective June 1,
2004 with the Subscribing Reinsurers.10.45
    
    P
    
    $50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract effective September
1, 2004 with the Subscribing Reinsurers.10.46
    
    P
    
    $5 million excess of $190 million Florida Only Catastrophe Excess Reinsurance Contract effective September
10, 2004 with the Subscribing Reinsurers.10.47
    
    P
    
    Underlying Excess Catastrophe Reinsurance Contract effective July 1, 2004 with the Subscribing Reinsurers.10.48
    
    P
    
    Casualty Excess of Loss Contract effective January 1, 2005 with Swiss Reinsurance America Corporation.10.49
    
    P
    
    Addendum Number 2 to the Property Excess of Loss Contract effective January 1, 2005 with Swiss Reinsurance
America Corporation.10.50
    
    P
    
    Endorsement No. 2 to the Property Per Risk 1 st and 2 nd Excess
Reinsurance Contract effective January 1, 2005 with General Reinsurance Corporation.10.51
    
    Q
    
    Excess Catastrophe Reinsurance Contract effective June 1, 2004 with the Subscribing Reinsurers.10.52
    
    Q
    
    65% Florida Only Third and Fourth Event Excess Catastrophe Reinsurance Contract effective September 1, 2004
with the Subscribing Reinsurers.10.53
    
    Q
    
    $45 million excess of $195 million Florida Only Catastrophe Reinsurance Contract effective September 10,
2004 with the Subscribing Reinsurers.10.54
    
    Q
    
    $6.5 million excess of $3.5 million Florida Only Fifth Event Catastrophe Reinsurance Contract effective
September 24, 2004 with the Subscribing Reinsurers.10.55
    
    Q
    
    $50 million excess of $240 million Florida Only Catastrophe Reinsurance Contract effective October 1, 2004
with the Subscribing Reinsurers.10.56
    
    Q
    
    $40 million excess of $50 million Florida Only Third Event Catastrophe Reinsurance Contract effective
October 1, 2004 with the Subscribing Reinsurers.10.57
    
    Q
    
    $50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract effective October
1, 2004 with the Subscribing Reinsurers.10.58
    
    Q
    
    Florida Hurricane Catastrophe Fund Reinsurance Contract effective June 1, 2005 (Liberty American Insurance
Company)10.59
    
    Q
    
    Florida Hurricane Catastrophe Fund Reinsurance Contract effective June 1, 2005 (Mobile USA Insurance
Company)
 87




---



##### Table of Contents



Exhibit No.
    
    
    
    Description10.60
    
    Q
    
    Third Event Catastrophe Reinsurance Contract effective September 3, 2004 with the Subscribing Reinsurers
for 50% share.10.61
    
    Q
    
    Third Event Catastrophe Reinsurance Contract effective September 3, 2004 with the Subscribing Reinsurers
for 50% share.10.62
    
    Q (1)
    
    Amendment and Restatement of the Companys Employees Stock Incentive and Performance Based Compensation
Plan.10.63
    
    Q (1)
    
    Form of Stock Option Award Agreement.10.64
    
    Q (1)
    
    Form of Restricted Stock Award Agreement.10.65
    
    R
    
    Casualty Excess of Loss Reinsurance Contract and Endorsement No. 1 effective January 1, 2005. The
participating reinsurers are Ace Property & Casualty Insurance Company, Allied World Assurance Company,
Ltd., Liberty Mutual Insurance Company, Max Re Ltd.10.66
    
    R
    
    Florida Only Reinstatement Premium Protection Reinsurance Contract effective June 1, 2005. The
participating reinsurers are ACE Tempest Reinsurance LTD, Aspen Insurance UK LTD, AXIS Specialty Limited,
Hannover Re (Bermuda) Ltd., Rosemont Reinsurance LTD, Syndicate #0958 and Syndicate #2001 at varying levels
of participation.10.67
    
    R
    
    Professional Liability Insurance Quota Share Contract effective July 1, 2005 with Cumis Insurance Society,
Inc.10.68
    
    S
    
    Lease Agreement dated as of March 1, 2006 between Bala Plaza Property, Inc., and Philadelphia Consolidated
Holding Corp.10.69
    
    T
    
    Excess Catastrophe Reinsurance Contract effective June 1, 2005.10.70
    
    T
    
    Florida Only Excess Catastrophe Reinsurance Contract effective June 1, 2005.10.71
    
    T
    
    Reinstatement Premium Protection Reinsurance Contract effective June 1, 2005.10.72
    
    T
    
    2004 Whole Account Net Quota Share Reinsurance Commutation and Release Agreement effective January 1, 2006
with Federal Insurance Company, through Chubb Re, Inc.10.73
    
    T
    
    2004 Whole Account Net Quota Share Reinsurance Commutation and Release Agreement effective January 1, 2006
with Swiss Reinsurance America Corporation10.74
    
    T
    
    Casualty Excess of Loss Reinsurance Agreement effective January 1, 2006  80% Placement via Willis Re Inc.10.75
    
    T
    
    Property Third and Fourth Excess of Loss Reinsurance Agreement effective January 1, 2006  50% Placement
via Willis Re Inc.10.76
    
    U
    
    Credit Agreement dated as of June 30, 200610.77
    
    V
    
    Casualty (Clash) Excess of Loss Reinsurance Agreement with Swiss Reinsurance America Corporation effective
January 1, 200610.78
    
    V
    
    Addendum No. 3 to the 3rd and 4th Property Excess of Loss Reinsurance Agreement with Swiss Reinsurance
America Corporation  50% Placement  effective January 1, 200610.79
    
    V
    
    Casualty Excess of Loss Reinsurance Contract effective January 1, 2006  20% Placement with Employers
Reinsurance Corporation10.80
    
    V
    
    Endorsement No. 4 to the Property Per Risk 1st and 2nd Excess of Loss and Terrorism Reinsurance Contract
with General Reinsurance Corporation effective January 1, 2006
 88




---



##### Table of Contents



Exhibit No.
    
    
    
    Description10.81
    
    V
    
    Commutation and Release Agreement with Trenwick America Reinsurance Corporation10.82
    
    V
    
    $6,150,000 Excess $10,000,000 Catastrophe Reinsurance Contract with Aspen Insurance Limited effective June
1, 200610.83
    
    V
    
    First Excess Reinstatement Premium Protection Reinsurance Contract with Subscribing Reinsurers effective
June 1, 2006 (Liberty American and Liberty American Select Insurance Companies)10.84
    
    V
    
    Second and Third Excess Reinstatement Premium Protection Reinsurance Contract with Subscribing Reinsurers
effective June 1, 2006 (Liberty American and Liberty American Select Insurance Companies)10.85
    
    V
    
    Florida Hurricane Catastrophe Fund Reimbursement Contract and Addendum No. 1 effective June 1, 2006
(Liberty American Insurance Company)10.86
    
    V
    
    Florida Hurricane Catastrophe Fund Reimbursement Contract and Addendums No. 1 and No. 2 effective June 1,
2006 (Liberty American Select Insurance Company)10.87
    
    W(1)
    
    Form of Performance Share Award Agreement10.88
    
    W(1)
    
    James J. Maguire, Jr. Employment Agreement10.89
    
    W(1)
    
    Sean S. Sweeney Employment Agreement10.90
    
    W(1)
    
    Craig P. Keller Employment Agreement10.91
    
    W(1)
    
    Christopher J. Maguire Employment Agreement10.92
    
    W(1)
    
    Form of Stock Appreciation Right Award Agreement10.93
    
    X(1)
    
    James J. Maguire, Jr. 2006 Grant of Stock Appreciation Rights10.94
    
    X(1)
    
    Sean S. Sweeney 2006 Grant of Stock Appreciation Rights10.95
    
    X(1)
    
    Craig P. Keller 2006 Grant of Stock Appreciation Rights10.96
    
    X(1)
    
    Christopher J. Maguire 2006 Grant of Stock Appreciation Rights10.97
    
    X
    
    Excess Catastrophe Reinsurance Contract effective June 1, 200621
    
    X
    
    List of Subsidiaries of the Registrant.23
    
    X
    
    Consent of Independent Registered Public Accounting Firm24
    
    A
    
    Power of Attorney31.1
    
    X
    
    Certification of the Companys chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    X
    
    Certification of the Companys chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    X
    
    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 2002.32.2
    
    X
    
    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.
 
 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). 89




---



##### Table of Contents



B
    
    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.C
    
    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.D
    
    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.E
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 1997.F
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999.G
    
    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.H
    
    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.I
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2002.J
    
    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.K
    
    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.L
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2003 and
incorporated by reference.M
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004
and incorporated by reference.N
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2004 and incorporated by reference.O
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2004 and
incorporated by reference.P
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2005
and incorporated by reference.Q
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005
and incorporated by reference.R
    
    Filed as an Exhibit to the Companys Annual Report on Form 10-K for the year ended December 31, 2005 and
incorporated by reference.S
    
    Filed as an Exhibit to the Companys Form 8-K dated March 21, 2006 and incorporated by reference.T
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2006
and incorporated by reference.U
    
    Filed as an Exhibit to the Companys Form 8-K dated July 6, 2006 and incorporated by reference.V
    
    Filed as an Exhibit to the Companys Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2006 and incorporated by reference.W
    
    Filed as an Exhibit to the Companys Form 8-K dated February 22, 2007 and incorporated by reference.X
    
    Filed herewith.(1)
    
    Compensatory Plan or Arrangement, or Management Contract. 90




---



##### Table of Contents



Philadelphia Consolidated Holding Corp.By: James J. Maguire, Jr.James J. Maguire, Jr.President and Chief Executive OfficerFebruary 27, 2007
  Signature
    
    Title
    
    DateJames J. Maguire, Jr.
    
    President & Chief Executive Officer,
    
    February 27, 2007James J. Maguire, Jr.
    
    (Principal
Executive Officer)Craig P. Keller
    
    Executive Vice President, Secretary,
Treasurer, and Chief Financial Officer
    
    February 27, 2007Craig P. Keller
    
    (Principal
Financial and Accounting Officer)James J. Maguire
    
    Chairman of the Board of
    
    February 27, 2007James J. Maguire
    
    DirectorsSean S. Sweeney
    
    Executive Vice President, Director
    
    February 27, 2007Sean S. SweeneyAminta Hawkins Breaux
    
    Director
    
    February 27, 2007Aminta Hawkins BreauxMichael J. Cascio
    
    Director
    
    February 27, 2007Michael J. CascioElizabeth H. Gemmill
    
    Director
    
    February 27, 2007Elizabeth H. GemmillMichael J. Morris
    
    Director
    
    February 27, 2007Michael J. MorrisShaun F. OMalley
    
    Director
    
    February 27, 2007Shaun F. OMalleyDonald A. Pizer
    
    Director
    
    February 27, 2007Donald A. PizerRonald R. Rock
    
    Director
    
    February 27, 2007Ronald R. Rock
 91




---



##### Table of Contents



COLUMN C
    
    
    COLUMN DEstimated
    
    
    Amount at whichCOLUMN A
    
    COLUMN B
    
    
    Market
    
    
    shown in theType of Investment
    
    Cost *
    
    
    Value
    
    
    Balance SheetFixed Maturities:Bonds:United States Government and Government Agencies and Authorities
    
    $
    445,675
    
    
    $
    440,710
    
    
    $
    440,710States, Municipalities and Political Subdivisions
    
    
    1,001,777
    
    
    
    1,003,362
    
    
    
    1,003,362Public Utilities
    
    
    16,835
    
    
    
    16,406
    
    
    
    16,406All Other Corporate Bonds
    
    
    671,944
    
    
    
    669,131
    
    
    
    669,131Total Fixed Maturities
    
    
    2,136,231
    
    
    
    2,129,609
    
    
    
    2,129,609Equity Securities:Common Stocks:Public Utilities
    
    
    11,451
    
    
    
    13,581
    
    
    
    13,581Banks, Trust and Insurance Companies
    
    
    28,056
    
    
    
    32,339
    
    
    
    32,339Industrial, Miscellaneous and all other
    
    
    219,677
    
    
    
    258,113
    
    
    
    258,113Total Equity Securities
    
    
    259,184
    
    
    
    304,033
    
    
    
    304,033Total Investments
    
    $
    2,395,415
    
    
    $
    2,433,642
    
    
    $
    2,433,642
 
 *
    
    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




---



##### Table of Contents



As of December 31,2006
    
    
    2005ASSETSCash and Cash Equivalents
    
    $
    188
    
    
    $
    196Equity in and Advances to Unconsolidated Subsidiaries (a)
    
    
    1,168,524
    
    
    
    815,735Income Taxes Recoverable
    
    
    
    
    
    
    1,266Total Assets
    
    $
    1,168,712
    
    
    $
    817,197LIABILITIES AND SHAREHOLDERS EQUITYOther Liabilities
    
    $
    1,445
    
    
    $
    701Total Liabilities
    
    
    1,445
    
    
    
    701Commitments 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, 70,848,482 and 69,266,016
Shares Issued and Outstanding
    
    
    376,986
    
    
    
    332,757Notes Receivable from Shareholders
    
    
    (17,074
    )
    
    
    (7,217
    )Accumulated Other Comprehensive Income (Loss)
    
    
    24,848
    
    
    
    (2,702
    )Retained Earnings
    
    
    782,507
    
    
    
    493,6581,167,267
    
    
    
    816,496Total Liabilities and Shareholders Equity
    
    $
    1,168,712
    
    
    $
    817,197
 
 (a)
    
    This item has been eliminated in the Companys Consolidated Financial Statements.  S-2




---



##### Table of Contents



For the Years Ended December 31,2006
    
    
    2005
    
    
    2004Revenue:Dividends from Subsidiaries (a)
    
    $
    7,645
    
    
    $
    35,797
    
    
    $
    11,838Net Realized Investment Loss
    
    
    
    
    
    
    (3,148
    )
    
    
    Total Revenue
    
    
    7,645
    
    
    
    32,649
    
    
    
    11,838Other Expenses
    
    
    3,511
    
    
    
    3,385
    
    
    
    2,573Total Expenses
    
    
    3,511
    
    
    
    3,385
    
    
    
    2,573Income, Before Income Taxes and Equity in Earnings of Unconsolidated Subsidiaries
    
    
    4,134
    
    
    
    29,264
    
    
    
    9,265Income Tax Benefit
    
    
    (884
    )
    
    
    (2,287
    )
    
    
    (901
    )Income, Before Equity in Earnings of Unconsolidated Subsidiaries
    
    
    5,018
    
    
    
    31,551
    
    
    
    10,166Equity in Earnings of Unconsolidated Subsidiaries
    
    
    283,831
    
    
    
    125,137
    
    
    
    73,517Net Income
    
    $
    288,849
    
    
    $
    156,688
    
    
    $
    83,683
 
 (a)
    
    This item has been eliminated in the Companys Consolidated Financial Statements.  S-3




---



##### Table of Contents



)
 For the Years Ended December 31,2006
    
    
    2005
    
    
    2004Cash Flows From Operating Activities:Net Income
    
    $
    288,849
    
    
    $
    156,688
    
    
    $
    83,683Adjustments to Reconcile Net Income to Net Cash Provided by Operating ActivitiesEquity in Earnings of Unconsolidated Subsidiaries
    
    
    (283,831
    )
    
    
    (125,137
    )
    
    
    (73,517
    )Net Realized Investment Loss
    
    
    
    
    
    
    3,148
    
    
    
    Change in Other Liabilities
    
    
    744
    
    
    
    218
    
    
    
    56Change in Other Assets
    
    
    
    
    
    
    
    
    
    
    1Change in Income Taxes Recoverable
    
    
    11,442
    
    
    
    (2,147
    )
    
    
    (401
    )Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans
    
    
    
    
    
    
    6,952
    
    
    
    1,031Fair Value of Stock Based Compensation
    
    
    12,511
    
    
    
    
    
    
    
    Excess Tax Benefit from Issuance of Shares Pursuant to Stock Based
Compensation Plans
    
    
    (8,646
    )
    
    
    
    
    
    
    Net Cash Provided by Operating Activities
    
    
    21,069
    
    
    
    39,722
    
    
    
    10,853Cash Flows Used by Investing Activities:Net Transfers to Subsidiaries (a)
    
    
    (41,408
    )
    
    
    (67,141
    )
    
    
    (21,577
    )Settlement of Cash Flow Hedge
    
    
    
    
    
    
    (3,148
    )
    
    
    Net Cash Used by Investing Activities
    
    
    (41,408
    )
    
    
    (70,289
    )
    
    
    (21,577
    )Cash Flows From Financing Activities:Proceeds from Exercise of Employee Stock Options
    
    
    6,697
    
    
    
    4,582
    
    
    
    1,151Proceeds from Collection of Notes Receivable
    
    
    2,534
    
    
    
    2,343
    
    
    
    2,305Proceeds from Shares Issued Pursuant to Stock Purchase Plans
    
    
    7,130
    
    
    
    23,721
    
    
    
    7,260Excess Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation
Plans
    
    
    8,646
    
    
    
    
    
    
    
    Cost of Shares Withheld to Satisfy Minimum Required Tax Withholding Obligation
Arising Upon Exchange of Options
    
    
    (4,676
    )
    
    
    
    
    
    
    Net Cash Provided by Financing Activities
    
    
    20,331
    
    
    
    30,646
    
    
    
    10,716Net Increase (Decrease) in Cash and Equivalents
    
    
    (8
    )
    
    
    79
    
    
    
    (8
    )Cash and Cash Equivalents at Beginning of Year
    
    
    196
    
    
    
    117
    
    
    
    125Cash and Cash Equivalents at End of Year
    
    $
    188
    
    
    $
    196
    
    
    $
    117Cash Dividends Received From Unconsolidated Subsidiaries
    
    $
    7,645
    
    
    $
    35,797
    
    
    $
    11,838Non-Cash Transactions:Issuance of Shares Pursuant to Employee Stock Purchase Plan in exchange for
Notes Receivable
    
    $
    12,391
    
    
    $
    4,095
    
    
    $
    2,326
 
 (a)
    
    This item has been eliminated in the Companys Consolidated Financial Statements.  S-4




---



##### Table of Contents



COLUMN CFuture Policy
    
    
    
    
    
    
    COLUMN E
    
    
    
    
    
    
    
    
    
    
    COLUMN H
    
    
    COLUMN ICOLUMN B
    
    
    Benefits,
    
    
    
    
    
    
    Other Policy
    
    
    
    
    
    
    
    
    
    
    Benefits,
    
    
    Amortization ofDeferred Policy
    
    
    Losses, Claims
    
    
    COLUMN D
    
    
    Claims and
    
    
    COLUMN F
    
    
    COLUMN G
    
    
    Claims, Losses,
    
    
    Deferred Policy
    
    
    COLUMN J
    
    
    COLUMN KCOLUMN A
    
    Acquisition
    
    
    and Loss
    
    
    Unearned
    
    
    Benefits
    
    
    Premium
    
    
    Net Investment
    
    
    and Settlement
    
    
    Acquisition
    
    
    Other Operating
    
    
    PremiumsSegment
    
    Costs
    
    
    Expenses
    
    
    Premiums
    
    
    Payable
    
    
    Revenue
    
    
    Income
    
    
    Expenses
    
    
    Costs
    
    
    Expenses
    
    
    Written2006:Commercial Lines
    
    $
    
    
    
    $
    904,521
    
    
    $
    603,822
    
    
    
    
    
    
    $
    966,281
    
    
    $
    
    
    
    $
    343,575
    
    
    $
    
    
    
    $
    
    
    
    $
    1,080,248Specialty Lines
    
    
    
    
    
    
    355,275
    
    
    
    107,504
    
    
    
    
    
    
    
    173,974
    
    
    
    
    
    
    
    109,462
    
    
    
    
    
    
    
    
    
    
    
    181,358Personal Lines
    
    
    
    
    
    
    23,442
    
    
    
    48,032
    
    
    
    
    
    
    
    29,047
    
    
    
    
    
    
    
    15,175
    
    
    
    
    
    
    
    
    
    
    
    21,258Corporate
    
    
    158,805
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    91,699
    
    
    
    
    
    
    
    283,692
    
    
    
    54,575
    
    
    
    Total
    
    $
    158,805
    
    
    $
    1,283,238
    
    
    $
    759,358
    
    
    
    
    
    
    $
    1,169,302
    
    
    $
    91,699
    
    
    $
    468,212
    
    
    $
    283,692
    
    
    $
    54,575
    
    
    $
    1,282,8642005:Commercial Lines
    
    $
    
    
    
    $
    859,209
    
    
    $
    481,568
    
    
    
    
    
    
    $
    778,407
    
    
    $
    
    
    
    $
    375,590
    
    
    $
    
    
    
    $
    
    
    
    $
    904,707Specialty Lines
    
    
    
    
    
    
    306,765
    
    
    
    97,028
    
    
    
    
    
    
    
    151,678
    
    
    
    
    
    
    
    93,824
    
    
    
    
    
    
    
    
    
    
    
    159,112Personal Lines
    
    
    
    
    
    
    79,789
    
    
    
    52,872
    
    
    
    
    
    
    
    46,562
    
    
    
    
    
    
    
    34,592
    
    
    
    
    
    
    
    
    
    
    
    46,952Corporate
    
    
    129,486
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,709
    
    
    
    
    
    
    
    208,914
    
    
    
    54,845
    
    
    
    Total
    
    $
    129,486
    
    
    $
    1,245,763
    
    
    $
    631,468
    
    
    
    
    
    
    $
    976,647
    
    
    $
    63,709
    
    
    $
    504,006
    
    
    $
    208,914
    
    
    $
    54,845
    
    
    $
    1,110,7712004:Commercial Lines
    
    $
    
    
    
    $
    633,859
    
    
    $
    395,035
    
    
    
    
    
    
    $
    614,151
    
    
    $
    
    
    
    $
    303,847
    
    
    $
    
    
    
    $
    
    
    
    $
    720,639Specialty Lines
    
    
    
    
    
    
    228,269
    
    
    
    85,981
    
    
    
    
    
    
    
    134,050
    
    
    
    
    
    
    
    123,597
    
    
    
    
    
    
    
    
    
    
    
    154,130Personal Lines
    
    
    
    
    
    
    134,539
    
    
    
    50,833
    
    
    
    
    
    
    
    22,047
    
    
    
    
    
    
    
    48,671
    
    
    
    
    
    
    
    
    
    
    
    39,763Corporate
    
    
    91,647
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43,490
    
    
    
    
    
    
    
    131,557
    
    
    
    82,812
    
    
    
    Total
    
    $
    91,647
    
    
    $
    996,667
    
    
    $
    531,849
    
    
    
    
    
    
    $
    770,248
    
    
    $
    43,490
    
    
    $
    476,115
    
    
    $
    131,557
    
    
    $
    82,812
    
    
    $
    914,532
 S-5




---



##### Table of Contents



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 Net2006Property and Casualty Insurance
    
    $
    1,361,057
    
    
    $
    196,056
    
    
    $
    4,301
    
    
    $
    1,169,302
    
    
    
    0.4
    %2005Property and Casualty Insurance
    
    $
    1,161,284
    
    
    $
    188,649
    
    
    $
    4,012
    
    
    $
    976,647
    
    
    
    0.4
    %2004Property and Casualty Insurance
    
    $
    1,055,152
    
    
    $
    291,809
    
    
    $
    6,905
    
    
    $
    770,248
    
    
    
    0.9
    %
 S-6




---



##### Table of Contents



Claims and ClaimsAdjustment ExpensesIncurred Related toPaid ClaimsReserve for Unpaid
    
    Discount if
    
    
    
    
    
    Net
    
    Net
    
    (1)
    
    (2)
    
    Amortization of
    
    and ClaimAffiliation with
    
    Deferred Policy
    
    Claims and Claim
    
    Any deducted
    
    Unearned
    
    Earned
    
    Investment
    
    Current
    
    Prior
    
    deferred policy
    
    Adjustment
    
    Net WrittenRegistrant
    
    Acquisition Costs
    
    Adjustment Expenses
    
    in Column C
    
    Premiums
    
    Premiums
    
    Income
    
    Year
    
    Year
    
    acquisition costs
    
    Expenses
    
    PremiumsCOLUMN A
    
    COLUMN B
    
    COLUMN C
    
    COLUMN D
    
    COLUMN E
    
    COLUMN F
    
    COLUMN G
    
    COLUMN H
    
    COLUMN I
    
    COLUMN J
    
    COLUMN KConsolidated
Property  Casualty
EntitiesDecember 31, 2006
    
    $
    158,805
    
    
    $
    1,283,238
    
    
    $
    0
    
    
    $
    759,358
    
    
    $
    1,169,302
    
    
    $
    91,699
    
    
    $
    559,647
    
    
    $
    (91,435
    )
    
    $
    283,692
    
    
    $
    313,778
    
    
    $
    1,282,864December 31, 2005
    
    $
    129,486
    
    
    $
    1,245,763
    
    
    $
    0
    
    
    $
    631,468
    
    
    $
    976,647
    
    
    $
    63,709
    
    
    $
    533,906
    
    
    $
    (29,900
    )
    
    $
    208,914
    
    
    $
    234,730
    
    
    $
    1,110,771December 31, 2004
    
    $
    91,647
    
    
    $
    996,667
    
    
    $
    0
    
    
    $
    531,849
    
    
    $
    770,248
    
    
    $
    43,490
    
    
    $
    440,989
    
    
    $
    35,126
    
    
    $
    131,557
    
    
    $
    285,891
    
    
    $
    914,532
 S-7