##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For the Fiscal Year Ended December 31, 2005
 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
    
    (IRS Employer Identification No )incorporation or organization)One Bala Plaza, Suite 100Bala Cynwyd, Pennsylvania
    
    19004(Address of principal executive offices)
    
    (Zip Code)
 (610) 617-7900
 Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
 
   R £
  £ R
  R £
  £
  R £ £
  £ R
   DOCUMENTS INCORPORATED BY REFERENCE
 (1)
    
    Portions of the definitive Proxy Statement for Registrants 2006 Annual Meeting of
Shareholders to be held April 26, 2006 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 AND EXECUTIVE OFFICERS OF THE REGISTRANTItem 11. EXECUTIVE COMPENSATIONItem 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSItem 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSItem 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVItem 15.  EXHIBITS AND FINANCIAL STATEMENTS SCHEDULESSIGNATURESCASUALTY EXCESS OF LOSSREINSTATEMENT PREMIUM PROTECTIONPROFESSIONAL LIABILITY INSURANCE QUOTA SHARE CONTRACTLIST OF SUBSIDIARIES OF THE REGISTRANTCONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMCERTIFICATIONCERTIFICATIONCERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350    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, combining direct
policyholder prospecting with an extensive network of independent agents and a subset of
this network, known as preferred agents, with whom the Company has established special
distribution arrangements.
    
    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




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##### Table of Contents




    
    The Commercial Lines Underwriting Group, which has underwriting responsibility for
the commercial multi-peril package, commercial automobile and specialty property and
inland marine insurance products;
    
    The Specialty Lines Underwriting Group, which has underwriting responsibility for the
professional liability and management liability insurance products; and
    
    The Personal Lines Underwriting Group, which has underwriting responsibility for
personal property and casualty insurance products for the homeowners and manufactured
housing markets, principally in Florida.
  For the Years Ended December 31,2005
    
    
    2004
    
    
    2003Dollars
    
    
    Percentage
    
    
    Dollars
    
    
    Percentage
    
    
    Dollars
    
    
    Percentage(dollars in thousands)Commercial Lines
    
    $
    960,344
    
    
    
    75.9
    %
    
    $
    874,018
    
    
    
    74.6
    %
    
    $
    662,339
    
    
    
    73.1
    %Specialty Lines
    
    
    205,306
    
    
    
    16.2
    
    
    
    184,419
    
    
    
    15.7
    
    
    
    154,105
    
    
    
    17.0Personal Lines
    
    
    99,265
    
    
    
    7.9
    
    
    
    112,880
    
    
    
    9.7
    
    
    
    89,549
    
    
    
    9.9Total
    
    $
    1,264,915
    
    
    
    100.0
    %
    
    $
    1,171,317
    
    
    
    100.0
    %
    
    $
    905,993
    
    
    
    100.0
    %
 Commercial Lines:
 Commercial Package:
 3




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##### Table of Contents




    
    non-profit organizations;
    
    social service agencies;
    
    sports and recreation centers;
    
    homeowners and condominium associations;
    
    private, vocational and specialty schools;
    
    religious organizations;
    
    camp operators;
    
    day care facilities;
    
    mental health facilities;
    
    amateur sports associations;
    
    bowling centers;
    
    golf clubs; and
    
    public entity.
  Commercial Automobile and Commercial Excess:
 
    
    rental car companies;
    
    leasing companies;
    
    banks; and
    
    credit unions.
 Specialty Property & Inland Marine
 
    
    shopping centers;
    
    business parks;
    
    medical facilities;
    
    hotels and motels; and
    
    new commercial construction (inland marine).
 Specialty Lines:
  
    
    lawyers;
    
    accountants;
    
    miscellaneous (marketing, management, computer, marriage/family counseling) consultants.
  
    
    non-profit (501(c)(3) companies); and
    
    for-profit smaller public and private companies
 Personal Lines
  4




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##### Table of Contents




    
    single family homes, primarily built after 1995;
    
    mobile homes, primarily built after 1995;
    
    condominiums; and
    
    rental dwellings.
    State
    
    Direct Earned Premiums
    
    
    Percent of TotalFlorida
    
    $
    186,043
    
    
    
    16.0
    %California
    
    
    136,051
    
    
    
    11.7New York
    
    
    119,049
    
    
    
    10.3Pennsylvania
    
    
    60,993
    
    
    
    5.3Texas
    
    
    59,786
    
    
    
    5.1New Jersey
    
    
    51,408
    
    
    
    4.4Massachusetts
    
    
    50,646
    
    
    
    4.4Illinois
    
    
    41,830
    
    
    
    3.6Ohio
    
    
    35,357
    
    
    
    3.0Minnesota
    
    
    24,972
    
    
    
    2.2Michigan
    
    
    24,805
    
    
    
    2.1Missouri
    
    
    23,312
    
    
    
    2.0Other
    
    
    347,032
    
    
    
    29.9Total Direct Earned Premiums
    
    $
    1,161,284
    
    
    
    100.0
    %
      5




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6




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##### Table of Contents



UnsecuredReinsuranceReinsurer
    
    Receivables
    
    
    % of Total
    
    
    AM Best RatingNational Flood Insurance Program
    
    $
    43,850
    
    
    
    15.1
    %
    
    Not Rated-Voluntary PoolLiberty Mutual Insurance Company
    
    
    38,177
    
    
    
    13.2
    %
    
    AFlorida Hurricane Catastrophe Fund
    
    
    27,347
    
    
    
    9.4
    %
    
    Not Rated-Mandatory PoolAmerican Re-Insurance Company
    
    
    23,418
    
    
    
    8.1
    %
    
    ASwiss Reinsurance America Corporation
    
    
    20,801
    
    
    
    7.2
    %
    
    A+ACE Property & Casualty Insurance Company
    
    
    20,503
    
    
    
    7.1
    %
    
    A+Converium Reinsurance (NA) Inc.
    
    
    18,765
    
    
    
    6.5
    %
    
    B-General Reinsurance Corporation
    
    
    17,804
    
    
    
    6.1
    %
    
    A++Lloyds of London
    
    
    12,946
    
    
    
    4.5
    %
    
    ACUMIS Insurance Society Inc.
    
    
    8,834
    
    
    
    3.0
    %
    
    AAll Other Reinsurers
    
    
    57,275
    
    
    
    19.8
    %
    
    Total Unsecured Reinsurance Receivables
    
    $
    289,720
    (1)
    
    
    100.0
    %
 
 (1)
    
    This amount differs by $106.5 million from the reinsurance receivables of $396.2 million as
reported in the consolidated financial statements as of December 31, 2005 due to collateral
held by the Company from its reinsurers reflected in this table. 7




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8




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As of and For the Years Ended December 31,(In Thousands)
    
    2005
    
    
    2004
    
    
    2003Unpaid loss and loss adjustment expenses at beginning of year
    
    $
    996,667
    
    
    $
    627,086
    
    
    $
    445,548Less: reinsurance receivables
    
    
    324,948
    
    
    
    145,591
    
    
    
    85,837Net unpaid loss and loss adjustment expenses at beginning of year
    
    
    671,719
    
    
    
    481,495
    
    
    
    359,711Provision for losses and loss adjustment expenses for current year claims
    
    
    533,906
    
    
    
    440,989
    
    
    
    314,609Increase (Decrease) in estimated ultimate losses and loss adjustment
expenses for prior year claims
    
    
    (29,900
    )
    
    
    35,126
    
    
    
    44,568Total incurred losses and loss adjustment expenses
    
    
    504,006
    
    
    
    476,115
    
    
    
    359,177Loss and loss adjustment expense payments for claims attributable to:Current year
    
    
    110,496
    
    
    
    107,129
    
    
    
    69,905Prior years (1)
    
    
    124,234
    
    
    
    178,762
    
    
    
    167,488Total payments
    
    
    234,730
    
    
    
    285,891
    
    
    
    237,393Net unpaid loss and loss adjustment expenses at end of year
    
    
    940,995
    
    
    
    671,719
    
    
    
    481,495Plus: reinsurance receivables
    
    
    304,768
    
    
    
    324,948
    
    
    
    145,591Unpaid loss and loss adjustment expenses at end of year
    
    $
    1,245,763
    
    
    $
    996,667
    
    
    $
    627,086
 
 (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). 9




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Net Basisincrease (decrease)Professional
    
    
    Commercial
    
    
    CommercialLiability
    
    
    Package
    
    
    AutoAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Coverages
    
    
    Other
    
    
    Total2004
    
    $
    (7.6
    )
    
    $
    (12.7
    )
    
    $
    (4.3
    )
    
    $
    0.4
    
    
    $
    (24.2
    )2003
    
    $
    (2.4
    )
    
    $
    3.5
    
    
    $
    (0.5
    )
    
    $
    1.0
    
    
    $
    1.62002
    
    $
    (2.0
    )
    
    $
    (0.6
    )
    
    $
    (3.4
    )
    
    $
    (1.0
    )
    
    $
    (7.0
    )2001 & Prior
    
    $
    (0.7
    )
    
    $
    1.9
    
    
    $
    (0.9
    )
    
    $
    (0.6
    )
    
    $
    (0.3
    )Calendar Year
    
    $
    (12.7
    )
    
    $
    (7.9
    )
    
    $
    (9.1
    )
    
    $
    (0.2
    )
    
    $
    (29.9
    )
  - -
    
    For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower net loss estimates for: commercial package policies
as a result of better than expected claim frequency and professional liability coverages
due to better than expected case incurred development.- -
    
    For accident year 2002, the decrease in estimated net unpaid loss and loss adjustment
expenses and prior was principally due to decreased loss estimates across most commercial
and specialty lines of business due to better than expected case incurred loss development.
  - -
    
    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.
  - -
    
    The Company increased the estimated gross and net loss for unreported claims incurred
and related claim adjustment expenses on residual value polices issued during the years 1998
through 2002 by $38.8 million. The residual value policies provide coverage guaranteeing the
value of a leased automobile at the lease termination, which can be up to five years from
lease inception. The increase in the estimated gross and net loss was a result of:
 
    
    Adverse trends further deteriorating in both claims frequency and severity for
leases expiring in 2003. During the second quarter of 2003, the Company engaged a
consulting firm to aid in evaluating the ultimate potential loss exposure under these
policies. Based upon the study and subsequent evaluation by the Company, the Company
changed its assumptions relating to future frequency and severity of losses, and
increased the estimate for unpaid loss and loss adjustment expenses by $33.0 million. The
Company primarily attributes this deterioration to the following factors that led to a
softening of prices in the used car market subsequent to the September 11, 2001 terrorist
attacks: prolonged 0% new car financing rates and other incentives which increased new
car sales and the volume of trade-ins and daily rental units being sold into the market
earlier and in greater numbers than expected, further adding to the oversupply of used
cars and the overall uncertain economic conditions.
 10




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
    
    The Company entering into an agreement with U.S. Bank, N.A. d/b/a Firstar Bank
(Firstar) relating to residual value insurance policies purchased by Firstar from the
Company. Under the terms of the agreement, the Company paid Firstar $27.5 million in
satisfaction of any and all claims made or which could have been made by Firstar under
the residual value policies. The Company increased the gross and net reserves for loss
and loss adjustment expenses from $21.7 million to $27.5 million pursuant to this
agreement.
 - -
    
    The Company increased its estimate for unpaid loss and loss adjustment expenses for
non-residual value policies by $43.5 million ($30.8 million net of reinsurance
recoverables), primarily for accident years 1999 to 2001, and decreased its estimate of the
unpaid loss and loss adjustment expenses for such policies by $30.6 million ($25.0 million
net of reinsurance recoverables) for the 2002 accident year. The increase in accident years
1999 to 2001 is principally attributable to:
 
    
    $19.6 million ($13.7 million net of reinsurance recoverables) of development in
claims made professional liability products as a result of case reserves developing
greater than anticipated from the year-end 2002 ultimate loss estimate; $18.1 million
($11.1 million net of reinsurance recoverables) of development in the automobile and
general liability coverages for commercial package products due to the frequency and
severity of the losses developing beyond the underlying pricing assumptions; and $5.8
million ($6.0 million net of reinsurance recoverables) of development in the commercial
automobile excess liability insurance and GAP commercial automobile products due to
losses developing beyond the underlying pricing assumptions.
 - -
    
    The decrease in unpaid loss and loss adjustment expenses in accident year 2002 was
principally attributable to:
 
    
    $4.2 million ($4.7 million net of reinsurance recoverables) and $26.4 million
($20.3 million net of reinsurance recoverables) of favorable development in professional
liability products and commercial package products, respectively, due to favorable loss
experience as a result of favorable product pricing.
  11




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##### Table of Contents



AS OF AND FOR THE YEARS ENDED DECEMBER 31,(Dollars in Thousands)1995
    
    
    1996
    
    
    1997
    
    
    1998
    
    
    1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005UNPAID LOSS AND
LOSS ADJUSTMENT
EXPENSES, AS STATED
    
    $
    68,246
    
    
    $
    85,723
    
    
    $
    108,928
    
    
    $
    136,237
    
    
    $
    161,353
    
    
    $
    195,464
    
    
    $
    250,134
    
    
    $
    359,711
    
    
    $
    481,496
    
    
    $
    671,719
    
    
    $
    940,995Cumulative Paid as
of:1 year later
    
    
    15,214
    
    
    
    22,292
    
    
    
    26,870
    
    
    
    43,769
    
    
    
    60,922
    
    
    
    70,757
    
    
    
    99,325
    
    
    
    167,489
    
    
    
    178,762
    
    
    
    124,2342 years later
    
    
    31,410
    
    
    
    38,848
    
    
    
    56,488
    
    
    
    84,048
    
    
    
    109,092
    
    
    
    131,649
    
    
    
    211,851
    
    
    
    291,325
    
    
    
    258,1863 years later
    
    
    40,637
    
    
    
    52,108
    
    
    
    80,206
    
    
    
    115,900
    
    
    
    144,435
    
    
    
    213,286
    
    
    
    277,783
    
    
    
    356,7434 years later
    
    
    47,994
    
    
    
    63,738
    
    
    
    95,047
    
    
    
    131,062
    
    
    
    201,779
    
    
    
    247,298
    
    
    
    314,0425 years later
    
    
    51,806
    
    
    
    69,116
    
    
    
    99,755
    
    
    
    151,753
    
    
    
    217,677
    
    
    
    267,9666 years later
    
    
    53,198
    
    
    
    70,779
    
    
    
    106,915
    
    
    
    158,158
    
    
    
    225,7377 years later
    
    
    53,701
    
    
    
    73,939
    
    
    
    110,194
    
    
    
    160,4998 years later
    
    
    55,541
    
    
    
    74,496
    
    
    
    111,1029 years later
    
    
    55,517
    
    
    
    75,15610 years later
    
    
    55,638Unpaid Loss and
Loss Adjustment
Expenses
re-estimated as of
End of Year:1 year later
    
    
    67,281
    
    
    
    84,007
    
    
    
    105,758
    
    
    
    135,983
    
    
    
    163,896
    
    
    
    208,899
    
    
    
    277,733
    
    
    
    404,279
    
    
    
    516,622
    
    
    
    641,8192 years later
    
    
    66,061
    
    
    
    81,503
    
    
    
    103,513
    
    
    
    138,245
    
    
    
    177,782
    
    
    
    232,582
    
    
    
    334,802
    
    
    
    473,680
    
    
    
    510,9163 years later
    
    
    63,872
    
    
    
    76,348
    
    
    
    104,712
    
    
    
    146,679
    
    
    
    196,735
    
    
    
    274,166
    
    
    
    361,052
    
    
    
    466,4134 years later
    
    
    59,085
    
    
    
    73,992
    
    
    
    109,061
    
    
    
    151,077
    
    
    
    228,082
    
    
    
    283,619
    
    
    
    360,7915 years later
    
    
    56,673
    
    
    
    75,672
    
    
    
    107,796
    
    
    
    163,657
    
    
    
    230,391
    
    
    
    285,5636 years later
    
    
    55,861
    
    
    
    74,645
    
    
    
    110,845
    
    
    
    164,272
    
    
    
    233,2067 years later
    
    
    55,439
    
    
    
    75,272
    
    
    
    111,582
    
    
    
    163,4168 years later
    
    
    55,606
    
    
    
    74,982
    
    
    
    111,8279 years later
    
    
    55,552
    
    
    
    75,22110 years later
    
    
    55,718Cumulative
Redundancy
(Deficiency):Dollars
    
    $
    12,528
    
    
    $
    10,502
    
    
    $
    (2,899
    )
    
    $
    (27,179
    )
    
    $
    (71,853
    )
    
    $
    (90,099
    )
    
    $
    (110,657
    )
    
    $
    (106,702
    )
    
    $
    (29,420
    )
    
    $
    29,900Percentage
    
    
    18.4
    %
    
    
    12.3
    %
    
    
    (2.7
    )%
    
    
    (20.0
    )%
    
    
    (44.5
    )%
    
    
    (46.1
    )%
    
    
    (44.2
    )%
    
    
    (29.7
    %)
    
    
    (6.1
    %)
    
    
    4.5
    %
 
 (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 $304,768,
$324,948, $145,591, $85,837, $52,599, $42,030, $26,710, $16,120, $13,502, $10,919 and $9,440,
at December 31, 2005, 2004, 2003, 2002, 2001, 2000, 1999, 1998, 1997, 1996, and 1995,
respectively.(2)
    
    1998 Unpaid Loss and Loss Adjustment Expenses, as stated, adjusted to include $1,207 unpaid
loss and loss adjustment expenses for Mobile USA Insurance Company as of acquisition date.(3)
    
    The Company maintains its historical loss records net of reinsurance, and therefore is unable
to conform the presentation of this table to the financial statements.   12




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##### Table of Contents



Statutory Combined Ratio
   For the Years Ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001Loss Ratio
    
    
    51.8
    %
    
    
    61.5
    %
    
    
    63.1
    %
    
    
    63.5
    %
    
    
    60.7
    %Expense Ratio
    
    
    26.3
    %
    
    
    27.2
    %
    
    
    27.2
    %
    
    
    28.0
    %
    
    
    31.2
    %Combined Ratio
    
    
    78.1
    %
    
    
    88.7
    %
    
    
    90.3
    %
    
    
    91.5
    %
    
    
    91.9
    %Industry Statutory Combined Ratio, after Policyholders Dividends
    
    
    102.0
    %
    
    
    98.1
    %
    
    
    100.2
    %
    
    
    107.3
    %
    
    
    115.7
    %(1
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (2
    )
 
 (1)
    
    Source: A.M. Best Company Review/Preview January 2006 (Estimated 2005).(2)
    
    Source: A.M. Best Company Review/Preview January 2006 Premium-to-Surplus Ratio:
   As of and For the Years Ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(Dollars in Thousands)Net Written Premiums
    
    $
    1,107,460
    
    
    $
    919,152
    
    
    $
    601,253
    
    
    $
    523,962
    
    
    $
    333,817Surplus as Regards Policyholders
    
    $
    691,038
    
    
    $
    503,657
    
    
    $
    415,900
    
    
    $
    312,626
    
    
    $
    280,960Premium to Surplus Ratio
    
    
    1.6 to 1.0
    
    
    
    1.8 to 1.0
    
    
    
    1.5 to 1.0
    
    
    
    1.7 to 1.0
    
    
    
    1.2 to 1.0
    13




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##### Table of Contents



Estimated
    
    
    
    
    
    
    Percent ofMarket
    
    
    Carrying
    
    
    CarryingAmortized Cost
    
    
    Value
    
    
    Value
    
    
    Value(Dollars in Thousands)Fixed Maturities:U.S. Treasury Securities and Obligations ofU.S. Government Corporations and Agencies
    
    $
    62,311
    
    
    $
    61,713
    
    
    $
    61,713
    
    
    
    3.2Obligations of States and Political Subdivisions
    
    
    821,456
    
    
    
    819,635
    
    
    
    819,635
    
    
    
    42.3Corporate and Bank Debt Securities
    
    
    246,918
    
    
    
    241,210
    
    
    
    241,210
    
    
    
    12.5Asset Backed Securities
    
    
    138,292
    
    
    
    137,827
    
    
    
    137,827
    
    
    
    7.1Mortgage Pass-Through Securities
    
    
    282,256
    
    
    
    276,936
    
    
    
    276,936
    
    
    
    14.3Collateralized Mortgage Obligations
    
    
    226,982
    
    
    
    224,209
    
    
    
    224,209
    
    
    
    11.6Total Fixed Maturities
    
    
    1,778,215
    
    
    
    1,761,530
    
    
    
    1,761,530
    
    
    
    91.0
    %Equity Securities
    
    
    160,926
    
    
    
    173,455
    
    
    
    173,455
    
    
    
    9.0Total Investments
    
    $
    1,939,141
    
    
    $
    1,934,985
    
    
    $
    1,934,985
    
    
    
    100.0
    %
   Amortized
    
    
    EstimatedCost
    
    
    Market Value(Dollars in Thousands)Due in one year or less
    
    $
    109,860
    
    
    $
    109,002Due after one year through five years
    
    
    272,048
    
    
    
    267,600Due after five years through ten years
    
    
    345,173
    
    
    
    341,737Due after ten years
    
    
    403,604
    
    
    
    404,219Asset Backed, Mortgage Pass-Through and Collateralized Mortgage Obligation Securities
    
    
    647,530
    
    
    
    638,972Total
    
    $
    1,778,215
    
    
    $
    1,761,530
   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
    
    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.
 14




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##### Table of Contents



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:
 Health Insurance Portability and Accessibility Act:
 Certain Legislative Initiatives and Developments:
 
    
    the enactment of the Gramm-Leach-Bliley Act of 1999 (which permits financial services
companies such as banks and brokerage firms to engage in the insurance business), which
could result in increased competition from new entrants to the Companys markets;
    
    the formation of new insurers and an influx of new capital in the marketplace as existing
companies attempt to expand their business as a result of better pricing and/or terms;
 16




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##### Table of Contents




    
    programs in which state-sponsored entities provide property insurance in catastrophe-prone areas; and
    
    changing practices caused by the Internet, which have led to greater competition in the insurance business.
   (1)
    
    if the insurer has received a written statement from the insured that affirmatively
authorizes such reinstatement; or(2)
    
    if
   Sarbanes-Oxley Act of 2002:
   17




---



##### Table of Contents



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 reason, we may not be able to
continue our normal business operations.
  
    
    Philadelphia Indemnity Insurance Company;
    
    Philadelphia Insurance Company;
    
    Maguire Insurance Agency, Inc.;
    
    PCHC Investment Corp., a Delaware investment corporation;
    
    Liberty American Insurance Group, Inc., an insurance holding company;
    
    Mobile USA Insurance Company;
    
    Liberty American Insurance Company;
    
    Liberty American Insurance Services, Inc.; and
    
    Liberty American Premium Finance Company.
   18




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##### Table of Contents



If A.M. Best downgrades the ratings of our 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 costs 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 rating of our insurance company subsidiaries.
  
    
    the amounts of claims settlements;
    
    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.
  19




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##### Table of Contents



We cannot guarantee that our reinsurers will pay in a timely fashion, if at all, and, as a result,
we could experience losses.
  Claims related to catastrophic events could result in catastrophe losses.
   We are subject to possible assessments from state insurance facilities and state guaranty funds.
    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
 20




---



##### Table of Contents




    
    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.
  
    
    standards of solvency, including risk-based capital measurements;
    
    restrictions on the nature, quality and concentration of investments;
    
    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
  21




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##### Table of Contents



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.
  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.
    22




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##### Table of Contents



We have a large shareholder whose interests may diverge from those of our other shareholders.
  
   
   
   
   23




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##### Table of Contents



2005 (1)
    
    2004 (1)Quarter
    
    High
    
    Low
    
    High
    
    LowFirst
    
    
    26.700
    
    
    
    21.767
    
    
    
    20.453
    
    
    
    15.233Second
    
    
    29.277
    
    
    
    24.453
    
    
    
    20.250
    
    
    
    17.537Third
    
    
    28.967
    
    
    
    25.307
    
    
    
    20.097
    
    
    
    17.467Fourth
    
    
    34.133
    
    
    
    27.250
    
    
    
    22.953
    
    
    
    16.323
 
 (1)
    
    Restated to reflect a three-for-one split of the Companys common stock distributed on
March 1, 2006.The Company did not declare cash dividends on its common stock in 2005 or 2004, and currently
intends to retain its earnings to enhance future growth. Any future payment of dividends by
the Company will be determined by the Board of Directors and will be based on general
business conditions and legal and regulatory restrictions.As a holding company, the Company is dependent upon dividends and other permitted
payments from its subsidiaries to pay any cash dividends to its shareholders. The ability of
the Companys insurance subsidiaries to pay dividends to the Company is subject to regulatory
limitations (see Item 7.-Liquidity and Capital Resources and Note 2 to the Consolidated
Financial Statements).(b)
    
    During the three years ended December 31, 2005, the Company did not sell any of its
securities which were not registered under the Securities Act of 1933.(c)
    
    The Companys purchases of its common stock during the fourth quarter of 2005 are
shown in the following table: (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 (1)
    
    Programs
    
    the Plans or ProgramsOctober 1  October 31
    
    
    20,175
    (2)
    
    $
    19.243
    
    
    
    
    $
    45,000,000
    (3)November 1  November 30
    
    
    351
    (2)
    
    $
    19.223
    
    
    
    
    $
    45,000,000
    (3)December 1  December 31
    
    
    7,293
    (2)
    
    $
    21.120
    
    
    
    
    $
    45,000,000
    (3)
 
 (1)
    
    Restated to reflect a three-for-one split of the Companys common stock distributed on March
1, 2006.(2)
    
    Such shares were issued under the Companys Employee Stock Purchase Plan and Employees Stock
Incentive and Performance Based Compensation Plan and were repurchased by the Company upon an
employees termination.(3)
    
    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




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##### Table of Contents



As of and For the Years Ended December 31,(In Thousands, Except Share and Per Share Data)2005
    
    2004
    
    2003
    
    2002
    
    2001Operations and Comprehensive Income Statement Data:Gross Written Premiums
    
    $
    1,264,915
    
    
    $
    1,171,317
    
    
    $
    905,993
    
    
    $
    663,739
    
    
    $
    473,565Gross Earned Premiums
    
    
    1,165,296
    
    
    
    1,062,057
    
    
    
    789,498
    
    
    
    555,485
    
    
    
    421,063Net Written Premiums
    
    
    1,110,771
    
    
    
    914,532
    
    
    
    602,300
    
    
    
    519,707
    
    
    
    337,281Net Earned Premiums
    
    
    976,647
    
    
    
    770,248
    
    
    
    574,518
    
    
    
    417,722
    
    
    
    299,557Net Investment Income
    
    
    63,709
    
    
    
    43,490
    
    
    
    38,806
    
    
    
    37,516
    
    
    
    32,426Net Realized Investment Gain (Loss)
    
    
    9,609
    
    
    
    761
    
    
    
    794
    
    
    
    (3,371
    )
    
    
    3,357Other Income
    
    
    1,464
    
    
    
    4,357
    
    
    
    5,519
    
    
    
    911
    
    
    
    587Total Revenue
    
    
    1,051,429
    
    
    
    818,856
    
    
    
    619,637
    
    
    
    452,778
    
    
    
    335,927Net Loss and Loss Adjustment Expenses
    
    
    504,006
    
    
    
    476,115
    
    
    
    359,177
    
    
    
    267,433
    
    
    
    179,655Acquisition Costs and Other Underwriting Expenses
    
    
    263,759
    
    
    
    214,369
    
    
    
    162,912
    
    
    
    129,918
    
    
    
    97,020Other Operating Expenses
    
    
    17,124
    
    
    
    9,439
    
    
    
    7,822
    
    
    
    6,372
    
    
    
    6,841Goodwill Impairment Loss (1)
    
    
    25,724
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Losses and Expenses
    
    
    810,613
    
    
    
    699,923
    
    
    
    529,911
    
    
    
    403,723
    
    
    
    283,516Minority Interest:Distributions on Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,749Income Before Income Taxes
    
    
    240,816
    
    
    
    118,933
    
    
    
    89,726
    
    
    
    49,055
    
    
    
    49,662Total Income Tax Expense
    
    
    84,128
    
    
    
    35,250
    
    
    
    27,539
    
    
    
    15,302
    
    
    
    16,851Net Income
    
    $
    156,688
    
    
    $
    83,683
    
    
    $
    62,187
    
    
    $
    33,753
    
    
    $
    32,811Weighted-Average Common Shares Outstanding (3)
    
    
    68,551,572
    
    
    
    66,464,460
    
    
    
    65,726,364
    
    
    
    64,833,159
    
    
    
    49,585,803Weighted-Average Share Equivalents Outstanding (3)
    
    
    4,533,807
    
    
    
    3,456,099
    
    
    
    2,254,800
    
    
    
    2,047,146
    
    
    
    1,968,225Weighted-Average Shares and Share Equivalents Outstanding (3)
    
    
    73,085,379
    
    
    
    69,920,559
    
    
    
    67,981,164
    
    
    
    66,880,305
    
    
    
    51,554,028Basic Earnings Per Share (3)
    
    $
    2.29
    
    
    $
    1.26
    
    
    $
    0.95
    
    
    $
    0.52
    
    
    $
    0.66Diluted Earnings Per Share (3)
    
    $
    2.14
    
    
    $
    1.20
    
    
    $
    0.91
    
    
    $
    0.50
    
    
    $
    0.64Cash Dividends Per Share
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Year End Financial Position:Total Investments and Cash and Cash Equivalents
    
    $
    2,009,370
    
    
    $
    1,623,647
    
    
    $
    1,245,994
    
    
    $
    950,861
    
    
    $
    723,318Total Assets
    
    
    2,927,826
    
    
    
    2,485,656
    
    
    
    1,870,941
    
    
    
    1,358,334
    
    
    
    1,019,974Unpaid Loss and Loss Adjustment Expenses
    
    
    1,245,763
    
    
    
    996,667
    
    
    
    627,086
    
    
    
    445,548
    
    
    
    302,733Total Shareholders Equity
    
    
    816,496
    
    
    
    644,157
    
    
    
    545,646
    
    
    
    477,823
    
    
    
    430,944Common Shares Outstanding (3)
    
    
    69,266,016
    
    
    
    66,821,751
    
    
    
    66,022,656
    
    
    
    65,606,631
    
    
    
    64,529,169Insurance Operating Ratios (Statutory Basis):Net Loss and Loss Adjustment Expenses to Net Earned Premiums
    
    
    51.8
    %
    
    
    61.5
    %
    
    
    63.1
    %
    
    
    63.5
    %
    
    
    60.7
    %Underwriting Expenses to Net Written Premiums
    
    
    26.3
    %
    
    
    27.2
    %
    
    
    27.2
    %
    
    
    28.0
    %
    
    
    31.2
    %Combined Ratio
    
    
    78.1
    %
    
    
    88.7
    %
    
    
    90.3
    %
    
    
    91.5
    %
    
    
    91.9
    %A+
    
    
    
    A+
    
    
    
    A+
    
    
    
    A+
    
    
    
    A+A.M. Best Rating (4)
    
    (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)
    
    Amount represents cash distributions related to Trust Originated Preferred Securities that
were issued on May 5, 1998.(3)
    
    Restated to reflect a three-for-one split of the Companys common stock distributed on March
1, 2006. 25




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##### Table of Contents



(4)
    
    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 Companys
insurance subsidiaries, Philadelphia Indemnity Insurance Company and Philadelphia Insurance
Company, entered into an intercompany reinsurance pooling arrangement which includes
substantially all the Companys commercial and specialty lines business. The Companys two
other insurance subsidiaries, Mobile USA Insurance Company and Liberty American Insurance
Company, also entered into an intercompany reinsurance pooling arrangement which substantially
includes 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+. 26




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##### Table of Contents



GENERAL
 Overview
    
    
    Increased premium rate competition for specialty lines segment products and for the specialty property product;
    
    Several products within the commercial and specialty lines segments were identified that did not meet predetermined
standards for profitability and were culled resulting in approximately a $20.8 million reduction in gross written premiums;
    
    The product mix shift in personal lines was substantially completed resulting in a $44.9
million reduction in mobile homeowners gross written premium and a $25.7 million increase in
the newer construction homeowners gross written premiums;
    
    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.
    
    Introduction of a number of new products, many of which were within the existing sports
and fitness market niche in the commercial lines segment.
  Commercial
    
    Specialty
    
    Personal($s in millions)
    
    Lines
    
    Lines
    
    Lines
    
    Total2005 Gross Written Premium
    
    $
    960.3
    
    
    $
    205.3
    
    
    $
    99.3
    
    
    $
    1,264.92004 Gross Written Premium
    
    $
    874.0
    
    
    $
    184.4
    
    
    $
    112.9
    
    
    $
    1,171.3Percentage Increase (Decrease)
    
    
    9.9
    %
    
    
    11.3
    %
    
    
    (12.0
    )%
    
    
    8.0
    %
   27




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##### Table of Contents



Date of Event:
    
    7/10/05
    
    
    8/25/05 &
    
    
    9/24/05
    
    
    10/24/058/29/05Hurricane:
    
    Dennis
    
    
    Katrina
    
    
    Rita
    
    
    Wilma
    
    
    Total(In millions)Net Loss and Loss Adjustment Expense Estimates:Personal Lines Segment
    
    $
    3.5
    
    
    $
    2.0
    
    
    $
    
    
    
    $
    3.5
    
    
    $
    9.0Commercial Lines Segment
    
    
    
    
    
    
    5.7
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    15.7Total
    
    $
    3.5
    
    
    $
    7.7
    
    
    $
    5.0
    
    
    $
    8.5
    
    
    $
    24.7
  Commercial
    
    Specialty
    
    Personal
    
    WeightedLines
    
    Lines
    
    Lines
    
    Average2005 calendar year net loss and loss adjustment expense ratio
    
    
    48.3
    %
    
    
    61.9
    %
    
    
    74.3
    %
    
    
    51.6
    %2005 accident year net loss and loss adjustment expense ratio
    
    
    50.4
    %
    
    
    70.2
    %
    
    
    75.2
    %
    
    
    54.7
    %
     For the years ended December 31,2005
    
    2004
    
    2003Total Revenue
    
    $
    1,051.4
    
    
    $
    818.9
    
    
    $
    619.6Total Losses and Expenses
    
    $
    810.6
    
    
    $
    699.9
    
    
    $
    529.9Net Income
    
    $
    156.7
    
    
    $
    83.7
    
    
    $
    62.2
 28




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##### Table of Contents




    
    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 $3.4 million in
securities for which there is no readily available independent market price.- -
    
    Other than temporary impairment, excluding interests in securitized assetsThe Company regularly performs various analytical procedures with respect to its
investments, including identifying any security whose fair value is below its cost. Upon
identification of such securities, a detailed review is performed for all securities meeting
predetermined thresholds to determine whether such decline is other than temporary. If the
Company determines a decline in value to be other than temporary, based upon its detailed
review, or if a decline in value for an equity investment has persisted continuously for nine
months, the cost basis of the security is written down to its fair value. The factors
considered in reaching the conclusion that a decline below cost is other than temporary
include, but are not limited to: whether the issuer is in financial distress; the performance
of the collateral underlying a secured investment; whether a significant credit rating action
has occurred; whether scheduled interest payments have been delayed or missed; whether
changes in laws and/or regulations have impacted an issuer or industry; an assessment of the
timing of a securitys recovery to fair value; and an ability and intent to hold the security
to recovery. The amount of any write down is included in earnings as a realized loss in the
period the impairment arose (see Investments). Gross unrealized losses for investments
excluding interests in securitized assets at December 31, 2005 were $16.8 million.- -
    
    Impairment recognition for investments in securitized assetsThe Company conducts its impairment evaluation and recognition for interests in
securitized assets in accordance with the guidance provided by the Emerging Issues Task Force
of the Financial Accounting Standards Board. Pursuant to this guidance, impairment losses on
securities must be recognized if both the fair value of the security is less than its book
value and the net present value of expected future cash flows is less than the net present
value of expected future cash flows at the most recent estimation date. If these criteria are
met, an impairment charge, calculated as the difference between the current book value of the
security and its fair value, is included in earnings as a realized loss in the period the
impairment arose (see Investments). Gross unrealized losses for investments in securitized
assets at December 31, 2005 were $9.7 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:
 The liability for unpaid loss and loss adjustment expenses reflects the Companys best
estimate for future amounts needed to pay losses and related settlement expenses with respect
to insured events. The process of establishing the liability for property and casualty
unpaid loss and loss adjustment expenses is a complex and imprecise process, requiring the
use of informed estimates and judgments. This liability includes an amount determined on the
basis of claim adjusters evaluations with respect to insured events that have been reported
to the Company and an amount for losses incurred that have not been reported to the Company.
In some cases significant periods of time, up to several years or more, may elapse between
the occurrence of an insured loss and the reporting of such to the Company. Estimates for
unpaid loss and loss adjustment expenses are based on managements assessment of known facts
and circumstances, review of past loss experience and settlement patterns, and consideration
of other factors such as legal, social, and economic developments. These estimates are
reviewed regularly and any adjustments resulting therefrom are made in the accounting period
in which the adjustment arose.
 29




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##### Table of Contents



The table below classifies as of December 31, 2005 the components of the reserve for
gross losses and loss expenses (loss or losses) with respect to major lines of business:
  As of December 31, 2005Case
    
    
    IBNR
    
    
    TotalGross loss reserves by line of business:Commercial Lines Segment:Commercial Package  General Liability
    
    $
    138,660
    
    
    $
    266,023
    
    
    $
    404,683Commercial Package  Auto
    
    
    59,020
    
    
    
    98,533
    
    
    
    157,553Commercial Package  Property
    
    
    92,026
    
    
    
    47,235
    
    
    
    139,261Automobile Rental  Supplemental Liability
    
    
    18,391
    
    
    
    19,161
    
    
    
    37,552Automobile Rental  Other
    
    
    11,650
    
    
    
    39,876
    
    
    
    51,526Program Umbrella
    
    
    41,275
    
    
    
    15,337
    
    
    
    56,612Other
    
    
    4,442
    
    
    
    7,580
    
    
    
    12,022365,464
    
    
    
    493,745
    
    
    
    859,209Specialty Lines Segment:Professional Liability Errors & Omissions
    
    
    51,222
    
    
    
    106,411
    
    
    
    157,633Professional Liability Directors & Officers
    
    
    38,625
    
    
    
    68,855
    
    
    
    107,480Professional Liability Excess
    
    
    20,792
    
    
    
    20,860
    
    
    
    41,652110,639
    
    
    
    196,126
    
    
    
    306,765Personal Lines Segment:Personal Lines
    
    
    51,936
    
    
    
    27,853
    
    
    
    79,78951,936
    
    
    
    27,853
    
    
    
    79,789TOTAL
    
    $
    528,039
    
    
    $
    717,724
    
    
    $
    1,245,763
  
    
    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 reported 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.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.
 30




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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 that 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.
    
    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.
 31




---



##### Table of Contents




    
    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.
     32




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##### 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 or decrease to the actuarially selected loss development
factors and expected loss ratios, in the aggregate, as applicable to all lines of
business in accident years 2003 to 2005, would increase or decrease the actuarially
determined loss reserve estimate by approximately $69.0 million. The results of
aggregate changes in the loss development factors and expected loss ratios are
approximately linear over reasonable ranges. A 1% increase or decrease in the loss
development factors and expected loss ratios, in the aggregate, would have impacts equal
to approximately 20% of the impacts stated above.
 
    
    Reinsurance Receivables:
  
    
    Goodwill
    33




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##### Table of Contents



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.
    
    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).
 34




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##### Table of Contents



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 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:
 35




---



##### Table of Contents




    
    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: 10-K).
  Net Realized Investment Gain:
  Other Income
 36




---



##### Table of Contents



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 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.
 37




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##### Table of Contents



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:
  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:
 38




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##### Table of Contents



Income Tax Expense:
 
 Premiums
 Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2004 Gross Written Premiums
    
    $
    874.0
    
    
    $
    184.4
    
    
    $
    112.9
    
    
    $
    1,171.32003 Gross Written Premiums
    
    $
    662.4
    
    
    $
    154.1
    
    
    $
    89.5
    
    
    $
    906.0Percentage Increase
    
    
    32.0
    %
    
    
    19.7
    %
    
    
    26.1
    %
    
    
    29.3
    %2004 Gross Earned Premiums
    
    $
    788.6
    
    
    $
    170.2
    
    
    $
    103.3
    
    
    $
    1,062.12003 Gross Earned Premiums
    
    $
    566.1
    
    
    $
    138.3
    
    
    $
    85.1
    
    
    $
    789.5Percentage Increase
    
    
    39.3
    %
    
    
    23.1
    %
    
    
    21.4
    %
    
    
    34.5
    %
  
    
    Consistent 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.
 
    
    The displacement of certain competitor property and casualty insurance
companies and their independent agency relationships continues to
result in new agency relationship opportunities for the Company. These
relationship opportunities have resulted in additional policyholders
and premium writings for the Companys commercial and specialty lines
segments.
 
    
    Continued expansion of marketing efforts relating to commercial lines
and specialty lines products through the Companys field organization
and preferred agents.
 
    
    The insurance subsidiaries of Liberty American Insurance Group, Inc.
(a subsidiary of the Company) have recently commenced writing a
previously brokered homeowners product on a direct basis due to a
recent termination of a brokerage agreement. Gross written premiums
from this homeowners product approximated $17.1 million for the year
ended December 31, 2004.
 
    
    In-force policy counts have increased 14.7%, 30.0%, and 16.0% for the
commercial lines, specialty lines and personal lines segments,
respectively, primarily as a result of the factors discussed above.
 
    
    Realized average rate increases on renewal business approximating
2.2%, 2.7%, and 7.1% for the commercial, specialty and personal lines
segments, respectively.
 
    
    This growth was offset in part as a result of Liberty American
Insurance Group, Inc. suspending the acceptance of applications for
new personal lines insurance policies the day prior to Hurricane
Charley making landfall in Florida to restrict an increase in exposure
during hurricane season. It is estimated that gross written premiums
were reduced by approximately $9.5 million due to this restriction.
The Company resumed underwriting new preferred homeowners business
effective January 1, 2005.
  Commercial Lines
    
    Specialty Lines
    
    Personal Lines
    
    Total2004 Net Written Premiums
    
    $
    720.6
    
    
    $
    154.1
    
    
    $
    39.8
    
    
    $
    914.52003 Net Written Premiums
    
    $
    463.9
    
    
    $
    107.9
    
    
    $
    30.5
    
    
    $
    602.3Percentage Increase
    
    
    55.3
    %
    
    
    42.8
    %
    
    
    30.5
    %
    
    
    51.8
    %2004 Net Earned Premiums
    
    $
    614.1
    
    
    $
    134.1
    
    
    $
    22.0
    
    
    $
    770.22003 Net Earned Premiums
    
    $
    431.5
    
    
    $
    108.8
    
    
    $
    34.2
    
    
    $
    574.5Percentage Increase (Decrease)
    
    
    42.3
    %
    
    
    23.3
    %
    
    
    (35.7
    )%
    
    
    34.1
    %
 39




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##### Table of Contents




    
    A change in the Companys reinsurance program whereby, effective April 1, 2003, the Company
entered into a Quota Share reinsurance agreement covering substantially all of the Companys
lines of business. Under this agreement:
 
    
    The Company ceded 22% of its net written 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 premiums and loss and loss adjustment expenses for policies
effective January 1, 2004 through December 31, 2004. During the years ended December 31,
2004 and 2003, the Company ceded $94.5 million and $199.4 million of net written premiums,
respectively, and $132.5 million and $116.8 million of net earned premiums, respectively.
    
    Of the $199.4 million of net written premiums ceded during the year ended December 31,
2003, $63.5 million represents 22% of the Companys April 1, 2003 unearned premium reserve
which was ceded upon entering into the quota share agreement. This cession of the unearned
premium reserve reduced net written premiums which approximated the following by segment:
commercial lines ($44.0 million), specialty lines ($13.3 million), and personal lines ($6.2
million).
 
    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 $15.6 million and $10.5 million for the years ended
December 31, 2004 and 2003, respectively. The profit commissions
reduce ceded written and earned premiums and increase net written and
earned premiums.
    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 provide coverage from the inception date of the
coverage through May 31, 2005) to supplement its original catastrophe
reinsurance program. 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.
    On December 31, 2004 the Company terminated a quota share reinsurance
agreement where under 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.
 Net Investment Income:
  Net Realized Investment Gain (Loss):
 40




---



##### Table of Contents



Other Income
 Net Loss and Loss Adjustment Expenses:
 
    
    A 34.1% growth in net earned premiums
    
    Multiple hurricane events which resulted in:
 
    
    $46.7 million of hurricane catastrophe losses incurred; and
    
    Acceleration of the recognition of $26.0 million of catastrophe reinsurance
premium expense, which reduced net earned premiums, due to the utilization of certain of
the catastrophe reinsurance coverages. The hurricane losses and associated accelerated
catastrophe reinsurance premium expense contributed 8.8 percentage points to the
combined ratio.
 
    
    Reserve actions taken during the year ended December 31, 2004 wherein the
estimated gross and net unpaid loss and loss adjustment expenses for accident
years 1996 through 2002 were increased by $84.8 million and $69.4 million,
respectively, due principally to continued case reserve development above
expectations primarily across various professional liability products in the
specialty lines segment and general liability and commercial automobile
liability coverages in the commercial lines segment.
  
    
    Reserve actions taken during the year ended December 31, 2004 wherein:
 
    
    The estimated gross and net unpaid loss and loss adjustment expenses for accident
year 2003 were decreased by $37.5 million and $34.3 million, respectively, due
principally to continued better than expected claim frequency primarily for general
liability and commercial automobile coverages in the commercial lines segment.
   Acquisition Costs and Other Underwriting Expenses:
 41




---



##### Table of Contents



Other Operating Expenses
 Income Tax Expense:
 Investments
      42




---



##### Table of Contents



Gross Unrealized Losses as of December 31, 2005(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
    
    $
    0.1
    
    
    $
    0.3
    
    
    $
    0.4
    
    
    $
    1.6
    
    
    $
    2.0>3
 6 months
    
    
    3.2
    
    
    
    4.4
    
    
    
    7.6
    
    
    
    0.7
    
    
    
    8.3>6
 9 months
    
    
    0.6
    
    
    
    0.4
    
    
    
    1.0
    
    
    
    0.7
    
    
    
    1.7>9
 12 months
    
    
    3.4
    
    
    
    1.6
    
    
    
    5.0
    
    
    
    
    
    
    
    5.0>12
 18 months
    
    
    3.2
    
    
    
    1.7
    
    
    
    4.9
    
    
    
    
    
    
    
    4.9>18
 24 months
    
    
    3.2
    
    
    
    0.6
    
    
    
    3.8
    
    
    
    
    
    
    
    3.8> 24 months
    
    
    0.1
    
    
    
    0.7
    
    
    
    0.8
    
    
    
    
    
    
    
    0.8Total Gross Unrealized Losses
    
    $
    13.8
    
    
    $
    9.7
    
    
    $
    23.5
    
    
    $
    3.0
    
    
    $
    26.5Estimated fair value of
securities with a gross
unrealized loss
    
    $
    766.9
    
    
    $
    555.7
    
    
    $
    1,322.6
    
    
    $
    38.7
    
    
    $
    1,361.3
    43




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##### Table of Contents



EstimatedHypothetical
    
    Fair Value afterChange in
    
    Hypothetical
    
    Hypothetical PercentageInterest
    
    Changes in
    
    Increase (Decrease) inEstimated
    
    Rates (bp=basis
    
    Interest
    
    
    
    
    
    ShareholdersFair Value
    
    points)
    
    Rates
    
    Fair Value
    
    EquityDecember 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
    )%December 31, 2004InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    1,299,704
    
    
    200 bp decrease
    
    $
    1,397,335
    
    
    
    7.5
    %
    
    
    9.9
    %100 bp decrease
    
    $
    1,350,997
    
    
    
    4.0
    %
    
    
    5.2
    %50 bp decrease
    
    $
    1,326,263
    
    
    
    2.0
    %
    
    
    2.7
    %50 bp increase
    
    $
    1,272,549
    
    
    
    (2.1
    )%
    
    
    (2.7
    )%100 bp increase
    
    $
    1,245,506
    
    
    
    (4.2
    )%
    
    
    (5.5
    )%200 bp increase
    
    $
    1,192,788
    
    
    
    (8.2
    )%
    
    
    (10.8
    )%
   44




---



##### Table of Contents



45




---



##### Table of Contents



1.8-to-1.0 for 2005 and 2004, respectively.
    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)
    
    $
    1,245,763
    
    
    $
    501,253
    
    
    $
    473,273
    
    
    $
    197,926
    
    
    $
    73,311Reinsurance Premiums Payable Under Terms of Reinsurance Contracts (2)
    
    
    67,608
    
    
    
    67,608
    
    
    
    
    
    
    
    
    
    
    
    Operating Leases
    
    
    13,014
    
    
    
    4,330
    
    
    
    7,325
    
    
    
    892
    
    
    
    467Other Long-Term Contractual Commitments (3,5)
    
    
    3,688
    
    
    
    2,744
    
    
    
    444
    
    
    
    200
    
    
    
    300Total (4)
    
    $
    1,330,073
    
    
    $
    575,935
    
    
    $
    481,042
    
    
    $
    199,018
    
    
    $
    74,078
 
 (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, and corporate sponsorship agreements.(4)
    
    As of December 31, 2005, 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.(5)
    
    The Company anticipates that it will acquire in 2006, pursuant to the terms of a Purchase
Agreement entered into in 2005, policy renewals, customer lists and other assets relating to
an insurance program developed by an insurance brokerage company. The purchase price is (a)
$1,500,000, of which $1,000,000 has already been paid to the seller as a deposit, and the
$500,000 balance will be paid at closing under the Purchase Agreement, plus (b) an additional
amount payable in four installments. The first installment will be equal to the excess of (a)
25% of the Specified Amount (as that term is hereinafter defined) over (b) $500,000, and is
payable within a specified period of time after closing. The next three installments are each
in the amount of 25% of the Specified Amount, and are payable on the first through third
anniversaries, respectively, of the Date on which the first installment is payable. The
Specified Amount is the amount of the gross written annual premiums of the policies in force
(with certain exceptions) relating to the insurance program referred to above. Each of the
installment payments is subject to increase or decrease, based on a formula contained in the
Purchase Agreement.   46




---



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47




---



##### Table of Contents



EstimatedHypothetical
    
    
    Fair Value afterChange in
    
    
    Hypothetical
    
    
    Hypothetical PercentageInterest
    
    
    Changes in
    
    
    Increase (Decrease) inEstimated
    
    
    Rates (bp=basis
    
    
    Interest
    
    
    
    
    
    
    ShareholdersFair Value
    
    
    points)
    
    
    Rates
    
    
    Fair Value
    
    
    EquityDecember 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
    )%December 31, 2004InvestmentsTotal Fixed Maturities Available For Sale
    
    $
    1,299,704
    
    
    200 bp decrease
    
    $
    1,397,335
    
    
    
    7.5
    %
    
    
    9.9
    %100 bp decrease
    
    $
    1,350,997
    
    
    
    4.0
    %
    
    
    5.2
    %50 bp decrease
    
    $
    1,326,263
    
    
    
    2.0
    %
    
    
    2.7
    %50 bp increase
    
    $
    1,272,549
    
    
    
    (2.1
    )%
    
    
    (2.7
    )%100 bp increase
    
    $
    1,245,506
    
    
    
    (4.2
    )%
    
    
    (5.5
    )%200 bp increase
    
    $
    1,192,788
    
    
    
    (8.2
    )%
    
    
    (10.8
    )%
 48




---



##### Table of Contents



Financial Statements
    
    PageReport of Independent Registered Public Accounting Firm
    
    
    50Consolidated Balance Sheets  As of December 31, 2005 and 2004
    
    
    52Consolidated Statements of Operations and Comprehensive Income  For the Years Ended December 31, 2005, 2004 and 2003
    
    
    53Consolidated Statements of Changes in Shareholders Equity  For the Years Ended December 31, 2005, 2004 and 2003
    
    
    54Consolidated Statements of Cash Flows  For the Years Ended December 31, 2005, 2004, and 2003
    
    
    55Notes to Consolidated Financial Statements
    
    
    56-77Financial Statement Schedules:ScheduleI
    
    Summary of Investments -
    
    
    S-1Other Than Investments in Related Parties As of December 31, 2005II
    
    Condensed Financial Information of Registrant As of December 31,
2005 and 2004 and For Each of the Three Years in the Period
Ended December 31, 2005
    
    
    S-2S-4III
    
    Supplementary Insurance Information As of and For the Years
Ended December 31, 2005, 2004 and 2003
    
    
    S-5IV
    
    Reinsurance For the Years ended December 31, 2005, 2004 and 2003
    
    
    S-6VI
    
    Supplementary Information Concerning Property-Casualty Insurance
Operations As of and For the Years Ended December 31, 2005, 2004
and 2003
    
    
    S-7
 49




---



##### Table of Contents



Consolidated financial statements and financial statement schedules
 
 Internal control over financial reporting
 Internal Control  Integrated Framework Internal Control  Integrated Framework
   50




---



##### Table of Contents



51




---



##### Table of Contents



As of December 31,2005
    
    
    2004ASSETSInvestments:Fixed Maturities Available for Sale at Market (Amortized Cost $1,778,215 and $1,287,094)
    
    $
    1,761,530
    
    
    $
    1,299,704Equity Securities at Market (Cost $160,926 and $110,601)
    
    
    173,455
    
    
    
    128,447Total Investments
    
    
    1,934,985
    
    
    
    1,428,151Cash and Cash Equivalents
    
    
    74,385
    
    
    
    195,496Accrued Investment Income
    
    
    18,095
    
    
    
    13,475Premiums Receivable
    
    
    286,778
    
    
    
    229,502Prepaid Reinsurance Premiums and Reinsurance Receivables
    
    
    396,248
    
    
    
    429,850Deferred Income Taxes
    
    
    31,893
    
    
    
    14,396Deferred Acquisition Costs
    
    
    129,486
    
    
    
    91,647Property and Equipment, Net
    
    
    23,886
    
    
    
    21,281Goodwill
    
    
    
    
    
    
    25,724Other Assets
    
    
    32,070
    
    
    
    36,134Total Assets
    
    $
    2,927,826
    
    
    $
    2,485,656LIABILITIES and SHAREHOLDERS EQUITYPolicy Liabilities and Accruals:Unpaid Loss and Loss Adjustment Expenses
    
    $
    1,245,763
    
    
    $
    996,667Unearned Premiums
    
    
    631,468
    
    
    
    531,849Total Policy Liabilities and Accruals
    
    
    1,877,231
    
    
    
    1,528,516Funds Held Payable to Reinsurer
    
    
    39,221
    
    
    
    131,119Loans Payable
    
    
    
    
    
    
    33,406Premiums Payable
    
    
    58,839
    
    
    
    48,111Other Liabilities
    
    
    136,039
    
    
    
    100,347Total Liabilities
    
    
    2,111,330
    
    
    
    1,841,499Commitments 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, 69,266,016 and 66,821,751Shares Issued and Outstanding
    
    
    336,277
    
    
    
    292,856Notes Receivable from Shareholders
    
    
    (7,217
    )
    
    
    (5,465
    )Restricted Stock Deferred Compensation Cost
    
    
    (3,520
    )
    
    
    Accumulated Other Comprehensive Income (Loss)
    
    
    (2,702
    )
    
    
    19,796Retained Earnings
    
    
    493,658
    
    
    
    336,970Total Shareholders Equity
    
    
    816,496
    
    
    
    644,157Total Liabilities and Shareholders Equity
    
    $
    2,927,826
    
    
    $
    2,485,656
  The accompanying notes are an integral part of the consolidated financial statements.
 52




---



##### Table of Contents



For the Years Ended December 31,2005
    
    
    2004
    
    
    2003Revenue:Net Earned Premiums
    
    $
    976,647
    
    
    $
    770,248
    
    
    $
    574,518Net Investment Income
    
    
    63,709
    
    
    
    43,490
    
    
    
    38,806Net Realized Investment Gain
    
    
    9,609
    
    
    
    761
    
    
    
    794Other Income
    
    
    1,464
    
    
    
    4,357
    
    
    
    5,519Total Revenue
    
    
    1,051,429
    
    
    
    818,856
    
    
    
    619,637Losses and Expenses:Loss and Loss Adjustment Expenses
    
    
    711,706
    
    
    
    1,232,645
    
    
    
    469,547Net Reinsurance Recoveries
    
    
    (207,700
    )
    
    
    (756,530
    )
    
    
    (110,370
    )Net Loss and Loss Adjustment Expenses
    
    
    504,006
    
    
    
    476,115
    
    
    
    359,177Acquisition Costs and Other Underwriting Expenses
    
    
    263,759
    
    
    
    214,369
    
    
    
    162,912Other Operating Expenses
    
    
    17,124
    
    
    
    9,439
    
    
    
    7,822Goodwill Impairment Loss
    
    
    25,724
    
    
    
    
    
    
    
    Total Losses and Expenses
    
    
    810,613
    
    
    
    699,923
    
    
    
    529,911Income Before Income Taxes
    
    
    240,816
    
    
    
    118,933
    
    
    
    89,726Income Tax Expense (Benefit):Current
    
    
    89,510
    
    
    
    33,158
    
    
    
    38,430Deferred
    
    
    (5,382
    )
    
    
    2,092
    
    
    
    (10,891
    )Total Income Tax Expense
    
    
    84,128
    
    
    
    35,250
    
    
    
    27,539Net Income
    
    $
    156,688
    
    
    $
    83,683
    
    
    $
    62,187Other Comprehensive Income (Loss), Net of Tax:Holding Gain (Loss) Arising during Year
    
    $
    (16,252
    )
    
    $
    3,576
    
    
    $
    1,046Reclassification Adjustment
    
    
    (6,246
    )
    
    
    (495
    )
    
    
    (516
    )Other Comprehensive Income (Loss)
    
    
    (22,498
    )
    
    
    3,081
    
    
    
    530Comprehensive Income
    
    $
    134,190
    
    
    $
    86,764
    
    
    $
    62,717Per Average Share Data:Basic Earnings Per Share
    
    $
    2.29
    
    
    $
    1.26
    
    
    $
    0.95Diluted Earnings Per Share
    
    $
    2.14
    
    
    $
    1.20
    
    
    $
    0.91Weighted-Average Common Shares Outstanding
    
    
    68,551,572
    
    
    
    66,464,460
    
    
    
    65,726,364Weighted-Average Share Equivalents Outstanding
    
    
    4,533,807
    
    
    
    3,456,099
    
    
    
    2,254,800Weighted-Average Shares and Share Equivalents Outstanding
    
    
    73,085,379
    
    
    
    69,920,559
    
    
    
    67,981,164
  The accompanying notes are an integral part of the consolidated financial statements.
 53




---



##### Table of Contents



For the Years Ended December 31,2005
    
    
    2004
    
    
    2003Common Shares:Balance at Beginning of Year
    
    
    66,821,751
    
    
    
    66,022,656
    
    
    
    65,606,631Issuance of Shares Pursuant to Stock Purchase Plans, net
    
    
    1,589,406
    
    
    
    597,345
    
    
    
    116,400Issuance of Shares Pursuant to Stock based Compensation Plans
    
    
    854,859
    
    
    
    201,750
    
    
    
    299,625Balance at End of Year
    
    
    69,266,016
    
    
    
    66,821,751
    
    
    
    66,022,656Treasury Shares:Balance at Beginning of Year
    
    
    
    
    
    
    
    
    
    
    Issuance of Shares Pursuant to Stock based Compensation Plans
    
    
    
    
    
    
    
    
    
    
    (19,500
    )Issuance of Shares Pursuant to Stock Purchase Plans, net
    
    
    
    
    
    
    
    
    
    
    (10,500
    )Shares Repurchased Pursuant to Authorization
    
    
    
    
    
    
    
    
    
    
    30,000Balance at End of Year
    
    
    
    
    
    
    
    
    
    
    Common Stock:Balance at Beginning of Year
    
    $
    292,856
    
    
    $
    281,088
    
    
    $
    276,945Issuance of Shares Pursuant to Stock Purchase Plans
    
    
    27,817
    
    
    
    9,585
    
    
    
    1,291Issuance of Shares Pursuant to Stock based Compensation Plans
    
    
    15,459
    
    
    
    2,183
    
    
    
    2,852Other
    
    
    145
    
    
    
    
    
    
    
    Balance at End of Year
    
    
    336,277
    
    
    
    292,856
    
    
    
    281,088Notes Receivable from Shareholders:Balance at Beginning of Year
    
    
    (5,465
    )
    
    
    (5,444
    )
    
    
    (6,407
    )Notes Receivable Issued Pursuant to Employee Stock Purchase Plans
    
    
    (4,095
    )
    
    
    (2,326
    )
    
    
    (1,065
    )Collection of Notes Receivable
    
    
    2,343
    
    
    
    2,305
    
    
    
    2,028Balance at End of Year
    
    
    (7,217
    )
    
    
    (5,465
    )
    
    
    (5,444
    )Restricted Stock Deferred Compensation Cost:Balance at Beginning of Year
    
    
    
    
    
    
    
    
    
    
    Deferred Compensation Cost Pursuant to Issuance of Restricted Stock
    
    
    (3,926
    )
    
    
    
    
    
    
    Amortization of Deferred Compensation Cost
    
    
    406
    
    
    
    
    
    
    
    Balance at End of Year
    
    
    (3,520
    )
    
    
    
    
    
    
    Accumulated Other Comprehensive Income (Loss), Net of Deferred Income Taxes:Balance at Beginning of Year
    
    
    19,796
    
    
    
    16,715
    
    
    
    16,185Other Comprehensive Income (Loss), Net of Taxes
    
    
    (22,498
    )
    
    
    3,081
    
    
    
    530Balance at End of Year
    
    
    (2,702
    )
    
    
    19,796
    
    
    
    16,715Retained Earnings:Balance at Beginning of Year
    
    
    336,970
    
    
    
    253,287
    
    
    
    191,100Net Income
    
    
    156,688
    
    
    
    83,683
    
    
    
    62,187Balance at End of Year
    
    
    493,658
    
    
    
    336,970
    
    
    
    253,287Common Stock Held in Treasury:Balance at Beginning of Year
    
    
    
    
    
    
    
    
    
    
    Common Shares Repurchased
    
    
    
    
    
    
    
    
    
    
    (300
    )Exercise of Employee Stock Options
    
    
    
    
    
    
    
    
    
    
    94Issuance of Shares Pursuant to Stock Purchase Plans
    
    
    
    
    
    
    
    
    
    
    206Balance at End of Year
    
    
    
    
    
    
    
    
    
    
    Total Shareholders Equity
    
    $
    816,496
    
    
    $
    644,157
    
    
    $
    545,646
  The accompanying notes are an integral part of the consolidated financial statements.
 54




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##### Table of Contents



For the Years Ended December 31,2005
    
    
    2004
    
    
    2003Cash Flows from Operating Activities:Net Income
    
    $
    156,688
    
    
    $
    83,683
    
    
    $
    62,187Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:Net Realized Investment Gain
    
    
    (9,609
    )
    
    
    (761
    )
    
    
    (794
    )Amortization of Investment Premiums, Net of Discount
    
    
    11,707
    
    
    
    9,175
    
    
    
    5,432Depreciation
    
    
    4,798
    
    
    
    3,494
    
    
    
    2,665Amortization of Stock Based Compensation Costs
    
    
    551
    
    
    
    
    
    
    
    Deferred Income Tax Expense (Benefit)
    
    
    (5,382
    )
    
    
    2,092
    
    
    
    (10,891
    )Change in Premiums Receivable
    
    
    (57,276
    )
    
    
    (49,993
    )
    
    
    (49,502
    )Change in Prepaid Reinsurance Premiums and Reinsurance Receivables, Net of
Funds Held Payable to Reinsurer
    
    
    (58,296
    )
    
    
    (116,585
    )
    
    
    (30,794
    )Change in Other Receivables
    
    
    (4,620
    )
    
    
    (2,467
    )
    
    
    (2,437
    )Change in Deferred Acquisition Costs
    
    
    (37,839
    )
    
    
    (35,359
    )
    
    
    4,984Goodwill Impairment Loss
    
    
    25,724
    
    
    
    
    
    
    
    Change in Income Taxes Payable
    
    
    13,202
    
    
    
    (8,563
    )
    
    
    513Change in Other Assets
    
    
    (909
    )
    
    
    (6,392
    )
    
    
    (14,721
    )Change in Unpaid Loss and Loss Adjustment Expenses
    
    
    249,096
    
    
    
    369,581
    
    
    
    181,538Change in Unearned Premiums
    
    
    99,619
    
    
    
    109,260
    
    
    
    116,496Change in Other Liabilities
    
    
    36,338
    
    
    
    32,341
    
    
    
    32,958Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans
    
    
    6,952
    
    
    
    1,031
    
    
    
    889Net Cash Provided by Operating Activities
    
    
    430,744
    
    
    
    390,537
    
    
    
    298,523Cash Flows from Investing Activities:Proceeds from Sales of Investments in Fixed Maturities
    
    
    185,576
    
    
    
    198,442
    
    
    
    184,082Proceeds from Maturity of Investments in Fixed Maturities
    
    
    200,615
    
    
    
    195,317
    
    
    
    202,284Proceeds from Sales of Investments in Equity Securities
    
    
    160,158
    
    
    
    43,734
    
    
    
    23,992Cost of Fixed Maturities Acquired
    
    
    (883,560
    )
    
    
    (622,238
    )
    
    
    (628,879
    )Cost of Equity Securities Acquired
    
    
    (201,333
    )
    
    
    (71,924
    )
    
    
    (54,956
    )Settlement of Cash Flow Hedge
    
    
    (3,148
    )
    
    
    
    
    
    
    Purchase of Property and Equipment, Net
    
    
    (7,403
    )
    
    
    (7,954
    )
    
    
    (6,692
    )Net Cash Used for Investing Activities
    
    
    (549,095
    )
    
    
    (264,623
    )
    
    
    (280,169
    )Cash Flows from Financing Activities:Proceeds from Loans Payable
    
    
    11,381
    
    
    
    76,104
    
    
    
    62,340Repayments on Loans Payable
    
    
    (44,787
    )
    
    
    (91,180
    )
    
    
    (52,971
    )Proceeds from Exercise of Employee Stock Options
    
    
    4,582
    
    
    
    1,151
    
    
    
    2,057Proceeds from Collection of Notes Receivable
    
    
    2,343
    
    
    
    2,305
    
    
    
    2,028Proceeds from Shares Issued Pursuant to Stock Purchase Plans
    
    
    23,721
    
    
    
    7,260
    
    
    
    432Cost of Common Stock Repurchased
    
    
    
    
    
    
    
    
    
    
    (300
    )Net Cash Provided (Used) by Financing Activities
    
    
    (2,760
    )
    
    
    (4,360
    )
    
    
    13,586Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    (121,111
    )
    
    
    121,554
    
    
    
    31,940Cash and Cash Equivalents at Beginning of Year
    
    
    195,496
    
    
    
    73,942
    
    
    
    42,002Cash and Cash Equivalents at End of Year
    
    $
    74,385
    
    
    $
    195,496
    
    
    $
    73,942Cash Paid During the Year for:Income Taxes
    
    $
    73,903
    
    
    $
    41,442
    
    
    $
    36,319Interest
    
    
    165
    
    
    
    639
    
    
    
    638Non-Cash Transactions:Issuance of Shares Pursuant to Employee Stock Purchase Plans in Exchange for
Notes Receivable
    
    $
    4,095
    
    
    $
    2,326
    
    
    $
    1,065
 The accompanying notes are an integral part of the consolidated financial statements.
 55




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##### Table of Contents



Principles of Consolidation and Basis of Presentation
  (a) Investments
     56




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##### Table of Contents



(b) Cash and Cash Equivalents
  (c) Deferred Acquisition Costs
  (d) Property and Equipment
  (e) Goodwill
   57




---



##### Table of Contents



(f) Liability for Unpaid Loss and Loss Adjustment Expenses
  (g) Premiums
  (h) Reinsurance Ceded
  (i) Assessments
  (j) Income Taxes
  (k) Earnings Per Share
  58




---



##### Table of Contents



(l) Comprehensive Income
  (m) Stock Based Compensation Plans
   2005
    
    
    2004
    
    
    2003Net Income As Reported
    
    $
    156,688
    
    
    $
    83,683
    
    
    $
    62,187Assumed Stock Compensation Cost
    
    
    6,354
    
    
    
    4,107
    
    
    
    3,029Pro Forma Net Income
    
    $
    150,334
    
    
    $
    79,576
    
    
    $
    59,158Diluted Earnings Per Average Common Share as Reported (1)
    
    $
    2.14
    
    
    $
    1.20
    
    
    $
    0.91Pro Forma Diluted Earnings Per Average Common Share (1)
    
    $
    2.06
    
    
    $
    1.14
    
    
    $
    0.87
 
 (1)
    
    Restated to reflect a three-for-one split of the Companys common stock distributed on March
1, 2006. (n) New Accounting Pronouncements
    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.
 59




---



##### Table of Contents




    
    Under SAP, policy acquisition costs, such as commissions, premium taxes, fees, and other costs of underwriting policies are
charged to current operations as incurred, while under GAAP, such costs are deferred and amortized on a pro rata basis over
the period covered by the policy.
    
    Under SAP, certain assets, designated as Non-admitted Assets (such as prepaid expenses) are charged against surplus.
    
    Under SAP, net deferred income tax assets are admitted following the application of certain criteria, with the resulting
admitted deferred tax amount being credited directly to policyholder surplus.
    
    Under SAP, premiums receivable are considered nonadmitted if determined to be uncollected based upon aging criteria as
defined in SAP.
    
    Under SAP, the costs and related recoverables for guaranty funds and other assessments are recorded based on managements
estimate of the ultimate liability and related recoverable settlement, while under GAAP, such costs are accrued when the
liability is probable and reasonably estimatable and the related recoverable amount is based on future premium collections
or policy surcharges from in-force policies.
    
    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
 Dividend Restrictions
 Risk-Based Capital
 60




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##### Table of Contents



Gross
    
    
    Gross
    
    
    EstimatedUnrealized
    
    
    Unrealized
    
    
    MarketCost (1)
    
    
    Gains
    
    
    Losses
    
    
    Value (2)December 31, 2005Fixed Maturities:Available for SaleU.S. Treasury Securities and Obligations ofU.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
    
    
    $
    1,934,985December 31, 2004Fixed Maturities:Available for SaleU.S.
Treasury Securities and Obligations of  U.S. Government Corporations and Agencies
    
    $
    62,929
    
    
    $
    172
    
    
    $
    432
    
    
    $
    62,669Obligations of States and Political Subdivisions
    
    
    617,464
    
    
    
    10,575
    
    
    
    1,447
    
    
    
    626,592Corporate and Bank Debt Securities
    
    
    218,434
    
    
    
    2,580
    
    
    
    1,745
    
    
    
    219,269Asset Backed Securities
    
    
    96,029
    
    
    
    1,460
    
    
    
    433
    
    
    
    97,056Mortgage Pass-Through Securities
    
    
    229,623
    
    
    
    2,470
    
    
    
    483
    
    
    
    231,610Collateralized Mortgage Obligations
    
    
    62,615
    
    
    
    310
    
    
    
    417
    
    
    
    62,508Total Fixed Maturities Available for Sale
    
    
    1,287,094
    
    
    
    17,567
    
    
    
    4,957
    
    
    
    1,299,704Equity Securities
    
    
    110,601
    
    
    
    18,216
    
    
    
    370
    
    
    
    128,447Total Investments
    
    $
    1,397,695
    
    
    $
    35,783
    
    
    $
    5,327
    
    
    $
    1,428,151
 (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.  61




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##### Table of Contents



As of December 31, 2005(In Thousands)
    
    Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair 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
    
    $
    10,968
    
    
    $
    141
    
    
    $
    47,030
    
    
    $
    505
    
    
    $
    57,998
    
    
    $
    646Obligations of States and Political Subdivisions
    
    
    391,586
    
    
    
    4,732
    
    
    
    107,099
    
    
    
    2,135
    
    
    
    498,685
    
    
    
    6,867Corporate and Bank Debt Securities
    
    
    84,848
    
    
    
    2,367
    
    
    
    125,359
    
    
    
    3,896
    
    
    
    210,207
    
    
    
    6,263Asset Backed Securities
    
    
    75,151
    
    
    
    648
    
    
    
    20,029
    
    
    
    545
    
    
    
    95,180
    
    
    
    1,193Mortgage Pass-Through Securities
    
    
    202,901
    
    
    
    3,661
    
    
    
    61,399
    
    
    
    1,860
    
    
    
    264,300
    
    
    
    5,521Collateralized Mortgage Obligations
    
    
    175,397
    
    
    
    2,387
    
    
    
    20,865
    
    
    
    575
    
    
    
    196,262
    
    
    
    2,962Total Fixed Maturities Available for Sale
    
    
    940,851
    
    
    
    13,936
    
    
    
    381,781
    
    
    
    9,516
    
    
    
    1,322,632
    
    
    
    23,452Equity Securities
    
    
    38,709
    
    
    
    3,012
    
    
    
    
    
    
    
    
    
    
    
    38,709
    
    
    
    3,012Total Investments
    
    $
    979,560
    
    
    $
    16,948
    
    
    $
    381,781
    
    
    $
    9,516
    
    
    $
    1,361,341
    
    
    $
    26,464
     62




---



##### Table of Contents



EstimatedAmortized
    
    
    MarketCost (1)
    
    
    Value (2)Due in One Year or Less
    
    $
    109,860
    
    
    $
    109,002Due After One Year Through Five Years
    
    
    272,048
    
    
    
    267,600Due After Five Years through Ten Years
    
    
    345,173
    
    
    
    341,737Due After Ten Years
    
    
    403,604
    
    
    
    404,219Asset Backed, Mortgage Pass-Through and Collateralized Mortgage Obligation Securities
    
    
    647,530
    
    
    
    638,972$
    1,778,215
    
    
    $
    1,761,530
 
 (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.  2005
    
    
    2004
    
    
    2003Fixed Maturities
    
    $
    61,550
    
    
    $
    47,739
    
    
    $
    41,393Equity Securities
    
    
    2,585
    
    
    
    2,046
    
    
    
    1,373Cash and Cash Equivalents
    
    
    3,943
    
    
    
    1,443
    
    
    
    656Total Investment Income
    
    
    68,078
    
    
    
    51,228
    
    
    
    43,422Funds Held Interest Credit
    
    
    (1,486
    )
    
    
    (4,853
    )
    
    
    (2,318
    )Investment Expense
    
    
    (2,883
    )
    
    
    (2,885
    )
    
    
    (2,298
    )Net Investment Income
    
    $
    63,709
    
    
    $
    43,490
    
    
    $
    38,806
   2005
    
    
    2004
    
    
    2003Fixed MaturitiesGross Realized Gains
    
    $
    4,454
    
    
    $
    5,472
    
    
    $
    7,832Gross Realized Losses
    
    
    (931
    )
    
    
    (7,437
    )
    
    
    (4,718
    )Net Fixed Maturities Gain (Loss)
    
    
    3,523
    
    
    
    (1,965
    )
    
    
    3,114Equity SecuritiesGross Realized Gains
    
    
    17,040
    
    
    
    8,340
    
    
    
    4,903Gross Realized Losses
    
    
    (7,806
    )
    
    
    (5,614
    )
    
    
    (7,223
    )Net Equity Securities Gain (Loss)
    
    
    9,234
    
    
    
    2,726
    
    
    
    (2,320
    )Cash Flow Hedge Realized Loss
    
    
    (3,148
    )
    
    
    
    
    
    
    Total Net Realized Investment Gain
    
    $
    9,609
    
    
    $
    761
    
    
    $
    794
     63




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##### Table of Contents



December 31,
    
    
    Estimated Useful2005
    
    
    2004
    
    
    Lives (Years)Furniture, Fixtures and Automobiles
    
    $
    7,072
    
    
    $
    6,027
    
    
    5Computer Software
    
    
    22,446
    
    
    
    19,625
    
    
    5Computer Hardware and Telephone Equipment
    
    
    14,603
    
    
    
    11,475
    
    
    5Land and Building
    
    
    3,635
    
    
    
    3,602
    
    
    40Leasehold Improvements
    
    
    2,686
    
    
    
    2,344
    
    
    3 -1250,442
    
    
    
    43,073Accumulated Depreciation and Amortization
    
    
    (26,556
    )
    
    
    (21,792
    )Property and Equipment
    
    $
    23,886
    
    
    $
    21,281
  64




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##### Table of Contents



As of and For the Years Ended December 31,2005
    
    
    2004
    
    
    2003Unpaid loss and loss adjustment expenses at beginning of year
    
    $
    996,667
    
    
    $
    627,086
    
    
    $
    445,548Less: reinsurance receivables
    
    
    324,948
    
    
    
    145,591
    
    
    
    85,837Net unpaid loss and loss adjustment expenses at beginning of year
    
    
    671,719
    
    
    
    481,495
    
    
    
    359,711Provision for losses and loss adjustment expenses for current year claims
    
    
    533,906
    
    
    
    440,989
    
    
    
    314,609Increase (Decrease) in estimated ultimate losses and loss adjustment
expenses for prior year claims
    
    
    (29,900
    )
    
    
    35,126
    
    
    
    44,568Total incurred losses and loss adjustment expenses
    
    
    504,006
    
    
    
    476,115
    
    
    
    359,177Loss and loss adjustment expense payments for claims attributable to:Current year
    
    
    110,496
    
    
    
    107,129
    
    
    
    69,905Prior years (1)
    
    
    124,234
    
    
    
    178,762
    
    
    
    167,488Total payments
    
    
    234,730
    
    
    
    285,891
    
    
    
    237,393Net unpaid loss and loss adjustment expenses at end of year
    
    
    940,995
    
    
    
    671,719
    
    
    
    481,495Plus: reinsurance receivables
    
    
    304,768
    
    
    
    324,948
    
    
    
    145,591Unpaid loss and loss adjustment expenses at end of year
    
    $
    1,245,763
    
    
    $
    996,667
    
    
    $
    627,086
 
 (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).   Net Basisincrease (decrease)Professional
    
    
    CommercialLiability
    
    
    Package
    
    
    CommercialAccident Year
    
    Coverages
    
    
    Coverages
    
    
    Auto Coverages
    
    
    Other
    
    
    Total2004
    
    $
    (7.6
    )
    
    $
    (12.7
    )
    
    $
    (4.3
    )
    
    $
    0.4
    
    
    $
    (24.2
    )2003
    
    $
    (2.4
    )
    
    $
    3.5
    
    
    $
    (0.5
    )
    
    $
    1.0
    
    
    $
    1.62002
    
    $
    (2.0
    )
    
    $
    (0.6
    )
    
    $
    (3.4
    )
    
    $
    (1.0
    )
    
    $
    (7.0
    )2001 & Prior
    
    $
    (0.7
    )
    
    $
    1.9
    
    
    $
    (0.9
    )
    
    $
    (0.6
    )
    
    $
    (0.3
    )Calendar Year
    
    $
    (12.7
    )
    
    $
    (7.9
    )
    
    $
    (9.1
    )
    
    $
    (0.2
    )
    
    $
    (29.9
    )
  65




---



##### Table of Contents



- -
    
    For accident year 2004, the decrease in estimated net unpaid loss and loss adjustment
expenses was principally due to lower net loss estimates for: commercial package policies
as a result of better than expected claim frequency and professional liability coverages
due to better than expected case incurred development.- -
    
    For accident years 2002, the decrease in estimated net unpaid loss and loss
adjustment expenses and prior was principally due to decreased loss estimates across most
commercial and specialty lines of business due to better than expected case incurred loss
development.
  - -
    
    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.
  - -
    
    The Company increased the estimated gross and net loss for unreported claims incurred
and related claim adjustment expenses on residual value polices issued during the years 1998
through 2002 by $38.8 million. The residual value policies provide coverage guaranteeing the
value of a leased automobile at the lease termination, which can be up to five years from
lease inception. The increase in the estimated gross and net loss was a result of:
 
    
    Adverse trends further deteriorating in both claims frequency and severity for
leases expiring in 2003. During the second quarter of 2003, the Company engaged a
consulting firm to aid in evaluating the ultimate potential loss exposure under these
policies. Based upon the study and subsequent evaluation by the Company, the Company
changed its assumptions relating to future frequency and severity of losses, and
increased the estimate for unpaid loss and loss adjustment expenses by $33.0 million. The
Company primarily attributes this deterioration to the following factors that led to a
softening of prices in the used car market subsequent to the September 11, 2001 terrorist
attacks: prolonged 0% new car financing rates and other incentives which increased new
car sales and the volume of trade-ins and daily rental units being sold into the market
earlier and in greater numbers than expected, further adding to the oversupply of used
cars and the overall uncertain economic conditions.
    
    The Company entering into an agreement with U.S. Bank, N.A. d/b/a Firstar Bank
(Firstar) relating to residual value insurance policies purchased by Firstar from the
Company. Under the terms of the agreement, the Company paid Firstar $27.5 million in
satisfaction of any and all claims made or which could have been made by Firstar under
the residual value policies. The Company increased the gross and net reserves for loss
and loss adjustment expenses from $21.7 million to $27.5 million pursuant to this
agreement.
 - -
    
    The Company increased its estimate for unpaid loss and loss adjustment expenses for
non-residual value policies by $43.5 million ($30.8 million net of reinsurance
recoverables), primarily for accident years 1999 to 2001, and decreased its estimate of the
unpaid loss and loss adjustment expenses for such policies by $30.6 million ($25.0 million
net of reinsurance recoverables) for the 2002 accident year. The increase in accident years
1999 to 2001 is principally attributable to:
 
    
    $19.6 million ($13.7 million net of reinsurance recoverables) of development in
claims made professional liability products as a result of case reserves developing
greater than anticipated from the year-end 2002 ultimate loss estimate; $18.1 million
($11.1 million net of reinsurance recoverables) of development in the automobile and
general liability coverages for commercial package products due to the frequency and
severity of the losses developing beyond the underlying pricing assumptions; and $5.8
million ($6.0 million net of reinsurance recoverables) of development in the
 66




---



##### Table of Contents



commercial automobile excess liability insurance and GAP commercial automobile products
due to losses developing beyond the underlying pricing assumptions.
 - -
    
    The decrease in unpaid loss and loss adjustment expenses in accident year 2002 is
principally attributable to:
 
    
    $4.2 million ($4.7 million net of reinsurance recoverables) and $26.4 million
($20.3 million net of reinsurance recoverables) of favorable development in professional
liability products and commercial package products, respectively, due to favorable loss
experience as a result of favorable product pricing.
    As of and For the
    
    
    As of and For theYear Ended
    
    
    Year EndedDecember 31, 2005
    
    
    December 31, 2004Funds Held Payable to Reinsurer Balance at Beginning of Period
    
    $
    131,119
    
    
    $
    110,011Net Written Premiums Ceded
    
    
    (316
    )
    
    
    94,474Reinsurer Expense Allowance
    
    
    11
    
    
    
    (3,318
    )Provisional Commission
    
    
    (6,722
    )
    
    
    (48,971
    )Paid Loss and Loss Adjustment Expenses
    
    
    (8,451
    )
    
    
    (25,585
    )Interest Credit
    
    
    1,486
    
    
    
    4,853Commutation
    
    
    (77,906
    )
    
    
    Other
    
    
    
    
    
    
    (345
    )Subtotal Activity
    
    
    (91,898
    )
    
    
    21,108Funds Held Payable to Reinsurer Balance at End of Period
    
    $
    39,221
    
    
    $
    131,119
    67




---



##### Table of Contents



December 31,2005
    
    
    2004Deferred Income Tax Assets:Unearned Premium
    
    $
    40,161
    
    
    $
    30,862Loss Reserve Discounting
    
    
    32,587
    
    
    
    27,376State Insurance Related Assessments
    
    
    4,233
    
    
    
    1,382Net Realized Investment Losses
    
    
    1,603
    
    
    
    1,855Deferred Compensation
    
    
    1,577
    
    
    
    616Unrealized Depreciation of Securities
    
    
    1,455
    
    
    
    Other Assets
    
    
    185
    
    
    
    85Total Deferred Income Tax Assets
    
    
    81,801
    
    
    
    62,176Deferred Income Tax Liabilities:Deferred Acquisition Costs
    
    
    45,320
    
    
    
    32,077Unrealized Appreciation of Securities
    
    
    
    
    
    
    10,660Property and Equipment Basis
    
    
    2,492
    
    
    
    1,919Net Investment Income
    
    
    1,035
    
    
    
    1,074Other Liabilities
    
    
    1,061
    
    
    
    2,050Total Deferred Income Tax Liabilities
    
    
    49,908
    
    
    
    47,780Net Deferred Income Tax Asset
    
    $
    31,893
    
    
    $
    14,396
   Amount of Tax
    
    
    PercentFor 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
    %For the year ended December 31, 2003:Federal Tax at Statutory Rate
    
    $
    31,404
    
    
    
    35
    %Nontaxable Municipal Bond Interest and Dividends Received Exclusion
    
    
    (4,522
    )
    
    
    (5
    )Other, Net
    
    
    657
    
    
    
    1Income Tax Expense
    
    $
    27,539
    
    
    
    31
    %
  68




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##### Table of Contents



As of and For the Years EndedDecember 31,2005
    
    
    2004
    
    
    2003Weighted-Average Common Shares Outstanding (1)
    
    
    68,551
    
    
    
    66,465
    
    
    
    65,726Weighted-Average Share Equivalents Outstanding (1)
    
    
    4,534
    
    
    
    3,456
    
    
    
    2,255Weighted-Average Shares and Share Equivalents Outstanding (1)
    
    
    73,085
    
    
    
    69,921
    
    
    
    67,981Net Income
    
    $
    156,688
    
    
    $
    83,683
    
    
    $
    62,187Basic Earnings Per Share (1)
    
    $
    2.29
    
    
    $
    1.26
    
    
    $
    0.95Diluted Earnings Per Share (1)
    
    $
    2.14
    
    
    $
    1.20
    
    
    $
    0.91
 
 (1)
    
    Restated to reflect a three-for-one split of the Companys common stock distributed on March
1, 2006.       69




---



##### Table of Contents



As of and For the Years Ended December 31,2005 (1)
    
    2004 (1)
    
    2003 (1)Exercise Price
    
    
    
    
    
    Exercise Price
    
    
    
    
    
    Exercise PriceOptions
    
    Per Option(2)
    
    Options
    
    Per Option(2)
    
    Options
    
    Per Option(2)Outstanding at beginning of year
    
    
    7,931,100
    
    
    $
    10.86
    
    
    
    6,704,100
    
    
    $
    9.18
    
    
    
    5,670,225
    
    
    $
    8.27Granted
    
    
    1,485,000
    
    
    $
    23.34
    
    
    
    1,440,750
    
    
    $
    17.70
    
    
    
    1,452,000
    
    
    $
    12.20Exercised
    
    
    (854,859
    )
    
    $
    5.36
    
    
     
    (201,750
    )
    
    $
    5.71
    
    
    
    (319,125
    )
    
    $
    6.45Canceled
    
    
    (77,250
    )
    
    $
    17.58
    
    
    
    (12,000
    )
    
     $
    14.97
    
    
    
    (99,000
    )
    
    $
    10.23Outstanding at end of year
    
    
    8,483,991
    
    
    $
    13.54
    
    
    
    7,931,100
   
    
    $
    10.86
    
    
    
    6,704,100
    
    
    $
    9.18Exercisable at end of year
    
    
    1,474,491
    
    
    
    
    
    
    
    1,363,350
    
    
    
    
    
    
    
    969,600Weighted-average fair value of
options granted during the year
(2)
    
    
    
    
    
    $
    9.40
    
    
    
    
    
    
    $
    6.21
    
    
    
    
    
    
    $
    3.76
  Outstanding
    
    Exercise Price
    
    Remaining
    
    
    
    
    
    Exercise PriceAt December
    
    Per
    
    Contractual Life
    
    Exercisable at
    
    PerRange of Exercise Prices
    
    31, 2005
    
    Option(2)
    
    (Years)(2)
    
    December 31, 2005
    
    Option(2)$2.83 to $5.00
    
    
    856,398
    
    
    $
    3.92
    
    
    
    2.2
    
    
    
    856,398
    
    
    $
    3.92$5.60 to $7.67
    
    
    291,693
    
    
    $
    7.37
    
    
    
    3.8
    
    
    
    291,693
    
    
    $
    7.37$7.83 to $11.17
    
    
    2,271,900
    
    
    $
    9.38
    
    
    
    5.8
    
    
    
    200,400
    
    
    $
    9.89$11.42 to $14.16
    
    
    1,981,500
    
    
    $
    12.97
    
    
    
    6.9
    
    
    
    126,000
    
    
    
    12.83$15.33 to $19.14
    
    
    1,615,500
    
    
    $
    17.40
    
    
    
    8.2
    
    
    
    
    
    
    $
    $22.62 to $28.30
    
    
    1,467,000
    
    
    $
    23.35
    
    
    
    9.2
    
    
    
    
    
    
    
    8,483,991
    
    
    $
    13.54
    
    
    
    
    
    
    
    1,474,491
    
    
    $
    6.18
 
 (1)
    
    Restated to reflect a three-for-one split of the Companys common stock distributed on March
1, 2006.(2)
    
    Weighted Average.(3)
    
    The Company uses the Black-Scholes pricing model to calculate the fair value of the options
awarded as of the date of grant.  Weighted AverageRestricted Stock
    
    Grant Date FairShares (1)
    
    Value (1)Unvested at beginning of year
    
    
    
    
    
    
    Granted (2)
    
    
    145,140
    
    
    $
    27.74Vested
    
    
    
    
    
    
    Forfeited
    
    
    (3,675
    )
    
    $
    27.52Unvested at end of year
    
    
    141,465
    
    
    $
    27.75
 
 (1)
    
    Restated to reflect a three-for-one split of the Companys common stock distributed on March 1,
2006.(2)
    
    Initial grant of restricted stock awards pursuant to the Plan occurred during 2005   70




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##### Table of Contents



2005
    
    2004
    
    2003Expected Stock Volatility
    
    
    33.9
    %
    
    
    28.3
    %
    
    
    23.2
    %Risk-Free Interest Rate
    
    
    3.8
    %
    
    
    3.8
    %
    
    
    3.1
    %Expected Option Life (Years)
    
    
    6.0
    
    
    
    6.0
    
    
    
    6.0Expected Dividends
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
      71




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##### Table of Contents



As of December 31, 2005Unsecured Reinsurance(In millions)
    
    Receivables
    
    
    A.M. Best RatingsNational Flood Insurance Program
    
    $
    43.9
    
    
    Not Rated - Voluntary PoolLiberty Mutual Insurance Company
    
    
    38.2
    
    
    
    AFlorida Hurricane Catastrophe Fund
    
    
    27.3
    
    
    Not Rated - Mandatory Pool$
    109.4
   Written
    
    
    EarnedFor the Year Ended December 31, 2005Direct Business
    
    $
    1,260,693
    
    
    $
    1,161,284Reinsurance Assumed
    
    
    4,222
    
    
    
    4,012Reinsurance Ceded
    
    
    154,144
    
    
    
    188,649Net Premiums
    
    $
    1,110,771
    
    
    $
    976,647Percentage Assumed 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
    
    
    $
    770,248Percentage Assumed of Net
    
    
    0.5
    %
    
    
    0.9
    %For the Year Ended December 31, 2003:Direct Business
    
    $
    898,170
    
    
    $
    784,445Reinsurance Assumed
    
    
    7,823
    
    
    
    5,053Reinsurance Ceded
    
    
    303,693
    
    
    
    214,980Net Premiums
    
    $
    602,300
    
    
    $
    574,518Percentage Assumed of Net
    
    
    1.3
    %
    
    
    0.9
    %
    72




---



##### Table of Contents



2006
    
    $
    4,3302007
    
    
    4,0202008
    
    
    2,0562009
    
    
    1,2492010 and Thereafter
    
    
    1,359Total Minimum Payments Required
    
    $
    13,014
       73




---



##### Table of Contents



74




---



##### Table of Contents



Three Months EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2005 (1)(2)
    
    
    2005 (1)(2)
    
    
    2005 (1)(2)
    
    
    2005 (1)(2)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 (5)
    
    $
    0.68
    
    
    $
    0.68
    
    
    $
    0.51
    
    
    $
    0.42Diluted Earnings Per Share (5)
    
    $
    0.64
    
    
    $
    0.64
    
    
    $
    0.48
    
    
    $
    0.39Weighted-Average Common Shares Outstanding (5)
    
    
    67,273,227
    
    
    
    68,858,718
    
    
    
    69,008,412
    
    
    
    69,041,580Weighted-Average Share Equivalents Outstanding (5)
    
    
    4,310,019
    
    
    
    4,461,048
    
    
    
    4,368,114
    
    
    
    4,925,142Weighted-Average Shares and Share Equivalents Outstanding (5)
    
    
    71,583,246
    
    
    
    73,319,766
    
    
    
    73,376,526
    
    
    
    73,966,722
 Three Months EndedMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,2004 (3)(4)
    
    
    2004 (3)(4)
    
    
    2004 (3)(4)
    
    
    2004 (3)(4)Net Earned Premiums
    
    $
    171,422
    
    
    $
    189,563
    
    
    $
    187,845
    
    
    $
    221,418Net Investment Income
    
    $
    9,973
    
    
    
    10,800
    
    
    $
    10,896
    
    
    $
    11,821Net Realized Investment Gain (Loss)
    
    $
    1,778
    
    
    $
    (1,061
    )
    
    $
    268
    
    
    $
    (224
    )Net Loss and Loss Adjustment Expenses
    
    $
    96,243
    
    
    $
    107,317
    
    
    $
    147,769
    
    
    $
    124,786Acquisition Costs and Other Underwriting Expenses
    
    $
    47,354
    
    
    $
    51,272
    
    
    $
    56,863
    
    
    $
    58,880Net Income (Loss)
    
    $
    26,761
    
    
    $
    26,667
    
    
    $
    (2,095
    )
    
    $
    32,351Basic Earnings (Loss) Per Share (5)
    
    $
    0.41
    
    
    $
    0.40
    
    
    $
    (0.03
    )
    
    $
    0.48Diluted Earnings (Loss) Per Share (5)
    
    $
    0.39
    
    
    $
    0.38
    
    
    $
    (0.03
    )
    
    $
    0.46Weighted-Average Common Shares Outstanding (5)
    
    
    66,054,810
    
    
    
    66,333,696
    
    
    
    66,692,187
    
    
    
    66,771,270Weighted-Average Share Equivalents Outstanding (5)
    
    
    3,247,833
    
    
    
    3,245,862
    
    
    
    3,397,353
    
    
    
    3,776,313Weighted-Average Shares and Share Equivalents Outstanding (5)
    
    
    69,302,643
    
    
    
    69,579,558
    
    
    
    70,089,540
    
    
    
    70,547,583
 
 (1)
    
    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.(2)
    
    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.(3)
    
    Net Earned Premiums for the three months ended March 31, 2004, June 30, 2004, September 30,
2004 and December 31, 2004 includes accrued profit commissions on certain reinsurance
contracts of $4.2 million, $4.5 million, $4.6 million and $2.3 million, respectively.(4)
    
    Net Realized Investment Gain (Loss) for the three months ended March 31, 2004, June 30, 2004,
September 30, 2004 and December 31, 2004 includes non-cash realized losses of $1.0 million,
$1.7 million, $5.7 million, and $1.5 million, respectively, as a result of impairment
evaluations.(5)
    
    Restated to reflect a three-for-one split of the Companys common stock distributed on March
1, 2006.  
 75




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##### Table of Contents



Commercial
    
    
    Specialty
    
    
    PersonalLines
    
    
    Lines
    
    
    Lines
    
    
    Corporate
    
    
    Total2005: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
    
    
    $
    2,485,6562003:Gross Written Premiums
    
    $
    662,339
    
    
    $
    154,105
    
    
    $
    89,549
    
    
    $
    
    
    
    $
    905,993Net Written Premiums
    
    $
    463,853
    
    
    $
    107,911
    
    
    $
    30,536
    
    
    $
    
    
    
    $
    602,300Revenue:Net Earned Premiums
    
    $
    431,535
    
    
    $
    108,809
    
    
    $
    34,174
    
    
    $
    
    
    
    $
    574,518Net Investment Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,806
    
    
    
    38,806Net Realized Investment Gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    794
    
    
    
    794Other Income
    
    
    
    
    
    
    
    
    
    
    5,092
    
    
    
    427
    
    
    
    5,519Total Revenue
    
    
    431,535
    
    
    
    108,809
    
    
    
    39,266
    
    
    
    40,027
    
    
    
    619,637Losses and Expenses:Net Loss and Loss Adjustment Expenses
    
    
    273,487
    
    
    
    65,075
    
    
    
    20,615
    
    
    
    
    
    
    
    359,177Acquisition Costs and Other Underwriting Expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162,912
    
    
    
    162,912Other Operating Expenses
    
    
    
    
    
    
    
    
    
    
    4,050
    
    
    
    3,772
    
    
    
    7,822Total Losses and Expenses
    
    
    273,487
    
    
    
    65,075
    
    
    
    24,665
    
    
    
    166,684
    
    
    
    529,911Income Before Income Taxes
    
    
    158,048
    
    
    
    43,734
    
    
    
    14,601
    
    
    
    (126,657
    )
    
    
    89,726Total Income Tax Expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,539
    
    
    
    27,539Net Income
    
    $
    158,048
    
    
    $
    43,734
    
    
    $
    14,601
    
    
    $
    (154,196
    )
    
    $
    62,187Total Assets
    
    $
    
    
    
    $
    
    
    
    $
    148,409
    
    
    $
    1,722,532
    
    
    $
    1,870,941
 76




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77




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(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,
2005. Our managements assessment of the effectiveness of internal control over financial
reporting as of December 31, 2005 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.
 
   78




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(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)
    
    Equity Compensation Plan Information
  Number ofsecurities to beissued upon
    
    
    Weighted-average
    
    
    Number of securities remainingexercise of
    
    
    exercise price of
    
    
    available for future issuanceoutstanding
    
    
    outstanding
    
    
    under equity compensationoptions, warrants
    
    
    options, warrants
    
    
    plans (1) (excluding securitiesand rights (1)
    
    
    and rights (1)
    
    
    reflected in column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation plans approved by security holders
    
    
    8,483,991
    
    
    $
    13.54
    
    
    
    7,109,319
    (2)Equity compensation plans not approved by security holders
    
    
    
    
    
    
    
    
    
    
    442,353
    (3)Total
    
    
    8,483,991
    
    
    $
    13.54
    
    
    
    7,551,672
 
 (1)
    
    Restated to reflect a three-for-one split of the Companys common stock distributed on March
1, 2006.(2)
    
    Includes 618,915, 837,138, 5,631,210 and 22,056 shares of the Companys common stock
available for future issuance under the Companys Non-Qualified Employee Stock Purchase Plan,
Employee Stock Purchase Plan, Amended and Restated Employees Stock Incentive and Performance
Based Compensation Plan and Directors Stock Purchase Plan, respectively.(3)
    
    These shares of the Companys common stock are available for future issuance under a stock
purchase plan for the Companys eligible Preferred Agents approved by the Companys Board of
Directors. Under this Plan the Companys eligible Preferred Agents may purchase shares of the
Companys common stock during 30 day offering periods as designated by the Companys Preferred
Agent Committee at a per share price equal to 85% of the lesser of the fair market value of a
share of the Companys common stock on the first business day of the offering period or the
last day of the offering period. Any shares purchased pursuant to the Plan are restricted for
a period of two-years, measured from the first day of the relevant offering period, and no
eligible Preferred Agent is permitted to purchase shares under the plan during any three
consecutive calendar years having an aggregate value in excess of $100,000. 79




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80




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##### 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.
 81




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##### 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
    
    
    G (1)
    
    Employment Agreement with James J. Maguire, Jr. effective June 1, 2002.10.18
    
    
    G (1)
    
    Employment Agreement with Sean S. Sweeney effective June 1, 2002.10.19
    
    
    G (1)
    
    Employment Agreement with Craig P. Keller effective June 1, 2002.10.20
    
    
    H (1)
    
    Employment Agreement with James J. Maguire effective June 1, 2002.10.21
    
    
    H (1)
    
    Employment Agreement with Christopher J. Maguire effective June 1, 2002.10.22
    
    
    I
    
    AQS, Inc. Software License Agreement, dated October 1, 2002.10.23
    
    
    I(1)
    
    Employment Agreement with P. Daniel Eldridge effective October 1, 2002.10.24
    
    
    J
    
    Florida Hurricane Catastrophe Fund Reimbursement Contract Effective June 1, 2003.10.25
    
    
    K
    
    Quota Share Reinsurance Contract with Swiss Reinsurance America Corporation
effective May 15, 2003 covering policies within the Custom Harvest Program.10.26
    
    
    K
    
    Excess of Loss Agreement of Reinsurance No. 9034 with General Reinsurance
Corporation effective January 1, 2003.10.27
    
    
    K
    
    Addendum No. 3 to the Casualty Excess of Loss Reinsurance Agreement No. TC988A,
B with Swiss Reinsurance American Corporation effective January 1, 2003.10.28
    
    
    K
    
    Property Excess of Loss Agreement of Reinsurance No. TP1600E with Swiss
Reinsurance America Corporation effective January 1, 2003.10.29
    
    
    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, 2003.10.30
    
    
    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 PHUB015555-01.10.31
    
    
    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 PHUB015557-01.10.32
    
    
    L
    
    Non Florida Commercial Excess Catastrophe Reinsurance Contract with the
Subscribing Reinsurer (s) Executing the Interests and Liabilities Agreement (s)
effective June 1, 2003.10.33
    
    
    L
    
    Florida Commercial Excess Catastrophe Reinsurance Contract with the Subscribing
Reinsurer (s) Executing the Interests and Liabilities Agreement (s) effective
June 1, 2003.10.34
    
    
    L
    
    Excess Catastrophe Reinsurance Contract with Federal Insurance Company through
Chubb Re, Inc. effective June 1, 2003.10.35
    
    
    L
    
    Whole Account Net Quota Share Reinsurance Contract with Federal Insurance
Company through Chubb Re, Inc. and Swiss Reinsurance America Corporation
effective April 1, 2003.
 82




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Exhibit No.
    
    
    
    Description10.36
    
    
    M
    
    Whole Account Net Quota Share Reinsurance Contract effective as of January 1, 2004 (Addendum No. 1)10.37
    
    
    M
    
    Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective as of June 1, 200410.38
    
    
    M
    
    Casualty Excess of Loss Reinsurance Contract effective as of January 1, 200410.39
    
    
    M
    
    Property Per Risk 1st and 2nd Excess Reinsurance Contract effective as of January 1, 2004 (Endorsement
No. 1)10.40
    
    
    M(1)
    
    Amended and Restated Employment Agreement with James J. Maguire effective as of January 1, 200410.41
    
    
    N
    
    Gap Quota Share Reinsurance Contract effective as of April 1, 200410.42
    
    
    N
    
    Casualty (Clash) Excess of Loss effective January 1, 200410.43
    
    
    N
    
    Casualty Semi-Automatic Facultative Excess of Loss reinsurance binder with Berkley Insurance Company
effective April 1, 200410.44
    
    
    N
    
    Casualty Automatic Facultative certificate with B F Re Underwriters, LLC effective June 1, 2004. RE
Philadelphia Insurance Companies certificate number 423004P110.45
    
    
    N
    
    Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective June 1, 2004 (Liberty American
Insurance Company)10.46
    
    
    N
    
    Florida Hurricane Catastrophe Fund Amended Reinsurance Contract effective June 1, 2004 (Mobile USA
Insurance Company)10.47
    
    
    O
    
    Reinstatement Premium Protection Reinsurance Contract effective July 1, 2004.10.48
    
    
    O
    
    Underlying Excess Catastrophe and Reinstatement Premium Protection Reinsurance Contract effective July 1,
2004.10.49
    
    
    O
    
    35% Florida Only Third and Fourth Catastrophe Event Reinsurance Contract effective September 2, 2004.10.50
    
    
    O
    
    $50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract effective
September 3, 2004.10.51
    
    
    P
    
    Florida Only Excess Catastrophe Reinsurance Contract effective June 1, 2004 with the Subscribing
Reinsurers.10.52
    
    
    P
    
    $50 million excess of $90 million Florida Only Excess Catastrophe Reinsurance Contract effective June 1,
2004 with the Subscribing Reinsurers.10.53
    
    
    P
    
    $50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract effective
September 1, 2004 with the Subscribing Reinsurers.10.54
    
    
    P
    
    $5 million excess of $190 million Florida Only Catastrophe Excess Reinsurance Contract effective
September 10, 2004 with the Subscribing Reinsurers.10.55
    
    
    P
    
    Underlying Excess Catastrophe Reinsurance Contract effective July 1, 2004 with the Subscribing Reinsurers.10.56
    
    
    P
    
    Casualty Excess of Loss Contract effective January 1, 2005 with Swiss Reinsurance America Corporation.10.57
    
    
    P
    
    Addendum Number 2 to the Property Excess of Loss Contract effective January 1, 2005 with Swiss Reinsurance America Corporation.10.58
    
    
    P
    

Preliminary
Endorsement No. 2 to the Property Per Risk
1st and
2nd Excess Reinsurance Contract effective January 1, 2005 with General Reinsurance
Corporation.10.59
    
    
    P
    
    2003 Whole Account Net Quota Share Reinsurance Commutation and Release agreement effective January 1,
2005 with Chubb Re, Inc.10.60
    
    
    P
    
    2003 Whole Account Net Quota Share Reinsurance Commutation and Release agreement effective January 1,
2005 with Swiss Reinsurance America Corporation.10.61
    
    
    Q
    
    Excess Catastrophe Reinsurance Contract effective June 1, 2004 with the Subscribing Reinsurers.
 83




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Exhibit No.
    
    
    
    Description10.62
    
    
    Q
    
    65% Florida Only Third and Fourth Event Excess Catastrophe Reinsurance Contract effective September 1,
2004 with the Subscribing Reinsurers.10.63
    
    
    Q
    
    $45 million excess of $195 million Florida Only Catastrophe Reinsurance Contract effective September 10,
2004 with the Subscribing Reinsurers.10.64
    
    
    Q
    
    $6.5 million excess of $3.5 million Florida Only Fifth Event Catastrophe Reinsurance Contract effective
September 24, 2004 with the Subscribing Reinsurers.10.65
    
    
    Q
    
    $50 million excess of $240 million Florida Only Catastrophe Reinsurance Contract effective October 1,
2004 with the Subscribing Reinsurers.10.66
    
    
    Q
    
    $40 million excess of $50 million Florida Only Third Event Catastrophe Reinsurance Contract effective
October 1, 2004 with the Subscribing Reinsurers.10.67
    
    
    Q
    
    $50 million excess of $140 million Florida Only Catastrophe Excess Reinsurance Contract effective October
1, 2004 with the Subscribing Reinsurers.10.68
    
    
    Q
    
    Florida Hurricane Catastrophe Fund Reinsurance Contract effective June 1, 2005 (Liberty American
Insurance Company)10.69
    
    
    Q
    
    Florida Hurricane Catastrophe Fund Reinsurance Contract effective June 1, 2005 (Mobile USA Insurance
Company)10.70
    
    
    Q
    
    Excess Catastrophe Reinsurance Contract effective June 1, 2005 (Preliminary Agreement).The participating reinsurers on the $5.0 million excess of $5.0 million in coverage are Aspen Insurance
Limited, AXA Re, Everest Reinsurance Company, Munchener Ruckversicherungs  Gesellschaf, Quanta
Reinsurance LTD, Renaissance Reinsurance Limited (Bermuda), Rosemont Reinsurance LTD and Transatlantic
Reinsurance Company at varying levels of participation.The participating reinsurers on the $10.0 million excess of $10 million in coverage are AXA Re, AXIS
Specialty Limited (Bermuda), Everest Reinsurance Company, Munchener Ruckversicherungs  Gesellschaft,
Partner Re (Bermuda), PXRE Reinsurance, Quanta Reinsurance LTD, Rosemont Reinsurance LTD, Sirius
International Insurance Corporation , Swiss Reinsurance America, Swiss Re Underwriting Agency Inc. and
Transatlantic Reinsurance Co. at varying levels of participation.The participating reinsurers on the $20.0 million excess of $20.0 million in coverage are American Re
Broker Market, AXA Re, AXIS Specialty Limited (Bermuda), Everest Reinsurance Company, Hannover Re
(Bermuda) Ltd., Munchener Ruckversicherungs  Gesellschaft, Partner Re (Bermuda), PXRE Reinsurance,
Quanta Reinsurance LTD, Rosemont Reinsurance LTD, Sirius International Insurance Corporation, Swiss
Reinsurance America, Transatlantic Reinsurance Co.and XL Re Limited at varying levels of participation.The participating reinsurers on the $60.0 million excess of $40.0 million in coverage are American Re
Broker Market, AXA Re, AXIS Specialty Limited (Bermuda), Everest Reinsurance Company, Hannover Re
(Bermuda) Ltd., Munchener Ruckversicherungs  Gesellschaft, Partner Re (Bermuda), PXRE Reinsurance,
Quanta Reinsurance LTD, Rosemont Reinsurance LTD, Sirius International Insurance Corporation, Swiss
Reinsurance America, Swiss Re Underwriting Agency Inc., Transatlantic Reinsurance Co., Syndicate #2020
and XL Re Limited at varying levels of participation.
 84




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Exhibit No.
    
    
    
    Description10.71
    
    
    Q
    
    Reinstatement Premium Protection Reinsurance Contract effective June 1, 2005 (Preliminary
Agreement). The participating reinsurers are ACE Tempest Reinsurance LTD, AXIS Specialty Limited,
Everest Reinsurance Company, Munchener Ruckversicherungs  Gesellschaft and Rosemont Reinsurance
LTD at varying levels of participation.10.72
    
    
    Q
    
    Florida Only Excess Catastrophe Reinsurance Contract effective June 1, 2005 (Preliminary Agreement).The participating reinsurers on the $3.5 million excess of $3.5 million in coverage are Aspen
Insurance UK LTD, Rosemont Reinsurance LTD, Ascot Insurance Services Limited, Syndicate #2623,
Syndicate #0033, Syndicate #0623, Syndicate #0780, Syndicate #0958, Syndicate #2001 and Syndicate
#2791 at varying levels of participationThe participating reinsurers on the $13.0 million excess of $7.0 million in coverage are Ascot
Insurance Services Limited, Aspen Insurance UK LTD, AXIS Specialty Limited (Bermuda ), AXA Re,
Montpelier Reinsurance Ltd, Platinum Underwriters Re, Partner Re (Bermuda), PXRE Reinsurance,
Rosemont Reinsurance LTD, Syndicate #2623, Syndicate #0033, Syndicate #0566, Syndicate #0623,
Syndicate #0780, Syndicate #0958, Syndicate #2001, Syndicate #2003, Syndicate #2010 and Syndicate
#2791 at varying levels of participation.The participating reinsurers on the $15.0 million excess of $20 million in coverage are Ascot
Insurance Services Limited , Aspen Insurance UK LTD, AXIS Specialty Limited (Bermuda ), AXA Re,
General Reinsurance Corporation, Montpelier Reinsurance Ltd , Partner Re (Bermuda), Platinum
Underwriters Re, PXRE Reinsurance, Rosemont Reinsurance LTD, Syndicate #2623, Syndicate #0566,
Syndicate #0623, Syndicate #0780, Syndicate #0958, Syndicate #2001, Syndicate #2003, Syndicate
#2010 and Syndicate #2791 at varying levels of participation.The participating reinsurers on the $25.0 million excess of $35.0 million layer in coverage are
Ascot Insurance Services Limited , Aspen Insurance UK LTD, AXIS Specialty Limited (Bermuda ), AXA
Re, General Reinsurance Corporation, Hannover Re (Bermuda) Ltd, Montpelier Reinsurance Ltd,
Partner Re (Bermuda), Platinum Underwriters Re, PXRE Reinsurance, Rosemont Reinsurance LTD, XL Re
Limited , Syndicate #2623, Syndicate #0566, Syndicate #0623, Syndicate #0780 and Syndicate #2010 at
varying levels of participation.The participating reinsurers on the $60.0 million excess of $60.0 million in coverage are American
Re Broker Market, Ascot Insurance Services Limited, AXIS Specialty Limited (Bermuda ), AXA Re,
General Reinsurance Corporation , Hannover Re (Bermuda) Ltd., Montpelier Reinsurance Ltd.,
Munchener Ruckversicherungs  Gesellschaft, Partner Re (Bermuda), PXRE Reinsurance, Rosemont
Reinsurance LTD, Swiss Re Underwriting Agency Inc., Transatlantic Reinsurance Co., XL Re Limited,
Syndicate #0566, Syndicate #0626, Syndicate #2001, Syndicate #2003, Syndicate #2010, Syndicate
#2020 and Syndicate #2791 at varying levels of participation.The participating reinsurers on the $65.0 million excess of $120.0 million in coverage are American
Re Broker Market, Ascot Insurance Services Limited, AXIS Specialty Limited (Bermuda), AXA Re,
Hannover Re (Bermuda) Ltd., Montpelier Reinsurance Ltd., Munchener Ruckversicherungs -
Gesellschaft, Partner Re (Bermuda), PXRE Reinsurance, Rosemont Reinsurance LTD, Swiss Re
Underwriting Agency Inc., Transatlantic Reinsurance Co., XL Re Limited, Syndicate #2001, Syndicate
#2020 and Syndicate #2791 at varying levels of participation.10.73
    
    
    Q
    
    Third Event Catastrophe Reinsurance Contract effective September 3, 2004 with the Subscribing
Reinsurers for 50% share.10.74
    
    
    Q
    
    Third Event Catastrophe Reinsurance Contract effective September 3, 2004 with the Subscribing
Reinsurers for 50% share.10.75
    
    
    Q (1)
    
    Amendment and Restatement of the Companys Employees Stock Incentive and Performance Based
Compensation Plan.10.76
    
    
    Q (1)
    
    Form of Stock Option Award Agreement.10.77
    
    
    Q (1)
    
    Form of Restricted Stock Award Agreement.
 85




---



##### Table of Contents



Exhibit No.
    
    
    
    Description10.78
    
    
    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.10.79
    
    
    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.10.80
    
    
    R
    
    Professional Liability Insurance Quota Share Contract effective July 1, 2005 with Cumis Insurance
Society, Inc.21
    
    
    R
    
    List of Subsidiaries of the Registrant.23
    
    
    R
    

Consent
of Independent Registered Public Accounting Firm.24
    
    
    A
    
    Power of Attorney31.1
    
    
    R
    
    Certification of the Companys chief executive officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.31.2
    
    
    R
    
    Certification of the Companys chief financial officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.32.1
    
    
    R
    
    Certification of the Companys chief executive officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    R
    
    Certification of the Companys chief financial officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 A
    
    Incorporated by reference to the Exhibit filed with the Registrants Form S-1 Registration Statement under the
Securities Act of 1933 (Registration No. 33-65958).B
    
    Filed as an Exhibit to the Companys 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.
 86




---



##### Table of Contents



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 herewith.(1)
    
    Compensatory Plan or Arrangement, or Management Contract.
 87




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##### Table of Contents



Philadelphia Consolidated Holding Corp.By: James J. Maguire, Jr.James J. Maguire, Jr.President and Chief Executive OfficerMarch 10, 2006
  Signature
    
    Title
    
    DateJames J. Maguire, Jr.

James J. Maguire, Jr.
    
    President & Chief Executive
Officer,

(Principal Executive Officer)
    
    March 10, 2006Craig P. Keller

Craig P. Keller
    
    Executive Vice President,
Secretary,

Treasurer, and Chief Financial Officer

(Principal Financial and Accounting
Officer)
    
    March 10, 2006James J. Maguire

James J. Maguire
    
    Chairman of the Board of
Directors
    
    March 10, 2006Sean S. Sweeney

Sean S. Sweeney
    
    Executive Vice President, Director
    
    March 10, 2006Aminta Hawkins Breaux

Aminta Hawkins Breaux
    
    Director
    
    March 10, 2006Michael J. Cascio

Michael J. Cascio
    
    Director
    
    March 10, 2006Elizabeth H. Gemmill

Elizabeth H. Gemmill
    
    Director
    
    March 10, 2006Margaret
M. Mattix

Margaret M. Mattix
    
    Director
    
    March 10, 2006Donald A. Pizer

Donald A. Pizer
    
    Director
    
    March 10, 2006Ronald R. Rock

Ronald R. Rock
    
    Director
    
    March 10, 2006Dirk A. Stuurop

Dirk A. Stuurop
    
    Director
    
    March 10, 2006
 88




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##### 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
    
    $
    339,849
    
    
    $
    333,984
    
    
    $
    333,984States, Municipalities and Political Subdivisions
    
    
    821,456
    
    
    
    819,635
    
    
    
    819,635Foreign Governments
    
    
    4,718
    
    
    
    4,665
    
    
    
    4,665Public Utilities
    
    
    35,787
    
    
    
    34,940
    
    
    
    34,940All Other Corporate Bonds
    
    
    573,237
    
    
    
    565,267
    
    
    
    565,267Redeemable Preferred Stock
    
    
    3,168
    
    
    
    3,039
    
    
    
    3,039Total Fixed Maturities
    
    
    1,778,215
    
    
    
    1,761,530
    
    
    
    1,761,530Equity Securities:Common Stocks:Public Utilities
    
    
    7,944
    
    
    
    8,228
    
    
    
    8,228Banks, Trust and Insurance Companies
    
    
    20,131
    
    
    
    21,313
    
    
    
    21,313Industrial, Miscellaneous and all other
    
    
    132,352
    
    
    
    143,412
    
    
    
    143,412Non-redeemable Preferred Stocks
    
    
    499
    
    
    
    502
    
    
    
    502Total Equity Securities
    
    
    160,926
    
    
    
    173,455
    
    
    
    173,455Total Investments
    
    $
    1,939,141
    
    
    $
    1,934,985
    
    
    $
    1,934,985
 
 *
    
    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 31,2005
    
    
    2004ASSETSCash and Cash Equivalents
    
    $
    196
    
    
    $
    117Equity in and Advances to Unconsolidated Subsidiaries (a)
    
    
    815,735
    
    
    
    645,404Income Taxes Recoverable
    
    
    1,266
    
    
    
    Total Assets
    
    $
    817,197
    
    
    $
    645,521LIABILITIES AND SHAREHOLDERS EQUITYIncome Taxes Payable
    
    
    
    
    
    
    881Other Liabilities
    
    $
    701
    
    
    $
    483Total Liabilities
    
    
    701
    
    
    
    1,364Commitments 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, 69,266,016 and 66,821,751
Shares Issued and Outstanding
    
    
    336,277
    
    
    
    292,856Notes Receivable from Shareholders
    
    
    (7,217
    )
    
    
    (5,465
    )Restricted Stock Deferred Compensation Cost
    
    
    (3,520
    )
    
    
    Accumulated Other Comprehensive Income (Loss)
    
    
    (2,702
    )
    
    
    19,796Retained Earnings
    
    
    493,658
    
    
    
    336,970816,496
    
    
    
    644,157Total Liabilities and Shareholders Equity
    
    $
    817,197
    
    
    $
    645,521
 
 (a)
    
    This item has been eliminated in the Companys Consolidated Financial Statements.   S-2




---



##### Table of Contents



For the Years Ended December 31,2005
    
    
    2004
    
    
    2003Revenue:Dividends from Subsidiaries (a)
    
    $
    35,797
    
    
    $
    11,838
    
    
    $
    61,348Net Realized Investment Loss
    
    
    (3,148
    )
    
    
    
    
    
    
    Total Revenue
    
    
    32,649
    
    
    
    11,838
    
    
    
    61,348Other Expenses
    
    
    3,385
    
    
    
    2,573
    
    
    
    778Total Expenses
    
    
    3,385
    
    
    
    2,573
    
    
    
    778Income, Before Income Taxes and Equity in Earnings of Unconsolidated Subsidiaries
    
    
    29,264
    
    
    
    9,265
    
    
    
    60,570Income Tax Benefit
    
    
    (2,287
    )
    
    
    (901
    )
    
    
    (272
    )Income, Before Equity in Earnings of Unconsolidated Subsidiaries
    
    
    31,551
    
    
    
    10,166
    
    
    
    60,842Equity in Earnings of Unconsolidated Subsidiaries
    
    
    125,137
    
    
    
    73,517
    
    
    
    1,345Net Income
    
    $
    156,688
    
    
    $
    83,683
    
    
    $
    62,187
 
 (a)
    
    This item has been eliminated in the Companys Consolidated Financial Statements.  S-3




---



##### Table of Contents



)
 For the Years Ended December 31,2005
    
    
    2004
    
    
    2003Cash Flows From Operating Activities:Net Income
    
    $
    156,688
    
    
    $
    83,683
    
    
    $
    62,187Adjustments to Reconcile Net Income to Net Cash Provided by Operating ActivitiesEquity in Earnings of Unconsolidated Subsidiaries
    
    
    (125,137
    )
    
    
    (73,517
    )
    
    
    (1,345
    )Net Realized Investment Loss
    
    
    3,148
    
    
    
    
    
    
    
    Change in Other Liabilities
    
    
    218
    
    
    
    56
    
    
    
    (188
    )Change in Other Assets
    
    
    
    
    
    
    1
    
    
    
    Change in Income Taxes Recoverable
    
    
    (2,147
    )
    
    
    (401
    )
    
    
    35Tax Benefit from Issuance of Shares Pursuant to Stock Based Compensation Plans
    
    
    6,952
    
    
    
    1,031
    
    
    
    889Net Cash Provided by Operating Activities
    
    
    39,722
    
    
    
    10,853
    
    
    
    61,578Cash Flows Used by Investing Activities:Net Transfers to Subsidiaries (a)
    
    
    (67,141
    )
    
    
    (21,577
    )
    
    
    (65,794
    )Settlement of Cash Flow Hedge
    
    
    (3,148
    )
    
    
    
    
    
    
    Net Cash Used by Investing Activities
    
    
    (70,289
    )
    
    
    (21,577
    )
    
    
    (65,794
    )Cash Flows From Financing Activities:Proceeds from Exercise of Employee Stock Options
    
    
    4,582
    
    
    
    1,151
    
    
    
    2,057Proceeds from Collection of Notes Receivable
    
    
    2,343
    
    
    
    2,305
    
    
    
    2,028Proceeds from Shares Issued Pursuant to Stock Purchase Plans
    
    
    23,721
    
    
    
    7,260
    
    
    
    432Cost of Common Stock Repurchased
    
    
    
    
    
    
    
    
    
    
    (300
    )Net Cash Provided by Financing Activities
    
    
    30,646
    
    
    
    10,716
    
    
    
    4,217Net Increase (Decrease) in Cash and Equivalents
    
    
    79
    
    
    
    (8
    )
    
    
    1Cash and Cash Equivalents at Beginning of Year
    
    
    117
    
    
    
    125
    
    
    
    124Cash and Cash Equivalents at End of Year
    
    $
    196
    
    
    $
    117
    
    
    $
    125Cash Dividends Received From Unconsolidated Subsidiaries
    
    $
    35,797
    
    
    $
    11,838
    
    
    $
    61,348Non-Cash Transactions:Issuance of Shares Pursuant to Employee Stock Purchase Plan in exchange for
Notes Receivable
    
    $
    4,095
    
    
    $
    2,326
    
    
    $
    1,065
 
 (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
    
    
    Written2005: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
    
    
    $
    914,5322003:Commercial Lines
    
    $
    
    
    
    $
    477,483
    
    
    $
    309,596
    
    
    
    
    
    
    $
    431,535
    
    
    $
    
    
    
    $
    273,487
    
    
    $
    
    
    
    $
    
    
    
    $
    463,853Specialty Lines
    
    
    
    
    
    
    136,000
    
    
    
    71,743
    
    
    
    
    
    
    
    108,809
    
    
    
    
    
    
    
    65,075
    
    
    
    
    
    
    
    
    
    
    
    107,911Personal Lines
    
    
    
    
    
    
    13,603
    
    
    
    41,250
    
    
    
    
    
    
    
    34,174
    
    
    
    
    
    
    
    20,615
    
    
    
    
    
    
    
    
    
    
    
    30,536Corporate
    
    
    56,288
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38,806
    
    
    
    
    
    
    
    109,888
    
    
    
    53,024
    
    
    
    Total
    
    $
    56,288
    
    
    $
    627,086
    
    
    $
    422,589
    
    
    
    
    
    
    $
    574,518
    
    
    $
    38,806
    
    
    $
    359,177
    
    
    $
    109,888
    
    
    $
    53,024
    
    
    $
    602,300
 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 Net2005Property 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
    %2003Property and Casualty Insurance
    
    $
    784,445
    
    
    $
    214,980
    
    
    $
    5,053
    
    
    $
    574,518
    
    
    
    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, 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
    
    
    $
    914,532December 31, 2003
    
    $
    56,288
    
    
    $
    627,086
    
    
    $
    0
    
    
    $
    422,589
    
    
    $
    574,518
    
    
    $
    38,806
    
    
    $
    314,609
    
    
    $
    44,568
    
    
    $
    109,888
    
    
    $
    237,393
    
    
    $
    602,300
 S-7